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Edited Transcript of SOHU earnings conference call or presentation 21-Feb-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Sohu.Com Inc Earnings Call

Beijing Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Sohu.Com Inc earnings conference call or presentation Tuesday, February 21, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Yuan

Sohu.com Inc. - IR Director

* Charles Zhang

Sohu.com Inc. - Chairman & CEO

* Xiaochuan Wang

Sohu.com Inc. - Sogou CEO

* Joanna Lv

Sohu.com Inc. - Acting CFO

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Conference Call Participants

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* Eddie Leung

Merrill Lynch - Analyst

* Juan Lin

86Research - Analyst

* Evan Zhou

Credit Suisse - Analyst

* Alicia Yap

Citigroup - Analyst

* Hillman Chan

Macquarie - Analyst

* Natalie Wu

CICC - Analyst

* Thomas Chong

BOCI - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's fourth-quarter and fiscal year 2016 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks there will be a Q&A session. Today's conference call is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the conference over to host for today's conference call, Mr. Eric Yuan, Investor Relations Director of Sohu. Please go ahead, sir.

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Eric Yuan, Sohu.com Inc. - IR Director [2]

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Thanks, operator. Thank you for joining us today to discuss Sohu's fourth-quarter 2016 results. On the call are Chairman and Chief Executive Officer Dr. Charles Zhang, Acting CFO Joanna Lv. Also with us from Changyou, our CEO Dewen Chen, CFO, Jasmine Zhou and the Sogou CEO Xiaochuan Wang.

Before management begins their prepared remarks, I would like to remind you of the Company's Safe Harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed during this conference call are forward-looking statements. These statements are based on current plans, estimates and projections and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from these contained in any forward-looking statements.

For more information about the potential risks and uncertainties, please refer to the Company's filings with the Securities and Exchange Commission, including its registration statement and the most recent annual report on Form 10-K.

With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [3]

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Thank you, Eric, and thanks to everyone for joining our call. Looking back at 2016, we faced a challenging operating environment. The sluggish economy, our intensified competition and tightening regulatory rules on search industry, all these factors impacted Sohu Group's financial performance.

However, these challenges did not stop us from pursuing innovation across our key products and exploring new business opportunities. We saw encouraging progress in each of our major business lines.

First of all, media portal, through improved content and product design, the Sohu News app gained solid user traction.

Also, video, we made original production one of our top priorities and as we released more -- several hit shows.

The exclusive content helped us rapidly expand our subscriber base. For Sogou, mobile search traffic and revenues continued to outgrow the industry. And we have made a financial -- we have made artificial intelligence, AI, our major cornerstone for our long-term strategic direction.

And lastly, for Changyou, it's focused on efforts of giving a pipeline of high quality mobile games as we prepare to rollout a few big titles, including the legacy TLBB mobile game this year.

Before I give more details about the key businesses, let me summarize the financial results for the fourth quarter. Total revenues $412 million, down 12% year over year and flat quarter over quarter. These results were negatively affected by the depreciation of the RMB. On a constant currency basis, total revenues would have been $28 million higher, or a decline of 6% year over year.

Net brand advertising revenue $99 million, down 30% year over year and 11% quarter over quarter.

Sogou revenues $172 million, up 4% year over year and 3% quarter over quarter.

Online game revenues $95 million, down 25% year over year and 3% quarter over quarter.

Non-GAAP net loss attributable to Sohu.com Inc. $69 million, or a loss of $1.79 per fully diluted share.

For the whole year of 2016 total revenues $1.65 billion, down 15% compared with 2015.

Net brand advertising revenues $448 million, down 22% compared with 2015.

Sogou revenue $660 million, up 12% compared with 2015.

Online game revenues $396 million, down 38% compared with 2015.

Non-GAAP net loss attributable to Sohu.com Inc. was $219 million, or a loss of $5.65 per fully diluted share.

Now let me go through some of the key businesses. First of all, the media business. Sohu media portal 2016, to accelerate the usage and accelerate the usage of our flagship mobile product the Sohu News app, Sohu News application, we concentrated our focus on two things. One is the content. The other one is product design. We strived to make user experience a better -- a bit better in every single new version we released.

On the content side, we reshuffled the leadership of our newsroom and established a centralized editorial committee to make day-to-day decisions on headline news selection. We also strengthened our collaboration with external partners to enrich the content source. These actions enabled us to offer the audience a real time and personalized news and information efficiently.

The news app, we continued to optimize its design and introduce new features to meet users' appetite. For example, we significantly increased the number of video-based stories in the newsfeed of our homepage and also integrated the content from Chinatown live broadcast into the news app.

At the same time, we ramped up our marketing spending to accelerate the product's penetration into the millennials and other young generation segments.

The effort helped drive our news app traffic growth and we see growth continuing into this year 2017.

On the sales front, in the fourth quarter of 2016, ad spending from large and brand advertisers remained soft while the monetization of smart media enterprises' customers are resilient.

For the full year of 2016, revenue from SMEs, small/medium enterprises, increased over 50% from the prior year.

Now Sohu video. The -- 2016 was a transformative year of -- for Sohu video. While we still managed to secure a good number of high quality TV shows, we relentlessly shifted our focus to self-developed content that can really create long-lasting value to our platform. In the meantime, we proactively developed a subsidiary-based service, which will potentially be the key growth driver and the right business model.

In the past year, leveraging our extensive experience in original production, we doubled our investment and presented a strong lineup of original dramas, including highly acclaimed series such as The Medical Examiner Dr. Qin (spoken in Chinese), My Little Princess, (spoken in Chinese), and Campus Beauty, (spoken in Chinese). Most notably, the crime scene drama Medical Examiner, (spoken in Chinese) set a new record in our history, collecting total views of over 1.5 billion video view.

From a financial perspective, if we add advertising revenue with those from new paid subscribers, the drama, by each in itself, achieved profitability.

The result demonstrated that the subscription model is likely to become a lucrative business.

Looking ahead, we'll continue our momentum into 2017 and our original pipelines appear to be very promising. We have prepared to launch the sequels of some of our most popular series like Campus Beauty, (spoken in Chinese), Monster Killer, (spoken in Chinese), and The Man with a Sword, (spoken in Chinese), scheduled to air later in this year.

As I mentioned, benefiting from our exclusive original content and the dedicated marketing efforts, our subscriber base saw a strong upward trajectory in the second half of 2016. In 2017, we plan to prioritize our resources to support our subsidiary business. On top of the self-produced dramas, we'll also introduce more attractive programs like movies to the subscription-based package. We expect the business to contribute more meaningfully to Sohu video over the next few quarters.

For the purchased TV content in 2016, we maintained a good mix of high quality domestic and American TV dramas. Of the top 10 most popular Chinese dramas, Sohu broadcasted six. For American series, we showed Contentment and American Crime on an exclusive basis.

Since the beginning of 2017 we have decided to cut the reliance on costly TV head content. We'll further evaluate -- elevated the importance of self-produced dramas. We believe the optimized content strategy will help Sohu video to stay competitive in the long term.

Next, we'll move to Sogou. So Xiaochuan will tell you about Sogou.

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Xiaochuan Wang, Sohu.com Inc. - Sogou CEO [4]

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(Interpreted). Thank you, Charles. In 2016, Sogou strengthened our competitive position by differentiating our products and developing AI powered, innovative applications. We were able to maintain healthy business growth as traffic and revenue share trended higher.

By year end, aggregated search traffic grew 30% from a year ago with mobile search traffic up 70%. The user base of Sogou mobile keyboard expanded over 50% from a year ago, solidifying its position as the number three mobile app in China in terms of daily active users.

Financially, despite regulatory challenges facing the search industry triggered by a healthcare incident, Sogou managed to post healthy revenue growth. Total revenues in 2016 were RMB4.4 billion, up 19% from 2015. Even considering the ramp-up of expenses in R&D and marketing, we delivered sizeable profit. Excluding the impact of certain one-time items, that income reached RMB640 million.

In 2016, we launched and upgraded a series of vertical channels, including English, academic and Wise Doctor, or healthcare channel. This new service has helped us stand out from competing products.

In the fourth quarter, Sogou English search service was upgraded and renamed as Sogou Overseas. This is the first cross-language search engine globally that uses our proprietary machine translation technology. With it, users can input queries in Chinese and immediately get search results from English online sources along with the corresponding Chinese translation.

During the past year we've set AI as a core part of our long-term strategy. We dedicated many resources to the area and saw some solid progress. We've significantly enhanced the voice and the image capabilities of Sogou mobile keyboard. As the number one mobile app for voice input in China, Sogo mobile keyboard voice input feature is now being used over 200 million times a day, more than doubled from a year ago.

While we consistently refined our products, we have been also more aggressively promoting our brand. Compared to a year ago, the Sogou brand is now better recognized and respected from users and business partners.

In the fourth quarter, we launched a nationwide online and offline marketing campaign in 25 cities and received a broad and positive response from users.

We also debuted Sogou's all-new AI robot Wangzai, which, on February 6, defeated human players in a popular question and answer TV show. As the difficulty level in this game for the robot was even higher than any previous human/computer contest, our success demonstrated Sogou's strong capabilities in AI spaces, such as natural interaction and machine intelligence.

Lastly, in terms of financial performance, total revenues for the fourth quarter reached $172 million, up 4% year on year, exceeding our prior guidance. In RMB terms, revenues for the fourth quarter increased 11% year on year, continuously outpacing the industry growth.

Mobile search revenue accounted for two-thirds of total search revenue.

Non-GAAP net income was $21 million compared with $31.5 million a year ago.

I would now like to turn the call over to our acting CFO Joanna, who will walk you through the Group's financial results.

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Joanna Lv, Sohu.com Inc. - Acting CFO [5]

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Thank you, Xiaochuan. I will walk you through the key financials by our four major segments.

For the fourth quarter and the full year of 2016, the profit and loss numbers mentioned below are all on a non-GAAP basis.

For Sohu media portal, in the fourth quarter, revenues were $42 million, down 15% year over year. The quarterly loss was $10 million, compared with net income of $5 million in the fourth quarter of 2015.

For 2016, Sohu media portal revenues were $182 million, down 8% from 2015. Its full-year net loss was $30 million, compared with net income of $21 million in 2015.

For Sohu video, in the fourth quarter, revenues were $44 million, down 31% from a year ago. Of this, advertising revenues were $25 million. The quarterly loss was $82 million, compared with a net loss of $35 million in the same quarter last year.

For 2016, Sohu video's total revenues were $172 million, down 30% from a year ago. Of this, advertising revenue was $123 million. Sohu video's full-year loss was $282 million, compared with a net loss of $173 million in 2015.

For Sogou, total revenues in the fourth quarter were $172 million, up 4% year over year and 3% quarter over quarter. Of this, search-related revenues were $153 million, up 1% year over year and quarter over quarter. Sogou posted net income of $21 million, compared with net income of $31 million in the same quarter last year.

For 2016, total revenues were $660 million, up 12% compared with 2015. Of this, search-related revenues were $597 million, up 11% compared with 2015. Sogou posted net income of $69 million, compared with net income of $110 million in 2015.

For Changyou, for the fourth quarter, total revenue, including 17173, were $131 million, down 19% year over year and 4% quarter over quarter. Changyou posted net income of $40 million, compared with net income of $46 million in the fourth quarter last year.

For 2016, total revenues were $525 million, down 31% compared with 2015. Changyou posted net income of $153 million, compared with net income of $228 million in 2015.

For the first quarter of 2017, we expect total revenues to be between $345 million and $375 million, brand advertising revenues to be between $75 million and $85 million. This implies an annual decrease of 32% to 40% and a sequential decrease of 14% to 24%.

Sogou revenues to be between $145 million and $155 million. This implies an annual decrease of 2% to an annual increase of 5% and a sequential decrease of 10% to 15%.

Online game revenues to be between $80 million and $90 million. This implies an annual decrease of 12% to 22% and a sequential decrease of 6% to 16%.

Before deducting the share of non-GAAP net income pertaining to non-controlling interest, non-GAAP net loss to be between $45 million and $55 million. Assuming no new grant of share-based awards and that the market price of our share is unchanged, we estimate that compensation expense relating to share-based awards will be around $5 million.

Including the impact of these share-based awards, GAAP net loss before non-controlling interests to be between $50 million and $60 million.

Non-GAAP net loss attributable to Sohu.com Inc. to be between $60 million and $70 million and the non-GAAP loss per fully diluted share to be between $1.55 and $1.80. Including the impact of aforementioned share-based awards and the netting of around $1 million of Sohu's economic interest in Changyou and Sogou, GAAP net loss attributable to Sohu.com Inc. to be between $64 million and $74 million, and GAAP loss for fully diluted share to be between $1.65 and $1.90.

For the first quarter 2017 guidance, the Company has adopted a presumed exchange rate of RMB7 to $1 as compared with the actual exchange rate of around RMB6.53 to $1 for the first quarter of 2016, and RMB6.83 to $1 for the fourth quarter of 2016.

This concludes our prepared remarks. Operator, we would now like to open the call to questions.

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Questions and Answers

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Operator [1]

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Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions).

The first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

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Eddie Leung, Merrill Lynch - Analyst [2]

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Good evening. Thank you for taking my questions. I have two questions. The first one is about Sogou. I'm wondering if management can give us some color on the number of advertisers on Sogou in the past couple of quarters and heading into first quarter 2017. Have we seen a recovery of the number of advertisers after the cleanup in middle of the year? So this is my first question.

And the second is about the media portal business, just wondering what could be the longer-term strategy on the business given continuous pressure on the revenues in the past year or two. Thank you.

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Xiaochuan Wang, Sohu.com Inc. - Sogou CEO [3]

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(Interpreted). For the fourth quarter, we had -- the number of advertisers totaled 63,000. And looking into 2017, we expect to see a slow recovery of the number of advertisers.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [4]

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Okay. The media portal for the long-term advertising prospect, first of all, the -- we will continue investment in product improvement and the marketing of various channels to make sure that the users continue to grow so that we have more inventories. And then we'll have -- expect, long term, the small/medium enterprises to grow and have a larger percentage of the total revenues so that of that -- the decline of the brand advertising that got impact more heavily by the macroeconomic situation.

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Eddie Leung, Merrill Lynch - Analyst [5]

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Thank you.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [6]

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All right.

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Operator [7]

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Thank you for the questions. Next question comes from the line of Juan Lin from 86Research. Please go ahead.

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Juan Lin, 86Research - Analyst [8]

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Hi. Good evening. Thank you for taking my questions. My -- I have two questions. The first question is related to your brand advertising. Looking at your fourth-quarter result for brand advertising, it looks like the pace of business decline seems to have slowed down from the previous two quarters. However, your first-quarter guidance seems to indicate that the decline of brand ad will reaccelerate, although revenue already decreased in the first quarter of 2016. When should we expect brand ad revenue to stabilize?

And then the second question is related to Sohu media portal. I'm wondering if you could share with us some metrics for the mobile part of Sohu media portal such as the AU/MAU trend for Sohu mobile portal and news app revenue trend and how should we expect the mobile portal revenue to change in 2017 given that competition is escalating? Thank you.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [9]

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The first quarter, right, 2017? The thing is it's a slow season because of the New Year, the spring festival. Yes, the spring festival. It's actually they happened earlier this year.

Yes, actually, right, so why is that a slow quarter for the Chinese New Year? It's earlier than previous years.

And secondly, that we're actually downsizing the operational focus because, yes, we're just streamlining the focus. From Q2, it's going to recover and stabilize and recover. And also, we hope that, as I just said, the first question, the small to medium enterprises will start to grow.

Portal. So we are -- I will tell you the portal, you mean the H5 web portal, right? You have actually --

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Juan Lin, 86Research - Analyst [10]

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The web portal and the app?

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [11]

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I can tell you the web portal daily unique visitors. It's 30 million plus. Between 30 million and 35 million. But we're not giving out the numbers of DOU for Sohu News App. But we've been seeing a growth in the Sohu News app daily active users. Especially we had -- actually several version upgrades in 2016 alone.

Now it's upgraded to version 8.5. So it's actually the user experiences are greatly improved, so we should expect continued growth of the user base, of the daily active users for the Sohu News app, but we're not giving out the number yet now -- for now.

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Juan Lin, 86Research - Analyst [12]

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Thank you, Charles. Can you also comment on the competitive landscape for the mobile advertising sector?

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [13]

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It's competitive landscape, I think definitely the brand advertising are all in decline because it's related so much to the macroeconomic situation. But it's really the small-medium enterprises, the kind of a big data because with the mobile Internet we just -- the advertising system, there's no -- each individual user is so much better, so that the big data advertising system -- the exchange system can actually match the users with the advertisers much better.

So it's almost -- so it's similar to we're actually getting this kind of information flow type of news information app are actually getting into the territory of actually a search engine, those small-medium enterprises and the local companies that we hope in the future in each cities, they're starting to advertise.

So it's really the big data and the advertising system, that are driving this small and medium enterprise advertising, and we hope that -- and also that's also the competitor's case.

We hope that -- for Sohu, we hope that as our daily active users continues to grow, we hope that all these second, third and fourth-tier cities are starting to use Sohu App, so that we can make those local mom and pop shops and those small companies to find -- let them find advertising on Sohu quite effective to their business.

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Juan Lin, 86Research - Analyst [14]

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Thank you, Charles. Very helpful.

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Operator [15]

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Thank you for the question. Next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead.

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Evan Zhou, Credit Suisse - Analyst [16]

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Hi. Good evening, management. Thanks for taking my question. I have two questions, The first one regarding the content spending on video. What is the content spending plan for 2017, and how do see the competition with various players like Tencent and NGE?

And secondly, could you update us the paid subscription numbers and how do you see the trend going forward? Thank you.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [17]

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The -- since the 2017 head content spending already, the decision was made, committed in 2016, so the head content spending level of spending is similar to actually 2016.

But for 2018, we will dramatically reduce or downsize our spending of the head content, and starting from later half of 2016, we invested heavily into Sohu produced content. It's exclusively on Sohu, and there is both advertising and a paid subscriber model.

Since it's much -- it's actually much cheaper to have, so that's why we were shifting focus. That means -- that's why with this kind of several hit shows, we are very confident in Sohu Videos, this kind of capability to produce good content as history, or as the track record showed, so that we'll be able to rapidly ramp up our user base of paid subscribers. It's a much better business model, just demonstrated by actually a US counterpart, which is Netflix.

With that, in 2018, we'll be able to have a large part of our spending on the in-house or produced -- Sohu-produced content, or purchased content subscriptions, and then significantly downsize, cut down the head content. And we are looking at the profitability of 2019 for the Sohu Video business.

Of course, our competitors are -- they have a lot more money, and they raise more money, and they continue to spend heavily on head content, and also their production. But compared with the competitors, Sohu just produced a better quality content. So -- and since this is not a -- this business is like the TV channels, that you actually have many channels. If you have good content exclusively, the users always come to you. So it's unlike the social network or other Internet products that's the leading one or two are just a monopoly in the market.

So we -- I think at Sohu Video, we remain competitive and in business, and moving toward a Netflix business model.

We're not giving out, but we see dramatic increase. Because we started late, we started with a low base, but it's actually ramped up pretty fast in the later part of the 2016, but we are not yet giving out user base -- user [by intent].

Look at the -- if you look at the revenue size, advertising has -- display advertising has decreased. That is because first of all, there is the macroeconomic situation, but also we have a major shuffling, or some kind of reshuffling of the sales team. Then the new team, it's actually up to speed to get to pick up, so it's kind of the brand advertising side of the video is stabilizing and basically start to grow again.

And then it is the non-advertising revenue which now already constituted 40% of the total revenue, and that's -- part of those 40%, a large part of it is actually subscription. I will not give out the paid numbers, but you can see the revenue composition, and you see the growth of the paid business.

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Evan Zhou, Credit Suisse - Analyst [18]

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Thank you very much.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [19]

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You're welcome.

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Operator [20]

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Thank you for the question. Next question comes from the line of Alicia Yap from Citigroup. Please go ahead.

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Alicia Yap, Citigroup - Analyst [21]

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Hi. Good evening, management team. Thanks for taking my question. So my question is related to Sogou, the search business, a couple parts of it. One is that any change of the advertiser sentiment or any -- their willingness to spend amount of various search platforms post the Mataka incident happened last year?

So in other words, do you think that Sogou actually gained some ad budget share in light of the incident at the leading competitors? And have we seen any rising threat also from the UC rep Shenma in terms of traffic shakings or revenue shakings, as well?

And then in related to that is also overall advertising sentiment and also budget allocation. Have we seen over the past few months any shift of the ad budget from the advertisers, say, from search engine to maybe the social or the news feed type of the targeted ads? So any color that you could share would be appreciated. Thanks.

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Xiaochuan Wang, Sohu.com Inc. - Sogou CEO [22]

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(Interpreted) So as compared to Baidu or Shenma, first compared to Baidu, both of us actually have very established monetization systems. Actually, if you can grow your traffic share, you can also grow your revenue share, as we -- apparently, we're gaining market share in terms of traffic, as well as also gaining revenue share.

As compared to Shenma, actually we have more established advertising systems, and so we don't think Shenma can compare in the same terms of acquiring customers at budget.

For the social network or news feed ad you mentioned, we do see some difficulty in acquiring new customers because they can choose -- they can have more options. They can -- they probably will choose a social network or news feed ads.

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Alicia Yap, Citigroup - Analyst [23]

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Okay. Very helpful. Thank you very much.

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Operator [24]

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Thank you for the question. The next question comes from the line of Hillman Chan from Macquarie. Please go ahead.

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Hillman Chan, Macquarie - Analyst [25]

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Good evening, everyone. Thank you for taking my questions. I have a question regarding the profitability of Sogou business. Just now you mentioned that we are rolling out marketing, online, offline in 25 cities for the brand marketing. And also, we also are stepping up our expense on the artificial intelligence development. So how should we think about the budget for these two going into 2017, and also the margin outlook for Sogou compared to last year?

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Xiaochuan Wang, Sohu.com Inc. - Sogou CEO [26]

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(Interpreted) In terms of branding, we probably -- in 2017, we'll change the format. We think our AI has powered our products and made us very competitive, so we will, to some extent, cut advertising budget.

But in terms of AI itself, we'll continue to invest aggressively on this front. So R&D expenses will rise.

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Hillman Chan, Macquarie - Analyst [27]

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Okay, and last question is on the headcounts for the whole Sohu business. Could we talk about the plan for individual segment for 2017? Thank you.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [28]

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(Spoken in Chinese). With Sogou and Changyou basically remain flat, and with Sohu to have some kind of downsizing, so the headcount numbers will remain about the same or less, a little bit less.

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Hillman Chan, Macquarie - Analyst [29]

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Okay. Thank you very much.

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Operator [30]

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Thank you for the question. Next question comes from the line of Natalie Wu from CICC. Please go ahead.

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Natalie Wu, CICC - Analyst [31]

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Hi. Thank you for taking my questions. So two questions here. The first one is regarding Sogou. So what's the management's expectations regarding Sogou's revenue growth in 2017? And as you know that Baidu is launching news feed ad, so is there any new advertising products for Sogou?

And regarding social ads and news feed ads, you have mentioned that you've noticed they have higher attractiveness in front of new advertisers. So how about existing ones, especially SMEs? So did you sense any kind of budget shifting from them?

And my second question is regarding Sohu Video. So, Charles, you mentioned that Sohu Video will reach breakeven in 2019. So wondering what roughly scale of revenue size are you targeting at that time? And also, how do you think about the competition dynamics in online video market, especially when ITE just erased a $1.5 billion to --

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [32]

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You mean the -- what's your last question regarding?

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Natalie Wu, CICC - Analyst [33]

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Regarding Sohu Video. So you mentioned that Sohu Video will reach breakeven in 2019.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [34]

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Yes. The scale, right, of the possibility.

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Natalie Wu, CICC - Analyst [35]

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Yes, the scale at that time.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [36]

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The size.

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Natalie Wu, CICC - Analyst [37]

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Yes, and also -- you also mentioned that in 2017, the head content budget will be -- remain similar to 2016. So if the competition in that field levels up, will you just be satisfied with procuring less content in terms of quantity? So that's my question.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [38]

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Okay, so the first question about Baidu is basically (spoken in Chinese).

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Natalie Wu, CICC - Analyst [39]

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(Spoken in Chinese).

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [40]

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(Spoken in Chinese).

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Natalie Wu, CICC - Analyst [41]

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Okay.

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Xiaochuan Wang, Sohu.com Inc. - Sogou CEO [42]

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(Interpreted) So on the revenue side, we are still formulating our 2017 budget, so we don't have a revenue number for you, but we expect to continue to outgrow the industry.

On news feed ads, we are making some trials at the moment, but we don't think it's a part of our core strategy.

The existing SMEs, they place much more emphasis on the set top advertising, so search for them is still the best format of advertising.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [43]

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Well, regarding the Sohu Video question, the -- we'll achieve profitability in 2019. And then I can tell you that by the end of this 2017, we're going to have the subscription-based revenue will be half -- will be half of the total revenue, or actually, will surpass the advertising revenue, right? So by the end of the year, by the end of this year, the subscription business will surpass the advertising revenue.

And so that -- let's see. It's -- so we don't have a forecast, right, for 2019, what kind of profitability, so I don't have that yet. But it's a general -- yes. And also, so it's for the 2017 head content, I think we already committed in the -- actually, the purchase or already finished or already finished -- committed last year, and we basically secured most of the top quality head content, so yes.

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Natalie Wu, CICC - Analyst [44]

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I see. So, Charles, so you mentioned that -- so just to make some clarification, so you mentioned that by at the end of 2017, the subscription revenue adds revenue. So do you mean in December, one month revenue or the whole year of 2017?

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [45]

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I think Q4. Q4.

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Natalie Wu, CICC - Analyst [46]

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Okay, so Q4. Okay, great. Thank you.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [47]

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Yes, as I said, it's even -- if competitors have more money, they may spend money on head content. But as I said, the content business is different from the social network or other platform business. If you have good content exclusively on your platform, and since it's not that expensive for the users to pay, just like RMB20 per month, so it's still -- users still come to our platform.

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Natalie Wu, CICC - Analyst [48]

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Great. Thank you. Very helpful.

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Operator [49]

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Thank you for the questions. Next question comes from the line of Thomas Chong from BOCI. Please go ahead.

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Thomas Chong, BOCI - Analyst [50]

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Hi. Thanks, management, for taking my questions. Can management give us some color about the trend of your content costs in 2017 and also the breakdown between TV drama versus our in-house content? Thank you.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [51]

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2017, I think we already -- I think did we give that out number? Do we?

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Unidentified Company Representative [52]

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No.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [53]

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No? So it's -- I think it's the same, right? So in 2017, 50% of head content purchased.

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Unidentified Company Representative [54]

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You mean gross?

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [55]

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No, I mean total -- totally committed. Not the revenue, but the content spending, right? Your question is about content spending, right?

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Thomas Chong, BOCI - Analyst [56]

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Yes, Charles. Yes, I just want to get a sense about in terms of year-on-year growth in content spending, how much are we seeing compared to last year?

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [57]

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The head content spending is similar to last year. But the in-house production spending are -- it's just increased.

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Thomas Chong, BOCI - Analyst [58]

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I see. Yes. Charles, may I ask a quick follow-up question in terms of the mix between in-house versus head content? Should we expect it to represent about 70% of the content costs over the long run?

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [59]

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You mean 70% of the content cost of, for what, for head content?

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Thomas Chong, BOCI - Analyst [60]

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For in-house, for self-produced in the long run.

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Charles Zhang, Sohu.com Inc. - Chairman & CEO [61]

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In the long run, yes. I think in the long run -- I think in 2017 is a turning point. It's a year of transition. So in 2017, it's similar. We ramp up the spending on -- I wouldn't call it in-house spending. It's just we call it Sohu production. So Sohu productions, exclusive content for paid subscribers, subscription business. So it's actually ramped up, so that now it's about similar to the spending of the head content.

But moving forward, in 2018, you see a reduction of the head content, so that means that the mix will be -- basically the subscription business will be a large part. But our advertising business will continue to grow because we have another part, which is the PGC. We call it the short clips. English short clips. That means produced -- some of those contributors from third party contributors for the short clips content, videos on the Sohu platform. That part will mostly be advertising supported, because you won't charge for those kind of contents. It's a very knowledge-based information and knowledge. It's like YouTube, and that is growing nicely.

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Thomas Chong, BOCI - Analyst [62]

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Thanks, Charles.

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Operator [63]

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Thank you for the questions. There are no more questions from the phone line. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participations. You may now disconnect the lines.

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Editor [64]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.