China’s second largest search engine Sogou continues growth slowdown trend

China’s old search engine businesses are struggling to stay relevant.

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Sogou, China’s second-largest search engine after Baidu, on Monday disclosed its financial results for the second quarter of this year, reporting a slump in its revenue growth. The struggle is only going to get worse with new competitors in the search space, according to an analyst.

Sogou said its total revenues climbed 1% year-on-year to USD 303.6 million, or over RMB 2 billion.

Search related revenues were at USD 276.2 million, a 2% increase YoY. This was mainly due to the growth of the auction-based pay-per-click services, which accounted for 88% of search revenues.

However, its ability to win business from advertizers will be challenged by other big internet companies entering the search sector. Earlier this year, the world’s most valuable startup ByteDance has launched search within its Toutiao content aggregator app, with search results even beyond the app.

During Sogou’s earnings call, the company’s CEO Xiaochuan Wang admitted that ByteDance’s entry has had a negative impact on search advertising revenue. However, he sees a clear distinction between the two companies’ products. In contrast to Toutiao’s content-consumption based search, Sogou continuously focuses on “generic search” that covers all categories.

Xiaochuan Wang remains positive. “Search revenue is going to maintain steady growth and continue to grow faster than the industry average,” he said in the call.

Ryan Soh, an independent emerging markets analyst, told KrAsia he is not convinced. Soh believes increasing competition is likely to impact the company’s downgraded outlook. “It may be believable that Sogou is too small to be affected by ByteDance’s entry, this is neutral at best, with a risk of downside“, he said.

Sogou, listed in New York, has been investing in expanding its business outside of the search sector for a long time now, however, its non-search revenue has seen a dismal decrease of 11% YoY, reaching only USD 27 million.

The numbers have followed a downward trend continuing now for the last 12 months, with average quarterly sales of -25%.

Soh says that it has been a necessity for many “tech businesses to diversify from their core to keep going”, but this strategy so far has not paid off for Sogou.

The company sees the decline as temporary, mainly due to „lower sales of smart hardware products as a result of continued efforts to upgrade our smart hardware strategy“, said Jessie Zheng, a director of investor relations, during the earnings call. The company has more models to launch and is expecting the sales to return to healthy growth in the Q3.

Sogou’s non-search product portfolio consists of two key businesses. One includes smart hardware products, based on its ever-developing AI technology. The company has previously introduced first AI news anchors, and is currently focusing on product lines for children, translation, and voice.

The second core business is Sogou Mobile Keyboard, which is still the most popular Chinese pinyin input method. In the quarterly filings, the company highlighted that the Keyboard has seen a 17% increase in its daily average users, reaching 453 million DAU. AI-powered innovations were applied to enhance the keyboard app as well, enabling its voice and translation features.

Lastly, the company has seen increasing traffic acquisition costs over the last four quarters, with an 8% increase in Q2, reaching up to USD 146 million. TAC is the primary driver of the cost of revenues. Although according to the company, the increase was due to the price inflation, Soh’s conclusion is that “SOGO is spending more to run slower”.

Whether the firm can recover from its slump and gain new growth via its non-search related businesses is yet to be seen. “We need to see it in the numbers, and they are not there yet”, says Soh.

Sogou, listed in 2017, itself is a spin-off of a larger and older Chinese internet firm called Sohu. Besides Sohu, Tencent is another major shareholder in Sogou.