Sohu.com Ltd (NASDAQ:SOHU) Q2 2021 Earnings Conference Call August 9, 2021 7:30 AM ET

Company Participants

Huang Pu - IR
Charles Zhang - CEO
Joanna Lu - CFO
James Deng - VP, Finance
Dewen Chen - CEO, Changyou
Yaobin Wang - CFO, Changyou

Conference Call Participants

Eddie Leung - Bank of America Merrill Lynch
Alicia Yap - Citigroup
Thomas Chong - Jefferies

Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. [Operator Instructions]

I would now like to hand the conference over to your host for today's conference call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

Huang Pu

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 Lu; 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 this 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 current plans, estimates and the 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 may 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.

Please also be reminded that Sogou's results of operations have been excluded from our results from continuing operations, which respective adjustments to the historic statements have been made in order to provide a consistent basis of comparison. Unless indicated otherwise, the results that we talk about are related to continuing operations only.

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

Charles Zhang

Thanks, Huang Pu, and thank you, everyone, for joining our call. For the second quarter of 2021, despite the negative impact of COVID-19, we kept exploring new monetization opportunities while quickly controlling the budget. Thanks to the outperformance of our online game business, our profitability exceeded the prior guidance.

For Sohu Media, we focused on innovating our products and technology, and effectively promoting the generation and distribution of high-quality content. As for Sohu Video, we continue to execute our Twin engine strategy of developing high-quality, long-form and short-form content, while at the same time refining our advanced live broadcasting technologies and rolling them out to various applications. We're also able to diversify our revenue sources and better capture advertising budgets by integrating our live broadcasting technologies into our unique events. For Changyou, online games performed well during the quarter, and its revenue exceeded the high end of our prior guidance.

Let me now go into more details about these businesses -- well, I'll go to each business in a moment, but now let me first look at a quick overview of our financial performance.

For the second quarter of this year, total revenues $204 million, up 28% year-over-year and down 8% quarter-over-quarter. Brand advertising revenues, $37 million, down 3% year-over-year and up 20% quarter-over-quarter. Online game revenues, $151 million, up 43% year-over-year and down 14% quarter-over-quarter.

GAAP net income from continuing operations attributable to Sohu.com Limited was $22 million compared with a net income of $11 million in the second quarter last year. And net income of $32 million in the first quarter of last -- '20 -- of this year, '21.

Non-GAAP net income from continuing operations attributable to Sohu.com Limited was $25 million compared with net income of $12 million in the second quarter last year and a $37 million in the first quarter of this year.

Lastly, please be noted that for the GAAP and non-GAAP net income for the second quarter of last year mentioned above, additional withholding income tax accrual of $88 million of Changyou has been excluded.

Now let me go through some of our key businesses. First, Media Portal and the Sohu Video. For Sohu Media Portal, we continue to innovate our products and technologies. We stimulated the organic generation of premium content and further enhanced our social network distribution features. We kept extending the presentation form of our content and introduced audio feature in this quarter on the Sohu Tech 5G & AI Conference, we launched -- we hosted in May. We rolled out an exclusive new feature called Sohu AI Anchor. By integrating Sogou's advanced technology -- AI technology, we can synthesize the image and voice of a well-known celebrity and a star using artificial intelligence, AI.

We've embedded the AI Anchor in a certain channel -- with a 24-hour channel with the Sohu News App, where viewers can catch up with real-time news and hot events. And also added an audio function into the news feed and into each article, enabling users to listen to articles and updates of their choice at any time. And these initiatives have comprehensively improved the audio/video experience of the Sohu News APP app and allow users to more easily consume our news and premium content with their limited time.

For Sohu Video, we continue to develop compelling long-form and short-form content with the Twin engine strategy. For original content, we launched the Mysterious Love, an original drama combining idle romance and a friends scene, and became a hit, a big hit during the quarter, attracting a lot of public attention on further boosting our subscriber base and the revenues.

For the short-form content and the live broadcasting, we kept optimizing our advanced live broadcasting technologies and these operations, and we consolidate our strength in value by broadcasting and committed towards reporting -- to the reporting of major breaking news events and emergencies witnessed live streaming in real-time, further reinforce our brand, and brand as an influence as the mainstream media platform.

Moreover, we also combined the advantages of our -- both our Sohu Media and Sohu Video platforms, kept exploring new monetization opportunities by integrating advanced live broadcasting technologies into our unique and creative content marketing campaigns. For example, in July, we successfully hosted the Sohu News Snow Mountain expedition, which immersed the users in the unique and visually spectacular mountaineering experience over a 5-day period of nonstop live broadcasting.

For the participants, including top stars and the celebrities, share their feelings, interacted with audience throughout the live streaming on their platform during the ascent -- during the climbing. The live streaming -- stream content allowed us to create a huge amount of great derivative content, all of which turned the expedition into an eye-catching event, real-time event for audiences and advertisers.

By creating and providing these unique marketing opportunities, we're able to better meet advertisers demands and the capture of their budgets.

So next, turning to Changyou. For the second quarter of 2021, Changyou launched new expansion packs of both TLBB PC and the Legacy TLBB Mobile. These updates proved to be well received by players and helped the overall performance of our online games to remain stable, which is better than we expected. As a result, revenue from our online game business exceeded the high end of our prior guidance. For PC games, we launched a series of in-game events for regular TLBB PC to celebrate its anniversary. We also launched a new dungeon for TLBB Vintage and improved the game, based on player feedback. For mobile games, we launched an expansion pack for the anniversary of Legacy TLBB Mobile with some holiday events and upgraded its graphics.

Thanks to these efforts, both user engagement and payments remained stable, and revenue was broadly flat on a sequential basis. Next quarter, we will continue to roll out a new content for TLBB PC and Legacy TLBB Mobile to sustain the vitality of these games.

For new games, Changyou launched a licensed card game called Little Raccoon Heroes on August 4, few days ago. It performed well so far.

In terms of pipeline, several key games are being developed and fine-tuned and we'll introduce them -- to players later.

Looking forward -- looking ahead, we will continue to execute our top game strategy, promote innovation and roll out more high-quality mobile games, including MMORPGs and a games in other genres.

Now let me turn the call to Joanna, our CFO, who will walk you through our financial results. Joanna?

Joanna Lu

Thank you, Charles. I will now walk you through the key financials of our major segments for the second quarter of 2021. All of the numbers that I will mention are all on a non-GAAP basis. You can find a reconciliation for non-GAAP to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $22 million, down 3% year-over-year and up 21% quarter-over-quarter. The quarterly operating loss was $28 million compared with an operating loss of $18 million in the same quarter last year.

For Sohu Video, quarterly revenues were $23 million, up 1% year-over-year and 16% quarter-over-quarter. The quarterly operating loss was $30 million compared with an operating loss of $10 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, were $154 million, up 41% year-over-year and down 14% quarter-over-quarter. Changyou posted an operating profit of $75 million compared with $37 million in the same quarter last year.

For third quarter of 2021, we expect brand advertising revenues to be between $35 million and $39 million. Online game revenue to be between $145 million and $155 million.

Non-GAAP net income from continuing operations attributable to Sohu.com Limited to be between nil and $10 million. And GAAP net income and loss from continuing operations attributable to Sohu.com Limited to be between a net loss of $4 million and a net income of $6 million.

This forecast reflects our current and preliminary view, which is subject to substantial uncertainty.

Lastly, please be reminded that in the Q&A section, we wont answer questions regarding any Sogou business updates. All the agreements with Tencent was Sogou's privatization.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question coming from the line of Eddie Leung from Bank of America Merrill Lynch. Please, go ahead.

Eddie Leung

I would like you to get a sense on the recent regulation changes. The impact on your advertising basis because we know that there has been a tightening on the education as well as the property sectors.

So wondering how important these two sectors to your advertising business? And what could be the impact to the business? I know that you guys are already providing our first quarter guidance. So just wondering if we do not have the tightening on these sectors, how the third quarter look like?

And then similarly, also a follow-up question -- congratulations on games. Wondering what would be the percentage of revenue from the young people in the second quarter for Changyou?

Charles Zhang

So Eddie, you mentioned the two factors, right, education and what? What's the second factor you said?

Eddie Leung

Property Charles, from [Indiscernible]

Charles Zhang

Okay. Okay. Well, in our portfolio of advertisers, we don't have a lot of education on advertising. So advertising revenue is not impacted by recent regulation development on education. Probably property a little bit impact. But since our revenue base is still relatively small, so it's not a major factor. On Changyou, basically, the question is about the Chinese users, with the young people or the recent regulation, young people.

Dewen Chen

[Foreign Language]

Our major products are designed for mostly adults. So contribution from teenagers are very few, nearly 0.

Charles Zhang

Secondly, it kind of levels, right? A lot of old users who are already in their 30s, 40s. [Indiscernible]

Operator

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

Alicia Yap

I have two questions. First one is, can you elaborate what is the effective tax rate for Changyou entity is currently paying?

And does Changyou actually entitled to the key software enterprise tax rate, would there be any changes to effective tax rate in the coming quarters?

Second question is just want to get your opinion, Charles, on given your experience and years of operating Internet companies in China. What is your view of these latest tightening regulatory measure. What are some of the outcomes you foresee could evolve for the industry and how is Sohu positioned in the current environment? Any potential impact to our current business model?

Dewen Chen

[Foreign Language]

In the past, several of our subsidiaries will apply and enjoy some preferential tax rate if they receive the key national software enterprise status, but our applications this year were not approved. So -- but for a high-end new technology enterprise status are still okay. In the future, we expect there will be 4% to 5% impact on this issue.

Charles Zhang

Yes. Regarding the regulation, internet regulation, I think what happened recently, more company-specific, and I don't see any on a general policy side tightening or any change. So I see a -- definitely the more regulation on user privacy and others. But it's -- I think it should be done because it's important. And I think -- I don't see -- I think the interim industry will continue to develop robustly and still a lot of things need to be done. A lot of new products need to be developed and roll out.

Alicia Yap

Can I just quickly ask one follow-up? I think according to some of the media interview, you did mention there is an intention for future potentially that Changyou could be listed in Hong Kong. Just wondering any time frame for this plan?

Charles Zhang

Yes. During my interview, I did mention that a possibility -- responsibilities in the next year, yes.

Operator

We have the next question coming from the line of Thomas Chong from Jefferies.

Thomas Chong

I also have a question regarding the advertising space. Can management comments about our thoughts on the auto advertising outlook. Given that, I think auto represents about 1/3 of our ad revenue. I just want to see how it is trending in Q3 because we are seeing the production capacity of a lot of OEM is suffering these days.

And then our second question is regarding our targeting technology. I think, Charles, you also talk about our content strategies, these short-form and long-form strategies that we do the targeting. But given that the regulations are also talking about -- maybe there will be more stringent regulations on targeting. Should we expect our content distribution to be affected if these rules implement?

And also, I also have a third question relating to the gaming sector in general. How should we think about the gaming regulations? Should we expect that the gaming space is expected to be relatively stable or relatively steady if we think about the regulatory impact other than the main protection?

Charles Zhang

Yes. The first two questions let me answer. The auto industry, I think there is some recent problems like the shortage of chips, right? So I think in Q3, the auto industry -- not too good, not too bad, it seems flat, right, flattish. Yes. In terms of content distribution, our -- we rely more on the -- on the product distribution, also social media distribution. So targeting is not a large part of our products.

So it's not -- no problem. I think, yes. And our video, long-form and short-form and also our video side is also exploring a social media distribution, yes. In terms of game sector, I think my answer will be similar because I think it's more -- I think more it's company specific. It's not -- overall, I don't see any regulation change. Yes. Right?

Dewen Chen

Yes.

Operator

[Operator Instructions] Ladies and gentlemen, that does conclude our conference call for today. Thank you all for your participation. You may disconnect now.