Sohu.com Ltd Q1 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I'd 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 to discuss Sohu's first quarter 2023 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 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 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 contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the conference 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, everyone, for joining our call. In the first quarter of 2023, we hit the high end of our prior guidance for brand advertising revenue, while our bottom-line performance came in well above expectations despite the impact of seasonality. At Sohu Media, we further improved operational efficiency and focused on enhancing user experience through product and algorithm refinements. We closely monitored market trends and provided innovative marketing solutions to our advertisers. At Sohu Video, we continued to develop both long-form and short-form original content under our Twin Engine strategy. Leveraging the advantages of our product matrix, we were able to consolidate our resources and proactively explore a diverse range of monetization opportunities. Online games remained stable during the quarter, with revenues in line with the prior guidance. Now let me go into detail about each of our businesses. I will go into each of our businesses in a moment. But first, a quick overview of the overall financial performance. For the first quarter of 2023, total revenue was $162 million, down 16% year-over-year, up 1% quarter-over-quarter. Brand advertising revenue was $23 million, down 5% year-over-year and 22% quarter-over-quarter. Online game revenues were $129 million, down 18% year-over-year and up 7% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was $80 million, compared with a net income of $3 million in the first quarter of 2022 and a net loss of $7 million in the fourth quarter of 2022. Non-GAAP net loss attributable to Sohu.com Limited was $13 million compared with net income of $9 million in the first quarter of last year, and a net loss of $2 million in the fourth quarter of 2022. Now we'll go through our key businesses in more detail. First, Sohu Media Portal and Sohu Video. At Sohu Media Portal, we harnessed cutting-edge technology to steadily optimize our products and algorithms as a mainstream media platform. We not only deliver reliable and real-time news and information to our users but also stimulate high-quality self-media content generation among users and expand our social network distribution. Through these efforts, we have continuously improved user experiences and further strengthened our brand influence. At Sohu Video, we focus on developing high-quality, long-form and short-form content. For the long-form content in the first quarter, we have rolled out several successful productions, both of which won acclaim from audiences. In April, we released a crime scene thriller entitled 'Love of Replica,' the upgraded sequel to 2021's 'Mysterious Love.' 'Love of Replica' became a hit show at the time of its release, last week, and further boosted our audience base. For reality shows, we saw the successful release of 'On Her Way Home: Special Edition' from the Spring Festival, and the 'On Her Way Home' series has gained widespread attention and generated in-depth discussions of various social issues, helping us reach larger audiences. In terms of short-form content, we continue to focus on social science-related live streaming supported by our advanced live streaming broadcasting technology. With abundant and professional reserves of broadcasters across numerous verticals and a rich offering of high-quality content, Sohu Video continues to consolidate its reputation as a leading science and technology-based live broadcasting platform. On the monetization front, the overall market recovered moderately during the quarter. As advertising demand bounced back, we proactively explored various monetization opportunities in differentiated scenarios. For example, during the quarter, we successfully hosted the annual Sohu Fashion Awards, which has become a distinctive IP for Sohu and demonstrates our position as the mainstream media platform. The Sohu Fashion Awards, together with various educational programs and interviews, generated significant attention and created various hot topics and discussions on our product matrix as well as across various social media platforms. These unique campaigns leveraged by our dual platform of Sohu Video and Sohu News reinforced our strong brand influence and enhanced our capability in providing ample market exposure for our advertisers. Now, turning to our online game business. During the first quarter of 2023, online game revenues were in line with the company's prior guidance. Within our PC games business, we launched several Chinese New Year holiday events and promotions for our regular TLBB PC game. We continue to improve the functionality of TLBB based on player needs and also introduced a new cross-server PVP event that matches players randomly. In our mobile game businesses, we launched updates for 'Legacy TLBB Mobile' to celebrate the Chinese New Year, introducing a series of holiday events as well as optimizations to game mechanics. In the second quarter of 2023, we will launch expansion packs and content updates for TLBB PC, 'Legacy TLBB Mobile,' and other games to keep players engaged. As technology in the gaming business continues to advance and market demand becomes deeper and more diversified, we intend to stick with our top game strategy, allocating more resources to professional talent development as well as content and technology innovation in order to roll out more high-quality mobile games. In terms of the game pipeline, while maintaining our core competitiveness in MMO RPGs, we also produce games across various genres, including card-based RPGs, strategy, sports, and idle games. I will now turn the call over to our CFO, Joanna, who will walk you through our financial results. Joanna?

Thank you, Charles. I will now walk you through the key financials of our major segments. For the first quarter of 2023, all the numbers 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 $18 million, unchanged from revenues of $18 million in the same quarter last year. The quarterly operating loss was $35 million compared with an operating loss of $45 million in the same quarter last year. For Sohu Video, quarterly revenues were $30 million compared with revenues of $50 million in the same quarter last year. Quarterly operating loss was $32 million, compared with an operating loss of $21 million in the same quarter last year. For Changyou's online game business and 17173, quarterly revenues were $131 million compared with revenues of $160 million in the same quarter last year. Quarterly operating profit was $55 million compared with an operating profit of $85 million in the same quarter last year. For the second quarter of 2023, we expect brand advertising revenues to be between $23 million and $26 million. This implies an annual decrease of 8% to an annual increase of 4% and a sequential increase of 2% to 15%. Online game revenues are expected to be between $112 million and $122 million, which implies an annual decrease of 22% to 29% and a sequential decrease of 6% to 13%. Non-GAAP net loss attributable to Sohu.com Limited is expected to be between $15 million and $25 million, while GAAP net loss attributable to Sohu.com Limited is expected to be between $80 million and $28 million. Our guidance 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.

Thank you. Our first question comes from Thomas Chong of Jefferies. Please proceed.

Thanks, management, for taking my question. I have two questions. The first one is about the advertising industry in 2023 outlook, and also about spending budgets among auto, FMCG, Internet service and property service advertisers. My second question is about online game outlook and our game pipelines in 2023. Thanks.

So for the advertising outlook in 2023, we see the top three categories: auto at 25%, FMCG at 15%, and internet service at 15%. We see some opportunities for the auto industry, probably later in Q2 or Q3 later this year. For Q1, advertising was somewhat soft due to the new policy on stricter emission standards set for July 1, which led some auto companies to lower prices and try to eliminate their stockpiles. So there's a negative impact in Q1. However, for the whole year, it looks like there are some opportunities with increased competition in the auto industry, especially for new energy electric car sectors. In FMCG, we notice that while consumers are spending less on larger items, there seems to be a recovery in spending on smaller items. This year marks the first year after the lifting of COVID-19 restrictions, so Q1 and Q2 will serve as indicators of how the economy is adjusting. The recovery isn't as pronounced as we hoped, but we do see signs such as the 'lipstick economy' where consumers are spending on smaller, affordable items rather than large purchases like real estate. This is what I see for the remainder of the year.

Thank you.

Thank you for the questions. Next up, we have Alicia Yap from Citigroup. Please proceed.

Hi. Good evening, Charles, Joanna, and the management team. Thanks for taking my questions. I do have a follow-up on both advertising and gaming. So first of all, on advertising, Charles, you mentioned during the first quarter that it was recovering moderately. You also explained some of the dynamics for big-ticket and small-ticket items. However, what is your assessment of the overall sentiment among advertisers in industries that are still a bit weak? Are they preparing to spend more, or are they still being cautious? Do you expect some improvements in big-ticket item spending in the second half of the year that could drive advertising growth? This is my first question. For the second question, regarding gaming and the guidance for the second quarter: it appears relatively weaker compared to what we delivered in the first quarter. Is this due to a lack of new games and seasonality? Should we anticipate a significant sequential bounce in the third and fourth quarters given the TLBB launch?

Alright. To address your first question regarding advertising, I would like to highlight that in Q1 and also for our Q2 projections, our advertising revenue in terms of RMB indeed reflects a growth of around 2%, for both Q1 and Q2, and projected at 3% in Q2 following currency exchange adjustments. My outlook on the real estate sector does not hold much hope for growth at this time, as advertising related to real estate is unlikely to see any recovery. However, we do see opportunities in the auto industry, and there's potential for advertising recovery in Q3 due to increased competition, particularly in the electric vehicle sector, with unique marketing packages providing significant brand exposure across social networks. Our advertising platform supports a wide range of businesses needing market presence, and while one industry may struggle, others may emerge. Spending patterns suggest a potential increase in smaller ticket items, particularly in FMCG and luxury goods, which might represent opportunities as we proceed into the later part of the year.

Thank you.

We have no further questions at this time. Thank you, everyone. That concludes today's conference call. You may now disconnect your lines.