Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] 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.

Huang Pu - Investor Relations Director

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 statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed here - 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 factors could cause actual results to differ materially from those contained in any forward-looking statement. 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.

Charles Zhang - Chairman and Chief Executive Officer

Thank you, Huang. Thank you for - to everyone for joining our call. In the second quarter of 2020, our brand advertising business performed well, the brand advertising revenue had a decent increase, up 48% quarter-over-quarter. Both the brand advertising revenue and bottom line exceeded our prior guidance. During the quarter, we integrated our Media Portal's brand advantage and influence with Sohu Video's advanced live broadcast technologies. These initiatives allowed us to more effectively generate and distribute our high-quality original content, and further enhanced our credibility by reflecting the attitude and values of Soho.

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

For Sogou, it delivered in-line results in the second quarter with Search maintaining a steady share of traffic and Mobile Keyboard input further expanding its DAU base.

Before I go into more detail of our key financial results, please be reminded that for the second quarter 2020, Changyou recognized an additional $88 million accrual for withholding income tax, since Changyou changed its policy for its PRC 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's cinema advertising business ceased operations. Unless indicated otherwise the results that we will discuss today exclude the impact of the above mentioned 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% over - 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 Sogou, 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 a 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 a more personalized experience. As a result, we saw the consumption of content increased significantly during the second quarter.

For Video, we continue to strengthen our long-form and short-form so-called two-engine strategy. For the long-form original content, we released the two original idol romance dramas, one is the High School Big Bang, Wo Cheng Le Ta De Ban Zhu Ren, and also, another one is My Dear Lady, Ni Cheng Gong Yin Qi Wo De Zhu Yi Le, 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 broadcast - 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, offline features. We launched a new live broadcast series called BOSS1+1, where we invited industry celebrities to share the insight views on the economy and the market wherever they are during the live broadcast sharing technology. We also successfully hosted the Sogou [Phonetic] Tech 5G Summit and Sogou [Phonetic] 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 e-commerce by hosting the best of sister [Phonetic] selection live from Sohu [Foreign Speech]. We invited celebrities to share their thoughts on live while recommending premium goods. The favorite product, the goods they 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 our revenue source and actively explore new opportunities to grow advertising dollars.

Next, let's talk about Changyou. For the second quarter 2020, online game revenues decreased for - quarter-over-quarter and met our prior guidance, mainly due to a decrease in player engagement as a result of the work resumption following the eased COVID-19 pandemic in China.

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

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

For third quarter of 2020, Changyou will focus on stabilizing player engagement and the rollout in-game rewarding - reward-giving events and fresh content for TLBB PC and the Legacy 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, while we are also scanning the market for opportunities across various genres as they look to diversify - as we look to diversify our product portfolio. Meanwhile, we will also increase expanding our effort 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 and growth. In the second quarter of 2020, Sogou delivered in-line results with healthy momentum in its core Search and Mobile Keyboard businesses. Sogou Search maintained a steady share of traffic and reinforced its position as China's second largest search engine. Mobile Keyboard, further expanded its DAU base to 484 million, maintaining the third largest Chinese mobile app in terms of DAUs according to iResearch. In addition, its AI hardware business recorded solid growth during the quarter. Going forward, Sogou will further boost AI empowerment and synergies across their businesses, while continually drive technology - technological advances.

Now, let me turn to - over - the call to - over to Joanna, our CFO, who will walk you through our financial results. Joanna?

Joanna Lv - Chief Financial Officer

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 the non-GAAP basis. You can find a reconciliation of non-GAAP to GAAP measures on our IR website.

So 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 [Phonetic] 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, $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 revenues to be between $37 million and $42 million. This implies an annual decrease of 9% to 20% and a sequential decrease of 3% to a sequential increase of 11%.

Online game revenues to be between $85 million and $95 million. This implies an annual decrease of 12% to 21% and a sequential decrease of 10% to 20%.

Excluding profit/loss generated 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 $15 million and $25 million. This forecast reflects Sohu's management current and preliminary view, 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 Tencent's non-binding proposal for Sogou privatization in the Q&A session.

And this concludes our prepared remarks. Operator, we would now like to open the call to questions.

Question & Answers

Operator

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

Eddie Leung - Bank of America Merrill Lynch - Analyst

Hey. Good evening, guys. Just two quick questions. The first one is about broadcasting. I think, Charles, you mentioned that there has been some synergy from using the influencer, as well as broadcasting. Wondering if you have any operating metrics or financial share - to share with us on the performance of broadcasting you achieved in the quarter. And how is 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 as we end the summer, which traditionally should be a good quarter in general for the gaming industry? Any color on the general industry trend of gaming industry into third quarter would be great? Thanks.

Charles Zhang - Chairman and Chief Executive Officer

So, Eddie, your first question is about live broadcasting, right?

Eddie Leung - Bank of America Merrill Lynch - Analyst

Yes.

Charles Zhang - Chairman and Chief Executive Officer

So, we have quite a - like, I think on a daily basis, like dozens of influencer to broadcast. And then there is probably 10 or 20 that we - actually using our platform to market. So there is a - so these are the live broadcast, like we're using general push to market about 10 broadcasts. And then we call it a value broadcasting or we call it - where the people from like the medical, health industry or lifestyle or cosmetic industry or those kind of influencer to teach people and to acknowledge same [Phonetic] information.

And then we have some few top live broadcast like myself participate, like each month we do like three or four with some top celebrities. And to - because they share the life experience and some products and then we are able to connect our live - our chat room or live broadcast room through e-commerce platforms like Jingdong or Taobao and others. So that when a celebrity recommend some products they use, then the users can click that small card, shopping card to be delivered directly to the e-commerce platform to purchase.

So, we're not - so because of this transaction-based advertising and basically, some - and also we actually give them a reward or some kind of lottery for people to click. So that it's not really the sales volume of those products, it's really the whole - the chat rooms popularity and also the celebrities recommendation or a verbal recommendation or those kind of thing is a good advertising set that 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?

Eddie Leung - Bank of America Merrill Lynch - Analyst

Yes. So basically, there is no direct e-commerce revenue, I think, right? So, Charles, you are using the content to attract advertising in general. That does actually the current [Speech Overlap].

Charles Zhang - Chairman and Chief Executive Officer

There is e-commerce revenue, because the advertisers, they give us a deep discount, better because - yeah. So, actually, why people are - it become so popular and people are really coming to this chat room because they are getting the best price online because the Jingdong and Taobao, those - or the others - the advertiser, they are willing, because this is really good for the brand. They are willing to give the deepest discount to us. So, that price difference is considered to be the - our e-commerce revenue.

Eddie Leung - Bank of America Merrill Lynch - Analyst

Oh, I see. Understood.

Charles Zhang - Chairman and Chief Executive Officer

I'm saying that's another big part. The main part is really the total advertising dollar and the advertising spend. And it drives the whole contract, like it's become very important component of our overall contract. Let's say, if a car company or I mean, auto company spend like RMB3 million advertising. In this contract, probably like RMB1 million was spent on this chat room advertising. And also we are able to get that RMB3 million contract because we have this component. It's very creative and it's very - it's got - everyone got - are talking about this.

Eddie Leung - Bank of America Merrill Lynch - Analyst

Yeah. Understood. And any color on the industry trend of games heading into summer, which traditionally a strong quarter would be helpful. Thanks.

Charles Zhang - Chairman and Chief Executive Officer

So, the people are - compared with Q1, people are spending less time at home. And also actually people are - because of the decline in economy, people are spend - people have less disposal income, right? The two reasons that, so that the, right, [Foreign Speech].

Unidentified Speaker -

[Foreign Speech]

Dewen Chen - Chief Executive Officer of Changyou

First of all, during the pandemic, there are 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 MMO hardcore RPG games, so we rely on those free [Phonetic] player to - or higher-paying users. So, we benefited from the restrictions in the first quarter. But during the second quarter, we see - we saw some pressures on the economy. So, we saw some pressure on the payment players investment in games. So, you can see that from the data in the second quarter, we had a decline APA number. So - but we expect in the third quarter, it will be stabilized.

Eddie Leung - Bank of America Merrill Lynch - Analyst

Got it. Thank you. [Foreign Speech], Dewen.

Charles Zhang - Chairman and Chief Executive Officer

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

Unidentified Speaker -

[Foreign Speech]

Dewen Chen - Chief Executive Officer of Changyou

The industry will be more stabilized.

Charles Zhang - Chairman and Chief Executive Officer

The industry [Foreign Speech] Changyou-specific. Okay. All right. Next?

Operator

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

Thomas Chong - Jefferies - Analyst

Hi. Thanks management for taking my question. I think, 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 spending among different categories?

And my second question is about the China and the US tension. Does that have any impact to our revenue coming from international advertisers? Thank you.

Charles Zhang - Chairman and Chief Executive Officer

Answer your second question, we don't have - you mean international advertiser?

Thomas Chong - Jefferies - Analyst

Like those international brands.

Charles Zhang - Chairman and Chief Executive Officer

So for international advertising, they actually increased their advertising. Yeah. It's actually better. So to answer the second.

Your first question, I think the - a wide range of - the range, right, of the forecast, it depends on really the COVID-19 situation, the economy, and - yeah. So, we will continue our innovative - product innovation and user base development, so that trying to gain momentum, but the economy and the uncertainties that would give a wide range of forecast.

Thomas Chong - Jefferies - Analyst

I see. Thanks, Charles. Is there any color about our key categories? Is the momentum similar to what we saw recently?

Charles Zhang - Chairman and Chief Executive Officer

It's - I think it's a euro allocation, like auto industry. And then, auto, I think then FMCG start moving goods and Internet services like e-commerce. Yeah. E-commerce. I think e-commerce is number two, right. Auto, is still number one. E-commerce is number two and FMCG. And then, some IT companies, right? And then followed by financial sectors, right, financial industries. Real estate, yeah, real estate also, yeah. That's the euro rank, yeah, ranking of this spending.

Thomas Chong - Jefferies - Analyst

I see. Got it. Thank you, Charles.

Charles Zhang - Chairman and Chief Executive Officer

Okay.

Operator

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

Alicia Yap - Citigroup - Analyst

Hi. Thank you and good evening, Charles and management. Thanks for taking my question. I have two questions. One is that 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 prospect 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 are getting more cash, will you spend more money in video content production again? Or would you actually continue your strategy on cutting the loss on the media business? Thank you.

Charles Zhang - Chairman and Chief Executive Officer

Yeah. We have now a clear strategy for both our key application, that means the Portal - the Sohu News App and Sohu Video App. Well, we have other H5-based [Indecipherable] Sohu and also PC that's another - but our focus really on the Sohu News App and Sohu Video App.

On the Sohu News App, the product innovation will mostly focus on the two information delivery mechanism: one is really will continue to have high-quality content, editorial content and original content and also content with collaborators, but the delivery through - editorial delivery plus the machine delivery, basically, the algorithm, will continue to improve the algorithm so that the news become so relevant to each individual users and information and also the percentage of video content in the information stream.

The second delivery is also, our focus is really the social network. I mean, social media delivery basically people are followers and those kind of - we have a different channel for that. That's the two area that we believe will be the driver for our News App's user growth.

And for Video, the long-form content is drama. And then the short-form is really the short video clips, like basically the YouTube type, the people actually upload short video. And people also produce short video by live broadcasting. Live broadcasting as a way to produce short-form or not even short-form, sometimes people broadcast for one hour and then become a one-hour replay. So, these are the - also the two top - two type of - and then the delivery also either is the front page editorial delivery and also we have also, [Indecipherable], social media delivery. These are the - especially the social media delivery, the following - followers and the tweet, retweet, and those kind of - is our focus.

And then the synergy of this two 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 Sohu Video App and other user base will be - the traffic will be driven through the News App - through the Video App, for - that's the synergy, where like the - some of those - our live broadcast because previously before the Sohu Video App had well-known for its TV drama and the US American dramas, but now - it's now established as one of the key live broadcast app. And also some kind of key breaking news app, the video news, and then people are using the News App are more likely to watch this kind of content and then they are - you can - there is a link or a direct link between the two apps, so that people are using News App can directly one click away just the - enter into the live broadcast room to watch those live broadcast content - video content of news type or other knowledge type, and not just the long-form of the video drama. So, it's kind of complicated. And I think - I hope you - you see - you understand what I'm saying.

Alicia Yap - Citigroup - Analyst

Yeah.

Charles Zhang - Chairman and Chief Executive Officer

We are looking at basically a matrix of user base with two apps specializing its features and content form. And also the H5, Sohu app with more of the traditional PC and the PC [Indecipherable] the more traditional browsing activities. So, it's a matrix of content. And then for video and live broadcast, all the traffics were diverted into the video app. Yeah.

Alicia Yap - Citigroup - Analyst

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

Charles Zhang - Chairman and Chief Executive Officer

We are - in the last few years we've been able to - manage to generate - to produce some - in terms of [Indecipherable] like some low-budget TV series, episodes. And then - but could be a hit. We have done it 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 we'll increase the density or frequency of - I mean, a number of TV series per quarter. Like in 2019, or let's say, the first two quarters, we only have three TV episodes, right, TV drama. Then in the - at the current pace, in the next half of the - this year, we only - we also only have another two, right, two or three. But with - if with more money, we'll 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 - and so that means not a lot of increase of spending on the long-form. So, our video business growth are most - will be driven by the short-form user upload, UGC content and the live broadcast.

And any TV dramas will be a opportunity to develop new users because it's exclusive content here, so that a lot of users will come here to watch our new TV dramas and they will stay, because they not only watch that TV drama, they probably - they find a lot of other social network features, so they will stay. So, yeah, that's our strategy.

Alicia Yap - Citigroup - Analyst

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

Charles Zhang - Chairman and Chief Executive Officer

Okay. Welcome.

Operator

Thank you. [Operator Instructions] All right. There are no further question.

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