Earnings Labs

Sohu.com Limited (SOHU)

Q3 2005 Earnings Call· Mon, Nov 21, 2005

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by and welcome to the SOHU's Third Quarter 2005 Results Conference Call. At this time all participants are in a listen-only mode. Operator Instructions As a reminder this call is being recorded today, Tuesday, November 08, 2005. I would now like to turn the call over to Ms. Ingrid Shea (ph). Please go ahead ma'am.

Ingrid Shea

Management

Thank you. Thank you everyone for joining SOHU.com to discuss our third quarter 2005 results. On the call today are Charles Zhang, Chairman of the Board and CEO and Carol Yu, Chief Financial Officer. Before the management presentations, I would like to read you the 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 statements. Potential risks and uncertainties include but are not limited to SOHU's historical and possible future losses, limited operating history, uncertain regulatory landscape in the People's Republic of China, fluctuations in quarterly operating results and the Company's reliance on on-line advertising sales, mobile phone related wireless revenues, on-line games and e-commerce for its revenues. Further information regarding these and other risks is included in SOHU's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Thank you all for your patience. Now let me turn the call to Charles Zhang, Chairman and CEO. Charles?

Charles Zhang

Management

Thank you all for joining our conference call today. First, I'd like to highlight one of the most significant events in our Company's history. We at SOHU are all very excited in the first official Internet content sponsor for the 2008 Olympics. This will provide SOHU exclusive access to the 2008 Olympics official Web site content and also give the Company exclusive cross marketing and cross selling opportunities with the other Fortune 1000 corporate partners and sponsors such as Coca Cola, GE, McDonalds, Adidas, Lenovo, China Mobile and Air China. The magnitude of what this means for SOHU is enormous for the future of our on-line advertising business. This was a heavily sought after project in China and the environment in which we won was highly competitive and the one that we view as a testament to the strength of SOHU brand. Our reasons for this investment are simple. As we move closer to the 2008 Olympics we believe we will see accelerated growth opportunities in leveraging the sponsorship program and drive more advertising revenue through customers looking to capitalize on the 2008 Olympic event. We believe it will serve as a platform to showcase our superior technology and a brand presence. There are two core messages that I want to emphasize on our call today. First, we firmly believe that having been chosen as official Internet content sponsor for the Olympics Web sites puts us at the head of the pack amongst our peers. This endorsement is one of the most exclusive events that can happen in the Chinese Internet market. With the full support of the Beijing Organizing Committee of the Olympic games and the Chinese government we are now well positioned to lead our Company down the path of strong success through seamless execution of the Olympic…

Carol Yu

Management

Thank you, Charles. I would like to take this opportunity to discuss some key financials to enhance your understanding of our business operations. 1) Revenues, we are pleased to report strong revenues of 28.3 million for the third quarter, which came in at the high end of our guidance. 1) advertising, with advertising revenues of 18.8 million we experienced a healthy 11% sequential and 21% year-on-year improvement. Year-to-date we're on track to meet our target advertising revenue growth of 25% for the full year of 2005. 2) Wireless, we are very pleased to note that our wireless business is continuing to show healthy signs of recovery. Let me give you a breakdown of the third quarter wireless revenue. Our SMS service grew 23% quarter-on-quarter to 4.2 million. Our wire services declined a marginal 2% to 2.1 million. Our MMS, IBR and ring back tone services contribute only very small amounts at this stage. Going forward we believe we will continue to see modest recovery for this business line. Other revenues, our on-line game revenues grew 8% sequentially to 1.4 million with flat on-line revenues growing 11% sequentially. 2) Turning to our gross margins overall gross margin for the third quarter was 65%, down from 67% in the previous quarter and 68% in the third quarter of 2004. Advertising gross margin was 74% in the third quarter down from 76 in the second quarter and 79% in the same period last year but still higher than that of our closest competitor. Both advertising profit increased to 13.9 million from 12.9 million in the previous quarter. Non-advertising gross margin was 47% for the third quarter compared to 51% in the prior quarter and 52% in the third quarter of last year. The decrease was mainly due to an alleged penalty of $241,000…