Sohu.com Ltd Q3 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Third Quarter 2024 Earnings Conference Call. Today's conference call is being recorded. 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 third quarter 2024 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 statements 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 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, everyone, for joining our call. In the third quarter of 2024, brand advertising revenue met the high end of our previous guidance while both our online game revenues and our bottom line performance exceeded expectations. For Sohu Media and Sohu Video, in addition to continued product refinements and user experience improvements, we continued to integrate resources and host various unique events and marketing campaigns. With these efforts, we were able to effectively stimulate social interactions among users, strengthen our brand influence, and secure more monetization opportunities. As a result of high-quality content updates and robust game operations, the online game business delivered better-than-expected performance. For the third quarter of 2024, total revenues were $152 million, up 5% year-over-year and down 12% quarter-over-quarter. Brand advertising revenues were $19 million, down 15% year-over-year and 6% quarter-over-quarter. Online game revenues were $128 million, up 9% year-over-year and down 13% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was $16 million compared with a net loss of $14 million in the third quarter of last year and a net loss of $38 million in the second quarter of this year. Non-GAAP net loss attributable to Sohu.com Limited was $12 million compared with a net loss of $10 million in the third quarter last year and a net loss of $34 million last quarter. Now I'll go through our key businesses in more detail. First, Sohu Media and Sohu Video. During this quarter, we kept promoting the social distribution features, connecting users and meeting their increasing needs, further consolidating our brand influence to carry out unique and influential events covering various verticals. In September, we successfully hosted the 2024 autumn convention of Sohu Video influencers, where users, broadcasters, and pop stars met in person to share their thoughts and build their social networks through our platform. This event greatly enhanced the recognition of the Sohu Video platform among broadcasters and users and significantly improved user engagement and interaction. We also proactively held diversified events based on our influential online interest clubs and groups in different areas. In October, we initiated a groundbreaking overseas collaboration with the event 2024 Dream Concert in South Korea, where we gathered 100 top K-pop contestants who stood out after 6 months of enhanced competition nationwide. This event attracted many K-pop fans and generated hot discussions across various social media platforms. Sohu Video has become a leading platform for K-pop fans and enthusiasts in China, drawing a large number of fans and providing them with a stage to realize their dreams. Moreover, we consistently reinforced our leading position in knowledge and science live streaming. Our highly regarded physics class, Charles' Physics Class, has just celebrated its third anniversary and published its third physics book. Together with Charles' Physics Class, we also have Charles' English Class and other related live content that further strengthened our core competitiveness in this field. We continue to innovate our content offerings and combine it with customized brand marketing solutions for advertisers. This helped us gain recognition from a large number of high-value audiences and advertisers, providing us with innovative monetization opportunities. Now let me turn to the online game business. During the third quarter of 2024, Changyou's online game revenues exceeded our prior guidance as TLBB PC performed better than expected, and our PC game revenues increased on a sequential basis. Meanwhile, due to the natural decline of the New Westward Journey, which was launched during the second quarter, mobile game revenue decreased on a sequential basis. We launched a series of crossover events around the Chinese Valentine's Festival, Qixi Festival, for both regular TLBB PC and TLBB Vintage, featuring themed maps and gameplays, which were well received by players. We also revamped the skill sets of a major client of regular TLBB PC, which effectively drew back former players to the game. For Legacy TLBB Mobile, we upgraded the skill sets of a client based on player feedback and introduced a corresponding new storyline and activities, which players were happy with. Next quarter, we will continue to launch expansion packs and content updates for the TLBB series, New Westward Journey, and other titles to keep players engaged. As market competition intensifies and user demand becomes more diversified, we will forge ahead with our top game strategy and remain committed to a user-centric philosophy. We'll continuously optimize the R&D process, enhance execution, and expand our international presence. By doing so, we are confident that we can bring more high-quality games to the market. In terms of the game pipeline, we will maintain our core competitiveness on MMORPGs going forward while also exploring possibilities in various types of games, including card-based RPGs and casual games. Now I'd like to give an update on the ongoing share purchase program. Sohu today announced that our Board of Directors has authorized an extension of the program for an additional year to November 10, 2026. As of November 7, 2024, Sohu had repurchased 3.4 million ADS for an aggregate cost of approximately $42 million. The total buyback program is $150 million, so that's why we need three years.

Thank you, Charles. I will now walk you through the key financials of our major segments for the third quarter of 2024. All the numbers are on a non-GAAP basis. You may find the reconciliation of non-GAAP to GAAP measures on our IR website. For Sohu Media and Sohu Video, quarterly revenues were $23 million compared with $27 million in the same quarter last year. Quarterly operating loss was $72 million compared with an operating loss of $66 million in the same quarter last year. For Changyou's online game business and 17173, quarterly revenues were $129 million compared with $118 million in the same quarter last year. Quarterly operating profit was $62 million compared with an operating profit of $52 million in the same quarter last year. For the fourth quarter of 2024, we expect brand advertising revenues to be between $17 million and $19 million, implying an annual decrease of 6% to 16% and a sequential decrease of 9% to a sequential increase of 2%. Online game revenues are expected to be between $97 million and $107 million, implying an annual decrease of 7% to 15% and a sequential decrease of 16% to 24%. We expect the non-GAAP net loss attributable to Sohu.com Limited to be between $26 million and $36 million and the GAAP net loss to be between $30 million and $40 million. This forecast reflects Sohu management's 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.

We will now take our first question from Alicia Yap from Citigroup.

I have a few questions. First is that in terms of the advertising outlook, have you seen any improvement in terms of the ad budget spend by advertisers entering the fourth quarter? Do you think overall advertiser sentiment has improved slightly heading into the remaining part of the year? And then given your guidance, which implies a year-over-year decline is narrowing for your ad revenue guidance, is that what you are seeing, an improving trend, and also possible if you could also resume positive growth as we enter 2025? Second question is on your gaming guidance versus your reported revenue. So in Q3, you guided very conservatively and yet delivered a massive beat in the third quarter, like $128 million. And then you guided Q4 again very conservatively. So what are the main reasons for you to guide conservatively? Which game performance have you not factored into the guidance for Q4? And then the last question is it seems like it takes a little bit slow to execute your buyback, given the trading liquidity. Just wondering if management could think of any better way to enhance the return to shareholders. Or would you consider speeding up the buyback by purchasing more shares in a shorter-term period?

In terms of advertising, the economy is steady but gradually losing a little bit of growth rate. The advertising market is still soft, not a robust market. But in Q3, we achieved a higher end of the forecast because our unique offline and online marketing events designed very uniquely provided some opportunities for advertisers to spend money on our projects. Overall, the advertising amount is not that large. Recently, there's some kind of stimulus package on the policy side, and we may see the market recover probably sometime next year.

The advertising market is still soft and not very strong. However, in Q3, we reached the higher end of our forecast thanks to our uniquely designed offline and online marketing events, which offered advertisers some opportunities to invest in our projects. Overall, the total amount spent on advertising is not significant. Recently, there has been a stimulus package introduced in policy, and we might see the market begin to recover sometime next year.

The advertising market remains weak, but in the third quarter, we exceeded our forecast due to our distinctive offline and online marketing events that created opportunities for advertisers to invest in our projects. Overall, the advertising spending is not significant. Recently, a stimulus package has been introduced on the policy front, and we may witness a market recovery sometime next year.

The reason for the revenue increase in the third quarter is primarily due to the new content and new servers we launched for both TLBB Vintage and regular TLBB PC during the quarter, which performed better than we expected.

The reason for the revenue beat in the third quarter is mainly because the new content and new servers that we launched during the quarter for both TLBB Vintage and regular TLBB PC. Their performances were better than expected.

The reason we provided a conservative outlook for the fourth quarter is that our focus for TLBB PC during this period is primarily on maintaining user stability and providing additional benefits, rather than prioritizing revenue growth. Therefore, our guidance may appear somewhat cautious.

Yes, regarding the buyback program, the delay is due to the daily volume limit. We don't want to impact or shake the price up too much. That's why we probably can finish buying $50 million a year, and that's why we needed to extend the program to 2026.

Do you have any follow-up questions, Alicia?

No, thank you, that's it.

Our next question comes from Thomas Chong from Jefferies.

I have two questions. First, what should we anticipate for the 2025 outlook on online games? Second, how do you see the operating margin trend evolving over the next few years?

Your question is about Changyou's game or the game industry in 2025?

About Changyou.

Your question is regarding Changyou's games or the game industry in 2025?

For 2025, our goal is to maintain the stability of our older games while striving to enhance their growth. We currently have around 10 games in development, some of which have received licensing approvals, including one called NBA Absolute Superstar and another named Hero: Three Kingdoms. We will begin testing these soon, and we also have a new version of the TLBB PC game that we are preparing to start monetization testing for.

Thank you. We have now reached the end of the question-and-answer session. Thank you all very much for your questions. And with that, we conclude our conference call today. Thank you for your participation. You may now disconnect.

Thank you.