Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Sohu’s third quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Brandi Piacente, Investor Relations, please go ahead.

Thank you for joining Sohu.com to discuss our third quarter 2007 results. On the call today are Dr. Charles Zhang, Chairman and Chief Executive Officer; Ms. Carol Yu, Co-President and Chief Financial Officer; Dr. Gong Yu, Chief Operating Officer; and Mr. [Wang Tao], Head of Online Game Business. Before management begins their prepared remarks, I would like to read you the Safe Harbor statement in connection with today’s conference call. Except for the historical information contained herein, that 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 online advertising sales, online game revenue, and mobile phone related wireless revenue for its revenues. Further information regarding these and other risks are included in Sohu's annual report on Form 10-K and other filings with the Securities and Exchange Commission. Now, let me turn the call over to Dr. Charles Zhang, Chairman and CEO. Charles.

Thank you, Brandi. Hello, everyone. Welcome to Sohu's third quarter 2007 financial results conference call. I am very pleased to report another outstanding quarter with record total revenues and non-GAAP earnings. We have exceeded all of our guidance for each of our revenue categories, as well as earnings. This set of results are made possible only because of our focus on technology and our long-term vision, such as investments in our first in-house developed online game, Tian Long Ba Bu, and our Beijing 2008 Olympics sponsorship. I will begin by discussing Sohu's major achievements for the third quarter. First, brand advertising -- Sohu delivered record high brand advertising revenue of $29.8 million, exceeding the high end of our guidance, representing 42% year-on-year growth. For the first nine months of 2007, brand advertising revenue grew by 40% year-on-year, despite a challenging comparison to 2006 with the FIFA World Cup. And here I would like to extend special thanks to Belinda Wang, our Chief Marketing Officer and Co-President, for her diligent efforts and accomplishments, even during her maternity leave over the last few months. Belinda will officially report to duty next month and will join us in our next call. Fueled by the fast growth of the Chinese economy and the continued migration of advertisers from offline to online, our brand advertising continues to ride the tide of a robust market, especially with the Beijing 2008 Olympic Games now less than 10 months away. For the third quarter, revenues continued to be driven by heavy spending sectors such as auto, real estate, and online games. Sectors that showed the highest year-on-year growth were online games, fast-moving consumer goods, and the financial services. Online games increased more than 120% year on year, driven by the launch of many new titles and IPO marketing…

We have achieved 21% user growth in unique visitors for the third quarter. We are also pleased to report healthy traffic growth for the Sohu matrix of websites over the last third quarter. Channels such as blog, entertainment, news and sports enjoyed the highest traffic growth. Now I would like to discuss more about our video strategy. With increased broadband penetration and the continuous improvement of peer-to-peer streaming technology, online video content is now in even higher demand from Internet users. In 2006, we launched our S and V channels, two online 24-hour video channels on sports and entertainment, respectively. Both channels have been well received. During the third quarter, page views for S and V channels increased by 32% and 21% respectively. In order to expand our video services, in the third quarter we launched a new TV channel through strategic partnerships with 49 television stations, including 14 provincial TV stations that have national coverage. Programs from these TV stations are now streamed on Sohu on both live and on-demand service. Such TV clips are nicely integrated into our text-based news and have been well received by our users. With that, I would like to turn the call to Carol, Co-President and Chief Financial Officer, from an update of our third quarter financial performance.

Thank you, Gong Yu. Hello, everyone. I will now provide a review of our financial results for the third quarter ended September 30, 2007. One, revenues -- as mentioned by Charles, for the third quarter total revenues hit a record of $51.5 million, exceeding the high end of our guidance by $4.5 million, representing an increase of 32% sequentially and 46% year on year. Not only does each of the revenue categories exceed our previous guidance, some by a rather wide margin, but each of them also hit their all-time highs as well. With total advertising revenues of $31.5 million, we achieved a sequential increase of 11% and a year-on-year increase of 32%. Brand advertising revenues were $29.8 million, representing a sequential increase of 12% and year-on-year increase of 42%. Sponsored search revenues were $1.7 million, flat from the second quarter and declined by 39% year-on-year. The year-on-year decline was mainly due to the strengthening of our anti-fraudulent click policy based on more sophisticated algorithms starting mid-2006. In the third quarter, through better integration with the Sohu Portal and fine-tuning of featured search product, such as picture and [favorites], traffic of Sogo has increased by 94% sequentially. Non-advertising revenues were $20 million, exceeding the high-end of our guidance by close to $4 million, an increase of 88% sequentially and 74% year-on-year. Online games revenue were $12.7 million, an increase of 232% sequentially and 473% year-on-year, due to the strong results of Tian Long Ba Bu. For the third quarter, revenues from Tian Long Ba Bu and Blade Online were $10.9 million and $1.8 million respectively. Wireless revenues were at $6.8 million, a sequential increase of 4% quarter on quarter and down 23% year-on-year. Sohu is well-positioned to minimize risks associated with the wireless sector as they now only represent 13%…

(Operator Instructions) Our first question comes from Jason Brueschke with Citigroup. Please go ahead.

Thank you. Good morning, everyone, and congratulations on a really fantastic quarter. Let me ask two questions, if I can; first of all, on the online gaming, you’ve had tremendous success so far from TLBB and it seems like we have at least another solid quarter of growth ahead of us. If I can look ahead to the new game that you announced, I think it was Duke of Mount Deer, could you maybe give us some additional color on some of the similarities that you see that that game represents? You indicated it’s by the same author. Maybe give us some indication of how popular this novel was versus TLBB and things like that, just so we can have a context for understanding what some of the potential is for the next game, and then I have a follow-up question.

Let me describe a little bit and then I will ask [Wang Tao] to say things and maybe I can translate, or you can. I think Duke of Mount Deer is as popular in terms of the novel and the story and the movie is as popular as Tian Long Ba Bu. It is very, very well-known and actually now, there is a television series that is being filmed now about Duke of Mount Deer. The game is a 2.5D cartoon style. Maybe Wang Tao can elaborate.

Okay. Similarities between Tian Long Ba Bu and Lù Dǐng Jì is as follows; when we first developed Tian Long Ba Bu, we followed two key themes or strategic direction. One is community-based. Tian Long Ba Bu is community-based, and the second is we followed the strong features of successful Korean games in China. We are now in the process of developing Lù Dǐng Jì. When we do that, we not only put equal emphasis on the two successful features from Tian Long Ba Bu, but at the same time, we also increased the in-game features that are actually success factors for other games in China, but also we also 3D features as well -- 3D engine. The target market for Lù Dǐng Jì is more of the cartoon featured market for the game.

Jason, you got a clue? Hello?

Our next question will come from the line of Dick Wei with J.P. Morgan. Please go ahead.

Congrats on the strong quarter, and two questions; first question is can you tell us more about what you see on advertisers plan for the Olympics -- where are they spending, in terms of timing of the spending, and is there any hints on the amount? That would be great. Because I’ve been hearing that some advertisers are holding back some of the ad spending in Q3 for the upcoming quarters. And the second question is on Tian Long Ba Bu, just quickly about the revenue expectation for Q4 on the game.

For advertising revenue coming from Olympics, we are seeing very encouraging signs. Our current efforts focused on marketing our Olympic Games package to the advertisers and so far, results have been encouraging. We will give out our full 2008 year guidance when we report our Q1 or Q4 results in the coming quarters. The second question regarding Tian Long Ba Bu, our revenue guidance for Q4 for total, for games in total, is $15 million to $16 million. So for Tian Long Ba Bu, it would be about $14 million.

Great. Thanks.

Thank you. Our next question comes from Jenny Wu with Morgan Stanley.

Hi, guys. Congratulations on a very good quarter. I have two questions. First one, would you please elaborate more on your advertising pricing change? I remember last quarter, you guys increased the price change by 37%. How about the trend going forward? Thank you.

On the pricing change, we haven’t had any price increase since last quarter, but based on the current package that we offer to our clients for the Olympic Games times, it would be at a premium of at least 20% to existing inventory.

Thank you. And the second one is regarding your new TV channel. Is there any revenue sharing plan with those 49 TV stations?

Not yet. Our first goal is to increase the traffic. When we have a sizable traffic, then we will definitely in the future, there will be advertising opportunities for these streaming video and TV channels, because advertisers have been used to advertise on television. So now, advertise with the video-on-demand or streaming, it’s a natural conversion, so we expect that the future is very good. But right now, we are focused on developing traffic and actually, the launch of the TV channel -- it’s only for less than a month and we’ve seen a pretty good result in terms of page views, and the page views are actually higher quality because each view represents a few minutes of viewing, so it’s actually better, more high quality numbers than a text-based page view.

Thank you.

Thank you. We have a follow-up coming from the line of Jason Brueschke. Please go ahead.

Thank you. Sorry about that. That was a glitch on my end. My follow-up question now is a follow-up basically to what Dick had asked. And what I’m interested in is with respect to the Olympic advertising, could you maybe just qualitatively comment on the linearity of the ramp? You gave an indication that some of your advertisers have increased their spending 70% year over year and we are less than a year away now. Should we expect that to be a linear ramp, that Q4 gets stronger and then Q1 is stronger and Q2 is stronger as we get closer to the games? Or is there something peculiar going on that might say it accelerates faster and plateaus, or will it just kind of like linear ride into August of next year? That would be helpful. Thanks.

Well, obviously we can divide the coming 300 days into basically I think three phases. The first phase will be from now on until March of next year, which will pretty much -- I will use the word stable to talk about advertiser spending. Starting from March next year, when the torch relay starts, we would actually be really entering into the Olympic time zone starting there, especially with a big ramp-up of mass interest starting from May when the torch actually enters into China’s soil. And then with the teams, national teams from around the world getting set up and the list of athletes who got into the Olympics and who is not got announced, everybody’s attention will be drawn towards the Olympics. I think that will reach another high ground. And then obviously the third phase would be starting maybe the first of August, a week before opening ceremony. I think the whole world’s attention will be on that. So I think the advertising revenue will follow that three phases as well.

Thank you. That’s very helpful.

In our interaction with our advertisers, since it is already the end of the year, they actually set out some good chunk of advertising spending for the Olympics, but how they will spend it really depends on the phases that Carol just described. So it is important to design the different marketing activities that attract mass attention and with good quality content that reporting all these activities and events, so that help our advertisers to plan their spending accordingly. Now they are -- they always think they are going to spend really good money for the Olympics but now they have the chunk of money set up, but how to spend it, it really depends on our interaction with them in the next 10 months.

Thank you. Our next question comes from Eddie Leung with Merrill Lynch. Please go ahead.

Good morning. I have two questions. One is kind of a housekeeping question. Can you guys talk about how many brand advertisers in this quarter and how the number has changed from the previous quarter? And then I have a follow-up.

In terms of number of advertisers, it’s actually pretty level. We have 652 advertisers in Q3 and 639 in Q2.

And also a question on brand advertising; can you talk a little bit about the demand from non-Olympic sponsors? I would imagine those advertisers would represent a majority of your branded advertisers. And for those advertisers, what’s the impact you see from you guys getting the Olympic sponsorship?

Well, we see equally good demand from sponsors and non-sponsors. I think what Charles has just described both during the script or in his script or when he answered earlier questions is that number one, during, for example, using the one-year countdown as an example, we have 10 Olympic partners and one non-partner coming to sponsor our reporting for that event, so that’s number one. And number two, I think a lot of advertisers, irrespective of whether they are partners or not, they are actually very anxious to see proposals from ourselves for how to do sports marketing or marketing surrounding the Olympics. I think we stand in a much better position versus our competitors and even some of the media, because of resources that we have secured on our media platform. So I think that actually -- I mean, Charles quoted two examples and I think that [factors all].

Thank you.

Thank you. Our next question comes from Wallace Cheung with Credit Suisse. Please go ahead.

Good morning. Congratulations on the very great results. I have questions related to the brand advertising side. Firstly, it seems to me the guidance of the brand advertising seems to be a bit low, because if you compared the year-on-year growth in the first quarter, it is actually around 42%. And if you take a look at the fourth quarter guidance, it is actually only 34% to 49%. I understand the management team has been very conservative in providing guidance, but can you give a little more color why the guidance, the year-on-year growth is actually lower than the first quarter, besides the RMB appreciation impact? And I also have a follow-up on brand advertising revenue. Thank you.

Well, this is how we look at the business at the present, as we speak. Like what you have said, I think we are already seeing very good growth for the past three quarters and I think an annual projection of close to 40% is already something that we are very pleased with.

Okay, I think one follow-up question is actually again on brand advertising side. It seems to be the, as what management have said, the sports channel has been doing very well, I think according to Alexa figures. The traffic was close to double from the year before, so from an advertiser perspective, how do they see this like reflection on this kinds of changes of the traffic mix? Do they think it is actually more valuable? Do they -- [inaudible] on this? Thank you.

I think first of all, we don’t look at it -- well, we don’t look at -- I think there’s a lot of some manipulation or whatever to the Alexa number that reflects, so we have our own internal account of our traffic growth. It’s quit a balanced growth, with traffic for our content channels across the board to grow, especially in sports and entertainment and also the improvement of the news media. And especially, because of the Sohu 3.0 and blogs and new features of blogs and the video content, the Sohu matrix 3.0 stickiness are significantly improved. So the average time spent for a user on the Sohu matrix is longer than before. That translates, so although blogs, standalone blogs we haven’t developed any methods to monetize, it’s all a free product, but because all these products are so inter-connected and you can move around so seamlessly, so that the stickiness improves, so that the click-throughs are getting better. Advertisers are feeling that effect that the advertising on Sohu has improved, so that helps advertisers to continue to sign bigger contracts with us. That’s why -- that’s the underlying force behind the ever-increasing strong brand advertising growth. Because people don’t see the connection. You invest in the technology, bandwidth, servers and all these software engineers to develop products that are free, like blogs and like Sohu 3.0. Actually, it’s indirectly fundamentally making our platform more attractive to advertisers, so in the long-term, you will see the effect of our technological initiatives in terms of brand advertising. For online games, it’s an immediate reflection of revenue and earnings, but for brand advertising, it’s a slow but fundamental and really irreversible path toward a largest Internet portal in China and the largest, most attractive advertising platform in China.

Thanks for that, Charles. Just a final question is I believe TLBB is actually providing a lot of incremental user base for Sohu as a whole. Any plan to convert the TLBB incremental user base into your portal or into the Sohu matrix? Thank you.

You got it right. I mean, that’s also my concern and initiative. It’s very important because Tian Long Ba Bu actually attracts -- it’s very sticky. I think among all the Internet products, RPG games are the most stickiest applications and communities. So we definitely have plans to integrate Tian Long Ba Bu players with our Sohu 3.0 and our Passport and other products. Actually, it’s already -- some of the process has already been going on and so it is - we are doing that.

Thank you very much.

Thank you. Our next question comes from James Mitchell with Goldman Sachs. Please go ahead.

Congratulations, Team Sohu. Two quick questions, first on your fourth quarter guidance. It looks like you are guiding for earnings growth faster than revenue in the fourth quarter, which is all good from our perspective. I’m curious whether --

Sorry, James. I lost you towards the tail end of the question. Can you repeat that?

First question on guidance for the fourth quarter, it looks like you are guiding for faster earnings growth than revenue growth, which is good. I’m wondering whether the cost in the fourth quarter will be more stable because of less sales and marketing spending on Tian Long Ba Bu, or whether the costs will be more stable because of our bonus accrual being more usual? I think you mentioned in the prepared remarks the bonus accrual was high during the third quarter and I was wondering if you could talk about how that works. And then I have a question on a separate topic. Thank you.

I think the Q4 results, the Q4 guidance include -- you are correct, that a lower amount on sales and marketing for Tian Long Ba Bu because the game will enter into a more matured phase. Employee bonuses, it would be more or less the same because they would be as a function of our profitability.

So you accrue bonuses fairly evenly through the year --

For the -- well, I would say for the back half of the year, the second half of the year.

Okay, great. And then my second question on the computer games, I think you gave an implied revenue growth for the fourth quarter to $14 million. I wonder if you’d see that revenue growth coming more from a greater number of paying accounts, or more from ARPU improvement? And comparing the games of peers, it seems like you have a relatively good conversion rate of free accounts into paying accounts.

If I guess, I think we are seeing good user growth. [Wang Tao], do you agree?

We are growing -- we are actually -- we’ll work hard for the fourth quarter, we’ll work hard to grow the active paying accounts, hopefully with a very stable ARPU.

Okay, great. Thank you.

Thank you. Our next question comes from Tian Hou with Pali Capital. Please go ahead.

Congratulations on the good quarter. Regarding your game, Tian Long Ba Bu, I just wonder, how do you position this game? Is this like a game similar to Westward Journey II or is the game much similar to [inaudible]? How do you position them?

It’s more like Fantasy Westward Journey and The Legend from Shanda.

How long do you expect this game’s life cycle will be?

Over five years.

Okay, the last question will be regarding the online advertising. I guess someone’s already asked this question, your Q4 brand advertising is quite flat compared with Q3. Is there any particular reason for this flat projection?

No particular reason. It’s just how we see businesses.

Seasonality. That’s normal seasonality.

Thank you.

Thank you. The next question comes from Ming Zhao with SIG. Please go ahead.

Thank you. Thank you for taking my questions. I have two questions. My first question, maybe following James Mitchell’s question; in the third quarter, you just mentioned there was some bonus for the employees, which I believe they deserve. Do we see that as a continuous payment incentive it the following quarters, so that your margin will actually improve in the fourth quarter? And a related question is, is the marketing spending for the game in the Q3, I believe you said it has increased by $1 million from Q2. How do you budget your marketing expense in the fourth quarter and quarters beyond?

It’s pretty much level.

You mean the marketing expense, right?

No, I’m talking about the bonus level.

How about the marketing expense?

It would be, because we see a growing revenue, but the absolute dollars for the marketing expense will remain pretty stable, so that circles back to James’ question. If we expressed it as a percentage of revenue, actually that would go down.

I guess previously, looking at the non-GAAP operating margin from a low 20s to mid-20s, with game accounting for more revenue in the top line and it’s more profitable, what’s the long-term operating margin that we will be looking at?

I am still looking at that level because like Charles and I and Gong Yu have all emphasized, I mean, we invest in the long-term of the company so we now have the “luxury” of contribution from Tian Long Ba Bu, so we would actually put that back into the business and invest in other technological investments and the like.

Last question is on the mobile side, I guess not many people asked this question today, the question is actually how do we see this business? If I think rightly, your Sogo Pinyin, if you can put that into the mobile phones, I think it would be a great product. Is that something you are going to explore in the future?

You mean the Sogo Pinyin on mobile phones?

Yeah, because I think the Pinyin input on the mobile phone is still very --

Yes, well, sure, definitely we have plans. But it’s because of the product or the type -- so many types of mobile phones, so the task will be a very big one. We have plans to do that but not immediately. It’s in our plan.

So how do you see this mobile business? Are you just going to make it a stable revenue stream going forward?

Well, the wireless -- you mean the wireless business, right?

Yes.

Yes, I think it really depends on operators’ policies and the general trend before any new business model emerged that’s independent of operators. I think the trend is generally going down gradually, but we managed well so that it gradually become a less and a less part of the Sohu overall revenue mix.

Okay. Thank you. Great quarter.

Thank you. The next question comes from Paul Keung with CIBC World Markets. Please go ahead.

Hello. This is [Mahresh] calling for Paul. Good quarter. Considering the strength in the gaming revenue, could you talk a little bit about what we could expect going forward for ARPU growth as well as active paying account growth? And also, in terms of your games pipeline, do you have a plan for a certain number of games to be launched every year and do you see this ever becoming even a bigger part of revenue than advertising?

As far as -- like we talked about, our objective is to grow active paying accounts during the fourth quarter while maintaining a relatively stable ARPU. We do have plans to launch another game next year, as we mentioned before, but taking into consideration that our games business, our real games business only has -- like is still in its infancy stage, which is like two quarters old, even if we count up to now, I mean, it’s only six months out. We would be very carefully articulating our overall game strategy where we see more quarters of success. Hello?

Does that answer your question?

Yes, it does. Thank you.

Thank you. At this time, I will turn the call back to Brandi Piacente for closing comments. Please go ahead.

We would like to thank everyone for participating in today’s call. Please feel free to contact us if you have any additional questions. Thank you.

Ladies and gentlemen, that will conclude today’s teleconference. We do thank you again for your participation and at this time, you may disconnect. Get the Top 5 Stocks to Buy Now :