Q2 2023 Sohu.com Ltd Earnings Call
Participants
Chaoyang Zhang; Founder, Chairman & CEO; Sohu.com Limited
Dewen Chen; CEO & Director; Changyou.com Limited
Pu Huang; IR Officer - China; Sohu.com Limited
Yanfeng Lv; CFO; Sohu.com Limited
Alicia Yap; MD & Head of Pan-Asia Internet Research; Citigroup Inc., Research Division
Thomas Chong; Equity Analyst; Jefferies LLC, Research Division
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Second Quarter 2023 Earnings Conference Call. (Operator Instructions) After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.
I'll now turn the conference over to your host for today's call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.
Pu Huang
Thanks, operator. Thank you for joining us to discuss Sohu's second quarter 2023 results. On the call are Chairman and Chief Executive Officer, Charles Zhang; CFO, Joanna Lv; and Vice President, James Deng. Also with us 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's safe harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed on this call may contain forward-looking statements. These statements are based on company's 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'll now turn the call over to Charles Zhang. Charles, please proceed.
Chaoyang Zhang
Thanks, Huang Pu, and thank you, everyone, for joining our call. In the second quarter of 2023, we delivered stable performance with both revenues and the bottom line meeting our expectations. At Sohu Media, we enhanced the user experience through continuous refinements to our products and technology and by offering users a steady stream of reliable content in real-time. In Sohu Video, with consistent execution of our Twin Engine strategy, we expanded our portfolio of long and short-form video content and proactively improved their social distribution. Leveraging our advanced live broadcasting technology and Sohu product matrix we hosted traditional flagship events and innovative content marketing campaigns, which generated abundant premium content and attracted more users. And this also put us in a position to explore more monetization opportunities and gain advertising dollars. Online games remained steady, generating revenues in line with our prior guidance.
Now let me first give you a quick overview of the financial performance. For the second quarter of 2023, total revenues, $152 million, down 22% year-over-year and 6% quarter-over-quarter. Brand advertising revenues, $24 million, down 4% year-over-year and up 6% quarter-over-quarter. Online game revenues, $118 million, down 25% year-over-year and 9% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was $21 million compared with a net income of $9 million in the second quarter of last year and a net loss of $18 million in the first quarter of 2023. Non-GAAP net loss attributable to Sohu.com Limited was $18 million compared with a net income of $12 million in the second quarter of last year and the net loss of $13 million in the first quarter of this year.
Now I'll go through our key businesses in more detail. First, Media Portal and Sohu Video. At Sohu Media Portal, we continue to focus on refining our product and optimizing the algorithm. We further enhanced the user experience by integrating cutting-edge technology into our products and expanding premium content and various forms of presentation. Thanks to our continuous dedication and integration of rich media resources, we strengthened our advantage and influence as a mainstream media platform.
At Sohu Video, we continue to execute our Twin Engine strategy. For long-form video content, we released the crime scene idle romance, Love of Replica, Wei Ni Ni Guang Er Lai, during the quarter to widespread popularity and further expanded our audience base. At the same time, we launched several reality shows like, This is Me, (foreign language), which is the sixth season of our On Her Way Home, and Hi, Summer Friend, (foreign language). These shows have created a lot of engaging discussions online and attracted millions of viewers across various social media platforms. In terms of short-form content and live streaming, we kept concentrating on knowledge and science-related live broadcasters. Driven by our distinctive IP of myself's, Charles' Physics Class, which is becoming very popular. And we further promoted high-quality content generation and its social distribution, attracting more users to produce video content and interact with each other on our platform.
On the monetization side, we closely monitored market trends and explored potential opportunities, leveraging our advanced live broadcasting technology and the dual platform of Sohu Media and Sohu Video. We provided advertisers with unique and diversified online and off-line marketing strategies that catered to their needs and boosted our advertising dollars.
In the second quarter of this year, we hosted a traditional content marketing event, the 15th Sohu News Marathon, in Xi'an, demonstrating the reinvigoration and popularity of traditional Chinese culture as well as Sohu's positive and upward social values. We also proactively developed new monetization opportunities by integrating innovative ideas into diversified events and expanded application scenarios using our advanced live broadcasting technology. We integrated the Charles' Physics Class into a Sohu Tech Conference and further expanding this IP into a new series of other activities called Talk Under the Stairs Guy, (foreign language). These events have generated an abundance of premium content and obtained recognition from advertisers.
Next, turning to the online game business. During the second quarter of 2023, online game revenues were in line with our prior guidance. Within our PC game business, we optimized the character development system of regular TLBB PC to make players' investments more worthwhile and also improved the social relation system for TLBB [Vantage]. In our mobile games business, we launched an expansion pack for the anniversary of Legacy TLBB Mobile with the addition of the limited-time player-versus-player event to satisfy demand for traditional -- for additional in-game combat. Next quarter, we will launch new TLBB Mobile, our next-generation TLBB product, along with the expansion packs and content updates for other games to maintain player engagement.
Nowadays, as technology in the game industry advances rapidly and market demand become deeper and more diversified, we intend to step to our top game strategy, allocating more resources for research and development to generate ideas, professional talent development as well as content and technology innovation in order to roll out more high-quality mobile games. In terms of games pipeline, we will maintain our core competitiveness in the MMORPGs while also producing various game -- other game types, including card-based RPGs, sports and casual games.
Now let's turn over the call to our CFO, Joanna, who will walk you through our financials. Joanna?
Yanfeng Lv
Thank you, Charles. I will now walk you through the key financials for our major segments for the second quarter of 2023. All the numbers are 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 $17 million compared with revenue of $20 million in the same quarter last year. The quarterly operating loss was $35 million compared with an operating loss of $44 million in the same quarter last year. For Sohu Video, quarterly revenues were $50 million compared with revenues of $60 million in the same quarter last year. Quarterly operating loss was $32 million compared with an operating loss of $25 million in the same quarter last year.
For Changyou. For Changyou's online game business and the 17173, quarterly revenues were $190 million compared with revenue of $159 million in the same quarter last year. Quarterly operating profit was $49 million compared with an operating profit of $85 million in the same quarter last year.
For third quarter of 2023, we expect brand advertising revenues to be between $21 million and $24 million. This impacts annual decrease of 7% to 18% and a sequential decrease of 9 to 12%; online game business -- online game revenues to be between $108 million and $118 million, this implies annual decrease of 21% to 27% and a sequential decrease of 0 to 9%; non-GAAP net loss attributable to Sohu.com Limited to be between $20 million and $30 million; and GAAP net loss attributable to Sohu.com Limited to be between $23 million and $33 million. Our guidance reflects our current and preliminary view, which is subject to substantial uncertainty.
Also, please be noted that the above guidance excludes projections for the new TLBB Mobile game which is scheduled to launch in the third quarter of 2023. Given that the game is not yet launched, revenue projections for the game remain uncertain. Therefore, the company believes that it's appropriate to take a conservative approach with the third quarter guidance.
This concludes our prepared remarks. Operator, we would now like to open the call for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Thomas Chong from Jefferies.
Thomas Chong
I have a question on the advertising. First, when I look into the Q3 guidance, it seems that the low end of the guidance and the high end, seems the range is quite high. If I try to exclude the foreign exchange impact, looking into local currency, it seems that there's a chance that we would have a positive sequential growth. So just want to ask management about how's the advertising sentiment so far we are seeing in the month of July versus June and how we should think about the advertising trend across different categories like auto, FMCG and Internet services.
Chaoyang Zhang
So you said a sequential growth, is that sequential growth for Q3?
Yanfeng Lv
Q3, the guidance, the guidance range.
Chaoyang Zhang
So in terms of RMB, right, some kind of growth.
Yanfeng Lv
Yes.
Chaoyang Zhang
So overall, for the second quarter, the advertising revenue is not -- so the whole overall market is not bouncing back as expected. So that's why compared with last year, the Q2 revenue dropped, right, 4%. But we are still holding steady because in terms of RMB, it's still a 2% growth for Q2. Normally, we have a better Q3 normally, right, in the normal economy situation.
Yanfeng Lv
Yes.
Chaoyang Zhang
But because of the sluggish economy, as I said, a bounce back is not expected. We are forecasting a downward revenue for Q3. And yes, because we're holding up the revenue because of our innovative marketing solutions to our advertisers, as I just said in the script, our live broadcasting and innovative events. But overall, in terms of the categories, and so the real estate is basically -- it's null, doesn't exist anymore.
And so our top advertisers: auto, 26%; Internet service, 18%; FMCG, 16%. With auto, it's not -- seems not doing well because the automakers are now more hesitant in spending much with big marketing campaigns, not as they did, because of the overall economy. And Internet service as well, it's the same thing, same because people are spending less, even buying less and online. So FMCG seems a little bit -- it's okay, but it's still with a smaller percentage of our overall revenue. So that's the kind of -- that's the overall picture. Did I answer your question, Thomas?
Thomas Chong
Yes, May I have a quick follow-up about AIGC and industry LLM. I just want to seek management thoughts about how AIGC can benefit Sohu in the future? And what are our strategies and the spending in this area?
Chaoyang Zhang
We believe that AIGC is a major technology advancement. It's -- and it's very, very important. It revolutionized the way -- formally, it's a search engine. Now it's a totally different way of delivering information or -- so it's a very important opportunity, especially for media and information providers like Sohu. So we are not investing in the large model, big data model, large model. We will probably outsource the large amount of -- to use some service providers, third-party provider to us. But -- and then we redevelop those applications in our consumer and services like Sohu News and Sohu social network. Like for example, we are now -- before each article, we have a machine generated (foreign language)...
Yanfeng Lv
Abstract.
Chaoyang Zhang
What? Abstract, Yes, exactly, abstract. And also some of our products actually are using AIGC. So we are going to be a heavy user of AIGC, and we're closely monitoring its development and also to turn those developments into the real attractive new applications and turn it into a user -- consumer side products, yes.
Operator
Our next question comes from Alicia Yap from Citi.
Alicia Yap
I have 3 questions. First, I wanted to follow up on the previous -- Thomas questions on the advertising, Charles. So can you elaborate -- you mentioned it was a little bit sluggish and bouncing back is a little bit weaker than expected. So do you expect the situation to actually continue into the next few months and also the rest of the year? Internally, is that worse than what you had previously expected? Or is this like worse than everybody has expected? So this is the first question on advertising, just a follow-up.
Chaoyang Zhang
I think it's probably throughout the year, not just the quarter. And just like everyone -- actually in Q2, you probably remember last quarter phone call or conference call, that we have -- we seem to note after the 3 years of the COVID lockdown, after we -- everyone expected a stronger bounce back of economy. But then now in the middle of Q3, we are seeing -- we're not seeing that strong bounce back like everyone did -- like everyone is seeing nothing. So it's pretty sluggish.
Alicia Yap
I see. Understood. Would you also kind of attribute some of the reason natural events, like the flooding, to maybe kind of like amplify the magnitude? The overall macro sentiment is also getting softer or worse because of some of the natural events that happened as well?
Chaoyang Zhang
The flooding just happened. It's nothing to do with the flooding, but I think it's the overall macroeconomic situation. The export, the -- people have less disposable income because people -- so not having enough disposable income. People are not buying things. Or -- and then the -- if you don't have export and people are not buying -- does not have the money to buy things, then those products, there's no sales of those products. Those companies then stop hiring and drop the -- and no job opportunities. So it's a negative downward -- it's a spiral downward, right, trend.
But still in terms of Internet companies and a company like Sohu, I think I'm still not that pessimistic because if the people are not spending large item spending like buying cars or buying houses, then in terms of cash, they probably have more cash to buy little things. So like the subscription of -- the monthly subscription our video drama membership or just playing games, playing online games and consuming the social networks.
And then so if the auto and some large item advertisers are kind of -- their spending is declining a little bit, then probably some small items, FMCG side, could come up because China's economy is still large and the population and the consumers -- number of consumers is pretty -- it's still the largest. So I'm still kind of optimistic. So that's why we are investing to continue to develop our social network and -- the information delivery and also social network so that at this economic downtime, we take advantage of -- we have -- actually, we are more -- we are actually cash-rich, and we can spend it to grow our user base. So it's a good time to grow our use base.
Alicia Yap
I see. Okay. The second question I wanted to ask is gaming. You just mentioned the small item spend. So I understand your guidance hasn't baked in the new TLBB launch. Just anything that you can share in terms of your expectation. Is it something that the game, potentially, it could be a title that you -- you haven't seen it for a long time that you guys actually are looking very much looking forward for that launch, that you're going to attract back some of the gamers and also potentially brings in the growth for the gaming business again. So any expectation that you can share would be helpful.
Chaoyang Zhang
Well, Chen Dewen, can share.
Dewen Chen
(foreign language) Yes. The game is developed by China itself and will be published by Tencent. And now before its launch, it's being prepared and in a registration phase, so because Tencent is in charge of the process. So we just did the monetization test in June and the testing results met with our prior expectations for the testing phase. But for sure, we cannot do any projections for the mid- to long-term game performance. So to be conservative, we just didn't put it into our guidance.
Alicia Yap
Okay. And then lastly, Charles, can you also share with us any updated views or thoughts on the cash use and also the shareholder return policy? For example, any thinking about a regular dividend policy or any upcoming new share buyback program?
Chaoyang Zhang
Well, we -- currently, right now, we don't have any plan for dividend or buyback plans. We are -- still have a huge task of growing our user base. And we've been working on our products for the last few years to refine it and to develop new applications, especially in the social network side. And we -- and our battlefield will enter into the stage of a major user acquisition, yes, stage of user acquisition that we need the fund to do that. So the use of cash will be -- continue to be to develop our user base. We don't have any -- currently, we don't have much other plans to investment.
Operator
(Operator Instructions) There are no further questions. So with that, we conclude today's conference call. Thank you for participating. You may now disconnect.
Chaoyang Zhang
Okay.
