Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements 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 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 fourth quarter 2020 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; CFO, Joanna Lu; and Vice President of Finance, James Deng. Also with us today are Changyou's CEO, Dewen Chen; and the CFO, Yaobin Wang.

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 measures discussed on 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 risk 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.

Please also be reminded that Sogou's results of operations have been excluded from our results from continuing operations, reach our respective adjustments to the historical statements have been made in order to provide a consistent basis of comparison.

Unless indicated otherwise, the results that we talk about are related to continuing operations only. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed..

Thanks, Huang Pu, and thank you to everyone for joining our call. For the fourth quarter of 2020 and for the whole year of 2020, we faced significant challenges with the outbreak of coronavirus pandemic and uncertain macroeconomic environment.

However, with our continuing efforts to innovate products and technology, improve monetization efficiency and strictly control our budgets, we're able to return to profitability as we recorded net income of USD 53 million this quarter, which greatly exceeded our previous guidance.

For the whole year of 2020, excluding an additional accrual of reporting income tax made by Changyou in the second quarter, we also achieved a profit of $51 million.

So for Sohu Media Portal and Video, we continue to focus on generating and distributing real-time and reliable news and the premium content and strengthened our competitiveness and credibility as a mainstream media platform.

We consistently upgraded our live broadcasting technology integrated into the Sohu product matrix and apply it widely to various content marketing events, which further enhanced the overall value of the Sohu Media Portal and Video.

Benefiting from our continuous efforts, our brand advertising revenues reached the high end of the previous guidance for Q4.

And for Changyou, thanks to the solid performance of some special servers for TLBB PC that were launched during the quarter, the online games business performed well as revenue exceeded the high end of our guidance by a lot, actually. For the -- so let me look at the financial numbers.

For the fourth quarter of 2020, total revenues $253 million, up 34% year-over-year and 60% quarter-over-quarter. Brand advertising revenue is $42 million, flat year-over-year and up 2% quarter-over-quarter. Online game revenues, $196 million, up 49% year-over-year and 94% quarter-over-quarter.

GAAP net income from continuing operations attributable to Sohu.com Limited was $47 million compared with a net loss of $29 million in the fourth quarter of 2019 and a net loss of $15 million in the third quarter of 2020.

Non-GAAP net income from continuing operations attributable to Sohu.com Limited was $153 million for Q4 compared with a net loss of $6 million in the fourth quarter of 2019 and a net loss of $7 million in the third quarter of 2020. For the whole year of 2020, total revenues, $750 million, up 11% compared with 2019.

Brand advertising revenue, $147 million, down 16% compared with '19. Online game revenues were $537 million, up 22% compared with 2019.

Excluding the impact of additional accrual of reporting income tax recognized by Changyou in the second quarter of 2020, GAAP net income attributable to Sohu.com Limited was $33 million compared with a net loss of $157 million in 2019.

Excluding the impact of the additional growth of the withholding income tax I've mentioned, non-GAAP net income from continuing operations attributable to Sohu.com Limited was $51 million for 2020 compared with a net loss of $128 million in 2019. Now let me go through some of our key businesses. First, Media Portal and Sohu Video.

For Sohu Media Portal, in the face of the COVID-19 pandemic and the challenging macroeconomic environment, we continue to innovate our products, upgrade our technology and keep refining our content distribution features by stimulating content generation and user generation and user interaction.

We were able to further enhance our credibility by reflecting the attitude and the core values of Sohu. For Sohu Video, in 2020, we continue to execute our team engine strategy.

For long-format content, we successfully rolled out new original idol romance content, Well-Intended Love, [Foreign Language] episode 2, and My Dear Lady, [Foreign Language] were both well received by audiences.

Thanks to the high-quality content and the better operating efficiency, our subscription revenue -- subscription revenue increased significantly during 2020. Despite delays in shooting new dramas as a result of the outbreak of COVID-19, we currently have several original dramas in our pipeline that will be steadily rolled out in 2021.

Most of them were filmed in the later part of 2020. For short-form content, the other part of our 2020 strategy, we accelerated the deployment of value live broadcasting areas such as medical health. We're glad to see the live streaming technology advancement that we have achieved.

We deeply integrated our unique live broadcasting technologies such as multi-person microphone relay feature with our products on the platform and widely expanded the live broadcasting landscape.

We proactively apply this advanced technology across various creative activities, including large content marketing events, value live broadcasting and live e-commerce backhaul, enabling users to interact with each other in real time, whenever they are.

During this past quarter with this live broadcasting technology, we successfully [Indiscernible] high-end deal like Plus 1 Plus 1 and also the e-commerce [Foreign Language], best selections by celebrities and several traditional flagship events such as the Sohu Fashion Awards and the Sohu Finance Annual Conference.

These events not only attracted a lot of attention in real time in terms of content, but also we're able to build even more attraction upwards and also attract advertisers. These events greatly reinforce our brand influence and help to effectively secure high budget from advertisers. Next, let me turn to Changyou.

For the fourth quarter of 2020, we launched some special servers for TLBB PC that use a memorable early version of the game for content. We're calling this TLBB Vintage. And thanks to its exceptional performance, online game revenue exceeded the high end of our guidance.

For PC games, TLBB Vintage helped us to draw back many players that were -- we lost over the years who love and still feel project for the experience from years ago. We were able to build up a lot of excitement around the launch and efforts help -- the efforts helped to significantly boost in-game spending.

Meanwhile, Changyou also upgraded regular TLBB PC by introducing, for the first time, a capital city map in which players from old servers can interact freely, and we're redesigning the cross-server client wall system.

For mobile games, Changyou launched a new expansion pack for Legacy TLBB Mobile that featured additional -- the addition of new plan and other creative cultural content, of which helps keep player engagement stable.

Next quarter, Changyou will further optimize TLBB Vintage based on user feedback and then we'll also unveil a variety of holiday events as well as promotions for the regular TLBB PC and Legacy TLBB mobile. Currently, several key games are being developed, and we look forward to introducing them to players soon.

Looking ahead, Changyou will further execute its core strategy of top games. Changyou's strategic focus will continue to be MMORPG mobile game, while we're also developing and looking to roll out games across various genres. Now let me turn to Joanna, who will walk you through financial results in detail..

Thank you, Charles. I will walk you through the key financials of our major segments for fourth quarter and full year of 2020. All of the numbers that I will mention are all on a non-GAAP basis. So for Sohu Media Portal, profit revenues were $24 million, up 7% year-over-year and down 1% quarter-over-quarter.

The quarterly operating loss was $28 million compared with an operating loss of $25 million in the same quarter last year. For full year 2020, Sohu Media Portal revenues were $86 million, down 9% compared with 2019. For full year, net loss was $92 million compared with an operating loss of $130 million in 2019.

For Sohu Video, quarterly revenues were $23 million, up 6% year-over-year and 1% quarter-over-quarter. The quarterly operating loss was $11 million compared with an operating loss of $80 million in the same quarter last year. For full year 2020, Sohu Video revenues were $91 million, flat with 2019.

Full year net loss was $73 million, compared with an operating loss of $94 million in 2019. For Changyou, company revenue, including 17173, $199 million, up 47% year-over-year and 91% quarter-over-quarter. Changyou posted an operating profit of $112 million compared with $50 million in the same quarter last year.

For full year 2020, total revenue $548 million, up 20% compared with 2019. Changyou posted an operating profit of $238 million compared with operating profit of $169 million in 2019.

For the first quarter of 2021, we expect brand advertising revenues to be between $27 million and $32 million, online game revenues to be between $137 million and $147 million, non-GAAP net income from continuing operations attributable to Sohu.com Limited to be between $5 million and $50 million and GAAP net income from continuing operations attributable to Sohu.com Limited to be between $1 million and $11 million.

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

Lastly, please be reminded that in the Q&A session, we won't take questions regarding any Sogou business updates or the agreements with Tencent for Sogou's privatization. This concludes our prepared remarks. Operator, we would now like to open the call to questions..

[Operator Instructions] Our first question comes from the line of Eddie Leung from Merrill Lynch..

I'm just curious on your outlook for first quarter 2021. Number one, it seems to be a pretty big range, especially on the advertising side.

And then number two, when we look at the year-on-year growth on the advertising side of brand advertising, could you talk a little bit about how much is more from an industry revamp, industry recovery? And how much is, broadly speaking, coming from the assets you have done in the past year, for example, having more rich media including live streaming in your portal as well as the off-line events you held for your marketers? So these are my 2 questions..

Okay. Eddie, this is Charles. Yes, the -- actually, the -- several elements have all contributed to the outlook on -- the first quarter of '21. Like first of all, a year ago, we have pandemic outbreak, right? So this year, it's less, the effect is less. But this year, both are the first quarter are the slow quarter because of the Chinese New Year.

And this 2021 Chinese New Year is actually a little bit later than 2019 -- 2020, right? So these are the negative impact. Well, the less effect of the pandemic is a positive contribution and the Chinese New Year.

And then there is definitely the continuation of our efforts with live broadcasting technology and its application to our various marketing events to create both content and also advertising opportunities for our advertisers to be just more interested or excited about the creative events that we are creating.

So like this month, we are also having this good selection e-commerce events. And also around the Chinese New Year, we have this live broadcasting programs featuring various programs, people and celebrities. So these are all contributing. So a number of factors contributed to -- yes, to the outlook of advertising..

And then I don't know whether it's -- I think Charles -- whether Charles and Joanna can talk about kind of like the big range of the advertising outlook. The reason I ask this question is that I know that most of your advertisers are quality, big brands.

So I think typically, they would have a marketing plan, some type of budgeting, right? So usually, the feasibility should be pretty good, unlike pure performance-based advertising, right? It seems like this year, especially this quarter, we are looking at a pretty big range in terms of the outlook, 5% to 25% year-on-year, right? So I wondering why this is a bit larger than usual..

Yes, that's because we have -- the brand advertising on our most part of -- with most of those top advertisers. So it's like big items, right? So it's this kind of -- if you have a small number of advertisers with -- instead of like 10,000 or 5,000, we have like a few hundred -- I mean, 100 or 1,000.

So those -- so -- and the big -- each one is spending like a large number. So the -- any change of 1 advertiser may drive the total revenue up and down. So that's -- it's -- so it's not -- and also the first quarter is a slow season with Chinese New Year and decisions made can be kind of changed or something..

[Operator Instructions] The next question comes from the line of Alicia Yap of Citigroup..

I have 2 questions. First of all, on online games. So I wanted to understand the outperformance for these PC TLBB resource 2% release for this special server.

Wonder the strength is already reversed or the strength is actually continue into the first quarter? And just wonder you can share like how many like the old gamers that you have successfully brought back? And then can you remind us under the first schedule for the PC games? How will that actually be benefiting the strength in 4Q? Should that also benefit first Q and also second quarter? And then any expansion pack release planning later this year that you can share? So this is on the gaming.

And then second question is related to the overall advertising outlook. I'm not sure Charles or management have any view so far in terms of some of the sentiment doubts in terms of the ad budget this year versus last year.

And then for the fourth quarter, could you also remind us which category actually performed well during the quarter? And which quarter actually has, from your indication, you know it will have a stronger recovery in 2021?.

Okay, Alicia. So your first question about the online gaming and about the special service and the -- the special and the older gamers brought back. Obviously, it contributed mostly in Q4, and the trend continuing a little bit, but definitely fall back a little bit, right, for Q1. And so maybe [Foreign Language]..

[Foreign Language].

[Foreign Language] The expansion pack, the expansion pack going mobile..

[Foreign Language].

[Foreign Language].

Okay. [Foreign Language].

Alicia, for the TLBB Vintage, we call those special servers. The content is very -- it's welcomed by those hardcore players that we lost over years, like 10 years ago. So the total number of the returning users is not so big, but they are really hardcore. And with the consumption level this quarter is far beyond our expectations.

So we expect in the first quarter, there will be a natural decline for the TLBB Vintage and also considering the festival traveling factors, so we see the guidance is pretty conservative..

[Foreign Language].

But in terms of active players, we see operating numbers, it's quite stable, currently speaking..

[Foreign Language].

Actually, there have been 2 versions are pursuing totally different experiences. So in the future, we will apply different operating strategies. For regular serving PC, we will make more evolutionary expansions like before. But for Vintage, we'll keep the classic content and make some strong social and further updates based on player feedback..

[Foreign Language].

So the regular TLBB PC is focused more on PVP, player versus player [typing] events. But for the TLBB Vintage, we will be focusing on more casual, more social things..

[Foreign Language].

We plan to launch the first expansion pack for TLBB Vintage in the second quarter of 2021..

All right. About advertising outlook. So since the total -- I think the total macroeconomic situation, I'm not sure, maybe a little bit better than 2020. But since it's -- actually it doesn't matter to Sohu because our advertising revenue base is very, very small. So it really depends on how we know -- we work, how well we do.

So then we'll continue the trend in 2020 because of our development of the live broadcasting technology and live streaming and applied to various marketing -- common marketing brands and create some value for advertisers so that we achieve, not only recovered from Q1 as the pandemic recede. And Q2 and Q3 and Q4, actually we achieved a slow growth.

And then that trend, I believe that in 2021, we will continue that slow growth with our strategy of live broadcasting and type [Indiscernible] and those kind of things and events.

But based on that event, if we -- there's a big if -- if we can have our product innovation like our Super News app and the Sohu Video app and innovation so that the user base can grow organically and actually -- or even have an uptick without heavy spending on pre-installment to devices or online stores, so without channel marketing basically continue to -- our strategy is really continue to have cost control, basically not much more spending, but through the product innovation, especially via our social media feature introduction into our app.

And so that we can grow our user base without much additional cost by the grow user base and the user base growth largely. So then we can grow our revenue faster than the pace that we did in 2020. So it's a big if, depending on whether our product innovation will be successful or not.

And the categories are mostly auto, right, auto and FMCG and e-commerce basically..

[Operator Instructions] The next question comes from the line of Thomas Chong of Jefferies..

My question is about advertising as well, but on the video side.

Given that we have been seeing the COVID breakout, should we expect there might be a delay in terms of the production time line or the release time line for this year? And on that front, how should we see the competition in long-form video advertising versus the short-form video advertising? Are we seeing short-form video advertising actually affect the advertising budget split to our portal and video? And then my follow-up question is about the long-game operating line.

If we strip out the gaming business, how should we think about the fundamentals or the operating loss for the long-game business? When should we expect profitability or breakeven?.

Yes. First of all, the advertising for long form, first of all, the production. So the 2020, the first half, we actually -- because of the pandemic, we don't have much filming. And then in later part, we filmed -- we produced a few drama episodes, so now we have -- I think we have 5, right? 5 is up.

We'll be -- we already launched -- we already start one in January and then we'll have another one. So we have a pipeline of a few dramas are lining up for this year. And also, we are also producing more. So basically, this year, we'll probably have 10, right, 10 dramas. And that actually mostly will drive the subscription business.

For advertising, it's -- our video advertising actually now does not depend that much on our long-form drama because most people subscribe, use the subscription.

So the subscribers do not see advertising, right? So our video advertising mostly depends on the -- some of our -- okay, yes, it's depend on -- they do advertise on our variety shows, right, variety shows and also some of the live broadcasting events and the short form. So Sohu Video also have this [indiscernible] strategy.

So we are actually actively developing this social media type of short-form video. So you will see first -- so you basically will see a few -- I mean about 10 dramas this year, and that will drive -- continue to drive our subscription growth, subscription business growth.

And advertising will not depend on that much on the production of long-form drama, but on some variety shows and also short-form and live streaming events. So we'll see a gradual -- continued slow growth of our advertising and also, I think, the strong growth of our subscription.

Nongame business, when will we break even? And that also depends on what I just said is, first of all, with the current -- in the last few years, we've been able to effectively to cut costs almost like by 1/2, right? So that the media platform basically now had a quarterly loss like around or even below $40 million per quarter.

And that's why with the game uptake with -- some kind of achieve profitability. Looking forward, we hope that the innovation and the product innovation in this, not only in the editorial distribution, the television distribution content and also algorithm or the recommendation distribution.

And also the third one is most important one, is the social media distribution.

So if we can achieve that and basically, we'll kind of achieve our product user base, user base without much spending basically through product innovation so that we form attraction and then user growth, then our advertising and both advertising and the distribution business will grow much faster.

And that will determine whether -- when we'll break even with the media nongame business. And -- but that is -- it really depends on -- so when we talk about innovate technology to innovate, we just -- we're not just -- generally speaking, innovation and product innovation, we really mean it, and we really mean it.

It's very detailed, very detailed experience and also the product in line and development. So it's really -- we are working -- and we hope that will be successful, and I hope that the turning point for the product uptake is really this year..

Our next question comes from the line of Jong Shi of [Emerald]..

And congratulations for a strong quarter. My question relates -- I know you're not allowed to comment much on Sogou. I just want to pick your brains on a hypothetical case.

In case the deal goes through and you received a cash allocation, I'm just wondering how are you thinking about the future investments in terms of a breakdown? What are the specific projects you are planning to allocate to distributors, I think the investors an idea?.

Well, hypothetically, if we have the cash, we can do both. So now without the cash, we can only grow our products by -- and user base by organic -- by product generation with new features and [Indiscernible]. Then with more cash, we can do both. We can do marketing and pre-installment so that we -- our user base can grow faster.

And also, definitely, in terms of the product innovation, we definitely can get into more areas like delivering news and content and explore its AI-enabled voice. And also -- so there's more features, more -- so that definitely is more.

Now we are basically assuming that do everything because in such a last years' experience, we are really improved the operation efficiency so that we can -- we try to do things with the low budget.

And so we hope that we'll continue this -- basically assuming that we -- we're always assuming that we don't have the money, and then we will just really work on product innovation. And spend less on the pre-installment or APD stores and all those things and really to see whether the product itself can attract new users..

I see.

And still, just based upon that hypothetical scenario, I was wondering if the M&A acquisitions and potentially maybe a special dividend or dividend policy, has your outlook on these kind of things changed over the last few months? And how are you thinking about these type of allocations?.

Well, I think we are quite conservative, but we will only think about those things when we have the money..

Okay. Okay.

And just the last question for me is in terms of the innovation projects that you're pursuing, maybe can you help us understand a bit more? Are you -- how -- what's the progress here? What kind of team are you building? Are you hiring some new people to help with the progress?.

It's more of a -- the current team, there's basically promotion of the people, a member of the team is really the good one to write to the tasks. And basically, and then it's more also an organic project instead of just set up a new department.

It's -- so its product innovation environment is really something very, very detailed and very daily work instead of -- so yes, we are hiring more people, but we're also -- we're getting -- just gradually evolving -- evolve the team.

And so -- and then on the product side, basically, as I said, we focus on the free distribution of content, delivery of content based on editorial, algorithm and social media, social net -- and we focus more on social network size aspect.

And also with social network, the aspect is 4G or 5G era as we are looking at more of a video or the video streaming type of video, type of content and also to fabric, to all the video content and live streaming for our social networking network product..

Thank you for the questions. Ladies and gentlemen, with that, that concludes the conference for today. Thank you for your participation. You may now disconnect your lines..