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Mar 9, 2020 3:01 AM ET

Sohu.com Reports Fourth Quarter and Fiscal Year 2019 Unaudited Financial Results


Sohu.com Reports Fourth Quarter and Fiscal Year 2019 Unaudited Financial Results

iCrowd Newswire - Mar 9, 2020

BEIJING,– Sohu.com Limited (NASDAQ: SOHU), China’s leading online media, video, search and gaming business group, today reported unaudited financial results for the fourth quarter and fiscal year ended December 31, 2019.

Fourth Quarter Highlights[1]

[1] As Changyou’s cinema advertising business ceased operations during the third quarter of 2019, its results of operations have been excluded from the Company’s results from continuing operations in the condensed consolidated statements of operations and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Unless indicated otherwise, results presented in this release are related to continuing operations only, and exclude results from the cinema advertising business.

[2] On a constant currency (non-GAAP) basis, if the exchange rate in the fourth quarter of 2019 had been the same as it was in the fourth quarter of 2018, or RMB6.91=US$1.00, US$ total revenues in the fourth quarter of 2019 would have been US$498 million, or US$8 million more than GAAP total revenues, and up 7% year-over-year.

[3] Search and Search related advertising revenues exclude intra-Group transactions.

Fiscal Year 2019 Highlights

Dr. Charles Zhang, Chairman and CEO of Sohu.com Limited, commented, “During 2019, China’s economy continued to slow down and competition intensified. However, these challenges did not stop us from exploring new opportunities and improving operating efficiencies. As a result, our operating results further improved due to the solid performance of our business and the effective cost saving initiatives. For the fourth quarter of 2019, excluding an impairment charge recognized for an investment unrelated to our core businesses, non-GAAP net income attributable to Sohu.com Limited was US$7 million. For Sohu Media Portal, we strengthened our position as a mainstream media platform with high quality original content and various events. For Sohu Video, with the unique and high-quality dramas and other shows, we actively searched for diversified monetization sources. With improved monetization capabilities and strict budget control, Sohu video was able to further trim its losses in 2019. For Sogou, search revenue grew faster than the industry average, and revenues from Sogou’s Recommendation Service that leverages Mobile Keyboard continued to experience robust growth. In 2019, Changyou’s online games performed well, and it took a number of steps to enhance its capacity to create new, high-quality games.”

Fourth Quarter Financial Results

Revenues

Total revenues for the fourth quarter of 2019 were US$490 million, up 5% year-over-year and 2% quarter-over-quarter.

Total online advertising revenues, which include revenues from the brand advertising and search and search-related advertising businesses, for the fourth quarter of 2019 were US$316 million, down 5% both year-over-year and quarter-over-quarter.

Brand advertising revenues for the fourth quarter of 2019 totaled US$42 million, down 27% year-over-year and 10% quarter-over-quarter. The decrease was mainly due to decreases in portal and video advertising revenues.

Search and search-related advertising revenues for the fourth quarter of 2019 were US$275 million, down 1% year-over-year and 5% quarter-over-quarter.

Online game revenues for the fourth quarter of 2019 were US$132 million, up 40% year-over-year and 22% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to the contribution of TLBB Honor, as well as improved performance of some of Changyou’s older games, including TLBB PC and Legacy TLBB Mobile, as a result of content updates and some promotional activities during the quarter.

Gross Margin

Both GAAP and non-GAAP[4] gross margin was 52% for the fourth quarter of 2019, compared with 46% in the fourth quarter of 2018 and 48% in the third quarter of 2019.

Both GAAP and non-GAAP gross margin for the online advertising business for the fourth quarter of 2019 was 39%, compared with 32% in the fourth quarter of 2018 and 37% in the third quarter of 2019.

Both GAAP and non-GAAP gross margin for the brand advertising business in the fourth quarter of 2019 was 31%, compared with 26% in the fourth quarter of 2018 and 31% in the third quarter of 2019. The year-over-year margin improvement was mainly due to decreased video content cost.

GAAP gross margin for the search and search-related advertising business in the fourth quarter of 2019 was 40%, compared with 34% in the fourth quarter of 2018 and 38% in the third quarter of 2019. Non-GAAP gross margin for the search and search-related advertising business in the fourth quarter of 2019 was 41%, compared with 34% in the fourth quarter of 2018 and 38% in the third quarter of 2019. The year-over-year and quarter-over-quarter increases primarily resulted from decreases in traffic acquisition cost as a percentage of search and search related advertising revenues.

Both GAAP and non-GAAP gross margin for online games in the fourth quarter of 2019 was 75%, compared with 85% in the fourth quarter of 2018 and 78% in the third quarter of 2019. The decreases in gross margins were mainly a result of an increase in the revenue contribution from new mobile games, primarily TLBB Honor, which typically require larger revenue-sharing payments compared with PC games and Legacy TLBB Mobile, and as a result drive down gross margin.

[4] Non-GAAP results exclude share-based compensation expense; non-cash tax benefits from excess tax deductions related to share-based awards; changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; a one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividends and deemed dividends to non-controlling preferred shareholders of Sogou; a one-time income tax expense recognized in the fourth quarter of 2017 as a result of the one-time transition tax (the “Toll Charge”) imposed by the U.S. Tax Cuts and Jobs Act signed into law on December 22, 2017 (the “TCJA”); the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge; the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge; and interest accrued in relation to the previously unrecognized tax benefit. Explanation of the Company’s non-GAAP financial measures and related reconciliations to GAAP financial measures are included in the accompanying “Non-GAAP Disclosure” and “Reconciliations of Non-GAAP Results of Operation Measures to the Nearest Comparable GAAP Measures.”

Operating Expenses

For the fourth quarter of 2019, GAAP operating expenses totaled US$211 million, down 15% year-over-year and 4% quarter-over-quarter. Non-GAAP operating expenses were US$204 million, down 17% year-over-year and 5% quarter-over-quarter. The year-over-year decrease in operating expenses was mainly due to decreased marketing expenses, and an approximately US$16 million impairment charge recognized by Changyou related to its 17173.com website business in the fourth quarter of 2018. The quarter-over-quarter decrease was mainly due to decreased marketing expenses.

Operating Profit/(Loss)

GAAP operating profit for the fourth quarter of 2019 was US$42 million, compared with an operating loss of US$36 million in the fourth quarter of 2018 and an operating profit of US$12 million in the third quarter of 2019.

Non-GAAP operating profit for the fourth quarter of 2019 was US$49 million, compared with an operating loss of US$34 million in the fourth quarter of 2018 and an operating profit of US$16 million in the third quarter of 2019. 

Income Tax Expense

GAAP income tax benefit was US$1 million for the fourth quarter of 2019, compared with income tax benefit of US$70 million in the fourth quarter of 2018 and income tax expense of US$17 million in the third quarter of 2019. Non-GAAP income tax benefit was US$4 million for the fourth quarter of 2019, compared with income tax expense of US$5 million in the fourth quarter of 2018 and income tax expense of US$15 million in the third quarter of 2019.

The income tax benefit in the fourth quarter of 2019 included a one-time tax benefit of US$19 million that was recognized as a result of some of the Changyou’s subsidiaries having been granted preferential tax rates upon their receipt of 2018 Key National Software Enterprise status or 2018 Software Enterprise status. GAAP income tax benefit recognized in the fourth quarter of 2018 resulted from management’s re-evaluation and adjustment of the tax expense previously recognized in the fourth quarter of 2017 for the one-time transition tax (the “Toll Charge”) imposed by the U.S. Tax Cuts and Jobs Act (the “TCJA”), and interest accrued in relation to the unrecognized tax benefit.[5].

[5] The tax benefit recognized and the unrecognized tax benefit in relation to the Toll Charge may be subject to further adjustment in subsequent periods based on future circumstances and on management’s further judgment and estimates.

Net Income/(Loss)

GAAP net loss attributable to Sohu.com Limited for the fourth quarter of 2019 was US$18 million, or US$0.45 loss per fully-diluted ADS, compared with net income of US$23 million in the fourth quarter of 2018 and a net loss of US$21 million in the third quarter of 2019. Non-GAAP net income attributable to Sohu.com Limited for the fourth quarter of 2019 was US$7 million, or US$0.17 income per fully-diluted ADS, compared with a net loss of US$51 million in the fourth quarter of 2018 and a net loss of US$17 million in the third quarter of 2019. 

Liquidity

As of December 31, 2019, cash and cash equivalents and short-term investments held by the Sohu Group, minus short-term bank loans, were US$1.51 billion, compared with US$1.73 billion as of December 31, 2018.

Fiscal Year 201Financial Results

Revenues

Total revenues for 2019 were US$1.85 billion, up 2% compared with 2018.

Total online advertising revenues, which include revenues from the brand advertising and search and search-related advertising businesses, for 2019 were US$1.25 billion, down 1% compared with 2018.

Brand advertising revenues for 2019 were US$175 million, down 25% compared with 2018. The decrease was mainly due to declines in portal and video advertising revenues.

Search and search-related advertising revenues for 2019 were US$1.07 billion, up 5% compared with 2018.

Online game revenues for 2019 were US$441 million, up 13% compared with 2018. The increase was mainly due to the revenue contribution from TLBB Honor, which was launched in the third quarter of 2019, as well as improved performance of some of Changyou’s older games in 2019, including TLBB PC.

Gross Margin

Both GAAP and non-GAAP gross margin was 47% for 2019, compared with 46% in 2018.

Both GAAP and non-GAAP gross margin for the online advertising business for 2019 was 34%, compared with 32% in 2018.

Both GAAP and non-GAAP gross margin for the brand advertising business for 2019 was 28%, compared with 20% in 2018. The increase was mainly attributable to a decrease in video content cost.

GAAP gross margin for the search and search-related advertising business for 2019 was 34%, compared with 35% in 2018. Non-GAAP gross margin for the search and search-related advertising business for 2019 was 35%, compared with 35% in 2018.

Both GAAP and non-GAAP gross margin for online games for 2019 was 80%, compared with 84% in 2018.

Operating Expenses

For 2019, GAAP operating expenses totaled US$863 million, down 9% compared with 2018. Non-GAAP operating expenses were US$845 million, down 10% compared with 2018. The decrease was mainly due to decreased marketing and promotional expenses.

Operating Profit/(Loss)

GAAP operating profit for 2019 was US$0.4 million, compared with an operating loss of US$116 million in 2018.

Non-GAAP operating profit for 2019 was US$19 million, compared with an operating loss of US$114 million in 2018. 

Income Tax Expense

GAAP income tax expense for 2019 was US$31 million, compared with income tax benefit of US$13 million in 2018. Non-GAAP income tax expense for 2019 was US$23 million, compared with income tax expense of US$62 million in 2018. The income tax expense in 2019 included a one-time tax benefit of US$19 million that was recognized as a result of some of the Changyou’s subsidiaries having been granted preferential tax rates upon their receipt of 2018 Key National Software Enterprise status or 2018 Software Enterprise status. GAAP income tax benefit in 2018 included management’s re-evaluation and adjustment of the tax expense previously recognized for the Toll Charge in the fourth quarter of 2017.

Net Loss

GAAP net loss attributable to Sohu.com Limited for 2019 was US$128 million, or US$3.25 loss per fully-diluted ADS, compared with a net loss of US$131 million in 2018. Non-GAAP net loss attributable to Sohu.com Limited for 2019 was US$93 million, or US$2.38 loss per fully-diluted ADS, compared with a net loss of US$207million in 2018. 

Business Outlook

For the first quarter of 2020, Sohu estimates:

For the first quarter 2020 guidance, the Company has adopted a presumed exchange rate of RMB7.00=US$1.00, as compared with the actual exchange rate of approximately RMB6.74=US$1.00 for the first quarter of 2019, and RMB7.03=US$1.00 for the fourth quarter of 2019. 

This forecast reflects Sohu’s management’s current and preliminary view, which at present is subject to substantial uncertainty, particularly in view of the potential impact of the COVID-19 virus, the effects of which are difficult to analyze and predict.

Non-GAAP Disclosure

To supplement the unaudited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), Sohu’s management uses non-GAAP measures of gross profit, operating profit, net income, net income attributable to Sohu.com Limited and diluted net income attributable to Sohu.com Limited per ADS, which are adjusted from results based on GAAP to exclude the impact of the share-based awards, which consist mainly of share-based compensation expenses and non-cash tax benefits from excess tax deductions related to share-based awards;  changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; a one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividend and deemed dividend to non-controlling preferred shareholders; the one-time income tax expense recognized in the fourth quarter of 2017 as a result of the Toll Charge imposed by the TCJA and the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge; the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge; and interest expense recognized in connection with the Toll Charge. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Sohu’s management believes excluding share-based compensation expense, changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; non-cash tax benefits from excess tax deductions related to share-based awards; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividend and deemed dividend to non-controlling preferred shareholders; and income tax expense, income tax benefit, uncertain tax position, and interest recognized in relation to the Toll Charge from its non-GAAP financial measure is useful for itself and investors. Further, the impact of share-based compensation expense and  changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; non-cash tax benefits from excess tax deductions related to share-based awards; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividend and deemed dividend to non-controlling preferred shareholders; the one-time income tax expense recognized in the fourth quarter of 2017 as a result of the Toll Charge imposed by the TCJA and the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge; the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge; and interest expense recognized in connection with the Toll Charge cannot be anticipated by management and business line leaders and these expenses were not built into the annual budgets and quarterly forecasts that have been the basis for information Sohu provides to analysts and investors as guidance for future operating performance. As the impact of share-based compensation expense and changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values, the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions, and dividend and deemed dividend to non-controlling preferred shareholders does not involve subsequent cash outflow or is reflected in the cash flows at the equity transaction level, Sohu does not factor this impact in when evaluating and approving expenditures or when determining the allocation of its resources to its business segments. As a result, in general, the monthly financial results for internal reporting and any performance measures for commissions and bonuses are based on non-GAAP financial measures that exclude share-based compensation expense and  changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values, the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions, and dividend and deemed dividend to non-controlling preferred shareholders, and also excluded the one-time income tax expense recognized in the fourth quarter of 2017 as a result of the Toll Charge imposed by the TCJA and the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge, the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge, and interest expense recognized in connection with the Toll Charge.

The non-GAAP financial measures are provided to enhance investors’ overall understanding of Sohu’s current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, operating profit, net income, net income attributable to Sohu.com Limited and diluted net income attributable to Sohu.com Limited per ADS, excluding share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions, dividend, and deemed dividend to non-controlling preferred shareholders is that the impact of share-based awards and non-cash tax benefits from excess tax deductions related to share-based awards has been and will continue to be a significant recurring expense in Sohu’s business for the foreseeable future, income/expense from the adjustment of contingent consideration previously recorded for acquisitions may recur in the future, and dividend and deemed dividend to non-controlling preferred shareholders may recur when Sohu and its affiliates enter into equity transactions. In order to mitigate these limitations Sohu has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between the GAAP financial measures that are most directly comparable to the non-GAAP financial measures that have been presented.

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is derived from Sohu’s unaudited financial statements prepared in accordance with GAAP.

Safe Harbor Statement

This announcement contains forward-looking statements. It is currently expected that the Business Outlook will not be updated until release of Sohu’s next quarterly earnings announcement; however, Sohu reserves right to update its Business Outlook at any time for any reason. Statements that are not historical facts, including statements about Sohu’s beliefs and expectations, 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 statement. Potential risks and uncertainties include, but are not limited to, instability in global financial and credit markets and its potential impact on the Chinese economy; exchange rate fluctuations, including their potential impact on the Chinese economy and on Sohu’s reported US dollar results; recent slow-downs in the growth of the Chinese economy; the uncertain regulatory landscape in the People’s Republic of China; fluctuations in Sohu’s quarterly operating results; the possibilities that Sohu will be unable to recoup its investment in video content and that Changyou will be unable to develop a series of successful games for mobile platforms or successfully monetize mobile games it develops or acquires; Sohu’s reliance on online advertising sales, online games and mobile services for its revenues; the impact of the U.S. TCJA; and the effects of the COVID-19 virus on the economy in China in general and on Sohu’s business in particular. Further information regarding these and other risks is included in Sohu’s annual report on Form 20-F for the year ended December 31, 2018, and other filings with the Securities and Exchange Commission.

Contact Information:

Sohu.com Ltd.








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