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Q1 2013 Earnings Call

April 29, 2013 8:30 a.m. ET


Tip Fleming – Investor Relations, Christensen

Charles Zhang – Chairman and CEO

Belinda Wang – Co-president and COO

Carol Yu – Co-president and CFO


Alicia Yap – Barclays Capital

Dick Wei – JPMorgan

Philip Wan – Morgan Stanley

Jiong Shao – Macquarie Research

Mark Marostica – Piper Jaffray

Thomas Chong - BOCI

Fei Fang – Goldman Sachs

Mi Zhou – UBS



Ladies and gentlemen, thank you for standing by, and a very good evening. Thank you for joining Sohu's first quarter 2013 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 hand the conference over to your host for today's conference call, Mr. Tip Fleming from Christensen. Thank you, sir. Please go ahead.

Tip Fleming

Thank you, operator. Thank you all for joining us today to discuss's first quarter 2013 results. On the call are Chairman and CEO, Dr. Charles Zhang; Co-President and Chief Operating Officer, Belinda Wang; Co-President and Chief Financial Officer, Carol Yu. Also with us from Changyou are President, Dewen Chen and Chief Financial Officer, Alex Ho. And we also have CEO of Sogou, Xiaochuan Wang and Vice President of Sohu and CEO of Sohu Video, Ye Deng.

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 any 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 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 most recent Annual Report on Form 10-K.

Now, let me turn the call over to Dr. Charles Zhang, Chairman and CEO. Charles, please proceed.

Charles Zhang

Thank you. And thanks to everyone for joining our call. I am pleased to report that Sohu Group’s three key properties, namely online media, in particular video, Sogou and Changyou are all making strong starts into 2013. For the first quarter, the Group revenues were up 36% year-on-year, exceeding our expectations. By business unit, online video delivered double digit sequential revenue growth in a typical slowest quarter of the year.

Sogou business was solid as its core products continued to gain user traction. Changyou set new records for both top-line and bottom-line, driven by decent performance of its MMO and web games. According to iResearch, the Sohu Group now has approximately 450 million users on a monthly basis consuming the Group’s news, video, Pinyin, games or our other services. This put us as a solid No.3 in China’s internet industry. Traffic growth for our PC internet services is stable while our mobile products are gaining strong traction as the total user base of two of our popular mobile applications APPs surpassed 100 million mark each.

Now I would like to share some first quarter financial highlights with you. Total revenues were US$308 million, up 36% year-over-year and 3% quarter-over-quarter, exceeding the high end of our guidance by $9 million. Net brand advertising revenues were US$80 million, up 32% year-over-year and down 2% quarter-on-quarter.

Sogou revenues were US$39 million, up 73% year-over-year and down 4% quarter-over-quarter, exceeding the high end of our guidance by 3 million. Online game revenues were US$167 million, up 33% year-over-year and 6% quarter-over-quarter. Non-GAAP diluted EPS were $0.62, exceeding the high-end of our guidance by $0.07.

Now let me discuss our online video business in more detail. In the first quarter, Sohu Video continued to focus on its strategy of providing high quality differentiated content and improving its monetization capabilities. We have been focusing on expanding our user base in metropolitan cities. This group of users with high disposable income is most sought after by major brand advertisers. Our carefully articulated common portfolio such as American Drama and the Japanese animation series is well suited to this demographics group.

As the number one online destination for American drama series, in March Sohu Video added Netflix blockbuster series House of Cards exclusively shortly after its U.S. release. Our data shows that about 30% of the viewers live in Beijing and Shanghai. And another classic example in our content library are Japanese animation (inaudible) and a fairy tale (inaudible). Two of the top three most popular animations in China are exclusively available on our platform.

Our pipeline in the third quarter, we will air the most anticipated variety shows of 2013, the Voice of China Season 2. I am also delighted to report our progress on the video advertising sales. For the first quarter, a typical soft advertising season, our revenues posted double-digit sequential growth. We already began pre-selling ad slots for the new season of the Voice of China and to date we have received a strong demand. We are confident about continuous strong sales momentum in the second half of 2013.

Mobile video has been one of our top priorities with our stepping up investment and are seeing some already successes. Our content technology gained the recognition from the important players such as Samsung and China Unicom which entered into a separate strategic cooperation agreements with Sohu Video. Belinda will discuss more details about Sohu Group’s mobile strategy in her remarks later.

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