Sohu.com Ltd Q1 FY2020 Earnings Call

Good evening. Thank you for joining Sohu's First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After management prepared remarks, there will be a Q&A 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.

Thanks, operator. Thank you for joining us today to discuss Sohu's first quarter 2020 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; CFO, Joanna Lv; and Vice President of Finance, James Deng. Also with us today are Changyou's CEO, Dewen Chen; and CFO, Yaobin Wang; and Sogou's CEO, Xiaochuan Wang; and CFO, Joe Zhou. 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 statement. 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 Dr. Charles Zhang. Charles, please proceed.

Thank you, Huang Pu. Thank you to everyone for joining our call. Let me begin. During the first quarter of 2020, the COVID-19 outbreak inevitably impacted the overall economy and the advertising industry as well. Facing these challenges, we continued to explore new opportunities and differentiated development strategies. For Sohu Media Portal as a mainstream media platform, we refined the product to generate and distribute a large amount of timely and accurate information, especially regarding the pandemic and its prevention. For Sohu Video, we proactively sought new opportunities in live broadcasting of medical and health-related content and provided unique content and valuable information to our audiences. We will continue to explore diversified revenue sources and ways to further narrow losses. For Changyou, online games performed well during the first quarter, mainly driven by the solid performance of both TLBB PC and Legacy TLBB Mobile. The privatization of Changyou was completed on April 17, after which Changyou's profit will be wholly attributable to Soho.com Limited. Going forward, we plan to increase integration of resources and combine Changyou onto Sohu's platform. For Sogou, despite the challenging environment during COVID-19, Sogou's core search business continued to outperform its competitors. The search on mobile keyboard recorded new highs in both traffic and user base. If I go into more detail about our financial results, please note that Changyou's cinema advertising business ceased operations in the third quarter of 2019. The results we will discuss today and the comparative figures that we refer to here only cover continuing operations and exclude the cinema advertising business. For the first quarter of 2020, total revenue was $436 million, up 6% year-over-year and down 11% quarter-over-quarter. On a non-GAAP constant currency basis, total revenues would have been $15 million higher than our reported revenues, reflecting a 10% improvement year-over-year. Brand advertising revenue was $26 million, down 40% year-over-year and down 39% quarter-over-quarter. Search and search-related advertising revenue was $238 million, up 1% year-over-year and down 13% quarter-over-quarter. Online game revenues were $133 million, up 35% year-over-year and 1% quarter-over-quarter. The non-GAAP net loss attributable to Soho.com Limited was $80 million compared with a net loss of $52 million in the first quarter of 2019 and a net income of $7 million in the fourth quarter of 2019. Excluding the profit/loss generated by Sohu, the non-GAAP net loss attributable to Sohu.com Limited was $8 million compared with a net loss of $51 million in the first quarter of 2019 and a net loss of $6 million in the fourth quarter of 2019. Now, let me go through some of the key businesses. First, for the Media Portal and Sohu Video. During the first quarter of 2020, the whole country and the world suffered from the onset of COVID-19. Although we were affected by the pandemic as a mainstream media platform, we focused on generating and distributing helpful real-time reports and live broadcasts to provide accurate and reliable information on the pandemic and prevention knowledge. On the product side, we promoted interactions between our core products and enhanced social features through innovations. We added a live broadcast feature in our Sohu News app, allowing users to easily switch to the Sohu Video app to watch live broadcasts and return with a single click. These upgrades provide users with timely and accurate information on Sohu's product matrix, further consolidating our advantage as a mainstream media platform. In addition to finding ways to improve our products for a better user experience, we also worked hard to save authors’ time and facilitate the creation of both high-quality short and long-form content, which improved communication between readers and writers. For Sohu Video during COVID-19, we accelerated our live broadcasting capabilities and launched our well-regarded 24-hour medical broadcast focused on health topics related to pandemic news and prevention. We're taking this opportunity to explore other verticals and build a knowledge platform to provide users with timely and accurate information while integrating live broadcasting with our premium content. We introduced a multi-person microphone relay feature that allowed the audience to interact directly with the show’s actors. This initiative improved user engagement, boosting interest in long and short-form videos. On the monetization side, we expect the negative impact of the pandemic on the economy to persist for some time; however, it seems China is currently on a recovery path. Our advertising business faced significant challenges in the first quarter. Nevertheless, we actively worked to diversify revenue by integrating resources and leveraging synergies between our core products. Starting in April, some events resumed, such as our drone photography content and the Sohu Tech 5G Summit. Furthermore, during the quarter, with the adoption of the multi-person microphone relay feature, we launched a new live broadcast called Boss One Plus One, inviting industry celebrities to share their insights on market trends, which helped advertisers enhance their branding while promoting our position as a mainstream media platform. We will continue to find new opportunities for advertising budgets in the upcoming quarter. Next, about Changyou's privatization on April 17, going forward, Changyou's profit will be wholly attributable to Soho.com Limited. However, as this transaction was completed in the second quarter, Changyou is not included in our first quarter financials. In the first quarter of 2020, online game performance was solid and the Changyou financial results exceeded our prior year guidance. Revenue for PC games rose significantly sequentially, mainly due to the better-than-expected performance of TLBB PC. Due to COVID-19, player engagement and willingness to play and pay saw notable improvements. For mobile games, player engagement remained stable during the quarter with new version expansion packs for Legacy TLBB Mobile and several holiday events. However, we expect revenue and user engagement for TLBB PC and TLBB Mobile to decline in the second quarter of 2020 as people return to work. Moving forward, Changyou will continue its core strategy focusing on MMORPG mobile games while developing casual and strategy games. Additionally, Changyou intends to expand into the international game market, developing key games across different categories in an orderly manner, and we believe that Changyou is well-positioned to roll out high-quality games for players in the future. Lastly, for Sogou, in the first quarter of 2020, despite the challenges in the macro environment and the online advertising industry in China due to COVID-19, Sogou's core search business continued to outperform its competitors in both quarters, and the mobile keyboard recorded new highs. Thanks to the surge in user demand for reliable information during the pandemic, Sogou Mobile keyboard further expanded by 9% year-over-year to $482 million, reinforcing its position as the third-largest Chinese mobile app in terms of daily active users. Additionally, Sogou's smart hardware business maintained steady progress. Looking ahead, we expect Sogou to resume healthy growth post-pandemic with steady momentum in its search business and accelerated growth in other sectors. Now, let me turn the call over to Joanna who will walk you through our financial results.

Thank you, Charles. I will walk you through the key financials of our four major segments. For the first quarter of 2020, all of the numbers that I will mention are all on a non-GAAP basis. You can find a reconciliation for non-GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $50 million, down 43% year-over-year and down 34% quarter-over-quarter. Quarterly operating loss was $23 million compared with an operating loss of $35 million in the same quarter last year. For Sohu Video, quarterly revenues were $23 million, down 11% year-over-year and up 8% quarter-over-quarter. Quarterly operating loss was $11 million compared with an operating loss of $34 million in the same quarter last year. For Changyou, quarterly revenues including 17173 were $136 million, up 32% year-over-year and up 1% quarter-over-quarter. Changyou posted an operating profit of $56 million compared with an operating profit of $45 million in the same quarter last year. For Sogou, quarterly revenues were $257 million, up 2% year-over-year and down 15% quarter-over-quarter. Net loss was $31 million compared with a net loss of $3 million in the same quarter last year. Before going through the outlook for the second quarter of 2020, please note that after the completion of Changyou's privatization, Changyou changed its policies for its subsidiary with respect to the distribution of cash dividends. As a result, it is expected that Changyou will recognize an additional accrual of withholding income tax of $88 million for the second quarter of 2020. For the second quarter of 2020, we expect total revenue to be between $410 million and $445 million, brand advertising revenue to be between $32 million and $37 million. This implies an annual decrease of 15% to 27% and a sequential increase of 25% to 45%. Total revenue is expected to be between $260 million and $280 million, implying an annual decrease of 8% to 14% and a sequential increase of 1% to 5%. Online game revenue is expected to be between $102 million and $112 million. This implies an annual increase of nil to 10% and a sequential decrease of 16% to 24%. Excluding the expected accrual of withholding income tax of $88 million, the non-GAAP net income and loss attributable to Sohu.com Limited is expected to be between a net loss of $5 million and net income of $5 million. The non-GAAP net income loss per fully diluted EPS is expected to be between a net loss of $0.30 per EPS and a net income of $0.30 per EPS. Excluding the expected accrual of reporting, GAAP net loss attributable to Sohu.com Limited is expected to be between nil to $10 million and GAAP loss per fully diluted EPS is expected to be between nil to $0.25. Excluding the profit and loss generated by Sogou and further excluding withholding income tax, the non-GAAP net income attributable to Sohu.com Limited is expected to be between nil and $10 million and GAAP net income and loss attributable to Sohu.com Limited is expected to be between a net loss of $4 million and a net income of $6 million. This forecast reflects Sohu's management's current and preliminary view which is subject to substantial uncertainties, particularly given the potential ongoing impact of the COVID-19 pandemic, which remains difficult to predict. And this concludes our prepared remarks. Operator, we would now like to open the call to questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

Hi, good evening, guys. Just a question on perhaps Changyou and another one on the Media Portal pieces. On Changyou, could management give us more color on the potential pipeline for the upcoming couple of quarters? We understand that there should be some uncertainty, but it would be great to hear management's targets and plans? And then on the Media Portal business, probably also related to Sohu Video advertising as well, we have seen a big decline in the first quarter because of the coronavirus outbreak, but we are also seeing recovery in the second quarter. So, in terms of the advertising segment, could you give us some color on the strengths and weaknesses of different advertiser industries? And which ones have been driving recovery in the second quarter? Thank you.

Hi, Eddie, this is Zhang translating today. For our self-developed games, we will be releasing Tetris and DMD Mobile over the next two quarters. Regarding licensed games, we have already launched one in South Korea called KOS extreme match. Additionally, we plan to introduce some strategy games in the forthcoming quarters, along with a total defense product. To address your second question about the Media, brand advertising, which encompasses both the portal and video, experienced some challenges in the first quarter. However, our projections indicate a strong recovery above the industry average. This improvement primarily stems from the portal side. As mentioned in the script, we've channeled efforts through various apps, including the Sohu News app and Sohu Video app, with a particular emphasis on live broadcasting via the Sohu Video app. Advertisers on our portal can now implement innovative marketing strategies using our live broadcasting features across both apps. This has proven beneficial, especially when offline gatherings are restricted or limited in size, as it allows for effective product launches. Due to our innovative approach in live broadcasting during the first quarter, we managed to secure some substantial advertising deals. Overall, portal advertising has rebounded more robustly than anticipated. I am seeing some sectors, particularly the auto industry, bounce back in the second quarter as they look to promote their products.

Thank you for the questions. I will take the next question from the line of Thomas Chong of Jeffries. Please go ahead.

Hi, management. Thank you for taking my question. Could you provide some insights on your SME and key advertisers? Additionally, could you discuss the timing of profitability? Thank you.

Yes, for the Sohu side, our recovery is mostly due to brand advertising from some large brands, which take advantage of innovative products in live broadcasting. I think the Sohu side, or Dewen can comment on the SME side; it seems their advertising trend is recovering slower. Regarding the profitability schedule, could you clarify on that?

Yes.

Okay. If you look at our forecast for Q2, excluding Sogou, the group, because in Q2 there's a certain number of days where Changyou's contribution is not included. With the cost management of Sohu and the relatively recovery of brand advertising, we forecast profit excluding Sogou to be between $0 and $10 million. So basically, the timeline is already Q2; we are going to be profitable. Yes. Any other questions?

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

Hi. Good evening, Charles and management team. Thanks for taking my question. I wanted to get a sense of the impact of the postponement of the Olympics in terms of the budget issue. How are advertisers' spending commitments changing? Are these budgets being affected by the postponement of the event? Or are they redeploying some of those to other events? And then related to the guidance, which I think you alluded to is much better than the industry standards. How much are we expecting to get from the new live broadcasting initiative in the second quarter? And how should we think about it into the second half as well? Will Sohu actually benefit from these new features that we are introducing? Thank you.

Yes. I think definitely the postponement of the Tokyo Olympics is among the many events that cannot be postponed. It's very hard to see this one event's impact on advertising. However, as you know, we have improved or achieved better than expected results for Q2 because of these live broadcasting technologies. This application not only helped with securing advertising deals from brand advertisers, but it has also become very much needed, as companies require an online-offline strategy. Sohu Video or Sohu's matrix can provide that solution for them. Moreover, our technology allowed us to launch events that were postponed in the first quarter, such as the drone contest and the 5G forum, which significantly enhanced our marketing reach.

Okay. Thank you, Charles.

Thank you for the questions. We have one final question from Forum Tech Research, Chang Chu. Please go ahead.

Hey, good evening, Charles. You know, after Changyou's privatization, I just wonder, do you guys have any changes in terms of strategy regarding resource allocation? Do you plan to invest in Changyou to grow its gaming business?

For the most part, Changyou will continue to operate like an independent company. It is crucial for them to have successful games and compete in the gaming industry. The Sohu side can offer support where applicable, such as for marketing some of the games on the Sohu platform, but Changyou has other platforms that require investment for game distribution. Therefore, while there is some synergy, we want to ensure Changyou can continue to function and compete as a standalone entity.

Thank you for the questions. At this time, there are no further questions on the line. Thank you, ladies and gentlemen, that concludes the conference call for today. You may now disconnect your lines.