Sohu.com Ltd Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Fourth Quarter 2021 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. Now, I'd 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 fourth quarter 2021 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 would like to remind you of the Company's safe harbor statements 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 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. Please also be reminded that following the completion of the transaction with Tencent related to Sogou, Sohu no longer has any ownership interest in Sogou. As indicated otherwise, the results that we are talking about exclude results from Sogou operations. For historical statements, the results of operations for Sogou and the gain from its disposal have been classified as discontinued operations. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thanks, Pu; and thank you, everyone, for joining our call. During the fourth quarter of 2021 and for the full year, we faced ongoing significant challenges from the macroeconomic environment and uncertainties of the COVID-19 pandemic. Despite these headwinds, we were proactive in refining our technology, developing product innovations, improving operating efficiency, and exploring differentiated monetization opportunities. In the fourth quarter, we were ahead of our guidance in brand advertising revenue and achieved profitability for the full year and every quarter in 2021. For Sohu Media and Sohu Video, we provided a better user experience through improvements in products and social interaction features. We applied advanced live broadcasting technologies to large and unique content marketing events. Based on the competitive advantages of the Sohu product metrics, these live broadcasting events helped us to generate a high volume of premium content and wide social distribution. We were able to further consolidate our influence as a mainstream media platform and better capture advertisers' attention and budgets. For Changyou, its online game business delivered in-line quarterly results, while its overall revenue of 2021 continued to grow year-over-year. Let me go to details about each of these businesses in a moment, but first a quick overview of our financial performance. For the fourth quarter of 2021, total revenues were $193 million, down 24% year-over-year and 11% quarter-over-quarter. Brand advertising revenue was $34 million, down 20% year-over-year and flat quarter-over-quarter. Online game revenue was $144 million, down 27% year-over-year and 14% quarter-over-quarter. GAAP net income attributable to Sohu.com Limited was $4 million compared with the net income of $47 million in the fourth quarter of 2020 and net income of $12 million in the third quarter of 2021. Non-GAAP net income attributable to Sohu.com Limited was $200,000 compared with a net income of $53 million in the fourth quarter of 2020 and net income of $17 million in the third quarter of 2021. For the whole year of 2021, total revenues were $836 million, up 11% compared with 2020. Brand advertising revenue was $135 million, down 8% compared with 2020. Online game revenues were $638 million, up 19% compared with 2020. GAAP net income attributable to Sohu.com Limited was $69 million compared with a net income of $33 million in 2020, excluding the impact of an additional accrual of withholding income tax recognized by Changyou in the second quarter of 2020. Non-GAAP net income attributable to Sohu.com Limited was $79 million compared with a net income of $51 million in 2020, excluding the impact of the additional accrual of withholding income tax described above. Now, I will go through some of our key businesses. First, Media Portal and the Sohu Video. At Sohu Media Portal during 2021, we continued to refine our products. We developed and upgraded the audio function of our News App. We continuously enhanced the user experience by extending the app's application scenarios and enriching our content presentation format and also refined the app's social network distribution features by providing greater motivation for user interactions with other users. We are able to further strengthen our differentiated advantage as a mainstream media platform. For Sohu Video, we have a Twin Engine strategy that we are executing with the focus on both high-quality original dramas and reality shows, and the steady development of social distribution of short-form video content. Leveraging our advanced live broadcasting technology, we were able to further accelerate the layout of our live broadcasting and extended to scientific knowledge courses. We have attracted scholars and scientists in a number of fields to share their knowledge and interact with our users on our platform, which has strengthened our reputation in the field of scientifically and knowledge-based learning. On the monetization side, we comprehensively integrated our live broadcasting technology with a number of innovative content marketing campaigns. Despite the weak macroeconomic environment, we have developed attractive marketing strategies to gain attention from advertisers and secure their advertising budgets. In December, we successfully hosted several flagship events such as the 2021 Sohu Fashion Award and the Sohu Finance Earning Conference. These events generated an array of premium content and created social distribution across both Media and Video platforms. Through the application of our live broadcasting technology and the synergies with the product mergers, we will attract not only audiences but also advertising by providing these unique marketing opportunities for them and we are better able to meet advertisers' demands and capture their advertising dollars. Now for Changyou. During the fourth quarter of 2021, Changyou's online games revenue declined on a sequential basis, in line with our prior guidance due to the natural decline of TLBB Vintage and the licensed game Little Raccoon: Heroes. In our PC games business lines, we improved player experience by reducing the number of repetitive daily quests for regular TLBB PC. We also introduced a skill enhancement system and corresponding quest line for TLBB Vintage to keep the games fresh. For mobile games, we launched an expansion pack of Legacy TLBB Mobile featuring the addition of a new plan and various events for the National Day and New Year holiday. Next quarter, we will roll out new expansion packs and make adjustments bringing content for TLBB PC, Legacy TLBB Mobile, Little Raccoon: Heroes, and other games to withstand their vitality. In terms of the game pipeline, several key games are under development and we are now in the process of fine-tuning them. We look forward to bringing them to players soon. In the year ahead, Changyou will execute its top games strategy and by promoting innovation leading the capacity of its team and rolling out more high-quality mobile games, including MMORPGs and other diversified products. Before I pass the call to Joanna to go through our financial results in detail, we'd like to give you an update on the share repurchase program of up to $100 million announced on November 13, 2021. As of February 18, 2022, Sohu had repurchased 3,079,064 ADS shares under the share repurchases program for an aggregate cost of approximately $53 million, so basically half of the $100 million. With that, I will now turn the call to Joanna. Joanna?

Thank you, Charles. I will walk you through the key financials of our major segments for the fourth quarter and the full year of 2021. All of the numbers that I will mention are on a non-GAAP basis. You may find a reconciliation from non-GAAP to GAAP measures on our IR website. Sohu Media Portal quarterly revenues were $90 million, down 20% year-over-year and up 16% quarter-over-quarter. The quarterly operating loss was $38 million compared with an operating loss of $28 million in the same quarter last year. For the full year 2021, Sohu Media Portal revenues were $76 million, down 13% compared with 2020. The full-year operating loss was $134 million compared with an operating loss of $92 million in 2020. For Sohu Video, quarterly revenues were $23 million, down 1% year-over-year and flat quarter-over-quarter. The quarterly operating loss was $11 million, flat with the same quarter of last year. For the full year 2021, Sohu Video revenues were $87 million, down 4% compared with 2020. The full-year operating loss was $47 million compared with an operating loss of $43 million in 2020. For Changyou, quarterly revenues, including 17173, were $146 million, down 27% year-over-year and 14% quarter-over-quarter. Changyou posted an operating profit of $55 million compared with $112 million in the same quarter last year. For the full year 2021, total revenues were $649 million, up 18% compared with 2020. Changyou posted an operating profit of $310 million compared with an operating profit of $238 million in 2020. For the first quarter of 2022, we expect brand advertising revenues to be between $23 million and $26 million. This implies an annual decrease of 15% to 25% and a sequential decrease of 23% to 32%. Online game revenue is expected to be between $130 million and $140 million. This implies an annual decrease of 21% to 26% and a sequential decrease of 3% to 10%. Non-GAAP net loss attributable to Sohu.com Limited is expected to be between $10 million and $20 million. GAAP net loss attributable to Sohu.com Limited is expected to be between $13 million and $23 million. This forecast reflects our current and preliminary view, which is subject to substantial uncertainties. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Our first question comes from Thomas Chong from Jefferies. Please go ahead with your question.

Thanks, management, for taking my questions. Charles, I just want to get some color with regard to our user growth strategies. I remember in last quarter, we talked about a number of our strategies and the significant drive to grow the user base for the media business. Just want to get some color about the way or the strategies that we are going to do it and how much are we going to spend in 2022? And my follow-up question would be regarding the advertising outlook in 2022, we have buoyed our Q1 advertising guidance. Just want to get a sense about under what situation will we hit the high end of the guidance and the low end of the guidance?

Okay. So the user base growth strategy basically for the Sohu Media, Sohu News App, and also Sohu Video. For Sohu News App, we'll continue with our traditional approach of providing high-quality news and content with editorial excellence and also the recommendation algorithm. But then, we'll also develop this social network channel. So now, with the audio feature and our other editorial content, the recommendation channel, and the social network distribution channel, all of these features have been developed over the last two to three years and have been maturing. Now we'll probably spend more money on marketing and on distribution channels for user acquisitions so that we will have more users to come to our site, to our app and to test if our products have been well developed or in the right direction. So, we hope to have some viral or chain reaction events or explosions with a higher number of users. That's our strategy. Basically, we've been refining the products for quite a few years. And now we're putting it to a test for a higher volume of users by spending more money to acquire them to generate a viral or explosive effect. For video, it's similar. For the news, it's really about content news. I mean, for the video, it's video content, and we will continue with our producing more drama, and we'll also have live broadcasting and knowledge-based live casting and the knowledge-based short-form video clips with our Twin Engine strategy. We will also spend more on user acquisitions to prove our product direction from the last two to three years. So, while we have a lot of cash, we are going to spend on product and especially on user acquisition to prove and test our products. So on the advertising forecast, regarding the high and low ends...

Yes, about the overall advertising trend and how we would hit the high end and the low end of the guidance?

The macroeconomic situation is not favorable. The challenges in the real estate sector and the automotive industry, due to chip shortages, are limiting marketing budgets since there are few products to launch. Consequently, we have organized innovative events in Q3 and Q4 to provide content while also serving as marketing opportunities. In Q3, we hosted snow mountain climbing and live broadcasting events, while Q4 featured finance conferences and fashion awards. These events created unique marketing opportunities that set us apart from other companies, enabling us to exceed our guidance despite the market's downturn and lower revenues. Looking ahead to Q1, we will continue with these initiatives while starting our user acquisition process. We anticipate reasonable growth in our user base, which should positively influence advertising performance. However, it's challenging to estimate if we will reach the high or low end of our projections, especially since we are already midway through the quarter and the seasonality mirrors last year's trends. The ongoing issues in the real estate and automotive sectors are affecting our Q1 outlook, leading us to forecast a 15% decline compared to the same period last year.

Our next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question.

Just a follow-up to Thomas's question on the advertising environment. Charles, you mentioned that some of the weaker advertising industries. Could you also talk a little bit about which industry you see as relatively stronger for you guys? And also, you mentioned the real estate and auto weakness. When your sales team talked to them for the full year 2022 budget, do you get a sense that they see kind of a bottoming out sometime this year, which means are they planning to increase the budget after that?

I think for the auto industry, the chip shortage will bottom out, that's good news. Even in Q4, despite that problem, our unique marketing opportunities because overall our advertisers have limited budgets. The more favorable options, like our unique marketing activities instead of just spending money on the regular advertising formats, have allowed us to outperform. Thus, even amid this chip shortage, our auto industry revenue share actually increased from before. I believe this year for the auto industry will be a better year than last year. However, with real estate, I'm less certain as it remains a problem.

Our next question comes from Alicia Yap from Citigroup. Please ask your question.

I have a few questions. The first one is a follow-up on the advertising guidance. I’m just wondering if these macro weaknesses you're seeing are more or less in line with your earlier expectations or if the macro sentiment has weakened going into 1Q from the 4Q level that you see? And any preliminary view on the overall ad budget sentiment when can we expect to see recovery, which quarter do you expect recovery of the ad sentiment?

Okay. So basically, in fact, we've internalized the weakness. There hasn't been much change in Q4 as our preliminary expectations were already weaker. Q4 itself was already weaker than last year's Q4. So Q1 is similar. The only difference is that the Chinese New Year occurred two weeks earlier this year.

Okay, I see. Any view on when we can start to see some rebound of the sentiment? Would that be in Q2 or would that be in Q3?

As I said, I think the auto industry's chip issues should improve, likely in the later part of this year according to my conversation with some auto industry advertisers. However, Sohu's advertising amounts are relatively small and do not reflect broader industry trends. Our current performance is more dependent on whether we can manage to create successful marketing activities and increase our user base.

And then second question is on spending. I think last quarter, you mentioned given the cash you have, now is the chance to spend more on user growth. I saw in 4Q that your sales and marketing came in much higher than the previous quarter at around $55 million. Should we expect this amount to continue into each quarter in 2022 or will it be even higher than this number?

So, you mentioned the $55 million, is that including Changyou or just only Sohu? If you include Changyou, then it's hard to say, as Changyou's revenue base is substantial and Sohu's revenue varies. When we turned from last quarter's profitability into a loss quarter, it was largely due to Changyou facing declines in vintage games. For Sohu's Media and Video, we did not increase our marketing significantly in Q4 as compared to previous quarters. We will spend more wisely and carefully, focusing on the returns because we're not just going to spend money simply because we have cash. In Q4, we conducted pilot spending to assess user acquisition and will continue with that strategy while increasing our budget for this year.

That's very helpful. Thanks for clarifying on that, the business differences in Sohu and Media and Video. Lastly, I think on the share repurchase, you guys have been leveraging opportunities well, having bought back half of your authorized program. If you exhaust the remaining buyback program later in the next few months or in one to two quarters, would the Board consider authorizing a new share buyback program?

Probably not, or we don't know. We'll finish the other half and then we'll see.

Our next question comes from Jasper Joshua from JVD Holdings. Please ask your question.

I've got two questions. One is in regards to Changyou, where Charles last year said that if the conditions were great, you would consider a Shanghai listing. Could you elaborate on how you see the conditions? Secondly, my second question is regarding Sogou. As I understand, they are leasing 18,000 square meters from Sohu.com. Have you considered selling that property now that Sogou is not a part of the group anymore?

Well, I think in terms of a Hong Kong listing, we don't have a particular time schedule yet. We will see the opportunity as it arises. In regards to the leasing, I think we'll continue happily to be the landlord, to collect rent. We're not going to sell any buildings. Why should we sell a building when we already have a lot of cash?

You can give it to the shareholders. Just curious.

Right. There are no further questions. So with that, we conclude our conference for today. Thank you for participating. You may now disconnect.