Sohu.com - Earnings Call - Q4 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Fourth Quarter twenty nineteen 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 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, Wang Ku, Investor Relations Director of Sohu. Please go ahead.

Speaker 1

Thank for joining us today to discuss Sohu's fourth quarter twenty nineteen results. On the call are Chairman and Chief Executive Officer, Josh 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 its most recent annual report on Form 20 F. With that, I will now turn the call over to Doctor. Charles Zhang. Charles, please

Speaker 2

proceed. Hello. Thank you to

Speaker 3

everyone for joining our call. During 2019, China's economy continued to slow down and competition intensified. However, these challenges did not stop us from exploring new opportunities and improving operating efficiency. As a result, our operating results further improved due to the solid performance of our business and effective cost saving initiatives. For the fourth quarter of twenty nineteen, excluding an impairment charge recognized for an investment unrelated to our core businesses, non GAAP net income attributable to sohu.comlimited was US7 million dollars profit.

Then separately for Sohu Media Portal, we strengthened our position as a mainstream media platform with high quality original content and diversity and also various events for Sohu Video with the unique and high quality drama drama and other shows to be actively searched for diversified monetization sources. And with improved monetization capabilities and strict budget control, Sohu Video was able to further trim its losses in 2019. And for Sogou, search revenue grew faster than the industry average. And revenues from Sogou's recommendation services that leverage Mobile Keyboard continue to experience robust growth. So in 2019, Changyou's online games performed well and took a number of steps to enhance its capacity to create new high quality games.

So before I go into more details of our key financial results, please be reminded that since Changyou's cinema advertising businesses ceased operations, The results that we will discuss today only cover continuing operations and exclude the cinema advertising business. So let me look at let me go through the fourth quarter twenty nineteen financial results. Total revenues, dollars $490,000,000, up 5% year over year and 2% quarter over quarter. On a non GAAP constant currency basis, total revenues would have been $8,000,000 higher than our reported revenues, which would be instead of 5%, it would be 7% improvement year over year. Net brand advertising revenues, 42,000,000 for the quarter, down 27% year over year and 10% quarter over quarter.

Search and search related advertising revenues, dollars $275,000,000, down 1% year over year and 5% quarter over quarter. Online game revenues, 132,000,000, up 40% year over year and 22% quarter over quarter. Excluding an impairment charge of approximately $23,000,000 that we recognized this quarter for an investment unrelated to the company's core businesses, non GAAP net income attributable to Sohu dot com Limited was $7,000,000 positive, which compares with the net loss of $51,000,000 a year ago, Q4 twenty eighteen. And also compared with the third quarter twenty nineteen, which is 17,000,000 loss a loss of $17,000,000 in the third quarter of twenty nineteen. So if we don't consider the contribution of profit and loss contribution from Sogou and Changyou, the and also for the the impairment charge, non GAAP net loss attributable to sogou.comlimited was $46,000,000 in Q4 compared with a net loss of $75,000,000 in a year ago, in the fourth quarter of twenty eighteen, so an improvement of $29,000,000 And also in Q3, the loss was $53,000,000 So that is an improvement of $7,000,000 Now let's look at the full year 2019.

Total revenues, 1,850,000,000.00, up 2% compared with 2018. Brand advertising was $175,000,000 down 25 compared with 2018. Search and search related advertising revenues, 1 point dollars 1,070,000,000.00, up 5% compared with 2018. Online game revenue, $441,000,000, up 13% compared with 2018. Non GAAP net loss attributable to Sohu Limited was a loss of $93,000,000 That compared with a net loss of $2.00 $7,000,000 in 2018, so cut by more than half.

Excluding the profit loss generated by Sogou and Changyou, the non GAAP net loss attributable to sogou.comlimited was two forty six million dollars compared with a net loss of $326,000,000 in 2018, dollars 80,000,000 improvement. So now let me look at go through some of the key businesses. First of all, the media portal and video businesses. The 2019, our for media portal business, we committed to strengthening our brand influence by generating, integrating and distributing news and premium content. While continuing with traffic we continue to track and focus on hot events, we also proactively produced high quality original content through a series of large events.

For the fourth quarter of twenty nineteen, we successfully hosted twenty nineteen Finance Annual Conference, AI Conference, Sohu Fashion Awards and others. All these events help to consolidate our competitiveness and enhance the credibility of Sohu Media by reflecting the attitude and values of Sohu. Further, we constantly upgraded our products, optimizing the algorithm and improved the overall quality of the content, some of which continues to help to our users and to our platform to keep them engaged. For Sohu Video, we continue to push a clean engine strategy with long form and short form content, both original content and short form user generated content, UGC. On the one hand, for the long form, we actively enhance our production strategy with differentiated content, especially related to idol romance and criminal theme dramas and culturally theme reality shows.

On the other hand, we continue to improve our features and social interactions around short form videos, basically, in a certain network of short clip short video clips and live broadcasting by encouraging users to post videos and share comments in communities and share their interests. And so video is constantly upgrading products and recommendation algorithms, basically recommending those recommendation algorithms for short videos and also the social network sharing short videos and communities, relogs and live broadcasting. So these initiatives have successfully increased our user base and overall user quality. So based on the two engine king engine strategy, we successfully carried out the diversified marketing and the monetization initiatives and provided advertisers those new ad management solutions embedded in various online or offline brands. For example, the original drama intended the Love two, National Boss L2O, Season two, work with advertisers to host an offline event to further boost advertising efficiency and embedded advertising in that popular drama.

And so overall, in 2019, with our consistent effort and strict budget controls, Sohu Video was able to further narrow its losses. In the fourth quarter of twenty nineteen, the operating loss was $18,000,000 which is 40% improvement compared with the same quarter 2018. So the full year operating loss for video was $94,000,000 which is a 33% improvement compared to 2018. So now if we look at the current quarter twenty twenty, as we all know that the novel coronavirus broke out and it has inevitably influenced the entire country and the world. Our media portal and video businesses were no exception.

So as leading mainstream media platform, we try to live up to the responsibility by releasing real time special events and launching live broadcast across our core products, including the Sohu Video apps. There is sports and broadcast distributed the latest news information about the epidemic in real time. We're also inviting many well known medical experts and express their views and advice on prevention and encourage our viewers to comment directly. Today, we have completed around 200 live broadcasts and press conferences related to the epidemic. And with the outbreak of novel coronavirus, the overall economic environment and the advertising business in particular are experiencing extremely difficult times.

At the same time, we noticed some advertisers are actively addressing their marketing promotion strategies. So we are closely collaborating together with advertisers to go through this challenging time and minimize the next news. Basically, our user base actually grow for our news media, but definitely our advertising business is it hit negatively. So next turning to Sogou. Sogou maintained a steady progress in 2019 driven by the dedication to continuously drive organic traffic growth and unlock monetization potential.

During 2019, Sogou Search remained China's second largest search engine and its search revenue continued to grow faster than industry average. Sogou consistently improved its content search and services, strengthened their content and service ecosystem. Sogou Mobile Keyboard increased its user base to four sixty four million DAUs, with 54% more daily voice requests on average year over year. Revenue from Sogou recommendation service that leverage the Mobile Keyboard continues to experience robust growth. Further in 2019, Sogou made great advances across their its core language based AI technology and the smart hardware business maintains healthy momentum.

The recording machine, yes. Lastly, for Changyou, in 2019, Changyou took a number of steps to enhance its capacity to create new high quality games focusing on its goal of developing top games, prioritize research and development R and D for mobile game development and continue to work hard on strengthening their existing game portfolio. For PC games, the new expansion pack for TLBB PC launched during the fourth quarter performed well and its revenue rose slightly on a sequential basis, which is better than previously expected. The fourth quarter of twenty eighteen revenue from United States TLBB Mobile increased significantly on a sequential basis. This was mainly attributable to newly introduced content and promotional events during the fourth quarter.

Looking ahead, Changyou will continue to execute its core strategy of delivering top games and strategic focus will continue to be MMORPG, mobile games. They will also seek to make breakthroughs in developing casual and strategy games. So now let me turn to Joanna who will walk through our financial results. Joanna?

Speaker 1

Thank you, Charles. I will walk you through the key financials of our four major segments for the fourth quarter and the full year of 2019. All of the numbers that I will mention are all on a non GAAP basis. You may find the reconciliation of non GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $23,000,000 Quarterly loss was $25,000,000 For Sohu Video, quarterly revenues were $22,000,000 and quarterly loss was $80,000,000 Excluding Sogou and Changyou, non GAAP net loss was $46,000,000 compared with a net loss of $25,000,000 in the fourth quarter of twenty eighteen and a net loss of $53,000,000 in the first quarter of twenty nineteen.

For full year 2019, Sohu Media portal revenues were $95,000,000 and a full year net loss of $130,000,000 Sohu Video revenues were $91,000,000 and a full year net loss was $94,000,000 Excluding Sogou and Changyou, non GAAP net loss was $246,000,000 compared with net loss of $326,000,000 in 2018. For Sogou, quarterly revenues were $3.00 $1,000,000 up 1% year over year and down 4% quarter over quarter. Net income was $39,000,000 compared with net income of $27,000,000 in the same quarter last year. For full year 2019, its total revenues were $1,170,000,000 up 4% compared with 2018. Net income was $105,000,000 compared with net income of $130,000,000 in 2018.

For Changyou, quarterly revenues were $135,000,000 up 35% year over year and 22% quarter over quarter. Changyou posted net income of $63,000,000 compared with net income of $23,000,000 in the same quarter last year. For full year 2019, total revenues were $455,000,000 up 5% compared with 2018. Changyou posted net income of $179,000,000 compared with net income of $123,000,000 in 2018. For the first quarter of twenty twenty, we expect total revenue to be between $400,000,000 and $435,000,000 Brand advertising revenues to be between 25,000,000 and $30,000,000.

This implies annual decrease of 30% to 42% and a sequential decrease of 28% to 40%. Sogou revenues to be between $240,000,000 and $260,000,000 This implies annual decrease of 5% to an annual increase of 3% and a sequential decrease of 14% to 20%. Online game revenue to be between $120,000,000 and $130,000,000 This implies annual increase of 21% to 31% and a sequential decrease of 1% to 9%. Non GAAP debt loss attributable to sohu.com Limited to be between $25,000,000 and $35,000,000 and then GAAP loss for fully diluted ADS to be between 65¢ and 90¢. GAAP net loss attributable to sohu.comlimited to be between $28,000,000 and $38,000,000 and GAAP loss to fully diluted ADS to be between $0.70 and $0.95 Excluding Sogou and Changyou, non GAAP backlog attributable to sohu.com Limited to be between $43,000,000 and $48,000,000.

GAAP cash loss attributable to sohu.comlimited to be between $45,000,000 and $50,000,000. For the first quarter twenty twenty guidance, we used a presumed exchange rate of RMB 7 to one dollar, which compares with the actual exchange rate of RMB 6.74 to $1 for the first quarter of twenty nineteen and RMB 6.03 to $1 for the fourth quarter of twenty nineteen. This forecast reflects the management's current and preliminary view, which at present is subject to substantial uncertainty, particularly in view of the potential impact of the COVID-nineteen virus, the effects of which are difficult to analyze and predict. Lastly, please be reminded that we won't take questions regarding China's privatization proposal in the Q and A session. And this concludes our prepared remarks.

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

Speaker 0

Certainly. Ladies and gentlemen, we will now begin the question and answer session. And wait for our name to be announced. If you like to cancel your request, please press the pound or hash key. There'll be a short silence while questions are being collected.

Thank you. The first questions will come from Eddie Leung from Bank of America. Please go ahead.

Speaker 4

Good evening, guys. Thank you for taking my questions. Could you talk a little bit about the top advertising industries for your news media business in the fourth quarter? And then in our first quarter, which advertising industries are seeing a bigger negative impact from the coronavirus outbreak than the others? And then secondly, about the video business, are not able to see the detailed breakdown of the balance sheet of different business units.

So just wondering if the video business would need capital raising and how is the cash flow of the video business doing for especially given the continuous need for production in 2020? Thank you.

Speaker 3

In Q4, the top advertising industry is still Right? Joanna. Right?

Speaker 4

Yeah. Yeah.

Speaker 3

Auto and, let's say, real estate? Or what what's the ranking, Joanna? What's the in Q4 Probably. Before the coronavirus outbreak?

Speaker 1

Internet Internet service.

Speaker 3

Internet services and IT. Right? Internet services Yeah. Or e commerce. Well, it's basically the traditional order, you would say, know, the but and then after the outbreak of the coronavirus, think real estate and auto are all impacted.

Also the luxury goods, basically, it's a a you know, basically, nearly all all the industry, all across the board are are affected because there's just not consumption and also the delivery logistics and all these so everything. So that's why we see across the board a decline of advertising. But we do see a more consumption of video content, long form dramas. So our you see us our stream video subscription revenue grow. And also online game, it's a mix.

Online gaming, people are spending more time at home and playing PC games. There is a positive contribution to the game, consuming MMORPG. But for the mobile games, because of our employees are safe staying home, that's kind of delayed our some development work. So that's contributed negatively. So for online gaming, it's a mix, probably a positive impact.

For brand advertising, it's really bad. For video game online video, it's good. It's a lot of more grew nicely.

Speaker 2

Yeah. Ready? Hey.

Speaker 4

So how about the long video business use of cash and kind of, like, the cash balance for 2,020? Thanks.

Speaker 3

So we've been having this low budget strategy basically for each video each drama we spend like million or 20 at most RMB20 million a piece. It's a drama. And through embedded advertising and also subscription and effective marketing on different sort of network platforms. So we, you know, we we try to make it breakeven, so basically. That's why and and also we have limited number of productions actually in 2019.

A lot of the revenues are from our basically our previous past productions. We have a whole library of in house produced or produced video I mean, dramas that are generating continue generating revenue. And we still have we have but we launched the new we launched in Q4 or actually Q1, the Season two of this Mega Boss Yaochi one. And we still have another three more video two more dramas already basically done, you know, filmed and and edited, ready to release. But for any further new drama to be filmed, it needs to be to wait for the, you know, for the the coronavirus to to to subside and to, you know, to people you know, basically, you have you you can't have actors or actress to wear facial mask to to play their role.

Right? So

Speaker 2

Got it. Yeah.

Speaker 0

Thank you, Charles.

Speaker 3

So because we're consuming the past production libraries, we're not investing a lot spending a lot of new money on producing new shows. So that's why you see our subscription business continue to grow and we actually the cost is down.

Speaker 0

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

Speaker 1

Hi, good evening, Charles and Joanna. Thanks for taking my question. Have questions on the guidance for the brand advertising. So unfortunate, this outbreak has causing a lot of the negative impact. So with your 30% to 40% year over year decline, how much of that should we expect for the video to decline and then versus the portal?

And then in your view, when do you expect the app sentiment to really recover? And do you expect the full year 2020 to experience negative growth for brand ad revenue?

Speaker 3

I think the both the portal brand ad on the portal and on the video side are hit, I think, Basically, both are affected on the proportionally, same similarly. But we expect that if the if the you know, if people get back to work and the economy start, start turning, starting again, then we expect a a a, you know, uptick, basically, strong rebound because a lot of our advertisers are ready to spend money because they have new products, really need to market. So they are ready. Actually, in 2019, you can see that we cut our loss, right, by the Q4 if you compare Q4 with twenty eighteen Q4, we cut the loss by excluding Sogou and Changyou, the media business and video business, we cut loss by how much? That was $29,000,000 right?

75 to 46, right? So $29,000,000 So actually, we buy, you know, the cost saving initiatives, like we're spending less money channels, on on all these and also on the content. But at the same time, we are improving our so how and other original content. So actually our user base are holding steady and we're spending less money on marketing, but our user base actually grow. And but the whole economy is slowing down, but we are holding our advertising in 2019.

Actually, already created some momentum. If without the coronavirus, we expect we would have expect that our advertising continue to hold down and even to rebound, then our costs continue to go down. So we expect that in later part of Q2, I think we want to regain the momentum that we accumulated in 2019 for the advertising top line. And also, yes, and also to consolidate to take the user base growth that we observed in the last two months the coronavirus, people staying home have more time and people are watching people need to consume not only video games and drama, but people need to get information and reliable information. That's why they turn to Sohu.

So the Sohu News actually is more trustworthy brand because it's such a historical it's a brand that people trust because the years is so actually, we see the news consumption is higher than industry average compared with some of the other news portals.

Speaker 1

Thank you, Charles. Can I ask one quick follow-up on the Olympics? So given you know, the summer Olympics is not far away, have we actually got some discussions or the budget commitment from some of the advertisers for the sponsorship that will actually help on the media portal business or perhaps maybe a bit onto the video business as well? Yes.

Speaker 3

It was all planned before the coronavirus because actually, as I said, we meant have some momentum created for advertising, and that includes a lot of events we did in Q4 and Q3. And we planned all those events for 2020 because with these events and then people sponsored advertise sponsored, that include the Olympics, the Tokyo Olympics. And also we have this news marathon, we have this talent show for all these events are all in a hot, you know, basically in a still, you know. So we are everything is is, you know, standing still, basically. We don't know.

We we will you know, we don't know when the Olympic will be held. You know, it's obviously, Japan is and also the Aussie International, they have different opinions. It's probably end of the year. And we'll plan accordingly. So we don't have any we definitely have advertisers committed to those events, which was very all these events we had in 2019 was very successful and people are willing to pay to advertise.

But and then all these events are there's a lot of uncertainties whether we can do that because these offline events need a lot of people gathering. That creates risk of exposure to the virus. Wei:]

Speaker 1

No problem. Thank you, Charles. Hope that the virus event go over very, very soon. Thank you.

Speaker 3

Many events are it's like the like the some of companies some real estate companies or auto companies, they now aggressively are exploring this live broadcast marketing. That's why we are actually still getting some advertising in Q1 because some of the car companies and the real estate companies use our live broadcast platform to promote their to launch their new products. And that's the will be 2020, you'll see a lot more things like that happening. People will move all things online.

Speaker 1

Okay. Great. Thank you. All the best.

Speaker 0

Thank you for the questions. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Speaker 2

Hi, good evening. Thanks management for taking my questions. I have a question regarding our revenue mix in our portal advertising. What's the contribution for FMD? And on that regard, how should we think about the competition from short form video?

Thank you.

Speaker 3

You mean the competition from short form video? What do you mean?

Speaker 2

Because we are seeing a short form video companies grabbing a lot of advertising budget from SMG. So just wondering how we should think about our SMG advertising trend going forward in light competition?

Speaker 3

Thank you, Charles. Yes. I think maybe Sogou has some probably Xiaotong can answer your question about the SME impact due to like you are talking about go in, right, and all those. Right? But for Sohu

Speaker 2

And also because our Sohu media news app also has a SME revenue contribution. So just wondering whether Sohu Media apps or our video SME spending package? First of the SME income represent

Speaker 3

a small part of our brand our ad revenue. And also so that part, since it's so small and it basically remains steady in 2019, and our focus in 2019 was really on the brand advertising. And brand advertising, that is very hard for those to take it away from us because the brand trust and also the unique events that we have and the reporting of original content, all these things. We're not we're actually consolidating the brand advertising, basically, that territory that we are consolidating in 2019. So if you look at the whole picture of 2019, why we can have such a, you know, cost saving, because we cut the channel and the marketing cost, and same time maintain the user base steady, steady stabilize the user base.

And even for the H5 Sohu H5 portal, we actually grow And also focus really focus on the brand advertising and original reporting, quality content, and also all these events like five g conference, AI conference, all those conference forum that created the content and also those Sohu Marathon, Sohu Fashion Show, all these events, those events and it's just that we are just in a category. So the large brand, you know, this is the advertised. So we're not affected by the uprising on Douyin and those, you know.

Speaker 2

Got it. Thank you, Charles.

Speaker 0

Thank you for the questions.

Speaker 3

So I think I asked your kind of question, but I want to the in the script talk that it's not I don't think it's getting the right really the elements. It's really about this quarter. The key is that after many, many quarters in 2019, we were able to stabilize our advertising revenue and grow our video subscription and consolidate, stabilize our user base and even grow in H5 category and then dramatically cut the cost so that we achieve together with Sogou and Changyou's contribution, we achieved a profitable quarter, non GAAP. That's the key of this quarter. If the coronavirus outbreak didn't happen, we'll continue that trend to be continually to be non GAAP, Sohu non GAAP profitable into 2020.

That's the key of this quarter's quarter results. Because the strategy will continue to execute that strategy basically to grow our user base, which has grown nicely during the last two months, And also continued momentum of brand advertising and same time to develop and also the video storage business. And same time, we developed our social network products that can we hope that it will explode. So that's the strategy. But without with this coronavirus and in the first quarter, our advertising definitely, especially those brand advertising that need a lot of discussion offline to design the kind of events for our advertisers that people cannot meet in person.

So our brand advertising definitely impacted, but people still have, you know, faith or the goodwill us. So after if this is a faith, if this coronavirus faith or actually in China, it seems the China the government seems under control. It's turning. It's kind of turning in a good sign. So that in Q2, if the whole business rebounded, I think we'll regain our momentum in our brand advertising and also continue this trend of getting profitable.

That's the key of this quarter.

Speaker 0

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your party's patience. You may now disconnect your lines.