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Edited Transcript of SOHU earnings conference call or presentation 27-Oct-17 12:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Sohu.Com Inc Earnings Call

Beijing Oct 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Sohu.Com Inc earnings conference call or presentation Friday, October 27, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Zhang

Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com

* Eric Yuan

* Joanna Lv

Sohu.com Inc. - Acting CFO

* Xiaochuan Wang

Sogou Inc. - CEO & Director

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Conference Call Participants

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* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Han Joon Kim

Deutsche Bank AG, Research Division - VP and Research Analyst

* Ningchuan Wang

HSBC, Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and good evening. Thank you for calling -- thank you for joining Sohu's Third Quarter 2017 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, Eric Yuan from Investor Relations Director of Sohu. Please go ahead, sir.

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Eric Yuan, [2]

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Thanks, operator. Thank you for joining us today to discuss Sohu's third quarter 2017 results. On the call are Chairman and CEO, Dr. Charles Zhang; acting CFO, Joanna Lv. Also with us today from Changyou, our CEO, Dewen Chen; and CFO, Jasmine Zhou. And from Sogou, CEO, Xiaochuan Wang; and CFO, James Deng.

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 containing 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 most recent annual report on Form 10-K.

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

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [3]

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Thank you, Eric, and thanks to everyone for joining our call. We had mixed results in the third quarter. While greater efforts are needed to get our Brand Advertising business back on the growth track, we are pleased with the solid performance of our search and online game businesses. Total revenues reached $516 million, up $26 million -- 26% year-over-year and 12% quarter-over-quarter.

For the Sohu Media Portal, we focused on growing the user base by consistently enhancing the content and design of the Sohu News APP. Sohu Video witnessed a steady growth of its subscription business, thanks to our newly released original dramas. And Sogou's top line comfortably exceeded its prior guidance, driven by robust growth in mobile search revenues. And for Changyou, its flagship TLBB PC and mobile games performed well and continued to generate strong cash flow for our group.

Let me give more details of our key businesses, summarize the financial results of this quarter. Total revenue, $516 million, up 26% year-over-year and 12% quarter-over-quarter. Net Brand Advertising revenue, $75 million, down 33% year-over-year and 13% quarter-over-quarter. Sogou revenues, $257 million, up 55% year-over-year and 22% quarter-over-quarter. Online game revenues, $132 million, up 34% year-over-year and 8% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com was $93 million or a loss of $2.38 per fully diluted share.

Now let me go through some of our key businesses. First of all, Media Portal business. Smartphone had completely reshaped the online media business in China and as industry feed have became -- become a mainstream format that users got used to receiving personalized information. In 2017, the market developed quickly, and the competition elevated. Established companies are fighting for users' time and attention, not only have traditional online news providers increased their investment, but big player in the other verticals such as search have also been proactively promoting the news feed features in their core products. The situation required us to substantially improve the user experience for our Sohu News APP to ensure that we remain our users' premium destination.

Specifically, we have invested extensively in 2 key areas: content and technology. First, we continue to refine our News APP's UI by using interface and enrich our common portfolio by introducing, among other things, more short form video content. And second, we consistently adjusted our algorithm of our recognition's new engine, which is powered by machine-learning technology. Talent is critical for us to implement these initiatives. In third quarter, we are able to strengthen our research and development team by hiring dozens of experienced engineers and -- smart engineers.

We're about to launch a major new version of News APP in November, [win the which] some innovative upgrades, and algorithms are applied and embedded.

In terms of monetization, we continue to see soft demand from larger advertisers, the Brand Advertising, that dragged down our overall performance. In the meantime, we see small medial enterprise segment actually resilient, actually robust as we enroll more local advertisers. In addition, we made great effort improving our performance ad system, which helped increase the click-throughs, and it's also using a machine-learning technology and matching users with advertisers. It's a very technology-driven system, is being developed and upgraded.

Moving to Sohu Video. In the third quarter, we continue to execute our ramped-up content strategy, which is to focus on in-house developed content production and subscriber base growth, user base growth, while strictly control the costs, especially for those head content. We also partnered with more small studios to give our audience a broader selection of interesting short form programs, short form videos that can be exported to Sohu News APP as well, consuming not only on Sohu Video APP but also on the Sohu News APP by users as those 2 complement the Sohu News APP's text-based content.

For original content, we are now selectively picking those projects with solid screenplays and a reasonable budget. In the first 3 quarters of 2017, we collectively rolled out 14 original dramas. One of the most popular series in the third quarter was the Monster Killer; #2, the sequel, Wu Xin Fa Shi. The show also helped to attract new subscribers to Sohu Video as people sign up in order to watch the first screen -- first season. So it actually drives the watching of the Season 1 that contributed to the new user acquisition.

Overall, our growing library of exclusive content helped draw new paying customers, and subscriber revenue was growing steadily. For the fourth quarter, we have a solid pipeline of dramas, some of which are based on strong IPs, such as Your Highness, Bàijiàn gong zhu dàrén. It's actually a TLBB version of a drama, and it's in collaboration with Changyou, actually, in terms of investment; and the [die now].

Financially, total revenues for Sohu Video were $44 million, up slightly from prior quarter. Of this, advertising revenue of $19 million. The ramp-up in our subsidiary business helped to offset the decline in advertising, Sohu Video quarterly loss of $60 million as we have stopped buying expensive domestic TV headcount in dramas. In 2018, our overall content cost is expected to go down substantially, and that should enable us to stream loss.

Next, moving to Sogou. In the third quarter, Sogou achieved a better-than-expected financial results, while artificial intelligence, AI, technology has been widely applied in various services such as search and machine translation. And Xiaochuan will provide more details in his remarks.

And lastly, Changyou. In the third quarter, our flagship TLBB PC and mobile game performed quite well. Our new mobile game, Legacy TLBB, remained as one of the most popular MMORPG games in the market. Since its launch in May, we have released 2 new expansion packs. We're continuing to improve this socially interactive system within the game and create new gameplay to maximize the longevity of the game.

In terms of game pipeline, we plan to launch a new mobile MMORPG game played online. Other new MMO game, including (inaudible) and (inaudible) as well as advanced casual games and runaway are also under development. These games are currently going through adjustments and modifications, and I expect it to hit the market early next year.

Now let me turn the call to Joanna -- oh, Xiaochuan -- turn it to Xiaochuan for Sogou.

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Xiaochuan Wang, Sogou Inc. - CEO & Director [4]

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Sales (inaudible) growth. At the end of September, total search traffic grew by 24% from a year ago, mainly driven by 38% growth in mobile search traffic. Quarter net revenues reached $257 million, up 55% year-over-year, continuously outpacing industry growth. The user base of our Chinese language input application, Sogou Mobile Keyboard, is expanding rapidly, up 55% from a year ago. According to iResearch, Sogou Keyboard -- Sogou Mobile Keyboard remained as the third-largest mobile app in China [that add] by DAU.

During the third quarter, we continued to strengthen our competitive advantages in search from channel to content, leveraging the robust ecosystem we have viewed and shared with Tencent. We made new progress with our product collaboration with Tencent. Specifically, Tencent began testing the integration of Sogou Search into Weixin, which allows its user to access all Internet information through our general search function from Weixin. We are currently working closely with Tencent on productivity and ongoing optimizations.

We have also made solid progress in AI technology development and its product applications for voice technology. We processed over 200 million voice inputs a day through Sogou Mobile Keyboard. Through our advanced machine translation and image recognition capabilities, we are able to translate English wordings and real-life objects such as menu and [risota fence] into Chinese.

We also have proven technologies in natural language processing that help us elevate search into question-and-answer. For example, in health care verticals, we have developed a smart diagnosis system, which enables users to conduct some basic sales diagnosis and decide which hospital department to visit through a series of interacting question and answers.

In terms of financial performance, Sogou's third quarter revenue reached $257 million, an increase of 55% year-over-year and 22% quarter-over-quarter, exceeding both our guidance and the industry growth. GAAP net income was $31 million compared to $20 million from a year ago and $23.5 million from the previous quarter.

I would now turn the call over to Joanna who will walk you through financial results.

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Joanna Lv, Sohu.com Inc. - Acting CFO [5]

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Thank you, Xiaochuan. I will walk you through the key financials of our 4 major segments for third quarter of 2017. 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, revenues were $38 million, down 21% year-over-year. The quarterly loss was $17 million compared with net loss of $6 million in the third quarter of 2016.

For Sohu Video, revenues were $44 million, up 25% from a year ago. Of this, advertising revenues were $19 million. The quarterly loss was $60 million compared with a net loss of $86 million in the same quarter last year.

For Sogou, total revenue was $257 million, up 55% year-over-year and 22% quarter-over-quarter. Of this, online search-related advertising revenues were $225 million, up 50% year-over-year and 21% quarter-over-quarter. Sogou posted net income of $31 million compared with net income of $20 million in the same quarter last year.

For Changyou, total revenues including 17173, were $166 million, up 22% year-over-year and 10% quarter-over-quarter. Changyou posted a net loss of $5 million. If excluding noncash impairment charges, Changyou's non-GAAP net income would have been $56 million compared with net income of $46 million in the third quarter last year.

For Sohu Group, total revenues were $516 million, up 26% year-over-year and 12% quarter-over-quarter. Non-GAAP net loss was $93 million. If excluding noncash impairment charges of Changyou, non-GAAP net loss would have been $51 million compared with a net loss of $65 million in the same quarter of 2016.

As Sogou has filed a registration statement on Form F1 with the U.S. Securities and Exchange Committee relating to a proposed initial public offering, we are not providing fourth quarter financial guidance for Sogou, also the Sohu Group as a whole. And the review of the proposed Sogou IPO, there will be no questions, except it's relating to Sogou. And we also won't take questions regarding Changyou's privatization proposal.

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

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Questions and Answers

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Operator [1]

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

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [2]

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So my question is regarding the search testing with Tencent Weixin. So do we know how long the testing will last before they reach a decision?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [3]

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No questions asked about Sogou.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [4]

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Oh, okay. All right. All right. So then, the questions regarding -- Charles, you mentioned in your prepared remarks there's some intensified competitions on competing with the mobile resources, so -- especially adding on the downloads and preinstall, right? So how long do you think this one actually last? And compared to a few years ago when we see the PC to mobile transition, there's also a lot of companies that are promoting aggressively their mobile apps. So versus now compared back then, is this year the channel competitions more competitive than a few years ago?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [5]

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Oh, yes. So now it's really -- there is just more entrants. Basically, you have the browsers, like the QQ browsers and the UC browsers, are getting into the battle of information streaming the feed. And you have search engines like Baidu search APP that's developing information feed under its search box. So you have just more players competing for people's time, people's -- nonintentional, just a random information scoring and those kind of reading behavior. So it's definitely a competition. It's actually more intense than a few years ago.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [6]

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Because you also mentioned the smartphone shipment has been stopped, right? So do -- how long do you think all these intense competition will last? Because at the end, we are just going to beat up the prices.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [7]

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Well, it's -- really the installment or the channels are just one of the factors and not -- probably not the most important factor. Because really -- because everyone is using smartphones and everyone is just trying to download the most popular or the most user-friendly or the most used, the best APPs. People are actually -- people, just to -- they're so sophisticated. They always choose the best APPs they like.

So now the competition is really about the product. The product is your APP, whether you have the top health technology team to develop with the best algorithms and to -- the best user profiles and the best content and also the UGC content and provide the most -- it was really the competition of technology, machine-learning algorithm and the content. So the companies that have the best culture and technology team. It's almost like a search engine competition.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [8]

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I see. I see. Okay. I have one quick follow-up question regarding our video business. Do we see any impact in terms of streaming the broadcasting content during the last few weeks of October, given the 19th Congress Meeting was happening? Did we see any impact on video business?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [9]

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Yes. Yes, we do. We do see. There are 2 sides, 2 aspects. One is some of those -- especially for some of the head content that's scheduled to be broadcasted. Major networks, TV networks are actually either postponed or delayed or probably will never be allowed to meet the audience. So that's -- that has a smaller impact on Sohu because we have now much less head content, but -- and we rely more on our sell in-house or self-produced dramas.

Another aspect is really the short form, the PGCs, those kind of short forms where there's just much more stricter requirement or censoring of the so-called problematic videos. Definition of problematic can be a quite wide, quite broad definition. Anything, any video that's considered to be of some kind of sensitivity could -- will be just not allowed to be streamed. So it is -- it has a major app impact, yes.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [10]

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Sure. But now it's over, right? So now it's back to more normal? It's resumed back to normal?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [11]

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I think it had some kind of long tail because it's doing this post the 19th Congress shadow.

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Operator [12]

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Our next question is coming from the line of Wayne Wang from HSBC.

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Ningchuan Wang, HSBC, Research Division - Associate [13]

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I have a question regarding to the Sohu News APP. So as Charles had mentioned that in November, we are going to launch a new version. Can you share with us more details about what's the new initiative in that APP? And for example, how AI, like Tencent, this APP's functions? Like do we have a revenue outlook for this APP?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [14]

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Yes. I think the November version will -- if you are a user of our Sohu News APP, the news channel will be overhauled, a complete ramp-up with a recognition, new algorithm. Now if you look at the News APP, the [Yellen], the news -- top line new -- headline news, are all manually or editorial team compile news, but the November version, you'll have a play, a new version, a new algorithm to compete -- to compute, to basically recommend each individual's based -- tailored to each individual's interest of our news.

So it will be a more -- and this is a new algorithm that was -- it just improved the ranking. And then it will continue to improve in the future when we have a better user profile and to have a real machine-learning calculation. So it's a new version. It's basically elevated to a new level of sophistication. And then from there, from that and then, it will continue to improve month after month.

So we should expect a steady growth of -- or basically, a restart of the Sohu News APP's DAU growth and also the page view. That means a gradual growth. Maybe, let's say, you will probably see, at least, the immediate 30% boost, and then you'll see a more gradual, more growth of the page views.

And the commercial impact will be, if you look at our small MS -- small ME media -- small media enterprises, the head of Brand Advertising is really soft, but the small media, if you look at it, it actually grow a good 20%, I think. I think the Q3's SME is a growth of 20%, 20-plus-percent over Q2. And so next Q1, you'll see the immediate reflection of that page view or DAU growth will be the small media growth, yes.

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Operator [15]

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(Operator Instructions) Our next question is coming from the line of Han Joon Kim from Deutsche Bank.

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Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [16]

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I just have 1. Just on the Sohu parent level, can you just remind us where our cash position is? And I guess, when you launched your new APP, you might need to invest a little bit more. So as we think about working capital, just kind of remind us where we are and if you have sufficient capital at the current juncture.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [17]

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Yes, we have, I think -- I would not go into details about the cash flow situation. But suffice it to say, we have enough cash to support. And also, our new version launch is basically a technology and a product overhaul that the marketing channel spending will remain similar, and the increase of DAU and [peter page view] are purely because we have just a better product with a more sophisticated technology.

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Operator [18]

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There are no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.