Sohu.com Ltd (SOHU) 2021 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 2021 Earnings Conference Call. (Operator Instructions) Today’s conference call is being recorded. If you have any objection, you may disconnect at this time.

I would now like to turn the call 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 first quarter 2021 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; CFO, Joanna Lu; and Vice President of Finance, James Deng. Also with us today are Changyou's CEO, Dewen Chen; and the CFO, Yaobin Wang.

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 measures discussed on this conference call may contain forward-looking statements. These statements are based on 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 the most recent annual report on Form 20-F.

Please also be note -- be reminded that Sogou's results of operations have been excluded from our results from continuing operations, which are respective of adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Unless indicated otherwise, the results that we talk about are related to continuing operations only.

With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thanks, Huang Pu. Thank you to everyone for joining our call. In the first quarter of 2021, we continue to execute the operating strategy of last year and delivered better than we expected performance on the top line. In addition, we are happy to report positive non-GAAP net income of USD 37 million, which greatly exceeded our previous guidance. This was mainly attributable to our strict budget control and the solid performance of our online game businesses.

In summary, for Sohu media, we kept focusing on improving our products and technology, while at the same time, stimulating content generation and social distribution. For Sohu video, we made continuous progress producing both long-form original dramas and short-form live streaming content. Further, we integrated advanced live broadcasting technologies into our product metrics and applied these technologies to our content marketing campaigns.

These campaigns not only effectively promoted the generation of premium content, but also attracted a lot of user attention as well as advertiser budget. For Changyou, our online game business remained solid during the first quarter of 2021, with its revenue greatly exceeding our prior guidance. I'll go through more details about each of these businesses in a moment.

But first, let's look at -- a quick review our financial performance. For the first quarter of 2021, total revenues USD 222 million, up 24% year-over-year and down 12% quarter-over-quarter. Brand advertising revenues, USD 31 million, up 20% year-over-year and down 26% quarter-over-quarter. Online game revenues, USD 176 million, up 32% year-over-year and down 10% quarter-over-quarter.

GAAP net income from continuing operations attributable to Sohu.com Limited was $32 million. Compared with a net loss of $10 million in the first quarter of 2020 and net income of $47 million in the fourth quarter of 2020. Non-GAAP net income from continuing operations attributable to Sohu.com Limited was USD 37 million compared with a net loss of USD 8 million in the first quarter of last year and net income of USD 53 million in the fourth quarter of 2020.

Now let me go through some of our key businesses. First of all, Media Portal and Sohu Video. We continue to upgrade our products and technology to stimulate high-quality content generation and further enhance social network distribution features. Based on our advanced live streaming technology, strong operating experience and extensive media resources, we further burnished our credentials as a mainstream media platform. By distributing our premium content through the Sohu Media and Sohu Video platform. We are attracting more exposure from viewers and advertisers, which is helping us to further diversify our revenue streams and explore new monetization opportunities.

For example, in March, we successfully aired live streaming broadcasted the 13th Sohu News Marathon, which is a well-known event that we host with a variety of celebrities and pop stars, leveraging our live broadcasting technology, we conducted more than 5 hours of nonstop long time live shows. The premium content generated by this campaign successfully attracted a lot of attention and advertising dollars as well. Through this event, we not only raised awareness of fitness and health, but also motivated users to create their own interactive content and promoted Sohu's product metrics.

For Video, we continue to execute our twin engine strategy. For the long-form content in 2021, we released several original dramas, including the recent Mysterious Love, (foreign language) which has become another big hit after the well intended (foreign language) about 2 years ago.

So Mysterious Love combined both idol romance and crime themes and was warmly welcomed by audiences. It has further broadened our leading position in these 2 categories and greatly boosted our user base and revenue.

In terms of short-form content, we kept working hard on developing value live streaming content, which is where we disseminate professional knowledge and library information on (inaudible) vertical. For example, we launched the (inaudible) show called the New Year Celebrations (inaudible) for the Chinese New Year holidays. The show consisted of more than 40 live broadcasts and attracted a lot of [QOLS] who shared their thoughts on multiple topics.

Now let me turn to Changyou. For the first quarter of 2021, thanks to the latest updates that our team made to our in-game content as well as a drop in travel as people were encouraged to stay in place for the spring festival, player engagement was better than expected.

Our TLBB franchise remained stable and the online game revenue exceeded our prior guidance. For PC games, revenue decreased on a sequential basis as TLBB vintage revenue experienced a natural decline after it peaked following the game's initial launch. During the quarter, we improved TLBB vintage by making a variety of enhancements based on player feedback. We also introduced some promotional events around the spring festival for the regular TLBB PC.

For mobile games, we also launched a variety of spring festival related events for legacy TLBB Mobile, including gateways for player engagement. These efforts helped legacy TLBB Mobile perform better than we anticipated. Next quarter, Changyou will release new expansion packs and in-game events to celebrate the anniversary of regular TLBB PC and the legacy TLBB Mobile. For TLBB Vintage, we plan to introduce a new download and other special in-game content.

In terms of pipeline, several key games are being developed and fine tuned. We look forward to launching them later this year. Looking ahead, we will continue to execute our top game strategies and promote innovation and roll out more high-quality mobile games, including MMORPG games and other genres.

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

Thank you, Charles. I will now walk you through the key financials of our major segments for the first quarter of 2021. All of the numbers that I will mention are all on a GAAP basis, you may find a reconciliation of non-GAAP to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $18 million, up 18% year-over-year and down 26% quarter-over-quarter. The quarterly operating loss was $31 million compared with an operating loss of $23 million in the same quarter last year. For Sohu Video, quarterly revenues were $19 million, down 17% year-over-year and 15% quarter-over-quarter. The quarterly operating loss was $13 million compared with an operating loss of $11 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, $180 million, up 32% year-over-year and down 10% quarter-over-quarter. Changyou posted an operating profit of $101 million. Compared with $56 million in the same quarter last year.

For the second quarter of 2021, we expect brand advertising revenues to be between $36 million and $40 million. Online game revenues to be between $134 million and $144 million. Non-GAAP net income from continuing operations attributable to Sohu.com Limited to be between $8 million and $18 million, and GAAP net income from continuing operations attributed to Sohu.com Limited to be between $3 million and $13 million. This forecast reflects our current and preliminary view, which is subject to substantial uncertainty.

Lastly, please be reminded that in the Q&A session, we won't take questions regarding any Sogou business update, all their agreements was cancelled for Sogou's privatization.

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

(Operator Instructions) Our first question is from the line of Alicia Yap of Citi.

So I have 2 questions. The first 1 on the gaming outperformance. I think you mentioned a little bit the reason is driven by the PC TLBB and all that. But I guess my question is more, when you gave out your guidance, I think because the actual gaming revenue came in much stronger than your guidance range. So just wondering, what's the performance mainly happened in March that conduct the quarter results came in stronger than what you guided, right, on the gaming revenue.

And then with the 2Q sequential declines, obviously, there might be some drop off and all that. But given these promotions that TLBB Mobile may be launching their anniversary, shouldn’t we also expect the game should be decent rather than a decent sequentially scale back. So any color you can give on this gaming front? And then I have a question on the advertising.

Well, let me comment a little bit and then (inaudible) can answer. First of all, the -- I think in the first quarter, the decline of TLBB PC Vintage -- TLBB Vintage is actually slower than we expected. Right, because we thought the Vintage -- TLBB Vintage peaked in Q4 last year. And then we expected it to decline faster, but it actually happened is that probably people have the time for the Vintage, for the old game. And so that's the reason why it's actually -- and also because of the spring festival that people are advised to stay in their city instead of going home. So that contributed to a better-than-expected game revenue. Yes. So is that your question? And also, you also want to know about the current quarter or the future, right, the mobile game.

That's right.

(foreign language) Okay. Yes, sorry, please let me briefly translate the answer. And for legacy TLBB Mobile because we had less travel in the first quarter due to people were encouraged to stay in place during the spring festival. So we had a high base in the first quarter. So in the second quarter, although we will have expansion paths for both mobile and our PC TLBB games, but the games will facing natural declines in the second quarter. And for vintage, especially it peaked after the initial launch. So in the second quarter, it will decline further more compared with during the first quarter.

I have a second question on the -- on advertising. Regarding the second quarter guidance, it seems like the year-over-year guidance of negative 5% to positive 5%, it doesn't sound it is strong enough. So I'm just wondering because we should be benefiting from the secular recovery trend? And also, last year, the COVID impact should also affect the first half as well. So just any color you can provide in terms of the second quarter?

And just broadly, also wondering if Charles or management team could comment the overall ad sentiment recently given the regulatory headwinds, this upcoming 100 years anniversary and there is Olympic games. So they are positive and negative external environment? So how will that impact the general ad budget that you're seeing?

I think the -- compared with last year Q2, right, the Q2 of 2020 is a rebound, right? So we had a strong Q2 in 2020. Then -- but this year, the overall economy, macroeconomic situation is actually not that good, especially, there's, I would say, a shortage of mobile -- chips for auto, right. So auto companies, car companies are just -- have -- they don't have enough of products or cars to sell to the market, so they don't spend that much -- as much. So that's why compared with the Q2 last year, the Q2 2021 is not a -- seems not a good, a strong quarter. And also because of our -- the revenue base of our advertising basis is so small, so it's not quite -- it's not -- I think it's not much things to do with what happened recently with the e-commerce platform and other -- so the 100-year celebration.

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

I have a question regarding our content strategies. Can Charles comment about how do you think about the content distribution, the -- and other measures like live streaming, et cetera, how it actually help to drive the user and the engagement? And on that front, how we should think about the advertising revenue growth or the user trend in 2021?

And then my second question is relating to the cost side. Can Charles also comment about how we should think about the OpEx and the cost for our Sohu Portal and Video business going forward?

Yes. I think the advertising revenue was -- we -- will depend so much on the user base. So that's why we need to grow our user base and to grow -- until we grow our user base much faster, our revenue, we have this unique activities like events or content is considered -- content generation events like our Sohu News Marathon and also the Sohu Mountain Expedition, that's we're going to do this quarter. And all these major events is part of content and also the live streaming turn this activity into real-time events and attract users.

But the -- in terms of content distribution, we are exploring, basically the -- like everyone else we're doing the information streaming -- stream like AI or computer algorithm, distribution. But we are choosing -- we also have that, but we are choosing the social network distribution as our battle ground to distribute our content either short form, either video or our text content. So yes, that's -- so our live streaming technology that become the central platform our metrics, product metrics to turn our event or the activity into a content event also attract advertisers and the users. But in long term, in the long run, we depend on -- rely on whether we are able to successfully to distribute our content through social network means. Not by the algorithm distribution, but the social network distribution, both our video content and also text content. So we launched a few social network products. Within our app, Sohu News app and Sohu Video app. So until that is -- so basically, we're growing our user base organically without spending a lot of money, but by improving technology and products and the distribution.

So in terms of cost, it will remain similar, basically, the sort of cost since we're not spending a lot of money on channel promoting and others. So the cost will remain the same. And then the revenue side will also be similar until we successfully basically build this Sohu network features and the user base explode. I hope I explained to you clearly.

(Operator Instructions) Next question is from the line of Eddie Leung of Bank of America Merrill Lynch.

Just a follow-up question on advertising. Charles, when you answered Alicia questions. You mentioned that one of the -- something like e-shows for the online advertising pieces was the automobile advertisers, right? So could you remind us some of the top advertiser industries at the moment for Sohu? And could you also give us some color on their kind of like their sentiment or their budgeting process for the rest of the year from conversations between your sales team? And are these key tie industries?

As you pointed out, actually, the top advertise industry is auto industry. And the auto industry because of the shortage of the chips. So the chips for cars or auto or vehicle for automobiles. So the production amount of all these car factories, car manufacturers are actually decreased. So they're not looking at a lot of -- so that's why the top advertising industry, auto industry are spending less in the quarters ahead. So that's why we're having a kind of a hard time. So -- and that's why we need to have a unique advertising with less budget, and then we have to provide a unique solution to -- for their brand marketing campaign from brand marketing, like using the live streaming events and also organize the content activities to…

And Charles, could you also give us some color on some of the other important advertiser industries? For example, any trend you can share with us on some of the, let's say, the FMCG brands or the financial services sector, et cetera, et cetera?

Yes. That's FMCG and others, that's the industry that actually we can explore and then probably -- they don't have this problem, chips problem. So it -- I think the situation is better in other industries. So we are working hard to get those advertisers FMCG like this and also luxury goods and a lot of others. So electronics (inaudible) and all this. More -- a better picture.

Next question is from the line of [Jason Meter of MC Capital].

My question is, what steps are you taking to support the stock price given that it's trading at 2/3 of incoming cash, this would imply the entire company without this cash is worth negative. Can you please elaborate?

Well, we don't have that much cash, right? We only have -- like we have $300 million, USD 327 million cash.

Yes.

The market cap is like twice that or less? Yes. It's the -- I think the stock price. Well, I think we need to demonstrate growth potential, right? So that's why, as I said, we need to explore and to do it successfully to build this sort of network platform to distribute content and to develop sort of networks with our current apps and to grow user base to a much larger scale in (inaudible) a larger user base so that we can -- so that we can get more market share of advertising, brand advertising market share and also to market our own products like market our TV -- our dramas, right? And also, even if Sohu built our own platform with a much larger user base, I think Changyou can also benefit because we'll sell Changyou, promote Changyou win in our own metrics. It will be -- the cost will be zero. We won't have any cost (inaudible) and promotion expenses.

So until we prove that we can build our social network successfully and have its exponential growth -- social networks are basically growing exponentially, but it's like building a chain reaction and also kind of building a atomic bomb chain reaction. So until we do that and then grow our user base exponentially. We -- our -- so our gross financial will remain at the current pace, so that the investors are now excited, excited. So it's -- in a word, basically, for our stock price, we need to demonstrate a hyper growth, right, and then the stock price will improve.

I was referring more to the incoming cash with the potential merger, the $1 billion plus in cash.

Okay. So that -- as we said, we don't talk about this because it's still -- I mean, it's -- we don't speculate what we will do with more cash because the deal is still not done.

Next question is from the line of Alex Ko of Morgan Stanley.

So you mentioned that like there's a key game launches, still fine tuning. And also like we'll introduce like more MMORPG games probably later this year. So can we provide like more granularity on the game pipeline, such as which games are license approved or like any like most anticipated game launch?

(foreign language) We have a couple of key products to be launched later this year or next year. First one should be [Taxi's Adventure] it will be published by Tencent and expect to be launched in July. And the second one is Bright Star. It's a similar oriented game and licensed by Tencent and expect to launch it in the August to this year. The other one is a card game called Little Racoon, and we will do a round of testing in -- we just got the license approval. So we can proceed to the monetization testing in June. If the results are okay, then we will publish by ourselves in the third quarter, it's a card game. And for MMOs Sing a Song it's a self-developed key MMO (inaudible). It's a -- we plan to launch it at the end of this year or early next year. And the next one is the next-generation of TLBB Mobile. We haven't decided an official name yet, but it will be published by Tencent as well and also the end of this year or next year.

Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.