Thank you for joining Sohu's Fourth Quarter’s 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objection you may disconnect at this time. I'd now like to turn the conference over to your host for today's conference call, Eric Yuan, Investor Relations, and Director of Sohu. Please go ahead, sir.

Thanks, operator. Thank you for joining us today here to discuss Sohu's fourth quarter 2014 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; President and Chief Financial Officer, Carol Yu. Also with us from Changyou is Co-CEO, Dewen Chen; COO of Sohu, Xiaochuan Wang; Vice President of Sohu and COO of Sohu Video, Ye Deng; VP Finance of Sohu, Steven Sim. Before management begins their prepared remarks, I'd like to remind you of the company's Safe Harbor statement in connection with today's conference call. Except for 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. For more information about the potential risks and uncertainties, please refer to the company's filings with Securities and Exchange Commission including its registration statement and most recent Annual Report on Form 10-K. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thank you and thanks to everyone for joining our call. Sohu Group ended 2014 with the encouraging quarter as total revenues comfortably top our prior guidance. For the fourth, quarter total revenues reached $477 million, up 24% year-on-year. Sohu Media Portal saw the rapid shift of users to our mobile products, Sohu News App and Sohu WAP portal where revenues accounted about one-third of total revenues. Sohu Video achieved an overall 60% annual rise in revenues, also one-third of which was from mobile. Sogou continued to see strong momentum as its top-line grew by 70% year-on-year with its profit hitting a new high. Changyou's TLBB PC game continued to generate sustainable revenues while TLBB 3D mobile game gained initial success with booking gross revenues of over $65 million in its first two months of operation. In 2014, we achieved solid progress on a number of key mobile initiatives for each of our business lines. Sohu News App and Sohu WAP portal now collectively have almost 50 million daily active users. More than 60% of Sohu Video's traffic comes from mobile. Sogou's Mobile Keyboard is the undisputable number one Chinese input application on both iPhones and Android phones, while mobile search also showed strong momentum. And Changyou made a breakthrough in mobile game leveraging its extensive experience of developing hard-core MMO games on PC. On the other side, in the second half of 2014, we took measures to realign our cost structure and rationalize expenses. For Changyou, we reduced the overall workforce by about 1,000 or 15% from the peak level and significantly lowered marketing expenses of some non-gain Internet products. We’ve also streamlined Sohu News editorial team as well as shutdown some local offices for auto and focus where performance did not reach our expectations. To date, the re-alignment has…

Thank you, Charles. Hello everyone. In 2014 Sogou continued on its rapid growth trajectory, total user base surpassed the 500 million covering 96% of Internet users in China. Full year revenues reached $386 million, up nearly 80% year-on-year. Our user base especially on mobile faster growing, Sogou mobile search continuously enhance its competitiveness and further solidified its No.2 position in the market. And Sogou Mobile Keyboard with 210 million monthly active users maintained its definitive position as the No.1 Chinese input application of smartphones. At the same time we made good progress improving our monetization capability offering leverage on the rapid revenue growth made 2014 the first of profitable year in Sogou’s [Audio gap]. With deepening cooperation with Tencent’s various products in particular Weixin we are building our competitive edge through product differentiation supporting the launch of a unique function that allows Sogou users to search content published by Weixin's official accounts this past summer. In our latest version of our mobile search app we added a new feature called Weixin Headlines. Weixin Headlines surfaces the most popular and breaking news stories being shared on Weixin based on his or her browsing and searching history, as a powerful ecosystem Weixin presented massive resources, we expect to leverage these resources to constantly enhance the competitiveness of mobile search. At the same time our flagship product Sogou input method has never stopped innovating on both PC and mobile. Sogou input method is one of the top three most popular applications by market penetration in China. Sogou Corporation with QQ and Weixin, we offered users a better experience while we chat online in addition we support users to log in Sogou input method using their QQ account. This drives the faster growth of log-in arrangement helping us to develop more personalized services. In…

Thank you, Xiaochuan. I will you through the financials for key business lines for the fourth quarter and 2014. The profit and loss numbers mentioned below are all on the non-GAAP basis, first brand ad business. In the fourth quarter net brand advertising revenues were $148 million, up 20% year-over-year and down 1% quarter-over-quarter. Of this revenues of Sohu medium quarter were $49 million down 5% year-over-year. The business posted net income of $3 million versus net income of $1 million in the prior year. Revenues of Sohu video were $51 million up 64% year-over-year. Sohu video posted net loss of $21 million versus net loss of $23 million in the prior year. For 2014, brand advertising revenues were $541 million up 26% year-over-year. Of this revenues of Sohu Media Portal were $198 million up 9% year-over-year. Sohu Media ported net income of $10 million versus net loss of $6 million in 2013. Revenues of Sohu Video were $176 million, up 61% year-over-year. Sohu Video posted net loss of $110 million versus net loss of $93 million in 2013. Second for Sogou, for the fourth quarter total revenues were $119 million, up 70% year-over-year and 12% quarter-over-quarter of this search related revenues were $94 million, up 73% year-over-year and 11% quarter-over-quarter. Sogou posted net income of $90 million as compared to [new] in the prior year. For 2014, total revenues were $386 million, up 79% year-over-year, a total net income of $38 million versus net loss of $5 million in 2013. Third Changyou, for the fourth quarter total revenues including 17173 were $216 million, up 11% year-over-year and 19% quarter-over-quarter, before non-controlling interest and other counting adjustments Changyou posted net income of $24 million versus net income of $43 million in the prior year. For 2014, total revenues $755 million,…

We are pleased to see strong financial momentum across businesses as a Sohu Group. Notably in 2014, Sohu gained strong traction in mobile search and posted nearly 80% revenue growth. For Changyou, TLBB PC game remained healthy, while TLBB 3D mobile game contributed meaningful new revenue streams, Changyou has now returned to profitability with continued margin improvement seen for 2015. All these developments enable us to make rational investments in online video and other promising initiatives. This concludes our prepared remarks, operator we will now like to open the call for questions.

(Operator Instructions) Your first question comes from the line of [indiscernible] from Credit Suisse. Please ask your question.

Hi, evening management thanks for taking my question. I just want first of all congratulations on the impressive growth in your mobile search revenue, just wonder if you can provide colors on your mobile search traffic contribution and how that compared to 4Q ’13? And can you give us a breakdown of the sources for your mobile search traffic?

In terms of mobile traffic most of them are coming from -- there is a platform with QQ mobile accounting a big portion of that. Mobile search traffic definitely complements increasing percentage of our total traffic but we wouldn’t disclose the numbers. It hasn’t surpassed the QQ traffic level.

Thank you. I have another housekeeping question can management remind us of the video content budget for the year 2015? Thank you.

Well, we’re not disclosing our video content budget for 2015, but I can say that Q1 is really a high cost quarter because of the -- China the Sing My Song -- and also the rest of the quarters of 2015 I can see that the costs will be declining.

Thank you. And your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

Just a question on the advertising fees, could you comment on the sentiment of some of your larger advertisers when you interact with then on 2015 budget, how is that comparing with our last year? Thank you.

You mean our advertiser who are video or video portals?

In general the [indiscernible] online advertising budget, Charles could you like to shed some color on how they are thinking about different media and in general whether they feel some pressure from their own business? Thanks.

Well, the general trend is definitely a shift from TV advertisers to video. And also from the portal advertisers they’re now very excited about mobile especially News App.

Can I have a follow up question, Charles when you mentioned about mobile advertising opportunities you see the industry going more towards performance based pricing rather than just your time based pricing like on the PC side?

It’s both. First of all, let me finish the question basically people are very excited about mobile applications and also the space I mean for advertising is enlarged because mobile phones are with people for like more than 10 hours a day, while PC only with people for two hours so you have much longer time to advertise and so post advertising advertisers are also very excited -- very interested to expose their brand because a small screen of the mobile phone with such a close distance to your eyes actually have brand impact if you have a banner or an embedded banner or text links that while people are reading in their reading in the feed lines so it’s actually -- people are very excited about advertising on mobile both from brand point of view and also from a -- in fact advertising for click through and also we are now redevelop our advertising systems to accommodate this small media enterprises to care for results through the referrals and all those also in Apps. So we are developing this new advertising system to accommodate this smart SMEs and even companies to advertise on our portals -- on our mobile portals.

Thank you. Your next question comes from the line of Zhao Ming from 86Research. Please ask your question.

Good evening. Thank you very much for taking my question. My question is regarding your mobile advertising revenue contribution for the Media Portal, that business. You mentioned that the Sohu Media Portal revenue was one third of the revenue comes from mobile. I am wondering, what is the revenue contribution from last quarter and as of the end of 2013. And how do we project the growth of mobile ad revenue this year? Thank you.

Actually it’s growing fast. In the previous quarter it’s about 20%, so now the Q4 is -- actually Q1 we’re looking at 40%, so you’re looking at 2015 probably well surpassed 50% of our revenues will come from mobile advertising. And we’re actually in a transition not only traffic shifting, while we maintain our PC traffic basically it’s a fence. Our PC traffic stayed flat, while out mobile traffic grow fast and also we’re in a condition period to hit for minor [position] not only the just some advertisers who’ve advertised with our PC portal before are moving towards mobile, but also we’re developing our advertising system to develop new advertisers that have never advertised with us on the PC Portal.

Thank you, Charles. And for end of 2013, we have any revenue contributed from mobile for the media portal or was that very small?

Very small, zero.

Thank you, your next question comes from the line of Alicia Yap from Barclays Capital. Please ask your question.

My question is related to Sogou, so can we get a sense of the numbers of advertisers for this quarter for Sogou and then are there any revenues that coming associated with the Tencent Weixin searched profit, if not, any chance for future monetization opportunity? And then lastly related to Sogou is that for the 2014 we achieved close to 8% margin, so what would be the normalized net margins for Sogou business going forward? Thank you.

In terms of the number of advertisers in the fourth quarter, it reached 60,000, an 8% increase from the prior quarter. We haven’t considered monetization from Tencent Weixin search, so I think most of implications were exclusive Weixin search that we want to view of products differentiation so that we can attract to users to use our Sogou search app. For 2016, we still put user acquisition and expansion of market share on top of our agenda. We will step up investments in R&D and marketing promotion. We start to see some fluctuations margins at the absolute level of our bottom line is as definitely going to increase in line with our revenue skill.

Let me add one point is that actually WeChat search, the search result automatically appeared on the page search -- default page, so because of this result it enhanced the web page I mean the page search results, so it helped to grow traffic. So it’s actually indirectly contributing to the Sogou’s revenue growth.

I see can I just follow-up and more asking on the normalized net margins going forward let’s say longer term two to three years later, what could be the Sogou margins profile looks like? Thank you.

It is technical the search engine, right. Search engine, if you study other search engine the normalized margin it’s just typical.

Thank you. And you next question comes from the line of Natalie Wu for CICC. Please ask your question.

You mentioned in your remarks that relentless efforts will be adopted to promote Sogou, so I am wondering can you give us some color on such possible marking measures in 2015, will it includes pre-installation of line brand app or something else. And what will be your budget on these endeavor?

In terms of channel, we plan to increase the [indiscernible] installation on a mobile site. We don’t disclose financial -- the exact investment with them to make in the area. We’re definitely going to step up investment because product differentiation offer us great opportunity to increase brand awareness of Sohu search.

I have another question if I may, you said that real estate market has been improving, wondering if you noticed any recovery sign on your real asset vertical Focus.cn and how do you see it will grow this year?

We do see a nice recovery in terms of revenue for Focus.cn for Q4, but when we moved into Q1 is a typical slow season again for the real estate market. It's too early to tell, how would you like for the rest of 2015 as everybody knows because it's very government policy driven sector.

Thank you. And your next question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.

Hi, good evening. Thanks for taking my question. First question is for Xiaochuan, can you discuss the monetization effectiveness of mobile search versus PC in terms of the cost per click or revenue impression, how would you compare PC search versus mobile? Also in terms of the advertising mix, which category or industry are you seeing strong demand from and which industry appears weak to you?

So action mobile RPM is approaching the level on PC and we have observed that pretty much it’s the same section on mobile as compared to PC, but is basically healthcare, ecommerce gaining, business service and machine services.

And also for Charles, you highlighted the cost discipline that management have introduced to different parts of the business such as Changyou and Focus and you mentioned that the cost reduction will take effect probably 2015. So is it possible to elaborate on that maybe give us a more specific guidance regarding to what type of profitability we should be looking at in 2015? Thank you.

Well, over the later part of 2014 and the first quarter of 2015, we already have realignment basically cutting headcounts at Changyou and also [auto] and Focus and also the ad authority team of Sohu and across the board. So, I think we are already having headcount reduction of about 13% compared with our peak level last year and that’s basically the headcount cut -- basically in Q1 we almost already finished completing. And also for the -- I think the hit count is really coming from the video content cost. So as I said, video content cost will be -- I mean first quarter it's very high because of the [indiscernible] and also these amortization of previous accumulation or previous cost of purchase of content and the rest of the year will be improving -- that there will be decline in the cost. And so because we are going to spend a minimum amount of money buying the head content, means those bit by bit TV drama and those variety shows to spend minimum and really spend smartly, to maintain our market-share -- traffic share market-share and same time basically and if we do spend some money and buy those very expensive ad content we’re going to use our creative marketing strategy and also our overall platform the portal platform to promote so that we will spend the minimum amount compared with our competitors and maintain -- sustain our market share and at the same time relatively pursue self-production and add [indiscernible] with our success with track record sale production and also the PGC professional generated content. So these are our strategies for content cost which is a big part of our cost structure. And also promoting channels and also tightening up all the management and make sure that people are really performing. So I think the headcount cost will show up in the later quarters of 2015.

Thank you. And your next question comes from the line of George Meng from Morgan Stanley. Please ask your question.

My question is related to your video business, first of all a housekeeping question so what’s your revenue -- video revenue contribution from mobile? You mentioned traffic 60% so I just wondering what your revenue contribution is and also what’s the incremental revenue contribution from 56.com in this quarter? And in general for the video business you mentioned that you are going to control the cost while try to keep your market share and there your first product guidance is actually implies about 70%ish, if I am correct? And you mentioned you are going to lose maybe US$15 million in the first quarter than in the later quarters costs should go down. So can we estimate that for example the full year loss from the video business will be less than the run rate in the first quarter and also because everybody -- this space is still very competitive to everybody is still spending a lot on content and bandwidth? So what do you see as the end game and how soon do you think we can get there? Thank you.

So you have many question, first of all the mobile revenue it is a third and this part I think will continue to grow probably not growing as fast as our Media Portal, which as I said will be 50%. But it’s growing basically the fraction the part of mobile advertising on video will be more than one third as we open up our video traffic resources and also to ramp up our advertising systems and to our mobile. And so to answer your question basically the run rate -- yes the cost will be less than Q1 so you cannot calculate our off base based on Q1 revenues because the Q1 is really -- because of the [indiscernible] that very expensive item and also some of the protected cost from previous purchase. So I think really the end game for this industry is really that we will -- PGC professional generated content that’s produced by the private studios and producers in the market will contribute to a variety of content just like the YouTube demonstrated and also a much more sophisticated advertising system that enable advertisers to advertise in many more ways not only the brand advertising and also brand advertising associated with not only associated video views but also with time exposure and also the long tail -- half tail, long tail small media enterprises to advertise and to have targeted advertising so that to maintain the momentum of advertising growth and at the same time to basically cut down the content cost and at the same time using P2P technology and other technologies to improve the bandwidth cost. And also part of it also come from the paid services like movies. So I think that’s -- we’re trying to make this business model work although our competitors are really trying basically competitor on our spending, we compete on smart spending and also on the business model conversion, I mean reinvention of the business model.

Got it, that’s very helpful. Just quickly so the contribution from 56.com and also the contribution from your paid services if you can comment on that.

That does not -- so 56.com is really -- will be contributing to our PGC strategy. So it’s not really contributing any significant amount for our income revenue and I also we had a lot of cost after the exhibition.

Got it and the paid services?

The paid service is not a large amount so it’s not significant yet, but we already launched our system and we’re securing some really good quality international content, especially American content for the service. So I think it will be contributed to some meaningful amount probably in 2016.

Thank you. And your question comes from the line of Vivian Hao of Deutsche Bank. Please ask your question.

I’ve got two questions, first one, within your portal business would give us some color on the strategies for Sohu Focus, I assume we’re trying transform from all sort of vertical portals to maybe more transactions driven marketing platform? Second is for Xiaochuan, for Sogou business what’s seemed impressive improvement in margins, but given that the mobile related revenue jumping up very fast, whether it be gradual impact on search margins due to the increasing mobile traffic acquisition cost? Thank you.

Yes, I think we’re on track towards that model but again it’s still a mix between advertising and the transaction base. We will see more of those of the conversion coming in to 2015.

Actually we’ll make trade progress improving our mobile monetization carefully, despite the increase in mobile investments, we do see some -- we do expect some fluctuations on margins but we don’t think it will have a material impact on our margins.

Next question?