Sohu.com Ltd

NASDAQ:SOHU

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Third Quarter 2023 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's conference call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

[Pu Huang, executive]

Thanks, operator. Thank you for joining us to discuss Sohu's third quarter 2023 results. On the call are Chairman and Chief Executive Officer, Charles Zhang; CFO, Joanna Lv; and Vice President of Finance, James Deng. Also with us are Changyou's CEO, Dewen Chen; and it's CFO, Yaobin Wang.

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 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. For these statements involving 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 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.

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

[Charles Zhang, executive]

Thanks, Huang Pu, and thank you, everyone, for joining our call. In the third quarter of 2023, we continue to improve our product offering and enhance operational efficiency. Thanks to these efforts, we delivered both top and bottom line performance in line with our prior expectations. As Sohu Media Portal, we further refined our products and upgraded the user experience. As Sohu Video, with our "Twin Engine" strategy, we focused on the generation and distribution of compelling short-form content as well as live broadcast. These efforts helped us further boost user engagement and social interactions. Same time, benefiting from our unique content and marketing campaigns. We continue to explore a diverse range of monetization opportunities that leverage our differentiated competitive advantages. For Online Games, with consistent release of new content updates and operational efforts, game revenues remained stable.

Before I go into more detail of our key financial results, please be reminded that the bankruptcy proceeding for Changyou's cinema advertising business concluded during the quarter. This release is related to continuing operations only. So this includes the disposable -- disposal gain from the cinema's -- Changyou's cinema underlying business.

So for this quarter, for the third quarter of 2023, the total revenues were $145 million, down 22% year-over-year and 4% quarter-over-quarter. Brand advertising revenue was $22 million, down 14% year-over-year and 8% quarter-over-quarter. Online game revenues were down $117 million, 21% year-over-year and 1% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was $14 million compared with a net loss of $22 million in the third quarter of 2022 and a net loss of $21 million in the second quarter of 2023. Non-GAAP net loss attributable to Sohu.com Limited was $10 million compared with a net loss of $17 million in the third quarter of 2022 and a net loss of $18 million in the second quarter of this year.

So now let me go through our key businesses in more detail. First, Media Portal and Sohu Video. In Sohu Media Portal, we continue to upgrade our products and strengthen operational efficiency. We actively promoted the generation and the social distribution of high-quality content through enhanced user engagement and interaction. Most integrated cutting-edge technologies in our products resulting in a better user experience for both audiences and content providers.

At Sohu Video, our focus remains on executing the "Twin Engine" strategy. We further diversified our long-term long-form content library and continuously promoted our unique live streaming and live streaming and short-form content. We're committed to establishing a leading position in the field of knowledge and science-related live broadcasting, leveraging our distinctive IP, the Charles' Physics class. And this IP has formed a multidimensional dissemination through live broadcasting, short videos, offline seminars, books and other means, which has driven considerable traffic and engagement on various topics across our platforms. In addition, as a video social platform, we were also proactively attracting broadcasters and users across various fields by refining our broadcaster ecosystem and organizing events centered on hot topics such as the 2023 Sohu K-Pop Dancing Festival and 2023 Sohu Broadcasters Conference, so basically user conference. These live broadcasting events enabled users to interact with each other, online and offline and further enhance their vitality and engagement on the Sohu Video platform.

On the monetization side, despite the advertising budgets remain cautious. We totally follow the market trends and we're developing synergies between Sohu's product matrix and our advanced live broadcasting technology. These efforts enable us to execute unique high-value marketing campaigns and allow new monetization -- unlock new monetization opportunities. During the quarter, we hosted traditional and innovative events that has talk Under the Starry Sky, [Foreign Language] and BOSS1+1, high-end dialogue. These events have been disseminated across the various social media platforms not only demonstrating our influence as a mainstream media platform but also effectively attracting millions of audiences and generating significant exposure for advertisers.

Now turning to the online game business. Game revenues remained stable during the quarter, driven by consistent release of new content updates and robust game cooperations. Within our PC games business, we roll out promotional events for regular TLBB PC and further optimized its character development system. With TLBB Vintage, we launched a month-long event during the PC festival, which helped stabilize player engagement. The Chinese Valentine's Day. In our mobile game business, we introduced a new strategic plan -- a new strategic plan war gameplay mode for legacy TLBB Mobile.

Next quarter, we will launch expansion packs and the content updates for the TLBB series and other titles to keep players engaged. We will stick to our top game strategy going forward as gaming technology advances rapidly and the market demand becomes deeper and more diversified. We will explore new ideas to better meet the players' needs, allocate more resources to professional talent development and invest in content and technology innovation in order to bring more high-quality games to the market. In terms of games in pipeline, we will maintain our core competitiveness in MMORPGs while also producing card-based RPGs or board and casual strategy game.

Before I pass the call to Joanna Lv to go to our financial results in detail, we are pleased to announce that on November 11, 2023, 2 days ago, our Board of Directors authorized a share repurchase program of up to $80 million over a 2-year period. The repurchase program underscores the continued confidence we have in our long-term growth prospects as well as our ongoing commitment to increasing shareholder value.

So with that, I will now turn the call over to Joanna, please?

[Joanna Lv, executive]

Thank you, Charles. I will now walk you through the key financials of our major segments for third quarter of 2023. All the numbers 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 $60 million, compared with revenue of $80 million in the same quarter last year. The quarterly operating loss was $33 million compared with an operating loss of $39 million in the same quarter last year.

For Sohu Video, quarterly revenues were $11 million compared with revenue of $60 million in the same quarter last year. Quarterly operating loss was $33 million compared with an operating loss of $31 million in the same quarter last year.

For Changyou's online game business and 17173, quarterly revenues, $180 million compared with revenues of $150 million in the same quarter last year. Quarterly operating profit was $52 million compared with an operating profit of $58 million in the same quarter last year.

For the fourth quarter of 2023, we expect Brand advertising revenues to be between $20 million and $23 million. This impacts annual decrease of 20% to 31% and a sequential decrease of 9% to a sequential increase of 4%. Online game revenues to be between $106 million and $116 million. This impacts annual decrease of 4% to 13% and a sequential decrease of 1% to 9%. Non-GAAP net loss attributable to Sohu.com Limited to be between $10 million and $20 million, and the GAAP debt loss attributable to Sohu.com Limited to be between $13 million and $23 million. This forecast reflects Sohu's management's current and preliminary view, which is subject to substantial uncertainty.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

My first question is relating to the advertising business. I saw our Q4 revenue guidance for brand advertising sequential down 9% to 4% growth at the high end. So I just want to get some color from Charles, if I may know about the October and so far the performance in November? Under what situation should we expect it to be down by 9%? Or is that a conservative guidance?

And my second question is relating to AIGC. Given that everyone I think talks about how AI can help to drive the conversion, the content creation. Just want to get some color from Sohu perspective our strategies in coming quarters?

And sorry, and finally, may I also ask a quick follow-up is more relating to 2024 online advertising outlook?

[Charles Zhang, executive]

All right. So the Q4 forecast is -- I think it's -- we just -- we are providing a range. And Q4 is quite similar to Q3, right? And there's nothing -- it's still -- the macroeconomic situation is really kind of bad, and we're trying to have some innovative marketing campaigns and events that attract advertisers so that in Q4, we have about equal number of events or content activities like the Sohu Fashion ceremony and also the finance conference. And also, we have a few others like the K-Pop Dancing Festival, the national contest and all these things. So I think the Q4 is similar to Q3, we're just providing a range.

The AIGC, I think it's only have some incremental improve with the application of AIGC to our content generation and its only have now have kind of incremental improvement of efficiency of content creation, but it's not -- so far, it's not getting any major impact on our business side -- positive impact on business side yet. With -- basically, like the video content, we have a better -- with the AI technology, we have better -- the titles words and translations and the voice to words. And also for articles, we have using AIGC to summarize to write to summarize the abstracts of the articles. So it's not a big deal yet.

[Thomas Chong, analyst]

Got it. May I also ask a very quick follow-up question is relating to how we should think about the advertising market in 2024? Are any preliminary discussions -- yes, 2024. Do we have any preliminary discussion with the advertisers yet about next year's spending?

[Charles Zhang, executive]

Yes. I think overall, the macroeconomic -- microeconomy is doing not that good. And -- so especially, for example, there's the auto industry, which consist quarter of -- 25% of our advertising base. The marketers are more cautious now in spending because all the -- across all the businesses people are spending less because people have -- consumers have limited disposal income to spend. So in this situation, the advertisers tend to center their budgets around some top-tier user base, top-tier platform. So with Sohu's current user base, we are not in a top tier so that we have to have this kind of innovative events and campaigns and others to attract the brand advertisers.

So unless we have -- so I think the next year, '24 seems will be similar. And unless we have our -- Sohu News and Sohu Portal and Sohu Portal and Sohu News and Sohu Video have really the uptake or the social media platform, social video -- social media platform have a major rise or explosive growth of user base. I think 2024 will be similar to '23. But we definitely have some hope that in 2024, our social media strategy will have some positive hope, yes, to expand rapidly.

[Operator]

We'll now move on to our next question. Our next question comes from the line of Alicia Yap from Citigroup.

[Alicis a Yap, analyst]

Charles, Joanna and team. I have 3 questions. First, I wanted to follow up on the comment, Charles, you just mentioned for the 4Q advertising outlook. Would you say the macro situation is improving from what you are seeing in 3Q or about similar? Or is it no improvement? And is it not getting worse in 4Q? So just any color as you compared to what you saw in 3Q would be great. So that's the first question.

[Charles Zhang, executive]

Well, the -- I think in Q4, the Internet service will have some improvement, right? Because Q3 is kind of a slow season for Internet services, like Q4 that we have [Foreign Language], and e-commerce. And -- but overall, the auto industry has been contracting. I mean, people are not spending because of the competition and less budget and because the car sales is not as robust. So they are becoming more cautious in promoting their products or sales.

Well, the -- some industries like fast-moving consumer goods industry -- FMCG industries seems to have -- they're spending more. It's typical of an economic downturn, right? People are drinking more, right, drinking wine, consuming leisure time and spending small items, right? So that's -- FMCG is only -- have some bright spot. Yes.

[Alicis a Yap, analyst]

I see. I see. That's very helpful. So second question is related to the gains guidance for 4Q. I think I thought you mentioned there will be some expansion content update for TLBB series. So just wondering what's the reason for the games guidance to also experience sequential decline?

[Unknown Executive]

[Interpreted] Mainly due to most of our older games, we will have a natural decline in the fourth quarter. The update -- content update in the fourth quarter are not major ones. So they cannot offset the natural declines from the game revenues.

[Alicis a Yap, analyst]

Can I follow up on that one? Is that -- so when you have new games launched next year, then you would -- we should assume to see some sequential growth, right, in the coming quarters beyond 4Q?

[Unknown Executive]

[Interpreted] Yes. Typically, yes, but it also depends on the performance of the new game launched.

[Alicis a Yap, analyst]

Okay. My last question is on your share buyback. So it is great that we are seeing this $80 million buyback that newly authorized. Just assuming if we are using finish up on the $80 million. Just wondering what's the next plan that management may have? Will that be more buyback down the road if we finish that $80 million? Or is that will be some other things that you are thinking?

[Charles Zhang, executive]

Well, we'll first to execute this $80 million buyback, right? And then we'll think what's next. I think our focus is still really to really make sure our business grow and our social network strategy works. So there will be -- actually, we haven't -- we've been refining our products, both the Sohu Video and the Sohu News. And the battle to be really -- to grow, to really grow our user base has not started. We've been refining our products and spending with. So we definitely need to watch that to continue to launch, right, to mention the major product -- I mean, to expand to grow our products, user base.

So that's -- and we are confident, actually. So that's why -- and also gaming and yes. So once the Sohu Media and Sohu Video user base grow, I would say, I hope exponentially because social network, that's the way it grows. It stays flat. And then suddenly, you got the product right and explode or grow expansion and hope that they will come. And then our advertising dollar will grow because it's high with this user base scale and also we'll hope that our game will even better in the future.

[Operator]

[Operator Instructions] As there are no further questions at this time, this concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

[Charles Zhang, executive]

Thank you.