Earnings Call: Q1 2021

May 14, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Tohu's First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. If you have any objection, you may disconnect at this time. I would like to turn the call over to your host for today's conference call, Investor Relations Director of Sohu, please go ahead. Thanks, operator. Thank you for joining us today to discuss Sohu's Q1 2021 results. On the call are Chairman and Chief Executive Officer, Doctor. Charles Zhang CFO, Johnny Liu and Vice President of Finance, James Also with us today are Changyou's CEO, Dovin Chen and CFO, Yowin Wang. 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 our 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 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 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 C. Wei:] Operations have been excluded from our results from continuing operations, retrospective as adjustments to the historical statements have been made in order to provide our 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 Doctor. Charles Zhang. Charles, please proceed. Thanks, Hong Kong. Thank you to everyone for joining our call. In the Q1 of 2021, we continued to execute on the operating strategy of last year and delivered better than expected performance on the top line. In addition, we are happy to report positive non GAAP net income of $37,000,000 which greatly exceeded our previous guidance. This was mainly attributable to our strict budget control and the solid performance of our online game businesses. 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 Further, we integrated Advanced live broadcasting technologies into our product metrics and applied these technologies to our content marketing campaigns. This campaign not only effectively promoted the generation of premium content, but also attracted a lot of user As well as advertiser budgets. For Changyou, our online game business remained solid during the Q1 of 2021, With its revenue greatly exceeding our prior guidance, I'll go through more details about each of these businesses In a moment, but first, let's look at quick review our financial performance. For the Q1 of 2021, Total revenues, US222 million dollars up 24% year over year and down 12% quarter over quarter. Brand advertising revenues, US31 $1,000,000 up 20% year over year and down 26% quarter over quarter. Online game revenues, US176 million dollars up 32% year over year and down 10% quarter over quarter. GAAP net income from continuing operations attributable to Sohu.com Limited Was $32,000,000 compared with a net loss of $10,000,000 in the Q1 of 2020 and net income of $47,000,000 in the Q4 of 2020. Non GAAP net income from continuing operations Viewtable to Sohu.com Limited was US37 $1,000,000 compared with a net loss of US8 million dollars In the Q1 of last year and net income of US53 $1,000,000 in the Q4 of 2020. Now let me go through some of our key businesses. First of all, media portal and social media. We continue to upgrade our products and technology to stimulate high quality content generation and further enhanced social network distribution features. Based on our advanced live streaming technology, Strong operating experience and extensive media resources, we further burnished our credentials as a mainstream media platform. By distributing our premium content to the Sohu Media and Sohu Video platform, we are attracting more exposure from viewers and advertisers, which is helping us to further diversify our revenue streams and explore new monetization opportunities. For example, in March, we successfully Air live streaming broadcasting broadcasted the 13th Sohu News Marathon, which is a well known event that we host with a variety of celebrities and pop stars. Leveraging our live broadcasting technology, we conducted more than 5 hours nonstop long time live shows. The premium content generated by this campaign successfully attracted a lot of attention and advertising dollars as well. Through this event, we not only raised awareness of fitness and health, but also motivated users to create They are all interactive content and promoted on Sohu's product metrics. For video, we continue to execute our teen engine strategy. For the long form content In 2021, we released several original dramas, including the recent mysterious love, which has become another big hit after the of the well intended lab that I have bought about 2 years ago. So, Mysterious Love combined both idol romance and crime scenes and was warmly welcomed by audiences. It has further broadened our leading position in these two categories and greatly boosted our user base and revenue. In terms of short form content, we kept working hard on developing value live streaming content, which is where we Disseminate professional knowledge and reliable information to consumers. For example, we launched the live The show called the New Year celebration for the Chinese New Year holidays show consists of more than 40 live broadcasts Attracting a lot of KOLs who share their thoughts on multiple topics. Now, let me turn to Changyou. The Q1 of 2021, thanks to the latest updates that our team made to our in game content As well as a drop in travel as people were encouraged to stay in place for the free festival, Player engagement was better than expected. Our TLBB franchise remained stable and online game revenue Our prior guidance for PC games, revenue decreased on a sequential basis as TLBB Vintage revenue experienced a natural decline after it peaked following the game's initial launch. During the quarter, we improved TLBB Vintage by making a variety of enhancements based on We also introduced some promotional events around the spring festival called the regular TLBB PC. For mobile games, we also launched a variety of spring festival related events for legacy TLBB Mobile, including gateway for player engagement. These efforts help CTLBB mobile platform performed better than we anticipated. Next quarter, Changyou will release new expansion packs and the in game event We celebrate the anniversary of regular TLBB PC and the legacy TLBB mobile. For TLBB Vintage, we plan to introduce a new dungeon and other special in game content. In terms of pipeline, several key games are being developed and fine tuned. Look forward to launching them later this year. Looking ahead, we will continue to execute our top game strategies, promote innovation and roll out more high quality mobile games, including MMORPG games and other adjacent generals. Now let me turn the call over to Joanna, our CFO, who will walk you through our financial results. Joanna? Thank you, Charles. I will now walk you through the key financials of our major segments for the Q1 of 2021. All of the numbers that I will mention on a non GAAP basis. You may find a reconciliation of non GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $80,000,000 up 18% year over year and down 26 The quarterly operating loss was $31,000,000 compared with an operating loss of $23,000,000 In the same quarter last year, for Sohu Video, quarterly revenues were $90,000,000 Down 17% year over year and 15% quarter over quarter, the quarterly operating loss was $30,000,000 compared with an operating loss of $11,000,000 in the same quarter last year. For Changyou, Quarterly revenues, including $17,173,000,000 $180,000,000 up 32% year over year and down 10% quarter over quarter. Changyou posted an operating profit of $101,000,000 Compared with $56,000,000 in the same quarter last year, for the Q2 of 2021, We expect brand advertising revenue to be between $36,000,000 $40,000,000 Online game revenues should be between $134,000,000 $144,000,000 Non GAAP net income from continuing operations attributable to Sohu dotcom Limited to be between $8,000,000 And $18,000,000 and GAAP net income from continuing operations attributable to sobu.com Limited to be between $3,000,000 $30,000,000 This forecast reflects our current and preliminary view, which is subject to substantial uncertainty. Lastly, please be reminded that in the Q and A session, We won't take questions regarding any Sohu business update or the agreements with Samsung for Sohu's privatization. This concludes our prepared remarks. Operator, we would now like to open the call to questions. Thank for your questions. Our first question is from the line of Abhishek Yap of Citi, your line is open. Please go ahead. Hi. Thank you for taking my questions. Good evening, Charles, Diana 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 not that, but I guess my question is more, when you gave out your guidance, I think because The actual gaming revenue came in much stronger than your guidance range. So just wondering, Was the performance mainly happened in March that prompted the Quarter results came in stronger than what you guided on the gaming revenue. And then with the 2Q sequential declines, obviously, there might be some Drop off and all that, but given these promotions that TRBB Mobile maybe launching the anniversary, Should we also expect the game should be decent rather than a decent sequentially Scaleback. So any color you can give on this gaming front? And then I have a question on the advertising. Well, let me comment a little bit and then Chen Yong can answer. First of all, I think in the Q1, The decline of TLBB PCVantage is actually slower Than we expected, right? Because we saw that the vintage TLBB vintage peaked in Q4 last year, and then We expect it to decline faster, but actually happening that probably people were supposed to have the phone for the vintage, So for the old game, and so that's the reason why it's actually and also because of the Spring Festival that people are advised to stay in their city instead of going home. That contributed to better than expected game revenue. Yes. So is that your question? And also you also want to know about the current quarter or the future, right, the mobile game? Yes. That's right. Okay. Yes. Sorry, please let me translate briefly translate this answer. And for Legacy TLBB Mobile, because We had less travel in the Q1 due to people were encouraged to stay in place during the spring festival. So we At a high base in the Q1, so in the Q2, although we will have expansion packs for both mobile and our The games were facing a massive decline in the Q2. And for vintage, especially, it peaked After the initial launch, so in the Q2, it will decline furthermore compared with during the Q1. Thank you. I see. Thank you. I have a second question on the online advertising. Regarding the Q2 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 So just any color you can provide in terms of the second quarter? And just broadly also wondering if Charles, our management team, could comment on the overall ad sentiment recently Given the regulatory headwinds, this upcoming 100 years anniversary and Olympic Games, So there are positive and negative external environments. So how will that impact the general ad budget that you're seeing? Thank you. I think the compared with last year Q2, right, the Q2 of 2020 is a rebound, Right. So, we had a strong Q2 in 2020. Then but this year, the overall economy, macroeconomic It's actually not that good, especially there's, I would say, a shortage of Mobile chips for auto, right? So the auto companies, car companies are just They don't have enough products or cars to sell So the market, so they don't spend that much. So that's why compared with Q2 last year, The Q2 2021 is not a seems not a good strong quarter. And also because of The revenue base of our advertising base is so small. It's not I think it's not much seems to do What happened recently with the e commerce platform and other and also the 100 year celebration. Okay. All right. Thank you. Thanks Charles. Thank you. Our next question is from the line of Thomas Chong of Jefferies. Please go ahead. Your line is open. Hi, Charles. Thanks management for taking my questions. I have a question regarding our content strategies. Can Charles comment about how we think about The content distribution, the and other Measures like live streaming, etcetera, how it actually help to drive the user engagement? And on that front, how we should think about the advertising Revenue growth or the user trend in 2021? And then my second question Yes, relating to the cost side, can Charles also comment about how we should think about The OpEx and the cost for Sohu portal and video business Going forward, thank you. 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 Content it's considered a content generation event like our Sohu News Marathon And also the Snow Mountain Expedition, that's what we're going to do this quarter. And all these major events, it's Part of content and also the live streaming turn this activity into a real time event and attract users. But the in terms of content distribution, we are exploring basically the Like everyone else, we're doing the information streaming 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 background to Distributor content either short form either video or text Content. So, yes, that's so our live streaming Technology that becomes a central platform for our matrix, product matrix To turn our events, all the activities into a content event, also attract advertisers and users, but in the long term, in the long run, We depend on rely on whether we are able to successfully to distribute our content through Not by the algorithm distribution, but the social network distribution, both our video content and also text content. So we launched a few social network products within our app, the Sohu News app and Sohu Video app. So until that is so basically, we're growing our user base organically without spending a lot of money, But by improving technology and products and the distribution. So in terms of cost, It will remain similar basically. The sort of cost 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 on Qiwi. We successfully Basically, build this social network features and the user base explode. I hope I explained to you Thank you. Next question is from the line of Eddie Leung of Bank of America Merrill Lynch. Your line is open. Please go ahead. Good evening, guys. Thank you for taking my question. Just a follow-up question on advertising. Charles, when you answered Alicia's questions, You mentioned that one of the kind of like issues for the on advertising pieces was the automobile advertisers, right. So could you remind us some of the top Advertiser Industries at the moment for Sohu. And could you also give us some color on their Kind of like a sentiment or their budgeting process for the rest of the year from conversations between your sales team And these are 3 tire industries. Thank you. Yes. As you pointed out, actually, the top Auto industry is auto industry and the auto industry because of the Shortage of the chips, so the chips for cars, for auto, For automobiles, so the production amount of all these car factories car manufacturers are Actually, it's so they're not looking at a lot of so that's why the Top advertising industry, auto industry are standing less in the quarters ahead. So that's why we're having a kind of a hard time. So and that's why we need to have Unique advertising with less budget and then we have to provide a unique solution to For their brand marketing campaign from brand marketing, like using the live streaming events And also online the content activities to 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 sector, etcetera, etcetera? Thank you. Yes. That's FMCG and others, that's the industry that actually you can explore and then probably they don't have this Problem, Chip's problem. So, I think the situation is better in other industries. So, we are working hard to get those advertisers, FMCG, And also luxury goods and a lot of others, so Electronics, ITs and all this. Yes. Understand. Thank you very much. Well, I better picture. Thank you. Next question is from the line of Jason Mecher of MT Capital. Please go ahead. Your line is open. Hi. 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 at 2 thirds of incoming cash? This would imply the entire company without this cash is worth negative. Can you please elaborate? Well, we don't have that much cash, right? We only have US300 million dollars US327 million dollars cash, the market cap is like twice that or less. Yes. It's I think the stock price well, I think we need to demonstrate growth Potential, right? So that's why, as I said, we need to explore and To do it successfully, to build this network platform, to distribute content and to develop the server networks with our current app Apps and to grow user base to a much larger scale 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 dramas, right? And also even If Sohu built our own platform with much larger user base, I think Changyou can also benefit because we will sell Changyou's Promo Changyou winning our own matrix. It will be the cost will be 0. We won't have any cost. So, until we approve that we can build our social network successfully And have its exponential growth. Social networks are basically growing exponentially, but it's like building Chain reaction and also kind of giving an atomic bomb is the chain reaction. So until we do that and then grow our user base exponentially, We our so our growth potential will remain at the current pace so that investors are now excited. So, in our words, basically, to support our stock price, we need to demonstrate a hyper growth, right, and then the stock price will improve. Yes. Thank you. I was referring more to the incoming cash with the potential merger, the $1,000,000,000 plus in cash. Okay. So that as we said, we don't talk about this because it's still I mean, it's we don't Speculate what we'll do with more cash because the deal is still not done. Great. Thank you. Thank you. Next question is from the line of Alex Koe of Morgan Stanley. Please go ahead. Thank you, Charles. Thank you, management for taking my question. So management, you mentioned that there's The game launches still 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 which games are licensed approved or like any like most anticipated game launch? Thank you. We have a couple of key products to be launched later this year or next year. First one should be Tetris Adventure. It will be published by Tencent and expect to be launched In July. And the second one is Bright Star. It's a streaming oriented game and licensed by Tencent and expect to launch it in the August of this The other one is a card game called Little Raccoon, and we will do a round of testing in We just got the license approval, so we can proceed to the monetization testing in June. If the results are okay, then we will publish By ourselves in the Q3, it's a car game. And for MMO, Sea of Song is a self Developed key MMORPG is we plan to launch it at the end of this year or early next Yes. And the next one is the next generation of TLBB mobile. We haven't decided the C. Wei:] Coffee is not named yet, but it will be published by Tencent as well and also the end of this year or next year. Thank you. Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.