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Sohu.com Inc (SOHU) Q2 2019 Earnings Call Transcript

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Sohu.com Inc (NASDAQ: SOHU)
Q2 2019 Earnings Call
Aug 5, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And good evening. Thank you for joining Sohu's Second Quarter 2019 Earnings Conference Call.

[Operator Instructions]

I'd 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.

Pu Huang -- Investor Relations Director

Thanks operator. Thank you for joining us today to discuss Sohu's second 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 CFO Yaobin Wang; and Sogou's CEO, Xiaochuan Wang; and CFO, Joe Zhou.

Before management begins their prepared remarks, I would like to remind you of the Company's Safe Harbor statements 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 statements.

For more information about the potential risks and uncertainties, please refer to the Company's fillings 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 -- Chairman of the Board and Chief Executive Officer

Thanks, Pu Huang. Thank you to everyone, for joining our call. Under the current challenging macroeconomic environment, our total revenue stayed largely in line with our prior guidance. On bottom line performance, excluding the charge for impairment of assets recognized by Changyou related to its cinema advertising business led the high end of our prior guidance. This was mainly driven by the continued cost savings that we were able to achieve at Sohu Video, and a solid performance of our online game business.

So for Sohu Media, Sohu Media is making a comeback and living up to its reputation as a top tier media platform. We have been hosting high quality events, generating and distributing premium content, and strengthening our core competitiveness and credibility among media brands.

Meanwhile, Sohu Video continues to provide users with unique high quality dramas and shows. We have seen the positive effects of this differential development strategy and stable improvements in monetization at both Sohu Media and Sohu Video. We hope to see further progress in the coming quarters.

In the second quarter of 2019, Sogou achieved steady growth in its core search business, while Sogou Mobile Keyboard further expanded its user base and reinforced its position as the third largest Chinese mobile app. For Changyou, both its revenue and profit exceeded expectations, excluding the aforementioned charge for impairment. Changyou is demonstrating a stable profitability while developing more games to provide a diversified product portfolio.

Before I go into more detail about our key businesses, let me summarize our financial results for the second quarter. Total revenues $475 million, down 2% year-over-year, and up 10% quarter-over-quarter. On a non-GAAP constant currency basis, total revenues would have been $32 million higher than our reported revenue, which would be a 4% improvement year-over-year.

Net brand advertising revenue is $44 million, down 29% year-over-year, and up 2% quarter-over-quarter. Search and search related advertising revenue is $276 million, up 2% year-over-year, and 18% quarter-over-quarter. Online game revenues $102 million, up 8% year-over-year and 3% quarter-over-quarter. Operating loss for Sohu Video was $23 million compared with a loss of $35 million in the same quarter last year, and a 33% improvement. GAAP net loss attributable to Sohu.com Limited contributed $3 million, compared with a net loss of $48 million in the same quarter last year.

Non-GAAP net loss attributable to Sohu.com Limited was $50 million, excluding a charge of that impairment of assets recognized by Changyou in the second quarter of 2019 related to the cinema advertising business, non-GAAP net loss attributable to Sohu.com Limited was $38 million, an improvement of 22% year-over-year. Excluding Sogou and Changyou, non-GAAP net loss attributable to Sohu.com Limited was $68 million and an improvement of 15% year-over-year.

Well, now let me go through some of our key businesses. First, Media Portal business, as I mentioned earlier Sohu Media is currently making its comeback, where we're actively strengthening our influence across certain verticals such as technology, finance and fashion. In the second quarter of 2019, we successfully hosted Sohu Tech News 5G Forum, firstly of the 5G era, which involved in a few collaboratives and again, a widespread discussions as well as sustained influence.

In early July, we launched the fifth China Drone Photography Contest, which will last through September. This contest will show off a combination of technology and arts and will be able to generate and distribute a large amount of premium content on our platform contributed by this event. These events not only demonstrate our position as a mainstream media source, but also enhance our core competitiveness and credibility by allowing us to leverage high quality content across our platform, which generates further interest and discussion and attracts users as well as other partners.

We are continuously focusing on ways to improve our product and the generate great content. In addition, we're also constantly refining our recommendation algorithm and building social features, social network features and products. With the most updated versions of Sohu products, users can reach the content they are interested in more quickly, accurately.

Sohu News app, notably this news app, news features can help users track news and content like they like and gather users with same interest in to communities where they can comment on the topics and further interactions. In other words, we are giving tools for users to contribute their own user generated content, UGC and also building other interactive social network on our Sohu News app.

Additionally, we are constantly engaging with the encouraging third party writers to produce more in-depth content around certain topics in order to further improve users stickiness. In this quarter, advertising revenues were inevitably influenced by the economic slowdown, especially in the auto and IT industries. In the face of these challenges, we worked hard to diversify our revenue sources while producing abound and high quality content with various tech events. This work is helping to attract advertisers and elevate our competitiveness and influence, and should help us put a modest rebound in revenues in Q3. Sohu [technical issues] strictly control our costs and expenses in order to limit the financial losses in the Sohu Media business.

Moving to -- moving over to Sohu Video. In the second quarter, we continued our two engine strategy, with a balanced mix of all the long form content and the short clips, user generated content. We will be able to produce more and more high quality content, such as -- at a much lower cost and saw a differential development strategy. We're happy to see some encouraging news of success.

Sohu Video is ranked number four on CI Week online video app ranking list for the first half of 2019. In the second quarter of 2019, we were able to be produce -- to reduce our operating cost -- loss for the unit to $23 million, which was a $33 million improvement -- no, 33% improvement from a loss of $35 million in the same quarter last year.

We plan to strictly keep our budget under control in the second half of this year and further improve the bottom line. In terms of content, we have developed a more in-depth understanding of idol romance and the criminal themed dramas, the two series. We have already created brand advantages in these two types of IP and we seek recognition among audiences as well as advertisers. For example, Well Intended Love, Nai He BOSS Yao Qu Wo gained widespread attention and was ranked number four by Douban among all original dramas in the first half of this year.

Looking ahead, we'll start shooting the second season of Well Intended Love and expect to release it next year. This is already -- there's already considerable buzz for the show among viewers and we have seen significant interest from advertisers. In July, we released the -- hosted Next Superstar, another popular idol romance drama. And in the second half of 2019, we will release several criminal themed dramas, including Without Knowing Dawn Will Break In the East . So the Next Superstar in Chinese, there is only one and the Without Knowing Dawn Will Break In the East in Chinese is [indecipherable]. So we believe we are well-positioned to continue delivering attractive and diversified content on our video platform.

Next, turning to Sogou in the second quarter, Sogou had maintained its position as China second largest search engine. Search revenues continue to grow faster than the industry average, for the end of Q1, Sogou Mobile Keyboard, DAU reached $415 million, up 17% year-over-year, and average daily voice request made via Sogou Mobile Keyboard increased by 72% year-over-year.

Furthermore, Sogou continue to implement the AI strategy of developing language centric AI technologies and advanced its leadership in voice and the computer vision with many industry leading breakthroughs. Lastly, for Changyou for the second quarter of 2019, online game revenues were $102 million, which slightly exceeded the high end of our guidance. Revenue for PC games increased slightly quarter-over-quarter due to the solid performance of the several -- of several legacy PC games, which failed to offset a decrease in revenues from TLBB PC, natural decline in life cycle.

During the quarter, Changyou launched an expansion pack TLBB PC's 12 year anniversary. In the third quarter 2019, Changyou will launch a new expansion pack and introduce online game contents to sustain user interest. Going forward for PC games, Changyou's key strategy is to maintain player engagement and maximize the longevity of legacy PC game such as TLBB. For Legacy TLBB mobile, Changyou continued to focus on long term oriented operational strategies and introduced new content to provide its players [technical issues]

In Q2, the expansion pack launched for Legacy TLBB mobile's two year anniversary introduced great new gameplay for players, resulting in higher user satisfaction. Furthermore, MMORPG mobile games will continue to be the strategic focus while Changyou is developing a number of casual games and strategy games to provide a diversified product portfolio.

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

Joanna Lv -- Chief Financial Officer

Thank you, Charles. I will walk you through the key financials of our four major segments, for the second quarter of 2019, all of the numbers that I will mention are all on a non-GAAP basis. You can find our reconciliation of non-GAAP to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $24 million, down 27% a year-over-year. The quarterly loss was $38 million, which compares with a net loss of $37 million in the second quarter of 2018. For Sohu Video, quarterly revenues were $21 million, down 34% from a year ago. Out of this, advertising revenues were $8 million. The operating loss for Sohu Video was $23 million, which compares with a net loss of $35 million in the same quarter last year.

For Sogou, quarterly revenues were $304 million, up 1% a year-over-year, and 20% quarter-over-quarter. Net income was $28 million compared with net income of $38 million in the same quarter last year. For Changyou, quarterly revenues, including 17173, were $190 million, up 5% year-over-year and down 4% quarter-over-quarter. Changyou posted net income of $14 million compared with net income of $28 million in the same quarter last year.

In the first quarter of 2019, we expect total revenues to be between $445 million and $470 million. Brand advertising revenues to be between $45 million and $50 million. This implies annual decrease of 12% to 21%, and the sequential increase of 2% to 14%. Sogou revenues to be between $304 million and $314 million. This implies annual increase of 10% to 14% and a sequential increase of near to 3%.

Online game revenue to be between $80 million and $90 million. This implies annual decrease of 6% to 17% and a sequential decrease of 12% to 22%. Non-GAAP net loss attributable to Sohu.com Limited to be between $22 million and $32 million, and non-GAAP loss per fully diluted ADS to be between $0.55 and $0.80. GAAP net loss attributable to Sohu.com Limited to be between $25 million and $35 million, and GAAP loss per fully diluted ADS to be between $0.65 and $0.90 excluding the profit generated by Sogou and Changyou.

Non-GAAP loss attributable to Sohu.com Limited to be between $50 million and $55 million. GAAP net loss attributable to Sohu.com Limited to be between $53 million and $58 million. For the third quarter of 2019 guidance, we used a presumed exchange rate of RMB6.9 to $1, which compares with the actual exchange rate of approximately RMB6.8 to $1 for the third quarter of 2018, an RMB6.81 to $1 for the second quarter of 2019.

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

Questions and Answers:

Operator

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

Eddie Leung -- Merrill Lynch -- Analyst

Good evening, management team. Thank you for taking my question. I would like to know if you could talk a little bit about the advertising outlook getting into second half of the year versus what we had in the second quarter? Particularly, could you also comment on the competitive landscape, which we heard have been affecting the advertising prices in the industry? Thank you.

Charles Zhang -- Chairman of the Board and Chief Executive Officer

The macroeconomic situation definitely is really pressure over advertising, but because the -- we have so many I mean, there is so many sectors. Certain sectors are under pressure like auto. But there's a lot of other sectors, verticals that actually we've seen even growth and that's why for Sohu's Media Portal, we are having a lot of activities at -- content generation activities and some unique marketing events that attract advertisers to other type on the Sohu platform with a premium -- with these premium content so that we are able to attract. So that's why we are looking at a even under this slowdown -- economic slowdown, we are actually looking at a growth compared with Q2. Right. Yeah for advertising.

And for videos, same thing for video, we had some unique drama or -- and variety shows that have the beauty in advertising. So we're not competing on price, but competing on a premium event or content that can be competitive in getting advertisers.

Eddie Leung -- Merrill Lynch -- Analyst

That's very helpful. Thank you, Charles.

Charles Zhang -- Chairman of the Board and Chief Executive Officer

Welcome.

Operator

Thank you. [Operator Instructions]

We have the next question comes from the line of Alicia Yap from Citigroup. Please ask the question.

Alicia Yap -- Citigroup -- Analyst

Hi. Good evening, Charles and Joanna. Thanks for taking my question. I have a couple of questions. Number one, it's related to the latest regulatory environment and the restrictions on the TV dramas. What are the impact to Sohu Video, so far if any? Second question is related to this overall ad sentiment weakness. I think Charles mentioned on the prepared remarks, inside Sohu Media Portal, have some decent comeback. So wanted to get a sense in terms of how we should think about this into even -- a little bit further into next year? And what is mainly driving the more positive momentum on the Media Portal side? Thank you.

Charles Zhang -- Chairman of the Board and Chief Executive Officer

Okay, first of all, on the media content aside, there is some regulations, but we are well -- we are from -- from the very start in choosing the topics and also to work together with the authorities, so it's now has been not a problem with the release of our TV dramas, because for example, like there is a restriction on making some dramas that, you know, in the ancient times, writing the historical old stories, but we only -- we now only produce modern dramas, topic, themes of modern times. So and also relatively compared with the television TV dramas, there is more relaxed because -- yeah so it's not a problem, we've been -- like recently our Nai He BOSS Yao Qu Wo, Well Intended Love and also [indecipherable] the Next Superstar, quite -- yeah it's no problem to get the approval from the authorities.

It is actually an interactive process with authorities to make sure that our dramas that get approved. In terms of media advertising into the -- so as I said in my answer to the first question, on the premium activities or content generate activities or for example, like our Sogou sponsored the Sogou News Marathon that involves a lot of celebrities that getting advertisers, because in that event, we have Sohu Media and also the Sohu Video or as the reporting media to report these celebrities running marathon, it's been a project that has been -- we have been doing for like the 10th time or 11th time, actually. So it's actually getting good advertisers and like the other one that we just launched, the drone contest, drone filming contest, which also getting good advertisers. So it's -- this kind of work and also the forum that we have a 5D forum and also in next -- in the second half of the AI forum and the business forum, all these content generation activities are getting a premium content, so that we're getting ahead.

So for this year and next, I think these kind of brand advertising will be unique. That's all we can do. So that is competitive, and same time, in the long run, we hope that, not only we will continue with this brand advertising, this event or premium content and the advertising, but also by developing a better algorithm for news product, news app and also social network features of news app and also the Vlog and social network feature of the Sohu Video app. And also Huyou, our social network products. We'll have -- and together with our large traffic from the PC side where we've accumulated over the years and also the Sohu H5, the walk portal, with -- that a lot of traffic. So with all these in the future, we hope that all traffic increase will have the momentum, so that with the larger traffic not only this brand advertising and premium brand advertising but also the -- the long tail standardized advertising will also pick up. So that's why with that -- with this two kind of end up having, we hope that next year into next year our advertising business will be competitive.

Alicia Yap -- Citigroup -- Analyst

Thank you.

Operator

[Operator Instructions] We have the next question comes from the line of Wei Zhao [phonetics] from First Capital. Please ask the question.

Wei Zhao -- First Capital -- Analyst

[Foreign Speech]

Charles Zhang -- Chairman of the Board and Chief Executive Officer

[Foreign Speech] Got it?

Wei Zhao -- First Capital -- Analyst

Okay. Thank you.

Charles Zhang -- Chairman of the Board and Chief Executive Officer

All right.

Operator

Thank you. [Operating Closing Remarks]

Duration: 31 minutes

Call participants:

Pu Huang -- Investor Relations Director

Charles Zhang -- Chairman of the Board and Chief Executive Officer

Joanna Lv -- Chief Financial Officer

Eddie Leung -- Merrill Lynch -- Analyst

Alicia Yap -- Citigroup -- Analyst

Wei Zhao -- First Capital -- Analyst

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