Sohu.com Ltd (SOHU) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's First Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

Now I'd like to turn the conference over to your host for today's conference call, Mr. Eric Yuan, Investor Relations Director of Sohu. Please go ahead, sir.

Thanks, operator. Thank you for joining us today to discuss Sohu's first quarter 2019 results. On the call are Chairman and CEO, Dr. Charles Zhang; CFO, Joanna Lv. Also with us today are Changyou's CEO, Dewen Chen; and the CFO, Yaobin Wang; and Sogou's CEO, Xiaochuan Wang; and the 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 registration statement and 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.

Thanks. Thank you, everyone, for joining our call. In the first quarter, we delivered better-than-expected revenue, mainly driven by the solid performance of our search and game businesses.

Sohu Media continued to make progress operating products and content on our platform, and we explore new ways to diversify revenue sources. Sohu Video consistently offered appealing self-developed dramas, and financial loss kept narrowing due to strict cost controls. In Sogou, the user base of its mobile search and keyboard products further expanded while its core search revenue grew faster than industry. In the first quarter, Changyou's revenue and profit exceeded guidance as TLBB PC games performed very well during the Chinese New Year's holiday.

Before I go into more detail about our key business, let me summarize our financial results for the first quarter. First quarter total revenues, $431 million, down 5% year-over-year and 11% quarter-over-quarter. On a constant currency basis, total revenue would have been $26 million higher than our reported revenues, so it's up 1% year-over-year.

Net brand advertising revenues, $43 million, down 24% year-over-year and 25% quarter-over-quarter. Search and search-related advertising revenues, $234 million, up 6% year-over-year and down 15% quarter-over-quarter. Online game revenues, $99 million, down 6% year-over-year and up 5% quarter-over-quarter.

Excluding certain noncash impairment charges, the operating loss for Sohu Video was $27 million compared with a loss of $48 million in the first quarter of 2018. GAAP net loss attributable to Sohu.com Limited was $57 million compared with a net loss of $93 million in the first quarter of 2018. Non-GAAP net loss attributable to Sohu.com Limited was $55 million. Excluding the effect of the impairment charge, net of tax effects, non-GAAP net loss attributable to Sohu.com Limited was $48 million, which compare with the net loss of $97 million a year ago, the first quarter of 2018.

Excluding Sogou and Changyou, the non-GAAP net loss attributable to our core Sohu.com business, specifically the media and video business, was $72 million, which compares with a net loss of $93 million in the first quarter of 2018. And for the first time, we're going to -- for the forecast, we will forecast this non-GAAP net loss attributable to Sohu business. And Joanna will have our business outlook.

Now let me go through some of the key businesses. First, Sohu Media portal business. In the first quarter, we -- to improve user stickiness, we continued to focus our efforts on improving our products and technology and upgrading the content on our platform. We deepened our partnerships with high-quality content providers, encouraging them to create in-depth articles on hot topics in the effort to increase user engagement. So the total number of articles posted by third-party writers, our so-called Sohu [hub], grew by 10% quarter-over-quarter.

On the product side, we are developing compelling social features for Sohu News App. These features aggregate coverage of different important events, such as breaking news and social topics and product launches. Not only our users can browse all related stories in a one-stop way, nonstop one-stop way, they can also conveniently make comments and share thoughts with peers. We believe upgrades such as this will make our News App not just an information distribution platform but also a more engaging product.

Financially, while the first quarter always tend to be a seasonally soft quarter, the sluggish -- and also the sluggish economic environment continued to impact our ad revenues. However, we worked hard to alleviate the negative pressure. For example, we are creating more customized solutions for our key advertising clients.

In early April, we successfully hosted a celebrity off-road marathon event in Chongli, Hebei province, where the next Winter Olympic Games will be held. The event attracted a good number of sponsors and helped to elevate the Sohu News brand. We've also been cultivating more local partners in lower-tier cities to better monetize our traffic. Overall, we expect a 20% plus revenue rebound in the second quarter compared with the first quarter.

Now Sohu Video. 2019, we continue to implement what we call the 2-engine strategy for our content offering. On one hand, we primarily focused on developing or producing original content, long clips, long video, long clips original content. We're also enhancing the short-form short clips user -- the UGC, user-generated content, and its distribution. So there's a 2-engine strategy. We believe this combination should enable us to provide users with interesting content at a much lower cost, and this will likely help our video business achieve profitability eventually.

For the self-developed shows, we have built an impressive track record in 2 categories in particular: One is the idol romance category. The other one is the criminal theme, the dramas. During the first quarter, our idol romance drama called Well-intended Love, Nai He BOSS Yao Qu Wo, became a web sensation upon its debut. It hit a Hot Search list on Weibo 30 times during the broadcast period, while its total video views reached 1 billion. Look ahead, we will mainly use our in-house artists and focus on producing high-quality content with low to midrange budgets.

Beside Sohu originals, we will be exploring optimizing short video categories, especially UGC. Leveraging our cross-platform advantages, UGC videos can be more efficiently distributed across a number of Sohu family platforms, such as news, live broadcast, games and search. So in the first quarter, benefiting from the strict cost controls, we were able to further narrow the financial loss at Sohu Video. Operating loss was $27 million, which was 10% less than the previous quarter and 43% less than the same period last year.

Now turning to Sogou. In the first quarter, Sogou's 2 key products, search and mobile keyboard, both demonstrated healthy growth leveraging our innovative AI technologies. The #2 search engine, Sogou's core search revenue continued to outpace industry growth. By the end of March, Sogou Mobile Keyboard's DAU reached 443 million, up 23% from a year ago, becoming the third-largest mobile app in terms of DAU in China according to iResearch.

Lastly, Changyou. In the first quarter, Changyou revenues and profits came in ahead of our expectations. In particular, its PC game revenues rose significantly on a sequential basis. Changyou launched a new expansion pack for the Spring Festival as well as a variety of online and off-line events for the holidays and received warm response from gamers. Looking out at 2019, we will continue to execute our strategy of top games and improve our capabilities and efficiency in game development.

MMORPG mobile games will continue to be our strategic focus while we are also developing a number of casual games and strategy games. With the support of strong cash flow, we believe Changyou is well positioned to roll out new hit games in the future.

Now let me turn to Joanna, our CFO, who will talk you through our financial results. Joanna?

Thank you, Charles. I will walk you through the key financials of our 4 major segments for the first quarter of 2019. All of the numbers that I will mention are all on a non-GAAP basis.

For Sohu Media Portal, quarterly revenues were $23 million, down 26% year-over-year. The quarterly loss was $35 million, which compares with a net loss of $29 million in the first quarter of 2018. For Sohu Video, quarterly revenues were $26 million, down 16% from a year ago. Of this, advertising revenues were $10 million. Excluding impairment charges, the operating loss for Sohu Video was $27 million, which compares with a net loss of $48 million in the same quarter last year.

For Sogou, quarterly revenues were $253 million, up 2% year-over-year and down 15% quarter-over-quarter. Net loss was $3 million compared with net income of $20 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, were $123 million, down 10% year-over-year and up 5% quarter-over-quarter. Changyou posted net income of $37 million compared with net loss of $60 million in the same quarter last year.

For the second quarter of 2019, we expect total revenues to be between $469 million and $494 million, brand advertising revenues to be between $47 million and $52 million. This implies annual decrease of 15% to 24% and a sequential increase of 9% to 21%.

Sogou revenues to be between $303 million and $313 million. This implies annual increase of 1% to 4% and a sequential increase of 20% to 24%. Online game revenues to be between $90 million and $100 million. This implies annual decrease of 5% to annual increase of 6% and a sequential decrease of 9% to a sequential increase of 1%.

Non-GAAP net loss attributable to Sohu.com Limited to be between $38 million and $48 million and non-GAAP loss per fully diluted ADS to be between $0.95 and $1.20. GAAP net loss attributable to Sohu.com Limited to be between $40 million and $50 million, and GAAP loss per fully diluted ADS to be between $1 and $1.25.

Excluding profit generated by Sogou and Changyou, non-GAAP net loss attributable to Sohu.com Limited to be between $65 million and $70 million. GAAP net loss attributable to Sohu.com Limited to be between $67 million and $72 million. For the second quarter of 2019 guidance, we used a presumed exchange range of RMB 6.80 to $1, which compares with the actual exchange rate of around RMB 6.38 to $1 for the second quarter of 2018 and RMB 6.74 to $1 for the first quarter of 2019. With that, this concludes our prepared remarks.

Operator, we would now like to open the call to questions.

(Operator Instructions) The first question comes from the line of Alicia Yap from Citigroup.

I have a couple questions. Number one is what are the plans for the use of cash from the special dividend that received from Changyou? Second question is what is the impact to Sohu Video on the recent regulatory restrictions on broadcasting the costume drama? Any other content restriction that you foresee could be introduced later this year? And then just lastly, quickly, as related to Changyou. On the Changyou call earlier, the management mentioned about the NetEase game, Ancient Nocturne, they are -- Changyou is licensing from NetEase to publish in Korea. So just wonder why NetEase would license that game rather than not publishing themselves.

Okay. The use of cash, right, from the dividend. Well, yes, the -- on a corp level, we're still at a loss and are still burning cash, right? So we'll continue -- we need to spend money on the news apps, the channels and also product and technology development, and so it's -- and also video. So that's -- there are many places to use the cash, so just to use it really diligently and make sure that we'll narrow -- continue to narrow the loss so that we'll have pretty -- plenty of room or ground to move forward.

The regulation on costume drama, it's actually not much of issue here, right, on the costume drama. And that's one. It's not -- it's just a -- there's no such a regulation. We sort of talked about it, but never -- never actually carried out. And also for Sohu's in-house, selfing-produced dramas, we tend to have drama for modern, not ancient stories, but in modern times so that we have a lot of opportunities to have the embedded advertising like cars, automobiles or mobile phones and also kind of commercials -- I mean commercial items that embedded in the story. For the ancient costume dramas, you don't have a lot of opportunities to do that sort of advertising.

So the question about Changyou, right, (foreign language) license, Dewen?

(foreign language)

(foreign language)

(foreign language)

[Interpreted] The way we work on games are -- very difficult the sell. So it's easy to cooperate with each other.

(foreign language)

[Interpreted] They're running business overseas is -- but we're especially doing good in Korea market.

(foreign language)

[Interpreted] So financially, we have been keep very good relationships with both, like Tencent and NetEase. For some IP or local or brand investors, we also give the -- we also authorize them to use those, so it's good for us.

(Operator Instructions) The next follow-up question comes from the line of Alicia Yap from Citigroup.

I have one follow-up question, if I may. Actually, wanted to know, I know this April period, the whole industry are kind of like closing signing up of most of the framework contract. So just wonder if management see what is Sogou's demand, right, from the [apachet] side. And then also any change in terms of the different industry vertical that -- if you can share the color.

(foreign language)

(foreign language)

Well, it's a -- there's a -- in the auto industry, there's a mixed -- it's a mixed signal. Some of those imported cars, vehicles, automobiles, especially U.S. or German -- U.S. or European brands seems suffering, but the Japanese brands seems -- and also German brand are doing better and -- yes, the Japanese brand, yes. So in auto industry there is a generally kind of weak, yes, weak advertise spending, weaker, but it's mixed. But some are strong. And e-commerce?

(foreign language)

Yes, but the -- yes, exactly. The surge or the, I mean, the -- in the liquor business, right?

Yes.

Yes, the Chinese liquor business seems coming out. And also those kind of the -- (foreign language). In fast-moving consumer goods, cosmetics and those medical, paramedical or something, those kind, we showing the...

Micro merchant.

Micro merchant through WeChat and other, those are coming strong. So we can always -- advertising always has economic downturn, as you always see some of those traditional industries, sectors are kind of weak showing. But then you'll always have -- because China has so many people, there's always factors that suddenly show up, right, strongly.

(Operator Instructions) So there are no further question at this time. And ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]