Sohu.com Reports Third Quarter 2021 Unaudited Financial Results
Sohu.com Limited (NASDAQ: SOHU), China’s leading online media, video, gaming business group, today reported unaudited financial results for the third quarter ended September 30, 2021.
Third Quarter Highlights
- Total revenues were US$216 million[1], up 37% year-over-year and 6% quarter-over-quarter.
- Brand advertising revenues were US$34 million, down 18% year-over-year and 8% quarter-over-quarter.
- Online game revenues were US$167 million, up 65% year-over-year and 10% quarter-over-quarter.
- GAAP net income from continuing operations[2] attributable to Sohu.com Limited was US$12 million, compared with a net loss of US$15 million in the third quarter of 2020 and net income of US$22 million in the second quarter of 2021.
- Non-GAAP[3] net income from continuing operations attributable to Sohu.com Limited was US$17 million, compared with a net loss of US$7 million in the third quarter of 2020 and net income of US$25 million in the second quarter of 2021.
Dr. Charles Zhang, Chairman and CEO of Sohu.com Limited, commented, “For the third quarter of 2021, facing spot outbreaks of the COVID-19 pandemic and uncertainties in the macroeconomic environment, we continued to focus on refining our technology and developing products. Overall, we delivered better than expected top line and bottom line performance thanks to the solid performance of our online game business. For Sohu Media, we kept improving our products while constantly expanding premium content and stimulating social network distributions, which further consolidated our influence as a mainstream media platform. For Sohu Video, we continued to focus on our “Twin engine” strategy. We applied our advanced live broadcasting technologies into various events and scenarios as an effective tool for generating even more video content. For Changyou, our online games performed well during the quarter, with its revenue exceeding the high end of our prior guidance.”
Third Quarter Financial Results
Revenues
Total revenues were US$216 million, up 37% year-over-year and 6% quarter-over-quarter.
Brand advertising revenues totaled US$34 million, down 18% year-over-year and 8% quarter-over-quarter. The decrease was mainly due to decreases in portal advertising revenues.
Online game revenues were US$167 million, up 65% year-over-year and 10% quarter-over-quarter. The year-over-year increase was mainly contributed by TLBB Vintage, which was launched during the fourth quarter of 2020. The quarter-over-quarter increase was mainly from Little Raccoon: Heroes, which was launched during the third quarter of 2021.
Gross Margin
Both GAAP and non-GAAP gross margin was 74%, compared with 66% in the third quarter of 2020 and 76% in the second quarter of 2021.
GAAP gross margin for the brand advertising business was 29%, compared with 31% in the third quarter of 2020 and 27% in the second quarter of 2021. Non-GAAP gross margin for the brand advertising business was 29%, compared with 31% in the third quarter of 2020 and 28% in the second quarter of 2021.
Both GAAP and non-GAAP gross margin for online games was 83%, compared with 80% in the third quarter of 2020 and 89% in the second quarter of 2021. The quarter-over-quarter decrease in gross margin was mainly due to a higher percentage revenue contribution from mobile games, which typically require higher revenue-sharing payments.
Operating Expenses
For the third quarter of 2021, GAAP operating expenses totaled US$135 million, up 17% year-over-year and 3% quarter-over-quarter. Non-GAAP operating expenses were US$132 million, up 20% year-over-year and 4% quarter-over-quarter. The year-over-year increase was mainly due to increases in salary and benefits expenses and the accrual of credit loss expenses.
Operating Profit/(Loss)
GAAP operating profit was US$25 million, compared with an operating loss of US$11 million in the third quarter of 2020 and an operating profit of US$25 million in the second quarter of 2021.
Non-GAAP operating profit was US$28 million, compared with an operating loss of US$5 million in the third quarter of 2020 and an operating profit of US$28 million in the second quarter of 2021.
Income Tax Expense
GAAP income tax expense was US$20 million, compared with income tax expense of US$11 million in the third quarter of 2020 and income tax expense of US$11 million in the second quarter of 2021. Non-GAAP income tax expense was US$19 million, compared with income tax expense of US$10 million in the third quarter of 2020 and income tax expense of US$9 million in the second quarter of 2021. The income tax expense in the second quarter of 2021 included a one-time tax benefit of US$9 million recognized by Changyou after final settlement of its income tax due for 2020.
Net Income/(Loss)
GAAP net income from continuing operations attributable to Sohu.com Limited was US$12 million, or net income of US$0.31 per fully-diluted ADS, compared with a net loss of US$15 million in the third quarter of 2020 and net income of US$22 million in the second quarter of 2021.
Non-GAAP net income from continuing operations attributable to Sohu.com Limited was US$17 million, or net income of US$0.44 per fully-diluted ADS, compared with a net loss of US$7 million in the third quarter of 2020 and net income of US$25 million in the second quarter of 2021.
Liquidity
As of September 30, 2021, cash and cash equivalents and short-term investments were US$1.57 billion.
Supplementary Information for Changyou Results
Third Quarter 2021 Operating Results
- For PC games, total average monthly active user accounts[4] (MAU) were 2.0 million, an increase of 3% year-over-year and a decrease of 5% quarter-over-quarter. Total quarterly aggregate active paying accounts[5] (APA) were 1.0 million, an increase of 4% year-over-year and 14% quarter-over-quarter. The quarter-over-quarter increase in APA was mainly due to in-game promotional activities launched for TLBB PC.
- For mobile games, total average MAU were 4.6 million, an increase of 22% year-over-year and 143% quarter-over-quarter. Total quarterly APA were 1.0 million, an increase of 55% year-over-year and 99% quarter-over-quarter. The increases in both MAU and APA were mainly due to the launch of Little Raccoon: Heroes during the third quarter of 2021.
Third Quarter 2021 Unaudited Financial Results
Total revenues were US$170 million, an increase of 63% year-over-year and 10% quarter-over-quarter. Online game revenues were US$167 million, an increase of 65% year-over-year and 10% quarter-over-quarter. Online advertising revenues were US$3 million, an increase of 4% year-over-year and 6% quarter-over-quarter.
GAAP and non-GAAP gross profit were both US$140 million, an increase of 68% year-over-year and 3% quarter-over-quarter.
GAAP operating expenses were US$63 million, an increase of 19% year-over-year and flat quarter-over-quarter. The year-over-year increase was mainly due to an increase in marketing and promotional spending for online games, as well as an increase in bonus expenses related to revenue growth.
Non-GAAP operating expenses were US$61 million, an increase of 22% year-over-year and flat quarter-over-quarter.
GAAP operating profit was US$77 million, compared with an operating profit of US$30 million for the third quarter of 2020 and US$73 million for the second quarter of 2021.
Non-GAAP operating profit was US$79 million, compared with a non-GAAP operating profit of US$33 million for the third quarter of 2020 and US$75 million for the second quarter of 2021.
Recent Development
Sohu today announced that on November 13, 2021, its board of directors authorized a share repurchase program of up to US$100 million of the outstanding American depositary shares (“ADSs”) of Sohu over the next twelve months. The ADSs may be purchased from time to time at Sohu’s management’s discretion at prevailing market prices in accordance with Rule 10b-18 and Rule 10b5-1 under the Securities Exchange Act of 1934. Sohu’s management will determine the timing and amount of any purchases of ADSs based on their evaluation of market conditions, the trading price of ADSs and other factors. The share repurchase program may be suspended or discontinued at any time. Sohu plans to fund repurchases from its existing cash balance.
Business Outlook
For the fourth quarter of 2021, Sohu estimates:
- Brand advertising revenues to be between US$28 million and US$31 million; this implies an annual decrease of 26% to 33% and a sequential decrease of 8% to 17%.
- Online game revenues to be between US$140 million and US$150 million; this implies an annual decrease of 23% to 29% and a sequential decrease of 10% to 16%.
- Non-GAAP net loss attributable to Sohu.com Limited to be between nil and US$10 million; and GAAP net loss attributable to Sohu.com Limited to be between US$3 million US$13 million.
For the fourth quarter 2021 guidance, the Company has adopted a presumed exchange rate of RMB6.40=US$1.00, as compared with the actual exchange rate of approximately RMB6.63=US$1.00 for the fourth quarter of 2020, and RMB6.47=US$1.00 for the third quarter of 2021.
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 the share-based awards, which consist mainly 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 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 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 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, 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, is that the impact of share-based awards has been and will continue to be a significant recurring expense in Sohu’s business for the foreseeable future. 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 pandemic 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, 2020, and other filings with and information furnished to the Securities and Exchange Commission.
Conference Call and Webcast
Sohu’s management team will host a conference call at 7:30 a.m. U.S. Eastern Time, November 15, 2021 (8:30 p.m. Beijing/Hong Kong time, November 15, 2021) following the quarterly results announcement. Participants can register for the conference call by navigating to http://apac.directeventreg.com/registration/event/8218759. Once preregistration has been completed, participants will receive dial-in numbers, an event passcode, and a unique registrant ID.
To join the conference, please dial the number you receive, enter the event passcode followed by your unique registrant ID, and you will be joined to the conference instantly. Please dial in 10 minutes before the call is scheduled to begin.
