Sohu.com - Earnings Call - Q3 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Seoul's Third Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in 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, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

Speaker 1

Before management begins their prepared remarks, I would like to remind you of the comprehensive 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 including its most recent annual report on Form 10 k f.

Speaker 2

With that,

Speaker 1

I will now turn the call over to Charles Zhang. Charles, please proceed.

Speaker 3

Thanks, Huangbo, and thank you to everyone for joining our call. For the third quarter of twenty nineteen, through although there is still much uncertainty in the macroeconomic environment, both of our total revenue and our bottom line exceeded our prior guidance, mainly driven by our online gaming and search businesses, as well as the continued cost saving initiatives that we are pushing through in our Sohu Media and Sohu Video segments. Sohu Media is making a comeback as a mainstream media platform with an enormous amount of high quality original content and various events. These premium features further enhance the reputation of Sohu Media and its sub brands and further strengthened our overall competitiveness. For our Sohu Video, we continue to deliver unique and high quality dramas and other shows for our users.

We also integrating various social functionalities into our products to help users build and find their own unique social community. We also strictly kept our budget under control and are actively exploring new ways to diversify our revenue streams in cooperation with advertisers. While in the third quarter two thousand nineteen, Sogou experienced healthy growth and its search revenue continued to grow faster than industry average. Besides, Sogou consistently focus on integrating its language centric AI capabilities to fully support innovations in search, mobile keyboard, and smart hardware businesses. And lastly, Changyou.

So overall performance continued to be stable. In addition to the solid results delivered by TLBB PC and the legacy TLBB Mobile, TLBB Honor, a new mobile game launched during the quarter, also performed well. Before I go into more details about our key financial results, please be reminded that since Changyou's cinema advertising business ceased operations, This release is related to continuing operations only and excludes results from Changi's cinema advertising business. So for the financials for the third quarter, our total revenues, $482,000,000, up 9% year over year and 4% quarter over quarter. If on a non GAAP constant currency basis, total revenues would have been $1,313,000,000 dollars higher than our reported revenue, which would be a 12% improvement year over year instead of 9%.

Net brand and brand advertising revenues, $46,000,000, down 19% year over year and up 5% quarter over quarter. Search and search related advertising revenues, $288,000,000, up 13% year over year and 4% quarter over quarter. Online game revenues, a $108,000,000, up 13% year over year and 6% quarter over quarter. Non GAAP net loss attributable to sohu.comlimited was 17 US 17,000,000 US dollars, decreased by 26,000,000. No.

Decreased by 26% compared with that of the second quarter of this year. Excluding Sogou and Changyou, the non GAAP net loss was $53,000,000, decreased by 31% compared with a year ago, and decreased by 22% compared with the February. So now let me go through some of our key businesses. First, our media portal business. In the third quarter of twenty nineteen, we continued our comeback as a top tier media platform that generates and distributes premium content.

In particular, we strengthened our influence in a number of verticals, including technology, finance, fashion, and others, which constitute our sub brands. During the quarter, we successfully hosted the fifth China drone photography contest, which attracted more than six hundred six hundred participants hailing from over a hundred fifth 50 cities cities nationwide. This contest not only enriched our content library with a large number of high quality photos, short videos, vlogs, We also gained a lot of attention and interest from both users and advertisers. In the fourth quarter, we will continue to launch high profile and influential events such as the AI Summit and Soul Fashion Award to further take advantage of our brand and credibility, continuing to cooperate with third party writers via Soul Foo and encourage them to contribute in-depth content. Overall, the number of registered writers on our platform, Zoho, has increased steadily.

On the product side, we are actively focusing on ways to improve our recommendation algorithms and refine the social features. This social function not only helps attract more users and increase the users' distance, but also encourage users to share content, improve interactions. And the result, users are viewing their social networks, winning the Sohu News app and contributing more high quality UGC content. During the quarter, as I mentioned before, the macroeconomic environment is still fairly challenging. It means we have seen budget shrink across industries.

In response, we implement implemented stricter cost and expense controls, improved resource utilization, and focused monetization and revenue growth potential. For example for example, through the fifth China drone photography contest, we provided various marketing solutions to our advertising clients that were supported by our in-depth understanding of their needs. With this effort, we expect the financial losses of Sohu Media to further shrink in the coming quarters. Now moving to the Sohu Video. During the quarter, we further developed our two engine strategy by building up the distribution of long form content through our theater model and distribution of short form video clips, user generated content, UTC content through our recommendations recommendation plus feed model.

With strict budget controls and continued efforts to improve monetization, we were able to reduce the operating loss to $20,000,000 which was solid improvement from the loss of $27,000,000 in the same quarter last year. We expect to continue improving the bottom line of Sohu Video in the coming quarters. For the video content, following the successful broadcast of Well Intended Love season Well Intended Love season one. And we started shooting the season two this quarter, benefiting from our brand advantages of idol romance dramas. The second season has seized advertisers' attention and began to secure advertising dollars.

Well, for reality shows, we launched the third season of sending a 100 girls home. Translation is really really funny. A reality show featuring white collar women. We improved the interaction between viewers and enhanced the distribution of the show by initiating a related topic in our product through which users can generate and post short term content mostly in re re log format. So these initiatives both been well in cc, the audience, the advertisers.

We also kept upgrading our product through user friendly functions and personalized features. Users can easily find a content and content provider that they are interested in and content providers can generate and distribute UTC as well as access followers more quickly and effectively. As a result, the content providers and users are able to interact more closely and quickly, therefore, build up their own social network. Next, turning to Sogou. In the third quarter of twenty nineteen, Sogou experienced healthy growth and maintained its position as China's second largest search engine.

Search revenue continued to grow faster than the industry average. During the quarter, mobile keyboard reached reached 464,000,000 DAUs, up 14% year over year, reinforcing its position as the third largest Chinese mobile app in terms of DAUs according to our research. We expect we with respect to Sogou's recommendation service that leverage the mobile keyboard, revenue ramped up quickly and it's on track to become the second growth engine following search. In terms of AI, Sogou consolidated its language centric AI technologies to fully support innovation in search, mobile keyboard, and smart hardware businesses. And further, reinforce its different the differentiation differentiation advantage and leading position in the sector.

Moreover, in October, Sogou renewed their its cooperation with WeChat. So Sogou service will continue to be the preferred search engine on WeChat for third party search services to access external Internet content. Lastly, Changyou, for the February, Changyou's overall financial performance continued to be stable, and online game businesses performed well. Its revenue and profit both exceeded prior expectation. For PC game, Changyou launched a new expansion pack of TLBB PC and roll out this year's second promotional event to sustain player engagement and stabilize the in game consumption.

Changyou will continue to focus the core strategy strategy to maintain user engagement and maximize maximize the longevity of the the legacy PC games, such as TLBB. For mobile games mobile games, revenue from legacy TLBB mobile increased slightly in the third quarter, mainly thanks to new content that introduced introduced or introduced during the quarter, which helped to drive higher player involvement. Besides, Changyou also launched TLBB Honor, a new MMORPG mobile game due to less expensive game content. However, since the game content is not particularly expensive, its revenue contribution and profitability are not comparable with, like, say, TLBB mobile. Going forward, MMORPG mobile games will continue to be Changyou's strategic focus, while some schedule and strategy games are also under development for a diverse diversified product portfolio.

So now I will turn the call over to Joanna, our CFO, who will walk you through other our financial results. Joanna?

Speaker 2

Thank you, Charles. I will walk you through the key financials of our four major segments for the third 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 $25,000,000, and quarterly loss was $31,000,000.

For Sohu Video, quarterly revenues were $22,000,000, and quarterly loss was $20,000,000 Excluding Sogou and Changyou, non GAAP net loss was $53,000,000 compared with a net loss of $77,000,000 in the third quarter of twenty eighteen and a net loss of $68,000,000 in the second quarter of twenty nineteen. For Sogou, quarterly revenues were $350,000,000 up 14% year over year and 4% quarter over quarter. Net income was $41,000,000 compared with net income of $28,000,000 in the same quarter last year. For Changyou, quarterly revenues, including $1.07 $1.07 3, were a $111,000,000, up 9% year over year and down 4% quarter over quarter. Changyou posted net income of $34,000,000 compared with net income of $67,000,000 in the same quarter last year.

For the fourth quarter of twenty nineteen, we expect total revenues to be between $435,000,000 and $470,000,000 brand advertising revenues to be between $40,000,000 and $45,000,000 This implies annual decrease of 21% to 30% and a sequential decrease of 3% to 14%. So go revenue should be between $290,000,000 and $310,000,000. This implies annual decrease of 3% to annual increase of 4% and a sequential decrease of 2% to 8%. Online same revenue to be between $95,000,000 and $105,000,000 This implies annual increase of 1% to 12% and a sequential decrease of 3% to 12%. Non GAAP net loss attributable to sohu.comlimited to be between $12,000,000 and $22,000,000 and non GAAP loss per fully diluted ADS to be between $0.30 and $0.55 GAAP net loss attributable to sohu.comlimited to be between $17,000,000 and $27,000,000 and GAAP loss per fully diluted ADS to be between $0.45 and $0.70 excluding profit loss generated by Sogou and Changyou.

Non GAAP net loss to be between $45,000,000 and $50,000,000 GAAP net loss to be between $48,000,000 and $53,000,000 For the fourth quarter twenty nineteen guidance, we used a presumed exchange rate of RMB 7.1 to $1, which compares with the actual exchange rate of approximately RMB 6.91 to $1 for the fourth quarter of twenty eighteen and RMB 6.99 to $1 for the third quarter of twenty nineteen. Lastly, please be reminded that we won't take questions regarding Changyou's privatization proposal in the Q and A session. And this concludes our prepared remarks. Operator, we would now like to open the call for questions.

Speaker 0

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

Speaker 4

Hey, good evening. I have two questions about the media business. The first one is about the advertisers spending. Are we seeing more pressure on our small and medium sized enterprises or more on our key accounts? And if you could remind us the revenue mix between SMEs and key accounts for media business, that would be great.

And then secondly, could you also talk a little bit about your top advertising industries and how are they trending? Thank you.

Speaker 3

Yes, this is Charles. Yes, the macroeconomic situation had a larger impact over the key accounts compared with the SMEs. So the like the auto industries and some key IT sectors are under pressure. While the fast moving consumer goods product are more resilient and environment, I mean, more less impacted. In terms of percentage, I think it's, let's say, 25% of our no.

Yeah. 25% or 30%. Twenty twenty five percent of revenue are coming from the small and medium SME, about 70% about from the brand, the brand. But even among the brands, there is some key factor like auto really affected by the fast moving consumer goods those are less affected.

Speaker 4

Got you, Thank you.

Speaker 3

Welcome.

Speaker 0

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

Speaker 5

Hi, thanks management for taking my questions. I have a question regarding the online video sector. Can management comment about the regulatory environments these days and how we should think about our timing of profitability? Should we expect it's a profitable business next year? Any color would be great.

Thank you.

Speaker 3

The regular, in terms of media business, well, the regulation is has been ongoing. There's not not much, you know, major events that have an impact on the on the on on the regulation side. We are looking at the media advertising business. The the loss will continue to be, you know, less. So the it will shrink.

And but it seems it's as we just reported, the it's it's 31% 71,000,000, right, loss. So it's still far from reaching profitability on its own. But combined with the video and also with the contribution from Changyou and Sogou, the the group Sogou Group, you know, the the profitability were actually you know, it's we're we are already achieving $70,000,000 non GAAP loss. So give us, you know, a couple of quarters, and we should be able to reach profitability on group level.

Speaker 5

Got it. Thank you,

Speaker 3

Charles. Okay.

Speaker 0

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

Speaker 6

Hi. Good evening, Charles and other management. Thanks for taking my questions. I have two quick questions. Number one is, Charles, related to the Sohu media.

So can you elaborate a little bit besides the photography content, what are the content also the high quality original content that you refer to that results to a comeback and the strength in the Sohu Media? And will that improving content quality translate to higher revenue opportunity? And have you seen the higher demand from advertiser on this improved content? And then second is just wanted to to follow-up on the video, I guess, from a lot of different peers. They were commenting about because of the the National Day where the kind of 3Q, 4Q, some of the content got delays or affected by this tightening regulation.

So just curious, have we seen any easing of the regulation last two weeks given now we passed the National Day celebration and also passed the congress meeting? So any anticipations of the relaxing of the video content in the coming weeks or any comments about next year in terms of further tightening, that will be great. Thank you.

Speaker 3

Okay. So first of all, the Sohu Media, not just the drone competition that contribute a lot of photographic video we lost, but the overall Sohu Media, first of we have this Sohu Hall, like the we have actually over 600,000 Sohu writer account where the all these writers contribute to, you know, the content and to to post their content on the Sohu Hub. And also, among the 600,000, more than 600,000, there's a lot of in house accounts, manage I know, in house accounts of Sohu's own accounts that cover Sohu technologies, know, Sohu finance, Sohu fashion. And internally, we basically to, you know, just manage better and for the for our own authors to write better articles, to report more accurately, to really make sure and also to to really become very professional, very, you know, to report industry events more, you know, with more depth in-depth analysis and also and so that's the overall improvement of our content generation. And also we continue to improve the algorithm so that Sohu News app to, you know, to basically to match the right content with the right, you know, the users, you know, individuals.

So that's overall the content improvement. And also another feature is really we consider as a media platform, we consider, you know, activities to be content generation source. Like, so we long we have this forum, like a five g forum or upcoming AI forum. And we have this Sohu fashion for fashion event. All these events and also recently the the the Sohu school girls, beauty contest, you know, all those kind of things.

Those are are just not a good, you know, ways to generate good content also and also opportunities for for advertisers, brand advertisers to to to sponsor those events. And together with your, you know, routine, you know, advertising on our platform, they they are more likely to in competing for deals because of Sohu's unique events so that the the the money will probably, you know, move towards Dolby instead of a compete competing platform. So these are the the ways that probably we under you know, even with the the the, you know, the worsening of the macroeconomic situation, we were able to achieve a, flattish or even a kind of increase of brand advertising. So and on the video side, we've been as as we said, you know, that we have this double engine or two engine strategy. One is really the theater long format video.

But on that part, we have this we really keep our pace really slow because we we this year, we spend in order to control cost, you know, we we really spend less on new drama, you know, creation. But we have such a, you know, a library of dramas that we purchase either purchased or we we produced over the years. So by better, you know, personalize those content to people. And so we actually being able to to have the you know, a flattish or even some increase of the of the sub subscriptions income of the Sohu video. We do delay, you know, our two dramas.

And now after after the National Day, we are in q four, we are we we look we look forward to to launch two two drama. Yeah. It's it's kind of you know, regulation wise, it's eased a little bit, but it's had less, you know, impact or kind of to Sohu because we are now rely more on more and more on some short videos and and some social social function social network functions, for social video instead of purely, depend on on the long form of extensive, you know, videos, or or dramas. Yeah. To answer your

Speaker 6

question. Yes. Yes. It is. Thank you so much, Charles.

Speaker 3

Alright.

Speaker 0

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.