Earnings Call Transcript - SOHU Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Fourth Quarter 2022 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.

Huang Pu, Investor Relations Director

Thanks, operator. Thank you for joining us to discuss Sohu's fourth quarter 2022 results. On the call are Chairman and the 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.

Charles Zhang, CEO

Thanks, Huang Pu. Thank you, everyone, for joining our call. In the fourth quarter and full-year of 2022, we continue to refine our products and optimize operating efficiency with strict budget control, despite the negative impact of COVID-19 and the macroeconomic challenges. Thanks to our efforts, brand advertising revenue and bottom line performance both exceeded our prior guidance for the fourth quarter of 2022. At Sohu Media Portal, we continued improving user experience by providing rich premium content and making significant advancements in both product and technology. At Sohu Video, based on our 'Twin Engine' strategy, we continued to develop both original content and science-based live broadcasting with our advanced live broadcasting technology. Meanwhile, we proactively explored a range of monetization opportunities with our differentiated content marketing campaigns. Online games delivered stable performance, with revenues in line with our prior guidance. I'll go into detail about each of this business in a moment, but first, a quick overview of our financial performance for the fourth quarter of 2022. Total revenues were $160 million, down 17% year-over-year and 13% quarter-over-quarter. Brand advertising revenues were $29 million, down 14% year-over-year, but up 12% quarter-over-quarter. Online game revenues were $121 million, down 16% year-over-year; and 18% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was $7 million, compared to a net income of $4 million in the fourth quarter of 2021 and a net loss of $22 million in the third quarter of 2022. Non-GAAP net loss attributable to Sohu.com Limited was $2 million, compared to a net income of $0.2 million in the fourth quarter of 2021 and a net loss of $17 million in the third quarter of 2022. For the full-year of 2022, total revenues were $734 million, down 12% compared to 2021. Brand advertising revenues were $103 million, down 24% compared to 2021. Online game revenues were $585 million, down 8% compared to 2021. GAAP net loss attributable to Sohu.com Limited was $17 million, compared to a net income of $69 million in 2021. Non-GAAP net income attributable to Sohu.com Limited was $2 million, compared to a net income of $79 million in 2021. Now let me go through our key business in more detail. First Media Portal and Sohu Video. At Sohu Media Portal during 2022, we upgraded algorithms, technologies, and products to improve our user experience and engagement by offering a wide range of premium content and self-media content and also their social distribution. We maintained strict budget control and made continuous improvements in operating efficiency. With these efforts, we were able to further reinforce our reputation as a mainstream media platform by leveraging our advanced live broadcasting technology and rich media resources. At Video, we focused on our Twin Engine strategy by providing compelling content in both long and short-form. We launched several original dramas and reality shows, including some foreign language dramas, and the fifth season of 'On Her Way Home'. Audiences were enthusiastic about both of these. We have several new original dramas in our pipeline to be released in the coming quarters. In terms of short-form content, we launched a successful series of science-related live broadcasting during the year, including a highly regarded IP that I discussed online. This IP has drawn significant attention and attracted hundreds of leading professional broadcasters in consolidating our position as the leading science and knowledge-based live broadcasting platform and a prominent online short-form video platform. On the monetization side, the COVID-19 pandemic and the macroeconomic uncertainties have negatively impacted the whole market. Even under these conditions, we explored new application scenarios using our advanced live broadcasting technology, benefiting from our unique IP, and we continued to close traditional flagship events, as well as unique and innovative content marketing campaigns. For example, these events and campaigns provided us with great premium content while simultaneously strengthening our brand influence and bringing us new and significant opportunities. In 2022, we successfully hosted the Sohu News Marathon, a traditional event, and the Sohu Finance Annual Conference. These events drew significant attention across media platforms and solidified Sohu's competitive brand advantages and captured advertisers' budgets. Now turning to our online game business. During the fourth quarter of 2022, online game revenues were in line with the company's prior guidance. In our business line for PC games, we adjusted the battlefield map and the gameplay of regular TLBB PC's cross-server clan system. We launched a new expansion pack for TLBB Vintage to celebrate its anniversary with the tradition of its first new clan. In mobile games, we introduced a survival mode PVT event for our game. In the first quarter of 2023, we will keep players engaged by launching expansion packs to celebrate the Chinese New Year and serious holiday events for both TLBB PC and TLBB mobile. As demand in the online games market becomes deeper and more diversified, we intend to stick with our top game strategy by promoting professional talent development, as well as innovation in content technology, and rolling out more high-quality mobile games of different types. In terms of game pipelines, while maintaining our core competitiveness in MMORPGs, we will also invest in more games of multiple types, including card, RPG, strategy, sports, and idle games. Now, I'll turn the call over to Joanna, our CFO, who will walk you through our financial results.

Joanna Lv, CFO

Thank you, Charles. I will now walk you through the key financials of our major segments for the fourth quarter and full-year of 2022. 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 $16 million, down 16% year-over-year and up 9% quarter-over-quarter. The quarterly operating loss was $32 million, compared with an operating loss of $38 million in the same quarter last year. For the full-year 2022, Sohu Media Portal revenues were $61 million, down 19% compared with 2021. The full-year operating loss was $156 million, compared with an operating loss of $134 million in 2021. For Sohu Video, quarterly revenues were $16 million, down 28% year-over-year and up 1% quarter-over-quarter. Quarterly operating loss was $21 million, compared with an operating loss of $11 million in the same quarter last year. For the full-year 2022, Sohu Video revenues were $63 million, down 28% compared with 2021. Full-year operating loss was $99 million, compared with an operating loss of $47 million in 2021. For Changyou's online game business and 17173, quarterly revenues were $122 million, down 16% year-over-year and 18% quarter-over-quarter. Quarterly operating profit was $54 million, compared with an operating profit of $55 million in the same quarter last year. For the full-year 2022, Changyou's total revenues were $592 million, down 9% compared with 2021. The full-year operating profit was $282 million, compared with an operating profit of $310 million in 2021. For the first quarter of 2023, we expect brand advertising revenues to be between $20 million and $23 million. This implies an annual decrease of 3% to 16% and a sequential decrease of 20% to 31%. Online games revenue is expected to be between $121 million and $131 million. This implies an annual decrease of 7% to 23% and a sequential increase of nil to 8%. Non-GAAP net loss attributable to Sohu.com Limited is expected to be between $15 million and $25 million, and GAAP net loss attributable to Sohu.com Limited is expected to be between $20 million and $30 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.

Operator, Operator

Thank you. Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question, Thomas.

Thomas Chong, Analyst

Hi, good evening. Thanks management for taking my questions. My first question is about the overall advertising industry outlook in 2023. Can management comment on the sentiment so far? And on Sohu, how should we think about the advertising spending among auto, FMCG, and Internet services? My second question is about our cash usage and investment strategies for this year. And finally, may I also get some color on our thoughts regarding the recent developments in the Internet sector? Thank you.

Charles Zhang, CEO

Okay. So, the first overall advertising market after the lift of the lockdown and after COVID-19, I think the economy is picking up in the first quarter. So, we are seeing an optimistic outlook for the overall advertising market compared with 2022 because companies are starting to spend money on marketing events and brand building. In terms of specific industries, I think auto is the first to recover, followed by FMCG and Internet services in Q4. Actually, for both parts of Q4, we were still in lockdown. But because of our live broadcasting activities, we experienced growth, an improvement of 12% in Q4 despite the lockdown. For 2023, we are optimistic as we see the economy recovering and companies starting to increase their spending. Regarding our investment strategy, we will continue to invest in refining our products and building our networks, and we will also spend on user acquisition, ensuring that our products are ready with improved stickiness. We're focusing more on video as this is crucial for us, which is evident from the loss in our video business last year. This year, we plan to spend more on Sohu Video and the Sohu News App to improve engagement. In terms of further investment, we are looking at AI technology and ChatGPT and utilizing our news recommendation algorithms that leverage deep adaptation of AI technology. However, we are not currently set up to develop a complete open AI system, but we can outsource certain foundational aspects to other companies for our applications.

Thomas Chong, Analyst

Thank you, Charles. Thanks for the detail.

Operator, Operator

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

Eddie Leung, Analyst

Good evening, guys. Just two questions. The first one is about games. I'm wondering if you have any guidance or outlook on the potential launch timing of new games, share buyback, or even dividends? Thank you.

Charles Zhang, CEO

Currently, we plan to launch new TLBB in the third quarter of this year.

Eddie Leung, Analyst

Got that. Thank you.

Charles Zhang, CEO

We will not exclude the possibility of share buybacks this year. Yes, it's possible.

Eddie Leung, Analyst

Understood Charles. Thank you.

Operator, Operator

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

Alicia Yap, Analyst

Hi, can you hear me?

Charles Zhang, CEO

Yes.

Alicia Yap, Analyst

Good evening management. Thanks for taking my questions. I have a couple of questions. First, a follow-up on the gaming business. Is the sequential improvement in your gaming business that you've guided for first quarter mainly due to some of the expansion packs that have released? And regarding the TLBB launch, can you comment on whether there will be any confusion or cannibalization effect from the similar title TLBB 2 by Perfect World? And for advertising business, could you elaborate on your first quarter guidance? Do you see this as an improving trend? Your guidance year-over-year still reflects negative growth despite the decline throughout the year, and would you expect positive year-over-year growth in the second quarter?

Dewen Chen, CEO of Changyou

We launched some promotional activities for our existing games in the first quarter around Chinese New Year. Yes. First of all, we are aware that both TLBB and TLBB 2 are mobile games, and we're sure there will be some impact, but from our past experiences, especially with Legacy TLBB mobile or TLBB, when they launched to the market, there was a positive impact on existing TLBB franchise games. So, we can only see the results after the games are launched.

Charles Zhang, CEO

In terms of advertising, the first quarter of 2022 was before the real lockdown happened in Q2, meaning it was a more normal quarter. The first quarter of 2023 is a slow season but still restoring. While we saw some improvement, it's not fully back to prior levels due to the slow recovery. That’s why there’s a decrease. Did I answer your question?

Alicia Yap, Analyst

Yes, I see what you mean. In terms of the year-over-year...

Charles Zhang, CEO

Q2 should see an improvement over Q2 of 2022. I think Q2 and Q3 of 2022 were the worst due to the lockdown in Shanghai. This Q1 shows some hope, but it's still not fully resumed.

Alicia Yap, Analyst

Thank you, Charles, and also thank you, Dewen for the answer. I just have one very quick follow-up. In terms of the Sohu Media and Sohu Video, do we have any plans or targets to narrow the loss this year?

Charles Zhang, CEO

The answer is no. We're going to spend as you asked— we have a good cash balance, which is why we need to invest in order to ultimately have a profitable platform. We must have a larger user base, which requires spending. That's why we intend to invest in both Video and the News App. We are seeing growth in user base on Video, and that's why we plan to increase our investment in 2022.

Alicia Yap, Analyst

I see. Okay. Thank you for your answer, Charles. Thank you.

Operator, Operator

I am showing no further questions. And with that, we conclude today's conference call. Thank you for participating. You may now disconnect.