Categories Earnings Call Transcripts, Technology

Sohu.com, Inc. (SOHU) Q3 2020 Earnings Call Transcript

SOHU Earnings Call - Final Transcript

Sohu.com, Inc . (NASDAQ: SOHU) Q3 2020 earnings call dated Nov. 16, 2020

Corporate Participants:

Huang Pu — Investor Relations Director

Charles Zhang — Chairman of the Board and Chief Executive Officer

Joanna Lv — Chief Financial Officer

Yaobin Wang — Chief Financial Officer of Changyou

Dewen Chen — Chief Executive Officer of Changyou

Analysts:

Thomas Chong — Jefferies — Analyst

Austin Pastner — Citigroup — Analyst

Chang Cheow — Foreign Tech Research — Analyst

Alex Ko — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu’s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. 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 today to discuss Sohu’s third 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.

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 conference 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.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Thanks, Huang Pu, and thank you, everyone, for joining our call. In the third quarter of 2020, to further consolidate our core competitiveness and credibility, we continued to optimize our products, refine our technology, enhance the quality of premium content and improve distribution. At the same time, we kept exploring creative, new and differentiated monetization opportunities, benefiting from our more mature and sophisticated Sohu Video app and its advanced live broadcasting technology. We successfully hosted many innovative content, marketing campaigns that could leverage the broad reach of our product portfolio.

We saw positive feedback in terms of user interaction and from advertisers. So for this quarter, despite the current challenging macroeconomic environment, our brand advertising revenue reached the high end of our prior guidance and achieved the 8% quarter-over-quarter growth.

Our game business, Changyou online games, performed well for the third quarter of 2020, with revenue exceeding the high end of our prior guidance.

So before I go into more detail about our key financial results, let me remind you that on September 29, 2020 our controlled subsidiary of Sogou, and a subsidiary of Tencent entered into an agreement and a planned merger which contemplates that Sogou will become a wholly-owned subsidiary of Tencent. And on the same date, we entered into a share purchase agreement, in which we agreed to sell all of our Sogou Class A and Class B ordinary shares to Tencent, shortly before the completion of the merger transaction between Tencent and Sogou. Accordingly, Sogou’s results of operations have been excluded from the Company’s results from continuing operations.

Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Unless indicated otherwise, the results that we would talk about here are related to continuing operations only.

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So for the third quarter of 2020, total revenues are $158 million, down 6% year-over-year and 1% over quarter-over-quarter. Brand advertising revenues, $41 million, down 11% year-over-year and up 8% quarter-over-quarter. Online game revenues were $101 million, down 6% year-over-year and 4% quarter-over-quarter.

GAAP net loss from continuing operations attributable to Sohu.com Limited was $15 million, compared with a net loss of $33 million in the third quarter of 2019 and a net loss of $77 million in the second quarter of 2020. That was due to the tax planning for Q2.

Non-GAAP net loss from continuing operations attributable to Sohu.com Limited was — net loss of $7 million, compared with a net loss of $30 million in the third quarter of last year, and a net loss of $75 million in the second quarter of 2020.

Now let me go into the key businesses. First, Media Portal and Sohu Video. So we continue to upgrade our products, improve the technology and refine social distribution features. We stimulated the generation of new content and further expanded our content dissemination. User interaction was — enhanced on both the Sohu News App and Sohu Video app.

We’re constantly looking for new ways to boost organic growth across our products while strictly controlling the budget. In addition for Sohu Video, we further strengthened our two-engine strategy, with long-form and short-form videos, and accelerated the layout of value livestreaming, where we disseminate professional knowledge and the reliable information across various verticals in vertical areas.

We continue to concentrate on improving our live streaming technology and have applied these advanced technologies to various events, which allowed users to interact with each other in real time and without upper limit on unit numbers.

During the quarter, we successfully hosted a number of flagship events such as the Sixth International Drone Photography Contest called UOV Campus Beauty Contest, the Best Selection Series live streaming e-commerce basically, and others with our enhanced video sharing technology. We not only stimulated online and offline correction among viewers, but also enhanced the generation of high-quality content to improve distribution across the products.

On the monetization side and with these technologies and the more mature Sohu Video app, we proactively explored new monetization opportunities and increased our monetization efficiency, featured as value streaming, live streaming and live commerce, which provided new way for the advertisers to promote their brands and stimulate sales.

And as like commerce, we share ideas, knowledge and thoughts about lifestyle while recommending premium products. We were able to meet advertisers marketing demand and capture their attention budgets. So going forward, we will continue to diversify our monetizing strategies and actively explore new opportunities.

Now, let me turn to Changyou game business. For the third quarter of 2020, Changyou’s online games performed well. For PC games, Changyou launched this year, second in-game promotional event and there is holiday events for TLBB PC, which maintain user engagement and the games revenue remained stable on a sequential basis.

For mobile games, Changyou launched a new expansion pack for Legacy TLBB mobile, featuring the addition of new plan and a method of character development.

Next quarter, Changyou will continue to focus on maintaining user stability by updating game content and making optimization for TLBB PC and the Legacy TLBB Mobile.

More recently, in October, Changyou rolled out some special server for TLBB PC, that used the content from an old version of the game. It has already attracted some players that we lost over the years, who love the game and feel nostalgic for the experience from years ago. We expect these new servers will drive up revenue for TLBB PC by some extent in the fourth quarter.

Looking ahead, Changyou will firmly execute its core strategy of top games. Changyou’s strategic focus will continue to be on MMORPG mobile games, while we are also developing and looking to roll out other games across various engines and genres.

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Currently, the development of several key games is well underway and we believe Changyou will bring more quality games to market in the future.

Now, let me turn to, Joanna, our CFO, who’ll walk you through our financial results.

Joanna Lv — Chief Financial Officer

Thank you, Charles. I will walk you through the key financials of our major segments for third quarter of 2020. All of the numbers that I will mention are all on the 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 $25 million, down 3% year-over-year and up 9% quarter-over-quarter. The quarterly operating loss was $23 million compared with an operating loss of $31 million in the same quarter last year.

For Sohu Video, quarterly revenues were $23 million, up 1% year-over-year and 2% quarter-over-quarter. The quarterly operating loss was $12 million compared with an operating loss of $20 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173 were $104 million, down 6% year-over-year and 5% quarter-over-quarter. Changyou posted an operating profit of $33 million compared with $35 million in the same quarter last year.

For the fourth quarter of 2020, we expect brand advertising revenues to be between $37 million and $42 million. This implies annual decrease of 11% to an annual increase of 1%, and a sequential decrease of 10% to a sequential increase of 3%.

Online game revenues to be between $140 million and $150 million. This implies annual increase of 6% to 14% and a sequential increase of 38% to 48%. Non-GAAP net income from continuing operations attributable to Sohu.com Limited to be between $15 million and $25 million, and GAAP net income from continuing operations attributable to Sohu.com Limited to be between $10 million and $20 million.

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

Lastly, please be reminded that in the Q&A session, we won’t take questions regarding any Sogou business updates or the agreements with Tencent for Sogou’s privatization.

And this concludes our prepared remarks. Operator, we will 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] Your first 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. My question is about the brand advertising. Can management comment about the trend for different key categories and how we should think about the momentum in 2021?

Charles Zhang — Chairman of the Board and Chief Executive Officer

Well, key sector, right? Auto industry, number one; and then, internet services, followed by real estate. That’s the top-three categories. Yes, we achieved 8% increase quarter-over-quarter, I mean, yes, with the microeconomics — basically a challenging microeconomics situation, by being with — well, we are having organic growth or stabilized user base. So, we are not spending a lot of money on our marketing channels, marketing for our products.

So, but with this creative marketing events and the content — actually content generation events, and also with live streaming, to beaming those events. This is very attractive to brand advertisers. That’s the reason why we are able to achieve a advertising revenue growth without spending marketing sales cost more — yes.

Thomas Chong — Jefferies — Analyst

Thank you.

Operator

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

Austin Pastner — Citigroup — Analyst

Thanks. I’m Austin Pastner on behalf of Alicia Yap. For online games, can you remind us the breakdown of PC versus mobile games in the third quarter, and what are the drivers for the strong sequential growth of online games inside on your 4Q guidance? Thank you.

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Charles Zhang — Chairman of the Board and Chief Executive Officer

Basically the — in Q3, the division between the PC game and mobile game, right?

Yaobin Wang — Chief Financial Officer – Changyou Management

[Foreign Speech] In terms of revenue, PC game accounts for 61% in the third quarter; and mobile games, 39%. In terms of gross billing cash receipts, PC game accounts for 45%, and the mobile game accounts for 55%.

In the fourth quarter, the increase was mainly due to TLBB PC. Actually, we launched some special servers, like Charles mentioned, that have old version as — for its content, and attracted some —

Charles Zhang — Chairman of the Board and Chief Executive Officer

Nostalgic experience.

Yaobin Wang — Chief Financial Officer – Changyou Management

Yes. Attracted some players that we lost over year. And the other reason is, we launched a game called the Illusion Connect in Korea, South Korea market. Thank you.

Austin Pastner — Citigroup — Analyst

Got it. Thank you.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of Chang Cheow from Foreign Tech Research [Phonetic]. Please ask your question.

Chang Cheow — Foreign Tech Research — Analyst

Yes, good evening, management. Your guidance in online games are very encouraging. I just wonder you said we are going into growth mode for the online games, going forward?

Dewen Chen — Chief Executive Officer of Changyou

[Foreign Speech] Yes, thanks. Currently, we can only say the performance of fourth quarter.

Chang Cheow — Foreign Tech Research — Analyst

Or maybe can you provide us some outlook in terms of your pipeline in games, what are you going to do next year?

Dewen Chen — Chief Executive Officer of Changyou

[Foreign Speech] We have couple of games that the development is well underway, but the schedule is — depends on the license approval supplying program, and also the testing and their adjustments program. So it’s not very easy to predict the specific launch date. But for the — for those game that we have obtained the license approval, we may have some more specific timing.

Two of those are projects, Sea of Dawn, we have done, [Indecipherable] and also Tetris, we have had license approval. We will launch the two games in the next year.

Next year we will also put more efforts in the overseas market and we’ll launch some other new games in the overseas market. Thank you.

Chang Cheow — Foreign Tech Research — Analyst

Thanks. That’s great.

Operator

Thank you. Our next question comes from the line of Alex Ko from Morgan Stanley. Please ask your question.

Alex Ko — Morgan Stanley — Analyst

Hi. Management, thanks for taking my question. So I have a question on Sohu Video. So we know that the industry peers have been stepping up for content investment these days. So just want to get more color like, how would the management plan to navigate like this kind of industry trend and like the content investment strategy going forward? Thank you.

Charles Zhang — Chairman of the Board and Chief Executive Officer

Well, we have, as I just said, we have this twin-engine strategy with long-form content and then short-form, basically, UGC. So for the long-form, our spending on basically to produce a like [Indecipherable] and most of the 15 episodes — drama episodes with reasonable investment, and then make sure that if you can, again, it become a hit with much less spending compared with our peers.

So that was — so our spending on producing the long-form TV dramas remain similar to the previous year. And then so — but for this UGC and also social network product of video, it’s not much — it doesn’t need lobby management; and also this live streaming, it’s user-generated, only spending on the product development.

Alex Ko — Morgan Stanley — Analyst

Got it. Thank you.

Operator

[Operator Instructions]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

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