Sohu.com Ltd Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's Third Quarter 2020 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. 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 third 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. Before management begins their prepared remarks, I'd 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, 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 the most recent Annual Report on Form 20-F. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thanks, Huang Pu, and thank you to everyone for joining our call. In the third quarter of 2020, 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 creative 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 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 2020, 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 September 29th, 2020, our controlled subsidiary of Sogou and the subsidiary of Tencent entered into an Agreement and a Plan of Merger, which contemplate 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 our 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'll talk about here are related to continuing operations only. So for the third quarter of 2020, total revenues were US$158 million, down 6% year-over-year and 1% quarter-over-quarter. Brand advertising revenues were $41 million, down 11% year-over-year and up 8% quarter-over-quarter. Online game revenues were $101 million, just down 6% year-over-year and 4% quarter-over-quarter. GAAP net loss from continuing operations attributable to Sohu.com Limited was US$50 million, compared with a net loss of US$33 million in the third quarter of 2019 and a net loss of US$77 million in the second quarter of 2020, but that was due to tax planning for Q2. Non-GAAP net loss from continuing operations attributable to Sohu.com Limited was a net loss of $7 million, compared with a net loss of $30 million in the third quarter of last year and a net loss of $75 million in the second quarter of 2020, that was due to tax planning. Now let me go into the key businesses. First, Media Portal and Sohu 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, and 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 two-engine strategy with long-form and short-form videos and accelerated the layout of value live streaming, where we disseminate professional knowledge and reliable information across 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 an upper limit of user numbers. During the quarter, we successfully hosted a number of flagship events such as the sixth International Drone Photography Contest, the Campus Beauty Contest, and the best selection series in live streaming ecommerce, among others. With our enhanced video sharing technology, we not only stimulated online to offline interaction among the viewers, but also enhanced the generation of high-quality content to improve distribution across the products. 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. We share ideas, knowledge, and thoughts about lifestyle while recommending premium products. We're able to meet advertisers' marketing demand and capture their attention on the budgets. So going forward, we're continuing to diversify our monetization strategies and actively explore new opportunities. Now, let me turn to Changyou game business. For the third quarter of 2020, Changyou's online games performed well. For PC games, Changyou launched this year's second in-game promotional event and various holiday events for TLBB PC, which maintains 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 plans and a new method of character development. Next quarter, Changyou will continue to focus on maintaining users' stability by updating game content and making optimizations for TLBB PC and the legacy TLBB Mobile. More recently, in October, Changyou rolled out some special servers for TLBB PC that use content from an old version of the game. 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 to some extent in the fourth quarter. Looking ahead, Changyou will firmly execute its core strategy of top games. Changyou's strategic focus will continue to be on MMORPG mobile games while we're also developing and looking to roll out other games across various enhancements and genres. 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 will walk you through our financial results. Joanna?

Thank you, Charles. I will walk you through the key financials of our major segments for the third quarter of 2020. All of the numbers that I will mention are 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 million, down 3% year-over-year and up 9% quarter-over-quarter. The quarterly operating loss was $23 million compared with an operating loss of $31 million in the same quarter last year. For Sohu Video, quarterly revenues were $23 million, up 1% year-over-year and 2% quarter-over-quarter. The quarterly operating loss was $12 million compared with an operating loss of $20 million in the same quarter last year. For Changyou, quarterly revenues, including 17173, were $104 million, down 6% year-over-year and 5% quarter-over-quarter. Changyou posted an operating profit of $33 million compared with $35 million in the same quarter last year. For the fourth quarter of 2020, we expect brand advertising revenues to be between $37 million and $42 million. This implies an annual decrease of 11% to an annual increase of 1%, and a sequential decrease of 10% to a sequential increase of 2%. Online game revenues are expected to be between $140 million and $150 million. This implies an annual increase of 6% to 14% and a sequential increase of 38% to 48%. Non-GAAP net income from continuing operations attributable to Sohu.com Limited is expected to be between $15 million and $25 million. And GAAP net income from continuing operations attributable to Sohu.com Limited is expected to be between $10 million and $20 million. 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-19 virus. Lastly, please be reminded that in the Q&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.

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.

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

Well, key sectors, right. Auto industry, number one. And then -

Internet -

Internet services, followed by -

Real estate.

Real estate, that's the top three categories. Yeah, we achieved an 8% increase quarter-over-quarter, I mean, yeah, with, you know the microeconomics, basically a challenging microeconomic situation. By being, you know, with, well, we are having, you know this organic growth or the stabilized user base. So, we are not spending a lot of money on our marketing channels, or marketing for our products, but with these creative marketing events, and the content, actually 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 advertising revenue growth without spending marketing sales costs more.

Thank you.

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

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

Well basically the - in Q3, the division between the PC game and mobile game, right?

In the third quarter, PC games represented 61% of our revenue, while mobile games accounted for 39%. For gross billing cash receipts, PC games made up 45%, and mobile games comprised 55%. In the fourth quarter, the growth is primarily attributed to TLBB PC. We also introduced special servers featuring older content, which helped attract players.

Nostalgic, nostalgic experience, yeah.

Yeah. Attracted some players that we lost over the years, who love the game and feel nostalgic for their experience from years ago. And the other reason is, where we launched a game called Illusion Connect in the South Korea market. Thank you.

Got it, thank you.

Thank you. Your next question comes from the line of Chang Cheow from Foreign Tech Research. Please ask your question.

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

Yeah, thanks. Currently, we can only discuss the performance of the fourth quarter.

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

We have a couple of games that are well into development, but the schedule relies on the license approval and testing adjustments. Therefore, it's challenging to predict a specific launch date. However, for the games that we have received license approval for, we may have more precise timing. Two of these projects, Sea of Dawn and Tetris, have received license approval. We will launch both games next year. Next year, we will also focus more on the overseas market and introduce additional new games in that market. Thank you.

Thanks. That's great.

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

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 on how would the management plan to navigate this kind of industry trend and the content investment strategy going forward? Thank you.

Well, we have, as I just said, we have this twin-engine strategy with long-form content and then short-form, basically, user-generated content. So for the long-form, our spending is basically to produce like videos with around 15 episodes of drama with reasonable investment, and then make sure that it becomes a hit with much less spending compared with our peers. So our spending on producing the long-form TV dramas remains similar to the previous year. And then so - but for this user-generated content and also social network product of video, it doesn't need much - it doesn't need lobby management and also this live streaming, it's user-generated, only spending on the product development.

Got it, thank you.

Thank you. There are no further questions, so we will conclude our conference for today. Thank you for participating. You may all disconnect.