REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Title of each class) |
(Trading Symbol(s)) |
(Name of each exchange on which registered) | ||
Large accelerated filer ☐ |
Non-accelerated filer ☐ |
Emerging growth company |
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ |
Other ☐ |
TABLE OF CONTENTS
Introduction
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
• | “we,” “us,” “our,” “our company,” “our Group,” the “Sohu Group,” the “Group,” and “Sohu” refer to Sohu.com Limited (or our predecessor Sohu.com Inc., as applicable) and, unless the context requires otherwise, include its subsidiaries and variable interest entities (“VIEs”) that it consolidates. For a list of the principal VIEs we consolidate, see “Information on the Company - Organizational Structure” in Item 4 of this annual report. As described elsewhere in this annual report, we do not own the VIEs, and the results of the VIEs’ operations only accrue to us through contractual arrangements between the VIEs, and the VIEs’ nominee shareholders, and certain of our subsidiaries. Accordingly, in appropriate contexts we will describe the VIEs’ activities separately from those of our direct and indirect owned subsidiaries and our use of the terms “we,” “us,” and “our” may not include the VIEs in those contexts. Sohu.com Inc., a Delaware corporation, was dissolved on May 31, 2018 and Sohu.com Limited, which before then was a direct wholly-owned subsidiary of Sohu.com Inc., replaced Sohu.com Inc. as the top-tier, publicly-traded holding company of the Sohu Group. See “Information on the Company-History and Development of the Company” in Item 4 of this annual report. |
• | “ADSs” refers to our American depositary shares, each of which represents one ordinary share, par value $0.001 per share; |
• | “Cayman Islands Companies Act” refers to the Companies Act (2023 Revision) (as amended or revised from time to time) of the Cayman Islands; |
• | “Changyou” refers to Changyou.com Limited, a Cayman Islands exempted company, and unless the context requires otherwise, includes its subsidiaries and the consolidated VIEs, but excludes Fox Information Technology (Tianjin) Limited (“Video Tianjin”) and its subsidiaries; |
• | “China” or the “PRC” refers to the People’s Republic of China; and “Chinese mainland” refers to the People’s Republic of China excluding Hong Kong, Macau, and Taiwan; |
• | “HNTE” refers to high and new technology enterprises; |
• | “IPO” refers to an initial public offering; |
• | “KNSE” refers to key national software enterprises; |
• | “Legacy TLBB Mobile” refers to a mobile game that Changyou developed based on the title and characters of Tian Long Ba Bu, which is operated by Tencent under license from Changyou and was launched in May 2017; |
• | “Memorandum and Articles of Association” refers to our Amended and Restated Memorandum of Association and our Amended and Restated Articles of Association; |
• | “MMORPGs” refers to massively multiplayer online role-playing games; |
• | “Offshore” refers to nations and territories outside of the Chinese mainland, and for this purpose includes Hong Kong, Macau, and Taiwan; |
• | “PC games” refers to interactive online games that may be accessed and played simultaneously by hundreds of thousands of game players through personal computers with local game client-end access software installation requirements. In previous annual reports, we have sometimes used the terms “MMOGs” and “MMORPGs” when referring to these client-end installed games played through personal computers; |
• | “RMB” refers to the Renminbi, which is the legal currency of the Chinese mainland; |
• | “Sogou” refers to Sogou Inc., a Cayman Islands exempted company, and unless the context requires otherwise, includes its subsidiaries and the VIEs it consolidates; |
• | “Tencent” refers to Tencent Holdings Limited and its subsidiaries under International Financial Reporting Standards; |
• | “Tian Long Ba Bu,” refers to the popular novel of that name by the famous Chinese writer Louis Cha; |
• | “TLBB” or “TLBB PC” refers to the PC game developed based on the title and characters of Tian Long Ba Bu; |
1
• | “TLBB 3D” refers to a mobile game that was developed based on the title and characters of Tian Long Ba Bu; |
• | “TLBB Honor” refers to another mobile game that was developed based on the title and characters of Tian Long Ba Bu, which adopts an innovative portrait interface; |
• | “U.S. GAAP” refers to generally accepted accounting principles in the United States; |
• | “U.S. TCJA” refers to the U.S. Tax Cuts and Jobs Act signed into law on December 22, 2017; and |
• | “VIE” refers to an entity that is a variable interest entity under U.S. GAAP, including a subsidiary of an entity that is a variable interest entity under U.S. GAAP. |
This annual report on Form 20-F includes our audited consolidated statements of comprehensive income/(loss) for the years ended December 31, 2020, 2021, and 2022 and audited consolidated balance sheets as of December 31, 2021 and 2022.
Our predecessor Sohu.com Inc. completed an IPO of shares of its common stock on Nasdaq on July 17, 2000. Following the dissolution of Sohu.com Inc. on May 31, 2018, our ADSs began trading on Nasdaq in place of the shares of common stock of Sohu.com Inc. under the same “SOHU” symbol under which Sohu.com Inc.’s shares had previously traded.
Changyou completed its IPO on Nasdaq in April 2009, trading under the symbol “CYOU.” On April 17, 2020, we acquired all outstanding shares of Changyou that we did not already beneficially own pursuant to the merger (the “Changyou Merger”) of an indirect newly-formed wholly-owned subsidiary (“Changyou Merger Co.”) with and into Changyou, with Changyou being the company surviving the Changyou Merger, and resulting in Changyou being delisted from Nasdaq and continuing as a privately-held company wholly-owned directly and indirectly by us.
Sogou completed its IPO on the New York Stock Exchange (the “NYSE”) in November 2017, trading under the symbol “SOGO.” On September 23, 2021, we completed the transactions contemplated by a Share Purchase Agreement, dated September 29, 2020 and amended on December 1, 2020 and further amended on July 19, 2021, among us, our indirect wholly-owned subsidiary Sohu.com (Search) Limited (“Sohu Search”), and TitanSupernova Limited (“Tencent Merger Sub”), an indirect wholly-owned subsidiary of Tencent (as so amended, the “Tencent/Sohu Sogou Share Purchase Agreement”), in which Sohu Search sold all of the Class A ordinary shares of Sogou and Class B ordinary shares of Sogou owned by Sohu Search to Tencent Merger Sub at a purchase price of $9.00 per share (the “Tencent/Sohu Sogou Share Purchase”). We received gross consideration of approximately $1.18 billion in cash from the Tencent/Sohu Sogou Share Purchase. As a result of the completion of the Tencent/Sohu Sogou Share Purchase, we no longer have any beneficial ownership interest in Sogou. See “Item 4. Information on the Company - History and Development of the Company” for a more detailed description of the transactions contemplated by the Tencent/Sohu Sogou Share Purchase Agreement.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains “forward looking statements.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terms such as “may,” “will,” “expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” and similar expressions. The forward-looking statements made in this annual report relate only to events as of the date on which the statements are made. We undertake no obligation, beyond any that is required by law, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made, even though our situation will change in the future.
These forward-looking statements include, but are not limited to, the following:
• | our ability to maintain and strengthen our position as a leading Chinese online media, video, and game business group in the Chinese mainland; |
• | our expected development, launch and market acceptance of our products and services; |
• | our various initiatives to implement our business strategies to expand our business; |
• | our future business development, results of operations and financial condition; |
• | the expected growth of and change in the online media, video, and game industries in the Chinese mainland; |
• | regulatory policies in the Chinese mainland relating to the Internet and Internet content providers, including online media, video, and game developers and operators; and |
2
• | the effect that Chinese mainland laws and regulations; regulatory policies in the Chinese mainland; and the views of courts, arbitral tribunals, and other regulatory authorities in the Chinese mainland may have on our ability to rely on contractual rights to effect control and management of the VIEs that are consolidated with us and our ability to consolidate such VIEs’ results of operations, assets, and liabilities in our consolidated financial statements and/or to transfer the revenues of such VIEs to our corresponding Chinese mainland subsidiaries. |
Whether actual results will conform with our expectations and predictions is subject to a number of risks and uncertainties, many of which are beyond our control, and reflect future business decisions that are subject to change. Some of the assumptions, future results, and levels of performance expressed or implied in the forward-looking statements we make inevitably will not materialize, and unanticipated events may occur which will affect our results.
We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with all other parts of this annual report, including the risk factors set forth in Item 3. See “Key Information-Risk Factors.”
PART I
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not Applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not Applicable.
ITEM 3. | KEY INFORMATION |
Financial Information Related to VIEs and Sohu.com Limited
We do not own the VIEs that we consolidate in our financial statements. Chinese mainland law currently restricts foreign ownership of value-added telecommunication services, Internet publishing, online news information services, online audiovisual transmission, online games, and certain other business activities in the Chinese mainland. To comply with Chinese mainland law, we conduct a significant part of our value-added telecommunications, online game, and other business activities through contractual arrangements between our principal Chinese mainland subsidiaries and the corresponding VIEs and their respective shareholders. See “Information on the Company - Organizational Structure” in Item 4 of this annual report for a description of the ownership information of the principal VIEs through which we conduct a significant portion of our operations. See Item 7 “Major Shareholders and Related Party Transactions – Contractual Arrangements with VIEs and their Shareholders” of this annual report for a more detailed discussion of the contractual arrangements with the VIEs. For a discussion of risks related to these contractual arrangements, please see “Item 3. Key Information - Risk Factors - Risks Related to Our Corporate Structure- We depend upon contractual arrangements with the VIEs and/or their shareholders for the success of our business, these contractual arrangements, which provide the basis for us to consolidate such VIEs under U.S. GAAP (ASC 810), may not be as effective in providing us with a controlling financial interest (as defined under U.S. GAAP (ASC 810)) as would ownership of these businesses, and the contracts may be difficult to enforce” and “- A failure by the VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business and financial condition.”
3
The table below presents our condensed consolidating schedule of financial position for our top-tier publicly-traded holding company Sohu.com Limited (the “Company”), our wholly-owned subsidiaries that are the primary beneficiaries of the VIEs under U.S. GAAP (the “Primary Beneficiaries of VIEs”), our other subsidiaries that are not the Primary Beneficiaries of VIEs (the “Other Subsidiaries”), and the VIEs and their subsidiaries that we consolidate as of the dates presented (in thousands).
Between our entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations of Sogou and the gain of approximately $855 million, net of transaction and other costs, from its disposal are presented in separate line items in the table below as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Accordingly, the financial position, results of operations, and cash flows related to the discontinued Sogou operations have not been disaggregated in the table below, because they do not constitute any part of our consolidated financial statements following the completion of the Tencent/Sohu Sogou Share Purchase.
As of December 31, 2021 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 13,564 | 606,306 | 346,566 | 32,513 | 0 | 998,949 | |||||||||||||||||
Restricted cash |
0 | 0 | 1,969 | 0 | 0 | 1,969 | ||||||||||||||||||
Short-term investments |
0 | 147,598 | 251,747 | 0 | 0 | 399,345 | ||||||||||||||||||
Accounts receivable, net |
0 | 25,552 | 20,971 | 36,027 | 0 | 82,550 | ||||||||||||||||||
Prepaid and other current assets |
723 | 13,224 | 74,528 | 18,836 | 0 | 107,311 | ||||||||||||||||||
Intra-Group receivables due from subsidiaries (1) |
539,677 | 670,362 | 837,566 | 647,330 | (2,694,935 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
553,964 | 1,463,042 | 1,533,347 | 734,706 | (2,694,935 | ) | 1,590,124 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Fixed assets, net |
0 | 55,358 | 274,212 | 427 | 0 | 329,997 | ||||||||||||||||||
Investment in subsidiaries (2) |
918,243 | 779,717 | 349,208 | 0 | (2,047,168 | ) | 0 | |||||||||||||||||
Controlling financial interests in VIEs (3) |
0 | 0 | 213,763 | 0 | (213,763 | ) | 0 | |||||||||||||||||
Long-term time deposits |
0 | 0 | 189,007 | 0 | 0 | 189,007 | ||||||||||||||||||
Other non-current assets |
22,036 | 9,469 | 19,976 | 86,744 | (1,568 | ) | 136,657 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 1,494,243 | 2,307,586 | 2,579,513 | 821,877 | (4,957,434 | ) | 2,245,785 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | 0 | 21,301 | 53,821 | 12,325 | 0 | 87,447 | |||||||||||||||||
Accrued liabilities |
1,678 | 11,257 | 81,566 | 43,695 | 0 | 138,196 | ||||||||||||||||||
Receipts in advance and deferred revenue |
0 | 4,938 | 6,259 | 45,844 | 0 | 57,041 | ||||||||||||||||||
Accrued salary and benefits |
83 | 25,637 | 57,372 | 8,393 | 0 | 91,485 | ||||||||||||||||||
Tax payables |
9 | 7,925 | 7,241 | 1,539 | 0 | 16,714 | ||||||||||||||||||
Intra-Group payables due to subsidiaries (1) |
36,912 | 1,011,224 | 1,184,312 | 462,487 | (2,694,935 | ) | 0 | |||||||||||||||||
Other short-term liabilities |
1,358 | 58,866 | 38,250 | 14,094 | 0 | 112,568 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
40,040 | 1,141,148 | 1,428,821 | 588,377 | (2,694,935 | ) | 503,451 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Long-term other payables |
0 | 0 | 3,922 | 0 | 0 | 3,922 | ||||||||||||||||||
Long-term tax liabilities |
163,334 | 16,119 | 0 | 14,465 | 0 | 193,918 | ||||||||||||||||||
Deferred tax liabilities |
0 | 237,116 | 8,726 | 3,323 | 0 | 249,165 | ||||||||||||||||||
Other non-current liabilities |
0 | 0 | 2,960 | 1,750 | (1,568 | ) | 3,142 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total long-term liabilities |
163,334 | 253,235 | 15,608 | 19,538 | (1,568 | ) | 450,147 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
$ | 203,374 | 1,394,383 | 1,444,429 | 607,915 | (2,696,503 | ) | 953,598 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
Total Sohu.com Limited shareholders’ equity |
1,290,869 | 911,936 | 1,135,084 | 213,962 | (2,260,982 | ) | 1,290,869 | |||||||||||||||||
Noncontrolling interest |
0 | 1,267 | 0 | 0 | 51 | 1,318 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders’ equity (2)(3) |
1,290,869 | 913,203 | 1,135,084 | 213,962 | (2,260,931 | ) | 1,292,187 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders’ equity |
$ | 1,494,243 | 2,307,586 | 2,579,513 | 821,877 | (4,957,434 | ) | 2,245,785 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
4
As of December 31, 2022 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1,308 | 648,981 | 25,800 | 21,732 | 0 | 697,821 | |||||||||||||||||
Restricted cash |
0 | 0 | 1,803 | 1,838 | 0 | 3,641 | ||||||||||||||||||
Short-term investments |
0 | 467,294 | 1,726 | 4,604 | 0 | 473,624 | ||||||||||||||||||
Accounts receivable, net |
0 | 28,913 | 6 | 38,622 | 0 | 67,541 | ||||||||||||||||||
Prepaid and other current assets |
700 | 22,201 | 46,258 | 13,934 | 0 | 83,093 | ||||||||||||||||||
Intra-Group receivables due from subsidiaries (1) |
512,936 | 353,286 | 666,291 | 594,099 | (2,126,612 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
514,944 | 1,520,675 | 741,884 | 674,829 | (2,126,612 | ) | 1,325,720 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Fixed assets, net |
0 | 51,087 | 236,787 | 352 | 0 | 288,226 | ||||||||||||||||||
Investment in subsidiaries (2) |
834,714 | 1,735,970 | 455,149 | 0 | (3,025,833 | ) | 0 | |||||||||||||||||
Controlling financial interests in VIEs (3) |
0 | 0 | 198,476 | 0 | (198,476 | ) | 0 | |||||||||||||||||
Long-term time deposits |
0 | 0 | 265,802 | 0 | 0 | 265,802 | ||||||||||||||||||
Other non-current assets |
22,036 | 8,284 | 15,694 | 53,450 | (1,436 | ) | 98,028 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 1,371,694 | 3,316,016 | 1,913,792 | 728,631 | (5,352,357 | ) | 1,977,776 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | 0 | 26,751 | 18,789 | 10,909 | 0 | 56,449 | |||||||||||||||||
Accrued liabilities |
1,129 | 57,224 | 30,162 | 37,946 | 0 | 126,461 | ||||||||||||||||||
Receipts in advance and deferred revenue |
0 | 7,055 | 77 | 40,948 | 0 | 48,080 | ||||||||||||||||||
Accrued salary and benefits |
83 | 19,288 | 35,154 | 6,229 | 0 | 60,754 | ||||||||||||||||||
Tax payables |
0 | 2,217 | 7,212 | 1,183 | 0 | 10,612 | ||||||||||||||||||
Intra-Group payables due to subsidiaries (1) |
90,173 | 907,191 | 726,702 | 402,546 | (2,126,612 | ) | 0 | |||||||||||||||||
Other short-term liabilities |
0 | 56,356 | 43,074 | 15,102 | 0 | 114,532 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
91,385 | 1,076,082 | 861,170 | 514,863 | (2,126,612 | ) | 416,888 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Long-term other payables |
0 | 866 | 929 | 0 | 0 | 1,795 | ||||||||||||||||||
Long-term tax liabilities |
170,867 | 16,120 | 0 | 13,242 | 0 | 200,229 | ||||||||||||||||||
Deferred tax liabilities |
0 | 239,013 | 8,252 | 549 | 0 | 247,814 | ||||||||||||||||||
Other non-current liabilities |
0 | (80 | ) | 420 | 1,436 | (1,436 | ) | 340 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total long-term liabilities |
170,867 | 255,919 | 9,601 | 15,227 | (1,436 | ) | 450,178 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
$ | 262,252 | 1,332,001 | 870,771 | 530,090 | (2,128,048 | ) | 867,066 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
Total Sohu.com Limited shareholders’ equity |
1,109,442 | 1,982,747 | 1,043,021 | 198,541 | (3,224,309 | ) | 1,109,442 | |||||||||||||||||
Noncontrolling interest |
0 | 1,268 | 0 | 0 | 0 | 1,268 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders’ equity (2)(3) |
1,109,442 | 1,984,015 | 1,043,021 | 198,541 | (3,224,309 | ) | 1,110,710 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders’ equity |
$ | 1,371,694 | 3,316,016 | 1,913,792 | 728,631 | (5,352,357 | ) | 1,977,776 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
5
The following table presents our condensed consolidating schedules of results of operations for the VIEs that we consolidate and other entities for the periods presented (in thousands):
Year Ended December 31, 2020 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Third-party revenues |
$ | 0 | 119,098 | 77,812 | 552,980 | 0 | 749,890 | |||||||||||||||||
Intra-Group revenues (4) |
0 | 19,598 | 390,062 | 30,207 | (439,867 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
0 | 138,696 | 467,874 | 583,187 | (439,867 | ) | 749,890 | |||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||
Third-party cost of revenues |
0 | 24,674 | 99,430 | 93,333 | 0 | 217,437 | ||||||||||||||||||
Intra-Group cost of revenues (4) |
0 | 4,376 | 34,280 | 141,717 | (180,373 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total cost of revenues |
0 | 29,050 | 133,710 | 235,050 | (180,373 | ) | 217,437 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
0 | 109,646 | 334,164 | 348,137 | (259,494 | ) | 532,453 | |||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Third-party operating expenses |
1,613 | 95,727 | 310,759 | 50,983 | 0 | 459,082 | ||||||||||||||||||
Intra-Group operating expenses (4) |
0 | 3,957 | 741 | 254,796 | (259,494 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
1,613 | 99,684 | 311,500 | 305,779 | (259,494 | ) | 459,082 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating profit/(loss) |
(1,613 | ) | 9,962 | 22,664 | 42,358 | 0 | 73,371 | |||||||||||||||||
Income/(loss) from subsidiaries (2) |
(46,084 | ) | 69,099 | 37,195 | 0 | (60,210 | ) | 0 | ||||||||||||||||
Income/(loss) from VIEs (3) |
0 | 0 | 41,743 | 0 | (41,743 | ) | 0 | |||||||||||||||||
Non-operating income/(expense) |
(1,071 | ) | (3,948 | ) | 24,679 | 3,668 | 0 | 23,328 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income/(loss) before income tax expense |
(48,768 | ) | 75,113 | 126,281 | 46,026 | (101,953 | ) | 96,699 | ||||||||||||||||
Income tax expense |
6,207 | 102,749 | 20,000 | 4,270 | 0 | 133,226 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income/(loss) from continuing operations |
(54,975 | ) | (27,636 | ) | 106,281 | 41,756 | (101,953 | ) | (36,527 | ) | ||||||||||||||
Less: Net income from continuing operations attributable to the noncontrolling interest shareholders |
0 | 18,448 | 0 | 0 | 0 | 18,448 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income/(loss) from continuing operations attributable to Sohu.com Limited |
(54,975 | ) | (46,084 | ) | 106,281 | 41,756 | (101,953 | ) | (54,975 | ) | ||||||||||||||
Net loss from discontinued operations, net of tax |
(31,137 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net loss |
$ | (86,112 | ) | |||||||||||||||||||||
|
|
6
Year Ended December 31, 2021 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Third-party revenues |
$ | 0 | 90,830 | 79,923 | 664,823 | 0 | 835,576 | |||||||||||||||||
Intra-Group revenues (4) |
0 | 275,774 | 256,801 | 21,488 | (554,063 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
0 | 366,604 | 336,724 | 686,311 | (554,063 | ) | 835,576 | |||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||
Third-party cost of revenues |
0 | 26,055 | 96,891 | 81,725 | 0 | 204,671 | ||||||||||||||||||
Intra-Group cost of revenues (4) |
0 | 4,957 | 37,732 | 136,221 | (178,910 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total cost of revenues |
0 | 31,012 | 134,623 | 217,946 | (178,910 | ) | 204,671 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
0 | 335,592 | 202,101 | 468,365 | (375,153 | ) | 630,905 | |||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Third-party operating expenses |
1,768 | 123,963 | 335,576 | 72,126 | 0 | 533,433 | ||||||||||||||||||
Intra-Group operating expenses (4) |
0 | 11,325 | 2,831 | 366,762 | (380,918 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
1,768 | 135,288 | 338,407 | 438,888 | (380,918 | ) | 533,433 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating profit/(loss) |
(1,768 | ) | 200,304 | (136,306 | ) | 29,477 | 5,765 | 97,472 | ||||||||||||||||
Income/(loss) from subsidiaries (2) |
75,343 | (71,989 | ) | 182,818 | 0 | (186,172 | ) | 0 | ||||||||||||||||
Income/(loss) from VIEs (3) |
0 | 0 | 35,805 | 0 | (35,805 | ) | 0 | |||||||||||||||||
Non-operating income/(expense) |
526 | (3,017 | ) | 32,843 | 9,508 | (5,765 | ) | 34,095 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income tax expense |
74,101 | 125,298 | 115,160 | 38,985 | (221,977 | ) | 131,567 | |||||||||||||||||
Income tax expense |
4,827 | 49,958 | 4,331 | 3,180 | 0 | 62,296 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income from continuing operations |
69,274 | 75,340 | 110,829 | 35,805 | (221,977 | ) | 69,271 | |||||||||||||||||
Less: Net loss from continuing operations attributable to the noncontrolling interest shareholders |
0 | (3 | ) | 0 | 0 | 0 | (3 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income from continuing operations attributable to Sohu.com Limited |
69,274 | 75,343 | 110,829 | 35,805 | (221,977 | ) | 69,274 | |||||||||||||||||
Net income from discontinued operations, net of tax |
858,451 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income |
$ | 927,725 | ||||||||||||||||||||||
|
|
7
Year Ended December 31, 2022 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Third-party revenues |
$ | 0 | 141,118 | 1,274 | 591,480 | 0 | 733,872 | |||||||||||||||||
Intra-Group revenues (4) |
0 | 202,250 | 257,442 | 27,914 | (487,606 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
0 | 343,368 | 258,716 | 619,394 | (487,606 | ) | 733,872 | |||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||
Third-party cost of revenues |
0 | 34,125 | 60,845 | 96,603 | 0 | 191,573 | ||||||||||||||||||
Intra-Group cost of revenues (4) |
0 | 24,232 | 17,499 | 104,883 | (146,614 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total cost of revenues |
0 | 58,357 | 78,344 | 201,486 | (146,614 | ) | 191,573 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
0 | 285,011 | 180,372 | 417,908 | (340,992 | ) | 542,299 | |||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Third-party operating expenses |
2,206 | 187,875 | 280,180 | 72,911 | 0 | 543,172 | ||||||||||||||||||
Intra-Group operating expenses (4) |
0 | 9,104 | 2,662 | 329,226 | (340,992 | ) | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
2,206 | 196,979 | 282,842 | 402,137 | (340,992 | ) | 543,172 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating profit/(loss) |
(2,206 | ) | 88,032 | (102,470 | ) | 15,771 | 0 | (873 | ) | |||||||||||||||
Income/(loss) from subsidiaries (2) |
(213 | ) | (71,405 | ) | 74,897 | 0 | (3,279 | ) | 0 | |||||||||||||||
Income/(loss) from VIEs (3) |
0 | 0 | 2,691 | 0 | (2,691 | ) | 0 | |||||||||||||||||
Non-operating income/(expense) |
(7,390 | ) | 24,159 | 37,107 | (12,398 | ) | 0 | 41,478 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income tax expense |
(9,809 | ) | 40,786 | 12,225 | 3,373 | (5,970 | ) | 40,605 | ||||||||||||||||
Income tax expense |
7,534 | 40,997 | 8,733 | 682 | 0 | 57,946 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income/(loss) from continuing operations |
(17,343 | ) | (211 | ) | 3,492 | 2,691 | (5,970 | ) | (17,341 | ) | ||||||||||||||
Less: Net loss from continuing operations attributable to the noncontrolling interest shareholders |
0 | 2 | 0 | 0 | 0 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income/(loss) from continuing operations attributable to Sohu.com Limited |
(17,343 | ) | (213 | ) | 3,492 | 2,691 | (5,970 | ) | (17,343 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net loss |
$ | (17,343 | ) | |||||||||||||||||||||
|
|
8
The following table presents our condensed consolidating schedules of cash flows for the VIEs that we consolidate and other entities for the periods presented (in thousands):
Year Ended December 31, 2020 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by/(used in) transactions with third parties |
$ | (5,371 | ) | (25,798 | ) | (264,700 | ) | 459,263 | 0 | 163,394 | ||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
0 | 18,721 | 360,928 | (379,649 | ) | 0 | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing operating activities (5) |
(5,371 | ) | (7,077 | ) | 96,228 | 79,614 | 0 | 163,394 | ||||||||||||||||
Net cash provided used in discontinued operating activities |
(68,187 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash provided by operating activities |
95,207 | |||||||||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Net cash provided by/(used in) transactions with third parties |
0 | 167,702 | 17,464 | (773 | ) | 0 | 184,393 | |||||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
1,961 | 5,660 | 226,972 | (106,321 | ) | (128,272 | ) | 0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing investing activities (5) |
1,961 | 173,362 | 244,436 | (107,094 | ) | (128,272 | ) | 184,393 | ||||||||||||||||
Net cash provided by discontinued investing activities |
235,374 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash provided by investing activities |
419,767 | |||||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Net cash provided by/(used in) transactions with third parties |
0 | 204,941 | (103,146 | ) | 0 | 0 | 101,795 | |||||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
0 | (254,216 | ) | 93,193 | 32,751 | 128,272 | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing financing activities (5) |
0 | (49,275 | ) | (9,953 | ) | 32,751 | 128,272 | 101,795 | ||||||||||||||||
Net cash used in discontinued financing activities |
(8,209 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash provided by financing activities |
93,586 |
9
Year Ended December 31, 2021 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by/(used in) transactions with third parties |
$ | (517 | ) | (127,098 | ) | (299,947 | ) | 541,172 | 0 | 113,610 | ||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
0 | 288,308 | 217,245 | (505,553 | ) | 0 | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing operating activities |
(517 | ) | 161,210 | (82,702 | ) | 35,619 | 0 | 113,610 | ||||||||||||||||
Net cash used in discontinued operating activities |
(175,888 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash used in operating activities |
(62,278 | ) | ||||||||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Net cash used in transactions with third parties |
0 | (112,599 | ) | (400,933 | ) | (23,887 | ) | 0 | (537,419 | ) | ||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
(5,999 | ) | (172,370 | ) | 209,079 | (140,671 | ) | 109,961 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in continuing investing activities |
(5,999 | ) | (284,969 | ) | (191,854 | ) | (164,558 | ) | 109,961 | (537,419 | ) | |||||||||||||
Net cash provided by discontinued investing activities |
1,054,148 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash provided by investing activities |
516,729 | |||||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Net cash used in transactions with third parties |
(17,418 | ) | (407,550 | ) | 0 | 0 | 0 | (424,968 | ) | |||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
36,912 | (236,658 | ) | 197,819 | 111,888 | (109,961 | ) | 0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing financing activities |
19,494 | (644,208 | ) | 197,819 | 111,888 | (109,961 | ) | (424,968 | ) | |||||||||||||||
Net cash used in discontinued financing activities |
(9,132 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash used in financing activities |
(434,100 | ) |
10
Year Ended December 31, 2022 | ||||||||||||||||||||||||
Sohu.com Limited |
Other Subsidiaries |
Primary Beneficiaries of VIEs |
VIEs and their subsidiaries |
Eliminating adjustments |
Consolidated totals |
|||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by/(used in) transactions with third parties |
$ | (10,122 | ) | (229,554 | ) | (177,018 | ) | 448,936 | 0 | 32,242 | ||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
0 | 186,468 | 259,192 | (445,660 | ) | 0 | 0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing operating activities |
(10,122 | ) | (43,086 | ) | 82,174 | 3,276 | 0 | 32,242 | ||||||||||||||||
|
|
|||||||||||||||||||||||
Net cash provided by operating activities |
32,242 | |||||||||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Net cash provided by/(used in) transactions with third parties |
0 | (340,000 | ) | 112,632 | (5,421 | ) | 0 | (232,789 | ) | |||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
7,967 | 605,535 | (208,182 | ) | 72,497 | (477,817 | ) | 0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing investing activities |
7,967 | 265,535 | (95,550 | ) | 67,076 | (477,817 | ) | (232,789 | ) | |||||||||||||||
|
|
|||||||||||||||||||||||
Net cash used in investing activities |
(232,789 | ) | ||||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Net cash used in transactions with third parties |
(82,136 | ) | 0 | 0 | 0 | 0 | (82,136 | ) | ||||||||||||||||
Net cash provided by/(used in) transactions with intra-Group entities |
72,036 | (171,590 | ) | (299,054 | ) | (79,209 | ) | 477,817 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by/(used in) continuing financing activities |
(10,100 | ) | (171,590 | ) | (299,054 | ) | (79,209 | ) | 477,817 | (82,136 | ) | |||||||||||||
|
|
|||||||||||||||||||||||
Net cash used in financing activities |
(82,136 | ) |
Note (1): Represents the elimination of intercompany balances generated from intra-Group service charges among Sohu.com Limited, the Primary Beneficiaries of VIEs, the Other Subsidiaries, and the VIEs and their subsidiaries that we consolidate.
Note (2): Represents the elimination of investments among Sohu.com Limited, the Primary Beneficiaries of VIEs, and the Other Subsidiaries.
Note (3): Represents the elimination between the Primary Beneficiaries of VIEs and the VIEs and their subsidiaries that we consolidate under U.S. GAAP (ASC 810).
Note (4): Represents the elimination of intra-Group service charges at the consolidation level.
Note (5): The net cash provided by/(used in) operating activities and investing activities of Sohu.com Limited and the net cash provided by/(used in) operating activities, investing activities and financing activities of the VIEs and their subsidiaries that we consolidate have been revised for the year ended December 31, 2020 from amounts previously disclosed in the financial statements Notes.
11
Transfers of Cash Within the Sohu Group
The following is a summary of cash transfers that have occurred between our subsidiaries and the VIEs (in thousands):
Year ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Cash paid by the VIEs to our subsidiaries under service agreements |
$ | (411,668 | ) | $ | (528,330 | ) | $ | (478,098 | ) | |||
Cash received by the VIEs from our subsidiaries under service agreements |
32,019 | 22,777 | 32,438 | |||||||||
Cash paid by the VIEs to our subsidiaries for intra-Group financing |
(106,321 | ) | (140,671 | ) | (79,209 | ) | ||||||
Cash received by the VIEs from our subsidiaries for intra-Group financing |
32,751 | 111,888 | 72,497 |
Risk Factors
Risks Related to Our Business
We are subject to the risks associated with operating in an evolving market.
As a company operating in an evolving Internet market in the Chinese mainland, we face numerous risks and uncertainties. Some of these risks relate to our ability to:
• | continue to attract users to remain with us and use our products and services as the primary means of surfing the Internet switches from traditional PCs to mobile phones and other portable devices; |
• | build our businesses such as Sohu Media Portal, Sohu Video, Focus, online games, and other businesses successfully; |
• | continue to attract a large audience to our matrices of Chinese language content and services by expanding the type and technical sophistication of the content and services we offer; |
• | maintain and develop a sufficiently large advertiser base for our brand advertising business; |
• | maintain and attract online game users by periodically updating our existing online games and developing and launching new online games; |
• | effectively control increases in our costs and expenses; and |
• | attract and retain qualified personnel. |
Our operating results are likely to fluctuate significantly and may differ from market expectations.
Our annual and quarterly operating results have varied significantly in the past, and may vary significantly in the future, due to a number of factors which could have an adverse impact on our business. Our online advertising revenues often fluctuate as our advertisers adjust their online marketing spending as their industries go through business and economic cycles. Our advertisers’ online marketing spending may also be negatively impacted by the COVID-19 pandemic and/or the general macroeconomic environment in the Chinese mainland, which in turn could negatively impact our online advertising revenues. Also see “- We depend on revenues from Changyou’s PC game TLBB and mobile game Legacy TLBB Mobile for a significant portion of our revenues, net income, and operating cash flow.”
We depend on revenues from Changyou’s PC game TLBB and mobile game Legacy TLBB Mobile for a significant portion of our revenues, net income, and operating cash flow.
For the year ended December 31, 2022, 61% of our total revenues and 77% of our online game revenues were derived from TLBB and Legacy TLBB Mobile. However, the popularity of PC games continues to decline as game players have switched to mobile devices to access online games. Despite Changyou’s efforts to improve TLBB, our game players may nevertheless lose interest in it over time and TLBB’s popularity, revenues, and profitability may decline accordingly. If Changyou fails to improve and update TLBB on a timely basis, or if Changyou’s competitors introduce more popular games, including mobile games, catering to Changyou’s game-player base, the decline in TLBB’s popularity can be expected to accelerate, which could cause a significant decrease in our revenues. If Changyou’s revenues from TLBB and Legacy TLBB Mobile continue to decline as they have in recent years, or if Changyou’s online game revenues from games other than TLBB and Legacy TLBB Mobile do not grow or if they decrease, our revenues, net income, and operating cash flow will be adversely affected. Furthermore, any interruptions in TLBB’s and Legacy TLBB Mobile’s operations could cause significant decreases in our revenues, net income, and operating cash flow.
12
We face intense competition, which could reduce our market share and adversely affect our financial performance.
There are many companies that distribute online content and services targeting Chinese Internet users. We compete with distributors of content and services over the Internet, including content sites, online games, Internet service providers and sites maintained by regulatory authorities, educational institutions and other institutions. These sites compete with us for user traffic, advertising dollars, online game players, potential partners and mobile services. The Internet market in the Chinese mainland continues to evolve. Competition is intense and can be expected to increase significantly in the future, because there are no substantial barriers to entry in our market.
We have many competitors in the Internet market in the Chinese mainland, including 58.com, Alibaba, Archosaur, Autohome, Baidu, Bilibili, BitAuto, Century Huatong (formerly known as Shanda), Douyin, Douyu, Fang, Giant, Huya, IGG, iQIYI, JOYY, Kuaishou, Leju, Lilith, Mango TV, miHoYo, Momo, NetDragon, NetEase, Perfect World, Phoenix, Qutoutiao, Sina, Tencent, TouTiao, and Youku. We compete with our peers and competitors in the Chinese mainland primarily on the following basis:
• | access to financial resources; |
• | gateway to a host of Internet user activities; |
• | technological advancements; |
• | attractiveness of products; |
• | brand recognition; |
• | volume of traffic and users; |
• | quality of Internet platforms and content; |
• | strategic relationships; |
• | quality of services; |
• | effectiveness of sales and marketing efforts; |
• | talent of staff; and |
• | pricing; |
Our competitors may have certain competitive advantages over us including:
• | greater brand recognition among Internet users and clients; |
• | better products and services; |
• | larger user and advertiser bases; |
• | more extensive and well-developed marketing and sales networks; and |
• | substantially greater financial and technical resources. |
Our existing competitors may in the future achieve greater market acceptance and gain a greater market share through launching of new products, introducing new technologies, or forming alliances among themselves, or may enhance their ability to compete with us through mergers and acquisitions or financing activities. For example, in the past many of our competitors have successfully raised significant amounts of capital through IPOs, follow-on public equity offerings, and convertible bond offerings. Several of our competitors have also conducted private placements of equity or debt that included alliances with larger partners who are able to bring them strategic advantages in addition to financing. By enhancing their capital bases and forming strategic alliances, our competitors have strengthened their competitiveness and gained greater brand recognition. Recently some of our major competitors have actively invested or initiated transactions in the market sectors in which we operate or into which we wish to expand our business, which could make it more difficult for us to compete against them effectively.
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In addition, in recent years the Internet industry in the Chinese mainland has been increasingly dominated by Alibaba, Baidu, and Tencent. These dominant companies may be able to further strengthen their influence in the industry by encouraging cooperation among the companies in which they invest or with which they establish strategic relationships. We may not be able to compete successfully and avoid marginalization in the industry if we are unable to develop our own comparable business ecosystem, which may be difficult for us to do in view of our relatively limited resources in comparison to these dominant companies.
Further, new competitors may emerge and acquire significant market share. For example, high-quality smaller Internet companies continue to emerge in the Internet industry with competitive advantages over us, including that many are led by young entrepreneurs who have a particular understanding of the needs and interests of younger users and that, in view of their relatively small size, they are able to adapt more easily than we are to rapid changes in the industry by adjusting their product strategies, market focus, and profit models. Such smaller competitors compete with us in such areas as vertical content production, video playback, and live broadcast.
In order to compete effectively in the primary markets in which we operate, we are likely to need additional financial and additional strategic resources, which may be hard to obtain. If our competitors are more successful than we are in obtaining necessary resources, in developing products or in attracting and retaining users and advertisers, our revenues and growth rates could decline.
If we fail to successfully develop and introduce new products, features and services, our ability to attract and retain users and generate revenues could be harmed.
We are continually developing new products, features and services for our users. The planned timing or introduction of new products, features and services is subject to risks and uncertainties. Actual timing may differ materially from original plans. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of our new products or services. Emerging start-ups may be able to innovate and provide new products, features and services faster than we can. Moreover, we cannot be sure that any of our new products, features and services will achieve widespread market acceptance or generate incremental revenue.
In addition, we may experience difficulties in promoting our new products, features and services as a result of the significant market power of our competitors or any anti-competitive practices they might engage in. As a result, despite considerable efforts in this regard, we may fail to attract and retain users.
As our products and services are currently accessed primarily through mobile phones, tablets and other internet-enabled mobile devices, we believe that we must develop products and applications for such devices if we are to maintain or increase our market share and revenues, and we may not be successful in doing so.
Devices other than personal computers, such as mobile phones, tablets, wearable devices and other internet-enabled mobile devices, are used increasingly in China and in overseas markets, and have surpassed personal computers as the primary means to access the Internet. We believe that, for our business to be successful when our content and services are delivered over mobile devices, we need to design, develop, promote and operate products and applications that are attractive to users of such devices, as well as enhance targeted delivery of our content and advertising services to our users and advertising customers. The design and development of new products and applications, and our efforts to enhance the effectiveness of such targeted delivery, may not be successful. We may encounter difficulties with the installation of such new products and applications for mobile devices, such products and applications may not function smoothly, and algorithms we develop for targeted delivery may not be effective in identifying the interests and needs of our users and advertising customers. As new devices are released or updated, we may encounter problems in developing and upgrading our products or applications for use on mobile devices and we may need to devote significant resources to the creation, support, and maintenance of such products or applications for mobile devices.
Our business depends on a strong brand; thus we will not be able to attract users, customers and clients of our products and offerings if we do not maintain and develop our brands.
It is critical for us to maintain and develop our brands so as to effectively expand our user base and our revenues. We believe that the importance of brand recognition will increase as the number of Internet users in China grows. In order to attract and retain Internet users, brand advertising, online game and mobile customers, we may need to substantially increase our expenditures for creating and maintaining brand loyalty. Our success in promoting and enhancing our brands, as well as our ability to remain competitive, will also depend on our success in offering high quality content, features and functionality. If we fail to promote our brands successfully or if our users or advertisers do not perceive our content and services to be of high quality, we may not be able to continue growing our business and attracting users, advertisers, online game players and mobile users.
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Our failure to keep up with rapid technology changes may severely affect our future success.
The Internet industry is undergoing rapid technological changes. Our future success will depend on our ability to respond to evolving technologies, adapt our services to changing industry standards and improve the performance and reliability of our services. If we fail to adapt to such changes, our business may be adversely affected. For example, with the emergence of cloud computing technology, the primary Internet technology platform has been transformed from a traditional platform to a cloud computing platform. If we fail to adapt to the transformation, our products and services upgrade process will fall behind our competitors, and accordingly weaken our capacity to adapt our technology to the market. Furthermore, cloud computing itself is a significant business opportunity. If we fail to seize the opportunity, we will lose our ability to capture a share of that market. In addition, as mobile devices other than personal computers are increasingly used to access the Internet, we must develop products and services for such devices. To meet advertisers’ needs in targeting potential advertisers accurately, we need to develop and operate a more effective system for our advertising delivery, tracking and recording. Otherwise, we will not be able to maintain or increase our revenues and market share. In the meantime, the Ministry of Industry and Information Technology (the “MIIT”) and other regulatory authorities in the Chinese mainland can be expected to regularly promulgate standards and other regulations regarding Internet software and other Internet-based technologies. Adapting to any such standards and regulations could require us to make significant expenditures in the future.
Our strategy of acquiring complementary assets, technologies and businesses or making other strategic investments may fail and result in impairment losses.
As a component of our growth strategy, we have acquired and intend to actively identify and acquire assets, technologies and businesses that are complementary to our existing businesses. Our acquisitions could result in the use of substantial amounts of cash, issuance of potentially dilutive equity securities, significant impairment losses related to goodwill or amortization expenses related to intangible assets, and exposure to undisclosed or potential liabilities of acquired companies. Companies that we have invested in could be adversely affected by the COVID-19 pandemic, which may lead to impairment of the values of our investments and in turn adversely affect our financial condition and operating results. In 2022, Changyou recognized a $12.0 million impairment loss for an equity investment in a third-party online game developer.
We may be required to record a significant charge to earnings if we are required to reassess our goodwill or other amortizable intangible assets.
We are required under U.S. GAAP to test for goodwill impairment annually or more frequently if facts and circumstances warrant a review. Currently our brand advertising business is losing money, and goodwill will be impaired if the losses continue. We are also required to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization and slower or declining growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined.
Any changes in accounting rules for share-based compensation, or any changes we make in our employee share incentive plans, may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace.
Our performance is largely dependent on talented and highly skilled individuals. Our future success depends on our continuing ability to identify, develop, motivate and retain highly skilled personnel for all areas of our organization. We have a history of using employee share options and restricted stock units to align employees’ interests with the interests of our shareholders and encourage quality employees to join us and retain our quality employees by providing competitive compensation packages. We have adopted guidance on accounting for share-based compensation that requires the measurement and recognition of compensation expense for all share-based compensation based on estimated fair values. As a result, our operating results contain a charge for share-based compensation expense related to employee share options and restricted share units. The recognition of share-based compensation in our statement of comprehensive income has had and will have a negative effect on our reported results and earnings per share, which can in turn negatively affect our ADS price. On the other hand, if we modify or cancel our employee share incentive plans, share-based compensation expense might be minimized but it may also limit our ability to continue to use share-based awards as a tool to attract and retain our employees, which may adversely affect our operations. It is possible that there will be changes in the accounting rules for share-based compensation in the future that could have an adverse effect on our ADS price and our competitiveness in the employee marketplace.
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Our failure to manage growth and adapt to evolving industry trends and business models could harm us.
The retention and management of personnel require significant time and resource commitments from us and our senior management. If we are unable to effectively manage a large and geographically dispersed group of employees or anticipate our future growth, our business could be adversely affected. As we have approximately 4,900 employees, it can be difficult for us to fully monitor each employee’s behavior. In addition, as we have several branch offices in the Chinese mainland, it is harder for us to monitor and regulate the overall behavior of our branch offices or of individual employees at such branch offices, to effectively implement our strategy to local offices and to manage the growth of these local operations. We cannot be certain that we will be able to maintain policies and procedures that are rigorous enough or that we will be able to cause all of our employees or all of our branch offices to behave in conformity with those policies and procedures, or to ensure that our employees will not engage in conduct that could expose us to third-party liability or governmental sanctions, which may limit our future growth and hamper our business strategy. Additionally, our business relies on our reporting and data systems, which have grown increasingly complex due to acquisitions and the diversification and complexity of our business. Our ability to operate our business efficiently depends on these systems, and if we are unable to adapt to these changes, our business could be adversely affected.