Ladies and gentlemen, thank you for standing by and welcome to Q2 2015 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Monday, July 27, 2015. I would now like to hand the call over to Mr. Eric Yuan. Thank you, sir. Please go ahead.

Thanks, operator. Thank you for joining us today to discuss Sohu’s second quarter 2015 results. On the call are Chairman and the Chief Executive Officer, Dr. Charles Zhang; President and Chief Financial Officer, Carol Yu. Also with us from Changyou are Co-CEO, Dewen Chen; CFO, Jasmine Zhou as well as CEO of Sogou, 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 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 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. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thank you, Eric. Thanks, everyone for joining our call. We had a good second quarter as the group’s total revenues reached $494 million, up 23% year-over-year. For Sohu Media Portal, we accelerated the business conditions from PC to mobile as mobile advertising contributed more than half of this segment’s total revenue for the first time. Sohu Video achieved 36% growth in advertising revenue, while the non-advertising business picked up steam. Sogou once again delivered better-than-expected performance as its revenues were up 62% year-over-year. For Changyou, its flagship TLBB PC and mobile games performed well and continued to generate healthy cash flows. These solid top line results were complemented by ongoing expense discipline, which has improved our overall financial performance. We have prioritized resources to support our key growth initiatives and we continue to rationalize expenses for video content, maintain stringent control over the headcount, and adopt a more cost-conscious approach to operate our business. Before I give more details about our key businesses, let me summarize our financial results for the second quarter of 2015. Total revenues of $494 million, up 23% year-over-year, 8% quarter-over-quarter. Net brand advertising revenues are $151 million, up 13% year-over-year and quarter-over-quarter as well. Of these, revenues from Sohu Media Portal or Sohu.com ex-Video, were $52 million, up 4% year-over-year and 16% quarter-over-quarter. Sohu Video revenues, $59 million, up 36% year-over-year and 17% quarter-over-quarter; Sogou revenue, $147 million, up 62% year-over-year, 27% quarter-over-quarter; online game revenues, $172 million, up 12% year-over-year and down 7% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com Inc. was $14 million, or $0.37 loss per fully diluted share. Now, I go through some of our key businesses. First, the Media business, our Sohu Media Portal, our mission is to build a leading platform that offers our users high quality news and…

Thanks Charles. For the second quarter, Sogou continued to post a strong growth in both users and traffic ticket. In particular, mobile search traffic jumped to over 110% year-over-year and 26% quarter-over-quarter and nearly caught up with PC traffic. For Sogou mobile keyboard, its monthly active users expanded further to 230 million, solidifying its position as the third largest mobile app in China. On the product front, we have made great strides in differentiating Sogou’s rich content to improve competitiveness. We started out by bringing unique content from Weixin official accounts and added features such as Weixin Headlines to our search app. In the second quarter, we began to establish content partnership with mainstream mobile applications, leveraging confidence at distribution advantage. Such advancement allows smartphone users to search and find the content within this app through Sogou search. In addition, we have been proactively developing artificial intelligence technologies based on deep learning in many areas, including Chinese language processing and image and voice recognition. Such technologies have been successfully applied to optimize our general search results ranking English search and voice search. For example, based on deep learning, the average of our voice recognition technology has decreased by 40% in the past year and voice search queries have more than quadrupled. Improved competitiveness gives us more leverage in expanding channels for mobile search. As a part of this, Sogou is now working with more mobile phone makers to either pre-install the Sogou search app or set Sogou search as the default search engine. This helps Sogou acquire more mobile search users. Financially, for the second quarter Sogou’s total revenues reached $147 million, up 62% year-over-year, which came in ahead of our expectations. Alongside the ramp up of mobile search traffic and benefiting from better adoption of mobile ads with customers, mobile search monetization showed strong traction. As a result, mobile ads contributed 25% of total search revenues, up from 12% a year ago. The operating leverage also helped us achieve good bottom line performance. Non-GAAP operating income was $29 million, which more than tripled from a year ago. Such healthy financial results should enable us to invest aggressively in our key growth initiatives in the second half of 2015. I would now like to turn the call over to our VP of Finance, Steven who will walk you through the group’s financial results.

Thank you, Xiaochuan. I will walk you through the financials of our key business lines for the second quarter. The profit and loss numbers mentioned below are all in a non-GAAP basis. First, by net business, in the second quarter, net brand advertising revenues were $151 million, up 13% year-over-year and quarter-over-quarter. Of this, revenues of Sohu Media Portal were $52 million, up 4% year-over-year and 16% quarter-over-quarter. The business posted net income of $8 million as compared to net loss of $1 million in the prior year. Revenues of Sohu Video were $59 million, up 36% year-over-year and 17% quarter-over-quarter. We are widening net loss as compared to the same period last year due to a higher content acquisition and bandwidth costs. Second, Sogou, for the second quarter, total revenues were $147 million, up 62% year-over-year and 27% quarter-over-quarter. Of this, search-related revenues were $135 million, up 59% year-over-year and 29% quarter-over-quarter. Before non-controlling interest, Sogou posted net income of $28 million as compared to $9 million in the prior year. Third, Changyou, for the second quarter, total revenues, including 17173, were $202 million, up 14% year-over-year and down 3% quarter-over-quarter. Before non-controlling interest, Changyou posted net income of $52 million versus net income of $2 million in the prior year. For the group, in the second quarter, total revenues were $494 million, up 23% year-over-year and 8% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com Inc. was $14 million, or $0.7 loss per fully diluted share. Now, let me provide our outlook for the third quarter of 2015. We are expecting total revenues to be between $470 million and $500 million, brand advertising revenues to be between $150 million and $160 million. This implies a sequential decrease of 1% to a sequential increase of 6% and an annual increase…

Thanks, Steven. As of today, two of our group subsidiaries, Sogou and Changyou, have both contributed sizable revenues as well as profits. Alongside with this, Sohu Media Portal is well on track to transform into a leading mobile news platform. And Sohu Video, for the first time, tested water in the film production business and achieved promising success, demonstrating the value of our original IPs. All these developments reflected that our group has strengthened competitiveness in China’s internet sector. This concludes our prepared remarks. Operator, we now would like to open the call to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Dick Wei from Credit Suisse. Please go ahead.

Hi, thank you for taking my questions. I have two questions. First question is on the mobile portal, mobile APP, I wonder what are the key consumer types, any kind of key differences compared with the PC portal as well as maybe if you can share more on the ad format on the mobile apps, how it’s picked up across different revenues? That will be great. Then I have a follow-up. Thank you.

Advertising format or the sector?

Yes, sector and the format.

Well, it’s still similar to the PCs, it’s the – the leading sectors are auto, e-commerce and general IT products and also actually coming out strong is really the consumer FMCG platform. And also the – can you hear me? So, I was just – blocked the speaker. So, you heard it, right, the leading three…

Yes.

Auto, yes, and general IT, okay. And also the smallest MME – the small media enterprise as that included all kind of things like English study or training or any kind of small businesses. The ad formats, it’s actually – when people using a News APP, we actually read news in terms of streaming stream like scrolling down and up. So, it’s actually in between these news, there is the streaming ads, I mean, within the stream, the reading stream, then there is the format. The formats can be a news item similar to a news item, it’s actually promotion, but definitely it’s noted, it’s a promotion. And also there could be a video window. So, it’s actually quite popular. So, it’s very different from the PC advertising.

Right, Charles. Just wondering so – if whether if you can breakout maybe the feeds type, how much is the revenue and maybe the startup screen or kind of video windows and any kind of sense of directionally how is it looking down?

We don’t have the – it’s quite messy, so many income. We don’t break it down. I mean, it’s hard to calculate that. So, we don’t have the exact number.

Okay, great. And maybe my next question is on the online video side, I wonder how is the subscription model kind of like coming along? Thank you.

We have a slow start. So, it’s still a modest user base, but it is a very important direction there we are launching into. And also it’s going to be related to our in-house production strategy so that if we get this user base up and more paying users, we are going to buy movies, we are going to produce our movie production, also in-house production of some really quality TV dramas and they will probably charge users for some of its services like people, like for example, if you take the Big Bang Theory, it’s updated weekly. So, some people probably won’t have the patience to wait every week, so you can enjoy the whole seasons and then you have to pay. So, those are all kind of reasons for people to pay. So, we are seriously looking into this new trend.

Okay, great. Thanks Charles.

Thank you. Our next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

Good evening. Thank you for taking my questions. I have a couple of questions about your Media Portal business, especially on the mobile side, could you talk a little bit about the advertisers as well as the budget you have observed from their expanding in mobile, for example, are we seeing a lot of overlapping of the advertisers between mobile and PC, are we getting new advertisers and what’s the reason behind it. And in addition to that, could you also tell a little bit about the budget allocation from these advertisers, are we talking about certain degree of cannibalization, are we talking about incremental budgets for mobile, any color on that front would be great? Thanks.

I think the – probably the overlap with the TV advertisers is less than video. So video advertising is actually a shift from TV advertisers to video. But for mobile News App, it’s just the regular advertisers, but now the – definitely, there are some advertisers. They are spending less on PC portal. So they are spending more on the mobile. So it is – it’s shifting toward the mobile. There is some cannibalization, if you put it that way. But because of the popularity of this new usage, consumer usage and also the really very sticky engaging advertising format, actually these formerly PC portal advertisers has actually been getting more interested in this mobile advertising. They are spending more. So, this is – the headcount – head advertising and then there is the small ME – small media enterprises. This is really something new. So these are the – what?

Thank you, Charles.

Yes.

Alright, thank you. Our next question comes from the line of Chun Ming from 86Research. Please go ahead.

Hi, good evening. Thank you very much for taking my questions. I also have one question regarding the mobile media portal app. And then one question related to the PC media portal app. For mobile portal app, I am wondering what is the end load for all the mobile feed ad. And what is the utilization rate of our mobile ad inventory so far?

You mean the feed ad, right?

Yes. The feed ad and the advertising…

Yes. It’s mostly on – it’s about every ten news items is the one feed, one advertising feed. So the news feed – I use the word streaming actually feed is the better word. So it’s really the news feed. And then every ten news, then you have a promotion, you have advertising promotion, so one to ten. And the inventory is quite usually up, right, quite high. Yes, its 6% to 70%, so that means it’s quite advertisers, they would really like it. So – and one important progress for our News App, which I didn’t – I think, in the script I didn’t describe it. It’s really that for Sohu, News App is very unique because it provides the two feeds – two kinds of feeds. One is really the editorial content like the content of the feed that edited, produced or presented and delivered by the Sohu’s editorial team. And you can – at the front page and also on the different channels. And then you have this recommended feed, basically recommended by the engine, by the smart engine that’s tailor-made to each person, a personalized feed. So in terms of the recommended feed, the inventory increased a lot in the second quarter because they are just becoming smarter with technology improvement. So the inventory, that’s where we are going to see a major growth, so that for each unique users we probably consume more of recommended feeds, that means more inventory.

Okay. Charles, my next question is related to the PC Media Portal revenue, we saw the revenue declined by more than 2% sequentially, which is the highest drop in the last few years. I am just wondering, should we expect similar trends to going forward with PC revenue with Sohu Media Portal or are we maybe hopefully seeing some pickup?

Could you put the question again?

Sorry. So my question is related to the PC Media Portal revenue, we saw more than 10% sequential decline for this part of the revenue, which is the highest sequential decline over the last few years from the first quarter to the second quarter. Should we expect a similar trend going forward for PC revenues for the Sohu Media Portal or maybe are we hopefully seeing some slowdown in the decline going forward?

Okay. I think, first of all the – there is a general trend of the PC portal advertising declining, but I hope that by actually there is a lot of – there is just a need – some improvement because there are still many people still used to browse the Internet with the PC. So I think we can – we should do a better job in slowing down that decline. So and – and also actually, small media enterprises also have interest to advertise on the PC. So it is generally coming on, but we hope we could stop the fast decline – descent. And also on the other hand, we definitely will accelerate the growth of the mobile side, so the matter of fact that you will see growth of overall media portal. And also with this new type of advertising and also the cost structure is really nice. Okay. So the cost structure of the mobile side is very good so that’s why the media portal made independent – separately made $7 million to $8 million profit, if you calculate separately. And so I think the decline in PC advertising is also another reason – or actually key reason is really the industry’s decline because they actually – they advertise mostly on PC and the macroeconomic situation and also a lot of auto companies car makers, car companies downsized their promotion budget. That can be – we feel that impact is rather category, including video.

Thank you very much, Charles for the very detailed explanation. Very helpful.

Thank you. Our next question comes from the line of Alicia Yap from Barclays. Please go ahead.

Hi, good evening Charles and everyone. Thanks for taking my questions. I also have a question related to Sohu Video and also Sohu Media Portal. First of all, on the video, it does seem that the video growth rate decelerate quite a bit from the last call, couple of quarters. And so if I use the third quarter guidance, if I use the mid-range of the guidance, it kind of implies a sequential decline for the video business. And then on the year-over-year basis, the slowdown seems to go into high-teens or maybe the low 20% year-over-year growth. So, can you elaborate what’s happening here for the video business, is it more the overall industry trend, like Charles you just mentioned or is it more the Sohu-specific issues? And then similarly for the Sohu Portal business, also using the guidance range, it also imply the best – the portal business is probably about flattish year-over-year, so any color on this? Is it related to the overall advertising demand outlook? Have you seen any slowdown in the macro-economy that impact the brand demand? Thank you.

Okay. For the video business, it’s definitely growing slower than before at 36% this quarter. So, it is – a few reasons, one is really the macroeconomic situation. It’s had an impact, like the auto industry and also some of the major brand advertisers like also the state-owned companies. So, we feel – we felt the impact of this macroeconomic situation, especially for the advertising. And also, the – we rationalized our spending on content, because especially the head advertising with some of the major advertisers, they really advertise heavily on some of the events in some of the hot content that is becoming very expensive. So, the more expensive content we buy, the more money we lose. So, this – so, in Q2 – so, we rationalize our spending on some of the content and try to stay in the game until some really new business models emerge. And also third reason is really the new policy towards – the tighter policy towards American TV drama, which Sohu, as the leading destination for American TV content now is affected because of the downsizing or the reduction or amount of American TV dramas. Although the Big Bang Theory coming back, but still the overall American content is much less than before. So that the overall idea is that we will spend as necessary on some really good content that with very precise bet on the right content as we have 9 out of the 10 most popular dramas. And actually, we are moving away a little bit from the variety of shows, which draw a huge amount of attention and some of the dumb advertisers to spend a lot of money in the quarter, but the variety show is really not a long-term content, because after it’s there unconsumed, then…

Okay, great. Thank you so much for the detailed answer, Charles.

Thank you.

Thank you. Our next question comes from the line of Fan Liu from Goldman Sachs. Please go ahead.

Hello, management. Thanks for taking my questions. Could the management add more colors on the operating metrics for Sogou, like the numbers of customers you have in the second quarter? And also, what’s the contribution of Weixin search in terms of both traffic and also revenue? And also on video side, Charles has mentioned that the rationalization of expenses for video content. So, would the management shed light on how is our content spending doing in terms of percentage of revenues? And also on the portal side, would the management show us that how is the performance of portal business, excluding focus in second quarter and what’s your expectation for this segment in the coming quarters? Thank you.

So, in the second quarter, the number of search advertisers for Sogou is about 65,000, representing a 15% increase year-over-year. So, I think the essence of this Weixin search function is to increase – is for Sogou search to index its unique content and to improve our search quality and user experience and of course can generate some traffic, but we don’t have advertising on that platform.

About video content spending, compared with last year, our content spending increased 60%. This is – we bring the spending under the 60 – about 60% level, so less than our competitors, which mostly doubled their spending of content. So, we – that’s what mean, we mean rationalize our content spending and try to – for the portal business, so it’s – because it has the better cost structure and also better monetization mechanism, so it’s – the overall revenue is flattish, like 4% growth, but actually, it made $7 million to $8 million profit. And going forward, I think this trend will continue.

Sorry. Do you ask a specific question on focus performance?

Yes, actually – it’s actually how is the performance of portal been excluding focus in second quarter?

So, when we talk about Sohu Media Portal, it actually excludes focus performance. Yes, so – but I can give you some colors on focus. For the first half, focus, the top line, it book around the mid-single-digit growth in revenues.

Okay, okay. Thank you, Eric.

Thank you.

Thank you. Our next question comes from the line of Natalie Wu from CICC. Please go ahead.

Hi, management. Thank you for taking my question. Just a quick follow-up with the prior question, you mentioned that the Focus, there were updates vertical actually recorded like a single-digit growth in the first half of 2015, right? But I noticed if my calculation is right, actually the second quarter, the growth regarding Focus.cn is actually an active one. So, I mean, I thought the real estate market is on a recovery trend, just wondering what is the reason behind the Focus media – sorry, the Focus.cn’s performance in the second quarter and what’s your outlook regarding this vertical?

Hi, this is Carol. Regarding Focus.cn, the developers have trended away from spending pure advertising budget on the media side. So we are in a transition stage where we transform ourselves into a transaction platform and that explains why the numbers are not as good as they wanted to be.

Okay. Thank you, Carol. Just a quick following up, considering current market situation, will you consider of coming back to Asia and what’s your development strategy regarding maybe video and you just mentioned real estate vertical, but what about Sogou, is it still considering about getting listed in the U.S. markets?

So, Natalie, this question is for Charles or for Xiaochuan or who else?

Maybe both of them.

Well, I think that I don’t have the answer for you.

Okay, perfect. Thank you.

Thank you. Now next question comes from the line of Chi Tsang of HSBC. Please go ahead.

And then it’s on the potential to integrate Sogou within WeChat and the potential monetization opportunity. And then secondly, in terms of video I was wondering if you can comment on the potential for industry consolidation in the online video market? Thank you.

So as I mentioned earlier, actually as Sogou leverages the Weixin search function, primarily to improve its search quality and generate – of course it generates some traffic, but we don’t have monetization plan yet.

And is that a large opportunity going forward our why did you not have a monetization plan yet, just curious?

Let me explain it. Well, it’s actually – with the feature, added feature of WeChat content can be searchable through Sogou, it has a very good edge, competitive edge compared with Baidu. So it’s actually provided a strong reason for people to switch from Baidu to Sogou. But the search engine people always use one search. So basically, it’s actually when you search something, you just input a keyword on the box and then it come up, brought up with all kind of information. So you don’t click a WeChat search, just click search and then you see other content and WeChat content. So it’s actually indirectly the WeChat content contributed to the overall user growth of Sogou. So in that search page, you can monetize. So you can say indirectly, WeChat content is being monetized.

Understood. In terms of – I am just wondering, given certain macro pressures on sort of video, I was wondering if you can comment on any potentiality for industry consolidation in the video market? Thank you.

Well, it’s – after 2 years or 3 years, there are still these players and so it’s unlike the social networks, where you basically have one or two large players consolidate, it really is exponentially attracting, sucking up all these other users. But like video industry, it’s actually, allow multiple players to exist because now that that exponential. But new business model do emerge. And in the first few years, the battlefield is really about really how much money you can spend to buy the head content. Of course, having said that the products quality and also users friendliness that contributes. But and then – whenever I am doing well on that front, then it’s really up to the money you spend and then the more money you spend it’s more users you have and the more revenue you have. But then the more loss you incurred. So that’s not really a good business model. But going forward, we hope that the new business model will emerge so that we will – so it’s still not consolidating.

Okay.

Thank you. Our next question comes from the line of Henry Guo from W.R. Hambrecht. Please go ahead.

Yes. Thanks for taking my question, real quick one. So, on the – I think management mentioned during the prepared remarks that Jian Bing Xia’s success. So, my question is could you elaborate more what’s the potential financial impact for the second half of this year from this movie to the Sohu group? Thank you.

Yes. We said its $40 million – profit of $80 million, right?

$80 million.

Yes. Its $80 million profit. I think it should be for Q3, that’s where the box office is.

Thank you very much.

Thank you. Now next question comes from the line of Thomas Chong from Citigroup. Please go ahead.

Hi, thanks for taking my questions. I have two questions. The first question is regarding the movie sector, can Charles talk about what you think about the outlook for the movie sector given you see some large producers, like Huayi and Enlight Media in the space. And secondly is regarding Sogou, can management talk about any O2O initiative in this regard? Thanks.

Well, for the movie business, it’s – well we will – definitely China’s offline box office is theatrical release, industry has really exploding. So it’s an excellent opportunity, it’s something that outside our original plan for video business. But once we develop our paid user business, then it’s going to be – when we have a paid model on our platform, our moviemaking business will be in line – will be aligned with our platform business because once we produce a good movie, then we can sell both through our online – and first through the box office and then through online. So we will enhance our in-house production capability once we have the sizable user base for paid users. Definitely, we will not only rely on in-house production for our content to stay online and offline, we will buy movies from producers – by company like Huayi and others, it’s all – it’s upstream for our content.

So, actually there are a lot of O2O companies out there and they have a lot of third party applications. So for Sogou search, we are actually working with Tencent apps – developing apps so that this ultra lab services can be infinitely showed on the Sogou search platform. We expect that compared to the similar product in the market, we expect to cover a broader range of O2O services.

Thank you. That comes to the end of our session for today. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.