Sohu.com Ltd (SOHU) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. (Operator Instructions) 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.

Thanks, operator. Thank you for joining us today to discuss Sohu's third quarter 2020 results. On the call are Chairman and the 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 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.

Thanks, Huang Pu, and thank you to everyone for joining our call. In the third quarter 2020, to further consolidate our core competitiveness and credibility, we continue to optimize our products, refine our technology, enhance the quality of premium content and improve its 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 8% quarter-over-quarter growth.

Our game business, Changyou's 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, please be reminded that on September 29, 2020, our controlled subsidiary of Sogou and a subsidiary of Tencent entered into an agreement and the plan of 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 talk about here are related to continuing operations only.

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

GAAP net loss from continuing operations attributable to Sohu Limited -- Sohu.com Limited was USD 15 million compared with a net loss of USD 33 million in the third quarter of 2019 and net loss of USD 77 million in the second quarter of 2020, but 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 last year and net loss of $75 million in the second quarter of 2020.

Now let me go into the each key businesses, first, Media Portal and Sohu Video. So we continue to upgrade our products, improve the technology and refine social distribution features, which 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 twin engine strategy with long-form and short-form videos and accelerated the layout of value live streaming where we disseminate professional knowledge and reliable information across various 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 of user numbers.

During the quarter, we successfully hosted a number of flagship events such as the 6th International Drone Photography Contest, [studio] Campus Beauty contest, [the best selection] series in a live streaming e-commerce basically and others with our enhanced digital sharing technology, which not only stimulated online and off-line traction among viewers but also enhanced the generation of high-quality content, improving distribution across the sellers.

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 (foreign language) provided a new way for the advertisers to promote their brands and stimulate sales.

Under the live commerce, we share ideas, knowledge and thoughts about lifestyle while recommending premium products. We're able to meet advertisers' marketing demands and capture their [production] budgets. So going forward, we'll continue to diversify our monetization 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's second in-game promotional event and there's holiday events for TLBB PC, which maintained the 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 clan and a new 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 servers for TLBB PC that used 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 their experience from years ago.

We expect this new service 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 game, while we're also developing and looking to roll out other games across various genres.

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 will walk you through our financial results. Joanna?

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 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 $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 impacts annual decrease of 11% to an annual increase of 1% and a sequential decrease of 10% to a sequential increase of 2%. Online game revenues to be between $140 million and $150 million. This impacts 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's management's current and preliminary view, which is subject to substantial uncertainty, particularly in view of the potential ongoing impact of 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.

(Operator Instructions) Your first question comes from the line of Thomas Chong from Jefferies.

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?

Well, key sector, right? Auto industry, number one. And then internet services, followed by real estate. That's the top 3 categories.

Yes, we achieved an 8% increase quarter-over-quarter. I mean yes, with the macroeconomic -- basically a challenging macroeconomic situation by being with -- well, we are having organic growth or stabilized user base. So we are not spending a lot of money on marketing channels and 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, it's very attractive to brand advertisers.

That's the reason why we are able to achieve an advertising revenue growth without spending marketing sales cost more. Yes.

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

I'm asking a question 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 implied on your 4Q guidance?

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

(foreign language)

[Interpreted] 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%.

(foreign language)

[Interpreted] In the fourth quarter, on the increase mainly due to TLBB PC actually, we launched some special servers, like Charles mentioned, that have old version for its content and attracted some...

Nostalgic experience.

Yes, attracted some players that we lost over the years.

And the other reason is where we launched a game called Illusion Connect in South Korea market.

(Operator Instructions) Your next question comes from the line of [Tsang Chi] from [Foreign Tech Research].

Your guidance in online games are very encouraging. I just wonder is that -- we are going to a growth mode for the online games going forward?

(foreign language)

[Interpreted] Yes. Thanks. But currently, we can only say the performance of fourth quarter.

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

(foreign language)

We have a couple of games that the development is well underway, but the schedule is -- depends on the license approval applying progress and also the testing and their adjustments progress. So it's not very easy to predict the specific launch date. But for those games that we have obtained the license approval, we may have some more specific timing.

(foreign language)

[Interpreted] Two of those are (inaudible) (foreign language) and also Tetris. We have had license approval. We will launch the 2 games in the next year.

(foreign language)

[Interpreted] Next year, we will also put more efforts in the overseas market. We will launch some other new games in the overseas market.

Our next question comes from the line of Alex Ko from Morgan Stanley.

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?

Well, we have -- as I just said, we have this twin engine strategy with long-form content and short form, basically UGC. So for the long form, our spending on basically to produce like 12 or at most 15 episodes of drama episodes was a reasonable investment and then to make sure that it can again 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 the UGC and also social network product of video, it's not much. It doesn't need a lot of investments. And also this live streaming, it's user-generated, so all the spending are on the product development.

(Operator Instructions) There are no further questions. So with that, we 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.]