Sogou Announces Fourth Quarter and Full year 2018 Results

BEIJING, Feb. 1, 2019 /PRNewswire/ -- Sogou Inc. (NYSE: SOGO) ("Sogou" or "the Company"), an innovator in search and a leader in China's internet industry, today announced its unaudited financial results for the fourth quarter and full year, ended December 31, 2018.

Fourth Quarter 2018 Highlights

  • Total revenues[1] were $297.8 million, a 7% increase year-over-year.
  • Net income attributable to Sogou Inc. was $26.4 million, a 71% increase year-over-year. Non-GAAP[2] net income attributable to Sogou Inc. was $27.1 million, a 28% decrease year-over-year.
  • Sogou Mobile Keyboard, the third largest mobile app in China, had 430 million DAUs (daily average users), up 28% year-over-year. As China's largest voice app, it processed up to 540 million daily voice requests.

Full Year 2018 Highlights

  • Total revenues were $1.12 billion, an increase of 24% year-over-year.
  • Net income attributable to Sogou Inc. was $98.8 million, an increase of 20% from 2017. Non-GAAP net income attributable to Sogou Inc. was $113.0 million, an increase of 7% from 2017.

"Our twin growth engines, Sogou Search and Sogou Mobile Keyboard, continued to drive solid growth in the fourth quarter," said Xiaochuan Wang, CEO of Sogou. "Our core search revenues grew faster than the industry average and we created more synergies between mobile keyboard and search. More importantly, despite macro uncertainties, Sogou remains solid with high quality assets, a large and highly engaged user base, and annual revenue of over one billion dollars."

"In addition, we have demonstrated industry-leading AI capabilities in several key areas such as voice, computer vision, machine translation and Q&A. Looking ahead to 2019, we remain committed to leveraging AI technology to accelerate innovation initiatives across our core businesses and enhance the overall competitiveness of Sogou," added Mr. Wang.

Joe Zhou, CFO of Sogou, said, "Our fourth-quarter revenues were in line with expectations, as core search revenues grew 12% year-over-year, and we delivered $27 million non-GAAP net income. We were pleased to see increased contribution from organic traffic in the fourth quarter and expect this trend to continue into 2019. In line with the ongoing upgrade of our smart hardware business, we have more AI-enabled hardware products in the pipeline and expect this segment will regain momentum in 2019." 

Fourth Quarter 2018 Financial Results

Total revenues were $297.8 million, a 7% increase year-over-year.

  • Search and search-related revenues[3] were $276.8 million, a 12% increase year-over-year. The increase was primarily due to growth in auction-based pay-for-click services. Auction-based pay-for-click services accounted for 84.8% of search and search-related revenues, compared to 83.7% in the corresponding period in 2017.
  • Other revenues were $21.0 million, a 32% decrease year-over-year. The decrease was primarily due to lower sales of smart hardware products due to our continued efforts to upgrade the smart hardware strategy.

Cost of revenues was $186.1 million, a 39% increase year-over-year. Traffic acquisition cost, a primary driver of cost of revenues, was $149.9 million, a 69% increase year-over-year, representing 50.3% of total revenues, compared to 32.0% in the corresponding period in 2017. The increase was driven by price inflation as a result of increased competition.

Gross profit was $111.7 million, a 22% decrease year-over-year. Non-GAAP gross profit was $111.7 million, a 23% decrease year-over-year.

Total operating expenses were $99.3 million, a 19% decrease year-over-year.

  • Research and development expenses were $48.3 million, a 21% decrease year-over-year, representing 16.2% of total revenues, compared to 22.1% in the corresponding period in 2017. The decrease was primarily due to a decrease in share based compensation expense.
  • Sales and marketing expenses were $41.7 million, a 17% decrease year-over-year, representing 14.0% of total revenues, compared to 18.1% in the corresponding period in 2017. The decrease was primarily attributable to a decrease in marketing and promotional spending on some of the Company's mobile products and share based compensation expense.
  • General and administrative expenses were $9.4 million, a 19% decrease year-over-year, representing 3.1% of total revenues, compared to 4.2% in the corresponding period in 2017. The decrease was primarily due to a decrease in professional fees.

Operating income was $12.4 million, compared to operating income of $20.5 million in the corresponding period in 2017. Non-GAAP operating income was $13.1 million, compared to non-GAAP operating income of $42.9 million in the corresponding period in 2017.

Other income, net was $9.6 million, compared with $0.6 million in the corresponding period in 2017. The increase was primarily due to an increase in the gain from short-term investments.

Income tax benefit was $3.6 million, compared to income tax expense of $6.8 million in the corresponding period of 2017. The income tax benefit was primarily due to a decrease in taxable income and a larger tax benefit from the renewal of the Key National Software Enterprise status for one of the Company's subsidiaries. 

Net income attributable to Sogou Inc. was $26.4 million, a 71% increase year-over-year. Non-GAAP net income attributable to Sogou Inc. was $27.1 million, a 28% decrease year-over-year.

Basic earnings per ADS and diluted earnings per ADS were $0.07. Non-GAAP basic and diluted earnings per ADS were $0.07.

As of December 31, 2018, the Company had cash and cash equivalents and short-term investments of $1.0 billion, compared with $1.0 billion as of December 31, 2017. Net operating cash outflow for the fourth quarter of 2018 was $21.3 million. Capital expenditures for the fourth quarter of 2018 were $22.1 million.

Full Year 2018 Financial Results

Total revenues were $1.12 billion, a 24% increase from 2017.

  • Search and search-related revenues were $1.02 billion, a 28% increase from 2017. The increase was primarily due to solid growth in auction-based pay-for-click services, which accounted for 83.8% of search and search-related revenues, compared to 83.0% in 2017.
  • Other revenues were $101.0 million, a 5% decrease from 2017. The decrease was primarily due to lower sales of smart hardware products.

Cost of revenues was $693.5 million, a 52% increase from 2017. Traffic acquisition cost, a primary driver of cost of revenues, increased by 75% to $532.7 million, representing 47.4% of total revenues, compared to 33.4% in 2017.

Gross profit was $430.7 million, a 4% decrease from 2017. Non-GAAP gross profit was $431.4 million, a 4% decrease from 2017.

Total operating expenses were $386.0 million, an 8% increase from 2017.

  • Research and development expenses were $201.7 million, a 17% increase from 2017, representing 17.9% of total revenues compared to 19.0% in 2017.
  • Sales and marketing expenses were $146.2 million, a 7% decrease from 2017, representing 13.0% of total revenues compared to 17.2% in 2017.
  • General and administrative expenses were $38.1 million, a 37% increase from 2017, representing 3.4% of total revenues compared to 3.1% in 2017.

Operating income was $44.7 million, compared to operating income of $93.9 million in 2017. Non-GAAP operating income was $58.9 million, compared to operating income of $117.6 million in 2017.

Other income, net was $41.5 million, compared to $0.7 million in 2017. The increase was primarily due to an increase in gain from short-term investments, as well as a $17.8 million gain from one of the Company's equity investments recognized under a new accounting standard (ASC321) that became effective on January 1, 2018.

Income tax expense was $1.2 million, compared to $14.4 million in 2017. The decrease in income tax expense mainly resulted from a decrease in taxable income and a larger tax benefit from the renewal of the Key National Software Enterprise status for one of the Company's subsidiaries.

Net income attributable to Sogou Inc. was $98.8 million, an increase of 20% from 2017. Non-GAAP net income attributable to Sogou Inc. was $113.0 million, an increase of 7% from 2017.

Basic and diluted earnings per ADS were $0.25. Non-GAAP basic and diluted earnings per ADS were $0.29.

__________

[1] On a constant currency (non-GAAP) basis, if the exchange rate in the fourth quarter of 2018 had been the same as it was in the fourth quarter of 2017, or RMB 6.61=$1.00, total revenues in the fourth quarter of 2018 would have been $311.4 million, or $13.6 million more than GAAP total revenues, and up 12% year-over-year.

[2] Non-GAAP results exclude share-based compensation expense. 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."

[3] The Company has adopted ASU No. 2014-09, ''Revenue from Contracts with Customers" beginning January 1, 2018. The only major impact of the standard is that revenues and expenses related to advertising barter transactions are recognized beginning January 1, 2018. The impact for the fourth quarter of 2018 is approximately $4.6 million for both revenues, and cost of revenues and expenses.

Recent developments

On January 22, 2019, Mr. Yuxin Ren resigned as a member of the board of directors of the Company (the "Board") for personal reasons. Mr. Yu Yin was appointed by the Company's shareholder Tencent Holding Limited ("Tencent") to serve on the Board as a Tencent designee pursuant to the Company's articles of association, effective January 23, 2019. Mr. Yin joined Tencent in 2006 and currently serves as a Corporate Vice President in charge of all of Tencent's information feed products and young people's entertainment communities. Mr. Yin was in charge of QQ from 2006 to 2018. Before joining Tencent, Mr. Yin worked for Microsoft for eight years. Ms.Yin received a bachelor's degree in computer science from Grinnell College in the United States.

Business Outlook

For the first quarter of 2019, Sogou expects total revenues to be in the range $231 million to $241 million, representing a 3% to 7% decrease year-over-year, or a 1% to 5% increase year-over-year in RMB terms.

For the first quarter 2019 guidance, the Company has adopted a presumed exchange rate of RMB 6.90 = $1.00, as compared with the actual exchange rate of approximately RMB6.36 = $1.00 for the first quarter of 2018, and RMB 6.91 = $1.00 for the fourth quarter of 2018.

Non-GAAP Disclosure

To supplement the unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), Sogou's management uses non-GAAP measures of gross profit, gross margin, and net income that are adjusted from results based on GAAP to exclude the impact of share-based awards. 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.

Sogou's management believes that excluding share-based compensation expense is useful for management's internal operating purposes and for investors. The amount of share-based compensation expense cannot be anticipated by management, and this is not built into the Company's annual budgets and quarterly forecasts, which generally will be the basis for information Sogou provides to analysts and investors as guidance for future operating performance. As share-based compensation expense does not involve subsequent cash outflow, Sogou does not factor in this expense when evaluating and approving expenditures or when determining the allocation of its resources to its business operations. As a result, in general, the Company's monthly financial results for internal reporting and any performance measures for commissions and bonuses are based on these non-GAAP financial measures that exclude share-based compensation expense.

The non-GAAP financial measures are provided to enhance investors' overall understanding of Sogou's current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, gross margin, and net income measures that exclude share-based compensation expense is that share-based compensation expense has been and is likely to continue to be a significant recurring expense in the Company's business. In order to mitigate these limitations, the Company has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between GAAP financial measures that are most directly comparable to the non-GAAP financial measures the Company has presented.

Safe Harbor Statement

This announcement contains forward-looking statements. It is currently expected that the Business Outlook will not be updated until release of Sogou's next quarterly earnings announcement. However, Sogou reserves the right to update its Business Outlook at any time for any reason. Statements that are not historical facts, including statements about Sogou's and Sogou management's beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates, and projections, which 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, intense competition in the market for search and search-related services; our need to continually innovate and adapt in order to grow our business; our reliance on Tencent platforms for a significant portion of our user traffic; and uncertainty regarding the extent and reach of PRC governmental regulation of sponsored search. Further information regarding these and other risks is included in Amendment No. 2 to Sogou's Registration Statement on Form F‑1 (Registration No. 333-220928) filed with the Securities and Exchange Commission on November 6, 2017, and other documents Sogou files with or submits to the Securities and Exchange Commission.

Conference Call and Webcast 

Sogou's management team will host a conference call at 7:30am U.S. Eastern Time, (8:30pm Beijing/Hong Kong time) on February 1, 2019, following the announcement of quarterly and fiscal year results.

The dial-in details for the live conference call are:

U.S. Toll Free:

+1-888-317-6003

Mainland China Toll Free:

4001-206115; or 4001-201203

Hong Kong Toll Free:

800-963976; or 800-905945

Hong Kong Local Toll:

+852-580-81995

International:

+1-412-317-6061

Passcode:

8389106

Please dial in 10 minutes before the call is scheduled to begin. When prompted, ask to be connected to the Sogou Inc. call and provide the passcode.

A replay of the conference call may be accessed by phone at the following number until February 8, 2019:

International:

+1-412-317-0088

Passcode:

10127927

A live webcast and archive of the conference call will be available on the Investor Relations section of Sogou's website at http://ir.sogou.com.

About Sogou

Sogou Inc. (NYSE: SOGO) is an innovator in search and a leader in China's internet industry. With a mission to make it easy to communicate and get information, Sogou has grown to become the second largest search engine by mobile queries and the fourth largest internet company by MAU in China. Sogou has a wide range of innovative products and services including the Sogou Input Method, which is the largest Chinese language input software for both mobile and PC. Sogou is also at the forefront of AI development and has made significant breakthroughs in voice and image technologies, machine translation, and Q&A, which have been successfully integrated into our products and services.

For investor enquiries, please contact:

Jessie Zheng
Sogou Investor Relations
Tel: +86 10 5689 8068
Email: ir@sogou-inc.com

For media enquiries, please contact:

Rachael Layfield
Brunswick Group
Tel: +86 10 5960-8600
Email: sogou@brunswickgroup.com

SOGOU INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)














Three Months Ended

Twelve Months Ended



 Dec. 31, 2018 


 Sep. 30, 2018 


 Dec. 31, 2017 


 Dec. 31, 2018 


 Dec. 31, 2017 

Revenues: 











Search and search‑related advertising
revenues

$

276,824

$

255,312

$

247,140

$

1,023,132

$

801,551

Other revenues


20,967


21,255


30,645


101,026


106,806

Total revenues 


297,791


276,567


277,785


1,124,158


908,357

Cost of revenues (1) 


186,076


173,622


134,183


693,470


457,401

Gross profit 


111,715


102,945


143,602


430,688


450,956

Operating expenses:











Research and development (1)


48,284


50,598


61,263


201,739


172,829

Sales and marketing (1) 


41,677


43,592


50,208


146,194


156,420

General and administrative (1)


9,376


15,548


11,632


38,072


27,821

Total operating expenses 


99,337


109,738


123,103


386,005


357,070

Operating (loss)/income


12,378


(6,793)


20,499


44,683


93,886

Interest income 


1,075


1,732


2,939


8,037


9,126

Foreign currency exchange (loss)/gain(2)


(266)


4,521


(1,805)


5,725


(7,082)

Other income, net


9,627


24,049


580


41,489


692

Income before income tax expenses 


22,814


23,509


22,213


99,934


96,622

Income tax (benefit)/expenses


(3,579)


(409)


6,750


1,153


14,422

Net income 


26,393


23,918


15,463


98,781


82,200

Net income attributable to Sogou Inc. 

$

26,393

$

23,918

$

15,463

$

98,781

$

82,200

Less: Dividends attributable to preferred
shareholders 


-


-


3,319


-


24,388.00

Net income attributable to ordinary
shareholders 

$

26,393

$

23,918

$

12,144

$

98,781

$

57,812

Weighted average number of ordinary shares
outstanding—basic


390,065


389,566


314,977


388,731


257,173

Weighted average number of ordinary shares
outstanding—diluted


395,074


396,354


337,263


395,898


287,305

Net income per ordinary share—basic

$

0.07

$

0.06

$

0.04

$

0.25

$

0.22

Net income per ordinary share—diluted

$

0.07

$

0.06

$

0.04

$

0.25

$

0.20

Net income per ADS—basic

$

0.07

$

0.06

$

0.04

$

0.25

$

0.22

Net income per ADS—diluted

$

0.07

$

0.06

$

0.04

$

0.25

$

0.20












(1)  Share-based compensation expense
included in:











Cost of revenues 

$

(47)

$

234

$

535

$

669

$

540

Research and development 


482


3,008


15,239


10,313


16,470

Sales and marketing 


174


373


4,234


1,327


4,299

General and administrative 


140


514


2,407


1,895


2,414


$

749

$

4,129

$

22,415

$

14,204

$

23,723












(2)  Foreign currency exchange (loss)/gain, mainly arising from our cross-border RMB-denominated intragroup loans, is a result of appreciation or depreciation, respectively, of the RMB.

 

 

SOGOU INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED, IN THOUSANDS)








As of  Dec. 31, 2018


As of  Dec. 31, 2017

ASSETS





Current assets:





Cash and cash equivalents 

$

185,175

$

694,207

Short-term investments


851,327


339,006

Accounts receivable, net 


104,074


69,967

Loans and interest receivables, net


38,812


-

Prepaid and other current assets 


40,122


15,091

Due from related parties 


2,608


2,971

Total current assets 


1,222,118


1,121,242

Long‑term investments, net


63,305


30,152

Fixed assets, net 


147,495


139,209

Goodwill 


5,625


5,908

Intangible assets, net 


1,349


1,328

Deferred tax assets, net 


13,793


15,006

Other assets


9,159


8,191

Total assets 

$

1,462,844

$

1,321,036

LIABILITIES





Current liabilities:





Accounts payable

$

108,679

$

73,018

Accrued and other short term liabilities


151,399


164,269

Receipts in advance


65,324


66,199

Accrued salary and benefits


32,079


29,719

Taxes payable


60,433


56,481

Due to related parties


38,425


23,109

Total current liabilities 


456,339


412,795

Total liabilities 

$

456,339

$

412,795






SHAREHOLDERS' EQUITY





Sogou Inc. shareholders' equity


1,006,505


908,241

Total shareholders' equity


1,006,505


908,241

Total liabilities and shareholders' equity 

$

1,462,844

$

1,321,036

 

 

SOGOU INC.

RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATION MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)








































Three Months Ended Dec. 31, 2018

Three Months Ended Sep. 30, 2018

Three Months Ended Dec. 31, 2017


GAAP

Non-GAAP

Non-GAAP

GAAP

Non-GAAP

Non-GAAP

GAAP

Non-GAAP

Non-GAAP

Adjustments (1)

Adjustments (1)

Adjustments (1)

Gross profit

$

111,715

$

(47)

$

111,668

$

102,945

$

234

$

103,179

$

143,602

$

535

$

144,137




















Gross margin


38%




37%


37%




37%


52%




52%




















Operating expenses

$

99,337

$

(796)

$

98,541

$

109,738

$

(3,895)

$

105,843

$

123,103

$

(21,880)

$

101,223




















Operating Profit

$

12,378

$

749

$

13,127

$

(6,793)

$

4,129

$

(2,664)

$

20,499

$

22,415

$

42,914




















Operating margin


4%




4%


-2%




-1%


7%




15%




















Income tax (benefit)/expenses

$

(3,579)

$


$

(3,579)

$

(409)

$


$

(409)

$

6,750

$


$

6,750




















Net income 

$

26,393

$

749

$

27,142

$

23,918

$

4,129

$

28,047

$

15,463

$

22,415

$

37,878




















Net income attributable to Sogou Inc. 

$

26,393

$

749

$

27,142

$

23,918

$

4,129

$

28,047

$

15,463

$

22,415

$

37,878




















Net margin attributable to Sogou Inc. 


9%




9%


9%




10%


6%




14%







































(1) To exclude share-based compensation expense. This non-GAAP adjustment does not have an impact on income tax expense.







 

 

SOGOU INC.

RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATION MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)































Twelve Months Ended Dec. 31, 2018

Twelve Months Ended Dec. 31, 2017



GAAP

Non-GAAP

Non-GAAP

GAAP

Non-GAAP

Non-GAAP

Adjustments

Adjustments

Gross profit


$

430,688

$

669

$

431,357

$

450,956

$

540

$

451,496















Gross margin



38%




38%


50%




50%















Operating expenses


$

386,005

$

(13,535)

$

372,470

$

357,070

$

(23,183)

$

333,887















Operating Profit


$

44,683

$

14,204

$

58,887

$

93,886

$

23,723

$

117,609















Operating margin



4%




5%


10%




13%















Income tax expense


$

1,153

$


$

1,153

$

14,422

$


$

14,422















Net income 


$

98,781

$

14,204

$

112,985

$

82,200

$

23,723

$

105,923















Net income attributable to Sogou Inc. 


$

98,781

$

14,204

$

112,985

$

82,200

$

23,723

$

105,923















Net margin attributable to Sogou Inc. 



9%




10%


9%




12%















(1) To exclude share-based compensation expense. This non-GAAP adjustment does not have an impact on income tax expense.

 

SOURCE Sogou Inc.


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