Sohu.com - Earnings Call - Q2 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Cerule's Second Quarter twenty nineteen 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 second quarter twenty nineteen results. On the call are Chairman and the Chief Executive Officer, Doctor. Charles Zhang CFO, General Li and Vice President of Finance, James Zhang. Also with us today are Chang'e CEO, Doron Chen and CFO, Yao Bin Wang 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 contained 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 statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including in 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

Thank you to everyone for joining our call. Under the current challenging macroeconomic environment, our total revenues stayed largely in line with our prior guidance. On bottom line performance, excluding the charge for impairment of assets recognized by Changyou related to cinema advertising business met the high end of our prior guidance. This was mainly driven by the continued cost savings that we were able to achieve at Sohu Video and the solid performance of our online game business. So for Sohu Media, Sohu Media is making a comeback and living up to its reputation as a top tier media platform.

We've been hosting high quality events, generating and distributing premium content, and strengthening our core competitiveness and credibility among media brands. Meanwhile, Sohu Video continues to provide users with unique high quality dramas and shows. We've seen the positive effects of this differential development strategy and stable improvement in monetization at both Sohu Media and Sohu Video. We hope to see further progress in the coming quarters. In the second quarter of twenty nineteen, Sogou achieved a steady growth in its core search business while Sogou Mobile Keyboard further expanded its user base and reinforced its position as the third largest Chinese mobile app.

For Changyou, both its revenue and profit exceeded expectations, including the aforementioned charge of impairment. For employment, Changyou is demonstrating a stable profitability while developing more games to provide a diversified product portfolio. Before I go into more detail about the key businesses, let me summarize our financial results for the second quarter. Total revenue was $475,000,000 down 2% year over year and up 10% quarter over quarter. On a non GAAP constant currency basis, total revenues would have been $32,000,000 higher than our reported revenue, which would be a 4% improvement year over year.

Net brand advertising revenue of $44,000,000 down 29% year over year and up 2% quarter over quarter. Search and search related advertising revenues, dollars $276,000,000, up 2% year over year and 18% quarter over quarter. Online game revenues, 102,000,000, up 8% year over year and 3% quarter over quarter. Operating loss for Suhu Video was $23,000,000 compared with a loss of $35,000,000 in the second quarter last year, a 33% improvement. GAAP net loss attributable to sohu.comlimited, dollars 53,000,000 compared with a net loss of $48,000,000 in the same quarter last year.

Non GAAP net loss attributable to zohu dot com Limited was $50,000,000 Excluding a charge of that impairment, as I recognized by Changyou in the second quarter of twenty nineteen related to the same time advertising business, non GAAP net loss attributable to sohu.comlimited was $38,000,000 an improvement of 22% year over year. Including Sohu and Changyou, non GAAP net loss attributable to sohu.comlimited was $68,000,000 an improvement of 15% year over year. Now let me go through some of our key businesses. First, media portal business. As I mentioned earlier, Sohu Media is currently making its comeback.

We're actively strengthening our influence across certain verticals such as technology, finance, and fashion. In second quarter of twenty nineteen, we successfully hosted Sohu Techne's five gs Forum, first year of the five gs era, which involved industry celebrities and gained widespread discussions as well as sustained influence. In early July, we launched the Fifth China Drone Photography contest, which will last June. This contest will show off a combination of technology and art, and we'll be able to generate and distribute a large amount of premium content on our platform contributed by this event. This event not only demonstrates our position as a mainstream media source, but also enhance our core competitiveness and credibility by allowing us to leverage high quality content across our platform, which generates further interest and discussion and attracts users as well as advertisers.

We are continuously focusing on ways to further improve our products and to generate great content. In addition, we're also constantly refining our recommendation algorithm and building social features, social network features and products. With the most updated versions of those products, users can these users can reach the content they're interested in more quickly and accurately. You know, so we don't need that. Most of these new app these new features can help users track news and content like they like and gather users with same interest in the communities where we can comment on the products and further interactions.

In other words, we are building tools for users to contribute the only user generated content, UGC, and also building all the interactive social network on our on the Sohu News app. Additionally, we are constantly engaging with encouraging third party writers to produce more in-depth content and around certain topics in order to further improve users stickiness. In this quarter, advertising revenues were inevitably influenced by the economic slowdown, especially in the auto and IT industries. In the face of these challenges, we worked hard to diversify our revenue sources while producing abundant high quality content with various events. This work is helping to attract advertisers and elevate our competitiveness and influence and should help us post a modest rebound in revenues in Q3.

We also continue to strictly control costs and expenses in order to limit the financial losses in the Sohu Media business. Moving to on over to Sohu Media. In the second quarter, we continued our two engine strategy with a balanced mix of original long form content and short clips, user generated content. We've been able to produce more and more high quality content such as much at lower cost and start a differential development strategy. We're happy to see some encouraging initial success.

Sohu Video is ranked number four on CI Week, the online video app ranking list for the first half of twenty nineteen. In the second quarter of twenty nineteen, we were able to produce to reduce our operating cost loss for the unit to $23,000,000 which was a $33,000,000 improvement no, 33% improvement from loss of $35,000,000 in the same quarter last year. We plan to strictly keep our budget under control in the second half of this year and further improve the bottom line. In terms of content, we have developed a more in-depth understanding of idol romance and criminal themed dramas, the two series. We have already created brand advantages in these two types of IP and received recognition among audiences as well as advertisers.

For example, Well Intended Love gained widespread attention and was ranked number four by Gu Duo among all original dramas in the first half of this year. Looking ahead, we will start shooting the second season of Well Intended Love and expect to release it next year. This is already there is already considerable buzz for the show among viewers, and we have seen significant interest in advertisers from advertisers. In July, we released the so called The Next Superstar, another popular idol romance drama in the second half of twenty nineteen. We released several criminal themed dramas, including, without knowing, Downbreak in the East.

So the next superstar in Chinese, and the without knowing downgrades in the East, in Chinese, So we believe we are well positioned to continue delivering attractive and diversified content on our video platform. Next, turning to Sogou. In the second quarter, Sogou maintained its position as China's second largest search engine. Search revenues continue to grow faster than the industry average. By the June, Sogou Mobile Keyboard DAU reached $450,000,000, up 17% year over year, and average daily voice request made via Sogou Mobile Keyboard increased by 72% year over year.

Furthermore, Sogou continued to implement the AI strategy of developing language centric AI technology and advanced its leadership in voice and computer vision with many industry leading pursuits. Lastly, for Changyou, for the second quarter of twenty nineteen, online game revenue, 102,000,000, which slightly exceeded the high end of our guidance. Revenue for PC games increased slightly quarter over quarter mainly due to the solid performance of several legacy PC games, which helped to offset a decrease in revenues from TLBB PC due to its natural decline in life cycle. During the quarter, Changyou launched an expansion pack for TLBB PC's twelve year anniversary. In the third quarter twenty nineteen, Changyou will launch a new expansion pack and introduce more in game content to sustain user interest.

Going forward for PC games, Changyou's key strategy is to maintain player engagement and maximize the longevity of legacy PC games such as TLBB. For legacy TLBB Mobile, Changyou continued to focus on long term oriented operational strategies and introduced new content to provide the players better experience. In Q2, the expansion pack launched for Legacy TLBB Mobile's two year anniversary introduced a great new gameplay for players resulting in higher user satisfaction. Furthermore, MMORPG mobile games will continue to be a strategic focus, while Changyou is developing a number of casual games and strategy games to provide a diversified product portfolio. Now let me turn to the call to CFO, Joanna, who will walk you through the financial details.

Speaker 1

Thank you, Charles. I will walk you through the key financials of our four major segments for the second quarter of twenty nineteen. 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 $24,000,000 down 27% year over year.

The quarterly loss was $38,000,000, which compares with a net loss of $37,000,000 in the February. For Sohu Video, quarterly revenues were $21,000,000, down 34% from a year ago. Of this, advertising revenues were $8,000,000. The operating loss for Sohu Video was $23,000,000, which compares with a net loss of $35,000,000 in the same quarter last year. For Sohu, quarterly revenues were $304,000,000, up 1% year over year and 20 quarter over quarter.

Net income was $28,000,000 compared with net income of $38,000,000 in the same quarter last year. For Changyou, quarterly revenues including $1.07 $1.07 3 were a $119,000,000, up 5% year over year and down 4% quarter over quarter. Changyou posted net income of $14,000,000 compared with net income of $28,000,000 in the same quarter last year.

Speaker 2

The first quarter

Speaker 1

of twenty nineteen, we expect total revenues to be between $445,000,000 and $470,000,000 Brand advertising revenues to be between $45,000,000 and $50,000,000. This implies annual decrease 12% to 71% and a sequential increase of 2% to 14%. Total revenues to be between $304,000,000 and $314,000,000. This implies annual increase of 10% to 14% and a sequential increase of nil to 3%. Online game revenue to be between $80,000,000 and $19,000,000.

This implies annual decrease of 6% to 17% and a sequential decrease of 12% to 22%. Non GAAP net loss attributable to sohu.comlimited to be between $22,000,000 and $32,000,000, and non GAAP loss for fully diluted ADS to be between 55¢ and 80¢. GAAP net loss attributable to sohu.comlimited to be between $25,000,000 and $35,000,000 and GAAP loss to fully diluted ADS to be between 65¢ and 90¢. Excluding the profit generated by Sogou and Changyou, non GAAP loss attributable to sogou.comlimited to be between $50,000,000 and $55,000,000 GAAP net loss attributable to sohu dot com Limited to be between $53,000,000 and $58,000,000 For third quarter of twenty nineteen guidance, we used our presumed exchange rate of RMB 6.9 to $1 which compares with the actual exchange rate of approximately RMB6.8 to $1 for the third quarter of twenty eighteen and RMB6.81 to $1 for the second quarter of twenty nineteen. With that, this concludes our prepared remarks.

Operator, we would now like to open the call to questions.

Speaker 0

The first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

Speaker 3

Good evening, management team. Thank you for taking my question. I would like to know if you could talk a little bit about the advertising outlook getting into second half of the year versus what we had in the second quarter? Particularly, could you also comment on the competitive landscape, which we heard have been affecting the advertising prices in the industry? Thank you.

Speaker 2

The macroeconomic situation definitely is really the pressure over advertising. But because we have so many I mean, there are so many factors. Certain factors are under pressure, auto, but there's a lot of other factors, verticals that actually we've seen even growth. And that's why for Sohu's media portal, are having a lot of activities, content generation activities and some unique marketing events that attract advertisers to advertise on our on the Secoo platform with with a premium with with this premium content so that we are able to attract. So that's why we are looking at even under this slowdown, economic slowdown, we are actually looking at a growth compared with Q2, right?

Yes. For advertising. And for videos, same thing. For video, we have some unique drama or variety shows that have the beauty and advertising. So we're not competing on price, but competing on premium event or content that can be competitive in getting advertisers.

Speaker 0

We have the next question comes from the line of Alicia Yeo from Citigroup. Please ask your question.

Speaker 1

I

Speaker 4

have a couple of questions. Number one is related to the latest regulatory environment and the restrictions on the TV dramas. What are the impact to Sohu Video so far, if any? Second question is related to this overall app sentiment weakness. I think Charles did mention on the prepared remarks inside Sohu Media, the portal, have some decent comeback.

So I wanted to get a sense in terms of how we should think about this into even a little bit further into next year? And what is mainly driving the more positive momentum on the media portal side? Thank you.

Speaker 2

Okay. First of all, the on the media content side, there is some regulations, but we are well we are, from the very start, choosing the topics and also to to work together with the authorities. So it's now has been not not a problem with, you know, with the the release of our TV dramas. Because, for example, there's a restriction on making some dramas of ancient times, right, the stories, old stories. But we only we now only produce modern dramas, comic themes of modern times.

So also relatively compared with the television TV dramas, they're relatively more relaxed because so, yeah, so it's not a problem within, like, Max About's actually well intended lab and also the phone, yeah, that superstar quite yeah. It's it's there's no way no no problem to to get the approval from the server. It's actually an interactive process with authorities to make sure that dramas get approved. In terms of media advertising into the so as I said in my answer to the first question, the premium activities or content generated activities or our for example, like our Sohu sponsored the Sohu News Marathon that involved a lot of celebrities that's getting advertisers because in that event, we have our social media and also the social video or as a reporting media to report these celebrities running marathon. It's been a project that has been been doing it for, like, the tenth time, eleventh time, actually.

So it's actually getting good advertisers. And also, like the other one that we just launched, the drone contest, the drone filming, right, drone filming contest, which are also getting good advertisers. So it's this kind of and also the forum that we have, the five gs forum and also next is the half year second half of the AI forum and the business forum. All these content generation activities are getting and generating premium content so that we're getting advertisers. So for this year and next, I think these kind of brand advertising will be it's unique that we can do so that it's competitive.

At the same time, in the long run, we hope that not only we'll continue with this brand advertising, with the events or premium content generated advertising, but also by developing better algorithm for news product news app and also social network features of news app and also Z Log and social network feature of the social video app And also HUIO, our social network product, we will have and together with our large traffic from the PC side where we accumulate over the years, and also the Sohu H5, the walk portal with that and a lot of traffic. So with all these, in the future, we hope that our traffic increase will have the momentum so that with the larger traffic, not only with brand advertising, premium brand advertising, but also the small media enterprises, long tail, standardized advertising will also pick up. So that's why with that with this two kind of advertising, we hope that next year into next year, our advertising business will be competitive.

Speaker 0

Thank you. Thank you. We have the next question, which comes from the line of Ray Jo from First Capital.

Speaker 2

Got it?

Speaker 1

Okay. Thank you.

Speaker 0

Alright. Thank you. Once again, if you wish to ask question, please press star one on your telephone and wait for your name to be announced. Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

You may now disconnect.