Sogou Files IPO in U.S and What’s the New Story to Tell

Sogou will go public in the U.S. and take a big step forward.

Yesterday, Sogou formally submitted its prospectus to the U.S. Securities and Exchange Commission. Sogou plans to raise up to 600M dollars through IPO. If all goes well, Sogou will be another eye-catching listed company this year after Snap, MuleSoft, Yext, Carvana, Cloudera and other tech companies.

The security code of Sogou is “SOGO”. Unlike other tech companies, Sogou didn’t choose NASDAQ; instead, it chose the New York Stock Exchange. What information has detailed operating data in Sogou prospectus revealed? Does Sogou IPO have favorable climatic geographical and human conditions? How will Sogou’s listing affect Xiaochuan Wang and Charles Zhang? What new story can Sogou tell American investors besides the searching function?

All of these, with the advent of Sogou’s going to public, have become the focus of attention.

What about Sogou’s health and strength in view of data?

Like any listed company, some people hold a positive attitude while others don’t. Regardless of different view, statistics is most unbiased one.  So, we might as well start with detailed analysis about Sogou’s operating data.

First, the revenue data.

From 2014 to H1, 2017, the total revenues of Sogou respectively are: $386 million, $592 million, $660 million and $373 million. If the annual revenue in 2017 year is roughly twice the half-year one, it will be about 746 million dollars. That is certainly less accurate than ultimate figure, but it also tells something. It can be calculated that the growth rate of Sogou annual revenue in the last three years is: 53.4%, 11.5% and 13.0% respectively.

The core source of Sogou revenue is search-related ads, which is $358 million, $540 million, $597 million and $329 million respectively from 2014 to H1 2017. In the same way, the corresponding growth rate in the last three years is roughly: 50.8%, 10.6% and 10.2% respectively.

From the trend of total revenue and core business revenue, it can be seen clearly that Sogou has poor performance on the revenue.

Second, the cost.

From 2014 to H1 2017, Sogou’s revenue costs were $166 million, $248 million, $303 million and $193 million respectively. In the same way, the cost has increased roughly in the past three years by: 49.4%, 22.2% and 27.4% respectively.

Comparing the revenue data, it is not hard to see in recent years, except 2014, Sogou’s revenue growth is slower than the cost growth. The revenue growth is even half or one third of the cost increase. The problem is that although Sogou increases its cost, it has no significant drive for revenue. In other words, even if Sogou goes public and gains more fund, it remains unclear whether its revenue could increase rapidly. Moreover, since Sogou does not have strong entrance effect, the cost increase is likely to be caused by flow purchase. Besides, Sogou is not in large scale so its unit traffic cost is likely to remain high.

Third, gross margins.

From 2014 to H1 2017, Sogou’s gross profit was $22.1 million, $344 million, $358 million and $180 million respectively. The same calculation method worked out that the growth in the last three years was roughly: 55.7%, 4.1% and 0.6% respectively.

Among indexes like total revenue, revenue, cost and gross profit, gross profit has the most satisfying performance. Its growth had cliff-like drop. In recent one to two years, it has almost stagnant growth.

Above analysis shows that Sogou has increased input to have more profits. However, the marginal effect of revenue to profit is in decline, not to mention its scale effect and scale dividend in Internet industry. Sogou has unobvious pulling-revenue effect and even has lower profit index. Thus, even if Sogou successfully goes to public, it will be very tricky for it to layout and invest business – intense competition demands more input while increasing investment has no effect. This seems to be a dilemma.

Does Sogou have favorable factors to go public in the U.S.?

Gossip is always more interesting than data. Gossip time, who’s the biggest beneficiary of Sogou’s IPO? Undoubtedly, Wang and Zhang are two biggest beneficiaries.

Wang leaves the public an impression that he is gifted youth and outstanding student from Tsinghua University. It might be great glory for ordinary people, but not for Wang. Not exaggerating, it’s not even a compliment. Why? Because the terms ‘gifted youth’ and ‘outstanding student from Tsinghua University’ obviously imply him being genius as teenager and no one as adult. Now, as Sogou goes to public, Wang Xiaochuan, who has been struggling to balance between Charles Zhang and Pony Ma, has finally “grown up” to become the CEO of a listed company. He can finally compete with Xing Wang (meituan), Wei Cheng (Didi), Yiming Zhang (toutiao) and Xuhao Zhang (Ele.me), becoming a young and strong figure in China’s Internet industry.

For Zhang, he has repeated the cycle of “retiring and re-work” in the last few years. He was ridiculed that “he had nothing wrong except being too old”. Even people calling him as “a good man” intend to “comfort and sympathize” him. As Sogou goes to public, the Sohu owned by Zhang will have three listed companies: Sohu, Changyou and Sogou. This is almost an unprecedented feat for China’s Internet giants. It seems older people are wiser.

After that, let’s come back to the favorable factors that Sogou enjoys.

First, we must emphasize that whenever the company goes to public, it is better than not listed. However, Sogou may not be listed at the best time. Because several Chinese companies, such as Best Logistics and SECOO, had gone publicly in the States. The Best Logistics only increased its shares by 11% nearly one month after going to the public and SECOO performed even worse. Its existing stock price has fallen about 40% than original $13, retaining a large number of investors. Will the widespread unfavorable view of U.S. capital markets toward newly listed Chinese companies inevitably influence Sogou? Will Sogou, which claims itself to be technologically advance, be mistaken as collecting money in the U.S.?

Second, in this point, Sogou is generally neutral with a good and an unfavorable condition. The good news is that the successful listing could greatly boost the morale, especially the pride and struggle of ordinary employees. Meanwhile, getting listed can make Sogou has more money in business layout and obtain more brand bonuses in the aspect of industrial cooperation. Just like Credit Ease, an internet finance company. As it is endorsed with U.S. listed company, even if its interest rate is lower than others’, a lot of people choose its financial products.

While the bad news is that there are too many tech Internet companies listed in the United States. It’s hard to say how outstanding Sogou is when throwing Sogou into such a huge pile of high-quality companies. It remains doubtful whether the valuation in the U.S. capital market is as high as that in domestic capital markets. Otherwise, in recent years, there won’t be so many China concept stocks clamoring for privatization.

Lastly, in this regard, Sogou faces two major challenges. One challenge is American investors. America’s investors have always had a preference for “buying the best instead of the second best”. In the fields of e-commerce, social communication, webs, travel, games, live, education and others, leading or quasi-leading enterprises, such as Alibaba, Weibo, Sina, Ctrip, Netease, Momo, New Oriental and others, generally have better performance in this year than other companies in the same field. Take e-commerce as an example. Alibaba has risen by around 115% so far this year, but Vipshop is down by about 28%. Similarly, Ctrip has risen by about 38% while Tuniu has fallen by nearly about 12%. It can be imagined that, Sogou, the second best company in the searching area, may not have optimistic performance in the capital market.

The other challenge is the post-IPO distribution. Sogou prospectus shows that Sogou executives and directors collectively hold 5705,000 stocks of A common shares, accounting for 16.5% of the company’s total equity. Zhang will hold 32 million A common shares and Wang will hold 19.2 million A common shares, accounting for 9.2% and 5.5% of total share capital respectively. Excluding their shares, stocks allocated to other executives and directors will be less than 6 million shares. While enjoying the fruits, relatively small stake is sure to cause the concerned to have other thoughts.

Two versions of the story, which one will the Sogou tell?

Sogou faces a more important problem, which is, what story should it tell the U.S. capital market? And how to put it?

The first story is, of course, the search. Telling this story could have following benefits, one is that it tells the fact that the search is the core business of Sogou. Second, after the privatization of 360, there is one less competitor among China Concept Stock in the field of searching. Third, though the story of “three-stage rocket” is not novel in China, Sogou could still “teach” investors in the United States. After all, in the field of the Internet, now, it is westerners learn from easterner rather than the easterners learn from the other.

Of course, it has some limitations.

First, it is kind of out of trend to talk about the search story. Just like Baidu, it talks the story of AI and information flow.

Second, Baidu is definitely the first in searching field. However, Sogou’s position in China’s search market is tremendously varied based on different research institutions. For example, based on Market Share Ranking of China’s Search Engines in August 2017 by StatCounter Global Stats, the market share of Sogou is only 3.95%, ranking fourth, after Baidu, Shenma and 360. But Market Research Report of China Cross-Platform Search by Bigdata Consultancy shows in Q1, 2017, Sogou search ranked the second place with 16.1% share in China market share. Even Chinese users don’t know exactly what position Sogou has, let alone American investors. And if investors don’t know clearly about a company, they won’t invest it.

Third, there may be an awkward situation of corresponding with Baidu. That is to say if the share price of Baidu, China’ No.1 Search Engine Company, falls down, then Sogou in the same camp generally would have lower share price. But if the share price of Baidu increases, the price of Sogou may not increase as well. Because investors may think now that Baidu is already “All in AI”. It claims itself to be an AI company and vigorously develops business related to information flow. So the increase may be the result of these two businesses. If the majority of investors hold such a view, it would be awkward for Sogou.

In addition to the search, the second story that Sogou can tell is artificial intelligence.

In terms of AI, Sogou actually has made some achievements. For instance, it has Sogou Wangzai, voice search, machine translation, knowledge algorithm and so on. And recently, Sogou introduced intelligent home robot. But frankly, that’s not enough.

For AI, Pony Ma believes that the four elements, namely the scenario, big data, calculation ability and talents, are dispensable. In these four elements, except the big data accumulated by Sogou Search Engine, Sogou is still weak in the other three fields. More importantly, Sogou made breakthrough in AI single-pointedly. It lack system and institutions as well as the overall building capacity of the underlying technology. Sogou neither has the ability to land surface open platform and to energize the outside. The lack of these abilities will result in weakness in basic technologies and the inability to grow in geometric rather than linear ways by using whole industry ecosystem.

In the recently released 2017 Top 100 AI Enterprises List, Sogou ranked 17th after iFLYTek, KSYun and Hanvon. And companies with similar ranks as Sougou are not well-known ones, like Dahua Technology, ZHICHEAUTO Technology and iCarbonX.

In fact, it is not only Sogou that performs unsatisfactorily in AI, even international giants like Google and Facebook also failed repeatedly. For example, Alphabet, the parent company of Google, will abolish the robot project Replicant, which has been in place for less than three years. Google also merges Nest Labs, the smart home business, into Google IoT. And Facebook has similar result. In 2017 Starcraft AI contest, CherryPi developed by top designers in Facebook AI research laboratory only obtained the sixth place. And the top three robots were completed by independent programmers.

Back to the theme of Sogou’s going to public in the U.S. Even if after the listing, problems and challenges Sogou faced is still tough and daunting, but the most difficult problem of going to the public had been solved. So with determination, courage, persistence and time, other challenges are bound to be solved.

This article originally appeared in Tmtpost and was translated by Pandaily.