Sohu.com - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's Second Quarter twenty twenty Earnings Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn 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 twenty results. On the call are Chairman and Chief Executive Officer, Daozheng Zhong CFO, Zhongli and Vice President of Finance, James Deng. Also with us today are Changyou's CEO, Douwen 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 here on this conference call may contain 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 the 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, Hong. Thank you for everyone for joining our call. In the second quarter of twenty twenty, our brand advertising business performed well. The brand advertising revenue had a decent increase, up 48% quarter over quarter. Both the brand advertising revenue and the bottom line exceeded our prior guidance.

During the quarter, we integrated our media portals brand advantage and influence with Sohu Video's advanced live broadcast technologies. These initiatives allowed us to more effectively generate and distribute our high quality original content and further enhanced our credibility with reflecting the attitude of that and values of Sohu. For Changyou, the privatization was completed on 04/17/2020. And after that Changyou's net income and loss was wholly attributable to sohu.comlimited. During the second quarter twenty twenty, online game revenues met our prior guidance and declined quarter over quarter, mainly due to the resumption of work following the easing of COVID-nineteen restrictions.

For Sogou, it delivered in line results in the second quarter with search, maintaining a steady share of traffic and mobile keyboard input further expanding its DAU base. Before I go into more detail of our key financial results, please be reminded that for the second quarter of twenty twenty, Changyou recognized an additional US88 million dollars accrual for withholding income tax since Changyou changed its policy for its TRC subsidiaries for the distribution of cash dividends after the completion of the privatization. In addition, back in the third quarter of twenty nineteen last year, Changyou's cinema advertising business ceased operations. Unless indicated otherwise, the results that we will discuss today exclude the impact of the above mentioned withholding income tax and the cinema advertising business. So now, for the second quarter of twenty twenty, total revenues were $421,000,000 down 9% year over year and 3% quarter over quarter.

Brand advertising revenues $38,000,000 down 14% year over year, up 48% quarter over quarter. Search and search related advertising revenues, $241,000,000, down 13% year over year and up 1% quarter over quarter. Online game revenues, dollars 1,000,000, 100 and up 4% year over year and down 21% quarter over quarter. GAAP net loss attributable to sohu.comlimited was $80,000,000 excluding the impact of the additional accrual of the withholding income tax described above, GAAP net income attributable to sohu.comlimited was $8,000,000 compared with a net loss of $35,000,000 in the second quarter of twenty nineteen and a net loss of $20,000,000 in the first quarter of twenty twenty. Excluding the impact of additional accrual of withholding income tax described above, non GAAP net income attributable to sohu dot com Limited was $11,000,000 income.

Further excluding the loss generated by Sogou, non GAAP net income attributable to Sohu dot com Limited was $12,000,000 compared with a net loss of $41,000,000 in the second quarter of last year and a net loss of $8,000,000 in the first quarter of twenty twenty. So now let me go through some of our key businesses. First, Media Portal and Sohu Video. For Media Portal, we continue to consolidate our core competitiveness and credibility as a mainstream media platform by generating and distributing news and premium content. We also continue to upgrade the quality of our content and recommendation algorithms to provide users with broader and a more personalized experience.

As a result, we saw the consumption of content increase significantly during the second quarter. For video, we continue to strengthen our long form and short form so called two engine strategy. For the long form original content, we released the two original idol romance dramas. One is the High School Big Band and also another one is My Dear Lady, which were well received by audiences and gained widespread attention. For short form content, we further strengthened our live broadcast capabilities.

We've been able to establish a good reputation with our medical and health areas, live broadcasters by generating and distributing accurate and reliable information in these areas. We'll continue to push forward in this area while proactively exploring new opportunities in other verticals. On the monetization side, we kept exploring new monetization opportunities by integrating the brand influence of our media portal with Sohu Video's advanced broadcast technologies. During the quarter, we successfully hosted several events that integrated both online and offline features. We launched a new live broadcast series called the BOSS plus one plus one, where we invited industry celebrities to share the inside views on the economy and the market, wherever they are using the live broadcast sharing technology.

We also successfully host the Sohu Tech five gs Summit and Sohu News Marathon, which broke geographical boundaries and provided participants with broader views and a greater experience wherever they are. In June, July, we moved further towards the field of e commerce by hosting the best of sister selection live from Sohu. We invited celebrities to share their thoughts on live while recommending premium goods, the favorite products, the goods they use. We have seen a number of positive results from these new initiatives, given that they are providing advertisers with a variety of marketing strategies that fit the current moment and meet general public demand. Going forward, we'll continue to diversify our revenue sources and actively explore new opportunities to secure advertising.

Next, let's talk about Changyou. For the second quarter twenty twenty, online game revenues decreased for quarter over quarter and met our prior guidance, mainly due to a decrease in player engagement as a result of the work resumption following the East COVID-nineteen pandemic in China. For PC games, Changyou launched a new expansion pack of TLBB PC during the quarter with various anniversary events and also new maps and dungeons that were developed using advanced rendering technologies. All of this new content served to greatly improve the user experience. For mobile games, an expansion pack of legacy TLBB mobiles three year anniversary was launched during the quarter.

The newly introduced the gameplay, which allowed players to explore randomly generated content was also well received. For the third quarter of twenty twenty, Changyou will focus on stabilizing player engagement and roll out in game rewarding reward giving events and fresh content for TLBB PC and the legacy TLBB Mobile. Looking ahead, Changyou will continue to focus on executing its core strategy of top games. MMORPG mobile games will remain a key strategic focus while we are also scanning the market for opportunities across the various genres as they look to diversify as we look to diversify our product portfolio. Meanwhile, we'll also increase expanding our efforts overseas.

Currently several key games are being developed and prepared for launch. We believe Changyou will bring more quality games for players in the future. Lastly, let me talk about Sogou. Despite great challenges under the COVID-nineteen pandemic, Sogou has been proactively upgrading its development strategy to focus on generating more user value and building out a business that is oriented toward a long term value and growth. In the second quarter of twenty twenty, Sogou delivered in line results with healthy momentum in its core search and mobile keyboard businesses.

Sogou Search maintained a steady share of traffic and reinforced its position as China's second largest search engine mobile keyboard further expanding its DAU base to four eighty four million maintaining the third largest Chinese mobile app in terms of DAUs according to iResearch. In addition, its AI hardware business recorded solid growth during the quarter. Going forward, Sogou will further boost AI empowerment and the synergies across their businesses while continually drive technological advances. Now let me turn to over the call to over to Joanna, our CFO, who will walk you through our financial results. Joanna?

Speaker 3

Thank you, Charles. I will walk you through the key financials of our four major segments for the second 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 $22,000,000 down 7% year over year and up 49% quarter over quarter. The quarterly operating loss was $80,000,000 compared with an operating loss of $38,000,000 in the same quarter last year. For Sohu Video, quarterly revenues were $22,000,000 up 6% year over year and down 4% quarter over quarter. The quarterly operating loss was $10,000,000 compared with an operating loss of $23,000,000 in the same quarter last year. For Changyou, quarterly revenues, including $17,001,182,000,000 up 3% year over year and down 20% quarter over quarter.

Changyou posted an operating profit of $37,000,000 compared with an operating profit of $38,000,000 in the same quarter last year. For Sogou, quarterly revenues were $261,000,000 down 14% year over year and up 2% quarter over quarter. Net loss was $6,000,000 compared with net income of $28,000,000 in the same quarter last year. For the third quarter of twenty twenty, we expect brand advertising revenues to be between $37,000,000 and $42,000,000 This implies an annual decrease of 9% to 20% and a sequential decrease of 3% to a sequential increase of 11%. Online game revenues to be between $85,000,000 and $95,000,000 This implies annual decrease of 12% to 21% and a sequential decrease of 10% to 20%.

Excluding profit loss generated by Sogou. Non GAAP net loss attributable to sogou.comlimited to be between $10,000,000 and $20,000,000 and GAAP net loss attributable to sohu.comlimited to be between $50,000,000 and $25,000,000 This forecast reflects Sohu's management's current and preliminary view, which is subject to substantial uncertainty, particularly in view of the potential ongoing impact of COVID-nineteen virus, which remains difficult to predict. Lastly, please be reminded that we won't take questions regarding any Sogou business updates and Tencent's nonbinding proposal for Sogou privatization in the Q and A session. And this concludes our prepared remarks. Operator, we would now like to open the floor to questions.

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question.

Speaker 4

Hey, good evening guys. Just two quick questions. The first one is about broadcasting. I think Charles, you mentioned that there has been some synergy from using the influenza as well as broadcasting. Wondering if you have any operating metrics or financial share to share with us on the performance of broadcasting you achieved in the quarter?

And how is it growing into third quarter? So that's my first question. The second question is about games. I also think you mentioned that after people returning to work, there has been some weakness in the game industry in general. So just wondering whether we have seen some stabilization on that front.

And as we enter summer, which traditionally should be a good quarter in general for the gaming industry? Any color on the general industry trend of gaming industry into third quarter would be great. Thanks.

Speaker 2

So Eddie, your first question is about live broadcasting, right?

Speaker 4

Yes.

Speaker 2

So we have quite a like, I think on a daily basis, we have like dozens of influencer to broadcast. And then there's probably 10 or 20 that we actually using our platform to market them. So there's a so these are the live broadcast, like we're using general push to market about 10 broadcasts. Then we call it a value broadcasting or we call it where the people from like the medical health industry or lifestyle or cosmetic industry or those kind of influencer to teach people and to about knowledge, things, information. And then we have some few top live broadcast, like myself participate, each month we do like three or four with some top celebrities and to be able to share the life experience and some products and then we are able to connect our live chat room or live broadcast room to e commerce platform like Jingdong or Taobao and others.

So that when a celebrity recommend some products they use, then the users can click that small cart, shopping cart to be delivered directly to the e commerce platform to purchase. So we're not so because of this transaction based advertising, basically some and also we actually give them a reward or some kind of lottery for people to click. So that it's not really the sales volume of those products, it's really the whole the chat rooms, the popularity and also the celebrities recommendation or verbal recommendation or those kind of things, the good advertising that become a good reason for some the big advertisers spend money on our overall advertising. So this is a central part of the whole contract. Am I answering your question, Eddie?

Speaker 4

Yes. So basically, there is no direct e commerce revenue, I think, right? So Charles, you are using the content to attract advertising in general. That's actually the current There business

Speaker 2

is e commerce revenue because the advertisers, they give us a deep discount better because so actually why people are it becomes so popular and people are really coming to this chat room, because they are getting the best price online, because the Jingdong and Taobao, those or the advertiser, they are willing, because this is really good for the brand. They are willing to give the deep discount to us. So that price difference is considered to be our e commerce revenue. But that I'm saying that's not a big part. The main part is really the total advertising dollar that advertiser spent.

It like drives the whole it's become very important component of our overall contract. Let's say, if our car company or I mean auto company spend like RMB3 million advertising, in this contract probably like RMB1 million was spent on this chat room advertising. And also we are able to get that 3,000,000 contract because we have this component. It's very creative and it's very it's get everyone got talking about this.

Speaker 4

Yes, understood. And any color on the industry trend of games heading into summer, which traditionally a strong quarter would be helpful? Thank you.

Speaker 2

So the people are compared with Q1, people are spending less time at home. And also actually people are because of the declining economy, people are spending people have less disposable income, right? The two reasons that so that the right?

Speaker 5

First of all, during the pandemic, they're different for different gaming companies and different numbers of games. So we got different impact caused by the pandemic. For our mostly our games are MMO, hardcore RPG games. So we rely on those Huiyou players to or higher paying users. So we benefited from the restrictions in the first quarter.

But during the second quarter, we see we saw some pressures on the economy. So we saw some pressure on the payment players' investment in games. So you can see that from the data in the second quarter, we had a decline APA number. So but we expect in the third quarter, it will be stabilized.

Speaker 4

Got it. Thank you. So

Speaker 2

my question is stabilized, but the earnings less because of the cost increase, right, because of the marketing of

Speaker 4

the Okay.

Speaker 5

The industry will be more stabilized. Okay.

Speaker 2

All right. Next.

Speaker 0

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Speaker 6

Hi, thanks management for taking my questions. I think first, I have a question about the 3Q brand advertising guidance. Given that is a negative 3% to positive over 10% sequential growth. I'm just wondering under what circumstances would we expect to hit the low end and the high end of the guidance? And can you comment about the ad spending among different categories?

And my second question is about the China and The U. S. Tension. Does that have any impact to our revenue coming from international advertisers? Thank you.

Speaker 2

To answer your second question, we don't have you mean international advertiser.

Speaker 6

Like those international brands.

Speaker 2

So for international advertising, they actually increased their advertising. Yes, it's actually better. So to answer your second one, your first question, I think the wide range of the range, right, of the forecast depends on really the COVID-nineteen situation, the economy and yes, so we'll continue our innovative product innovation and user base development to that, trying to momentum about the economy and the uncertainties. So that would give a wide range of forecast.

Speaker 6

I see. Thanks, Charles. Is there any color about our key categories? Is the momentum similar to what we saw recently?

Speaker 2

I think it's a euro allocation like auto industry and then auto, I think then FMCG that's moving And like Internet e commerce. Yes, e commerce. I think e commerce is number two, right? Auto is number one. Two.

Then some IT companies, right? Yes. And then followed by financial industry sectors, right? Financial industry.

Speaker 3

Real estate.

Speaker 2

Real estate. Yes, real estate also. Yes, that's the euro rank, yes, ranking of this spending.

Speaker 6

I see. Got it. Thank you, Charles.

Speaker 2

Okay.

Speaker 0

Thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Speaker 7

Hi, thank you. Good evening, Charles and management. Thanks for taking my question. I have two questions. One is that following the closer integrations of your app system and the sales team between the Sohu Video and Sohu Portal.

So could you elaborate and help us to understand more the future prospect of Sohu Portal? What is your plan and aspiration to transform the Sohu Portal to become true? And then the second question is on your video content strategy. So assuming you are getting more cash, will you spend more money in video content production again? Or will you actually continue your strategy on cutting the loss on the video business?

Thank you.

Speaker 2

Yes, we have now clear strategy for both our key application. That means the portal the Sohu News app and the Sohu Video app. Well, we have other H5 based Sohu and also PC, that's another our focus really on the Sohu News app and the Sohu Video app. On the Sohu News app, the product innovation will mostly focus on the two information delivery mechanism is one is really we'll continue to have high quality content, editorial content and original content and also content with collaborators. But the delivery through editorial delivery plus the machine delivery, basically the algorithm, we'll continue to improve the algorithm so that the news becomes so relevant to each individual users and information and also the percentage of video content in the information stream.

The second delivery is also our focus is really the social network. I mean social media delivery basically people are followers and those kind of we have a different channel for that. That's the two areas that we believe will be the driver for our news apps user growth. And for video, the long form content is this drama And then the short form is really the short video clips like basically the YouTube type, people are actually upload short video. And people also produce short video by live broadcasting.

Live broadcasting as a way to produce short form or not even short form, sometimes people broadcast for one hour and then become a one hour replay. So these are the also the two top two type of and then delivery also is there is the front pages editorial delivery and also we have also this is the social media delivery. These are the especially the social media delivery, the following followers and the tweet, retweet and those kind of, it's our focus. And then the synergy of this two app for live broadcast, we don't allow we do not allow the news app to reinvent the wheel to have a live broadcast feature. But the whole company has only the live broadcasting feature at the Sohu Video app and other user base will be the traffic will be driven to the news app to the video app for that's the synergy where like the some of those are live broadcast.

Because previously, before the Sohu video app had well known for its TV drama and The U. S. American dramas. But now it's now established as one of the key live broadcast app and also some kind of key breaking news app, the video news and then people using the news app are more likely to watch this kind of content. And then there are you can there's a link or a direct link between the two apps so that people using news app can directly one click away just to drive enter that into the live broadcast room to watch those live broadcast content video content of news type or other knowledge type, just the long form of the video drama.

So it's kind of complicated and I think, I hope you see, you understand what I'm saying. Mhmm. Yeah. We are looking at basically a matrix matrix of user base with the two app specializing in in its features and the content form. And also the H5 shows more of the traditional PC and the PC and the more traditional browsing activities.

So it's a matrix of content. And then for video and live broadcast, all the traffic will divert it into the video app.

Speaker 7

So that means we are not going to spend more money in the long form content production again, right?

Speaker 2

We in the last few years, we've been able to manage to generate to produce some in terms of Xiaomi, like some low budget TV series episodes and then but could be a hit. We have we've done it many times. So if we have more money, we're not going to spend like we did in 2017 or 2016, spend a lot buying a lot of very expensive content, but probably will increase the density or frequency of, I mean, number of TV series per quarter, like in 2019, or let's say the first two quarters, we only have three TV episodes, right, TV drama. Then in the at the current pace, in the next half of this year, we only we also only have another two or right? But two, with if with more money, we'll probably only double that.

That means we probably have like instead of five or six TV dramas a year, we probably have 10 to tell, which so that means a lot of increase of spending on the long form. So our video business growth are most will be driven by the short form user upload, UGC content and the live broadcast. And any TV dramas will be an opportunity to develop new users because it's exclusive content here. So there are lot of users who will come here to watch our new TV dramas and they will stay because they not only watch that TV drama, they probably they find a lot of other social network features. So they will stay.

Yes, that's our strategy.

Speaker 7

Okay, great. Thank you, Charles. Very helpful.

Speaker 2

Okay. You're welcome.

Speaker 1

Thank you.

Speaker 0

All right. There are no further questions. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.