Sohu.com Inc (NASDAQ: SOHU) Q1 2020 Earnings Call Transcript

Sohu.com Inc (SOHU) Q1 2020 earnings call dated May. 18, 2020

Corporate Participants:

Huang Pu — Investor Relations Director

Charles Zhang — Chairman of the Board and Chief Executive Officer

Joanna Lv — Chief Financial Officer

Analysts:

Eddie Leung — Bank of America Merrill Lynch — Analyst

Macy — Jefferies LLC — Analyst

Alicia Yap — Citigroup — Analyst

Changshu — Forum Tech Research — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu’s First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After management prepared remarks, there will be a Q&A session. 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 today to discuss Sohu’s first quarter 2020 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 today are Changyou’s CEO, Dewen Chen; and CFO, Yaobin Wang; and Sogou’s CEO, Xiaochuan Wang; and CFO, Joe Zhou.

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 in this conference call are 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 statement. For more information about the potential risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission, including its 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 — Chairman of the Board and Chief Executive Officer

Thank you to everyone for joining our call. Let me [Technical Issues]. So, during the first quarter of 2020, the COVID-19 outbreak inevitably impacted the overall economy and advertising industry as well. Facing these challenges, we continue to explore new opportunities and differentiated development strategies. For Soho Media Portal as a mainstream media platform, we continue to refine the product to generate and distribute a large amount of timely and accurate information, especially regarding the pandemic and its prevention. For Sohu Video, we proactively brought new opportunities in the live broadcasting of medical and health-related content and provided unique content and valuable information to our audiences. We’ll continue to explore diversified revenue sources and ways to further narrow losses.

For Changyou, online games performed well during the first quarter, mainly driven by the solid performance of both TLBB PC and the Legacy TLBB Mobile. The privatization of Changyou was completed on April 17, after which Changyou’s profit will be wholly attributable to Soho.com Limited. Going forward, we plan to increase the integration of resources and combine Changyou onto Sohu’s platform. For Sogou, despite the challenging environment during the COVID-19, Sogou’s core search business continue to outperform industry. The Search and Mobile Keyboard recorded new highs in terms of traffic and user base, respectively.

If I go into more detail about our key financial results, please be reminded that the Changyou’s cinema advertising business ceased operations in the third quarter of 2019. The results that we will discuss today and comparative figures that we refer to here only cover continuing operations and exclude the cinema advertising business.

So, for the first quarter of 2020, total revenues, $436 million, up 6% year-over-year and down 11% quarter-over-quarter. On a non-GAAP constant currency basis, total revenues would have been $15 million higher than our reported revenues, which would be a 10% improvement year-over-year, constant currency that, yeah. Net brand advertising revenue, $26 million, down 40% year-over-year and 39% quarter-over-quarter. Search and search-related advertising revenue, $238 million, up 1% year-over-year and down 13% quarter-over-quarter. Online game revenues, $133 million, up 35% year-over-year and 1% quarter-over-quarter.

Non-GAAP net loss attribute to Soho.com Limited was $80 million compared with a net loss of $52 million a year ago, the first quarter of 2019 and net income of $7 million in the fourth quarter of 2019. Excluding the profit/loss generated by Sogou, non-GAAP net loss attributable to Sohu.com Limited was $8 million — net loss, $8 million compared with a net loss of $51 million in the first quarter of 2019 and a net loss of $6 million in the fourth quarter of 2019.

Now let me go through some of the key businesses. First of all, Media Portal and Sohu Video. During the first quarter of 2020, the whole country and even the whole world suffered from [Technical Issues] of COVID-19. Although we were inadvertently affected by the pandemic as a mainstream media platform, we continuously focused on generating and distributing helpful real-time reports and live broadcasts to provide accurate and reliable pandemic information and prevention knowledge.

On the product side, we continue to promote interactions between our core products and enhance the social features through product innovations — social network features. We inserted a live broadcast feature in our Soho News app in the information stream where users can have automatically transferred or jumped to the Soho Video app to watch the live broadcast. We can instantly switch back to Soho News app to browse other news with a single click. So, these upgrades allow users to access timely and accurate information on Sohu’s product matrix and further consolidate our advantage and influence as a mainstream media platform.

On the content side, for our media portal in addition to our efforts consistently to find our products to provide readers with a better user experience, we also worked hard to seize also fragmented time and facility to generate some high quality, short and long form content. This has further improved communication and interaction between readers and writers. For Sohu Video during the COVID-19 outbreak, we accelerated the deployment of our live broadcasting capability and launched a highly regarded 24-hour health/medical broadcast that has focused on health topics and related to pandemic news and prevention. We are seeking the opportunity to actively explore other verticals and also building knowledge platform and provide users with timely and accurate information and content to integrate the live broadcasting with our premium content during the [Indecipherable] volume — during the release of our drama TV — long form drama, Well Intended Lab 2 [Foreign Speech] and the High School Big Bang [Foreign Speech], we introduced the multi-person microphone relay feature [Foreign Speech] which allowed the audiences to interact with the shows actor directly. The new initiative improved user engagement, allowing to further boost the interest in long and short form videos.

On the monetization side, it is expected that the negative impact of the pandemic on the overall economy will continue for some time, though it appears that China is currently on track for recovery, our advertising business have faced big headwind in the first quarter. Nevertheless, we actively worked on diversifying our revenue by integrating our resources and leveraging the synergies between our core products. Starting in April, some of our events resumed, such as our drone photography content and compact and Soho Tech 5G Summit. And furthermore, during the quarter with the adoption of the above mentioned multi-person microphone relay feature, we launched a new live broadcast called Boss1+1, which we invite celebrities in different industry segments to share their insight views on trends in economy, in the market with events and live broadcast to help advertisers fully extend their branding and promote our position as a mainstream media platform. We’ll continue to explore new opportunities to secure advertising budgets in the coming quarter.

Next, turning to Changyou. Following Changyou’s privatization on April 17th, Changyou’s profit will be wholly attributable to Soho.com Limited. However, since this transaction was completed in the second quarter, the Changyou is not reflected in our first quarter financials. Going forward, we plan to increase integration of resources and the combined Changyou onto Sohu’s platform for more opportunities. For the first quarter of 2020, online game performed well. The Changyou financial results exceeded the top-end of our prior year guidance. For PC games, revenue for the first quarter rose significantly on a sequential basis, mainly due to the better than expected performance of TLBB PC. Due to COVID-19 outbreak, player engagement and the willingness to pay saw notable improvements in the short period of time.

For mobile games, player engagement remained stable during the quarter with the launch of new expansion packs for the spring festival for Legacy TLBB Mobile, as well as several holiday events. However, expect revenues from TLBB PC and TLBB Mobile and user engagement to decline in the second quarter of 2020 as people get back to work.

Looking ahead, Changyou will continue to execute its core strategy of top game, will continue to focus on MMORPG mobile games, while developing some casual and strategy games. Meanwhile, Changyou intends to expand more into the international market for games. Key games across different genres are being developed in an orderly way and we believe that Changyou is well-positioned to roll out high quality game for players in the future.

Lastly, for Sogou, in first quarter 2020, despite the setbacks in the macro environment and online advertising industry in China amidst COVID-19, Sogou’s core search business continue to outperform the industry, both the core search and mobile keyboard recorded new highs in the quarter, thanks for the surge of users demand for reliable information, the high efficiency during the pandemics. Sogou Mobile keyboard further expanded its deals by 9% year-over-year to $482 million, reinforcing its position as the third largest Chinese mobile app in terms of DAUs according to our research. Further, Sogou Mobile carried out an all-around upgrade across the core business, leveraging the leading AI technologies and tap into new areas with high revenue potential. In addition, Sogou’s smart hardware business maintained steady progress. Looking ahead, we expect Sogou to resume healthy growth post the pandemic with a steady momentum in search business and acceleration of growth and other businesses.

Now, let me turn over the call to Joanna who will walk you through our financial results. Joanna?

Joanna Lv — Chief Financial Officer

Thank you, Charles. I will walk you through the key financials of our four major segments. For the first quarter of 2020, all of the numbers that I will mention are all on a non-GAAP basis. You can find a reconciliation of non-GAAP to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $50 million; down 43% year-over-year and 34% quarter-over-quarter. Quarterly operating loss was $23 million compared with an operating loss of $35 million in the same quarter last year. For Sohu Video, quarterly revenues were $23 million, down 11% year-over-year and up 8% quarter-over-quarter. Quarterly operating loss was $11 million compared with an operating loss of $34 million in the same quarter last year. For Changyou, quarterly revenues including 17173 were $136 million, up 32% year-over-year and 1% quarter-over-quarter. Changyou posted an operating profit of $56 million compared with an operating profit of $45 million in the same quarter last year. For Sogou, quarterly revenues were $257 million, up 2% year-over-year and down 15% quarter-over-quarter. Net loss was $31 million compared with a net loss of $3 million in the same quarter last year.

Before we go through the outlook for the second quarter of 2020, please note that after the completion of Changyou’s privatization, Changyou changed its policies for its PRC subsidiaries with respect to distribution of cash dividends. As a result, it is expected that Changyou will recognize an additional accrual of withholding income tax of $88 million for the second quarter of 2020. For the second quarter of 2020, we expect total revenue to be between $410 million and $445 million, brand advertising revenue to be between $32 million and $37 million. This implies annual decrease of 15% to 27% and a sequential increase of 25% to 45%. Total revenue to be between $260 million and $280 million. This implies annual decrease of 8% to 14% and the sequential increase of 1% to 5%. Online game revenue to be between $102 million and $112 million. This implies annual increase of [Indecipherable] to 10% and a sequential decrease of 16% to 24%, excluding expected accrual of withholding income tax of $88 million discussed above.

Non-GAAP net income and loss attributable to Sohu.com Limited to be between a net loss of $5 million and the net income of $5 million. And non-GAAP net income loss per fully diluted ADS to be between a net loss of $0.30 per ADS and a net income of $0.30 per ADS. Excluding the expected accrual of withholding income tax, GAAP net loss attributable to Sohu.com Limited to be between nil to $10 million and GAAP loss per fully diluted ADS to be between nil to $0.25. Excluding the profit and loss generated by Sogou and further excluding withholding income tax, non-GAAP net income attributable to Sohu.com Limited to be between nil and $10 million and GAAP net income and loss attributable to Sohu.com Limited to be between a net loss of $4 million and a net income of $6 million.

This forecast reflects Sohu’s management current and preliminary view which is subject to substantial uncertainties, particularly in view of the potential ongoing impact of the COVID-19, which remains difficult to predict.

And this concludes our prepared remarks. Operator, we would now like to open the call to questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from the line of Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Hi, good evening, guys. Just a question on perhaps Changyou and another one on the Media Portal pieces. On Changyou, could management give us more color on the potential pipeline for the upcoming couple of quarters? We understand that there should be some uncertainty, but that would be great to hear management target and plan?

And then on the Media Portal business, probably also related to Soho Video advertising as well. We have seen a big decline in the first quarter because of the coronavirus outbreak, but we’re also seeing recovery in the second quarter. So in terms of the advertising segment, could to give us some color on the strengths and weaknesses of different advertiser industries? And which ones have been driving recovery in the second quarter? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

[Foreign Speech] Hi, Eddie, it’s Zhang translating for Dewen and Yaobin today. For self-developed games, we will have Tetris and DMD Mobile for the next two quarters. For licensed games, we have one that has been launched in South Korea. That is KOS [Phonetic] extreme match. And we also plan to launch some of the strategy in the coming quarters [Foreign Speech] as well as a total defense product.

[Foreign Speech] Okay. To answer your second question about the Media. Yes, the brand advertising actually includes both the portal and the video. It suffered some, there’s an impact in the first quarter, but you can look at the numbers actually, according to our forecast or estimate, business outlook that is recovered actually pretty strongly, right, above the average, I think about average industry level. So it’s mostly from the portal side, but we are basically as I said in the script that we actually channeled through different apps, the Sohu News app and Sohu Video app, especially the live broadcasting all happening on a Sohu Video app. But all these portal advertisers — and they can have innovative new marketing initiative with our live broadcasting with both app combined, so that, especially when people are not, especially offline gathering are kind of restricted or limited or there is limited number of people appear in the same hall, this live broadcasting and the online format of communication actually helped them to launch new products.

So that’s the — because of our innovation in the live broadcasting area in the first quarter. We are able to get some real good advertising deals. So the overall portal advertising have recovered stronger than expected. And it’s some — I can see some auto industry, just there’s kind of a rebound in the second quarter. They need to market their products, it’s almost like a yeah, rebound I would say. And also some other industries, I think lead by the auto industry, right. [Foreign Speech]

Yeah. I hope I answered the question.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Thanks.

Charles Zhang — Chairman of the Board and Chief Executive Officer

All right.

Operator

Thank you for the questions. I will take the next question from the line of Thomas Chong of Jefferies. Please go ahead.

Macy — Jefferies LLC — Analyst

Hi, management. Thank you for taking my question. This is Macy [Phonetic] talking on behalf of Thomas. Could management provide some colors on the SME and key advertising mix? And moreover, could you talk more about the profitability timing? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Yeah. The SME, I think for the Sohu side, our recovery mostly are due to the brand advertising of some large brands, because they can take advantage over our innovative products the live broadcasting. Well, I think Sohu side or Xiaochuan can comment on the SME side, that’s represented SME companies advertising trend seems to slower — recovering slower from brand — from our experience and the profitability — you’re asking about profitability, right? Schedule for profitability.

Macy — Jefferies LLC — Analyst

Yeah.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Okay. If you look at our forecast for Q2, excluding Sogou, the group because in Q2 there’s excluding 17 days of profit contribution from Changyou, there’s 90 days you have 60 — 70 — 73 days of contribution of earning from Changyou. And with the cost management of Sohu and also relatively recovery of the brand advertising, we have a forecast of actually profit excluding Sogou of between zero to $10 million. You can see that, so that’s basically the time, the schedule is already Q2, we’re going to be profitable.

Yeah. Any other questions?

Operator

Thank you. The next question — I beg your pardon. Please continue.

Charles Zhang — Chairman of the Board and Chief Executive Officer

[Foreign Speech] Yeah, which is true. Okay.

Operator

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

Alicia Yap — Citigroup — Analyst

Hi. Good evening, Charles and management team. Thanks for taking my questions. So wanted to get a sense on the impact of the postponing of the Olympic in terms of the ad budget this year. So, how are advertisers spending commitment change? Are these budget gone with the postponing of the event or are they redeploying some of that to other events?

And then related to the guidance, which I think you alluded to is actually much better than the industry standards. So how much are we expecting to get from the new live broadcasting initiative in the second quarter? And how should we think about into the second half as well? Will Sohu actually get benefit from these new features that we are introducing. Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Yeah. I think definitely the postponement of the Tokyo Olympics have — it’s among the many things that cannot postpone. So it’s very hard to see this one event what’s the impact on advertising. So yeah, we have improved or better than expected results for Q2, because these live broadcasting application of the technologies and not only helped with the — some of those brand advertisers to secure deals, secure advertising deals from them. It’s just — and also it helped — it becomes very much needed, because all companies need to have an online offline strategy. And Sohu Video or Sohu the matrix can provide that solution to them.

And also, but most importantly, it actually helped Sohu’s own events. As you look at 2019, we had a lot of events, marketing events or we call it activities that is content, because and then all these almost due to the COVID-19 we postponed it, but because of our own technology, we are able now to launch it in Q2. Like, in Q2, we launched the drone contest event with online offline technology help and also we launched the talents for campus — basically the contest of [Foreign Speech]. And also we were able to hold the — it took place yesterday, right, the 5G forum with online offline with like probably only 200 people or less than 200 people at a site in the conference hall, but hundreds of thousand people are watching from other places, and also even some panelists can actually interact with the panel from anywhere in the world.

So that helped us, so it’s really actually these are new online broadcasting technologies that helped our only events. And these events are a kind of a catalyst or some kind of to help us to secure some really marketing deals. Yeah. As I did in 2019, and then it continued it’s working because of this new approach. So I think this trend will continue. In the second half of the year, we will refine our technology and with also new applications, new like application VR or even 5G Technologies. So we’ll be able to help to have more innovative tools for company to market themselves at a time of COVID-19. And so we will look at a continued profitable quarters-after-quarters. I’m saying that, excluding Sogou. Of course, we hope that Sogou will also recover in the second or third quarter. Yeah.

Alicia Yap — Citigroup — Analyst

Okay. Thank you, Charles.

Operator

Thank you for the questions. [Operator Instructions] We do have a last question from the line of Forum Tech Research, Changshu [Phonetic]. Please go ahead.

Changshu — Forum Tech Research — Analyst

Hey, good evening, Charles. After Changyou’s privatization, I just wonder, do you guys have any changes in terms of strategy in terms of a resource allocation whether you keep Changyou grow — put necessary resources into it to grow the gaming business?

Charles Zhang — Chairman of the Board and Chief Executive Officer

I think for the most part I think Changyou will continue to operate like an independent company. And then to really have good games and really compete in the gaming industry, just like an independent company. And then the group, the Sohu side can only try to, if we can do something if we can help Changyou to grow. Say, let’s say some of those games — some of the games are suitable or good for the Sohu platform to market the games and then it will very cost effective, we will do that, but still Changyou there is a lot of other platforms that Changyou have to spend money to buy — to distribute the games. So there is some synergy, but I will be very cautious. We want to make sure Changyou continue to fight and compete like a standalone company and compete with industries.

Operator

Thank you for the questions. [Operator Instructions] At this time, there are no further questions on the line.

[Operator Closing Remarks]