Sohu.com - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer 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, Pu Huang, Investor Relations Director of Sohu. Please go ahead.

Pu Huang (Director of Investor Relations)

Thanks, operator. Thank you for joining us to discuss Sohu's second quarter 2024 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang, CFO, Joanna Lu, and Vice President of Finance, James Deng. Also with us are Changyou, CEO Dewen Chen, and CFO, Yaobin 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 on the 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 Dr. Charles Zhang. Charles, please proceed.

Charles Zhang (Chairman and CEO)

Thanks, Huang Pu, and thank you everyone for joining our call. In the second quarter of 2024, we hit the high end of our prior guidance in brand advertising. Revenues, well, our online game revenues came in well, came in well above expectations. Our bottom line performance was in line with our prior guidance. For Sohu Video, Sohu Media, and Sohu Video, leveraged by our increasingly integrated and sophisticated product matrix, we further promoted the generation and consumption of premium content, and vigorously boosted social interactions among users. Benefiting from our differentiated events and marketing campaigns, we were able to continually strengthen our brand influence and explore a diverse range of monetization opportunities. Online games performed well, with revenues exceeding our expectations. Before going through each business unit in more detail, let me first give you a quick overview of our financial performance.

For the second quarter of 2024, total revenues $172 million, up 13% year-over-year, and 24% quarter-over-quarter. Brand advertising revenues $20 million, down 17% year-over-year, and 24% up quarter-over-quarter. Online game revenues $147 million, up 24% year-over-year, and at 25% quarter-over-quarter. The GAAP net loss attributable to Sohu.com Limited was $38 million, compared with a net loss of $21 million in the second quarter of last year, and a net loss of $25 million in the last quarter.

Non-GAAP net loss attributable to Sohu.com Limited was $34 million, compared with a net loss of $18 million last year, second quarter of last year, and a net loss of $22 million in the first quarter of this year. Now, let me go through the key businesses in more detail. First, Sohu Media and Sohu Video together. We consistently optimized our products, introduced innovative features, and further enhanced user experiences. We have built up a close connection among the platform's content creators, and same time, they are also users. These enhancements greatly promoted a continuous generation and distribution of diversified content, improved user engagement, and inspired active social interactions. During the quarter, we focused on stimulating content innovation through various online and offline events, and actively explored opportunities in developing our influential online interest clubs in different verticals.

For example, the 2024 Sohu Video K-pop Master Class has attracted nationwide attention and recognition from large number of K-pop fans. We'll follow this up by launching 2024 Sohu K-pop Dancing Festival. Last year, we also did that, so second annual event this year. In early August, besides K-pop, we have also hosted various events related to the traditional Chinese Hanfu costume and photography. These events have gained notable traction and recognition as younger users with same interest flocked to our flourishing online interest clubs. Meanwhile, in June, we hosted our traditional flagship event of 16th Sohu News Marathon in Shenzhen this time. During the marathon, entrepreneurs, sports celebrities, and pop stars actively shared their ideas and their pictures by broadcasting short video clips on Sohu News app and Sohu Video app and the social network channel.

These have provided us with abundant premium content, stimulating user engagement and social interactions across our platform, as well as attracted various advertisers at budgets. Furthermore, we continue to enrich our video content library by acquiring exclusive dramas, rolling out unique original content, and introducing short-form dramas, short-form clips, short-form dramas. Our original drama, Present Is Present, [Foreign language], and Olympic variety show topic variety show reality show, Be a Hero, [Foreign language], were both well-received by audiences and generated widespread discussions across various social media platforms. Although advertisers remain relatively cautious in the quarter, thanks to our knowledge base and video platform, and advanced and live broadcasting technology, and the strong dissemination ability, we were able to strengthen our differentiated advantages and continue to explore innovative monetization opportunities.

For example, we integrated our distinctive, my own, Charles' Physics, physics class into various marketing campaigns, which were highly appreciated by advertisers. This class helped us capture advertising budgets, because through these, during the events, we not only helped audiences simultaneously comprehend, the physics knowledge behind, you know, especially the auto industry, auto car, companies, the products, the cars, the physics, knowledge behind the, products, also promoted branding for advertisers. Meanwhile, we kept integrating advertisers' needs into our traditional content marketing campaigns to maximize the monetization value we offered. Next, turning to online game business.

During the quarter, online game business performed well, with revenues exceeding prior guidance, as our TLBB series has remained stable, while New Westward Journey, [Foreign language], a licensed card-based RPG that we launched during the quarter, performed well. In our PC game business, we launched various events for regular TLBB PC to celebrate its anniversary. We also supplemented and optimized its gameplay and the content based on player feedback. With TLBB Vintage, we introduced a team PVP event to satisfy players' demands of combat. In our mobile game business, we launched an expansion pack for Legacy TLBB Mobile for its anniversary, updating its graphics and adding a fun strategic gameplay, which were well-received by players. Next quarter, we will continuously launch expansion packs and content updates for the TLBB series, series, New Westward Journey, and other titles to keep players engaged.

As market competition intensifies, the market demand becomes more diversified, we will forge ahead with our top game strategy, continuously optimizing the R&D process, enhancing execution, and expanding our international presence. In addition, we will continue to invest in professional talent development, as well as content and technology innovation, in order to bring more high-quality games to the market. We'll maintain our core competitiveness on MMORPGs going forward, while also seeking to make breakthroughs in multiple types of games, including card-based RPGs, sports games, and casual games, et cetera. Now, I would like to give an update on the ongoing share repurchase program for Sohu. As of August 1, 2024, Sohu has repurchased 2.3 million ADS for an aggregate cost of approximately $26 million. With that, I now turn the call to CFO Joanna. Joanna, please.

Joanna Lu (CFO)

Thank you, Charles. I will now walk you through the key financials of our major segments for the second quarter of 2024. All the numbers are on a non-GAAP basis. You may find a reconciliation of non-GAAP to GAAP measures on our IR website. For Sohu Media and Sohu Video, quarterly revenues were $24 million, compared with $32 million in the same quarter last year. Quarterly operating loss was $72 million, compared with an operating loss $67 million in the same quarter last year. For Changyou's online game business and 17173, quarterly revenues are $148 million, compared with $120 million in the same quarter last year. Quarterly operating profit was $32 million, compared with operating profit $49 million in the same quarter last year.

For third quarter of 2024, we expect brand advertising revenues to be between $70 million and $90 million. This implies annual decrease of 14%-23%, and a sequential decrease of 4%-14%. Online game revenues to be between $104 million and $114 million. This implies annual decrease of 3%-11%, and a sequential decrease of 22%-29%. Non-GAAP net loss attributable to Sohu.com Limited to be between $13 million and $14 million, and the GAAP net loss attributable to Sohu.com Limited to be between $34 million and $44 million. This forecast reflects Sohu's management's current and preliminary view, which is subject to substantial uncertainties. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Operator (participant)

Thank you. As a reminder, if you'd like to ask question, please press star one one and wait for your name to be announced. One moment for the first question. The first question comes from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong (Managing Director)

Hi, good evening. Thanks management for taking my question. My first question is about the brand advertising business. Can management comment about how the macro headwinds affect the advertising market, quarter to date? Because if I look at the guidance, we are expecting a sequential decline of 4%-14%. Just want to get some color with regard to sectors like auto, FMCG, internet service, and property sector. How are we seeing the quarter to date so far? And my second question is about our gaming business. Given that we are expecting our gaming business to decline by about 22%-29%, I just want to get some color with regard to the sequential decline.

Is it mainly due to Westward Journey? How should we think about TLBB series? And my third question is about our share repurchase program. Given that we have a $150 million share repurchase program, how should we think about the share repurchase in the second half, if any color? Thank you.

Charles Zhang (Chairman and CEO)

Okay, thank you for the question. And let me first of all, on advertising, the overall macroeconomic situation is not that good, the downward trend. So advertising is still a challenge, you know, a big challenge because advertisers are very cautious in spending, and some advertisers tend to, you know, to have the effect, you know, effect-driven advertising, right? They want to. Brand side is spending less, so overall it's not good.

But because of, as I just said, I just said that, you know, scripted report that we've been using innovative marketing campaigns and this platform, innovative platform to was able to to attract some brand advertising spending, so that we achieved a 24% quarter-to-quarter increase over Q1. And, of course, in Q1, in Q2, the auto industry spending is, you know, is more, is spent more compared with Q1. And, in the long run, auto industry is, it's still, it's hopeful. It looks promising.

But it's still very competitive and there's the electric car, BEV, I think, you know, is upcoming and increased, but the electric cars are really phasing out from the because of the price wars and everything. So Q2 auto now have a 25% of our overall advertising, and then also internet services. So Q2 the auto spend more, and also Q2 is a e-commerce quarter, new especially like the 618, you know, June 18th. And in the summer the FMCG is coming up because of the hot weather and the drink companies, beverage companies are start spending. So that's the overall. Yeah, that's the advertising situation. About Changyou, Dewen Chen.

Dewen Chen (CEO)

[Foreign language]

Joanna Lu (CFO)

The sequential decrease of the third quarter gaming revenue guidance is mainly because Westward Journey, which accounts about half of the decrease, and the natural decline of other older games accounts the other half.

Charles Zhang (Chairman and CEO)

And then about the share repurchase, we've been we spent $26 million out of the $150 million. We have a program of $150 million repurchase, right? So, we'll keep the same pace in Q3 to. Because of the limitation of the volume, the total volume, percentage volume, right, each day. That's why we're not able to. To purchase, you know, faster or so or same pace in Q3.

Thomas Chong (Managing Director)

Got it. Thank you, Charles.

Charles Zhang (Chairman and CEO)

All right.

Operator (participant)

Thank you for the questions. One moment for the next question. Next question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap (Equity Research Analyst)

Thank you. Good evening, Charles and management, thanks for taking my questions. A few questions here. One, number one, wanted to follow up on the gaming question. So, 3Q, the guidance obviously implying there is a sequential reversal or decline, mainly, as you mentioned, half of this is driven by Westward Journey. Just wondering, will this game actually have a chance to rebound in the later quarters? Or you actually would expect, you know, after the decline, there's probably less hope for that to recover back to the 2Q level. And then second question is on your sales and marketing spend. Obviously, 2Q, due to the game promotion, you spent a very big number, which I think is you guided.

But then for 3Q, the loss guidance, it also seems to be implying, the expenses side is, seems to be remaining quite high. So, can you maybe elaborate a little bit, among the expense in terms of the gross margin trend, and also the sales and marketing trend? And then just, related to that on the last question, is that, any, planning or initiative, for you to think about to narrow your operating loss in the coming quarter? Thank you.

Yaobin Wang (CFO)

[Foreign language]

Alicia Yap (Equity Research Analyst)

We think there is possibility for New Westward Journey to rebound because it's a licensed game, and before we have some, we were kind of divided about the game's improvement and its development direction with a third-party developer. Recently we have agreed upon it, and the center will be around the user's experience. We did a lot of user research. If those measures are effective, we think it should have chance to recover. Thank you.

Yaobin Wang (CFO)

[Foreign language]

Alicia Yap (Equity Research Analyst)

Actually, the retention rates before 30 days are excellent, and the main problem lies in the content after 30 days. So we, actually, we have postponed our overseas plan for overseas release plan, and we hope we can improve the game, modify the game, solve the problem, and after that, we will release the game in the overseas market.

Yaobin Wang (CFO)

Thank you.

Alicia Yap (Equity Research Analyst)

The growth margin for online game will recover in the third quarter because the marketing expenditure and as well as the revenue sharing payments will decrease as well.

Operator (participant)

Thank you for the questions.

Dewen Chen (CEO)

Okay, thanks.

Operator (participant)

As a reminder to ask questions.

Alicia Yap (Equity Research Analyst)

Um.

Operator (participant)

Sorry, please go ahead.

Alicia Yap (Equity Research Analyst)

Sorry. I wanted to follow up any, you know, plans or initiative to narrow the operating loss in the coming quarters?

Dewen Chen (CEO)

In terms of game or the overall Sohu?

Alicia Yap (Equity Research Analyst)

Overall, overall business. I mean,

Dewen Chen (CEO)

You know, first of all.

Alicia Yap (Equity Research Analyst)

Probably on the.

Dewen Chen (CEO)

Well, a lot depends on the gaming spending, because that's the large part, right? So if the game does not rebound in Q3, then our spending will not, you know, be as much. So gross margin definitely will improve for the gaming part. For Sohu, I think we are at, you know.

Charles Zhang (Chairman and CEO)

You know, people often ask us about, you know, the, you know, with our cash, you know, how are we going to spend our cash? Besides, you know, repurchasing of the shares, we are actually still in a battlefield, right? So we need to build a user base. And only when we have a, you know, a sizable user base that we can turn the Sohu part, the media part, to be turned into profitable, turn profitable. So we need to invest in building the products, developing the products, and also acquire new users and that's where we're going to spend. So I think on the Sohu part, the gross margin will be similar, right? Or, yeah, we'll spend, keep spending.

Alicia Yap (Equity Research Analyst)

I see. I see. Thank you, Charles. Maybe just slip in one last one regarding the cash position. I mean, given there is this 20% daily limit restriction, any other, you know, thinking about other shareholder return policy that in your mind?

Charles Zhang (Chairman and CEO)

No. No, no, not now. Yeah.

Alicia Yap (Equity Research Analyst)

Okay, all right.

Charles Zhang (Chairman and CEO)

Yeah, yeah, buyback. Yeah, buyback is one of the main one, and then the best one is we are very confident. We are hopeful that we are going to build a, you know, successful, be successful in building up the user base, and then to turn Sohu into a profitable. Turn the, yeah, into a, you know, highly prof- a profitable company. That's the best reward for our shareholders.

Alicia Yap (Equity Research Analyst)

Okay. Thank you, Charles.

Operator (participant)

Thank you for the questions. Once again, to ask question, please press star one one. There are no more questions on the line. I would like to conclude today's conference call. Thank you for your participation. You may now disconnect your lines.