Sohu.com Inc  (NASDAQ: SOHU) Q4 2019 Earnings Call Transcript

Sohu.com Inc  (NASDAQ: SOHU) Q4 2019 Earnings Conference Call
Final Transcript

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

Alicia Yap — Citigroup — Analyst

Thomas Chong — Jefferies — Analyst

Presentation:

Operator

Thank you for joining Sohu’s Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions].

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 fourth quarter 2019 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, Huang Pu. Thank you to everyone for joining our call. During 2019, China’s economy continued to slow down and competition intensified. However, these challenges did not stop us from exploring new opportunities and improving operating efficiencies. As a result, our operating results further improved due to the solid performance of our business and effective cost saving initiatives.

For the fourth quarter of 2019, excluding an impairment charge recognized for an investment unrelated to our core businesses, non-GAAP net income attributable to Sohu.com Limited was $7 million profit. Then separately for Sohu Media Portal, we strengthened our position as a mainstream media platform, with high quality original content and various events. And also there is impact for Sohu Video, with the unique and high quality dramas and other shows, we actively searched for diversified monetization sources. And with improved monetization capabilities and strict budget control, Sohu Video was able to further trim its losses in 2019.

And for Sogou; search revenue grew faster than the industry average and the revenues from Sogou’s recommendation services that leveraged it’s Mobile Keyboard, continues to experience robust growth. In 2019, Changyou’s online games performed well, and it took a number of steps to enhance its capacity to create new, high-quality games.

So before I go into more details of our key financial results, please be reminded that since Changyou’s cinema advertising business ceased operations, the results that we will discuss today, only cover continuing operations and exclude the cinema advertising business. So let me look at — let me go through the fourth quarter 2019 financial results. Total revenues of $490 million, up 5% year-over-year and 2% quarter-over-quarter. On a non-GAAP constant currency basis, total revenues would have been $8 million higher than our reported revenues, which would be — instead of 5%, it would be 7% improvement year-over-year.

Net add of brand advertising revenues, $42 million for the quarter, down 27% year-over-year and 10% quarter-over-quarter. Search and search related advertising revenues, $275 million down 1% year-over-year and 5% quarter-over-quarter. Online game revenues, $132 million up 40% year-over-year and 22% quarter-over-quarter. Excluding an impairment charge of approximately $23 million that we recognized this quarter for an investment unrelated to the company’s core businesses, non-GAAP net income attributable to Sohu.com Ltd. was $7 million, which compares with the net loss of $51 million a year ago, Q4 2018. And also compared with third quarter 2019, which is a loss of $17 million in the third quarter 2019. So if we don’t consider profit and loss contribution from Sogou and Changyou, excluding the impairment charge, non-GAAP net loss attributable Sohu.com Ltd. was $46 million in Q4 compared with a net loss of $75 million a year ago, in the fourth quarter of 2018, so a improvement of $29 million. And also in Q3, the loss was $53 million, so that is an improvement of $7 million.

Now let’s look at the full year 2019; total revenues $1.85 billion, up 2% compared with 2018. Brand advertising was $175 million, down 25% compared with 2018. Search and search related advertising revenues $1.07 billion, up 5% compared with 2018. Online game revenue, $441 million, up 13% compared with 2018. Non-GAAP net loss attributable to Sohu Ltd. was a loss of $93 million, that compared with a net loss of $207 million in 2018, cut by more than half. Excluding the profit-loss generated by Sogou and Changou, the non-GAAP net loss attributable to Sohu.com Ltd. was $246 million compared with a net loss of $326 million in 2018, so a $80 million improvement.

So now let me look at — go through some of the key businesses. First of all, the Media Portal and video businesses; the 2019 — for Media Portal business we are committed to strengthening our brand influence, by generating integrating and distributing news and premium content, while continuing with — we continue to attract the focus on hot events. We also proactively produced high quality original content through a series of large events. For the fourth quarter of 2019, we successfully hosted 2019 Finance Annual Conference, AI Conference, Sohu Fashion Awards and others. All these events helped consolidate our competitiveness and enhance the credibility of Sohu media, by reflecting the average unit value of Sohu. Further, we constantly upgraded our products, optimizing the algorithm, and improve the overall quality of the content, which continue to help draw users to our platform and keep them engaged.

For Sohu Video, we will continue to push twin engine strategy with long-form and short form content, both original content and short form user generated content, UGC. On the other hand, for the long clip, long form we actively enhance our production strategy with differentiated content, especially related to either romance and criminal themed dramas, and culturally theme reality shows. On the other hand, we continue to improve our feature and social interactions around short form videos, basically and sort of network of short video clips and the live broadcasting. By encouraging users to post videos and share comments in communities and share their interests. So what we do, is consistently upgrading products recommendation recommendation algorithms, basically recommending those — recommendation algorithm for short videos and also the social network sharing videos and communities. And we launched live broadcasting. So these initiatives have successfully increased our user base and overall user environment.

So based on the twin-engine strategy, we successfully carried out diversified marketing in the monetizing initiatives and provided advertisers those new advanced solutions embedded in various online and offline brands, for example, the original drama, Well Intended Love, [Indecipherable]. Season 2. Worked with advertisers hosting offline events, to further boost ad efficiency advertising efficiency, and embedded advertising in that popular drama. And so overall in 2019 with our consistent effort and strict budget controls, Sohu Video was able to further narrow its losses. In the fourth quarter of 2019, the operating loss was $18 million, which is 40% improvement, compared with the same quarter 2018. Q3 operating loss for video was $94 million, which is 33% improvement compared 2018.

So now, if we look at the current quarter 2020, as we all know that the novel coronavirus broke out and it has inevitably influenced the entire country and the world. Our Media Portal and video businesses were no exception. So as the leading mainstream media platform, we try to live up to the responsibility, by releasing real time special events and launching live broadcast across our core products, including the Sohu News and Sohu Video apps. The news and broadcasters distributed the latest news and information about the epidemic in real time, and also invited many well known medical experts and expressed their views and the advice on prevention, and encouraged our viewers to comment interactively. Today, we have completed around 200 live broadcasts and press conferences related to the epidemic and with the outbreak of the novel coronavirus, the overall economic environment and the advertising business in particular, are experiencing an extremely difficult time. At the same time, we noticed some advertisers adjusting their marketing promotion strategies. So we are closely collaborating together with advertisers to go through this challenging time and minimize the [Indecipherable]. Basically, our user base actually grow and for our news news media, but definitely their advertising business is hit effectively.

Next, turning to Sogou; Sogou maintained a steady progress in 2019, driven by the dedication to continuously drive organic traffic growth and unlock the monetization potential. During 2019, Sogou search remained China’s second largest search engine, and the search revenue continued to grow faster than industry average, Sogou consistently improved its quality of search and service and strengths into their content and service ecosystem.

Sogou’s Mobile Keyboard increased its user base to 164 million DAUs, with 54% more daily voice requests on average year-over-year. The revenue from Sogou’s recommendation service that leverage the mobile keyboard continue to experience robust growth. Further in 2019, Sogou made great advances across it’s core language-sense AI technology and the smart hardware business, maintain healthy momentum, the recording machine.

Lastly for Changyou, in 2019, Changyou took a number of steps to enhance its capacity to create new high quality games, focusing on its goal of developing top games, prioritize our R&D for mobile game development and continue to work hard on strengthening their existing portfolio. For PC games, the new expansion pack for TLBB PC launched during the fourth quarter, performed well, and its revenue rose slightly on a sequential basis, which was better than previously expected. The fourth quarter of 2019 revenue from Legacy TLBB Mobile increased significantly on a sequential basis. This was mainly attributable to newly introduced content and promotional event during the fourth quarter.

Looking ahead, Changyou will continue to execute its core strategy of building top games, as future focus will continue to be MMORPG mobile games. we will also seek to make breakthroughs in developing casual and strategic games.

So now let me turn to Joanna, who will walk 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 fourth quarter and full year of 2019. All of the numbers that I will mention are all 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 $23 million. Quarterly loss was $25 million. For Sogou Video, quarterly revenues were $22 million and quarterly loss was $80 million. Excluding program channel, non-GAAP net loss was $46 million compared with a net loss of $75 million in the fourth quarter of 2018; and a net loss of $53 million in the fourth quarter of 2019.

For full year 2019, Sohu Media Portal revenues were $95 million, and a full year net loss of $113 million. Sohu Video revenues were $91 million and a full year net loss was $94 million. Excluding Sogou and Changyou, non-GAAP net loss was $246 million compared with net loss of $326 million in 2018. For Sogou, quarterly revenues were $301 million, up 1% year-over-year and down 4% quarter-over-quarter. Net income was $39 million compared with net income of $27 million in the same quarter last year. For full year 2019, total revenues were $1.17 billion, up 4% compared with 2018. Net income was $105 million, compared with net income of $130 million in 2018.

For Changyou, quarterly revenues were $135 million, up 35% year-over-year and 22% quarter-over-quarter. Changyou posted net income of $63 million, compared with net income of $23 million in the same quarter last year. For full year 2019, total revenues were $455 million, up 1% compared with 2018. Changyou posted net income of $179 million compared with net income of $123 million in 2018. For the first quarter of 2020, we expect total revenue to be between $400 million and $445 million. Brand advertising revenues to be between $25 million and $30 million. This implies annual decrease of 30% to 42%, and a sequential decrease of 28% to 40%. Sogou revenues to be between $240 million and $260 million. This implies annual decrease 5% to annual increase of 3% and a sequential decrease of 14% to 20%. Online gaming revenues to be between $120 million and $130 million. This implies an increase of 21% to 31%, and a sequential decrease of 1% to 9%.

Non-GAAP net loss attributable to Sohu.com Ltd. to be between $25 million and $35 million, and non-GAAP loss per fully diluted ADS to be between $0.65 and $0.90. GAAP net loss attributable to Sohu.com Ltd.to be between $28 million and $38 million, and GAAP loss per fully diluted ADS to be between $0.70 and $0.95. Excluding Sogou and Changyou, non-GAAP loss loss attributable to Sohu.com Ltd. to be between $43 million and $48 million. GAAP net loss attributable to Sohu.com Ltd. to be between $45 million and $50 million.

For the first quarter 2020 guidance, we used a presumed change rate of RMB7 to $1, which compares with the actual exchange rate of RMB6.74 to $1 for the first quarter of 2019 and RMB6.03 to $1 for the fourth quarter of 2019. This forecast reflects Sohu management’s current and preliminary view, which at present is subject to substantial uncertainty. Particularly, since of the overall potential impact of the COVID-19 virus. The effects of which are difficult to analyze and predict. Lastly, please be reminded that we won’t take questions regarding Changyou’s privatization proposal in the Q&A session.

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

Questions and Answers:

Operator

[Operator Instructions]. The first question will come from Eddie Leung from Bank of America. Please go ahead.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Good evening guys. Thank you for taking my questions. Could you talk a little bit about the top advertising industries for your news media pieces in the fourth quarter? And then in the first quarter, which advertising industries are seeing a big negative impact from the coronavirus outbreak than the others? And then secondly, about the video pieces, we are not able to see the detailed breakdown of the balance sheet of different business units. So just wondering if the video pieces would need capital raising and how’s the cash flow of video pieces doing for — especially given the continuous need for production in 2020? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

In Q4, the top advertising industries still be in the auto, right? Joanna right?

Joanna Lv — Chief Financial Officer

Yeah.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Auto and let’s real estate or — what’s the ranking new Joanna in Q4, before the coronavirus outbreak?

Joanna Lv — Chief Financial Officer

Internet services.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Internet services, and IT right. Internet services, e-commerce. Well, it’s basically the traditional order you would say in the — after the outbreak of the coronavirus. I think real estate and auto are all impacted and also the luxury goods — basically nearly all across the board are affected, because there is not consumption, and also the delivery logistics and all this, everything. So that’s why we see across the board, a decline of advertising. But we do see more consumption of video content, long-form dramas. So our VCS, our video subscription revenue grew, and also all our game is mixed — gaming people are spending more time at home and playing PC games. There is a positive contribution to the game consuming MMORPG. But for the mobile games, because our employees are staying home, so that’s kind of delayed our development work. So that’s contributed negatively. So online gaming is mixed, probably with a positive impact. But brand advertising is really bad and for video games — online video is good, it’s a lot of — revenue grew nicely. Yeah, Eddie?

Eddie Leung — Bank of America Merrill Lynch — Analyst

Thanks Charles. How are you looking at long video pieces, use of cash and kind of like the cash balance for 2020? Thanks.

Charles Zhang — Chairman of the Board and Chief Executive Officer

So we’ve been — we’re having this low-budget strategy basically for each video. Each drama we spend like can RMB50 million or at most RMB20 million, a piece. Its a drama. And through embedded advertising and also subscription and the effect of marketing on different sort of network platforms. So we try to make it breakeven. So basically that’s why — and also we have limited number of productions actually in 2019. A lot of the revenues are from our — basically our previous — past productions. We have a whole library of in-house produced or produced the video — I mean dramas that continue generating revenue. And we still have, we have — but we launched the new — we launched in Q4 the Season 2 of this [Indecipherable]. And we still have another three — two more dramas already basically done, filmed and ready to lease. But for any further new drama to be filmed, it needs to be — to wait for the coronavirus to subside and to people, basically you have — you can’t have actors or actress to wear facial mask to play the role. Right.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Got it. Thank you, Charles.

Charles Zhang — Chairman of the Board and Chief Executive Officer

So because we are consuming the past production libraries. We’re not spending a lot of money on producing new shows. So that’s why, you see our subscription business continue to grow, and actually — be consistent.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Thank you.

Operator

Thank you for the questions. Next question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap — Citigroup — Analyst

Hi, good evening. Charles and Joanna, thanks for taking the questions. I have some questions on the guidance for the brand advertising. So unfortunate this outbreak is causing a lot of the negative impact. So with your 30% to 40% year-over-year decline, how much of that should we expect for the video to decline? And then versus the portal? And then in your view, when do you expect the sentiment to really recover? And do you expect the full year 2020 to experience massive growth for Brand-X revenue? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

I think the — both the portal and — the brand on the portal and on the video side are the hit, I think equally; basically, both are affected on this proportionally, same, similarly. But we expect that if the — you know, if we people get back to work and the economy starts turning, starting again; then we expect an uptick, basically a strong rebound because a lot of our advertisers are ready to spend money because their need — we have new products, really needed to new markets; so they are ready. And actually, in 2019, you can you see that we cut our loss, right, by — you know, the Q4, if you compare the Q4 with 2018 Q4, we cut the loss by excluding Sogou and Changyou, the media business and video business, we cut loss by — how much, that was $30.9 million, right $75 million to $46 million, right. So $29 million cut. So actually we buy — you know, the cost saving initiatives like spending less money on channels, on all these — and also on the content, but at same time we are improving our Sogou and other original content, and so actually our user base are holding steady and we’re spending less money on marketing but our user base actually grow. And — but the whole economy is slowing down but we are holding our advertising in 2019, actually already created some momentum. If without the coronavirus, we extract — you know, we would have expected that our advertising continued to hold on and even to rebound. And then, our cost continue to go down; so it’s — so that is — so we expect that in later part of Q2, I think the — we want to regain the momentum that we accumulated in 2019 for the advertising top line. And also to consolidate to the user base growth that we observed in the last two months.

During the coronavirus, you know, people staying home have more time and people are watching — people need to consume not only video games and drama, but people need to get information and reliable information, that’s why they turn to Sohu. So the Sohu News actually is more trustworthy brand because it’s such a historical — it’s a long — it’s a brand that people trust, because for the years it’s — so, actually we see the news consumption is higher than the industry average compared with some other news portals.

Alicia Yap — Citigroup — Analyst

Thank you, Charles. Can I ask one quick follow-up on the Olympics. So given the Summer Olympics is not far away, have you actually got some discussions or the budget commitment from some of the advertisers for the sponsorship that will actually help on the media portal business or perhaps lead a bit onto the video business as well? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Yes, it was all planned before the coronavirus because actually, as I said, we meant we can — and we have some momentum created for advertising, and that includes a lot of events we did in Q4 and Q3. And we planned all those events for 2020 because with events and the people, sponsors — you know, advertising has sponsored, that includes the Olympics, the Tokyo Olympics. And also, we have this news marathon, we have this talent show for — all this event are all in the hot, you know, basically still — so we are — everything is standing still, basically. We don’t know we will — we don’t know when the Olympic will be held, it’s — ROC Japan and also the ROC International has had different opinions, they say that probably end of the year. And then, we’ll plan our accordingly; so we don’t have any — we definitely have advertising committed to those events which was very — all these events we had in 2019 was very successful and people were willing to pay up to advertise. But — and then all these events are with a lot of uncertainties, whether we can do that, because it’s all planned events, a lot of people gathering and that’s a great risk of exposure to the virus.

Alicia Yap — Citigroup — Analyst

No problem. Thank you, Charles. I hope the virus event go over very, very soon. Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Thank you. So, many events are — like some of those companies — some real estate companies or auto companies, the — now aggressively are exploring these live broadcast marketing, that’s why we are actually still getting some advertising in Q1 because some of the car companies and the real estate companies use our live broadcast platform to promote their — to launch their new products. And that’s the — it will be in 2020 you’ll see a lot more things like that happening. People will move all things online.

Alicia Yap — Citigroup — Analyst

Okay, great. Thank you. All the best.

Operator

Thank you for the questions. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong — Jefferies — Analyst

Hi, good evening. Thanks management for taking my questions. I have a question regarding our revenue mix in our portal advertising. What’s the contribution for SME? And on that regard, how should we think about the competition from short-form video? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

You mean the competition from short-form video? What do you mean?

Thomas Chong — Jefferies — Analyst

Because we are seeing the short-form video companies grabbing a lot of advertising budget from SME. So just wondering how we should think about our SME advertising trend going forward in light of competition? Thank you, Charles.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Yes. I think maybe Sogou has some — probably Xiaochuan can answer your question about the SME impact due to you — like, you’re talking about [Indecipherable], right, and all those, right? But…

Thomas Chong — Jefferies — Analyst

And also, because our Sohu Media News app also has an SME revenue contribution; so just wondering whether our Sohu Media ads or our video SME spending factor…

Charles Zhang — Chairman of the Board and Chief Executive Officer

First of all, the SME income represent a small part of our brand, our advertising revenue or — and also — so that part, since it’s so small and it’s basically remained steady or in 2019, and our focus in 2019 was really on the brand advertising and the brand advertising — that is very hard to look for those — to take it away from us because the brand trust and also the unique events that we have and reporting the original content, all these things; so we’re not — we’re actually consolidated the brand advertising — basically that territory that we are consolidated in 2019. So if you look at the whole picture of 2019, why we can have such a cost-saving? Because we cut the channel and the marketing costs, and same time maintain the user base steady, steady stabilizes the user base, and even for the H5, Sohu — Sohu H5 portal — work portal, we actually grow. And also, focus — really focus on the brand advertising and original reporting, quality content, and also all these events like 5G conference, AI conference, all those conference forum that created the content, and also the Sohu marathon, Sohu fashion show, all these events; those events and it’s just — that we’re just in a different category; so the large brand is the advertise. So, we are not affected by the uprising — I mean, the [Indecipherable]. No.

Thomas Chong — Jefferies — Analyst

Got it. Thank you, Charles.

Operator

Thank you for the questions. [Operator Instructions].

Charles Zhang — Chairman of the Board and Chief Executive Officer

So, if I — you know, I think you can ask your question but I want to — in the scripted — in the part that it’s not — I don’t think it’s getting the right — these really, the elements — it’s really about this quarter. The key that after many, many quarters in 2019, we’re able to stabilize our advertising revenue, and grow our video subscription and consolidate and stabilize our user base, and even grow in H5 category and then, dramatically cut the cost so that we achieve together with Sogou and Changyou’s contribution; we achieved a profitable quarter, non-GAAP, that’s the key of this quarter. If without — if the coronavirus outbreak didn’t happen, we’ll continue that trend to be continually to be non-GAAP — Sohu non-GAAP profitable into 2020, that’s the key of this quarter results. Because the strategy, we’ll continue to execute that strategy, basically to grow our user base which is growing nicely during the last two months and also continue the momentum of brand advertising, and at the same time to develop — and also the video subscription business. And at the same time we developed our social network products that can — we hope that we will explore.

So that’s the strategy but without — with this coronavirus, in the first quarter our advertising investment, especially this brand advertising that needs a lot of discussion offline to design the kind of events for our advertisers that people cannot meet in person, so our brand advertising definitely impacted but the people still have faith or the goodwill in us. So after if this fades, if this coronavirus fade or actually in China, it seems under control, you know it’s turning, it’s kind of turning in a good sign; so that in Q2 if the whole business rebounded, I think our — we’ll regain our momentum in our brand advertising and also continue this trend of getting profitable. That’s the key of this quarter.

Operator

[Operator Closing Remarks]

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