SOHU

Sohu.com Inc. (SOHU)

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Sohu.com Inc. (SOHU)

Q1 2011 Earnings Call

April 25, 2011 8:30 am ET

Executives

Tip Fleming - IR, Christensen

Charles Zhang - Chairman and CEO

Belinda Wang - Co-President and COO

Carol Yu - Co-President and CFO

Xiaochuan Wang - CTO

Ye Deng - VP of Entertainment Media

James Deng - Senior Finance Director

Dewen Chen - President and COO, Changyou

Alex Ho - CFO, Changyou

Analysts

Dick Wei - JPMorgan

Wendy Huang - RBS Capital Markets

Andy Yeung - Oppenheimer

Catherine Leung - Goldman Sachs

Gary Ngan - UBS

Chao Wang - BofA

Muzhi Li - Mizuho Securities

Jenny Wu - Morgan Stanley

Presentation

Operator

Welcome to today's first quarter 2011 Sohu earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to our host, Mr. Tip Fleming from Christensen. Please go ahead, sir.

Tip Fleming

Thank you, operator, and thank you for joining us today to discuss Sohu.com's first quarter 2011 results. On the call today are Chairman and Chief Executive Officer, Dr. Charles Zhang; Co-President and Chief Operating Officer, Belinda Wang; Co-President and Chief Financial Officer, Carol Yu; Chief Technology Officer, Xiaochuan Wang; Vice President of Entertainment Media, Ye Deng; Senior Finance Director, James Deng. Also with us from Changyou are President and Chief Operating Officer, Dewen Chen; and Chief Financial Officer, Alex Ho.

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 contained in any forward-looking statement. 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 Zhang

Thank you. Hello, everyone, welcome to our call. I'm pleased to report another solid quarter with record total revenues and the record revenues in our search and online game business. First of all, I would like to start with some quarterly highlights.

Total revenues were US$174.4 million, up 35% year-over-year. Gross online brand ad revenues before tax were US$62.4 million. Net online brand ad revenues were US$57.2 million, up 45% year-over-year and ahead of our expectations. Search revenues were US$8 million, up 183% year-over-year and 21% quarter-over-quarter, exceeding our expectations. Online game revenues were at US$94.9 million, up 32% year-over-year and 3% quarter-over-quarter, also exceeding our expectations. Non-GAAP diluted EPS reached US$1.13, up 31% year-over-year and also ahead of our expectation.

In addition to our solid financial results, there are a few areas in particular that I would like to highlight. First, online video, our conscientious efforts to expand our library of authorized and self-produced premium content have increased our market share in terms of total time users spent watching online video from 13% in December 2010 to 16% in March 2011. This ranks us second in the market according to iResearch.

Secondly, Sogou's business continues its momentum, and over the first quarter of 2011 active users of Sogou's browser, search traffic and search revenue all grew north of 20% quarter-over-quarter. And thirdly, on online games, while our leading game franchise, Tian Long Ba Bu or TLBB, continues to attract new, existing and returning players to its community. Today also marks two significant events for our online game subsidiary Changyou.

First, Changyou just unveiled an updated version of its upcoming game Duke of Mount Deer or DMD, and will launch the most-anticipated game this summer. Second, we have entered into a definitive agreement to acquire a majority stake in Shenzhen 7Road Technology Corporation and its affiliates or 7Road, a reputable web-based game developer that created DDTank, one of the most popular web-based games in China. This will expand Changyou's product portfolio to cover not only MMORPG games, but also web-based games.

Let me start by discussing a more on our online video business in more detail. We continue to expand our library of authorized high-definition video content, especially for exclusive Chinese dramas. For example, "Falling in Love", the Chinese drama with TV's highest audience rating. When broadcast exclusively on our video site, we see unparallel popularity.

By the end of March 2011, we have secured approximately 130 prime time Chinese dramas, but have not yet aired on Chinese stations. And off which 22 are exclusively online, which really will ensure an attacking pipeline to continue to gain user for the next six to 12 months. Along with authorized premium content, our self-produced content has also proven a cost-effective way to attract both users and ahead of (inaudible).

Our first self-produced drama series, Leftover Lady on Changyou in Chinese, was one of our top five TV dramas in the first month of broadcasting. Building on this success and keeping advantage of our expertise and the close relationship with the entertainment industry, we've planned to invest introduction of more drama series during 2011. Our common strategy, together with our aggressive cross marketing efforts, we have Sohu and Sogou's 300 million users and our online video platform has generated positive results.

For the first quarter of 2011, average daily video views on our high-definition video channel grew by 36% quarter-over-quarter. According to iResearch, we make visitors to our video sites increased to 145 million in March, up 77% compared with the March 2010, a year ago; and than 44% compared with December 2010. Then, as I mentioned earlier, our video market share in terms of time spent rose from 13% to 16% and this kick us to the number two spot in the market.

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