Earnings Call Transcript - SOHU Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Third Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would 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 third quarter 2023 results. On the call are Chairman and Chief Executive Officer, Charles Zhang; CFO, Joanna Lv; and Vice President of Finance, James Deng. Also, with us are Changyou, Dewen Chen; and its 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. For these statements involving 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 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 Charles Zhang. Charles, please proceed.

Charles Zhang, Chairman and CEO

Thanks, Huang Pu, and thank you, everyone, for joining our call. In the third quarter of 2023, we continue to improve our product offering and enhance operational efficiency. Thanks to these efforts, we delivered both top and bottom line performance in line with our prior expectations. As Local Media Portal, we further refined our products and upgraded the user experience. As Sohu Video, with our 'Twin Engine' strategy, we focused on the generation and distribution of compelling short-form content as well as live broadcast. These efforts helped us further boost user engagement and social interactions. At the same time, benefiting from our unique content and marketing campaigns, we continue to explore a diverse range of monetization opportunities that leverage our differentiated competitive advantages. For Online Games, with a consistent release of new content updates and operational efforts, game revenues remained stable. Before I go into more detail of our key financial results, please be reminded that the bankruptcy proceeding for Changyou's cinema advertising business concluded during the quarter. This release is related to continuing operations only. So, this includes the disposal gain from Changyou's cinema underlying business. For this quarter, for the third quarter of 2023, the total revenues were $145 million, down 22% year-over-year and 4% quarter-over-quarter. Brand advertising revenue was $22 million, down 14% year-over-year and 8% quarter-over-quarter. Online game revenues were $117 million, down 21% year-over-year and 1% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was $14 million compared with a net loss of $22 million in the third quarter of 2022 and a net loss of $21 million in the second quarter of 2023. Non-GAAP net loss attributable to Sohu.com Limited was $10 million compared with a net loss of $17 million in the third quarter of 2022 and a net loss of $18 million in the second quarter of this year. Now let me go through our key businesses in more detail. First, Media Portal and Sohu Video. In Sohu Media Portal, we continue to upgrade our products and strengthen operational efficiency. We actively promoted the generation and social distribution of high-quality content through enhanced real engagement and interaction. We integrated cutting-edge technologies in our products, resulting in a better user experience for both audiences and content providers. At Sohu Video, our focus remains on executing the 'Twin Engine' strategy. We further diversified our long-form content library and continuously promoted our unique live streaming and short-form content. We're committed to establishing a leading position in the field of knowledge and science-related live broadcasting, leveraging our distinctive IP, the Charles' Physics class. This IP has formed a multidimensional dissemination through live broadcasting, short videos, offline seminars, books, and other means, which has driven considerable traffic and engagement on various topics across our platforms. In addition, as a video social platform, we were also proactively attracting broadcasters and users across various fields by refining our broadcaster ecosystem and organizing events centered on hot topics such as the 2023 Sohu K-Pop Dancing Festival and 2023 Sohu Broadcasters Conference. These live broadcasting events enabled users to interact with each other, online and offline, and further enhanced their vitality and engagement on the Sohu Video platform. On the monetization side, despite the advertising budgets remaining cautious, we followed the market trends and developed synergies between Sohu's product matrix and our advanced live broadcasting technology. These efforts enable us to execute unique high-value marketing campaigns and unlock new monetization opportunities. During the quarter, we hosted traditional and innovative events such as Talk Under the Starry Sky, various dialogue sessions, and other high-end discussions. These events have been disseminated across various social media platforms, effectively attracting millions of audiences and generating significant exposure for advertisers. Now, turning to the online game business. Game revenues remained stable during the quarter, driven by consistent release of new content updates and robust collaborations. Within our PC games business, we rolled out promotional events for regular TLBB PC and further optimized its character development system. With TLBB Vintage, we launched a month-long event during the Qixi festival, which helped stabilize player engagement, coinciding with the Chinese Valentine's Day. In our mobile game business, we introduced a new strategic gameplay mode for legacy TLBB Mobile. Next quarter, we will launch expansion packs and content updates for the TLBB series and other titles to keep players engaged. We will stick to our top game strategy going forward as gaming technology advances rapidly and the market demand becomes deeper and more diversified. We will explore new ideas to better meet the players' needs, allocate more resources to professional talent development, and invest in content and technology innovation to bring more high-quality games to the market. In terms of our game pipeline, we will maintain our core competitiveness in MMORPGs while also producing card-based RPGs or sports and casual strategy games. Before I pass the call to Joanna Lv to go through our financial results in detail, we are pleased to announce that on November 11, 2023, just two days ago, our Board of Directors authorized a share repurchase program of up to $80 million over a two-year period. The repurchase program underscores the continued confidence we have in our long-term growth prospects as well as our ongoing commitment to increasing shareholder value. With that, I will now turn the call over to Joanna, please?

Joanna Lv, CFO

Thank you, Charles. I will now walk you through the key financials of our major segments for the third 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 $60 million, compared with revenue of $80 million in the same quarter last year. The quarterly operating loss was $33 million compared with an operating loss of $39 million in the same quarter last year. For Sohu Video, quarterly revenues were $11 million compared with revenue of $60 million in the same quarter last year. The quarterly operating loss was $33 million compared with an operating loss of $31 million in the same quarter last year. For Changyou's online game business and 17173, quarterly revenues were $180 million compared with revenues of $150 million in the same quarter last year. The quarterly operating profit was $52 million compared with an operating profit of $58 million in the same quarter last year. For the fourth quarter of 2023, we expect Brand advertising revenues to be between $20 million and $23 million, reflecting an annual decrease of 20% to 31% and a sequential decrease of 9% to a sequential increase of 4%. Online game revenues are expected to be between $106 million and $116 million, indicating an annual decrease of 4% to 13% and a sequential decrease of 1% to 9%. Non-GAAP net loss attributable to Sohu.com Limited is expected to be between $10 million and $20 million, while the GAAP net loss attributable to Sohu.com Limited is expected to be between $30 million and $23 million. This forecast reflects Sohu's 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.

Operator, Operator

Our first question comes from Thomas Chong from Jefferies.

Thomas Chong, Analyst

My first question is relating to the advertising business. I saw our Q4 revenue guidance for brand advertising sequentially down 9% to 4% growth at the high end. I just want to get some color from Charles. If I may know about the performance in October and so far, the performance in November. Under what situation should we expect it to be down by 9%, or is that conservative guidance? My second question relates to AIGC. Given that, everyone, I think, talks about how AI can help to drive conversion and content creation. Just want to get some color from Sohu perspective, our strategies in the coming quarters. And finally, may I also ask a quick follow-up regarding the 2024 online advertising outlook? Thank you.

Charles Zhang, Chairman and CEO

So, the Q4 forecast is providing a range and Q4 is quite similar to Q3. There is nothing, the macroeconomic situation is quite bad, and we're trying to have some innovative marketing campaigns and events that attract advertisers, so that in Q4 we have about the equal number of events or content activities like the Sohu fashion ceremony, the finance conference, and a few others, like the national contest. I think that Q4 is similar to Q3. We're just providing a range. The AIGC, I think it has only had some incremental improvement with the application of AIGC to our content generation and it has only resulted in incremental increases in efficiency of content creation, but so far, it's not making a major positive impact on our business side yet. Basically, for video content, AI technology allows us to better the titles, wording, translations, and voiceovers. For articles, we are using AIGC to summarize and write abstracts of the articles. So, it's not a big deal yet.

Thomas Chong, Analyst

May I also ask a very quick follow-up question regarding how we should think about the advertising market in 2024? Any preliminary discussions, yes, in 2024, do we have any preliminary discussions with the advertisers yet about next year spending? Thank you.

Charles Zhang, Chairman and CEO

Yes, I think overall the macroeconomy is not doing well. For instance, the auto industry, which accounts for 25% of our advertising base, has marketers being more cautious in spending because people have limited disposable income. Consequently, advertisers are tending to concentrate their budgets around some top-tier user base and platforms. With Sohu's current user base not in the top tier, we will have to conduct innovative events and campaigns to attract brand advertisers. For next year, 2024, things will be similar unless we see our Sohu News, Sohu Portal, and Sohu Video platforms achieve significant growth in user base. I think 2024 will resemble 2023. However, we definitely have some hope that our social media strategy will see some positive expansion in 2024.

Operator, Operator

Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap, Analyst

Hello, and thank you. Good evening, Charles, Johanna, and team. Thanks for taking my questions. I have three questions. First, I wanted to follow up on the comment Charles just mentioned for the Q4 advertising outlook. Would you say the macro situation is improving compared to what you are seeing in Q3, or is it similar? Is it not getting worse in Q4? Any color as you compare to what you saw in Q3 would be great. So that's the first question.

Charles Zhang, Chairman and CEO

In Q4, the internet service sector will see some improvement because Q3 is typically a slow season for internet services. Q4 is expected to double, especially in e-commerce. However, overall, the auto industry has been contracting. People are not spending due to competition and reduced budgets, as car sales are not robust. Advertisers are being more cautious in promoting their products. Some sectors like the fast-moving consumer goods (FMCG) industry seem to be increasing their spending, which is typical in an economic downturn. People tend to spend more on smaller items and leisure activities.

Alicia Yap, Analyst

I see. That's very helpful. So, my second question relates to the gains guidance for Q4. I thought you mentioned that there will be some expansion pack content updates for the TLBB series. Could you clarify why the game's guidance is expected to experience a sequential decline?

Unidentified Company Representative, Unidentified Company Representative

Due to most of our older games, we will experience a natural decline in the fourth quarter. The content updates in the fourth quarter are not major ones, so they cannot offset the natural declines in game revenues.

Alicia Yap, Analyst

Can I follow up on that? So, when you have new games launched, we should assume to see some sequential growth right in the coming quarters beyond Q4?

Unidentified Company Representative, Unidentified Company Representative

Typically, yes. But it also depends on the performance of the new game launches.

Alicia Yap, Analyst

Okay, thank you. My last question is about your share buyback. It's great to see the $80 million buyback that has been newly authorized. If we were to use all $80 million, what would your next plan be? Would there be more buybacks down the road, or is there something else that you are considering? Thank you.

Charles Zhang, Chairman and CEO

First, we want to execute this $80 million buyback and then start considering what the next steps might be. We are still focused on ensuring our business grows and our social network strategy works. We have been refining our products in both Sohu Video and Sohu News. We need to really grow our user base. We are confident that we will eventually achieve significant growth. There will be a time when our user base grows exponentially, which will lead to an increase in advertising dollars as it is tied to user base scale. We also hope to see our gaming operations improve in the future.

Operator, Operator

As there are no further questions at this time, this concludes today's conference call. Thank you for participating. You may now disconnect.