Sohu.com - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and good evening. Thank you for JingSoHu's Third Quarter twenty twenty 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

Speaker 1

you

Speaker 0

have any objections, you may disconnect at this time. I'd 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 2

Thanks, operator. Thank you for joining us today to discuss Sohu's third quarter twenty twenty results. On the call are Chairman and Chief Executive Officer, Doctor. Charles Zhang CFO, Joanna Liu 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 common Safe Harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed 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 statements.

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 3

Thanks, Wang Yu, and thank you to everyone for joining our call. In the third quarter twenty twenty, to further consolidate our core competitiveness and credibility, we continued to optimize our products, refine our technology, enhance the quality of premium content and improve its distribution. At the same time, we kept exploring, created new and differentiated monetization opportunities, Benefiting from our more mature and sophisticated Sohu Video app and its advanced live broadcasting technology, we successfully hosted many innovative content marketing campaigns that could leverage the broad reach of our product portfolio. We saw positive feedback feedback in terms of user interaction and from advertisers. So for this quarter, despite the current challenging macroeconomic environment, our brand advertising revenue reached the high end of our prior guidance and achieved 8% quarter over quarter growth.

Our game business Changyou's online games performed well for the third quarter of twenty twenty with revenue exceeding the high end of our prior guidance. So before I go into more detail about our key financial results, please be reminded that on 09/29/2020, our controlled subsidiary of Sogou and the subsidiary of Tencent entered into an agreement and the plan of merger, which contemplates that Sogou will become a wholly owned subsidiary of Tencent. And on the same date, we entered into a share purchase agreement in which we agreed to sell all of our Sogou class a and class b ordinary shares to Tencent shortly before the completion of the merger transaction between Tencent and Sogou. Accordingly, Sogou's results of operations have been excluded from the company's results from continuing operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison.

Unless indicated otherwise, the results that we talk about here are related to continuing operations only. So for the third quarter of twenty twenty, total revenues USD 158,000,000, down 6% year over year and 1% over quarter over quarter. Brand advertising revenues, dollars 41,000,000, down 11% year over year and up 8% quarter over quarter. Online game revenues were $101,000,000 down 6% year over year and 4% quarter over quarter. GAAP net loss from continuing operations attributable to Sohu Limited sohu.comlimited was 50,000,000 US dollars compared with a net loss a net loss of 33,000,000 US dollars in the third quarter of twenty twenty nineteen, and net loss of US77 million dollars in the second quarter of twenty twenty, but that was due to the tax planning for Q2.

Non GAAP net loss from continuing operations attributable to sohu.comlimited was net loss of $7,000,000 compared with a net loss of $30,000,000 in the third quarter last year and net loss of $75,000,000 in the second quarter of twenty twenty. Now let me go into the each key businesses. First, media portal and video. So we continue to upgrade our products, improve the technology, and refine social distribution features. We stimulated the generation of new content and further expanded our content dissemination.

User interaction was enhanced on both the Sohu News app and Sohu Video app. We're constantly looking for new ways to boost organic growth across our products while strictly controlling the budget. In addition for Sohu Video, we further strengthened our to engine strategy with long form and short form videos and accelerated the layout of value live streaming where we disseminate professional knowledge and the reliable information across various vertical areas. We continue to concentrate on improving our live streaming technology and have applied these advanced technologies to various events, which allowed users to interact with each other in real time and without upper limit of user numbers. During the quarter, we successfully hosted a number of flagship events such as the Sixth International Drone Photography Contest, Huiyo campus beauty contest, the best selection series, you know, live streaming e commerce basically, and others with our enhanced video sharing technology.

We not only stimulated online and offline interaction among viewers, but also enhance the generation of high quality content, improve distribution across the sellers. On the monetization side and with these technologies and the more mature Sohu Video app, we proactively explored new monetization opportunities and increased our monetization efficiency featured as value streaming, live streaming and live commerce. ZhiBoDai Huo provided a new way for the advertisers to promote their brand and stimulate sales. Under the live commerce, we share ideas, knowledge and thoughts about lifestyle while recommending premium products. We're able to meet advertisers' marketing demand and capture their attention and budgets.

So going forward, we'll continue to diversify our monetization strategies and actively explore new opportunities. Now let me turn to Changyou game business. For the third quarter of twenty twenty, Changyou's online games performed well. For PC games, Changyou launched this year's second in game promotional event, and there's holiday event for TLBB PC, which maintain user engagement and the games revenue remained stable on a sequential basis. For mobile games, Changyou launched a new expansion pack for legacy TLBB mobile featuring the addition of new clan and the new method of character development.

Next quarter, Changyou will continue to focus on maintaining user stability by updating game content and making optimization for TLBB PC and the legacy TLBB mobile. More recently, in October, Changyou rolled out some special server for TLBB PC that used the content from an old version of the game. It it has already attracted some players that we lost over the years who love the game and feel nostalgic for their experience from years ago. We expect these new servers will drive up revenue for TLBB PC by some extent in the fourth quarter. Looking ahead, Changyou will firmly execute its core strategy of top games.

Changyou strategic focus will continue to be on MMORPG mobile games, while we're also developing and looking to roll out other games across various gen and general generals. Currently, the development of several key games is well underway, and we believe Changyou will bring more quality games to market in the future. Now let me turn to Joanna, our CFO, who works you through our financial results.

Speaker 4

Thank you, Charles. I will walk you through the key financials of our major segments for the third quarter of twenty twenty. All of the numbers that I will mention are all on a non GAAP basis. You may find a reconciliation of non GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $25,000,000 down 3% year over year and up 9% quarter over quarter.

The quarterly operating loss was $23,000,000 compared with an operating loss of $31,000,000 in the same quarter last year. For Sohu Video, quarterly revenues were 23,000,000 up 1% year over year and 2% quarter over quarter. The quarterly operating loss was $12,000,000 compared with an operating loss of $20,000,000 in the same quarter last year. For Changyou, quarterly revenues, including $1,700,173,000,000 were $104,000,000 down 6% year over year and 5% quarter over quarter. Changyou posted an operating profit of $33,000,000 compared with $35,000,000 in the same quarter last year.

For the fourth quarter of twenty twenty, we expect brand advertising revenues to be between $37,000,000 and $42,000,000 This implies annual decrease of 11% to an annual increase of 1% and a sequential decrease of 10% to a sequential increase of 6%. Online game revenues to be between $140,000,000 and $150,000,000 This implies annual increase of 6% to 14% and a sequential increase of 38% to 48%. Non GAAP net income from continuing operations attributable to sohu.comlimited to be between 50,000,000 and $25,000,000 and GAAP net income from continuing operations attributable to sohu.comlimited to be between $10,000,000 and $20,000,000 This forecast reflects Sohu's management current and preliminary view, which is subject to substantial uncertainty, particularly in view of the potential ongoing impact of COVID-nineteen virus. Lastly, please be reminded that in the Q and A session, we won't take questions regarding any Sogou business updates or the agreements with Tencent for Sogou's privatization. And this concludes our prepared remarks.

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

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Speaker 5

Hi, good evening. Thanks management for taking my questions. My question is about the brand advertising. Can management comments about the trend for different key categories and how we should think about the momentum in 2021?

Speaker 3

Well, key sec sector. Right? Auto industry, number one. Yes.

Speaker 1

And then Internet.

Speaker 3

Internet services followed by real estate. Yeah. That that's the top three categories. Yeah. We achieved a a 8% increase quarter over quarter.

I mean yeah. With, you know, this macroeconomic, basically, a challenging macroeconomic situation by being by being, you know, with well, we are we are having, you know, organic growth or to stabilize the user user base. So we are not spending a lot of money on on marketing channels, on marketing for our products. So but with this creative marketing events and the content actual content generation events and also with live streaming to, you know, beaming those events, This is very attractive to brand advertisers. That's the reason why we are able to achieve a advertising revenue growth without spending marketing sales cost more, yes.

Speaker 5

Thank you.

Speaker 0

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

Speaker 1

Thanks. I'm asking a question on behalf of Alicia Yap. For online games, can you remind us the breakdown of PC versus mobile games in the third quarter? And what are the drivers for the strong sequential growth of online games implied on your 4Q guidance? Thank you.

Speaker 3

Basically, the in q three, the the division between the PC game and mobile game. Right?

Speaker 1

In terms of revenue, PC game accounts for 61% in the third quarter and mobile games, 39%. In terms of gross billing cat receipts, PC game accounts for 45% and the mobile game accounts for 55%. In the fourth quarter of the increase mainly due to TLBB PC, actually, we launched some special servers, like Charles mentioned, that have old version as for its content and attracted some Nostalgic experience. Attracted some players that we lost over years. And the other reason is, well, we launched a game called Illusion Connect in Korea South Korean market.

Thank you. Got it. Thank you.

Speaker 0

Thank you. Your next question comes from the line of Chang Chew from Forentech Research. Please ask your question.

Speaker 6

Yeah. Good evening, management. Your guidance in online games are very encouraging. I just wonder, is that, you know, we are going to a growth mode for the online games going forward?

Speaker 1

Yes. Think currently, we can only say the performance of fourth quarter.

Speaker 6

Or maybe can you provide us some outlook in terms of your pipeline in games? What are you going to do next year?

Speaker 1

We have couple of games that the development is well underway. But the schedule is depends on the license approval applying progress and also the testing and their adjustments progress. So it's not very easy to predict the specific launch date. But for those games that we have obtained the license approval, we may have some more specific timing. Two of those are Project Z, Sea of Dawn, Lining Zhihai and also Tetris.

We have had license approval. We will launch the two games in the next year. Next year, we will also put more efforts in the overseas market. We will launch some other new games in the overseas market. Thank you.

Speaker 6

Thanks. That's great.

Speaker 0

Thank you. Our next question comes from the line of Alex Ko from Morgan Stanley. Please ask your question.

Speaker 7

Hi management thanks for taking my question. So I have a question on Sohu Video. So we know that the industry peers have been stepping up for content investment these days. So just want to get more color like how would the management plan to navigate like this kind of industry trend and like the content investment strategy going forward? Thank you.

Speaker 3

Well, we have as I just said, we have this two twin engine strategy with long form content and then short form, basically UDC. So for the long long form, our spending on basically to produce a, like, 12 at most 15 episodes drama episodes with the reasonable investment and then make sure that it's it can again, you know, you know, it become a hit with much less spending compared with our peers. So that was so our spending on on producing the long form TV dramas remain similar to the previous year. And and then so but for this UGC and also social, you know, network product of video, it's it's not much it doesn't need a lot lot of investment. And also this live streaming, it's user generated.

Though all the spending are on the product development.

Speaker 7

It. Thank you.

Speaker 0

Thank you. All right. There are no further questions. So with that we conclude our conference for today. Thank you for participating.

You may all disconnect.