Sohu.com Ltd. (NASDAQ:SOHU) Q1 2022 Results Conference Call May 16, 2022 7:30 AM ET

Company Participants

Huang Pu - IR Director
Dr. Charles Zhang - Chairman and CEO
Joanna Lv - CFO
Dewen Chen - CEO, Changyou

Conference Call Participants

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

Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu’s First Quarter 2022 Earnings Conference Call. [Operator Instructions] Today’s conference call is being recorded. If you have any objections, you may disconnect at any time. I would now like to turn the conference over to our host the conference call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

Huang Pu

Thanks, operator. Thank you for joining us to discuss Sohu’s fourth quarter two results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; CFO; and Vice President of Finance, James Deng. Also with us are Changyou’s CEO, Dewen Chen; and the CFO, [indiscernible].

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 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 statements. For more information about the potential risks and uncertainties, which 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 will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Dr. Charles Zhang

Thanks,[indiscernible] Jane, and thank you, everyone, for joining our call. In the first quarter of 2022, despite the negative impact of COVID-19 and the challenging macroeconomic environment, we continue to focus on product requirements and improving optimal efficiency. Thanks to the excellent performance of our online game business, we delivered better-than-expected bottom line performance and achieved profitability for the quarter.

For Sohu Media Portal, we carried out product upgrades and improvements in the overall quality of our news and content, all of which continued to draw users to our platform and keep them engaged. For Sohu Video, continuous execution of our twin-engine strategy. We proactively extended our live broadcasting to a greater number of scientific fields. We also focused on user acquisition for our key mobile products and explore ways to improve monetization for both Sohu Media Portal and Sohu Video.

For Changyou, our online games performed well during the quarter with revenue exceeding the high end of our prior guidance. I’ll go into details about each of these businesses in a moment. But first, let us look at a quick review of our financial performance.

For the first quarter of 2022, total revenues were $193 million, down 13% year-over-year and flat quarter-over-quarter. Brand advertising revenues $24 million, down 23% year-over-year and 29% quarter-over-quarter. Online game revenues, $158 million, down 11% year-over-year and up 10% quarter-over-quarter.

GAAP net income attributable to account limited was $3 million compared with $32 million in the first quarter of 2021 and $4 million in the fourth quarter of 2021. Non-GAAP net income attributable to Sohu.com Limited was $9 million compared with $37 million in the first quarter of 2021 and $200,000 in the fourth quarter of 2021.

Now let I go through some of our key businesses. First, Media Portal and Sohu Video. For Sohu Media Portal, in order to strengthen our visibility and influence as a mainstream media platform, we provided real-time breaking news and hot social topics to users as well as optimizing algorithms and adding features to provide better user experience and increased user engagement and enhanced social distribution. For Sohu Video continued to execute our 10 engine strategy, the product differentiation and the competitive advantages of our live broadcasting have enabled us to extend its scope.

For example, in late 2021, we launched Charge Zhang physics class. I opened -- start teaching physics online, live broadcasting since late 2021. Now have already more than 40 online episodes since the initial launch. Starting this March this year, we also introduced the offline classes as well with also live broadcasting. Young audience were enthusiastic and generated robust online conversations.

The recognition gives this IT -- given to this IT supported by our advanced live broadcasting technologies attracted broadcasters in a variety of scientific fields ranging from physics, mathematics, chemistry and aerospace, et cetera, to our platform to engage in scientific live broadcasting. As a result, we have built a solid and credible reputation as a live broadcasting platform in the field of science and basically a knowledge-based platform.

We will continue to explore innovative ways to create and distribute high-quality content. We also had some new wins with our new own product -- production house for episodes and reality shows. For original dramas, following the successful broadcast of [indiscernible], this quarter, we started shooting this sequel [indiscernible] and also have several original dramas in our pipeline that will be rolled out steadily in 2022, this year.

For reality shows, we saw the successful lease of the fifth season of On her Way Home [indiscernible] On her way home was designed to be more inclusive and to include training topics, which led to lively conversations with high visibility. We believe the success of the fifth season demonstrated by our ability to create a robust and sustainable IP, which also attracts advertisers -- advertising dollars.

On the monetizing side, the first quarter tends to be a soft period for several reasons. Advertising spending was affected also by macro uncertainties and Omicron driven lockdowns. Despite these headwinds, we took advantage of the dual platform advantages of Sohu Media Portal and Sohu Video as well as our advanced live broadcasting technologies, and this gives us the opportunity to explore the promotional needs and advertisers and work closely with them on their marketing plans in order to attract and capture their advertising dollars.

Next, turning to Game business, Changyou. During the first quarter of 2022, Changyou’s online games revenue exited our prior guidance. This was thanks to the sound performance of TLBB PC. In our business line for PC games, looking first at regular TLBB PC, we launched a variety of holiday-related quests and promotional events and adjusted relative strengths of different plans based on player feedback. With TLBB Vintage, we launched rich content around the time of New Year and Spring Festival. We continue to optimize the game based on player feedback to increase players that satisfaction. With mobile games, we launched a variety of holiday events and promotional events for Legacy TLBB Mobile, whose revenue remained steady on a sequential basis.

Next quarter, we’ll roll out new content for TLBB PC, Legacy TLBB Mobile, Little Raccoon, Heroes and other games. We’ll also launch TLBB Vintage on the WeGame platform as we look to bring more back long-time TLBB players by way of new channels. In our game pipeline, several key games are under development, and we are in the process of fine-tuning them.

We look forward to bringing them to players soon. Against an ever-changing environment, Changyou will stick to its top game strategy by promoting innovation, building the capacity of its team and rolling out more high-quality mobile games in a variety of categories. Now I’ll turn the call to join our CFO, who will walk you through our financial results. Joanna?

Joanna Lv

Thank you, Charles. I will now walk you through the key financials of our major segments for the first quarter of 2022. All the numbers on a non-GAAP basis. You may find a reconciliation of net debt to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $40 million, down 22% year-over-year and 27% quarter-over-quarter. The quarterly operating loss was $44 million compared with an operating loss of $31 million in the same quarter last year. For Sohu Video, quarterly revenues were $50 million, down 25% year-over-year and 36% quarter-over-quarter. The quarterly operating loss was $21 million compared with an operating loss of $30 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, $160 million, down 11% year-over-year and up 10% quarter-over-quarter. Changyou [indiscernible] operating profit of $83 million compared with $99 million in the same quarter last year. For the second quarter of 2022, we expect brand advertising revenues to be between $22 million and $25 million. This implies an annual decrease of 32% to 40% and a sequential decrease of 7% to a sequential increase of 5%. Online game revenues to be between $150 million and $160 million. This impacts annual decrease of 1% to an annual increase of 6% and a sequential decrease of 5% to a sequential increase of 1%.

Non-GAAP net loss attributable to Sohu.com Limited to be between $15 million and $5 million and a net loss attributable to Sohu.com Limited to be between $18 million and $8 million. This forecast reflects our current and preliminary view, which is subject to substantial uncertainty. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Thomas Chong from Jefferies.

Thomas Chong

Management I have a question regarding the Q2 guidance. How should we think about the low end and the high end of the guidance, given that we are seeing a negative Q-on-Q and positive Q-on-Q growth? And on that front, may I ask about the advertising momentum in the month of April. And so far, we are seeing in the month of May. And my second question is about, if there is no pandemic in Shanghai, how does our second quarter would look differently from before? And are we actually seeing more people spending time paying games recently.

Dr. Charles Zhang

Yes, in terms of advertising, I think in Q2 is -- I think it’s quite impacted by the lockdowns and not only Shanghai but also in other cities. So your question without the COVID lockdown, I think we should be looking at another $5 million more to work in terms of even more, right, $5 million to $6 million more revenue in advertising. And for online game, people spending more time playing..

Unidentified Company Representative

[Foreign Language]

We’re not seeing any influence caused by the pandemic outbreak of Shanghai. And we think that Shanghai accounts for a little part of our total players. And also during the dynamic time, people have to shopping online and also they have some time to testings -- COVID testing.

Operator

The next question comes from the line of Eddie Leung from Bank of America.

Eddie Leung

Just a follow-up question on the advertising base. Could you give us an idea on the key advertised industry in first quarter? And which industry you have seen better performance and which ones are weaker? And then secondly, just a question about the share buyback program. Wondering if there is any update on the share buyback program? Or how the management thinks about launching another buyback program given the discount value of your share price?

Dr. Charles Zhang

I think the distribution of advertiser industries are similar to other quarters, right, with all of the first top category. And Internet services and FMCG. And -- but especially the -- I think the auto industry are quite affected by the lockdowns. In Q2 -- and also in Q1, I think we are quite real estate kind of a meltdown or something. Yes, also affected. Q1 is impacted by some of the real estate companies before, share buyback program, any updates? Do We have any update on?

Joanna Lv

In Q1, the repurchase of 4.3 million shares, total cost of probably USD 34 million.

Dr. Charles Zhang

So basically, 75% of the $100 million have been spent in buyback. And with this quarter, up to this point, we do not have any new plan to buy back, but we’ll see because with the -- yes. .

Operator

[Operator Instructions] The next question comes from the line of Alicia Yap from Citigroup.

Alicia Yap

I have a follow-up on the second quarter advertising outlook. So I think Charles, you just mentioned some of the verticals that probably been impacted more. So when do you expect some of these ad budgets to recover. Will the second half can we see or potentially see some year-over-year growth instead of the declining trend? So any color if you can give in terms of some of the outlook? And then second question is on the online gaming. So with games approval resume recently, so any change of the view for the second half gaming outlook for Changyou?

Dr. Charles Zhang

Okay. The first question about advertising, as I said that without the COVID lockdowns, we should have at least -- we basically -- I think I estimated that we lost about $6 million advertising dollars due to the pandemic or the lockdown in Q2. Yes, in Q1, right Q2?

Joanna Lv

Q2.

Dr. Charles Zhang

Q2, yes. Q1 is a soft season because of Chinese New Year. So for two reasons. One is that these companies are postponing their marketing plans or the product rollout. Secondly, the -- so they do not -- they spend less. And secondly, especially with Sohu, our unique marketing plan for advertisers is like some unique events -- with live broadcasting events and for that, especially with the COVID the pandemic, these events need a lot of gathering of people and events we cannot do it like Sohu News Marathon and other.

So that’s also in particular, affected our own monetization ability. So in the second half of the year, I hope that the lockdown will be eased and the economy will gain some momentum. We’ll see. We don’t know. About online game...

Dewen Chen

[Foreign Language] Yes, the license approval resumed issuing from April and we got the first session of 25 approvals. So we have -- we need to observe further later on changes, but we believe that the direction will be okay for gaming companies.

Alicia Yap

Can I follow up a couple of questions. One is that can you remind us the games titles that US have in the pipeline that are still waiting for the game approval? And then second question, the follow-up is given these HCAA the delisting list, any plans that Sohu will be thinking about either the introductory offering in Hong Kong or the secondary listing in Hong Kong? .

Dewen Chen

[Foreign Language] Now we have got the license approval for Stone, and we plan to launch it in July this year. It has been -- it has started the appointment right now. For other games, we haven’t got any new license approval so far.

Dr. Charles Zhang

Well the second question about the U.S. -- I mean, Sohu left the NASDAQ and the listing issue. I think it’s still -- it’s not that urgent yet. It’s still -- 2 years time table time to think about it. So we don’t have a plan yet to reintroduce in the Hong Kong market.

Operator

[Operator Instructions] The next question comes from the line of Oli Jacobson from Private Investor.

Unidentified Analyst

To say that 75% of the share buyback program was spent at the end of Q1 or that 75% of the program was spent until today?

Dr. Charles Zhang

75% of the $100 million have been spent since we announced the buyback, that was like in Q4, right? So in the last few months, we finished -- we achieved -- we bought back, yes 4 million shares, right? Yes. What’s your question? .

Unidentified Analyst

Yes, of course, correct. Can I follow up with another question? The combination of a huge amount of cash and a very low market cap, it looks like an excellent opportunity to create a lot of shareholder value. Can you give an update on how we think about the current cash pile ? When do we expect to get more clarity regarding how the cash will be used?

Dr. Charles Zhang

Currently, we have like $1.5 billion -- yes, USD 1.5 billion cash. And we -- well, this quarter, at this point, we have decided not to have a new buyback program, but that doesn’t say that we will not have in the future. We probably will have some buyback program in the future. And also we still see some promising product innovations that we expect to test our products, make sure that it has some potential to explode or to really again, user traction. And then we’ll spend some money on user acquisition to bring more users to our platform.

So the -- actually, in Q1, we -- because we’re still fine-tuning some of the products and test the variability of the products, we spend less than we planned or expected. So that’s why we -- our guidance, we exceeded our guidance because we were guiding more loss, right? But because the gaming are performing better and also we spend less on the channel and user acquisition. So that was turned into profitable quarter overall. But in the future, we will spend.

Because Chinese interest is very competitive, and you have to -- first of all, you have to have the right products and then or the right strategy, either you algorithm recommendation based or social network base, we probably -- our product is more social network-based and we hope that it will explode and -- but with the products and then you need to spend some money. If you don’t spend the money, you don’t bring the users to your platform, then you don’t know whether the product is the right one or not.

So with that kind of cash, we will spend wisely and we’re not going to just -- that’s all I can think of either buyback and also spend the money on our product innovation and get users. For this media and social network platform, you have to have size. You don’t have like a [critical mass] of size, users.

It’s very hard to achieve profitability, but then some products, sometimes some products flow, you just think, oh, you have the right business model. You have the right the design or the right idea. But actually, the product has been -- they have been refining that product for years and suddenly one day is exploded and people think that it’s just overnight success is actually not. That’s why we need to improve the products and really improve user experience gradually and slowly and really very carefully, and we are doing that. .

Unidentified Analyst

Thank you for the answer, Charles. Does this mean that, for example, if you do not think that you can spend all the money on marketing over time that more buybacks are more likely that, for example, a special dividend due to the current situation with a very low market cap?

Dr. Charles Zhang

Yes, it’s all possible. It’s -- and also we are -- we also need to look at how the COVID pandemic and the lockdown and the overall economy and all the world. So there’s a lot of factors we’re looking at. So we will not exclude the possibility of buyback -- more buyback and the dividend. So it’s possible. We are still in the game. We’re on a media platform. We’re still the players on the Internet field, and then we see some good opportunities, especially in the social network field, people in China companies have not have not stopped. We have WeChat, but still, it’s an open field. A lot of needs of user needs are not satisfied. So we’re still the players. And then to find the Internet world, you need a war chest of cash and you need to fight, you need unless we just give up and don’t do it. We’ll just distribute the money and create shareholder value. But we believe that we have a chance to win in the end. .

Unidentified Analyst

Can I ask one more question? There is an upcoming game called [indiscernible]. Is that game still planned for a 2022 release, so it will be released in the second half still of the year?

Dewen Chen

[Foreign Language] We will [indiscernible] launch in July this year.

Dr. Charles Zhang

So basically the company has -- actually -- the company has, I think, is a better position than before. We are -- first of all, we have a game business that’s making money. And we -- after the Sohu deal, we have a part of cash. And also our media platform and video platforms growth strategy is organic. We do not using -- so this organic growth sometimes consume less cash. It’s really rely on the right product and product design. So that’s why I think we’re in a pretty good position to really fight the battle. Even in our video business, instead of spending huge amount of money buying very expensive content, we have our chain strategy. We use -- we spend less money -- spend less amount of money than some of our peers and to create these dramas and episodes. And then we once users come to our platform so video, they found the video networking, social networking and so need to -- and short video clips that will stay. So the user acquisition and also the user stickiness is just higher. It’s a less cost effective -- more cost-effective growth of users than just long video, long-form drama and those content, basically Netflix model. Are there other questions?

Operator

There are no further questions. That does conclude our conference for today. Thank you for participating. All disconnect. Have a nice day.