Sohu.com Ltd (SOHU) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions)

Today's conference 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.

Thanks, operator. Thank you for joining us today to discuss Sohu's Fourth Quarter 2019 results. On the call are Chairman and the Chief Executive Officer, Dr. Charles Zhang; CFO, Joanna Lv; Vice President of Finance, James Deng. Also with us today are Changyou's CEO, Dewen Chen; and CFO, Yaobin Wang; and Songou'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 the 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 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.

Thank you, Huang, Pu. Thank you to everyone for joining our call. During 2019, China's economy continues 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 USD 7 million profit. Then, separately, for Sohu Media Portal, we strengthened our position as a mainstream media platform with high-quality original content and legacy and also various events.

For Sohu Video, with the unique and high-quality dramas and other shows, we actively searched for diversified monetization sources. And with the improved monetization capabilities and strict budget control, Sohu Videos 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 leverage Mobile Keyboard continued to experience robust growth.

So in 2019, Changyou's online game performed well and 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 businesses 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 a 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 Limited was $7 million positive, which compares with a net loss of $51 million a year ago, the Q4 2018. And also compared with the third quarter 2019, which is $17 million loss -- a loss of $17 million in the third quarter of 2019.

So if we don't consider the contribution of -- profit and loss contribution from Sogou and Changyou, the -- and also further excluding the impairment charge, non-GAAP net loss attributable to Sohu.com Limited was $46 million in Q4 compared with a net loss of $75 million a year ago, in the fourth quarter of 2018. So an 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 Limited was a loss of $93 million. That compared with a net loss of $207 million in 2018. So cut by more than half, yes. Excluding the property loss generated by Sogou and Changyou, the non-GAAP net loss attributable to Sohu.com Limited was $246 million compared with a net loss of $326 million in 2018, $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 -- our -- for our Media Portal business, we're committed to strengthening our brand influence by generating, integrating and distributing news and premium content. While continuing to track and 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 help to consolidate our competitiveness and enhance the credibility of Sohu Media by reflecting the attitude and value of Sohu. Further, we constantly upgraded our products, optimizing the algorithm and improved the overall quality of the content, all of which, continue to help draw users and -- to our platform and keep them engaged.

For Sohu Video, we continued 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, we -- for the long clip -- long form, we actively enhanced our production strategy with differentiated content, especially related to either romance and criminal themed dramas and culturally themed reality shows.

On the other hand, we continued to improve our feature and social interactions around short-form videos, basically in Sohu Network of short video clips and the live broadcasting by encouraging user to post videos and share comments in communities and share their interests. And Sohu Video is consistently upgrading products and recommendation algorithms, basically recommending those recommendation algorithm for short videos and also the social network sharing short videos and communities, vlogs and live broadcasting. So these initiatives have successfully increased our user base and overall user loyalty. So based on the 2-engine -- twin-engine strategy, we successfully carried out the diversified marketing and the monetization initiatives and provided advertisers those new advertising solutions embedded in various online and offline brands, for example, the original drama Well Intended Love 2, Nai He BOSS Yao Qu Wo Season 2, worked with advertisers and host and offline events further boost advertising efficiency and embedded advertising in that popular drama.

And so overall, in 2019, with our consistent effort and strict budget control, Sohu Video is able to further narrow its losses. In the fourth quarter 2019, the operating loss was $18 million, which is 40% improvement, compared with the same quarter 2018. So the full year operating loss for Video was $94 million, which is a 33% improvement compared with 2018.

So now if we look at the quarter -- 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 broadcasts across our core products, including the Sohu News and Sohu Video apps.

The news reporters and broadcasters distributed the latest news information about the epidemic in real-time and also invited many well-known medical experts to express their views and advise on prevention and encourage 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 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 actively addressing the marketing promotion strategies. So we are closely collaborating together with advertisers to go through these challenging time and minimize the negative influence. Basically, our user base actually grow and for our News media. But definitely, the Advertising business is hit negatively.

So 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 services, strengthened their content and service ecosystem. Sogou's mobile keyboard increased its user base to 464 millions DAUs, with 54% more daily voice requests on average year-over-year. Revenue from Sogou Recommendation Service that leverage the mobile keyboard continued to experience robust growth. Further in 2019, Sogou made great events across their -- its core language-sense AI technology and the smart hardware business maintaining healthy momentum, yes. The recording machine, yes.

Lastly, it's 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 research and development, R&D, for mobile game development and continue to work hard on strengthening their existing game portfolio.

For PC games, the new expansion pack for TLBB PC, launched during the fourth quarter, performed well and its revenue grew slightly on a sequential basis, which is better than previously expected. The fourth quarter of 2018 revenue from legacy TLBB Mobile increased significantly on a sequential basis. This was mainly attributable to newly introduced content and promotional events during the fourth quarter.

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

So now let me turn to Joanna, who will walk through our financial results. Joanna?

Thank you, Charles. I will walk you through the key financials of our 4 major segments for the fourth quarter and the full year of 2019. All of the numbers that I will mention are all on a non-GAAP basis. You may find a reconciliation for non-GAAP to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $23 million, quarterly loss was $25 million. For Sohu Video, quarterly revenues were $22 million, and the quarterly loss was $18 million. Excluding Sogou and Changyou, 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 third quarter of 2019. For full year 2019, Sohu Media Portal revenues were $95 million and a full year net loss of $130 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, its 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 9% 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 $435 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 of 5% to an annual increase of 3% and a sequential decrease of 14% to 20%.

Online game revenues to be between $120 million and $130 million. This implies annual increase of 21% to 31%, and a sequential decrease of 1% to 9%. Non-GAAP net loss attributable to Sohu.com Limited 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 Limited 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 net loss attributable to Sohu.com Limited to be between $43 million and $48 million. GAAP net loss attributable to Sohu.com Limited to be between $45 million and $50 million.

For the first quarter 2020 guidance, we used a presumed exchange rate of RMB 7 to $1, which compares with the actual exchange rate of RMB 6.74 to $1 for the first quarter of 2019, and RMB 6.03 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, particular in view of the 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.

(Operator Instructions) The first question will come from Eddie Leung from Bank of America.

Could you talk a little bit about the top advertising industries for your News Media business in the fourth quarter? And then in the first quarter, which advertising industries are seeing a bigger negative impact from the coronavirus outbreak than the others? And then secondly, about the Video business, we are not able to see the detailed breakdown of the balance sheet of different business units. So just wondering if the Video business would need capital raising? And how is the cash flow of the Video business doing for, especially, given the continuous need for production in 2020?

In Q4, the top advertising industry is still the auto, right? Joanna, right?

Yes. Yes.

Auto, and is it real estate or? What's the ranking, Joanna? What's -- in Q4 before the coronavirus outbreak.

Internet service.

Internet services and IT, right?

Yes.

And in internet services, e-commerce. Well, it's basically the traditional order, you would say, but -- and then after the year -- after the outbreak of the coronavirus, I think the -- I think, real estate and auto are both impacted. And also, the luxury goods, the -- basically, it's a -- basically, nearly all the industry -- all across the board are affected because they're -- there's not enough consumption. And also the delivery, logistics and all these, so everything. So that's why you see, across the board, a decline of advertising. But the -- we do see a more consumption of video content, long-form dramas. So our -- you will see us, our subscription -- video subscription revenue grow. And also online game, it's a mix. Online 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 of our employees are staying home. So that's kind of delayed our -- some development work. So that contributed negatively. So for online gaming, it's a mix, probably a positive impact. But for brand advertising, it's really bad. And for video -- online video, it's good. It's a lot of more -- revenue grow nicely. Yes, Eddie?

How is it looking on long-video business, use of cash and target cash balance for 2020?

So we've been -- we're having this low-budget strategy basically for each video -- each drama, we spend like RMB 15 million or RMB 20 million at most, RMB 20 million a piece, a drama. And through embedded advertising and also subscription and effective marketing on different sort of network platforms. So we try to make it breakeven 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 produce the video -- I mean, dramas that are generating -- continue generating revenue. And we still have -- we have -- but we launched a new -- we launched in Q4 or actually Q1, the season 2 of this Nai He BOSS Yao Qu Wo. And we still have another 3 -- 2 more video -- 2 more dramas already basically done, filmed and edited, ready to release. 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 actress or actors to wear facial mask to play the role, right?

So because we are consuming the past production libraries, we're not investing or spending a lot of new money on producing new shows. So that's why you see our subscriptions business continue to grow. And we -- actually, the cost is down.

The next question comes from the line of Alicia Yap from Citigroup.

I have a question on the guidance for the brand advertising. So unfortunate, this outbreak has costing 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 ad sentiment to really recover? And do you expect the full year 2020 to experience negative growth for brand ad revenue?

I think the -- both the portal -- brand advertising on the Portal and on the Video side are hit, I think, equally. Basically, both are effected on a proportionately similarly. But we expect that if the people get back to work and the economy starts turning to the starting again, then we expect a uptick, basically a strong rebound, because a lot of our advertisers are ready to spend money because they'll need -- they have new products really need to new market so they are ready.

Actually, in 2019, you can see that we cut our loss, right, by the Q4 -- if you compare 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 $29 million, right? $75 million to -- yes, $46 million, right? So $29 million cut. So actually we, by the cost-saving initiatives like spending less money on channels and all these -- and also on the content, but at the same time, we are improving our Sohu hub 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 expect -- we would have -- expect that our advertising continued to hold down and even to rebound. And then our costs continue to go down. So it's -- so that is -- so we expect that in later part of the Q2, I think the -- we want to regain the momentum that we accumulated in 2019 for the advertising top line, yes, and also to consolidate the -- to take the user base growth that we observed in the last 2 months during the coronavirus. People staying home have more time and people are watching -- people need to consume not only video games and dramas, 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 in our -- it's a long -- it's a brand that people trust because for years. So actually, we see the news consumption is higher than industry average compared with some of other news portals.

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 maybe a bit on to the Video business as well?

Yes, it was all planned before the coronavirus. Because actually, as I said, we have some momentum created for advertising. And that include a lot of the events we did in Q4 and Q3. And we planned all those events for 2020. Because with these events and then people sponsor and advertise sponsored that include the Olympics, the Tokyo Olympics. And also, we have this news marathon. We have this Talent Show for this -- all these events are all in the halt or basically in a still. So we are -- everything is standing still, basically. We don't know, we will -- we don't know when the Olympics will be held. It's IOC of Japan is and also the IOC International, they have different opinions. They say that probably at the end of the year. And we'll plan accordingly. So we don't have any -- we definitely have advertisers committed to those events, which was various -- all these events we had in 2019, was very successful and people are 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 off-line events, need a lot of people gathering and that create a risk of exposure to the virus.

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

Yes. Many events, it's like the -- some companies -- some real estate companies or auto companies, they now aggressively are exploring this 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 -- will be -- in 2020, you'll see a lot more things like that happening. People move all things online.

Our next question comes from the line of Thomas Chong from Jefferies.

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?

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

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

Yes. I think maybe Sogou has some -- probably Xiaochuan can answer your question about the SME impact due to -- like you're talking about Douyin, right, and all those, right? But for Sohu...

Yes. And also because our Sohu Media News app also has a SME revenue contribution. So just wondering whether our Sohu Media Apps or our Video SME spending effected the...

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 basically remains steady or in 2019. And our focus in 2019 was really on the brand advertising. And brand advertising, that is very hard for those to take it away from us. Because the brand trust and also the unique events that we have and is reporting the original content, all these things. So we're not -- we're actually consolidating the brand advertising, basically that territory there -- we consolidated in 2019.

So if you look at the whole picture of 2019, why we can have such a cost savings, because we cut the channel and marketing cost and at same time, maintained the user base steady and stabilized the user base. And even for the H5, Sohu H5 Portal -- work portal, we actually grow. And also focus -- really focused 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 content and also the Sohu Marathon, Sohu Fashion Show, all these events. Those events and is it just -- we're just in a different category. So the large brand, this is the advertise. So we're not affected by the uprising -- I mean, the Douyin and those. No.

(Operator Instructions)

So if I -- I think you can ask your, kind of, questions, but I want to be descriptive in the talk 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 were able to stabilize our Advertising revenue and grow our video subscription and consolidate, stabilize our user base and even grow in H5 category. And then dramatically cut the cost, so that we achieve -- together with Sogou and the 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 up -- continually to be non-GAAP -- Sohu non-GAAP profitable into 2020. That's a key of this quarter's press release -- I mean, quarter results. Because the strategy, we'll continue to execute that strategy. Basically, to grow our user base, which has grown nicely during the last 2 months. And also continue the momentum of brand advertising and at the same time to develop -- and also the video subscription business. At the same time, we've developed our social network product that can -- we hope that it will explode. So that's the strategy.

But without -- with this coronavirus, and in the first quarter, our advertising definitely, especially this brand advertising that need 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 people still have faith or the goodwill in us. So after -- if this is the faith -- if this coronavirus faith or actually in China, it seems -- the China -- government -- it seems under control, it's turning. It's kind of turning in a good sign. So that in Q2, if the whole business rebounded, I think we'll regain our momentum in our brand advertising and also continue this trend of getting profitable. Yes, that's the key of this quarter.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.