Sohu.com Ltd (SOHU) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu Second Quarter 2020 Earnings Conference Call. (Operator Instructions) 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.

Thanks, operator. Thank you for joining us today to discuss Sohu's second 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 safe harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed here 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 statement. 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.

Thank you, Pu Huang. Thank you everyone for joining our call. In the second quarter of 2020, our brand advertising business performed well. The brand advertising revenue had a decent increase, up 48% quarter-over-quarter. Both the brand advertising revenue and bottom line exceeded our prior guidance.

During the quarter, we integrated our media portal's brand advantage and influence with Sohu Video's advanced live broadcast technologies. These initiatives allowed us to more effectively generate and distribute our high-quality original content and further enhance our credibility reflecting the attitude and values of Sohu.

For Changyou, the privatization was completed on April 17, 2020. And after that, Changyou's net income and loss was wholly attributable to Sohu.com Limited. During the second quarter 2020, online game revenues met our prior guidance and declined quarter-over-quarter, mainly due to the resumption of work following the easing of COVID-19 restrictions.

For Sogou, it delivered in-line results in the second quarter, with Search maintaining a steady share of traffic and mobile keyboard input further expanding its DAU base.

Before I go into more detail about our key financial results, please be reminded that for the second quarter 2020, Changyou recognized an additional USD 88 million accrual for withholding income tax since Changyou's changed its policy for its PRC subsidiaries for the distribution of cash dividends after the completion of the privatization. In addition, back in the third quarter of 2019, last year, Changyou's cinema advertising business ceased operations. Unless indicated otherwise, the results that we will discuss today exclude the impact of the above-mentioned withholding income tax and the cinema advertising business.

So now for the second quarter of 2020, total revenues were $421 million, down 9% year-over-year and 3% quarter-over-quarter. Brand advertising revenues, $38 million, down 14% year-over-year, up 48% quarter-over-quarter. Search and search-related advertising revenues, $241 million, down 13% year-over-year and up 1% over -- quarter-over-quarter. Online game revenues, $106 million, up 4% year-over-year and down 21% quarter-over-quarter.

GAAP net loss attributable to Sohu.com Limited was $80 million. Excluding the impact of the additional accrual with holding income tax described above, GAAP net income attributable to Sohu.com Limited was $8 million compared with a net loss of $35 million in the second quarter of 2019 and a net loss of $20 million in the third quarter of 2020. Excluding the impact of additional accrual of withholding income tax described above, non-GAAP net income attributable to Sohu.com Limited was $11 million income. Further, excluding the loss generated by Sogou, non-GAAP net income attributable to Sohu.com Limited was $12 million compared with a net loss of $41 million in the second quarter of last year and a net loss of $8 million in the first quarter of 2020.

So now let me go through some of our key businesses. First, Media Portal and Sohu Video. For Media Portal, we continue to consolidate our core competitiveness and credibility as a mainstream media platform by generating and distributing news and premium content. We also continue to upgrade the quality of our content and recommendation algorithms to provide users with broader and a more personalized experience. As result, we saw the consumption of content increase significantly during the second quarter.

For video, we continue to strengthen our long form and short form, so-called 2 engine strategy. For the long-form original content, we released 2 original idol romance dramas, one is the High School Big Bang, Wo Cheng Le Ta De Ban Zhu Ren; and also, another one is My Dear Lady, Ni Cheng Gong Yin Qi Wo De Zhu Yi Le, which were well received by audiences and gained widespread attention.

For short-form content, we further strengthened our live broadcast capabilities by being able to establish a good reputation with our medical and health live -- health areas live broadcasters by generating and distributing accurate and reliable information in these areas. We'll continue to push forward in this area while proactively exploring new opportunities in other verticals.

On the monetization side, we kept exploring new monetization opportunities by integrating the brand influence of our Media Portal with Sohu Video's advanced broadcast technologies. During the quarter, we successfully hosted several events that integrated both online and off-line features. We launched a new live broadcast series called BOSS1+1, where we invited industry celebrities to share the inside views on the economy and the market wherever they are during the live broadcast sharing technology.

We also successfully host the Soho Tech 5G Summit and Sohu News Marathon, which broke geographical boundaries and provided participants with broader views and a greater user experience wherever they are.

In June and July, we moved further towards the field of e-commerce by hosting the best of [sister] selection live from Sohu (foreign language). We invited celebrities to share their thoughts on life while recommending premium goods. The favorite, the products, the good they use. We have seen a number of positive results from these new initiatives, given that they are providing advertisers with a variety of marketing strategies that treat the current moment and meet general public demand. Going forward, we'll continue to diversify our revenue source and actively explore new opportunities to secure advertising dollars.

Next, let's talk about Changyou. For the second quarter 2020, online game revenues decreased quarter-over-quarter and met our prior guidance, mainly due to a decrease in player engagement as a result of the work resumption following the eased COVID-19 pandemic in China. For PC games, Changyou launched a new expansion pack of TLBB PC during the quarter with various anniversary events. And also, new maps and dungeons were developed using advanced rendering technologies. All of this new content served to greatly improve the user experience. For mobile games, an expansion pack of Legacy TLBB Mobile 3-year anniversary was launched during the quarter. The newly introduced gameplay, which allows players to explore randomly generated content, was also well-received.

For third quarter of 2020, Changyou will focus on stabilizing player engagement and rollout in-game rewarding -- reward-giving events and fresh content for TLBB PC and the Legacy TLBB Mobile. Looking ahead, Changyou will continue to focus on executing its core strategy of top games. MMORPG mobile games will remain a key strategic focus while we are also scaling the market for opportunities across various [generals] as they look to diversify -- as we look to diversify our product portfolio. Meanwhile, we'll also increase expanding our efforts overseas. Currently, several key games are being developed and prepared for launch. We believe Changyou will bring more quality games for players in the future.

Lastly, let me talk about Sogou. Despite great challenges under the COVID-19 pandemic, Sogou has been proactively upgrading its development strategy to focus on generating more user value and building out a business that is oriented toward a long-term value and growth. In the second quarter 2020, Sogou delivered in-line results with healthy momentum in its core search and mobile keyboard businesses. Sogou Search maintained a steady share of traffic and reinforced its position as China's second largest search engine; mobile keyboard, further expanded its deal base to 484 million, maintaining the third largest Chinese mobile app in terms of DAUs, according to iResearch. In addition, its AI hardware business recorded solid growth during the quarter. Going forward, Sogou will further boost AI empowerment and synergies across their businesses while continually drive technological advances.

Now let me turn to over -- the call over 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 4 major segments for the second quarter of 2020. All of the numbers that I will mention are all on a non-GAAP basis. You can find a reconciliation of non-GAAP to GAAP measures on our IR website.

So Sohu Media Portal. Quarterly revenues were $22 million, down 7% year-over-year and up 49% quarter-over-quarter. The quarterly operating loss was $80 million compared with an operating loss of $38 million in the same quarter last year.

For Sohu Video, quarterly revenues were $22 million, up 6% year-over-year and down 4% quarter-over-quarter. The quarterly operating loss was $10 million compared with an operating loss of $23 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, $109 million, up 3% year-over-year and down 20% quarter-over-quarter. Changyou posted an operating profit of $37 million compared with an operating profit of $38 million in the same quarter last year.

For Sogou, quarterly revenues were $261 million, down 14% year-over-year and up 2% quarter-over-quarter. Net loss was $6 million compared with net income of $28 million in the same quarter last year.

For the third quarter of 2020, we expect brand advertising revenues to be between $37 million and $42 million. This implies an annual decrease of 9% to 20% and a sequential decrease of 3% to a sequential increase of 11%. Online game revenues to be between $85 million and $95 million. This implies an annual decrease of 12% to 21% and a sequential decrease of 10% to 20%. Excluding profit loss generated by Sogou, non-GAAP net loss attributable to Sohu.com Limited to be between $10 million and $20 million and GAAP net loss attributable to Sohu.com Limited to be between $50 million and $25 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 of COVID-19 virus, which remains difficult to predict.

Lastly, please be reminded that we won't take questions regarding any Sogou business updates and Tencent's nonbanking proposal for Sogou privatization in the Q&A session.

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

(Operator Instructions) Our first question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

Just 2 quick questions. The first one is about broadcasting. I think, Charles, you mentioned that there has been some synergy from using the influencer as far as broadcasting. Wondering if you have any operating metrics or financial share to share with us on the performance of broadcasting you achieved in the quarter. And how is that going into third quarter? So that's my first question. The second question is about games. I also think you mentioned that after people returning to work, there has been some weakness in the game industry in general. So just wondering whether we have seen some stabilization on that front. And as we end here summer, which traditional way should be a good quarter in general for the game industry? Any color on the general industry trend of gaming industry into the third quarter would be great.

So Eddie, your first question is about live broadcasting, right?

Yes.

So we have quite a like -- I think on a daily basis, we have like dozens of influencer to broadcast. And then there's probably 10 or 20 that we're actually using our platform to market. So there's -- so these are the live broadcasts, like we're using general push to market about 10 broadcasts. Then we call it value broadcasting or we call it where the people from like the medical health industry or lifestyle or cosmetic industry or the kind of influencer to teach people and include about knowledge, things, information.

And then we have some few top live broadcasts like myself participate. Like each month, we do like 3 or 4 with some top celebrities. And to -- because to share the life experience and some products, and then we are able to connect our chat room or live broadcast room to e-commerce platform like Jing Dong or Taobao and others. So that when a celebrity recommends some products they use, then the users can click that small cart, shopping cart, to be delivered directly to the e-commerce platform to purchase.

So we're not -- so because of this transaction-based advertising, basically, some -- and also, we actually give them a reward or some kind of lottery for people to click. So that it's not really the sales volume of those products. It's really the whole -- the chatroom's popularity and also the celebrity's recommendation or verbal recommendation of those kind of things is a good advertising set that become a good reason for some big advertisers to spend money on our overall advertising. So this is a central part of the whole contract.

Am I answering your question, Eddie?

Yes. So basically, there is no direct e-commerce revenue, I think, right? So Charles, you are using the content to attract advertising in general. That does actually the current piece of...

There is e-commerce revenue because the advertisers, they give us a deep discount, better because -- yes. So actually, why people are -- become so popular and people are really coming to this chat room because they are getting the best price online, because in Jing Dong and Taobao or the others -- the advertiser, they are willing because this is really good for the brand. They are willing to give the deepest discount to us. So that price difference is considered to be our e-commerce revenue. But that's -- I'm saying that it's not the big part. The main part is really the total advertising dollar and the advertise spend. And it drives the whole contract like it's become a very important component of our overall contract. Let's say, if a car company or I mean, auto company spend like RMB 3 million advertising, in his contract, probably like RMB 1 million was spent on this chat room advertising. And also, we are able to get that RMB 3 million contract because we have this component. It's very creative, and it's very -- it's get -- everyone got -- are talking about this.

Yes. Understood. And any color on the industry trend of games heading into summer, which traditionally a strong quarter would be helpful.

So the people are -- compared with Q1, people are spending less time at home. And also, actually, people are -- because of the declining economy, people spend -- people have less disposal income, right? The 2 reasons that right (foreign language).

(foreign language) First of all, during the pandemic, there are different for different gaming companies and different rounders of games. So we've got different impact caused by the pandemic. For our -- mostly our games are MMO hardcore RPG games. So we rely on those free players to -- or higher-paying users, so we benefited from the restrictions in the first quarter. But during the second quarter, we see -- we saw some pressures on the economy. So we saw some pressure on the payment players investment in games. So you can see that from the data in the second quarter, we had a declined APA number, so -- but we expect in the third quarter, it will be stabilized.

My question is stabilized, but the earnings less because of the cost increase, right, because of marketing of...

(foreign language) The industry will be more stabilized.

(foreign language) okay.

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

I think, first, I have a question about the (inaudible) brand advertising guidance. Given that is a negative 3% to positive over 10% sequential growth, I'm just wondering under what circumstances would we expect to hit the low end and the high end of the guidance. And can you comment about the ad spending among different categories? And my second question is about the China and the U.S. Tencent. Does that have any impact to our revenue coming from international advertisers?

To answer your second question, we don't have -- you mean, international advertiser?

Like those international brands.

So for international advertiser, they actually increased their advertising. Yes, it's actually better, so to answer the second one. Your first question, I think the wide range of the range, right, of the forecast depends on really the COVID-19 situation, the economy and -- yes, so we'll continue our innovative -- product innovation and user-based development, so that -- trying to drive momentum about the economy and the uncertainties. That will give a wide range of forecast.

I see. Is there any color about our key categories? Is the momentum similar to what we saw recently?

I think it's a euro allocation, like auto industry. And then although I think then FMCG start moving goods and Internet services like e-commerce?

Yes.

Yes, e-commerce. I think e-commerce, number two, right?

Yes.

Oh, (inaudible) number one; e-commerce, number two; and FMCG.

Yes.

And then some IT companies, right?

Yes.

And then followed by financial sectors, right, financial industry.

Real estate sector.

Real estate, yes, real estate also. Yes, that's the euro rank, yes, the ranking of this spending.

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

I have 2 questions. One is that following the closer integration of your ad system and also the sales team between the Sohu Video and Sohu portal. So could you elaborate and help us to understand more the future prospect of Sohu portal? What is your plan and aspiration to transform the Sohu portal to become to? And then the second question is on your video content strategy. So assuming you are getting more cash, will you spend more money in video content production again? Or will you actually continue your strategy on cutting the loss on the video business?

Yes. We have now a clear strategy for both our key application. That means the portal -- the Sohu News App and Sohu Video app. Well, we have other H5-based show (inaudible) and also PC, that's another -- but our focus really on the Sohu News App and the Sohu Video app. On the Sohu News App, the product innovation will mostly focus on the 2 information delivery mechanism: one is really will continue to have high-quality content, editorial content and original content and also content with collaborators, but the delivery through -- at the power of delivery plus the machine delivery, basically, the algorithm, will continue to improve the algorithm, so that the news become so relevant to each individual users and information and also the percentage of video content in the intermission stream. The second delivery is also our focus is really the social network, I mean, social media delivery. Basically, people are followers and those kind of -- we have a different channel for that. That's the 2 areas that we believe will be the driver for our news app's user growth.

And for video, the long-form content is drama. And then the short form is really the short video clips, like basically, the YouTube type, people actually upload short video. And people also produce short video by live broadcasting as a way to produce short form or not even short form, sometimes people broadcast for 1 hour and then become 1 hour replay.

So these are also the 2 type of -- and delivery also either the front page editorial delivery. And also, we have also (inaudible) the social media delivery. These are the -- especially the social media delivery, the following, followers and the tweet, retweet. And those kind of -- is our focus. And then the synergy of this 2 app for live broadcast, we don't allow -- we do not allow the news app to reinvent the wheel to have a live broadcast feature. But the whole company has only the live broadcasting feature at the Sohu Video app and the other user base will be -- the traffic will be driven to the news app -- to the video app for -- that's the synergy where like the -- some of those are live broadcast. Because previously, before, the Sohu Video app had well-known for its TV drama and the U.S. American dramas. But now it's now established as one of the key live broadcast app. And also some kind of key breaking news app, the video news, and then people using the news app are more likely to watch this kind of content. And then there are -- you can -- there's a link or a direct link between the 2 apps, so that people using news app can directly 1 click away just to drive -- enter into the live broadcast room to watch those live broadcast content -- video content of news type or other knowledge type, not just the long form of the video drama.

So it's kind of complicated. And I think -- I hope you see -- you understand what I'm saying. We are looking at basically a matrix of user base with a true app specializing its features and content form. And also the H5 shows (inaudible) with more of the traditional PC and the PC (inaudible) more traditional browsing activities. So it's a matrix of content. And then for video and live broadcast, all the traffic will diverted into the video app, yes.

So that means we are not going to spend more money in the long-form content production again, right?

We -- in the last few years, we've been able to manage to generate -- to produce some in terms of (inaudible) like some low-budget TV series, episodes and then -- but could be a hit. We've done this many times. So we -- if we have more money, we're not going to spend like we did in 2017 or 2016. We spent a lot, buying a lot of very expensive content. But probably we'll increase the density or frequency of -- I mean a number of TV series per quarter like in 2019 or, let's say, the first 2 quarters, we only have 3 TV episodes, right, TV drama? Then in the -- at the current pace, the next half of this year, we only -- we also have another 2, right, 2 or 3?

No.

But if -- with more money, we probably only double that. That means we probably have like instead of 5 or 6 TV dramas a year, we probably have 10 to 12, which -- so that means a lot of increase of spending on a long form. So our video business growth most will be driven by the short form, user upload, UTC content and live broadcast. And any TV dramas will be an opportunity to develop new users because it's exclusive content here so that a lot of users will come here to watch our new TV dramas. And then they will stay because you not only watch that TV drama, they probably -- they find a lot of other social network features, so they will stay. So yes, that's our strategy.

(Operator Instructions) All right. There are no further question. 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.]