Earnings Call: Q2 2021

Aug 9, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Second 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 objections, you may disconnect at this time. I would now like to hand the conference over to your host for today's conference call, Huang Du, Investor Relations Director of Sohu. Please go ahead. Thanks, operator. Thank you for joining us today to discuss Sohu's Q2 2020 results. On the call are Chairman and Chief Executive Officer, Doctor. Charles Zhang CFO, Joanna Li and Vice President of Finance, James Dun. Also with us today are Changyou's CEO, Dovin Chen and CFO, Alvin Wang. Before management begins their prepared remarks, I would like to remind you of this common Safe Harbor statement in connection with today's conference call. Except for the historical information contained herein, The measures 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 may 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 the most recent annual report on Form 20 F. Please also be reminded that Sogou's results of operations have been excluded from our results from continuing operations. Retrospective adjustments to the historical statements has been made in order to provide a consistent basis of comparison. Unless indicated otherwise, The results that we talk about are related to continued operations only. With that, I will now turn the call over to Doctor. Charles Zhao. Charles, please proceed. Thank you, everyone, for joining our call. For the Q2 of 2021, despite the negative impact of COVID-nineteen, We kept exploring new monetization opportunities while simply controlling the budget. Thanks to the outperformance of our online game business, our profitability exceeded the prior guidance. For Sohu Media, we focused on innovating our products and technology and effectively promoting the generation and distribution of high quality content. For Sohu Video, we continue to execute our tune engine strategy of developing high quality long form and short form content, while at the same time refining our advanced live broadcasting technologies and rolling them out to various applications. We are also able to diversify our revenue sources and better capture advertising budgets by integrating our live broadcasting technologies into our unique events. For Changyou, online games performed well Q2 and its revenue exceeded the high end of our prior guidance. Let me now go into more details about this business. Well, I'll go through each business in a moment, but now let me first look at the quick overview of our financial performance. For the Q2 of this year, total revenues $204,000,000 up 28% year over year and down 8% quarter over quarter. Brand advertising revenue was $37,000,000 down 3% year over year and up 20% quarter over quarter. Online game revenue is $151,000,000 up 43% year over year and down 14% quarter over quarter. GAAP net income from continuing operations attributable to Sohu dotcom Limited was $22,000,000 compared with a net income of $11,000,000 in the Q2 last year and net income of $32,000,000 In the Q1 of 'twenty of this year, 'twenty one. Non GAAP Net income from continuing operations attributable to Sohu.com Limited was $25,000,000 compared with net income of $12,000,000 in the Q2 last year and a $37,000,000 in the Q1 of this year. Lastly, please be noticed that for the GAAP and non GAAP net income for the Q2 of last year mentioned above, additional withholding income tax accrual of $88,000,000 of Changyou has been excluded. Now let me go through some of our key differences. First, media portal and Sohu Video. For Sohu Media Portal, we continue to innovate our products and technologies. We stimulated The organic generation of premium content further enhanced our social network distribution features. We kept extending the presentation form of our content and introduced audio feature in this quarter on the Sohu Tech 5 gs and AI Conference we launched we hosted in May, we rolled out and exclusive new feature called Sogou AI Anchor. By integrating Sogou's advanced technology, AI technology, we can synthesize the image and the voice of a well known celebrity star using artificial intelligence AI. We've embedded the AI anchor in a certain channel with a 24 hour channel with the Sohu News app where viewers can catch up with real time news and hot events. And also added an audio function into the new feed and into each article, enabling users to listen to articles and updates of their choice at any time. These initiatives have comprehensively improved the audiovideo experience of the Sohu News APG app and allow users to more easily consume our news and premium content with a limited time. For Sohu Video, we continue to develop compelling long form and short form content with the twin engine strategy. For original content, we launched the mysterious love, Our original drama combining idol romance and crime scenes became a hit, big hit during the quarter, attracting a lot of public attention and further boosting our subscriber base and the revenues. For the short form content and the live broadcasting, We kept optimizing our advanced live broadcasting technology from these operations and we consolidated our strength in value live broadcasting and committed towards reporting So the reporting of major breaking news events and emergencies, witness live streaming in real time, which further reinforces our brand advantage and influence as the mainstream media platform. Moreover, we also combined the advantages of both our Sohu Media and Sohu Video platforms kept exploring new monetization opportunities by integrating advanced live broadcasting technologies in for a unique and the creative content marketing campaigns. For example, in July, we successfully hosted the Sohu News Snow Mountain Expedition, which immersed the users in the unique and visually spectacular mountaineering experience over 5 day period of non stop live broadcasting. The participants, including pop stars And celebrities share their feelings interacting with audience throughout the live streaming on their platform during the ascent during the climbing. The live streaming content allowed us to create a huge amount of great derivative content, All of which turned the expedition into an eye catching event, real time event for audiences and advertisers. By creating and providing these unique marketing opportunities, we're able to better meet advertisers' demand and then capture their budgets. So next, turning for Changyou. For the Q2 of 2021, Changyou launched a new expansion packs of both TLBB PC and the legacy TLBB mobile. These updates proved to be well received by players and helped The overall performance of our online games remains stable, which is better than we expected. As a result, revenue from our online game business exceeded the high end of our prior guidance. For PC games, we launched a series of in game events for regular TLBB PC to celebrate its anniversary. We also launched a new dungeon for TLBB Vintage and improved the game based on player feedback. For mobile games, we launched an expansion pack for the anniversary of Legacy TLBB Mobile with some holiday events and upgraded its graphics. Thanks to these efforts, both user engagement and payments remained stable and revenue was broadly flat on a sequential basis. Next quarter, we will continue to roll out new content for TLBB PC and the likes of TLBB Mobile to sustain the vitality of these games. For new games, Changyou launched a licensed card game called Little Racoon Heroes On August 4, 2 days ago, it performed well so far. In terms of pipeline, several key games are being developed and fine tuned and we'll introduce them to players later. Looking forward looking ahead, we'll continue to Execute our top game strategy, promote innovation and roll out more high quality mobile games, including of RPGs and games in other genres. Now let me turn the call 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 Q2 of 2021. All of the numbers that I will mention are all on a non GAAP basis. You can find the reconciliation of non GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $22,000,000 down 3% year over year and up 21% quarter over quarter. The quarterly operating loss was $28,000,000 compared with an operating loss of $18,000,000 in the same quarter last year. For Sohu Video, quarterly revenues were $23,000,000 up 1% year over year and 16% quarter over quarter. The quarterly operating loss was $13,000,000 compared with an operating loss of $10,000,000 in the same quarter last year. For Changyou, quarterly revenues, including 17,173 were $154,000,000 up 41% year over year and down 14% quarter over quarter. Changyou posted an operating profit of $75,000,000 compared with $37,000,000 in the same quarter last year. For Q3 of 2021, we expect brand advertising revenues to be between $35,000,000 $39,000,000 online game revenues to be between $145,000,000 $155,000,000 Non GAAP net income from continuing operations attributable to Sohu dotcom Limited to be between $10,000,000 and GAAP net income and loss from continuing operations attributable to Sohu dotcom Limited to be between a net loss of $4,000,000 and a net income of $6,000,000 This forecast reflects our current and preliminary view, which is subject to substantial uncertainty. Lastly, please be reminded Q and A section. We want some questions regarding any Sogou business updates. And all the agreements with Tencent for Sohu's privatization. This concludes our prepared remarks. Operator, we would now like to open the call to questions. Certainly. Ladies and gentlemen, we will now begin the question and answer session. And wait for your name to be announced. We have the first question coming from the line of Eddie Leung from Bank of America Merrill Lynch. Please go ahead. Good evening. Thank you for taking my questions. I would like to get a sense on The recent regulation changes, the impact on your advertising business, because we know that there has been tightening on the education as well as the property sectors. So wondering how important these 2 sectors to your advertising business and what could be the impact to the business? I know that you guys are already providing a Q1 guidance. So just wondering if we do not have the tightening on these sectors, how will the Q1 look like? And then similarly, also a follow-up Wondering what would be the percentage of revenue from the young people in the Q2 for Changyou. Thank you. So Eddie, you mentioned the 2 factors, right? Education and what? What's the second section you said? Property. Okay. Well, in our portfolio advertisers, We don't have a lot of education advertising. So our advertising revenue is not impacted Probably a little bit impact, but since our revenue base is still relatively small, so it's Not a major factor. On Changyou, basically, the question is about users, the young people or the recent regulation. Our major products are designed for mostly adults. So, contribution from teenagers are very few, Thank you. Shall we move to the next question? The next question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi, thank you. Hello, good evening, Charles And management, thanks for taking my questions. I have two questions. First one is, can you elaborate what is the effective tax rate for Changyou entity that is currently paying? And does Changyou actually entitled to the key software enterprise tax rate. Would there be any changes to effective tax rate in the coming quarters? Second question is, just want to get your opinion, Charles, given your experience and years of operating Internet companies in China. What is your view of these latest as an in regulatory measure. What are some of the outcome you foresee could evolve for the industry? And how is Sohu position in the current environment. Any potential impact to our current business model? Thank you. In the past, several of our subsidiaries will apply and enjoy Some preferential tax rate is for the received key national software enterprise status. But our applications this year were not approved. So but for high end new technology enterprise status are still okay. In the future, we expect there will be 4% to 5% impact on this issue. Yes. Regarding the regulation, Internet regulation, I think what happened recently more company specific, I don't see any on a general policy side tightening or any change. So I see Definitely, there are more regulation on user privacy and others. But it's I think it should be done, because it's important. And I think I don't see I still I think the entire industry will continue to develop robustly and Still a lot of things need to be done, a lot of new products need to be developed and rolled out. I see. Thank you, Charles. Thank you, Dylan. Can I just quickly ask one follow-up? I think according to some of the media's interview, you did mention that is an intention for future potentially that Changyou could be listed In Hong Kong. Just wondering any time frame for this plan? Thank you. Yes. During my interview, I did mention that there's possibilities in the next year. Yes. Okay, great. Thank you, Charles. We have the next question coming from the line of Thomas Chong from Jefferies. Please go ahead. Hi, good evening management. Thanks for taking my questions. I also have a question regarding the advertising space. Can management comments about our thoughts on the OTTOL advertising outlook? Given that I think OTTOL represents about 1 third of our ad revenue. Just want to see how it is trending in Q3 because we are seeing the production capacity of a lot of OEMs are suffering these days. And then our second question is regarding our targeting technology. I think Charles, you also talked about our content strategies, the short form and the long form strategies that we do the targeting. But given that the regulations Also talking about maybe there will be more stringent regulations on targeting. Should we expect our content distribution to be affected if these moves implement? And also I also have a first question relating to the gaming sector in general. How should we think about the gaming regulations? Should we expect that the gaming space is expected to be relatively stable or relatively steady if we think about the regulatory impact other than the minor protection? Thank you. Yes. The first two questions, let me answer. The auto industry, I think there is some recent problems like the shortage of Chips, right. So, I think in Q3, the auto industry, not too good, not too bad, it seems flat, right, flattish. Yes. In terms of content distribution, our we rely more on the And the total distribution also social media distribution. So targeting is not a large part of our products. So it's not no problem. I think, yes. And our videos, long form, short form, and also our video side, Yes. In terms of game sector, I think my answer will be similar because I think it's more I think more it's company specific. Not overall, I don't see any regulation change or Yes. Right? Yes. Got it. Thank you, Charles. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for your participation. You may disconnect now.