Shulou(Shulou.com)06/03 Report--

In the early stage, I only heard that Sogou's performance saved Sohu, but I never thought that Sogou's excessive loss in this quarter would lead to Sohu's loss expansion.

Recently, Sogou released unaudited financial results for the first quarter of fiscal year 2020 ended March 31. According to the financial report, according to GAAP, Sogou's total revenue in the first quarter was $257.3 million, up 2 per cent year-on-year and 5 per cent in renminbi terms.

It is worth noting that the net loss attributed to Sogou was $31.6 million, an increase of 710% from the net loss of 3.9 million in the same period last year; according to non-US general accounting standards (Non-GAAP), excluding equity incentive fees, the net loss attributed to Sogou was $31.1 million, up 1052% from the net loss of $2.7 million in the same period last year.

Sohu's financial report for the first quarter of 2020 showed that total income was $436 million, an increase of 6% over the same period last year; non-general accounting standards attributed to Sohu's net loss of $18 million, narrowed year-on-year. For this loss, Sohu said: excluding the influence of Sogou, its net loss narrowed to $8 million. In other words, Sohu was dragged down by Sogou's heavy losses in the first quarter of 2020.

As soon as the news came out, rumors about Sogou's search business spread all over the world.

It is difficult to increase income and the loss expands.

At present, the epidemic has led to a decline in the global economy, coupled with increased competition in the industry and the limitations of its own profitability, Sogou's income is difficult to increase and continues to be under pressure.

Sogou reported revenue of $257 million (1.827 billion yuan) in the first quarter of 2020, up 2% from a year earlier, and Sogou expects revenue in the second quarter of 2020 to range from 1.815 billion yuan ($260 million) to 1.954 billion yuan ($280 million). According to the 2019 financial report, Sogou's revenue in the four quarters of 2019 was 1.7 billion yuan, 2.07 billion yuan, 2.2 billion yuan and 2.1 billion yuan respectively, showing a downward trend compared with the previous quarter.

Specifically, Sogou's revenue growth slowed compared with the previous month, due to the slow growth of the main search and search-related revenue business.

It is reported that Sogou's search and search-related revenue in the first quarter of 2020 was 1.658 billion yuan ($238 million), an increase of 1% year-on-year and nearly flat. Similarly, Sogou search and search-related business revenue growth, mainly due to the growth of pay-per-click services. Pay-per-click-based search services accounted for 91.0 per cent of search and search-related revenue, compared with 87.2 per cent in the same period in 2019.

It can be found that for five consecutive quarters, Sogou's main business revenue is in a relatively stable state, and the revenue is basically between 1.7 billion yuan and 2.2 billion yuan. This also reveals a signal: search and search-related business has entered a period of stable development, and if nothing happens, the growth space is relatively stereotyped.

Therefore, Sogou vigorously develops AI business in order to find new economic growth points to support Sogou's growing body. In the first quarter of 2020, Sogou's other income was 138 million yuan (US $20 million), up 6% from the same period last year, mainly due to an increase in sales of smart hardware products.

As Sogou's closely watched business, the 6 per cent growth in sales of smart hardware products in this quarter is also an account of the efforts made over the years. Just in the face of the high traffic costs during the epidemic, the meagre income of the AI business could not support this running-water expenditure, so it was expected that the net loss of $2.7 million in the same period last year increased by 1052%, compared with a huge loss of $31.6 million.

High traffic cost

"the effect of open source is slow, and the traffic cost is high." this is the root cause of Sogou's huge losses in the first quarter.

Wang Xiaochuan, CEO of Sogou, said: "at the beginning of 2020, despite the challenging environment of the COVID-19 epidemic, our core business is operating smoothly. In particular, our core search business continued to surpass the industry in the first quarter. Due to the surge in user demand for reliable information and efficiency during the pandemic, our search and input methods hit new highs in terms of traffic and user base, respectively.

According to the corresponding financial report, Sogou's search traffic increased by 16% in the first quarter compared with the same period last year, making it the second largest search engine. The number of daily active users of Sogou's mobile phone input method increased by 9% compared with the same period last year, reaching 480 million, and the average daily voice request reached a peak of 1.4 billion.

It is true that the user scale of Sogou has reached a new high, but it is also accompanied by rising traffic acquisition costs.

According to the financial report, Sogou's revenue cost was $217 million, up 18 per cent from a year earlier; traffic acquisition costs were $181.3 million, up 27 per cent from a year earlier, accounting for 70.5 per cent of total revenue, up from 56.6 per cent in the same period last year. In addition, Sogou made a gross profit of 281 million yuan ($40 million) and a gross profit margin of 15.66% in the current quarter. Gross profit was $40.3 million, down 41 per cent from a year earlier.

The reason is that Sogou's traffic fee is based on the number of searches multiplied by a fixed unit price, while during the epidemic period, home users spend more time and search for information more frequently, resulting in an increase of nearly 20% in Sogou's traffic acquisition cost.

In addition, 30 per cent of Sogou's traffic in the last quarter came from its own channels, 35 per cent from Tencent, and the remaining 35 per cent from paid-to-purchase traffic, compared with 25 per cent from its own channels, 36 per cent from Tencent and 39 per cent from paid purchases in this quarter. The increase in traffic growth in paid channels has led to an increase in traffic costs.

Although the current traffic cost is high, Sogou officials are optimistic that the cost of obtaining traffic will drop accordingly after the epidemic. At that time, Sogou's overall revenue cost will also be reduced and thus play the effect of cutting expenditure.

In any case, search and search-related advertising business is under long-term pressure and high traffic cost is a problem in front of Sogou. Whether we can increase the revenue share of other businesses and get rid of the problem of a single revenue structure is related to Sogou's future survival.

AI's open source help is limited.

Since entering the intelligent age, everyone has told the "AI story", and Sogou is also a member of the army of "owning AI".

Following the launch of AI recorders in 2019, Sogou launched high-end recorders for more complex scenes such as conference training in March this year. Although affected by the epidemic, the upgraded sales of Sogou recorders were objective, which also strengthened Sogou's confidence in AI.

On the one hand, Sogou continues to allocate funds to support the development of AI business. According to the financial report, the total operating expenses were US $82.6 million, up 3% from the same period last year. Of this total, R & D expenses were US $47 million, up 15% from the same period last year, accounting for 18.3% of total revenue, up from 16.2% in the same period last year.

On the other hand, Sogou continues to upgrade AI and open up more AI hardware categories. From "Sogou Travel Translation Treasure", "Sogou shorthand Translation Pen" to "Sogou AI Recorder", Sogou AI product camp has been further expanded, product competitiveness and brand influence have also been enhanced, and new competition barriers have been set up.

In addition, traditional businesses such as Sogou Input and search also wear the armor of AI.

In search, Sogou uses knowledge graph to improve search quality and promote the click rate of encyclopedia content. At the same time, the further integration of AI technology to vigorously develop AI medical and health, during the epidemic launched COVID-19 AI self-test, intelligent question answering robot and other functions. It is reported that during the epidemic, the peak number of Sogou medical searches increased by about 100% compared with the same period last year, and the number of online consultations increased by about 400%.

In terms of input method, Sogou continues to strengthen the experience of AI input method, launching AI handwriting completion, handwriting association, hand-painted facial expressions and other functions, in order to respond to the input needs of different groups and deeply tap user value, in order to capture the hearts of the people with high-quality service. At the same time, Sogou's AI assistant "Smart Wang" has also been upgraded. According to public data, Smart Wang uses 900 million times a week, and the number of uses per capita has increased nearly three times compared with the previous month.

However, Sogou has only intelligent hardware sales revenue in the field of AI, while there are many experts in the C-end intelligent hardware market, including Internet giants such as Ali, Baidu, Tencent and Huawei, as well as traditional manufacturing giants such as Gree and Haier. Smart hardware market is a red sea, Sogou wants to gain higher market share to achieve revenue growth, in order to support the ramshackle body seems inadequate and slow to achieve results.

Business is like a battlefield, it is impossible to defeat the enemy with one move forever. In the increasingly fierce market competition, maintaining the stable development of the search business can no longer guarantee the sustainable development of Sogou, but in order to resist the upward jump of foreign enemies, we need to further consolidate the core competitive advantage and continue to improve the search, input method business and so on. At the same time, through AI to comprehensively upgrade business, tap new business potential, stimulate new development momentum, broaden the track and build a new moat.

After all, it is safer to walk on more than one leg.

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