Good evening. Thank you for joining Sohu's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management prepared remarks, there will be a Q&A session. 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..

Thanks operator. Thank you for joining us today to discuss Sohu's second quarter 2020 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; CFO, Joanna Lv; and Vice President of Finance, James Deng. Also with us today are Changyou's CEO, Dewen Chen; and 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 in this conference 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 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. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed..

Thank you, Huang Pu. Thank you everyone for joining us for second quarter of 2020. Our brand advertising business performed well. The brand advertising revenue had a decent increase of 48% quarter over quarter. Both the brand advertising revenue and the bottom line exceeded our prior guidance.

During the quarter, we integrated our media portals grant advantage and influence with Sohu Video's advanced live broadcast technologies, these initiatives allowed us to more effectively generate and distribute or high-quality original content and further enhanced our credibility with reflecting the attitude and value of so for Sohu.

For Changyou the privatization was completed on April 17, 2020. And after that Chinese net income and loss was wholly attributable to Sohu.com Limited. During the second quarter 2020 online game revenue met our prior guidance and declined the quarter over quarter, mainly due to the resumption of work following the easing of COVID-19 restrictions.

For Sohu, it delivered in line results in the second quarter with search maintaining a steady share of traffic and mobile keyboard input further expanding its DU base.

Before I go into more detail of our key financial results, please be reminded that for the second quarter of 2020, Changyou recognized an additional $88 million accrual for withholding income tax. Changyou changed its policy for its TRT subsidiaries for the distribution of cash dividends, after the completion of the privatization.

In addition, back in the third quarter of 2019, last year, Changyou cinema advertising business ceased operations unless indicated otherwise, the results that we'll discuss today excludes the impact of the abovementioned withholding income tax and the cinema advertising business.

So now for the second quarter of 2020, total revenues were $421 million down 9% year over year and 3% quarter over quarter. Brand advertising revenues $38 million down 14% year over year, up 48% quarter over quarter. Search and search related advertising revenues $241 million down 13% year over year and up 1% quarter over quarter.

Online game revenues $106 million up 4% year over year and down 21% quarter over quarter. GAAP net loss attributable to Sohu.com Limited was $80 million.

Excluding the impact of the additional accrual of withholding income tax described above GAAP net income attributable to Sohu.com Limited was $8 million, compared with a net loss of $35 million in the second quarter of 2019 and a net loss of $20 million in the first quarter of 2020.

Excluding the impact of additional accrual of withholding income tax described above non-GAAP net income attributable to Sohu.com Limited was $11 million income.

Further excluding the loss generated by Sohu non-GAAP net income attributable to Sohu.com Limited was $12 million compared with a net loss of $41 million in the second quarter of last year and the net loss of $8 million in the first quarter of 2020. So now let me go through some of our key businesses.

First Media Portal and Sohu Video; for Media Portal we continue to consolidate our core competitiveness and credibility as a mainstream Media Platform.

By generating and distributing news and premium content we also continue to upgrade the quality of our content and recommendation algorithms to provide users with broader and more personalized experience. As a result, we saw the consumption of content increase significantly during the second quarter.

For video, we continue to strengthen our long form and short form so called true engine strategy. For the long form original content we released the two original idol romance dramas. One is the High School Big Bang recognized as a bandwagon and also another one is My Dear Lady 2020 which were well received by audiences and gained widespread attention.

For short form content, we further strengthened our live broadcast capabilities. By being able to establish a good reputation with our medical and health live - health areas live broadcasters, by generating and distributing accurate and reliable information in these areas.

We'll continue to push forward in this area while proactively exploring new opportunities in other verticals. On the monetization side, we kept exploring new monetization opportunities by integrating the brand influence of our media portal with Sohu Video's advanced broadcast technologies.

During the quarter we successfully hosted several events that integrated both online and offline features. We launched a new live broadcast series called the Boss1+1 where we invited industry celebrities to share the insight views on the economy and the market wherever they are using the live broadcast sharing technology.

We also successfully host the Sohu Tech 5G Summit and Sohu News Marathon which broke geographical boundaries and provided participants with broader views and a greater user experience wherever they are. In June, July, we moved further towards the field of ecommerce by hosting the best of sisters' selection live from Sohu via [indiscernible].

We invited celebrities to share their thoughts live while recommending premium goods, the product so good to use. We have seen a number of positive results from these new initiatives given that they are providing advertisers with a variety of marketing strategies that fit the current moment and meet general public demand.

Going forward we will continue to diversify revenue source and actively explore new opportunities to grow advertising. Next, let's talk about Changyou.

For the second quarter of 2020, online game revenues decreased for quarter-over-quarter a net of our prior guidance, mainly due to a decrease in player engagement as a result of the work resumption following the COVID-19 pandemic in China.

For PC games, Changyou launched the new expansion pack of TLBB PC during the quarter with various anniversary events, and also new maps and dungeons were developed using advanced and rendering technologies. All of this new content served and greatly improved the user experience.

For mobile games, expansion pack of legacy TLBB Mobile's three-year anniversary was launched during the quarter. The newly introduced game play, which allowed players to explore randomly generated content was also well received.

For third quarter of 2020, Changyou will focus on stabilizing player engagement and rollout in game rewarding - reward gaming events and fresh content for TLBB PC and the likes TLBB Mobile. Looking ahead, Changyou will continue to focus on executing its core strategy of top games.

MMORPG mobile games will remain a key strategic focus, we're also scanning the market for opportunities across various generals as they look to diversify - as we look to diversify our product portfolio. Meanwhile, we'll also increase expanding our efforts overseas, currently several key games are being developed and prepared for launch.

We believe, Changyou will bring more quality games for players in the future. Lastly, let me talk about Sogou. Despite great challenges under the COVID-19 pandemic Sogou has been proactively upgrading its development strategy to focus on generating more user value and building out a business that is oriented toward a long-term value-added growth.

In the second quarter of 2020, Sogou delivered inline results with healthy momentum is search and mobile keyboard businesses.

Sogou search maintained a steady share of traffic and reinforce its position as China's second largest search engine, mobile keyboard, further expanding its DAU base to $484 million, maintaining the third largest Chinese mobile app in terms of DAU according to AI research.

In addition, its AI hardware business recorded solid growth during the quarter. Going forward, Sogou will further boost AI empowerment and as synergies across their businesses while continually drive technological advances. Now let me turn over the call over to Joanna, our CFO, who will walk you through our financial results.

Joanna?.

Thank you, Charles. I will walk you through the key financials of our four major segments for the second quarter of 2020. All of the numbers that I will mention are all on a non-GAAP basis. You can find a reconciliation of non-GAAP to GAAP measures on our IR website.

For Sohu Media Portal, quarterly revenues were $22 million; down 7% year-over-year and up 49% quarter-over-quarter. The quarterly operating loss was $80 million compared with an operating loss of $38 million in the same quarter last year. For Sohu Video, quarterly revenues were $22 million, up 6% year-over-year and down 4% quarter-over-quarter.

The quarterly operating loss was $10 million compared with an operating loss of $23 million in the same quarter last year. For Changyou, quarterly revenues including 17173 a $109 million, up 3% year-over-year and down 20% quarter-over-quarter.

Changyou posted an operating profit of $37 million compared with an operating profit of $38 million in the same quarter last year. For Sogou, quarterly revenues were $261 million, down 14% year-over-year and up 2% quarter-over-quarter. Net loss was $6 million compared with net income of $28 million in the same quarter last year.

For the third quarter of 2020, we expect brand advertising revenue to be between $37 million and $42 million. This implies our annual decrease of 9% to 20% and a sequential decrease of 3% to sequential increase of 11%. Online game revenue to be between $85 million and $95 million.

This implies annual decrease of 12% to 21% and a sequential decrease of 10% to 20%. Excluding total loss general by Sogou non-GAAP net loss attributable to Sohu.com Limited to be between $10 million and $20 million. And GAAP net loss attributable to Sohu.com Limited to be between $50 million and $25 million.

This forecast reflects Sohu's management's current and preliminary review, which is subject to substantial uncertainty, particularly in view of the potential ongoing impact of COVID-19 virus, which remains difficult to predict.

Lastly, please be reminded that we won't take questions regarding any Sogou business updates, and tenses non-bonding proposal for Sogou privatization in the Q&A session. And this concludes our prepared remarks. Operator, we will now like to open the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask the question..

Hey, good evening, guys. I just have two quick questions. The first one is about podcasting. I think, Charles you mentioned that there has been some synergy from reducing the influence, as well as broadcasting.

Wondering if you have any operating metrics, or financial share to share with us on the performance of broadcasting you have shifted in the quarter. And how's it growing into third quarter? So, that's my first question. The second question is about games.

I also think you mentioned that after people returning to work, there has been some weakness in the gaming industry in general. So, just wondering whether we have seen some stabilization on that front.

And now as we end the summer, would traditionally it should be a good quarter in general for the gaming industry? Or any color on the general industry trend of gaming industry into the third quarter will be great? Thanks..

So, Eddie, your first query is about live broadcasting, right?.

Yes..

So we have quit like - I think on a daily basis like dozens of influencers to broadcast. And then it is probably 10 or 20 that we actually using our platform to market them. So there is a - so these are the live broadcast, like we put using general push to market about 10 broadcasts.

Then we - we call it a value broadcasting, or we call it where are the people from like medical health industry or lifestyle or cosmetic industry or the influencer to teach people and the truth about knowledge, things, information.

And then we have some of few top live broadcasts, like myself participate, like each month we do like three or four with some top celebrities and to pick the share the life experience and some products. And then we are able to connect live our chat room or live broadcast room to e-commerce platform like [indiscernible] and others.

So that when a celebrity recommends some products they use, then the user can click that small cart shopping cart to be delivered directly to the e-commerce platform to purchase. So we're not - so because of this transaction-based advertising, and also, we actually give them a reward or some kind of lottery for people to click.

So that really the sales volume of those products is really the whole the chat rooms, the popularity and also the celebrity's recommendation or verbal recommendation or those kind of thing's a good advertising and had become a good reason for some of the big advertisers spend money on our overall advertising.

So this is a central part of the whole contract.

Am I answering your question, Eddie?.

Yes. So basically there is no direct e-commerce platform [indiscernible]. So, Charles using the content to attract advertising in general, that's actually the current [indiscernible]..

There is an e-commerce, because the advertisers, they give out the deep discount because - so actually why people become so popular and people are really coming to this chat room because they are getting the best price online, because the Kindle on top of those other advertiser they are willing because this is really good for the brand.

They are willing giving the big discount to us. So that price difference is considered to be our e-commerce revenue..

Understood..

I'm saying that's another big part, the main part is really the total advertising dollar annual spent. And it drives the whole contract, like it has become very important component of our overall contract.

Let's say, if a car company or I mean auto company spends like RMB 3 million advertising, in this contract, probably like one million was spent on these chat room advertising. And also, we are able to get that three million contract because we have this component. It's very creative and everyone got talking about this..

Yes. Understood. And any color on the industry trend of our games tapping into some of which traditionally a strong quarter will be helpful? Thanks..

So compared with Q1, the work done in less timing at home and also actually, because of the decline in economy people are spending less income right the two reasons for that..

First of all, during the pandemic, they're different for different gaming companies and different genres of games. So we got different impact caused by the pandemic. For our mostly our games are MNO Hardcore RPG games. So we rely on those [indiscernible] players who are higher paying users. So we benefited from the restrictions in the first quarter.

But during the second quarter, we saw some pressures on the economy. So we saw some pressure on the payment players' investment in game. So you can see that from the data in the second quarter, we had a declined ATA number. So, but we expect in the third quarter it will be stabilized..

Got it. Thank you..

So, my question is stabilized about the earnings less because of the cost increase right because of the marketing of..

The industry will be more stabilized..

All right.

Next?.

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please ask the question..

Hi. Thanks, management, for taking my questions. First, I have a question about the 3Q brand advertising guidance. Given that is a negative 3% to positive over 10% sequential growth.

I'm just wondering under what circumstances, would we expect to hit the low end and the high end of the guidance? And can you comment about the ad expending among different categories? And my second question is about the China and the U.S. tensions. Does that have any impact to our revenue coming from international advertisers? Thank you..

As your second question. We don't have - you mean international advertiser..

Like those international brands..

FMCG increases..

So for international advertise they actually increased the advertising. Yeah, it's actually better. So to answer the second question. Your first question, I think the wide range of the rent of the forecast depends on really the COVID-19 situation of the economy. So we'll continue our product innovation and user base elements of that.

Trying to create momentum about the economy and the uncertainties that would give a wide range of forecast..

I see. Then Charles.

Is there any color about our key categories? Is the momentum similar to what we saw recently?.

I think it's a euro allocation like auto industry. And then auto, I think then FMCG, fast moving consumer goods and internet services like ecommerce. I think ecommerce is number two, right? Auto industry, number one. Ecommerce number two. And FMCG, three. And then some IT companies right. And then followed by financial sectors, financial industry.

Real-estate also. So yes, that's the Euro ranking of these spending..

I see. Got it. Thanks you, Charles..

Okay..

Thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please ask your question..

Hi, thank you. Good evening, Charles and management. Thanks for taking my question. I have two questions. One is following, the closer integrations of your ad system and also, the sales team between the Sohu Video and Sohu Portal.

So could you elaborate and help us to understand more the future prospects of Sohu Portal? What is your plan and aspiration to transform the Sohu Portal to become to? And then the second question is on your video content strategy.

So, assuming you're getting more cash, will you spend more money in video content production again? Or will you actually continue your strategy on cutting the loss on the video business? Thank you..

Yes, we have now clear strategy for both our key application that means the portal, the Soho News app, and Soho Video app. Well we have other H5 based so this one - and also PC that's another interpret. But our focus is really on the Soho News app and Soho Video app.

On the Sohu News app, the product innovation base will mostly focus on the two information delivery mechanisms. One is really we will continue to have high quality content, editorial content and original content and also content with collaborators.

But the deliveries, editorial delivery plus the machine delivery, basically, the algorithm, we will continue to improve the algorithms that in the news become so relevant to each individual users and information. And also, the percentage of video content in the intermission stream. The second delivery is also our focus is really the social network.

I mean, social media delivery basically people are followers and have those kind of - we have a different channel for that. That's a two area that we believe that will be the driver for our news apps, user growth. And for video the long form content is drama.

And then the short-form is really the short video clips basically the YouTube type, people will actually upload short video. And people will also produce short video by live broadcasting, live broadcasting as a way to produce short form or not even short form sometimes people broadcast one-hour replay.

So, these are also the two, two types of and delivery also. Either the front page or editorial, delivery and also, we have all this social media delivery. These are especially the social media delivery, the following followers and then retreat those kind of is our focus.

And then as soon as you have this to app for live broadcast, we don't allow - we do not allow the news app to reinvent the wheel to have a live broadcast feature.

But the whole company has only the live broadcasting feature at the Soho Video app and other user base will be, the traffic will be driven to the news app - to the video app for that synergy where like some of those are live broadcasts. Because previously before the Sohu Video apps are well known for its TV drama and the U.S. - American dramas.

But it's now established as one of the key live broadcast app and also some kind of key breaking news app, video news. And then people using the news app are more likely to watch this kind of content.

And then there's a link or a direct link between the two apps so that people using news app can directly one click away just to enter into the live broadcast room to watch those live broadcast content, video content of news type or other knowledge type not just the long form of video drama. So it's kind of complicated.

And I hope you understand what I'm saying. We are looking at basically a matrix of user base with the two app specializing in features and content form. And also the H5 Sohu app the more of the traditional PC and a PC initial discipline, more traditional browsing activities. So it's a matrix of content.

And then for video and live broadcasts, all the traffic was diverted into the video app..

So that means we are not going to spend more money in the long form content production again, right?.

In the last few years we've been able to manage to generate - to produce them in terms of [indiscernible] like some low budget TV series episode. And then - but it could be a hit. We have - we done this many times. So we, if we have more money, we're not going to spend like we did in 2017 or 2016, spend buying a lot of very expensive content.

But probably will increase the density or frequency of a number of TV series per quarter. Like in 2019 or let's say the first two quarters. We're going to have three TV episodes, TV drama. Then in - at the current pace, the next half of this year, we also only have another tool to write towards. But if with more money, we probably only double that.

That means we probably have like, instead of five or six TV dramas a year, we probably have 10 to 12, which - so that means a lot of increased spending on a long form. So our video business growth mostly will be driven by the short form, user upload, UGC content and the live broadcast.

And TV dramas opportunity to develop new users, because it's exclusive content here. There are a lot of users will come here to watch our new TV dramas and then they will stay, because we not only watch that TV drama, they probably will find a lot of other social network features. So they will stay tuned. That's our strategy..

Okay, great. Thank you, Charles. Very helpful..

Okay. Welcome..

Thank you. [Operator Instructions]. All right, there are no further questions..

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect..