Sohu.com - Earnings Call - Q1 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's First Quarter twenty twenty Earnings Conference Call. At this time, all participants are in listen only mode. After management prepared remarks, there will be a Q and A session. Today's conference call is being recorded.

If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

Speaker 1

Thanks, operator. Thank you for joining us today to discuss Sohu's fourth quarter twenty twenty results. On the call are Chairman and Chief Executive Officer, Doctor. Charles Zhang CFO, John Liu and Vice President of Finance, Gemstone. Also with us today are Changyou's CEO, Douwen Chen and CFO, Yao Bin Wang and Sogou's CEO, Xiaochuan Wang and CFO, Zhou Zhou.

Before management begins their prepared remarks, I would like to remind you of the company's Safe Harbor statement in connection with today's conference call. Except for the historical information pending herein, the matters discussed in this conference call are forward looking statements. These statements are based on current plans, estimates and projections, and therefore, you should not place undue reliance on them. Forward looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward looking statement.

For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 20 F. With that, I will now turn the call over to Doctor. Charles Zhang. Charles, please proceed.

Speaker 2

And thank you for to everyone for joining our call. Let me okay, should I hold on? All right now. During the first quarter of twenty twenty, the COVID-nineteen outbreak inevitably impacted the overall economy and advertising industry as well. Facing these challenges, we continued to explore new opportunities and differentiated development strategies.

For Sohu Media Portal, as a mainstream media platform, we continue to refine the product to generate and distribute a large amount of timely and accurate information, especially regarding the pandemic and its prevention. For Sohu Video, we proactively explored new opportunities in the live broadcasting of medical and health related content and provided unique content and valuable information to our audiences. We'll continue to explore diversified revenue sources and the ways to further narrow losses. For Changyou, online games performed well during the first quarter, mainly driven by the solid performance of both TLBB PC and the legacy TLBB Mobile. The privatization of Changyou was completed on April 17, after which Changyou's profit will be wholly attributable to sohu.comlimited.

Going forward, we plan to increase the integration of resources and combine Changyou onto Sohu's platform. For Sogou, despite the challenging environment during the COVID-nineteen, Sogou's core search business continued to outperform industry. The search and mobile keyboard recorded new highs in terms of traffic and user base, respectively. Before I go into more detail about our key financial results, please be reminded that since Changyou's cinema advertising business ceased operations in the third quarter of twenty nineteen, the results that we will discuss today and comparative figures that we refer to here only cover continuing operations and exclude the cinema advertising business. So for the first quarter of twenty twenty, total revenues dollars $436,000,000, up 6% year over year and down 11% quarter over quarter.

On a non GAAP constant currency basis, total revenues would have been $15,000,000 higher than our reported revenues, which would be a 10% improvement year over year. Constant currency. Net brand advertising revenue, $26,000,000 down 40% year over year and 39% quarter over quarter. Search and search related revenue, advertising revenue, dollars $238,000,000, up 1% year over year and down 13% quarter over quarter. Online game revenues, dollars 133,000,000, up 35% year over year and 1% quarter over quarter.

Non GAAP net loss attributable to Sohu dot com Limited was $18,000,000 compared with a net loss of $52,000,000 a year ago, the first quarter of twenty nineteen and net income of $7,000,000 in the fourth quarter of twenty nineteen. Excluding the profit loss generated by Sogou, non GAAP net loss attributable to Sogou dot com Limited was $8,000,000 yes, net loss $8,000,000 compared with a net loss of $51,000,000 in the first quarter of twenty nineteen and a net loss of $6,000,000 in the fourth quarter of twenty nineteen. Now let me go through some of our key businesses. First of all, Media Portal and Sohu Video. During the first quarter of twenty twenty, the whole country and even the whole world suffered from the outbreak of COVID-nineteen.

Although we were ineptly affected by the pandemic as a mainstream media platform, we continuously focused on generating and distributing helpful real time reports and live broadcast to provide accurate and reliable pandemic information and prevention knowledge. On the product side, we continue to promote interactions between our core products and enhance the social features through product innovation, social network features. We inserted a live broadcast feature in our Sohu News app in the information stream where users can automatically transfer or jump to the Sohu Video app to watch in the live broadcast. We can instantly switch back to Sohu News app to browse other news with a single click. So these upgrades allow users to access timely and accurate information on Sohu's product matrix and further consolidate our advantage and influence as a mainstream media platform.

On the content side, media portal for our media portal in addition to our efforts consistently refine our product provide readers with a better user experience, we also work hard to seize author's fragmented time and facilitate the generation of high quality short and long form content. This has further improved communication and interaction between readers and writers. For Sohu Video during the COVID-nineteen outbreak, we accelerated the deployment of our live broadcasting capability and launched a highly regarded twenty four hour medical broadcast and it has focused on health topics. And related to pandemic news and prevention work, the opportunity to actively explore other verticals and also building knowledge platform that provide users with timely and accurate information and content to integrate the live broadcasting with our premium content using the during the previous volume. During the release of our launch our drama TV long form drama, well intended lab to and high school big band, we introduced a multi person microphone relay feature, which allowed audiences to interact with the show's actor directly.

The new initiative improved user engagement, allowing them to further boost the interest in and short form videos. On the monetization side, it is expected that the negative impact of the pandemic on the overall economy will continue for some time, though it appears that China is currently on track for recovery. Our advertising business and faced big headwinds in the first quarter, nevertheless, we actively worked on diversifying our revenue by integrating our resources and leveraging the synergies between our core products. Starting in April, some of our events resumed, such as our drone photography content and contest and Sohu Tech five g Summit. And furthermore, during the quarter, with the adoption of the above mentioned multi person microphone relay feature, we launched a new live broadcast called BOSS one plus one,

Speaker 3

which we invite celebrities in different industry segments to share their insight, views on trends economy in

Speaker 2

the market with the events and live broadcast to help advertisers further expand their branding and promote our position as a mainstream media platform. We'll continue to explore new opportunities to secure advertising budgets in the coming quarter. Next turning to Changyou. Following Changyou's privatization on April 17, Changyou's profit will be wholly attributable to sohu dot com Limited. However, these transaction was completed in the second quarter, the change is not reflected in our first quarter financials.

Going forward, we plan to increase integration of resources and combine Changyou onto Sohu's platforms for more opportunities. For the first quarter of twenty twenty, online game performed well. The Changyou financial results exceeded the top end of our prior guidance. For PC games, revenue for the first quarter rose significantly on a sequential basis, mainly due to the better than expected performance of TLBB PC. Due to COVID-nineteen outbreak, player engagement and willingness to pay saw notable improvements in the short period of time.

For mobile games, player engagement remained stable during the quarter with the launch of a new version, new expansion packs for the spring festival for legacy TLBB mobile, as well as several holiday events. However, we expect revenues from TLBB PC and TLBB mobile and user engagement to decline in the second quarter of twenty twenty as people get back to work. Looking ahead, Changyou will continue to execute its core strategy of top games. We'll continue to focus on MMORPG mobile games while developing some casual and strategy games. Meanwhile, Changyou intends to expand more into the international market for games.

Key games across different general are being developed in an orderly way. And we believe that Changyou is well positioned to roll out high quality games for players in the future. Lastly, for Sogou, in first quarter of twenty twenty, despite the setbacks in the macro environment and online advertising industry in China amidst COVID-nineteen, Sogou's core search business continued to outperform the industry. Both the core search and mobile keyboard recorded new highs in the quarter, thanks to the surge of users' demand for reliable information and high efficiency during the pandemic. Sogou Mobile Keyboard further expanded its DAOs by 9% year over year to four eighty two million, reinforcing its position as a third artist Chinese mobile app in terms of DAUs according to iResearch.

Further, Sogou carried out an all round upgrade across the core business, leveraging the leading AI technologies and tapped into new areas with high development potential. In addition, Sogou's smart hardware business maintained steady progress. Looking ahead, we expect Sogou to resume healthy growth post the pandemic with a steady momentum in search business and acceleration of growth in other businesses. Now let me turn to over to the call to Joanna, who will work through work you through our financial results. Joanna?

Speaker 1

Thank you, Charles. I will walk you through the key financials of our four major segments for the first quarter of twenty twenty. All of the numbers that I will mention are all on a non GAAP basis. You can find a reconciliation of non GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $50,000,000 down 33 year over year and 34% quarter over quarter.

Quarterly operating loss was $23,000,000 compared with an operating loss of $35,000,000 in the same quarter last year. For Sohu Video, quarterly revenues were $23,000,000 down 11% year over year and up 8% quarter over quarter. Quarterly operating loss was $11,000,000 compared with an operating loss of $34,000,000 in the same quarter last year. For Changyou, quarterly revenues, including 173,017,000 were $136,000,000 up 32% year over year and 1% quarter over quarter. Changyou posted an operating profit of $56,000,000 compared with an operating profit of $45,000,000 in the same quarter last year.

For Sogou, quarterly revenues were $257,000,000 up 2% year over year and down 15% quarter over quarter. Net loss was $31,000,000 compared with a net loss of $3,000,000 in the same quarter last year. Before we go through the outlook for the second quarter of twenty twenty, please note that after the completion of Changyou's privatization, Changyou changed its policies for its PLC subsidiaries with respect to distribution of cash dividends. As a result, it is expected that Changyou will recognize an additional accrual of withholding income tax of $88,000,000 for the second quarter of twenty twenty. For the second quarter of twenty twenty, we expect total revenues to be between $410,000,000 and $445,000,000 Brand advertising revenues to be between $32,000,000 and $37,000,000 This implies annual decrease of 16% to 27 and a sequential increase of 25% to 45%.

SOGO revenues to be between $260,000,000 and $280,000,000 This implies annual decrease of 8% to 14% and a sequential increase of 1% to 5%. Online game revenues to be between $102,000,000 and $112,000,000 This implies annual increase of news to 10% and a sequential decrease of 16% to 24%. Excluding expected accrual of withholding income tax of $88,000,000 discussed above, non GAAP net income and loss attributable to sohu.com Limited to be between a net loss of $5,000,000 and a net income of $5,000,000 And non GAAP net income and loss per fully diluted ADS to be between a net loss of zero one three dollars per ADS and a net income of $0.13 per ADS. Excluding the expected accrual of withholding income tax, GAAP net loss attributable to sohu.com Limited to be between 0 to $10,000,000 and GAAP loss per fully diluted ADS to be between Excluding the profit and loss generated by Sogou and further excluding withholding income tax, non GAAP net income attributable to sogou.com Limited to be between 0 and $10,000,000 and GAAP net income and loss attributable to sohu.comlimited to be between a net loss of $4,000,000 and a net income of $6,000,000 This forecast reflects SOAP management's current and preliminary view, which is subject to substantial uncertainties, particularly in view of the potential ongoing impact of the COVID-nineteen, which remains difficult to predict.

And this concludes our prepared remarks. Operator, we would now like to open the call for questions.

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. First question comes from the line of Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

Speaker 3

Hi, good evening guys. Just a question on perhaps Changyou and the other one on the media portal business. On Changyou, could management give us more color on the potential pipeline for the upcoming couple of quarters? We understand that there should be some uncertainty, but that would be great to hear management target and plan. And then on the MediaPortal business, probably also related to Sohu Video advertising as well.

We have seen a big decline in the first quarter because of the coronavirus outbreak, but we're also seeing a pretty nice recovery in the second quarter. So in terms of the advertiser segments, could you give us some color on the strength and weakness of different advertiser industries and which ones have been driving the recovery in the second quarter? Thank you.

Speaker 4

Okay. Hi, Adi. It's Yuzhao translating for Dylan and Yodin today. For self developed games, we will have Tetris and D and D Mobile for the next two quarters. For licensed games, we have one that have been launched in South Korea.

That is the POS Extreme Match. And, we also plan to launch some of the strategy in the coming quarters. Hi. Hi, As well as a tower defense product. Okay.

Speaker 2

To answer your second question about the media, yes, the brand advertising actually includes both the portal and video. It suffered some there's an impact in the first quarter. But if you look at the numbers, actually according to our forecast or estimate business outlook that is recovered actually pretty strongly, right, above the average I think above every industry level. So it's mostly from the portal side, but we are basically, as I said in the script that we actually channel through the different apps, the Sohu News app and Sohu Video app, especially the live broadcasting all happening on the Sohu Video app. But all these portal advertisers and they can have, you know, innovative new marketing, initiative with our live broadcasting with both app combined.

So that especially when people are not especially offline gathering are kind of restricted or limited or there is limited number of people appear in the same hall, this live broadcasting and the online format of communication actually help them to launch new products. So that's the because of our innovation in the live broadcasting area area in the first quarter, we are able to gain, get some real, good, you know, advertising deals. So the overall portal advertising, have recovered, stronger, you know, stronger than expected. And it's some I I can see some auto industry auto industry, you know, they're they're they're just there's kind of a rebound in the second quarter. They need to, you know, market their products.

It's almost like a, yeah, rebound, I would say, and also some other industries. I think lead led by the by the auto auto industry. Right?

Speaker 3

Yeah.

Speaker 2

I hope I answered

Speaker 3

very very much, All right.

Speaker 0

Thank you for the questions. I will take the next questions from the line of Thomas Chong of Jefferies. Please go ahead.

Speaker 5

Hi, management. Thank you for taking my questions. This is Matas asking on behalf of Thomas. Could management provide some colors on the SME and KA advertising mix? And moreover, could you talk more about the profitability timing?

Thank you.

Speaker 2

Yeah. The SME, I think for the Sohu grew Sohu side, the our recovery mostly are due to the brand advertising of some large brand brands because they can take advantage of our innovative products, the live broadcasting. Well, I think the Sogou side or Xiaopran can comment on the SME side. That represents SME companies advertising trend seems slower recovering slower than the brand from our experience. And the profitability, you're asking about profitability, right?

Schedule of probability?

Speaker 1

Yes.

Speaker 2

If you look at our forecast for Q2, excluding Sogou, the group because in q two, there's excluding seventeen days of profit contribution from Changyou. There's in ninety days, you have, like, you know, sixty, you know, seventy seventy three days of contribution of earning from Changyou. And with the the, you know, cost management of Sohu Sohu and also the relatively recovery of the brand advertising, we have a forecast of actually profit excluding Sogou of between 0 to $10,000,000. You can see that. So that's basically the, you know, the the time the the schedule.

It's already already q two, we are going we are going, you know, to be profitable. Yeah. Any other questions?

Speaker 0

Thank you. I'll take the next questions.

Speaker 2

Okay.

Speaker 0

Alright. Thank you, Harlan. Please continue.

Speaker 2

Yeah. Which is true.

Speaker 0

Thank you. Okay. Next question. Thank you. Our next questions comes from the line of Alicia Yap of Citigroup.

Please go ahead.

Speaker 5

Hi. Good evening, Charles and management team. Thanks for taking my questions. So wanted to get a sense on the impact of the postponing of the Olympic in terms of the ad budget this year. So how are advertisers spending commitment change?

Are these budget gone with the postponing of the event? Or are they redeploying some of that to other events? And then related to the guidance, which I think you alluded to actually much better than the industry standard. So how much are we expecting to get from the new live broadcasting initiative in the second quarter? And how should we think about into the second half as well?

Will Sohu actually get benefit from these new features that we are introducing? Thank you.

Speaker 2

Yes, I think definitely the postponement of the Tokyo Olympics have a it's among many things that cannot postpone. So it's very hard see this one event, what's the impact on advertising. Yeah, we have improved or better than expected results for Q2 because these live broadcasting technology application of the technology technologies and not only helped with the some of those brand advertisers, you know, to to secure secure deals, secure advertising deals from them. It it's just and also, it helped it it becomes it it becomes very much needed because all companies need to have an online, offline strategy. And Sohu Video or Sohu The Matrix can provide that solution to them.

And also but most importantly, it actually helped Sohu's own event. As if you look at the 02/2019, we had a lot of events, marketing events, or or we call it, you know, content activities as content because and then all these almost due to the COVID nineteen, postponed it. But because of our own technology, we are able now to launch it in Q2. Like in Q2, we launched the drone contest event. And with online, offline technology help.

And also, launched the the talents for for for for campus, you know, basically, you know, the contest of. And, also, we we were able to to hold to to hold the you know, it took place yesterday. Right? The the five g forum with online, offline. We with, like, probably only 200 people or less than 200 people, you know, in in a at at a site in a in a in a conference in a conference hall.

But, you know, there are hundreds of thousand people are watching And also even some panelists can actually interact with the panel from anywhere in the world. So that help us. So it's really actually these new online broadcasting technologies that helped our own events. And these events are a a kind of a catalyst or some kind of, you know, to help us to secure some really, marketing deals.

Yeah. As we as it did in 02/2019, and then it's continued to, it's working, because of this new approach. So I think this trend will continue. In the in the second half of the year, we will refine our technology and with also new applications, new like application VR or even five g technologies. So we will be able to help to have a more innovative tools for company to market themselves at the time of COVID nineteen.

And so we will look at a a a, you know, a continued, a profitable quarters after quarters. I'm I'm saying that excluding Sogou. Of course, we we we hope that Sogou will also recover in the second or third quarter. Yeah.

Speaker 5

Okay. Thank you, Charles.

Speaker 0

Thank you for the questions.

Speaker 2

Okay, great.

Speaker 4

Okay.

Speaker 0

We do have the last questions from the line of Forum Tech Research. Chang Chu, please go ahead.

Speaker 4

Hey, good evening, Charles. You know, after Changyou's privatization, I just wonder, do you guys have any changes in terms of the strategy, in terms of resource allocation? Will you, you know, keep Changyou going, you know, grow and, know, put necessary resource into it to grow the gaming business?

Speaker 2

I think most part for the most part, I think Changyou will continue to operate like a, you know, a a a company. And then to to really have good games and really the, you know, really compete in the game industry, just like a a independent company. And then the the group, the Sohu side, they can only try to you know, if we we you can do something if we can help Changyou to grow. Say, let's say, some of those games some of the games are are suitable or good for for the Sohu platform to market the games. And then it will very cost effective.

We'll do that. But still, Changyou, there is a lot of, you know, other platform that Changyou have to spend money to to buy, to to to distribute the games. So and there is some synergy, but I will be very cautious. We want we want to make sure Changyou continue to to fight and compete like a, you know, a a stand alone company and compete with industries. Thank

Speaker 0

you for the questions. At this time, there are no further questions on the line. Thank you, ladies and gentlemen. That does conclude the conference call for today. You may now disconnect your lines.