Sohu.com Limited (NASDAQ: SOHU) (“Sohu” or the “Company”), China’s leading online media, video, and game business group, today reported unaudited financial results for the second quarter ended June 30, 2022.
Second Quarter Highlights
- Total revenues were US$195 million[1], down 5% year-over-year and up 1% quarter-over-quarter.
- Brand advertising revenues were US$25 million, down 32% year-over-year and up 5% quarter-over-quarter.
- Online game revenues were US$157 million, up 4% year-over-year and flat quarter-over-quarter.
- GAAP net income[2] attributable to Sohu.com Limited was US$9 million, compared with net income of US$22 million in the second quarter of 2021 and net income of US$3 million in the first quarter of 2022.
- Non-GAAP[3] net income attributable to Sohu.com Limited was US$12 million, compared with net income of US$25million in the second quarter of 2021 and net income of US$9 million in the first quarter of 2022.
Dr. Charles Zhang, Chairman and CEO of Sohu.com Limited, commented, “In the second quarter of 2022, COVID-19 and related prevention measures disrupted normal economic activity nationwide. We met the challenge proactively, by refining our products and technology and exploring a range of monetization opportunities. Our brand advertising revenue met the high end of our previous guidance during the quarter. Thanks to the solid performance of our online game business, our profitability exceeded guidance. For Sohu Media Portal and Sohu Video, we continued to generate and distribute reliable news and premium content, reinforcing our competitiveness and credibility as a mainstream media platform. Leveraging the differentiated advantages of the Sohu product matrix, we extended our live broadcasting to a greater number of scientific fields and to various online and offline events. For online games, our performance was stable during the quarter, with revenues in line with our guidance.”
Second Quarter Financial Results
Revenues
Total revenues were US$195 million, down 5% year-over-year and up 1% quarter-over-quarter.
Brand advertising revenues were US$25 million, down 32% year-over-year and up 5% quarter-over-quarter.
Online game revenues were US$157 million, up 4% year-over-year and flat quarter-over-quarter.
Gross Margin
Both GAAP and non-GAAP gross margin were 73%, compared with 76% in the second quarter of 2021 and 75% in the first quarter of 2022.
GAAP gross margin for the brand advertising business was 4%, compared with 27% in the second quarter of 2021 and 2% in the first quarter of 2022. Non-GAAP gross margin for the brand advertising business was 4%, compared with 28% in the second quarter of 2021 and 2% in the first quarter of 2022. The margin decrease was mainly due to the decrease in brand advertising revenues.
Both GAAP and non-GAAP gross margin for online games were 84%, compared with 89% in the second quarter of 2021 and 86% in the first quarter of 2022.
Operating Expenses
GAAP operating expenses were US$132 million, up 1% year-over-year and flat quarter-over-quarter. Non-GAAP operating expenses were US$130 million, up 2% year-over-year and flat quarter-over-quarter.
Operating Profit
GAAP operating profit was US$10 million, compared with an operating profit of US$25 million in the second quarter of 2021 and an operating profit of US$13 million in the first quarter of 2022.
Non-GAAP operating profit was US$11 million, compared with an operating profit of US$28 million in the second quarter of 2021 and an operating profit of US$14 million in the first quarter of 2022.
Income Tax Expense
GAAP income tax expense was US$17 million, compared with income tax expense of US$11 million in the second quarter of 2021 and income tax expense of US$17 million in the first quarter of 2022. Non-GAAP income tax expense was US$16 million, compared with income tax expense of US$9 million in the second quarter of 2021 and income tax expense of US$17 million in the first quarter of 2022. Income tax expense in the second quarter of 2021 included a one-time tax benefit of US$9 million recognized after final settlement of income tax due for 2020.
Net Income
GAAP net income attributable to Sohu.com Limited was US$9 million, or net income of US$0.25 per fully-diluted ADS, compared with net income of US$22 million in the second quarter of 2021 and net income of US$3 million in the first quarter of 2022.
Non-GAAP net income attributable to Sohu.com Limited was US$12 million, or net income of US$0.36 per fully-diluted ADS, compared with net income of US$25 million in the second quarter of 2021 and net income of US$9 million in the first quarter of 2022.
Liquidity and Capital Resources
As of June 30, 2022, cash and cash equivalents, short-term investments and long-term time deposits totaled approximately US$1.46 billion.
Supplementary Information for Changyou Results[4]
Second Quarter 2022 Operating Results
- For PC games, total average monthly active user accounts[5] (MAU) were 2.3 million, an increase of 7% year-over-year and 13% quarter-over-quarter. Total quarterly aggregate active paying accounts[6] (APA) were 1.0 million, an increase of 15% year-over-year and 6% quarter-over-quarter. The increases in both MAU and APA were mainly from TLBB Vintage, which was launched on the WeGame platform during the quarter.
- For mobile games, total average MAU were 2.0 million, an increase of 7% year-over-year and a decrease of 14% quarter-over-quarter. The year-over-year increase was mainly from games launched during recent quarters, including Little Raccoon: Heroes and Bright Stars. The quarter-over-quarter decrease mainly resulted from the natural decline of Bright Stars. Total quarterly APA were 0.4 million, a decrease of 13% year-over-year and 20% quarter-over-quarter. The year-over-year decrease was mainly due to the natural decline of older games, including TLBB Honor and Legacy TLBB Mobile. The quarter-over-quarter decrease was mainly from Bright Stars.
Second Quarter 2022 Unaudited Financial Results
Total revenues were US$159 million, an increase of 3% year-over-year and flat quarter-over-quarter. Online game revenues were US$157 million, an increase of 4% year-over-year and flat quarter-over-quarter. Online advertising revenues were US$2 million, a decrease of 30% year-over-year and 2% quarter-over-quarter.
GAAP and non-GAAP gross profit were both US$133 million, a decrease of 2% year-over-year and 3% quarter-over-quarter.
GAAP operating expenses were US$49 million, a decrease of 23% year-over-year and 10% quarter-over-quarter. Non-GAAP operating expenses were US$48 million, a decrease of 23% year-over-year and 10% quarter-over-quarter. The year-over-year decrease was mainly due to a decrease in marketing and promotional spending for online games, as well as a decrease in bonus expenses. The quarter-over-quarter decrease was mainly due to a decrease in outsourcing and licensing fees related to product development.
GAAP operating profit was US$84 million, compared with an operating profit of US$73 million for the second quarter of 2021 and US$83 million for the first quarter of 2022.
Non-GAAP operating profit was US$85 million, compared with a non-GAAP operating profit of US$75 million for the second quarter of 2021 and US$85 million for the first quarter of 2022.
Business Outlook
For the third quarter of 2022, Sohu estimates:
- Brand advertising revenues to be between US$25 million and US$28 million; this implies an annual decrease of 17% to 26%, and a sequential increase of nil to 12%.
- Online game revenues to be between US$138 million and US$148 million; this implies an annual decrease of 11% to 17%, and a sequential decrease of 6% to 12%.
- Non-GAAP net loss attributable to Sohu.com Limited to be between US$35 million and US$25 million; and GAAP net loss attributable to Sohu.com Limited to be between US$38 million and US$28 million.
For the third quarter 2022 guidance, the Company has adopted a presumed exchange rate of RMB6.75=US$1.00, as compared with the actual exchange rate of approximately RMB6.47=US$1.00 for the third quarter of 2021, and RMB6.61=US$1.00 for the second quarter of 2022.
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 worldwide COVID-19 pandemic, which remains difficult to 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 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; an impairment charge recognized for an investment unrelated to the Company’s core businesses; and interest expense recognized in connection with the Toll Charge imposed by the U.S. TCJA. 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 impairment charge recognized for an investment unrelated to the Company’s core businesses; and interest expense recognized in connection with the Toll Charge from its non-GAAP financial measure is useful for itself and investors. Further, the impact of 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 impairment charge recognized for an investment unrelated to the Company’s core businesses; 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, changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values, and the impairment charge recognized for an investment unrelated to the Company’s core businesses 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, changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values, and the impairment charge recognized for an investment unrelated to the Company’s core businesses, and also excluded the 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; changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; and interest expense recognized in connection with the Toll Charge is that these excluded items have been and will continue to be significant recurring expenses in Sohu’s business for the foreseeable future and similar impairment charges may also recur. 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 U.S. 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 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 and online games for its revenues; the impact of the U.S. TCJA; the effects of the COVID-19 pandemic on the economy in China in general and on Sohu’s business in particular; and the possibility that, unless an accommodation is reached between the SEC and the China Securities Regulatory Commission, the U.S. Holding Foreign Companies Accountable Act and rules of the SEC thereunder may cause the SEC to prohibit trading of Sohu’s ADSs on Nasdaq, any other U.S. stock exchange, or the U.S. over-the-counter markets beginning in 2024 or, if currently pending legislation becomes law, 2023. Further information regarding these and other risks is included in Sohu’s annual report on Form 20-F for the year ended December 31, 2021, and other filings with and information furnished to the Securities and Exchange Commission.
