Sohu.com - Earnings Call - Q4 2020

Transcript

Speaker 0

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

Speaker 1

Thanks, operator. Thank you for joining us today to discuss Sohu's fourth quarter twenty twenty results. On the call are Chairman and Chief Executive Officer, Doctor. Chuck Zhang CFO, Johnny Liu, and Vice President of Finance, James Deng. Also with us today are Chang's CEO, Doron Chen, and CFO, Yao Bin Wang.

Before Martin 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 this conference call may contain forward looking statements. These statements are based on current plans, estimates 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 reports on the Form 20 F. Please also be reminded that Sogou's results of operations have been excluded from our 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, results that we talk about are related are related to continuing operations only. With that, I will now turn the call over to Doctor.

Charles Zhang. Charles, please proceed.

Speaker 2

Thanks, Ankou, and thank you to everyone for joining our call. For the fourth quarter of twenty twenty and for the whole year of 2020, we faced significant challenges with the outbreak of COVID nineteen pandemic and uncertain macroeconomic environment. However, with our continuing efforts to innovate products and technology, improve monetization efficiency and strictly control our budgets, we're able to return to profitability as we recorded net income of US53 million dollars this quarter, which greatly exceeded our previous guidance. For the whole year of 2020, excluding an additional accrual of withholding income tax made by Changyou in the second quarter, we also achieved a profit of $51,000,000 So for Sohu Media Portal and the video, we continue to focus on generating and distributing real time and reliable news and premium content and strengthened our competitiveness and credibility as a mainstream media platform. We consistently upgraded our live broadcasting technology, integrated into the Sohu product matrix, and apply it widely to various content marketing events, which further enhance the overall value of the Sohu Media Portal and video.

Benefiting from our continuous efforts, our brand advertising revenues reached the high end of our previous guidance for Q4. And for Changyou, thanks to the solid performance some special servers for TLBB PC that launched that were launched during the quarter, the online games business performed well as revenue exceeded the high end of our guidance by a lot, actually. For the so let me look at the financial numbers. For the fourth quarter of twenty twenty, total revenues, $253,000,000, up 34% year over year and 60% quarter over quarter. Brand advertising revenues, $42,000,000 flat year over year and up 2% quarter over quarter.

Online game revenues, a $196,000,000, up 49 percent year over year and 94% quarter over quarter. GAAP net income from continuing operations attributable to sohu.comlimited was $47,000,000 compared with a net loss of $29,000,000 in the fourth quarter of twenty nineteen and a net loss of $15,000,000 in the third quarter of twenty twenty. Non GAAP net income from continuing operations attributable to sohu.comlimited was $53,000,000 for Q4 compared with a net loss of $6,000,000 in the fourth quarter of twenty nineteen and a net loss of $7,000,000 in the third quarter of twenty twenty. For the whole year of 2020, total revenues, $750,000,000 up 11% compared with 02/2019. Brand advertising revenue, 147,000,000, down 16% compared with 2019.

Online game revenues, dollars $537,000,000, up 22% compared with 2019. Excluding the impact of additional accrual of withholding income tax recognized by Changyou in the second quarter of twenty twenty, GAAP net income attributable to Sohu dot com Limited was $33,000,000 compared with a net loss of $157,000,000 in 2019. Excluding the impact of the additional accrual of the withholding income tax aforementioned, non GAAP net income from continuing operations attributable to sohu.comlimited was $51,000,000 for 2020 compared with a net loss of $128,000,000 in 2019. Now let me go through some of our key businesses. First, media portal and Sohu Video.

For Sohu Media Portal, in the face of the nineteen pandemic and the challenging macroeconomic environment, we continue to innovate our products, upgrade our technology, and keep refining our content distribution features by stimulating content generation and user generation user and the user user interaction. We were able to further enhance our credibility by reflecting the attitude and the core values of Sohu. For Sohu Video in 2020, we continue to execute our chain engine strategy. For long format content, we successfully rolled out new original idol romance content, Well Intended Love, episode two. And my dear lady, were both well received by audiences.

Thanks to the high quality content and the better operating efficiency, our subscription revenue subscription revenue increased significantly during 2020 Despite delays in shooting new dramas as a result of the outbreak of COVID nineteen, we currently have several original dramas in our pipeline that will be steadily roll out in 2021. Most of them were filmed in the later part of 2020. For short form content, the the other part of our, you know, two hundred two hundred two hundred two hundred system 200 strategy, We accelerated the deployment of value live broadcasting in various areas such as medical health. We're glad to see the live streaming technology advancement that we have achieved. We deeply integrated our unique live broadcasting technology such as multi person mount microphone relay feature with our products on the SOAP platform and widely expanded the live broadcasting landscape.

We proactively applied this advanced technology across various creative activities, including large content marketing events, value live broadcasting, and live e commerce that will enable users to interact with each other in real time whenever they are. During this past quarter with this live broadcasting technology, we successfully posted high end interview, like, one plus one, and and also the e commerce best selections of with with of by celebrities and several traditional flagship events such as the Sohu Fashion Awards and the Sohu Finance Annual Conference. These events not only attracted a lot of attention in real time in terms of content, but also we are able to build even more attraction upward and and also attract advertisers. These events greatly reinforce our brand influence and help to effectively secure high budget from advertisers. Yeah.

Next, let me turn to Changyou. For the fourth quarter of twenty twenty, we launched some special servers for TLBB PC that use a memorable early version of the game for content. We're calling the TLBB Vintage. And thanks to its exceptional performance, online game revenue exceeded the high end of our guidance. For PC games, TLBB Vintage helped us to draw back many players that were we lost over the years who love and feel feel feel nostalgic for their experience from years ago.

We were able to build up a lot of excitement around the launch and effort help. The effort help to significantly boost in game spending. Meanwhile, Changyou also upgraded regular TLBB PC by introducing for the first time a capital city map in which players from all servers can interact freely and the redesigning the cross server clan war system. For mobile game mobile games, Changyou launched a new expansion pack for legacy TLBB mobile that featured additional featured the addition of a new clan and other creative cultural content, all of which help keep player engagement stable. Next quarter, Changyou will further optimize TLBB vintage based on user feedback, and then we'll also unveil a variety of holiday events as well as promotions for the regular TLBB PC and legacy TLBB mobile.

Currently, several key games are being developed, and we look forward to introducing them to players soon. Looking ahead, Changyou will probably execute its core strategy of top games. Changyou's strategic focus will continue to be MMORPG mobile game. Well, we are also developing and looking to roll out gains across various generic. Now let me turn to our CFO, Joanna, who will walk you through financial results in detail.

Joanna?

Speaker 3

Thank you, Charles. I will walk you through the key financials of our major segments for the fourth quarter and full year of 02/2020. All of the numbers that I will mention are all on a non GAAP basis. So for Sohu Media Portal, quarterly revenues were $24,000,000, up 77% year over year and down 1% quarter over quarter. The quarterly operating loss was $28,000,000 compared with an operating loss of $25,000,000 in the same quarter last year.

For full year 02/2020, Sohu Media portal revenues were $86,000,000, down 9% compared with 02/2019. For full year, net loss was $92,000,000 compared with an operating loss of a $130,000,000 in 02/2019. For Sohu Video, quarterly revenues were $23,000,000, up 6% year over year and 1% quarter over quarter. The quarterly operating loss was $11,000,000 compared with the operating loss of $18,000,000 in the same quarter last year. For full year 02/2020, Sohu Video revenues were $91,000,000, flat with 02/2019.

Full year net loss was $43,000,000 compared with an operating loss of $94,000,000 in 02/2019. For Changyou, total revenue, including one seven one seven three, a $199,000,000, up 47% year over year and 91% quarter over quarter. Changyou posted an operating profit of a $112,000,000 compared with $50,000,000 in the same quarter last year. For full year 02/2020, total revenues, $548,000,000, up 20% compared with 02/2019. Changyou posted an operating profit of $238,000,000 compared with an operating profit of a $169,000,000 in 02/2019.

For the February, we expect brand advertising revenues to be between $27,000,000 and $32,000,000, online game revenues to be between a $137,000,000 and a $147,000,000, Non GAAP net income from continuing operations attributable to sohu.comlimited to be between $5,000,000 and $50,000,000. And the GAAP net income from continuing operations attributable to sohu.comlimited to be between $1,000,000 and $11,000,000. 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 the COVID nineteen pandemic. 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. This concludes our prepared remarks.

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

Speaker 0

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. For a name to be announced. To cancel your request, you can also press the pound or hash key. Once again, to ask question, please press one.

There will be a short silence while questions are being collected. Thank you for your patience. Our first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

Speaker 4

Hey, good evening guys. Thank you for taking my questions, and I hope all is well with every one of you. I'm just curious on your outlook for first quarter twenty twenty one. Number one, it seems to be a pretty big range, especially on the advertising side. And then number two, when we look at the year on year growth on the advertising side, our brand advertising, Could you talk a little bit about how much is more from the industry rebound industry recovery?

And how much is, broadly speaking, coming from the efforts you have done in the past year? For example, having more rich media, live streaming in your, portal as well as the offline events you held for your marketers. So these are my two questions. Thank you.

Speaker 2

Okay. Hi, Ed. This is Charles. Yeah. The actually, there's several elements are all contributed to the outlook of '20 the first quarter of twenty one.

Like, first of all, a year ago, we have pandemic outbreak. Right? So this year, it's less. The effect is less. But this year, it's both both are the first quarter are the slow slow quarter because of the Chinese New Year.

And this twenty twenty one twenty one Chinese New Year is actually a little bit later than than 2019 2000 2020. Right? So these are the negative impact. Well, the the less effect of the pandemic is a a positive contribution and the and the Chinese New Year. And then there is definitely the continuation of our efforts with the live broadcasting technology and its application to our various marketing events to create both content and also a advertising opportunities for for our advertisers to be, you know, to be just, you know, more interested or or excited about the creative events that we're we are creating.

So, like like, you know, this month, we are also having this, you know, goodies selection ecommerce events. And also around the Chinese New Year, we have this live broadcasting program featuring various program, various people, and and celebrities. So these are all contributing. So it's a a number of factors contributed to a, yeah, to to the the outlook of advertising.

Speaker 4

And then I don't know whether it's I think it's Charles. Whether Charles and Joanna can talk about kind of like the the big range of the advertising outlook. The reason I asked this question is that I know that most of your advertisers are quality big brands. So I think, typically, they would have a marketing plan, some type of budgeting. Right?

So usually, the visibility should be pretty good unlike pure performance based advertising. Right? It seems like this year, especially this quarter, we are looking at, a pretty big range in terms of the, outlook, 5% to 25% year on year. Right? So I wonder, you know, why why this is a bit larger than usual?

Speaker 2

Yeah. Just because we have a brand advertising on our product most part of with most of those top advertisers. So so it's like big items. Right? Each so this is kind of if you have if you have a, you know, small number of advertisers with instead of, like, you know, 10,000 or 5,000 advertisers, we have, like, a few 100 I mean, 100 or dozens.

So those, you know so and the big one, each one spending, like, you know, a large number. So so the any change of one advertiser may, you know, drive the, you know, the whole revenue up and down. So that's it's it's so it's not and also the the first quarter is a slow season of the Chinese New Year, and decisions made are can be kind of, you know, changed or something.

Speaker 4

Oh, thank you. Thank you very much. Thank you.

Speaker 0

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

Speaker 5

Hi. Good evening, Charles and management. Thanks for taking my questions. I have two questions. First of all, on online games, I wanted to understand the outperformance for this PCTLBB.

You know, this was, you know, due to percent release for this special server. Wonder if this strength is already reversed or the strength is actually continue into the first quarter. And just wonder, you can share, like, how many, like, the old gamers that you have successfully brought back? And then, can you remind us on the the first schedule for for the PC games? How will that actually be the strength in 4Q?

Should that also benefit first q and also second quarter? And then any expansion pack release planning later this year that you can share? So this is on the gaming. And then second question is related to the overall advertising outlook. I'm not sure Charles or management have any view so far in terms of some of the sentiment that in terms of the ad budget this year versus last year?

And then for the fourth quarter, could you also remind us which category actually performed well during the quarter and which quarter actually has you know, from your indication, you know, it will have a stronger recovery in 2021. Thank you.

Speaker 2

Okay, Alex. So your first question about the online gay the gaming and about the special servers and the the, you know, the PC the special server and all the gamers brought back. Obviously, it contributed mostly in the q four, and the trend continue a little bit, but definitely fall back a little bit, right, for q one. And so maybe Okay.

Speaker 6

Hi, Alicia. For the TLBB vintage, we call those special server. The content is very is welcomed by those hardcore players that we lost over years, like ten years ago. So total number of the current returning users is not so big, but they are really hardcore. And with the consumption level this quarter, it's far beyond our expectations.

So we expect in the first quarter, there will be a natural decline for the TLBB vintage and also considering the festival traveling factors. So we see the guidance is pretty conservative. So in terms of active payers, we see the operating numbers. It's quite stable, currently speaking. Actually, players in two versions are pursuing totally different experiences.

So in the future, we will apply different operating strategies. For regular self VPC, we will make more evolutionary expansions like before. But for a vintage, we'll keep the classic content and make some strong social and further updates based on player feedback. For the regular TLBB PC, it's focused more on PVP player versus player fighting events. But for the Teledy Vintage, we will be focusing on more casual, more social things.

We want we plan to launch the first expansion pack for 12 digit vintage in the second quarter of twenty twenty one. Okay.

Speaker 2

Alright. About advertising advertising outlook. So since the total I think the total macroeconomic situation, I I'm not sure. Maybe maybe a little bit better than 2020. But since it's actually, doesn't matter to Sohu because our ad spend revenue base is relatively small.

So it really depend on how we we know we work. How how how how well we do. So then we'll continue the trend in 2020 because of our our development of the live broadcasting technology and live streaming and apply to various marketing content marketing events and create some value for advertisers so that we achieve not only recover from q one as the pandemic recede in and q two and q three and q four, we actually were achieved a slow growth. You know? And then that trend, I I I believe that in in 2021, we'll continue that slow growth with our our strategy of live broadcasting and and and all those kind of things and the events.

But based on based on that, and then if we there's a big if if we have and we can have our product innovation, like our Sohu News app and the Sohu Video app and innovation so that the user base can grow organically and actually or even have a uptick without heavy spending on, you know, pre installment to devices or or online stores. So without channel marketing, basically, continue to with our strategy is really continuing to have cost control, basically, you know, not much more spending, through the techno product innovation, especially the our social media feature introduction into our APP. And so that we can grow our user base without much additional cost, but grow user base and the user base grow largely. So then we can grow our revenue faster than than the pace that we did in 02/2020. So it's a big if depending on whether our product innovation will be successful or not.

Thank you. And the categories are mostly auto. Right? Auto and FMCG and all the e commerce, basically.

Speaker 5

Thank you, Charles. Thank you, Charles.

Speaker 0

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

Speaker 7

Hi. Thanks management for taking my questions. My question is about advertising as well, but on the video side, given that we have been seeing the COVID breakout, should we expect there might be a delay in terms of the production timeline or the release timeline for this year? And on that front, how should we see the competition in long form video advertising versus the short form video advertising? Are we seeing a short form video advertising actually affects the advertising budget script to our portal and video.

And then my follow-up question is about the long game operating line. If we strip out the gaming business, how should we think about the fundamentals or the operate operating loss for the long game business? When should we expect profitability or breakeven? Thank you.

Speaker 2

Yeah. First of all, the advertising for long form, first of the production. So the 2020, the first half, we we actually because of the pandemic, we don't have much filming. And then in later part, we we we we filmed we we produce produce few, you know, a a dramas episode. So now we have I think we have five.

Right? Five in stock. And we'll be you know, we're already launched we already start, you know, one in January, and then we'll have another one. So we have a, you know, pipeline of a few dramas are lining up for for this year. And, also, we are also producing more.

So, basically, this year, probably have 10. Right? 10 dramas. And that actually mostly will drive the subscription business. For advertising, it's our video advertising actually now does not depend that much on our long form drama because most people subscribe, you know, you users, you know, the subscription.

So there's so subscribers do not have the advertising. Right? So so our video advertising are mostly depend on the some of our okay. Yeah. It depend on they do advertise on of our

Right? Right. It's a moment. Mhmm. Variety shows.

And also some of the live broadcasting events and and a short form. So Sohu Video also have this chain strategy. So we are actually actively developing this social media type of short form video. So so you will see first of so you basically will see a few, I mean, about 10 dramas this year, and then we'll drive continue to drive our subscription growth subscription business growth. And advertising will not depend on that much on the production of long form drama, but but on some variety shows and also short form and live streaming events.

So we'll see a gradual a continued slow growth of our advertising and also a, I think, a strong growth of subscription. Non game business, when will we break even? And that also depend on what I just said is the first of all, with the current in the last two years, we've been able to effectively to cut costs almost, like, by half. Right? So that that to, you know, the the media platform basically now have a quarterly loss, like, around or even below $40,000,000 a quarter.

And that's why with the game uptake, with the game, we can appreciate achieve profitability. Looking forward, we hope that we hope that the, you know, the innovation and the product innovation in this not only in the editorial distribution of content editorial distribution content and also, you know, algorithm or, you know, the recommendation distribution. And also the third one is most important one is the social media distribution. So if we can achieve that and, basically, we'll kinda achieve our product user base user base without much spending, Basically, this would product innovation so that it will form attraction and then user user growth. Then our advertising and the both advertising and the solution business will grow much faster, and that will determine whether when we'll break even with the media business nongame business.

And but but that that is it really depend on so we when we talk about, you know, innovate technology to innovate, we just we're not just talk you know, generally speaking, you know, innovation and the product innovation, I we really mean it, and we really mean it. It's very detailed, very detailed experience and also the product, you know, design and and, you know, development. So it's it's really we're we're working on we hope that we'll be successful, and I hope that the turning point for the product uptake is really this year.

Speaker 7

Got it. Thank you.

Speaker 0

Thank you for the questions. Our next question comes from the line of John Hsu of Emerald Jashun. Please go ahead.

Speaker 8

Hi, Charles and management. Thanks a lot for letting me ask my question, and congratulations for a strong quarter. My question relates I know you're not allowed to comment much on Sogou. I I just want to, you know, pick your brains on a hypothetical case, you know, in case the deal goes through and you receive the cash allocation. Just wondering how are you thinking about, you know, the future investments in terms of breakdown?

What are the specific projects you are planning to, you know, allocate to just to give, I think, the investors an idea?

Speaker 2

Well well, hypothetically, if we have the cash, I can we can do both. So now without the cash, we can only grow our products by and user base by organic, you know, by by product innovation with the new features and the then then with with the with the more cash, we can do both. We can do marketing and pre installment so that we our user base can grow faster. And also, definitely, in terms of the product innovation, we we definitely can, you know, get into more areas like delivering news and content and and explore its, you know, AI enabled, you know, voice. And also, you know so there's more features, new more you know, so that that that one is know?

Now we are basically assuming that do everything because it's such a last two years experience. We are really, you know, in you know, improve the operation efficiency so that we can we try to do things with a low budget. And so we hope that we'll continue this, you know, basically assuming that we we we always assuming that we don't have the money, and then we will just really work on product innovation. And that's spend less on on the, you know, the tree installment or APD scores and all those things and really to see whether the product itself can attract on any, you know, the users.

Speaker 8

I see. And and still just based upon that hypothetical scenario, I was wondering in terms of, m and a acquisitions and potentially maybe a special dividend or dividend policy, has your outlook on these kind of things changed, over the last few months? And, how are you thinking about these type of allocations?

Speaker 2

Well, I think, you know, we we are quite conservative, so we will only think about those things when we have them, the money.

Speaker 8

Okay. Okay. And just the last question for me is in terms of the innovation projects that you're pursuing, maybe can you help us understand a bit more? Are you how what's the progress here? You know?

What kind of team are you building? Are you hiring some new people to help with the progress?

Speaker 2

It's more of a you know, the current team, you know, this you know, basically promotional the people, a member of the team, you know, to the really the good one to to rise to the task and the basic and then it's it's more like also a organic process instead of just to set up a new department. It's so it's product product innovation and development. It's really a something very, very detailed and very daily daily, you know, work instead of so we're, yeah, we're hiring more people, but we're also you know, we're getting yeah. We're just gradually evolving evolve the team. And so and then on the product side, basically, as I said, we we focus on this free distribution of content, delivery of content, basic editorial, algorithm, and and the social media social social net and then we focus more on social social network side aspect.

And also with with social net social networking social network social media aspect, this is four g or five g era, so that we are looking at more of a video or, you know, the video streaming type of video type of content, you know, and also to to fabric to to wall the video content and live streaming content into our network network product. Yeah.

Speaker 8

Got it. Thanks very much, Alex.

Speaker 0

Thank you for the questions. Ladies and gentlemen, with that, that concludes the conference for today. Thank you for your participation. You may now disconnect.