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Sohu.com (NASDAQ:SOHU)
Q4 2018 Earnings Conference Call
Feb. 1, 2019 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's fourth-quarter 2018 earnings conference call. [Operator instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to your host for today, Mr. Eric Yuan, investor relations director of Sohu. Please go ahead, sir.

Eric Yuan -- Investor Relations Director

Thanks, operator. Thank you for joining us today to discuss Sohu's fourth-quarter 2018 results. On the call are Chairman and CEO Dr. Charles Zhang, CFO Joanna Lv.

Also with us today are Changyou's CEO Dewen Chen, CFO Yaobin Wang, and Sogou's CEO Xiaochuan Wang, and CFO Yi Zhou. 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 during 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 filings with the Securities and Exchange Commission, including its registration statement and most recent annual report on Form 10-K. With that, I will now turn the call over to Dr.

Charles Zhang. Charles, please proceed.

Charles Zhang -- Chairman and Chief Executive Officer

Thank you, Eric. And thanks to everyone for joining our call. During 2018 we had, we faced a challenging macroeconomic environment. We focused our resources on key mobile products and worked hard to improve operating efficiencies.

While annual revenues were largely flat compared with 2017, our bottom line performance was meaningfully improved, thanks to a variety of cost-savings efforts. For Sohu Media Portal, daily active users of Sohu News App, our flagship mobile product, outpaced the industry's growth, benefiting from superior content and continued upgrades of the recommendation engine. For Sohu Video, we focused on original program production, providing users unique and high-quality dramas and shows. In the meantime, we significantly cut spending on traditional TV programs and successfully lowered the segment's loss over 50% compared with 2017.

In 2018, Sogou mobile search and mobile keyboard continued to gain user traction, while its leading AI capabilities have been -- not been -- have been not only recognized in an international context but also applied to new commercial use cases. Lastly, Changyou delivered in-line financial results supported by solid performance of TLBB PC and mobile games, Legacy TLBB and other mobile games. For 2019, Changyou will strengthen its research and development capabilities to launch more hit games. Before I go into more details about our key business, let me summarize our financial results for the fourth quarter.

So for the fourth quarter, total revenues $482 million, down 5% year over year, up 5% quarter over quarter. If on the constant currency basis, total revenues would have been $22 million higher than our reported revenues and down 1% year over year. Net brand advertising revenues $57 million, down 20% year over year and flat quarter over quarter. Search and search-related advertising revenues $277 million, up 12% year over year and 8% quarter over quarter..

Online games revenues $94 million, down 14% year over year and 2% quarter over quarter. Operating loss for Sohu Video was $30 million compared with a loss of $69 million in the fourth quarter of 2017. GAAP net income attributable to Sohu.com Limited was $15 million, [Inaudible], compared with a net loss of $295 million in the fourth quarter of 2017. Non-GAAP net loss attributable to Sohu.com Limited was a loss of $59 million compared with a net loss of $78 million in the fourth quarter of 2017.

Now in the fourth quarter of 2018, Changyou recognized a $16 million worth of charge for goodwill impairment related to the 17173 website. Excluding the effect of this goodwill impairment charge, non-GAAP net loss attributable to Sohu.com would have been $48 million instead of $59 million. So $48 million compared with the $78 million in the fourth quarter of 2017. So now let me look at full year of 2018.

And total revenues $1.88 billion, up 1% from 2017. Net brand advertising revenues $232 million, down 26% from 2017. Search and search-related advertising revenues $1 billion, up 28% from 2017. Online game revenues were $390 million, down 13% from 2017.

Operating loss for Sohu Video was $140 million compared with a loss of $302 million in 2017. That was a 50% reduction -- no, no, a 100% reduction, yes. [Inaudible] 100% reduction, right? So GAAP net loss attributable to Sohu.com Limited was $161 million compared with a net loss of $556 million in 2017. Non-GAAP net loss attributable to Sohu.com Limited was $237 million compared with a net loss of $310 million in 2017.

So now let me go through some of our key businesses. First of all, the media portal business. As one of the leading online media platform in China, we define user growth as the main priority for Sohu media business in 2018. However, we'll continue to elevate the quality of our content, including our way of reporting as well as the third-party content in media's Sohu house.

On the other hand, we strengthened the product, upgrade the design and -- of our flagship mobile news product Sohu News App; and especially continued refining the algorithm that drives the recommendation engine behind apps and make it more intelligent, basically applied AI technology, machine learning. We can now send more relevant stories to you as -- smartphones more quickly and accurately. In addition, we actively invested in expanding the distribution of Sohu News App through free installations on mainstream mobile phones brands. And as a result of these efforts, all user metrics surpassed industry's growth over the past year, actually significantly.

In December 2018, the daily active user of Sohu News App doubled, while the video and page view tripled from a year ago. This solid performance should help lay the groundwork for a stronger monetization in 2019 -- well, first, the user base, then the monetization. In 2018, the slowdown in China's economic growth negatively impacted our advertising revenues, and some of the most important sectors such as auto and IT experienced difficulty. The industrywide budget cuts that we saw last year may last for a few more quarters in 2019.

To address this challenging situation, we plan to increase content-marketing efforts and seek promotional budgets from key clients. And the same time, we are upgrading our advertising system to improve conversions so that we can get more budget allocation from SME customers. So despite the macro headwinds, with a strong user traction and execution, I'm confident that Sohu media will achieve positive revenue growth in 2019. Now moving to Sohu Video.

In 2018, our content strategy was to provide users with a balanced mix of in-house developed dramas and shows; and low-cost nonexclusive TV programs; as well as enriched short-form, short video clips. We're pleased to see that, as we gave up some most -- some of the most expensive licensed content, the overall content ROI improved substantially. And the same time, we seriously reviewed our options -- reviewed our operations and terminated a number of noncore and unprofitable projects. The effect was quite clear.

Sohu Video expenditure loss in 2018 saw a 55% drop from a year ago. In terms of the original content, in 2018, we released a total of 12 dramas and five daily variety shows, for dramas leveraging our industry knowledge and also a team of talented producers and their unique insights about new trend. So our teams developed a series of popular dramas such as [Inaudible] the Medical Examiner Dr. Qin and [Inaudible] and also [Inaudible] like The X-Files TV [Inaudible] drama episode.

Such high-quality content helped us retain a large group of viewers who are willing to pay for our dramas. Therefore, even though we reduced our budget for original -- the expensive licensed drama significantly, the subscription revenues in 2018 actually were stable compared with 2017. And for the reality shows, variety shows, we launched a number of differentiated projects that target certain demographic groups, such as one of the very successful one, I think, the [Inaudible] white-collar woman theme reality show which -- and drew a positive review for two seasons, season one and season two. We also approached a potential advertising clients at early stage of the development of our projects in order to secure the advertising dollars because we sort of need programs.

And we're able to do that. This move helped to increase the likelihood that we can make profit from the projects. For this year, for 2019, we plan to keep up the pace of our original content production, focusing on quality over quantity. We're also acquiring more inexpensive and low-cost TV programs to complement our content library.

For short video clips, we plan to enhance the personalization features in Sohu Video app to better match users with content they want. In short, with a healthier and more sustainable business model and content mix, I believe Sohu Video is on track to continue improving its bottom line in 2019. Now next turning to Sogou. In 2018, we have increasingly targeted and integrated AI technologies into our products and services.

For Sogou Search, we made dedicated efforts to improve the quality of search results, enriched our differentiated content and continued to upgrade such services to the question-and-answering based search. And also, with Sogou's Mobile Keyboard, its user base continued to expand. By the end of the year, Sogou Mobile Keyboard's daily active users reached 430 million users a day, an increase of 28% from prior year. In the technology investment field, we also made big swings in line with [Inaudible] technologies, which brought ways to use our AI technology in practical applications.

For instance, in November 2018, at the fifth world internet action conference in Wuzhen we debuted a world-first AI news anchor in partnership with Weixin Agency using Sogou's [Inaudible] avatars, illusions in which an anchor creates a lifelike resemblance of a professional human anchor. The success has then generated a lot of interest among media adaptation and other industries. Lastly, for Changyou, in 2018, Changyou's flagship TLBB PC and Legacy TLBB mobile game both performed well, driven by content launch of a new expansion pack. Performed -- they both performed well, driven by content launch of new expansion packs.

The content features -- the content and features introduced into games effectively drew many gamers back and improved the user engagement. Changyou continued to contribute healthy free cash flows to our group. For the full year, its total revenue reached $486 million. And excluding certain one-off items, non-GAAP net income was $141 million.

Looking ahead, Changyou's priority is to develop top-level quality games. MMORPG mobile games were continuing to be its strategic focus, where we are also exploring the opportunities with casual- and strategy-themed games. Its management has spent significant time to review the game in pipeline and set higher standard in the game development process. And these efforts should help us lay a solid foundation for producing high-quality games in the future.

I would like now to turn the call to Joanna, our CFO, who'll walk you through our financial results. Joanna?

Joanna Lv -- Chief Financial Officer

Thank you, Charles. I will walk you through the key financials for our four major segments for the fourth quarter and full year of 2018. All of the numbers that I will mention are all on a non-GAAP basis. For Sohu Media Portal, quarterly revenues were $33 million, down 10% year over year.

Quarterly loss was $36 million, which compares with a net loss of $25 million in the fourth quarter of 2017. For full-year 2018, Sohu Media Portal revenues were $128 million, down 16% from 2017. Its full-year net loss was $141 million compared with net loss of $67 million in the -- in 2017. For Sohu Video, quarterly revenues were $26 million, down 34% from a year ago.

Of this, advertising revenues were $13 million. Quarterly loss was $40 million, which compares with a net loss of $69 million in the same quarter last year. For full-year 2018, Sohu Video's total revenues were $150 million, down 29% from a year ago. Of this, advertising revenue was $54 million.

Sohu Video's full-year loss was $140 million compared with a net loss of $302 million in 2017. For Sogou, quarterly revenues were $298 million, up 7% year over year and 8% quarter over quarter. Net income was $27 million compared with net income of $48 million in the same quarter last year. For full-year 2018, its total revenues were $1.12 billion, up 24% compared with 2017.

Net income was $113 million compared with net income of $106 million in 2017. For Changyou, quarterly revenues including 17173 were $118 million, down 18% year over year and flat quarter over quarter. Changyou posted net income of $11 million compared with net income of $34 million in the same quarter last year. For full-year 2018, total revenues were $486 million, down 16% compared with 2017.

Changyou posted net income of $78 million compared with net income of $126 million in 2017. For the first quarter of 2019, we expect total revenues to be between $390 million and $415 million. Brand advertising revenues to be between $45 million and $50 million, this implies annual decrease of 11% to 20% and a sequential decrease of 13% to 21%. Sogou revenues to be between $231 million and $241 million, this implies annual decrease of 3% to 7% and a sequential decrease of 19% to 22%.

Online game revenues to be between $80 million and $90 million, this implies an annual decrease of 15% to 24% and a sequential decrease of 4% to 15%. Non-GAAP net loss attributable to Sohu.com Limited to be between $50 million and $60 million and non-GAAP loss per fully diluted ADS to be between $1.30 and $1.55. GAAP net loss attributable to Sohu.com Limited to be between $55 million and $65 million and GAAP loss per fully diluted ADS to be between $1.40 and $1.65. For the first quarter of 2019's guidance, we used a presumed exchange rate of RMB 6.9 to $1, which compares with the actual exchange rate of RMB 6.36 to $1 for the first quarter of 2018 and RMB 6.91 to $1 for the fourth quarter of 2018.

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

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

Thomas Chong -- Credit Suisse -- Analyst

Hi. Thanks, management, for taking my questions. I have a question on our brand advertising. When I'm looking at the Q1 guidance, can management talk about how much is coming from negative seasonality? And any impacts do we see from macro headwinds? Thank you.

Charles Zhang -- Chairman and Chief Executive Officer

So Thomas, your question is how much is from the pay accounts...

Thomas Chong -- Credit Suisse -- Analyst

Yes, yes. Basically, for brand advertising, our sequential metrics decline is about somewhere along 13% to 21% for on a sequential basis. So I just wanted to go and get a sense about how much is actually for macro headwinds and how much is coming from negative seasonality. Because historically when we're looking at the brand advertising business, typically [Inaudible] somewhere along that range.

So just want to get a sense about do we actually see any impacts from the macro headwinds.

Charles Zhang -- Chairman and Chief Executive Officer

I think it's more seasonality. You have the Chinese new year in the first quarter. So the macroeconomic situation definitely has an impact, but since Sohu's advertising -- brand advertising market share is still relatively small, the headwinds or the impact is less -- secondary from the -- to the seasonality of the Chinese new year.

Thomas Chong -- Credit Suisse -- Analyst

I see. Thanks, Charles.

Operator

Thank you. Our next question comes from the line of Alicia Yap from Citi. Please ask a question.

Alicia Yap -- Citigroup -- Analyst

Good evening. Thanks for taking my question. I have a question about macro impact. How is this year macro softness compared to previous down cycle? And what are the industry vertical that will be most impacted? Thank you.

Charles Zhang -- Chairman and Chief Executive Officer

Yes. So the -- it is -- we're looking at -- we're seeing the -- some of the traditional sectors that [Inaudible] like auto. And IT centers are -- actually have not -- are depending less, but we just need to develop new clients, new customers to have a -- just a broader range or a mix of, well, customers. Because there's 1.4 billion people in China and they need to consume things.

So there are always companies that have need to advertise something. So we need to see a better spread of advertisers. And also as I said earlier, the -- since the Sohu's advertising market share is relatively small, so we are -- we just need to have a -- although -- the overall pie is shrinking to some extent, but we just need to work harder and do a better job to have a larger allocation of the pie. So that's why we are looking at growth in this year.

Operator

Thank you. Our next question comes from the line of Shi Jialong from Nomura. Please ask your question.

Jialong Shi -- Nomura -- Analyst

Hi. Hi, management. Thanks for taking my questions. I have two questions, both about your video business.

And we saw the net loss -- the operating loss for your video business narrowed quite meaningfully in Q4. So I just wonder if you can update us when your video business can see breakeven based on the latest progress they made. And also, what do you think is a long-term sustainable OP margin for your online video business? So this is question number one. And question number two is about regulation.

Online video business or industry in China used to enjoy less regulation than TV in content productions as well as in the types of contents that were allowed to air. And however, we saw regulations on video contents were tightening quite rapidly in particular in the past two years, so I just wonder where we are now in terms of the video regulation. That's if you -- I just wonder if you guys still enjoy relatively less regulation than TV. Thank you.

Charles Zhang -- Chairman and Chief Executive Officer

The first question. So we are -- certainly we already established a trend of cost cutting. So the -- like compared with -- so we're -- this -- so the Q4, right? Q4's loss is $30 million, and it's -- actually there is a the kind of a...

Joanna Lv -- Chief Financial Officer

$24 million.

Charles Zhang -- Chairman and Chief Executive Officer

It's a real number. [Inaudible]...

Joanna Lv -- Chief Financial Officer

Yes, [Inaudible] impairment...

Charles Zhang -- Chairman and Chief Executive Officer

Impairment of some of the American TV dramas. It was like $6 million. So the -- actually the real loss is actually $24 million. That means a reduction.

It's a big reduction compared with a year ago. Actually we already established this trend of narrowing the loss. And we are looking at still -- I'm still looking at a quarter in this year that we're -- that Sohu Video will reach profitability. As I just said in our -- in my script, I talked that we are already -- we found a way toward the future.

It's because a mix of house produced -- it's in-house-produced dramas and for execution and also variety shows for advertising and also low-cost TV programs instead of the very high -- expensive ones. And also short videos. So we're -- with a good video mix and with better monetization, we are looking at a path to profitability a quarter, some quarter in this year. Your second question, about regulation: Yes, it's tightening.

And the -- both the long clips -- I mean the videos or the dramas or the variety shows, the long clips; or the short clips, they're tightening. But actually I will say the impact is less on video and compared what's actually on the news side. So -- and the media side. So -- and since -- it's actually affecting everyone, but because, as we all know, that when economic downturn, people mostly stay home and don't go out and spend money.

And people will just order things and -- cheap things. And people will just sort of play online games. And watching video. That's why that's a time, a good time, to produce a lot of good video, programs for people to watch.

So it's actually a online activity. As we all know, that actually in the last -- in the 1930s, Hollywood got -- no, nearly closed because of the recession, right? So we're looking at the opportunities.

Operator

[Operator instructions] [Operator signoff]

Duration: 32 minutes

Call Participants:

Eric Yuan -- Investor Relations Director

Charles Zhang -- Chairman and Chief Executive Officer

Joanna Lv -- Chief Financial Officer

Thomas Chong -- Credit Suisse -- Analyst

Alicia Yap -- Citigroup -- Analyst

Jialong Shi -- Nomura -- Analyst

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