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Edited Transcript of SOHU earnings conference call or presentation 24-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Sohu.Com Inc Earnings Call

Beijing Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Sohu.Com Inc earnings conference call or presentation Monday, April 24, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Zhang

Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com

* Eric Yuan

* Joanna Lv

Sohu.com Inc. - Acting CFO

* Xiaochuan Wang

Sogou Inc. - CEO and Director

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Conference Call Participants

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* Alex Yao

JP Morgan Chase & Co, Research Division - Analyst

* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Evan Zhou

Crédit Suisse AG, Research Division - Research Analyst

* Hillman Chan

Macquarie Research - Research Analyst

* Thomas Chong

* Yue Wu

China International Capital Corporation Limited, Research Division - 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 First Quarter 2017 Earnings Conference Call. (Operator Instructions) 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 your host for today's conference call, Mr. Eric Yuan, Investor Relations Director for Sohu. Please go ahead, sir.

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Eric Yuan, [2]

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Thanks, operator. Thank you for joining us today to discuss Sohu's first quarter 2017 results. On the call, our 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 in 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 those containing 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. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [3]

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Thank you, Eric. Thanks to everyone for joining our call. We are off to a -- off a solid start in 2017, as we delivered in-line results in the first quarter. For Sohu Media Portal, we launched a redesigned front page of our PC portal and channels to meet the changing habits of users in the media area -- era. For Sohu Video, we continued to shift more resources to self-produced content and made subscription business made one of our key priorities this year. Sogou achieved better-than-expected top line results as its mobile search traffic maintained robust growth. Changyou's online game business performed well in the first quarter, and our new Legacy TLBB mobile game is set to debut in mid-May.

Before I give more details about our key businesses, let me summarize the financial results for the first quarter. Total revenues, $374 million, down 8% year-over-year and 9% quarter-over-quarter. These results were negatively affected by the depreciation of the RMB. If on a constant-currency basis, total revenues would have been $20 million more or a decline of 3% year-over-year. Net brand advertising revenues, $81 million, down 35% year-over-year and 18% quarter-over-quarter. Sogou revenues, $162 million, up 10% year-over-year and down 5% quarter-over-quarter. Online game revenues, $85 million, down 17% year-over-year and 11% quarter-over-quarter. Non-GAAP net loss attributable to Sogou.com Inc. was $68 million loss or a loss of $1.75 per fully diluted share.

Now let me go through some of our key businesses. First, media business. Sohu Media Portal, the 3 -- we have 3 platforms for Media Portal, the PC portal, the H5 WAP portal and Sohu News APP application. Thanks to the fast penetration of various mobile applications, our user already get used to a new feed stream of information displayed on their mobile devices. To better serve such a change of habit, we overhauled the design of the front page of PC and Portal -- PC portal and give our users a clean and a consistent feeling when they visit our website. While enhancing the overall experience our PC users with in-line -- in-time and high-quality news and information and introductions from machine algorithms to help screen content has also increased our editorial efficiency. On the content side, in the first quarter, we continued to focus on our effort to develop the partnership with third-party authors -- contributors. We've now covered nearly 400,000 independent content accounts who provide us a wider variety of stories. Our goal is to use the technology and the editorial expertise and pick the most interesting and the best-quality content from such a large pool and let our users get them effortlessly. Also, there's a clear sign that the usage of short format -- short-form video in the mobile news products has exploded. To capture this trend, we have significantly increased the number of video-based articles within our News APP and integrated more PGC content from the Sogou video. In terms of financial performance, in the first quarter, brand advertisers' performance was still disappointing. While we see some recovery signs as some domestic brands began to launch more marketing campaigns, at the same time, we continue to see growth from SME customers and have developed new app products to address this more sophisticated demand.

Now moving to Sohu Video. We have made effort in 2017 to rationalize the cost structure. And in the meantime, we are actively exploring the new growth opportunities derived from the large subscription market. As such, there are 2 important initiatives for us. First, we first -- we invest heavily to build a stronger pipeline of self-produced dramas, which tend to enjoy better value for money compared to traditional TV dramas. Second, we make best use of our exclusive content to grow subscription base -- subscriber base -- user base. For -- in the first quarter, for content, of the 10 most-watched dramas, Sohu Video has 6 out of the most popular 10, including Life After Life, Blooms over Blooms, (inaudible), and [ Pretty Lee Agent ], (inaudible), for example. For us, the past quarter was a light season in terms of original dramas, but we still managed to release a few popular self-produced dramas -- shows, like Reborn of Monk, (foreign language). We also exclusively bought some less-expensive web dramas and movies to replenish our library for paid users. Among them, Amazing Detective (foreign language) stood out as a dark horse as it has attracted some paid users. As the summer season approaches, our portfolio of original content is getting better. We are about to launch several sequels of our most popular series, such as Campus Beauty, Tie Shen Xiao Hua, Monster Killer, Wu Xin Fa Shi and Dear Prince (foreign language), the sequel of (foreign language), and a few highly anticipated new titles such as Die Now -- Done Now, Liar Hunter X, (foreign language) and the Big Bang (foreign language). The total number of self-produced developed dramas in 2017 is expected to be between 20 and 30 compared with 17 in 2016. The popularity of these shows will be crucial to us as we seek to expand our paid user base who come to our platform for exclusive content. Financially, we expect the advertising sales to bottom out from the second quarter. Meanwhile, support -- supported with our original dramas, subscription revenue will also ramp up. Looking ahead, the overall content spending for Sohu Video will remain at a high level throughout 2017. However, the changes we are putting in place should gradually improve our cost structure and bottom line results over time and especially in 2018.

Next moving to Sogou. Driven by strong mobile search traffic, Sogou revenue gross reaccelerated in the first quarter. We're also upbeat about the long-term prospect for our search business. Xiaochuan will update you with more details about my remarks -- after my remarks.

Lastly, Changyou. Both top line and bottom line for Changyou met with our prior expectation in the first quarter, largely driven by the solid performance of TLBB PC and 3D mobile games. In 2017, Changyou will do a content release and the capabilities in 2 of the most promising categories of the mobile game market, that is MMORPG and advanced cardio games. In terms of a highly anticipated mobile game, Legacy TLBB, we conducted another round of tests in March, and the results are significantly better than the first round of tests. In particular, we saw a major improvements in our user behavior among noncore users after we adjusted the introductory session for new players and simplified some of the gameplay. The open beta testing is now scheduled to start in mid-May.

Now, I'll pass the call over to Xiaochuan for an overview of Sogou business. Xiaochuan?

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Xiaochuan Wang, Sogou Inc. - CEO and Director [4]

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(foreign language)

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Unidentified Company Representative, [5]

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Thank you, Charles. In the first quarter, Sogou got off to a good start in core search business as we add our exciting initiatives in artificial intelligence. As of March, aggregate search traffic grew 26% from a year ago, with mobile search up more than 50%. The number of active users of Sogou Mobile Keyboard grew over 60% from a year ago, solidifying its position as the #3 mobile app in China in terms of DAU. Total revenues for the first quarter reached RMB 1.12 billion, up 16% year-on-year, which was ahead of our prior expectations and also faster than that of industry, thanks to decent growth of mobile search performance.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [6]

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(foreign language)

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Unidentified Company Representative, [7]

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During the first quarter, we continued to build our competitive edge with differentiated content for a number of verticals. For example, we consistently upgraded the healthcare channel, Sogou Wise Doctor, improving and enriching the search results. We brought in more of assertive health-care information to our platform, including encyclopedia entries on diseases and their respective symptoms. On top of that, we bolstered the content with detailed information on hospitals and doctors to help users get health-care services more conveniently. With these efforts, our health-care search service is now in the top class in the industry.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [8]

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(foreign language)

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Unidentified Company Representative, [9]

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In the past quarter, we also made encouraging progress in AI space, such as voice technology and machine translation. Sogou Mobile Keyboard remained the #1 mobile app for voice input in China as data voice input more than doubled from a year ago to 240 million times. In addition, our proprietary machine translation technology have been applied to our products. We recently rolled out our Chinese-to-English voice-enabled translation function in Sogou Mobile Keyboard, which are well received by users.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [10]

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(foreign language)

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Unidentified Company Representative, [11]

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Turning to the financials. Total revenues for the first quarter reached $162 million, up 10% year-on-year. In RMB terms, revenues were up 16% year-on-year. Mobile search revenues contributed 72% of total search revenues, up from 44% a year ago. Non-GAAP net income was $12.6 million compared with $21.8 million in the same period of last year.

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 [12]

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Thank you, Xiaochuan. I will walk you through the key financials by our 4 major segments for the first quarter of 2017. The profit and loss numbers mentioned below are all on a non-GAAP basis. For Sohu Media Portal, in the first quarter, revenues were $37 million, down 18% year-over-year. The quarterly loss was $50 million compared with net income of $1 million (sic) [ $11 million ] in the first quarter of 2016.

For Sohu Video. In the first quarter, revenues were $37 million, down 32% from a year ago. Of this, advertising revenues were $22 million. The quarterly loss was $70 million compared with a net loss of $38 million in the same quarter last year.

For Sogou. Total revenues in the first quarter were $162 million, up 10% year-over-year and down 5% quarter-over-quarter. Of this, search-related revenues were $142 million, up 6% year-over-year and down 7% quarter-over-quarter. Sogou posted net income of $30 million compared with net income of $22 million in the same quarter last year. For Changyou, for the first quarter, total revenues, including 17173, were $120 million, down 8% year-over-year and quarter-over-quarter. Changyou posted net income of $35 million compared with net income of $31 million in the first quarter last year. For the second quarter of 2017, we expect total revenues to be between $390 million and $420 million, brand advertising revenues to be between $85 million and $95 million. This implies an annual increase of 16% to 25% and a sequential decrease -- increase of 4% to 17%. Sogou revenues to be between $190 million and $200 million. This implies an annual increase of 8% to 14% and a sequential increase of 17% to 23%. Online game revenues to be between $75 million and $85 million. This implies an annual decrease of 14% to 24% and a sequential decrease of 0 to 12%. Before deducting the share of non-GAAP net income pertaining to noncontrolling interest, non-GAAP net loss to be between $50 million and $60 million. Assuming no new grants of share-based awards and that the market price of our shares is unchanged, we estimate that compensation expense relating to share-based awards will be around $4 million. Including the impact of these share-based awards, GAAP net loss before noncontrolling interest to be between $54 million and $64 million. Non-GAAP net loss attributable to Sogou.com Inc. to be between $70 million and $80 million, and a non-GAAP loss per fully diluted share to be between $1.80 and $2.05. Including the impact of aforementioned share-based awards and around $5 million of Sohu's economic interests in Changyou and Sogou, GAAP net loss attributable to Sogou.com Inc. to be between $79 million and $89 million and GAAP loss per fully diluted share to be between $2.05 and $2.30.

For the second quarter 2017 guidance, the company has adopted a presumed exchange rate of RMB 7 to $1 as compared with actual change rates of around RMB 6.53 to $1 for the second quarter of 2016 and RMB 6.88 to $1 for the first quarter of 2017. The guidance does not include impact of Changyou's Legacy TLBB mobile game, which is scheduled to launch in May 2017.

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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(Operator Instructions) First question comes from the line of Mr. Eddie Leung of Merrill Lynch Investment Banking.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [2]

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Just a couple of questions on Sogou. I'm wondering if Xiaochuan can share his thoughts on the competition for advertising project between search and mobile news outfit. And then just a housekeeping question. I'm wondering if Xiaochuan can also share the number of advertisers for Sogou in first quarter 2017.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [3]

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Okay. (foreign language)

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Unidentified Company Representative, [4]

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Newsfeed versus search, I think for large customers, if they look for branding exposure, I think newsfeed may be a better choice, but search has always focused on performance in the long-tail periods. So I think for customers looking in this regard, search has -- is definitely a better choice.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [5]

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(foreign language)

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Unidentified Company Representative, [6]

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So to wrap up, being general, we don't see too much impact from newsfeed adding to our online search ads. In terms of the number of search advertisers in Q1, we have over 60,000 customers, which represented a double-digit growth from a year ago.

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Operator [7]

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And your next question comes from the line of Mr. Evan Zhou of Crédit Suisse.

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Evan Zhou, Crédit Suisse AG, Research Division - Research Analyst [8]

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I have a question also regarding Sogou. Wondering if Xiaochuan can give us an update about our current kind of mobile search traffic mix. Specifically, I think he mentioned that the mobile search-related traffic is up like 50% year-over-year. So that's on what metrics? Is it on like (inaudible) or any other metrics that he might want to specify. And also in terms of -- I remember like in the PC area that we've been having a great portion of where traffic contributed by our PC browser. So I think now, it will have like the over 72% of the mobile search revenue coming from mobile. What's kind of the major contributor on our product side for the mobile search side? And lastly, I noticed that there's a slight decline of the gross margin for the search business for -- overall for this quarter both on a quarter-on-quarter, year-on-year basis. Just wondering what's kind of the driver behind that. That would be helpful.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [9]

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(foreign language)

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Unidentified Company Representative, [10]

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So first, maybe starting from the profit margin decline. So a few factors here. First, the PC search business continued to shrink in the first quarter. Second, revenue mix increasingly shifted to mobile search, which has a relatively lower gross margin than PC. And lastly, we continue to beef up our R&D spend.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [11]

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(foreign language)

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Unidentified Company Representative, [12]

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So in terms of customer sectors, they are largely the same as prior quarters. The top 5 sectors are e-commerce, healthcare, gaming, business services and merchant services.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [13]

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(foreign language)

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Unidentified Company Representative, [14]

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So in terms of mobile traffic -- search traffic, traffic from Sogou is organic and it looked like traffic to grow even faster by Q1. Tencent actually contributed less than 40% of our mobile traffic.

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Evan Zhou, Crédit Suisse AG, Research Division - Research Analyst [15]

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(foreign language)

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Xiaochuan Wang, Sogou Inc. - CEO and Director [16]

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(foreign language)

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Unidentified Company Representative, [17]

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Yes, sure. Because we have more acquired traffic on mobile side, so that contributed to the margin decline.

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Operator [18]

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And next question comes from the line of Mr. Juan Lin of 86Research.

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Unidentified Analyst, [19]

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This is Cheryl on behalf of Jen. I have one question on Sogou. So the mobile search traffic grew by over 50%, and its revenue growth is around 80%, significantly up as in the traffic growth. So I'm wondering what's the reason behind the revenue improvement of the mobile search monetization.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [20]

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(foreign language)

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Unidentified Company Representative, [21]

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I think the major reason for that is PC RPM used to be higher than mobile, but now mobile traffic accounted for a much larger portion. So that bring -- which led to mobile search revenue outpacing the growth of mobile traffic.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [22]

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Outpaced. Yes, revenue growth outpaced by the traffic growth.

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Unidentified Company Representative, [23]

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Yes, yes, yes.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [24]

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Not outpaced by...

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Operator [25]

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Next question comes from the line of Ms. Alicia Yap of Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [26]

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I have 2 questions. Number one is related to your earnings guidance. So your guidance for the 2Q revenues actually shows about a 4% to 12% sequential increase, but then the last guidance is actually wider than the first quarter. So can you give us some color where would be the spending increase for the second quarter? Is that more related to the video content cost? What about some of the operating expenses expectations? So any color you could share would be appreciated. And then second question is related to Sohu Video revenue. So what is your expectations for the revenue mix between the subscription revenue versus the video advertising revenue, say, by the end of this year? So what are the tractions for your subscription growth so far?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [27]

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Yes. This is Charles. The first question -- the last actually, were mostly incurred due to the video content because we had -- we made some commitments last year of the purchase of some large head content, basically, advertising base. It was very expensive, and it will be broadcasted throughout the year this year. And so that loss will be incurred. So that is why we have a -- cost is higher. I mean -- yes, cost is higher. Video content.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [28]

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(foreign language)

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [29]

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Yes. By the end of year. It means, by the end of the year, what the picture looks like by the end of the year.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [30]

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(foreign language)

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [31]

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I think it's the past. Actually, this -- I think the subscription-based paid revenue should be -- surpass the advertising by the end of the year, I think.

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Eric Yuan, [32]

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So, Alicia, this is Eric. Just to add some color. In Q1, about 60% of the Sohu Video's revenue were from advertising and 40% from the non-advertising, which includes subscription revenue.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [33]

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I see. But then Charles mentioned, by the end of this year, he expects the subscription revenue should surpass the advertising revenue, right?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [34]

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Yes. It can be. Non-advertising -- well, non-advertising revenue will surpass -- we still have the revenue from the live broadcast. (foreign language)

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [35]

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I see. Okay. All right.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [36]

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Well, it depends. It really depends on our content's success -- our comment news -- self-produced comments success if we have really a lot of big hits for our self-production then...

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [37]

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Will you be able to share the numbers of subscriber currently?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [38]

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No. I can't.

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Operator [39]

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Our next question comes from the line of Mr. Hillman Chan of Macquarie.

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Hillman Chan, Macquarie Research - Research Analyst [40]

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I also have a question regarding the video business. Could you share more on our strategy to grow the paying subscription base? And related to that, the content spending and the types of content for that? And another question is about the consumption pattern between the paying subscribers and also the nonpaying video watchers. Any color would be helpful.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [41]

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Well, the comments -- so the -- I mean, our strategy in growing our paid subscriber-based is purely -- solely depends on the exclusive self-produced or acquired content. So we had some good success last year with the titles like Fa Yi Qin Ming and also Wu Xin Fa Shi and all of these -- so this year will be a year with -- the sequels of those successful drama series. And that's nearly -- it is the time of harvest because the brand is already there, and people -- a lot of the users look forward to watch the second season. And also, instead of spending like RMB 100 million or RMB 200 million to buy those kind of stupid head contents that -- or we keep the cost of each production of self-produced content below like $30 million -- I mean, RMB, RMB 20 million, RMB 30 million apiece, and so that we can -- we make sure we have a few new productions that start -- are brought online each month, so that keeps the kind of subscription users to continue their subscription. So it's really -- and also there's -- I have a strong team that select the kind of -- it's really a judgment call basically about what kind of stories, what kind of these current Chinese viewers like, and also production quality, and all these things. It's a lot of -- for the -- another -- and also, we bought some content exclusive for subscription like the -- (inaudible). It's actually, we bought it exclusively. It's a ready-made product. It's not just purchased for subscription and it had some good results.

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Operator [42]

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Your next question comes from the line of Ms. Natalie Wu of CICC.

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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [43]

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So my question is majorly regarding Sogou. So firstly, Xiaochuan, can you share with us more details on the organic traffic conclusion and excellent traffic conclusion of both PC and the mobile side? And also Sogou search, revenue actually performed better -- much better than your projects provided in the guidance in the first quarter. So just wondering what kind of the industry in specific of the advertisers is driving up a stronger-than-expected search revenue growth. And lastly, given that WeChat had just announced that it has established its search application business unit, so just wondering if Sogou has anything to do with that view? And if not, will this affect the existing collaboration between Tencent and Sogou? Or will it increase the risk for the advertisers to shift away parts of their search-related ads budgets from existing search players?

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Xiaochuan Wang, Sogou Inc. - CEO and Director [44]

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(foreign language)

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Unidentified Company Representative, [45]

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So regarding your question on Tencent just launched a search app -- application -- application search, we actually have some common ground with Tencent, that is, Tencent will not enter into general search. If they decide to do so, that should be Sogou.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [46]

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Collaboration with Sogou.

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Unidentified Company Representative, [47]

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That should be a collaboration with Sogou.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [48]

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(foreign language)

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Unidentified Company Representative, [49]

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So in terms of acquired traffic, we have 1/3 from acquired -- traffic acquisition of mobile.

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Xiaochuan Wang, Sogou Inc. - CEO and Director [50]

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(foreign language) Okay, the guidance.

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Unidentified Company Representative, [51]

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(foreign language)

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Xiaochuan Wang, Sogou Inc. - CEO and Director [52]

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(foreign language)

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Unidentified Company Representative, [53]

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The stronger-than-expected Q1 revenue growth is mainly due to better-than-expected mobile search traffic.

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Operator [54]

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The next question comes from the line of Mr. Alex Yao of JPMorgan.

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Alex Yao, JP Morgan Chase & Co, Research Division - Analyst [55]

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I have a follow-up question on the video strategy. Firstly, can you give us an update on your content budget this year for video content? Secondly, what portion of your video budget will be allocated to the in-house production versus licensed content from third parties? And lastly, how do you think the competition in the in-house production as most of the online video platforms are shifting focus more towards the original content or in-house production? They're going to be a new competition towards production capability in terms of actors, actresses, or producers, et cetera, et cetera.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [56]

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Yes. The spending allocation, right? About half and half, right?

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Xiaochuan Wang, Sogou Inc. - CEO and Director [57]

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(foreign language)

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [58]

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Yes. The overall content spending is a little bit more than the 2016 budget. And of them, about half and half, right?

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Unidentified Company Representative, [59]

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About 40%.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [60]

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About 40% is for the in-house production or content for paid users, and the other part -- say, 60% is still for the advertising base, the head content. And this number will, in 2018, the percentage of -- the content for paid users will be -- increase for much larger -- will increase much larger. And for your second question, regarding the writing costs and the competition in the production -- original content production, yes, it is, but we want to make sure that we'll produce this kind of like RMB 20 million, RMB 30 million per drama kind of production. And fight, basically, against this -- another round of inflation of content cost. Because we believe that it's really -- to have a great story, and it really mainly depends on the story itself and on the screenplay and the ideas and other things, it's -- and money is not only problem. And also, if you have some really -- a comment because it's a good comment. It's exclusive so that users continue to come to our platform. So the video business is the business, like the -- it's not like the sort of network or other kind of winner takes all. It's just that, that it keeps your unique type of content and then people continue to come to your -- and we want to make basically turn the video business into a kind of a money-making business instead of the money-losing business like it is now.

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Alex Yao, JP Morgan Chase & Co, Research Division - Analyst [61]

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Just a little quick follow-up. When do you expect Sohu Video can be profitable?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [62]

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Yes. It's '19 -- 2019.

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Operator [63]

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Your next question comes from the line of Thomas Chong of BOCI.

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Thomas Chong, [64]

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I have 2 quick questions. The first question is about the advertising sentiment this year. Are we seeing it turn better compared to last year? And my second question is, can management comment about the trend, the advertising trends, for Internet services as well as auto?

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [65]

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The overall trend seems better than last year, right? There is some kind of come back. The inventory and the businesses start to come back a little bit. And in terms of the categories of industries -- the auto industry or...

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Eric Yuan, [66]

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I think for auto industry, Thomas, we think that some domestic brands will, as we mentioned, will launch more marketing campaigns to promote their new models.

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Charles Zhang, Sohu.com Inc. - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com [67]

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And I think one of the more robust sectors is really the SM, small-medium enterprise, and as we -- our user base cover -- continue to cover especially with the mobile -- WAP portal and also News APP and PC combined. So we have a large user-based that have a sizable number of users in the local cities, the second-tier or third-tier cities, that we will move into -- develop more those kind of local SMEs to -- those kind of -- and China is so big, and there are many, many small, medium and large companies who will find the Sohu media platform to be effective in marketing their products to their local towns and cities. That's -- and our stories, that will be the future driver of our advertising business.

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Operator [68]

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(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to today's presenter. Please continue.

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Eric Yuan, [69]

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Yes. Okay. Thank you for joining us. Have a good evening, and yes, good morning. Good day. Bye.

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Operator [70]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.