Sohu.com Limited (NASDAQ:SOHU) Q3 2019 Results Earnings Conference Call November 4, 2019 8:30 AM ET

Company Participants

Huang Pu - Investor Relations Director
Charles Zhang - Chairman & Chief Executive Officer
Joanna Lv - Chief Financial Officer

Conference Call Participants

Eddie Leung - Bank of America Merrill Lynch
Thomas Chong - Jeffries

Operator

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a Q&A session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I would 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.

Huang Pu

Thanks operator. Thank you for joining us today to discuss Sohu's third 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.

Charles Zhang

Thanks, Huang. And thank you to everyone for joining our call. For the third quarter of 2019, although there is still much uncertainty in the macroeconomic environment, both of our total revenue and our bottomline exceeded our prior guidance, mainly driven by our online gaming and search businesses, as well as the continued cost saving initiatives that we're pushing through in our Sohu Media and Sohu Video segments.

Sohu Media is making a comeback as a mainstream media platform with an enormous amount of high quality original content and the various events. These premium features further enhance the reputation of Sohu Media and its sub-brand and further strengthen our overall competitiveness.

For Sohu Video, we continue to deliver unique and high quality dramas and other shows to our users. We've also integrating various social functionalities into our products to help users build and find their own social community.

We also strictly kept our budget under control, and our activity exploring new ways to diversify our revenue streams in cooperation with advertisers. In the third quarter of 2019, Sogou experience healthy growth and its search revenue continue to growth faster than industry average.

Beside, Sogou consistently focus on integrating its language-centric AI capabilities to fully support innovations in search, mobile keyboard and the smart hardware businesses. And lastly, Changyou's overall performance continues to be stable. In addition to the solid result delivered by TLBB PC and the Legacy TLBB mobile, TLBB Honor, a new mobile game launch during the quarter also performed well.

Before I go into more details about our key financial results, please be reminded that since Changyou's cinema advertising business ceased operation. This release is related to continuing operations only and excludes the results from is related from Changyou's cinema advertising business.

So, for the financials; for the third quarter our total revenues $482 million, up 9% year-over-year and 4% quarter-over-quarter. On non-GAAP currency basis, total revenue would have been $13 million higher than our reported revenues, which would be a 12% year-over-year instead of 9%.

Net brand advertising revenues, $46 million saw 19% year-over-year and up 5% quarter over quarter. Search and search related advertising revenues $288 million, up 13% year-over-year and 4% quarter over quarter, online game revenue $108 million, up 13% year-over-year and 6% quarter-over-quarter.

Non-GAAP net loss attributable to Sohu.com Limited was $17 million, decreased by $26 million – decreased by 26% compared with that of the second quarter of this year. Excluding Sogou and Changyou the non-GAAP net loss was $53 million, increased by 31% compared with year ago and decreased by 22% compared with the second quarter of 2019.

So now, let me go through some of our key businesses. First, our Media Portal business. In the third quarter of 2019, we continued our comeback as a top-tier media platform that generates and distribute premium content. In particular we've strengthen our influence in the number of verticals including technology, finance, fashion and others which constitutes our sub-brands.

During the quarter, we successfully hosted the fifth China Drone Photography Contest, which attracted more than 600 participants hailing from over 150 cities nationwide. This contest not only enriched our content library with a large number of high-quality photos, short videos and vlogs but also gained a lot of attention and interest from both users and advertisers.

In fourth quarter we will continue to launch high profile and influential events such as the AI summit and Sohu fashion award to further take advantage of our brand and credibility. We also continuing to corporate with third-party writers via Sohu hub and encourage them to contribute in-depth content.

Although, the number of registered writers on our platform Sohu hub has increased steadily. On the product side we are actively focusing on ways to improve our recommendation algorithm and refine our social features. This social function not only attracts more users and increased users [Indiscernible] but also encourage users to share content to improve interaction.

And the results, users are viewing their social networks and Sohu News App and contributing more high quality, UGC content. During the quarter as I mentioned before the macroeconomic environment is still clearly a challenging.

We have seen budget shrink across industry. In response, we implemented future cost and expense controls, improve resource utilization and focus on monetization and revenue growth potential.

For example, through the fifth China Drone Photography Contest, we provided various marketing solutions to our advertising clients that are supported by our in-depth understanding of their needs. With these efforts, we expect the financial losses of Sohu Media to further shrink in the coming quarter.

Now moving to the Sohu Video. During the quarter, we further developed our two engine strategy by building up the distribution of long-form content through our theater model and distribution of the short-form video clip is a general comment, UGC comment through our recommendation plus feed model.

With strict budget controls and continues effort to improve monetization we were able to reduce the operating loss with $20 million which was solid improvement from loss of $27 million in the same quarter last year.

We expect to continue improving the bottom line of Sohu Video in the coming quarters. For the video content following the successful broadcast of Well Intended Love Season. And we started shooting the season two this quarter, benefiting from our brand advantages of either romance/dramas potentially.

The second seasons has seized advertiser's attention and begin to secure advertising dollars. Well, for reality shows we launch the three season of sending [Indiscernible]. Reality show featuring white-collar women.

We improve the interaction between viewers and enhanced the distribution of shows by initiating a related topic in our product through which users can generate and post short-term content mostly in vlog format. So these initiatives have both been well received by audience and advertisers.

We also kept upgrading our product through user-friendly functions and personalized features, users can easily find the content and content provider that they are interested and content provider can generate and distribute UGC, as well as access followers more quickly and effectively. As a result, the content providers and users are able to interact more closely and quickly, therefore, build up their own social networks.

Next turning to Sogou. In the third quarter of 2019, Sogou experienced healthy growth and maintained its position as China's second-largest search engine. Search revenues continue to grow faster than the industry average. During the quarter, mobile keyboard reached 464 million DAU, up 14% year-over-year, reinforcing its position as a third largest Chinese mobile app in terms of DAU according to our research.

We expect to Sogou's recommendation service that leverage the mobile keyboard, revenue ramped up quickly and it's on track to become the second growth engine following search.

In terms of AI, Sogou consolidated its language-centric AI technology to fully support innovation in search, mobile keyboard and smart hardware businesses and further reinforce its differentiation advantage and leading position in the sector.

Moreover, in October, Sogou renewed its corporation with WeChat, so Sogou Search will continue to be the preferred search engine on WeChat for third parties search services to access external/internal content.

Lastly for Changyou for the third quarter of 2019, Changyou's overall financial performance continues to be stable and online game business has performed well, its revenue and profit growth exceeded prior expectations.

For PC games, Changyou launch a new expansion pack of TLBB PC and rolled out this year's second promotional event to sustain player engagement and stabilized the in game consumption. Changyou will continue to focus the core strategy to maintain user engagement and maximize the longevity of the Legacy PC game such as TLBB.

For mobile game, revenue from Legacy TLBB mobile, increased slightly in the third quarter, many thanks to new content that introduced -- were introduced during the quarter, which help to track higher player involvement.

Beside Changyou also launch TLBB Honor, a new MMORPG mobile game due to less extensive game content. However, since the game content is not particularly extensive, its revenue contribution and profitability are not comparable with Legacy TLLBB mobile.

Going forward, MMORPG mobile game will continue to be Changyou's strategic focus, while some casual and strategy games are also under development for a diversified product portfolio.

So now, I will turn the call over to Joanna, our CFO who will walk you through our financial results.

Joanna Lv

Thank you, Charles. I will walk you through the key financials of our four major segments. For the third 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 $25 million and quarterly loss was $31 million. For Sohu Video, quarterly revenues were $22 million and quarterly loss was $20 million.

Excluding Sogou and Changyou non-GAAP net loss was $53 million compared with a net loss of $77 million in the third quarter of 2018. And then net loss of $68 million in the second quarter of 2019.

For Sogou, quarterly revenues were $350 million, up 14% year-over-year and 4% quarter-over-quarter. Net income was $41 million compared with net income of $28 million in the same quarter last year.

For Changyou, quarterly revenues including 17173 were $111 million, up 9% [ph] year-over-year and down 4% quarter-over-quarter. Changyou posted net income of $34 million compared with net income of $67 million in the same quarter last year.

For the fourth quarter of 2019, we expect total revenues to be between $435 million and $470 million. Brand advertising revenues to be between $40 million and $45 million, this implies annual decrease of 21% to 30% and a sequential increase of 3% to 14%.

Sogou revenues to be between $290 million and $310 million, this implies annual increase of 3% to annual increase of 4% and a sequential increase of 2% to 8%. Online game revenues to be between $95 million and $105 million; this implies annual increase of 1% to 12% and a sequential decrease of 3% to 12%.

Non-GAAP net loss attributable to Sohu.com Limited to be between $12 million and $22 million and non-GAAP loss per fully diluted ADS to be between $0.30 and $0.55; GAAP net loss attributable to Sohu.com Limited to be between $17 million and $27 million and GAAP loss per fully diluted ADS to be between $0.45 and $0.70. Excluding the profit generated by Sogou and Changyou, non-GAAP loss to be between $45 million and $50 million, GAAP net loss to be between $48 million and $53 million.

For the fourth quarter 2019 guidance, we used a presumed exchange rate of RMB71 to $1, which compares with the actual exchange rate of approximately RMB6.91 to $1, for the fourth quarter of 2018, and RMB6.99 to $1 for the third quarter of 2019. Lastly, please be reminded that we want to caution regarding Changyou's privatization proposal in the Q&A session.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask a question.

EddieLeung

Hey, good evening. I have two questions about the media pieces. The first one is about the advertisers spending. Are we seeing more pressure on our small and medium-sized enterprise or more on our key accounts? And if you could remind us the revenue mix between SMEs and key accounts for our media pieces. That will be great? And then second, could you also talk a little bit about your top advertising industries and how are they trending? Thank you.

CharlesZhang

Ed, this is Charles. Yes, the macroeconomic situation has a larger impact over the key accounts compared with the SMEs. So like the auto industries and some key IT sectors are under pressure, while the fast-moving consumer good products are more resilient and at this moment it's more or less impacted. In terms of percentage, I think, let's say 25% of our – no, yes, the 25% or 30% -- 25% of our revenue are coming from the small and medium SMEs, while 70% from the brand, but even though among the brands, there are some key sector like auto really affected by the fast-moving consumer good. Those are less affected.

EddieLeung

Got you, Charles. Thank you.

CharlesZhang

Welcome.

Operator

Thank you. The next question comes from the line of Thomas Chong from Jeffries. Please ask your question.

ThomasChong

Hi. Thanks management for taking my question. I have a question regarding the online video sector. Can management comment about the regulatory environment these days and how we should think about our timing, our profitability? Should we expect is a profitable business next year? Any color would be great. Thank you.

CharlesZhang

The regular -- in terms of media business, well, the regulation has been ongoing. There's not much major event have an impact on regulation side. We are looking at the media advertising business. The loss will continue to be less or shrink. But since as we just reported, the – it's $31 million loss, so it still far from reaching profitability on its own. But combined with the video and also with the contribution from Changyou and Sogou, the group, the Sohu Group, where the profitability were actually – we are already achieving $70 million non-GAAP loss. So give us a couple of quarters, we should be able to reach profitability on a group level.

ThomasChong

Got it. Thank you, Charles.

Operator

Thank you. The next question comes from the line of Alicia Yap from Citigroup. Please ask the question.

AliciaYap

Hi. Good evening, Charles and auto management. Thanks for taking my questions. I have two quick questions. Number one is, Charles, related to the Sohu Media. So can you elaborate a little bit besides the photography content, what are the contents, also the high quality original content that you refer to that results to a comeback and the strength in the Sohu Media. And that improving content quality translates to higher revenue opportunity? And have seen the higher demand from advertiser or this improve content?

And then second is just wanted to follow-on the video. I guess from a lot of different peers, they were commenting about because of the National Day, we're kind of 3Q, 4Q, some of the content got delays or factored by the tightening regulation. So, just curious having seen any easing of the regulations last weeks, given now we past the National Day celebration and also past the conference meeting. So, any anticipations of the relaxing of the video content in the coming week, so any comments about next year in terms of further tightening that would be great. Thank you.

CharlesZhang

Okay. First of all, the Sohu Media not just the drone competition that contribute a lot of photographic video, vlog, but the overall Sohu Media, first of all we have this Sohu Hub like we have actually over 600,000 Sohu writer or comp where all these writers contribute to content and to post their content on Sohu hub. And also among the 600,000 more than 600,000 there is a lot of in-house accounts manageable -- in-house accounts of Sohu's own accounts that cover Sohu Technology, Sohu Finance, Sohu Fashion and internally we basically to just managing better and for our own authors to write better article, to report more accurately to really make sure and also to really become very professional, very to report industry events and with more depths, in-depths analysis and also – so that's the overall improvement of our content generation and also we continue to improve the algorithm so that Sohu News App to basically to match the right content with the right users in the videos.

So that's overall the content improvement. And also another feature is really we consider as a media platform, we consider activities to the common generation source like, so we have this forum like 5G forum or upcoming AI forum. We have this Sohu Fashion for fashion events, all these events and also recently the Sohu School Girls Beauty Context and all those kind of things. Those are just ways to generate good content and also opportunities for advertisers, brand advertisers to sponsor those events. And together with your routine advertising on our platform, they are more like to competing for deals because of Sohu's unique events, so that the money will probably move towards Sohu instead of competing platforms. So these are the ways that how we under -- even with the worsening of microeconomic situation we're able to achieve a flattish or even kind of increase of brand advertising.

AliciaYap

So and on the video side we been, as we said that we have this double engine or two-engine strategy, ones that really deliver long format video, but on that part we really keep our pace really slow because this year we spend in order to control cost, we really spend less on new dramas creation. But we have such library of dramas that we either purchase or we produced over the years. So by better -- personalized those content with people. And so we're actually being able to have a flattish or even some increase of the subscription income of the Sohu video.

With two delayed -- our two dramas now after the National Day we are -- in Q4 we are – we look forward to launch two drama. It’s kind of – regulation wise, it's ease a little bit, but it’s had less impact or kind of to Sohu, because we're now rely more and more on some short videos and some social function, social network functions for Sohu video, instead of purely depend on long form in videos or dramas. Did I answer your question?

AliciaYap

Okay. Yes. It is. Thank you so much Charles.

CharlesZhang

All right.

Operator

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