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Sohu.com Inc  (NASDAQ:SOHU)
Q1 2019 Earnings Call
April 29, 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 First Quarter 2019 Earnings Conference Call. At this time, all participants are in a 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.

Now I'd like to turn the conference over to your host for today's conference call 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 first quarter 2019 results. On the call are Chairman and CEO, Dr. Charles Zhang; CFO, Joanna Lv. 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 statement 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 filings with the Securities and Exchange Commission, including its registration statement and most recent Annual Report on Form 20-F.

With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

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

Thanks. Thank you, everyone, for joining our call. In the first quarter, we delivered better-than-expected revenue, mainly driven by the solid performance of our search and game businesses. Sohu Media continued to make progress upgrading its products and content on our platform and we explored new ways to diversify revenue sources.

Sohu Video consistently offered appealing self-developed dramas and its financial loss kept narrowing due to strict cost controls. And Sogou, the user base of its mobile search and keyboard products further expanded, while its core search revenue grew faster than industry.

In the first quarter, Changyou's revenue and profit exceeded guidance as the TLBB PC game performed very well during the Chinese New Year holiday.

Before I go into more detail about our key businesses, let me summarize our financial results for the first quarter. First quarter total revenue is $431 million, down 5% year-over-year, and 11% quarter-over-quarter. On a constant currency basis, total revenue would have been $26 million higher than our reported revenues though it's up 1% year-over-year.

Net brand advertising revenue is $43 million, down 24% year-over-year and 25% quarter-over-quarter. Search and search related advertising revenue is $234 million, up 6% year-over-year and down 15% quarter-over-quarter. Online games revenue is $99 million, down 6% year-over-year and up 5% quarter-over-quarter.

Excluding certain non-cash impairment charges, the operating loss for Sohu Video was $27 million, compared with a loss of $48 million in the first quarter of 2018. GAAP net loss attributable to Sohu.com Limited was $57 million, compared with a net loss of $93 million in the first quarter of 2018. Non-GAAP net loss attributable to Sohu.com Limited was $55 million.

Excluding the effect of the impairment charge, net of tax effects, non-GAAP net loss attributable to Sohu.com Limited was $48 million which compared with a net loss of $97 million a year ago, in the first quarter of 2018. Excluding Sogou and Changyou, the non-GAAP net loss attributable to our core Sohu.com business, basically the media and video business was $72 million, which compares with a net loss of $93 million in the first quarter of 2018. And for the first time, we're going to forecast -- we'll forecast this non-GAAP net loss attributable to Sohu business, and Joanna will cover our business outlook.

Now let me go through some of the key businesses. First of all, our Media Portal business, in the first quarter we -- to improve user stickiness, we continued to focus our efforts on improving our products and technology and upgrading the content on our platform. We deepened our partnerships with high quality content providers, encouraging them to create in-depth articles on hot topics in an effort to increase user engagement and so the total number of articles posted by third-party writers or so-called Sohu hub (ph) grew by 10% quarter over quarter.

On the product side, we are developing compelling social features for the Sohu news app. These features aggregate coverage of different important events such as breaking news and social topics and product launches, not only our users can browse all related stories in a one-stop way -- noon-stop -- one-stop way, the accounts or conveniently make comments and share thoughts with peers. We believe upgrades such as this will make our news app not just an information distribution platform but also a more engaging product.

Financially well the first quarter always tend to be a seasonally soft quarter. The sluggish -- and also the sluggish economic environment continue to impact our ad revenues. However, we worked hard to elevate the negative pressure. For example, we are creating more customized solutions for our key advertising clients. In early April, we successfully hosted a celebrity off road marathon event in Chongli, Hebei Province, where the next Winter Olympic Games will be held.

The event attracted a good number of sponsors and helped to elevate the Sohu news brand. We've also been cultivating more local partners in lower tiered cities to better monetize our traffic. Overall, we expect a 20%-plus revenue rebound in the second quarter compared with the first quarter.

Now Sohu Video; in 2019, we continue to implement what we call the Two Engine strategy for our content offering. On one hand, we're primarily focused on developing, producing original content, long clips, long video, long clips; original content. We're also enhancing the short form, short clips, user -- the UGC User Generate Content and its distribution. So this is the Two Engine strategy. We believe this combination should enable us to provide users with interesting content at a much lower cost and this will likely help our video business achieve profitability eventually.

For the self-developed shows, we have built an impressive track record in two categories, in particular. One is the idol romance category. The other one is the criminal theme -- the dramas. So, in the first quarter, our idol romance drama called, Well Intended Love, Nai He BOSS Yao Qu Wo, became a web sensation upon its debut. It hit in a hot search list on Weibo 30 times during the broadcast period, where its total video views reached 1 billion.

Look ahead, we'll mainly use our in-house artists and focus on producing high quality content with low-to-mid range budgets. Besides Sohu originals, we're also exploring opportunities in short video categories, especially UGC leveraging our cross platform advantages. UGC videos can be more efficiently distributed across a number of Sohu-family platforms such as news, live broadcast, games and search.

So, in the first quarter, benefiting from the strict cost controls, we were able to further narrow the financial loss as Sohu Video. Operating loss was $27 million which was 10% less than the previous quarter and a 43% less than the same period last year.

Now, turning to Sogou; in the first quarter, Sogou's two key products, search and mobile keyboard, both demonstrated a healthy growth, leveraging our innovative AI technologies. As the Number 2 search engine, Sogou's core search revenue continued to outpace industry growths. By the end of March, Sogou mobile keyboards' DAU reached 443 million, up 23% from a year ago, becoming the third largest mobile app in terms of the DAU in China, according to iResearch.

Lastly Changyou, in the first quarter, Changyou revenues and profit came in ahead of our expectations. In particular, its PC game revenues rose significantly on a sequential basis. Changyou launched a new expansion pack for the Spring Festival as well as a variety of online and offline events for the holidays and received warm response from gamers.

Looking out into 2019, we'll continue to execute our strategy of top games and improve our capabilities and efficiency in game development. MMORPG mobile games will continue to be our strategic focus while we're also developing a number of casual games and strategy games. With the support of strong cash flow, we believe Changyou is well-positioned to roll out new hit games in the future.

Now let me turn to Joanna, our CFO, who will take you through our financial results. Joanna?

Joanna Lv -- Chief Financial Officer

Thank you, Charles. I will walk you through the key financials of our four major segments for the first quarter of 2019. All of the members that I will mention are all on a non-GAAP basis.

For Sohu Media Portal, quarterly revenues were $23 million, down 26% year over year. The quarterly loss was $35 million which compares with a net loss of $29 million in the first quarter of 2018.

For Sohu Video, quarterly revenues were $26 million, down 16% from a year ago. Of this, advertising revenues were $10 million. Excluding impairment charges, the operating loss for Sohu Video was $27 million, which compares with a net loss of $48 million in the same quarter last year.

For Sogou, quarterly revenues were $253 million, up 2% year-over-year and down 15% quarter-over-quarter. Net loss was $3 million compared with net income of $20 million in the same quarter last year.

For Changyou, quarterly revenues, including 17173, were $123 million, down 10% year-over-year and up 5% quarter-over-quarter. Changyou posted net income of $37 million compared with net loss of $16 million in the same quarter last year.

For the second quarter of 2019, we expect total revenue to be between $469 million and $494 million; brand advertising revenue to be between $47 million and $52 million, this implies annual decrease of 15% to 24% and a sequential increase of 9% to 21%; Sogou revenues to be between $303 million and $313 million, this implies annual increase of 1% to 4% and a sequential increase of 20% to 24%; online game revenues to be between $90 million and $100 million, this implies annual decrease of 5% to an annual increase of 6%, and a sequential decrease of 9% to a sequential increase of 1%; non-GAAP net loss attributable to Sohu.com Limited to be between $38 million and $48 million; and non-GAAP loss per fully diluted ADS to be between $0.95 and a $1.20; GAAP net loss attributable to Sohu.com Limited to be between $40 million and $50 million; and GAAP loss per fully diluted ADS to be between $1.00 and $1.25; excluding profits generated by Sogou and Changyou, non-GAAP net loss attributable to Sohu.com Limited to be between $65 million and $70 million; GAAP net loss attributable to Soho.com Limited to be between $67 million and $72 million.

For the second quarter of 2019 guidance, we use a presumed exchange rate of RMB6.8 to $1, which compares with the actual exchange rate of around RMB6.38 to $1 for the second quarter of 2018, and RMB6.74 to $1 for the first quarter of 2019. With that, this concludes our prepared remarks.

Operator, we would now like to open the call for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we would now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Alicia Yap from Citigroup. Please ask your questions.

Alicia Yap -- Citigroup -- Analyst

Hi, good evening Charles, Joanna, and other management. Thanks for taking my question. I have a couple of questions. Number one is, what are the plans for the use of cash from the special dividend that we see from Changyou? Second question is, what is the impact to Sohu Videos on the recent regulatory restrictions on broadcasting the costume drama? Any other content restriction that you foresee could be introduced later this year? And then just lastly, quickly it's related to Changyou. On the Changyou call earlier, I think management mention about the NetEase Game, Ancient Nocturne, they are Changyou's licensing from NetEase to publish in Korea. So just wonder why NetEase would license that game rather than not publish it themselves? Thank you.

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

Okay, the use of cash, right, from the dividend. Well, yeah, the -- on a corporate we're still at a loss and still burning cash, right. So we'll continue -- we need to spend money on the news apps, the channels, and the also product and technology development and so it's -- and also the Video. So that's -- there are many places to use the cash, but we'll just use it really diligently and make sure that we'll continue to narrow the loss, so that we'll have a pretty -- plenty of rooms or the ground to move forward.

The regulation on costume drama, it's actually not much restriction, right, on the costume drama and -- that's one, it's just -- there's no such a regulation. There is just the talk about it, but never proceed -- never actually carried out.

And also for Sohu's in-house staffing (ph) produced dramas, we tend to have -- to have drama from modern -- not the ancient stories but the modern times. So that we have a lot of opportunities to have the embedded advertising like cars, automobiles or mobile phones in all these kind of commercials, I mean commercial items that embedded in the story. For the ancient costume dramas, you don't have a lot of opportunities to do that, so the advertising.

So your question about Changyou right (foreign language).

Unidentified Speaker --

(Foreign Language) It's -- the way we work on games are relatively close (inaudible) so it's real easy to cooperate with each other. (Foreign Language) They are running it overseas. But we are especially doing good in Korea market. (Foreign Language) For long time actually we have been keeping very good relationship with both like Tencent and NetEase for some IP or local or brands we registered we also give -- we authorized them to use those. So it's good for us.

Alicia Yap -- Citigroup -- Analyst

Okay. Thank you.

Operator

Thank you. (Operator Instructions) The next follow-up question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap -- Citigroup -- Analyst

Hi. Sorry. Thanks. I have one follow-up question, if I may. Actually wanted to know -- I know this April period you know that the whole industry kind of like closing -- signing up off most of the framework contracts, so just wonder if management see what is Sohu's demands right from the appetite side and then also any change in terms of the different industry vertical that, if you can share the color. Thank you.

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

Any change in what...?

Unidentified Speaker --

(Foreign Language)

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

Well, it's -- there is, in the auto industry there is the mix -- there are mixed signal, some of those imported cars, vehicle, automobiles especially US or Germany -- US or European brands seems suffering, but the Japanese brand seems -- and also German brand, that's doing better. And yeah, the Japanese brand. Yeah. So in auto industry, there is a -- generally a kind of weak, yeah, weak advertising spending, weaker, but it is mixed, some becomes strong, and e-Commerce

Unidentified Speaker --

(Foreign Language)

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

Yeah, but -- yeah, exactly, the third or the -- I mean the -- in the liquor, liquor business right.

Unidentified Speaker --

Yeah.

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

Yeah the Chinese liquor business is coming up and all also those kind of the (foreign language). In fast moving consumer goods you know cosmetics and those medical, paramedical or something, those can -- we shine in those.

Unidentified Speaker --

Micro merchant.

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

Micro merchant through WeChat and another. Those are coming strong. So it is always -- the advertising is always -- at the economic downturn you know, is you always see some of those the traditional industry sectors kind of weak showing but then you always have because China as you know so many people, and there's always sectors that's (inaudible) but then they show up, right, strongly.

Alicia Yap -- Citigroup -- Analyst

Okay. All right, that's helpful. Thank you, Charles.

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

All right.

Operator

Thank you. (Operator Instructions) All right, thank you, so there are no further questions at this time. And ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Duration: 27 minutes

Call participants:

Eric Yuan -- Investor Relations Director

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

Joanna Lv -- Chief Financial Officer

Alicia Yap -- Citigroup -- Analyst

Unidentified Speaker --

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