Sohu.com Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu’s First Quarter 2022 Earnings Conference Call. Today’s conference call is being recorded. If you have any objections, you may disconnect at any time. I would now like to turn the conference over to our host for the conference call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

Thanks, operator. Thank you for joining us to discuss Sohu’s fourth quarter results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; CFO; and Vice President of Finance, James Deng. Also with us are Changyou’s CEO, Dewen Chen; and the CFO. 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 on this 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 containing 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 report on Form 20-F. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thanks, everyone, for joining our call. In the first quarter of 2022, despite the negative impact of COVID-19 and the challenging macroeconomic environment, we continued to focus on product requirements and improving operational efficiency. Thanks to the excellent performance of our online game business, we delivered better-than-expected bottom line performance and achieved profitability for the quarter. For Sohu Media Portal, we conducted product upgrades and improvements in the overall quality of our news and content, all of which continued to draw users to our platform and keep them engaged. For Sohu Video, we continuously executed our twin-engine strategy. We proactively extended our live broadcasting to a greater number of scientific fields. We also focused on user acquisition for our key mobile products and explored ways to improve monetization for both Sohu Media Portal and Sohu Video. For Changyou, our online games performed well during the quarter, with revenue exceeding the high end of our prior guidance. I’ll go into details about each of these businesses in a moment, but first, let us look at a quick review of our financial performance. For the first quarter of 2022, total revenues were $193 million, down 13% year-over-year and flat quarter-over-quarter. Brand advertising revenues were $24 million, down 23% year-over-year and 29% quarter-over-quarter. Online game revenues were $158 million, down 11% year-over-year and up 10% quarter-over-quarter. GAAP net income attributable to Sohu.com Limited was $3 million compared with $32 million in the first quarter of 2021 and $4 million in the fourth quarter of 2021. Non-GAAP net income attributable to Sohu.com Limited was $9 million compared with $37 million in the first quarter of 2021 and $200,000 in the fourth quarter of 2021. Now let me go through some of our key businesses. First, Media Portal and Sohu Video. For Sohu Media Portal, to strengthen our visibility and influence as a mainstream media platform, we provided real-time breaking news and hot social topics to users as well as optimizing algorithms and adding features to enhance user experience, increase user engagement, and enhance social distribution. For Sohu Video, we continued to execute our twin-engine strategy, and the product differentiation and competitive advantages of our live broadcasting have enabled us to extend its scope. For example, in late 2021, we launched Charge Zhang's physics class. I started teaching physics online through live broadcasting since late 2021. We have already hosted more than 40 online episodes since the initial launch. Starting this March, we also introduced offline classes along with live broadcasting. Young audiences were enthusiastic and generated robust online conversations. The recognition given to this initiative, supported by our advanced live broadcasting technology, has attracted broadcasters in various scientific fields, ranging from physics, mathematics, chemistry, and aerospace, to our platform to engage in scientific live broadcasting. As a result, we built a solid and credible reputation as a live broadcasting platform in the field of science and as a knowledge-based platform. We will continue to explore innovative ways to create and distribute high-quality content. We also had some new wins with our own production house for episodes and reality shows. For original dramas, following the successful broadcast of the previous show, this quarter, we started shooting a sequel and also have several original dramas in our pipeline that will be rolled out steadily in 2022. For reality shows, we saw the successful release of the fifth season of 'On Her Way Home,' designed to be more inclusive and to include training topics, which led to lively conversations with high visibility. We believe the success of the fifth season demonstrated our ability to create a robust and sustainable intellectual property, which also attracts advertising dollars. On the monetizing side, the first quarter tends to be a soft period for several reasons. Advertising spending was affected by macro uncertainties and Omicron-driven lockdowns. Despite these headwinds, we took advantage of the dual platform strengths of Sohu Media Portal and Sohu Video, as well as our advanced live broadcasting technologies, which gives us the opportunity to explore the promotional needs of advertisers and work closely with them on their marketing plans in order to attract and capture their advertising dollars. Next, turning to our Game business, Changyou. During the first quarter of 2022, Changyou’s online games revenue exceeded our prior guidance, thanks to the strong performance of TLBB PC. In our business line for PC games, looking first at regular TLBB PC, we launched a variety of holiday-related quests and promotional events and adjusted the relative strengths of different plans based on player feedback. With TLBB Vintage, we launched rich content around the time of the New Year and Spring Festival. We continue to optimize the game based on player feedback to increase player satisfaction. For mobile games, we launched a variety of holiday events and promotional events for Legacy TLBB Mobile, whose revenue remained steady on a sequential basis. Next quarter, we’ll roll out new content for TLBB PC, Legacy TLBB Mobile, Little Raccoon, Heroes, and other games. We’ll also launch TLBB Vintage on the WeGame platform as we look to bring back long-time TLBB players through new channels. In our game pipeline, several key games are under development, and we are in the process of fine-tuning them. We look forward to bringing them to players soon. Against an ever-changing environment, Changyou will stick to its top game strategy by promoting innovation, building the capacity of its team, and rolling out more high-quality mobile games in a variety of categories. Now I’ll turn the call over to our CFO, who will walk you through our financial results.

Thank you, Charles. I will now walk you through the key financials of our major segments for the first quarter of 2022. All numbers are on a non-GAAP basis. You may find a reconciliation of net debt to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $40 million, down 22% year-over-year and 27% quarter-over-quarter. The quarterly operating loss was $44 million compared with an operating loss of $31 million in the same quarter last year. For Sohu Video, quarterly revenues were $50 million, down 25% year-over-year and 36% quarter-over-quarter. The quarterly operating loss was $21 million compared with an operating loss of $30 million in the same quarter last year. For Changyou, quarterly revenues, including 17173, were $160 million, down 11% year-over-year and up 10% quarter-over-quarter. Changyou had an operating profit of $83 million compared with $99 million in the same quarter last year. For the second quarter of 2022, we expect brand advertising revenues to be between $22 million and $25 million. This implies an annual decrease of 32% to 40% and a sequential decrease of 7% to a sequential increase of 5%. Online game revenues are expected to be between $150 million and $160 million, implying an annual decrease of 1% to an annual increase of 6% and a sequential decrease of 5% to a sequential increase of 1%. Non-GAAP net loss attributable to Sohu.com Limited is expected to be between $15 million and $5 million and a net loss attributable to Sohu.com Limited to be between $18 million and $8 million. This forecast reflects our current and preliminary view, which is subject to substantial uncertainty. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

The first question comes from the line of Thomas Chong from Jefferies.

Management, I have a question regarding the Q2 guidance. How should we think about the low end and the high end of the guidance, given that we are seeing a negative Q-on-Q and positive Q-on-Q growth? And on that front, may I ask about the advertising momentum in the month of April and what we are seeing in the month of May? My second question is about, if there is no pandemic in Shanghai, how would our second quarter look differently from before? Are we actually seeing more people spending time playing games recently?

In terms of advertising, I think in Q2 it’s quite impacted by the lockdowns in not only Shanghai but also in other cities. Your question without the COVID lockdown, I think we should be looking at another $5 million to $6 million more in revenue in advertising. And for online gaming, people are spending more time playing.

We’re not seeing any influence caused by the pandemic outbreak in Shanghai. We think that Shanghai accounts for a small part of our total players. During this time, people have been shopping online and also have time for COVID testing.

The next question comes from the line of Eddie Leung from Bank of America.

Just a follow-up question on the advertising base. Could you give us an idea of the key advertised industry in the first quarter? Which industry have you seen better performance and which ones are weaker? Secondly, just a question about the share buyback program. Is there any update on the share buyback program? How does management think about launching another buyback program given the discount value of your share price?

I think the distribution of advertiser industries is similar to other quarters, with all of the top categories being Internet services and FMCG. However, the auto industry has been quite affected by the lockdowns. In Q1, there was also a real estate meltdown that impacted us. Regarding the share buyback program, we have no updates currently.

In Q1, we repurchased 4.3 million shares at a total cost of approximately USD 34 million.

So, basically, 75% of the $100 million have been spent on buybacks. At this point this quarter, we do not have any new plans to buy back, but we’ll see.

The next question comes from the line of Alicia Yap from Citigroup.

I have a follow-up on the second quarter advertising outlook. So, Charles, you just mentioned some of the verticals that have probably been impacted more. When do you expect some of these ad budgets to recover? Will we potentially see some year-over-year growth in the second half instead of the declining trend? Any color you can provide in terms of some of the outlook? My second question is on online gaming. With game approvals resuming recently, is there any change in your outlook for the second half gaming for Changyou?

Regarding advertising, as I said, without the COVID lockdowns, we should have at least lost about $6 million in advertising dollars due to the pandemic lockdown in Q2. Q1 is typically a soft season because of Chinese New Year. There are two reasons for this. One is that companies are postponing their marketing plans or product rollouts, which leads them to spend less. Secondly, we have unique marketing plans for advertisers that require gathering of people, and these events have been impacted. In the second half of the year, I hope that the lockdown will ease and the economy will regain some momentum.

Yes, the license approval resumed issuing from April, and we received the first session of 25 approvals. We need to observe further changes, but we believe that the trend will be favorable for gaming companies.

Can I follow up with a couple of questions? Can you remind us of the game titles that you have in the pipeline that are still waiting for game approval? Secondly, given the delisting issue, does Sohu have any plans regarding either an initial public offering in Hong Kong or a secondary listing in Hong Kong?

Now we have received the license approval for Stone, and we plan to launch it in July this year. It has started the appointment right now. For other games, we haven’t received any new license approvals so far.

Regarding the U.S. listing issue, I think it’s still not that urgent. We have a two-year timetable to think about it. Currently, we do not have plans to reintroduce in the Hong Kong market.

The next question comes from the line of Oli Jacobson from Private Investor.

To say that 75% of the share buyback program was spent at the end of Q1 or that 75% of the program was spent until today?

75% of the $100 million have been spent since we announced the buyback, which was in Q4. So, in the last few months, we have achieved our buyback of 4 million shares.

Can I follow up with another question? The combination of a large amount of cash and a very low market cap looks like an excellent opportunity to create substantial shareholder value. Can you give an update on how you think about the current cash pile? When do you expect to get more clarity regarding how the cash will be used?

Currently, we have about USD 1.5 billion in cash. At this point this quarter, we have decided not to implement a new buyback program, but that doesn’t mean we won’t have one in the future. We will likely have some buyback program down the line. We also see promising product innovations that we expect to test and will invest in user acquisition to draw more users to our platform. In Q1, we spent less than we planned due to fine-tuning some products, which led us to exceed our guidance due to better gaming performance and lower spending on user acquisition. Looking ahead, we will allocate funds wisely, whether for buyback, product innovation, or acquiring users, as achieving profitability requires a critical mass of users.

Thank you for the answer, Charles. Does this mean that if you do not believe you can allocate all the funds for marketing over time, more buybacks or even a special dividend may be more likely, given the current low market cap?

Yes, that’s all possible. We are also looking at how the COVID pandemic and lockdown impacts the overall economy. So there are many factors to consider, but we will not exclude more buybacks or even dividends.

Can I ask one more question? There is an upcoming game called 'indiscernible.' Is that game still planned for a 2022 release? Will it be released in the second half of the year?

We will launch it in July this year.

The company is in a better position than before. We have a game business that is making money. After the Sohu deal, we have a portion of cash. Our growth strategy for our media platform and video platforms is organic. We are not using excessive cash for this organic growth as it relies on having the right product and product design. That’s why I believe we’re well-positioned to fight in this competitive environment. In terms of user acquisition, for our video business, we are more focused on cost-effective strategies than simply large expenditures on expensive content. We hope to create stickiness with users through engagement on our platforms.

There are no further questions. That does conclude our conference for today. Thank you for participating. All disconnect. Have a nice day.