Sohu.com Limited
Q1 2021 Earnings Call Transcript

Published: 15 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there'll 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 would like to turn the call 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 first quarter 2021 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 the CFO, Yaobin Wang.

[Charles Zhang:]

Thanks, Huang Pu. Thank you to everyone for joining our call. In the first quarter of 2021, we continued to execute the operation strategy of last year, and delivered better-than-expected performance on the top line. In addition, we're happy to report positive non-GAAP net income of U.S.$37 million, which greatly exceeded our previous guidance. This was mainly attributable to our strict budget control, and the solid performance of our online game business. In summary, for Sohu Media, we kept focusing on improving our products and technology, while at the same time stimulating content generation and social distribution. For Sohu Video, we made continuous progress producing both long-form original dramas and short-form livestreaming content. Further, we integrated advanced live broadcasting technologies into our product matrix, and applied these technologies to our content marketing campaigns. These campaigns not only effectively promoted the generation of premium content, but also attracted a lot of user attention as well as advertiser budgets. For Changyou, our online game business remained solid during the first quarter of 2021, with its revenue greatly exceeding our prior guidance.

[Joanna Lv:]

Thank you, Charles. I will now walk you through the key financials of our major segments for the first quarter of 2021. All of the numbers that I will mention are all on a non-GAAP basis. You may find our reconciliation for non-GAAP to GAAP measure in our IR website. For Sohu Media Portal, quarterly revenues were $80 million, up 18% year-over-year, and down 26% quarter-over-quarter. The quarterly operating loss was $31 million compared with an operating loss of $23 million in the same quarter last year. For Sohu Video, quarterly revenues were $90 million, down 17% year-over-year and 15% quarter-over-quarter. The quarterly operating loss was $13 million compared to with the operating loss of $11 million in the same quarter last year. For Changyou, quarterly revenue is, including 17173, $180 million, up 32% year-over-year and down 10% quarter-over-quarter. Changyou posted an operating profit of $101 million compared with $56 million in the same quarter last year.

[Operator:]

Thank you. Our first question comes from the line of Alicia Yap of Citi. Your line is open, please go ahead.

[Alicia Yap:]

Thank you for taking my questions. Good evening, Charles, Joanna and other management team. So I have two questions, the first one on the gaming outperformance. I think you mentioned a little bit the reasons is driven by the PC, TLBB and all that. But I guess, my question is more when you give out your guidance I think because the actual gaming revenue came in much stronger than your guidance range. So just wondering what's the performance mainly happen in March, that problem that the quarter results came in stronger that what you guided on the gaming revenue? And then with the 2Q sequential declines over we see that might be some drop off and all that, but given these promotion that TLBB Mobile may be launching the anniversary. Should we also aspect the games should be season rather than – a season sequentially scale back. So any color you give on this gaming front? And then I have a question on the advertising.

[Charles Zhang:]

Well, let me come up, Alicia, genuine answer. First of all, I think, in the first quarter of the year, decline of TLBB PC Vintage – TLBB Vintage is actually slower than we expected, right? Because we thought it's – that Vintage – TLBB Vintage peaked in Q4 last year. And then we expect that, it will decline faster, but that actually happened, that's probably a people were for the Vintage – for the old game. And so that's why – it's actually, and also because of the spring festival that people are advised to stay in their cities rather going home, so that contributed to a better than expected game revenue. Yes. So is that your question? And also you are also wanting to know about the current quarter or the future, right, of the mobile game.

[Alicia Yap:]

Yes. That’s right.

[Charles Zhang:]

[Unidentified Company Representative:]

[Charles Zhang:]

[Unidentified Company Representative:]

[Alicia Yap:]

Okay. Thank you.

[Charles Zhang:]

Alicia, yes, sorry, please let me translate – briefly translate that answer. And for, like I said, TLBB Mobile, because we had the less travel in the first quarter, due to people were encouraged to stay in place during the spring festival. So we've had a high reducing in the first quarter. So in the second quarter, although we will have expansion packs for both mobile and our PC TLBB team, but the games were facing natural decline in the second quarter. And for Vintage, especially it’s peaked after the initial launch. So in the second quarter, it will decline further more compare with during the first quarter. Thank you.

[Alicia Yap:]

Thank you. I have second questions on the online advertising. Regarding the second quarter guidance, it seems like the year-over-year guidance of negative 5% to positive 5%, it doesn't sound, it is strong enough. So I'm just wondering, because we should be benefiting from the secular recovery trend and also last year the COVID impact, should also affect the first half as well. So just any color you can provide in terms of the second quarter. And just broadly also wondering, if Charles or management team could comment the overall economy very recently given the regulatory headwinds, we know these upcoming 100 years anniversary and nice Olympic Games. So they are positive and negative external environment. So how will that impact the general attitude that you are seeing? Thank you.

[Charles Zhang:]

I think the compare with last year Q2, right? The Q2 of 2020 is a rebound, right? So we had a strong Q2 in 2020. Then by this year the overall economy macroeconomic situation is actually not that good. Especially there's I would say, a shortage of mobile chips for auto, right, for some auto companies, car companies that are just that they don't have enough product for cars to sell to the market spend that much – as much. So that's why compare with the Q2 last year, with the Q2 2021 is not – it seems not a good, strong quarter. And also in terms of our revenue base of our advertising campaigns is so small, so it's not quite, it's not – I think not much things to do with what happened recently with the e-commerce platform and other and also the 100 year celebration.

[Alicia Yap:]

I see. Okay. All right. Thank you. Thanks Charles.

[Operator:]

Thank you. Our next question is from the line of Thomas Chong of Jefferies. Please go ahead. Your line is open.

[Thomas Chong:]

Hi Charles, thanks management for picking my questions. I have a question regarding our content strategies, can Charles comment about how we think about the content distribution and other measures like live streaming, et cetera. How it actually help to drive the user engagement and on that front, how we should think about the advertising revenue goal or the user trend in 2021? And then my second question is relating to the cost side. Can Charles also comment about how we should think about the OpEx and the cost for also Sohu Portal and the Video business going forward? Thank you.

[Charles Zhang:]

Yes. I think the advertising revenue will depend so much on the user base. So that's why we need to grow our user base and to grow – until we grow our user base much faster our revenue, we have this unique activities like events or content – it's considered – content generation events like our Sohu News marathon or also the expedition, that's we're going to do this quarter and all these major events. It's a part of content that also the live streaming turn this activity into a real time events and attract the users. But in terms of content distribution, we are exploring basically the like everyone else, we're doing the information stream like AI or computer algorithm distribution. But we are choosing, we also have that, but we are choosing the social network distribution as our battleground to distribute our content either or short-form, either, a video or a text content. So yes that's – so our live streaming technology that becomes a central platform product matrix to turn our event or the activity into a current event also attract the advertisers and the users. But in the long run, we depend on – rely on we’re able to successfully to distribute our content through social network. Not by this algorithm distribution, but the social network distribution, both our video content and also a text content. So we launched a few social network products. Within our APP, Sohu News APP and Sohu Video APP. So until that is – so basically we’re growing our user base organically without us spending a lot of money, but by improving technology and products and distribution. So in terms of costs, it will remain similar, basically, the sort of cost well since we're not spending a lot of money on channel promoting others, but so the cost will remain the same. And then the revenue side will also be similar until we successfully basically build this social network features and the user base explode. I hope I explained to you clearly.

[Thomas Chong:]

Got it. Thank you, Charles.

[Operator:]

Thank you. Next question is from the line of Eddie Leung of Bank of America Merrill Lynch. Your line is open. Please go ahead.

[Eddie Leung:]

Good evening guys. Thank you for taking my question. Just a follow-up question on advertising. Charles, when you answered Alicia questions, you mentioned that one of the kind of like issues for the online advertising pieces was the automobile advertisers, right? So but you remind us some of the top advertising industries at the moment for Sohu. And could you also give us some color on the kind of like ads demand or that budgeting process for the rest of the year from conversations between your sales team and these are three client industries? Thank you.

[Charles Zhang:]

Yes. As you pointed out, actually the top advertising industry is auto industry. And the auto industry is because of the shortage of the chips for cars – for auto – of big automobiles. So the production amounts of all these car factories – car manufacturers are actually decreased. So they're not looking at a lot of it. So that's why the top advertising industry, auto industry are spending less in the quarter ahead. So that's why where we're having a kind of a hard time. So and that's why we need to have a unique advertising with less budge. And then we have to provide a unique solution to for their brand marketing campaign for brand marketing like using the online live streaming events and also organize the content activities to.

[Eddie Leung:]

Charles, could you also give us some color on some of the other important advertising industries. For example, any trend you can share with us on some of the – let's say the FMCG brands or the financial services, et cetera, et cetera. Thank you.

[Charles Zhang:]

Yes, that's – FMCG and others, that's the industries that actually we can explore and then probably, they don't have this problem, no chips problems. So I think it's a situation it's better in other industries. So we are looking hard to get those advertisers, FMCG like this and also luxury clothes and a lot of other, electronics and all this.

[Eddie Leung:]

I understand. Thank you very much.

[Charles Zhang:]

Better picture.

[Operator:]

Thank you. Next question is from the line of Jason . Please go ahead. Your line is open.

[Unidentified Analyst:]

Thank you for taking my question, Charles. My question is what steps are you taking to support the stock price given that it's trading that two-thirds of incoming cash? This would imply the entire company without this cash is worth negative. Can you please elaborate?

[Charles Zhang:]

Well, we don't have that. We only have like $300 million, $327 million U.S. dollar cash. The market cap is like five times or less. Yes. I think the stock price. Well I think we need to demonstrate growth potential, right? So that's why as I said that I would need to explore and to do it, especially to build this social network platform to the distribute content and to develop social networks with our current APPs – apps and to grow user base to a much larger scale in a matter of fact, larger user base. So that we can get more market share of advertising brand, advertising market share and also to market our own products like market our TV, our dramas, right. And also even, if Sohu build our own platform with large – much larger user base. I think Changyou can also benefit because we will sell Changyou and promote Changyou winning our own matrix using the costs have any costs expensive. So on until we approve that we can build our social network successfully and have its exponential growth. Social networks are basically grows exponentially. But it's like a building a chain reaction and also kind of giving a atomic bomb neither chain reaction. So until we do that and then grow our user base exponentially, we are – so our growth financial will remain at the current pace. So that events are not excited. So in other word, basically the score of our stock price, we need to demonstrate a hyper growth, right. And then the stock price will improve.

[Unidentified Analyst:]

Yes. Thank you. I was referring more to the incoming cash with a potential merger the $1 billion plus in cash.

[Charles Zhang:]

Okay. So that as we said, we don't talk about this because it's still – I mean, we don't speculate what we'll do with more cash because the deal is still not done.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Thank you. Next question is from the line of Alex Poon of Morgan Stanley. Please go ahead.

[Alex Poon:]

All right. Thank you, Charles. Thank you, management for taking my question. So management, you mentioned that like, there's a key game launches so fine tuning, and also like we'll introduce like more MMORPG games probably later this year. So can we provide like more granularity on the game pipeline? Such as like which games are license approved or like any like most anticipated game launch? Thank you.

[Unidentified Company Representative:]

[Charles Zhang:]

We have a couple of key products to be launched later this year or next year. First one is to be Taxi Adventure. It will be published by Tencent and expect to be launched in July. And the second one is a Bright Star. It's a similar into the game and licensed by Tencent and expect to launch it in the August to this year. The other one is a card game called Little Raccoon, and we will do a round of testing. We just got the license approval. So we can proceed to the monetization testing event in June. If the results okay, then we will publish by ourselves in the third quarter, it's a card game. And for MMO, it's a self-developed key MMORPG, we plan to launch it at the end of this year or early next year. And the next one is the next generation of TLBB mobile. We haven't decided that official name yet, but it will be published by Tencent as well and also the end of this year or next year. Thank you.

[Unidentified Company Representative:]

[Operator:]

Thank you. Ladies and gentlemen, that concludes the conference for today. And thank you for participating. You may now all disconnect.