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Edited Transcript of SOHU.OQ earnings conference call or presentation 5-Aug-19 12:30pm GMT

Q2 2019 Sohu.com Ltd Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Sohu.com Ltd earnings conference call or presentation Monday, August 5, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Zhang

Sohu.com Limited - Chairman & CEO

* Joanna Lv

Sohu.com Limited - CFO

* Pu Huang

Sohu.com Limited - IR Officer - China

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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

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Tzu Wei Wang

First Capital Management Inc., Research Division - Analyst

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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 joining Sohu's Second Quarter 2019 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, Mr. Huang Pu, Investor Relations Director of Sohu. Please go ahead.

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Pu Huang, Sohu.com Limited - IR Officer - China [2]

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Thank you, operator. Thank you for joining us today to discuss Sohu's second quarter 2019 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 the CFO, Yaobin Wang; and Sogou'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 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 in 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.

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Charles Zhang, Sohu.com Limited - Chairman & CEO [3]

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Thanks, Huang. Thank you to everyone for joining our call. Under the current challenging macroeconomic environment, our total revenues stayed largely in line with our prior guidance. Our bottom line performance, excluding the charge for impairment of assets recognized by Changyou related to its cinema advertising business, met the high-end of our prior guidance. This was mainly driven by the continued cost savings that we were able to achieve at Sohu Video, and the solid performance of our online game business. Sohu Media is making a comeback and living up to its reputation as a top tier media platform. We have been hosting high-quality events, generating and distributing premium content, and strengthening our core competitiveness and credibility among media brands.

Meanwhile, Sohu Video continues to provide users with unique, high-quality dramas and shows. We have seen the positive effects of this differential development strategy and stable improvements in monetization at both Sohu Media and Sohu Video. We hope to see further progress in the coming quarters.

In the second quarter of 2019, Sogou achieved a steady growth in its core search business while Sogou Mobile Keyboard further expanded its user base and reinforced its position as the third largest Chinese mobile app.

For Changyou, both its revenue and profit exceeded expectations, excluding the aforementioned charge of impairment. More importantly, Changyou is demonstrating a stable profitability, while developing more hit games to provide a diversified product portfolio.

Before I go into more detail about our key business, let me summarize our financial results for the second quarter. Total revenue is $475 million, down 2% year-over-year and up 10% quarter-over-quarter. On a non-GAAP constant currency basis, total revenues would have been $32 million higher than our reported revenues, which would be a 4% improvement year-over-year.

Net brand advertising revenues was $44 million, down 29% year-on-year and up 2% quarter-over-quarter.

Search and search-related advertising revenues $276 million, up 2% year-over-year and 18% quarter-over-quarter.

Online game revenues $102 million, up 8% year-over-year and 3% quarter-over-quarter.

Operating loss for Sohu Video was $23 million compared with a loss of $35 million in the second quarter of last year, a 33% improvement.

GAAP net loss attributable to Sohu.com Limited $53 million compared with a net loss of $48 million in the second quarter last year.

Non-GAAP net loss attributable to Sohu.com Limited was $50 million. If excluding a charge of impairment of assets recognized by Changyou in the second quarter of 2019 related to the cinema advertising business, non-GAAP net loss attributable to Sohu.com Limited was $38 million, an improvement of 22% year-over-year. Excluding the Sogou and Changyou, non-GAAP net loss attributable to Sohu.com Limited was $68 million, an improvement of 15% year-on-year.

Now let me go through some of our key businesses.

First, Media portal business. As I mentioned earlier, Sohu Media is currently making its come back. We're actively strengthening our influence across certain verticals, such as technology, finance, and fashion. In the second quarter of 2019, we successfully hosted Sohu Tech News 5G Forum, foreseeing of the 5G era, which involved industry celebrities and have gained widespread discussions as well as sustained influence.

In early July, we launched the 5th China Drone Photography Contest, which will last through September. This contest will show off a combination of technology and art and we will be able to generate and distribute a large amount of premium content on our platform contributed by this event. This event not only demonstrates our position as a mainstream media source, but also enhance our core competitiveness and credibility by allowing us to leverage high-quality content across our platform, which generates further interest and discussion and attracts users as well as advertisers.

We are continuously focusing on ways to further improve our products and to generate great content. In addition, we're also constantly refining our recommendation algorithms, including social network features and products.

In the most updated versions of Sohu products, users can reach the content they're interested in more quickly and accurately on Sohu News App. Notably, these new app -- these new features can help users track news and content like Welike and gather users with same interest into communities where they can comment on the topics and have further interactions. In other words, we are building tools for users to contribute all user-generated content, UGC, notably on the interactive Sohu network on the Sohu News App.

Additionally, we are constantly engaging with encouraging the third-party writers to produce more in-depth content and -- around certain hot topics in order to further improve user stickiness.

In this quarter, advertising revenues were inevitably influenced by the economic slowdown, especially in the auto and IT industry. In the face of these challenges, we worked hard to diversify our revenue sources, while producing about and -- high-quality content with various events. This work is helping to attract advertisers and elevate our competitiveness and influence and should help us post a modest rebound in revenues in Q3.

Sohu is committed to -- strictly to lower costs and expenses in order to limit the financial losses with Sohu Media business.

Moving over to Sohu Video. In the second quarter, we continued our 2-engine strategy, with a balanced mix of original long-form content and short clips, user-generated content. We'll be able to produce more and more high-quality content such as -- at a much lower cost and start a differential development strategy. We're happy to see some encouraging initial success. Sohu Media is ranked #4 on CI (sic) [CIW] Week's online video app ranking list for the first half of 2019.

In the second quarter of 2019, we are able to produce -- to reduce our operating cost -- loss for the unit to $23 million, which was a $33 million improvement -- no, 33% improvement from a loss of $35 million in the same quarter last year. We plan to strictly keep our budget under control in the second half of this year and further improve the bottom line.

In terms of content, we have developed a more in-depth understanding of idol romance and criminal-themed dramas. We have already created brand advantages in these 2 types of IP and received recognition among audiences as well as advertisers. For example, Well Intended Love, Nai He BOSS Yao Qu Wo, gained widespread attention and was ranked #4 by [Weibo] among all original dramas in the first half of this year.

Looking ahead, we will start shooting the second season of Well Intended Love and expect to release it next year. This is already -- there is already considerable buzz for the show among viewers, and we have seen significant interest in advertisers -- from advertisers.

In July, we released the -- called "The Next Superstar," another popular idol romance drama and in the second half of 2019, we will release several criminal-themed dramas, including Without Knowing Dawn Break in the East, The Next Superstar in Chinese [Xià yigè chaojí míngxing], and Without Knowing Dawn Break in the East in Chinese [Bù zhidào dongfang dí límíng pòliè]. So we believe we are well positioned to continue delivering attractive and a diversified content on our social media platform.

Next, turning to Sogou. In the second quarter, Sogou has maintained its position as China's second-largest search engine. Search revenues continues to grow faster than industry average. By the end of Q1, Sogou Mobile Keyboard DAU reached 450 million, up 17% year-over-year and average daily voice request made via Sogou Mobile Keyboard increased by 72% year-over-year. Furthermore, Sogou continued to implement the AI strategy of developing language-centric AI technology and advance its leadership in voice and computer vision with many industry-leading breakthroughs.

Lastly, for Changyou, for the second quarter of 2019, online game revenue was $102 million, which slightly exceeded the high end of our guidance. Revenue for PC games increased slightly quarter-over-quarter, mainly due to the solid performance of the several legacy PC games, which helped to offset a decrease in revenues from TLBB PC due to its natural declining life cycle.

During the quarter, Changyou launched an expansion pack for TLBB PC's 12th year anniversary. In the third quarter 2019, Changyou will launch a new expansion pack and introduce more in-game content to sustain user interest. Going forward, for PC games Changyou's key strategy is to maintain player engagement and maximize the longevity of legacy PC games such as TLBB.

For legacy TLBB mobile, Changyou continued to focus on long-term oriented operational strategies and introduce new content to provide players better experience. In Q2, the expansion pack launched for legacy TLBB Mobile's 2-year anniversary introduced a great new gameplay for players, resulting in higher user satisfaction. Furthermore, MMORPG mobile games will continue to be the strategic focus while Changyou is developing a number of casual games and strategy games to provide a diversified product portfolio.

Now let me turn the call to CFO Joanna who will walk you through the -- our financial details.

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Joanna Lv, Sohu.com Limited - CFO [4]

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Thank you, Charles. I will walk you through the key financials of our 4 major segments for the second quarter of 2019. 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.

For Sohu Media Portal, quarterly revenues were $24 million, down 27% year-over-year. The quarterly loss was $38 million, which compares with a net loss of $37 million in the second quarter of 2018.

For Sohu Video, quarterly revenues were $21 million, down 34% from a year ago. Of this, advertising revenues were $8 million. The operating loss for Sohu Video was $23 million, which compares with a net loss of $35 million in the same quarter last year.

For Sogou, quarterly revenues were $304 million, up 1% year-over-year, and 20% quarter-over-quarter. Net income was $28 million compared with net income of $38 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, were $119 million, up 5% year-over-year and down 4% quarter-over-quarter. Changyou posted net income of $40 million compared with net income of $28 million in the same quarter last year.

For the third quarter of 2019, we expect total revenues to be between $445 million and $470 million; brand advertising revenues to be between $45 million and $50 million, this implies annual decrease of 12% to 21% and a sequential increase of 2% to 14%; Sogou revenues to be between $304 million and $314 million, this implies annual increase of 10% to 14% and a sequential increase of 0 to 3%; online game revenues to be between $80 million and $90 million, this implies annual decrease of 6% to 17% and a sequential decrease of 12% to 22%; non-GAAP net loss attributable to Sohu.com Limited to be between $22 million and $32 million and non-GAAP loss per fully diluted ADS to be between $0.55 and $0.80; GAAP net loss attributable to Sohu.com Limited to be between $25 million and $35 million, and GAAP loss per fully diluted ADS to be between $0.65 and $0.90.

Excluding the profit generated by Sogou and Changyou, non-GAAP loss attributable to Sohu.com Limited to be between $50 million and $55 million, GAAP net loss attributable to Sohu.com Limited to be between $53 million and $58 million.

For third quarter of 2019 guidance, we used a presumed exchange rate of RMB 6.9 to $1, which compares with the actual exchange rate of approximately RMB 6.8 to $1 for the third quarter of 2018 and RMB 6.81 to $1 for the second quarter of 2019.

With that, 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) The first question comes from the line of Eddie Leung from Merrill Lynch.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [2]

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I would like to know if you could tell a little bit about the advertising outlook getting into second half of the year versus what we had in the second quarter? Particularly could you also comment on the competitive landscape, which we heard have been affecting the advertising prices in the industry?

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Charles Zhang, Sohu.com Limited - Chairman & CEO [3]

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The macroeconomic situation definitely is -- there's really pressure over advertising, but because the -- we have so many -- I mean there's many sectors -- certain sectors are under pressure, like auto, but there's a lot of other sectors, verticals that actually we're seeing even growth, and that's why for Sohu Media Portal, we're having a lot of activities -- content generation activities and some unique marketing events that attract advertisers to advertise on the Sohu platform with this premium content, so that we are able to attract. So that's why we are looking at a -- even under this slowdown, the incoming slowdown, we are actually looking at a growth compared with Q2, right, for advertising. And for video, same thing for video, we have some unique drama or -- and variety shows that have a -- building the advertising. So we are not competing on price, but competing on the premium event or content that can be competitive in getting advertisers.

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Operator [4]

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(Operator Instructions) We have the next question come 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 [5]

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I have a couple of questions. Number one is related to the latest regulatory environment and the restrictions on the TV dramas, what are the impact to Sohu Video, so far if any? Second question is related to this overall App sentiment weakness, I think Charles did mention on the prepared remarks inside Sohu Media, the portal had some decent comeback. So wanted to get a sense in terms of how we should think about this into -- even a little bit further into next year? And what is mainly driving the more positive momentum on the media portal side?

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Charles Zhang, Sohu.com Limited - Chairman & CEO [6]

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Okay. First of all, on the media content side, there are some regulations, but we are well -- we are, from the very starting, choosing the topics and also to work together with the authorities. So it now has been not a problem with the release of our TV dramas. Because, for example, like there is a restriction on leaking or some dramas of ancient times, right, the historical stories. But we only -- we now only produce modern dramas, topic scene of modern times. And also relatively compared with the television -- TV dramas, those are actually more relaxed. Because -- yes, so it's not a problem. We've been like recently are Nai He BOSS Yao Qu, Well Intended Love, (inaudible) The Next Superstar, quite a lot. Yes, there's no problem to get the approval from the authority. It's actually an interactive process with authorities to make sure that our dramas get approved.

In terms of media advertising into the -- so as I have said in my answer to the first question, on the premium activities or content-generated activities, or our -- for example, like our Sohu-sponsored, the Sohu News Marathon, that involved a lot of celebrities, that is getting advertisers because in that event, we have Sohu Media, and also the Sohu Video as a reporting media to report these celebrities running marathon. It's been a project that has been -- we've been doing it for like the 10th time or 11th time, actually. So it's actually getting good advertisers. And also like the other ones, which we just launched the Drone Contest -- drone filming contest, those are also getting good advertisers. So it's these kind of work and also the forum that we have, 5G Forum opening next half year, second half of -- the AI forum and business forum. All these content generation activities are getting -- generating premium content so that we are getting advertisers. So for this year and next, I think these kind of brand advertisings will be -- it's unique that Sohu can do, so that is a competitive.

At the same time in the long run, we hope that not only we will continue with this brand advertising event or premium content-generating advertising, but also by developing a better algorithm towards news product -- News App and also social network features of News App, and also the vlog and the social network feature of the Sogou Video App and also WEO, our social network product. We will have -- and together with our large traffic from the PC side, where we've accumulated over the years, and also, the Sohu H5, the WAP portal with a lot of traffic. So with all these, in the future, I mean, we hope that our traffic increase and we will have the momentum, so that with a larger traffic, not only it is brand advertising, premium brand advertising, but also the small media enterprises the long-tail -- and standardized advertising will also pick up. So that's why with those 2 kind of advertising, we hope that next year -- or into next year advertising business would be competitive.

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Operator [7]

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(Operator Instructions) We have the next question that comes from the line of Wei, Tzu from First Capital.

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Tzu Wei Wang, First Capital Management Inc., Research Division - Analyst [8]

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(foreign language)

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Charles Zhang, Sohu.com Limited - Chairman & CEO [9]

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(foreign language) Got it?

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Tzu Wei Wang, First Capital Management Inc., Research Division - Analyst [10]

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Okay.

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Operator [11]

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(Operator Instructions) Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]