Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Huang Pu, Investor Relations Director of Sohu. Please go ahead.

Thanks, operator. Thank you for joining us today to discuss Sohu's Third Quarter 2021 Results. On the call are Chairman and Chief Executive Officer, Dr. Chaoyang Zhang; CFO, Joanna Lu; and Vice President of Finance, James Deng. Also with us today are Changyou CEO, Dewen Chen; and the CFO, Yaobin Wang. 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 on this call may contain forward-looking statements. These statements are based on current plans, estimates and the 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 the Securities and Exchange Commission, including the most recent annual report on Form 20-F. Please also be reminded that Sogou's results of operations and the disposal gain recognized in this quarter have been classified as discontinued operations. The results that we talk about are related to continuing operations only. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thanks, Huang Pu, and thank you to everyone for joining our call. For the third quarter of 2021, facing spot outbreaks of the COVID-19 pandemic and uncertainties in the macroeconomic environment, we continued to focus on refining our technology and developing products. Overall, we delivered better than expected top line and bottom-line performance, thanks to the solid performance of our online game business. For Sohu Media, we kept improving our products while constantly expanding premium content and stimulating social media distributions, which further consolidated our influence as a mainstream media platform. For Sohu Video, we continued to focus on our "Twin engine" strategy. We applied our advanced live broadcasting technologies into various events and scenarios as an effective tool for generating even more video content. For Game Changyou, our online games performed well during the quarter, with its revenue exceeding the high end of our prior guidance. Now let me go into details about each of this business -- I'll go in each of the business in detail in a moment. But first, a quick overview of our financial performance. For the third quarter 2021, total revenue was $216 million, up 37% year-over-year and 6% up quarter-over-quarter. Brand advertising revenues were $34 million, down 18% year-on-year and 8% quarter-over-quarter. Online game revenues were $167 million, up 65% year-over-year and 10% quarter-over-quarter. GAAP net income from continuing operations attributable to Sohu.com Limited was $12 million compared with a net loss of $15 million in the third quarter of 2020 and net income of $22 million in the second quarter of 2021. Non-GAAP net income from continuing operations attributable to Sohu.com Limited $17 million, compared with a net loss of $7 million in the third quarter of last year and net income of $25 million in the second quarter of this year.…

Thank you, Charles. I will walk you through the key financials of our major segments for third quarter of 2021. All of the numbers that I will mention are on a non-GAAP basis. You may find a reconciliation for non-GAAP to GAAP measures on our IR website. For Sohu Media Portal, quarterly revenues were $70 million, down 32% year-over-year and 23% quarter-over-quarter. The quarterly operating loss was $37 million, compared with an operating loss of $23 million in the same quarter last year. For Sohu Video, quarterly revenues were $23 million, flat year-over-year and up 1% quarter-over-quarter. The quarterly operating loss was $10 million, compared with an operating loss of $12 million in the same quarter last year. For Changyou, quarterly revenues, including 17173, $117 million, up 63% year-over-year and 10% quarter-over-quarter. Changyou posted an operating profit of $79 million compared with $33 million in the same quarter last year. For the fourth quarter of 2021, we expect brand advertising revenues to be between $28 million and $31 million. This impacts annual decrease of 26% to 33% and a sequential decrease of 8% to 17%, online game revenues to be between $140 million and $150 million. This implies annual decrease of 23% to 29% and a sequential decrease of 10% to 16%. Non-GAAP net loss attributable to Sohu.com Limited to be between 0 and $10 million, and GAAP net loss attributable to Sohu.com Limited to be between $3 million and $13 million. This forecast reflects our current and preliminary result, which is subject to substantial uncertainties. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

[Operator Instructions] We have a question coming from the line of Alicia Yap from Citigroup.

I have a few questions regarding the advertising. So first of all, can you elaborate a little bit more the weakness of these online ad revenue that we saw in 3Q? How much of that was due to the soft macro that leads to the ad budget cut? And just wondering, is there any impact from the recent regulations on the celebrity or even the crackdown of the fan-based economy that could impact your video ad revenue? And then as related to that for the third quarter, can you remind us which vertical -- industry vertical that actually have suffered in terms of their ad budget is coming in lower than expected and which vertical actually outperformed your expectation? And then as regard to the fourth quarter online ad revenue guidance, is that reflecting the continued macro weakness? Or is there any specific ad industry vertical that will be actually suffer more from the weakness? A – Chaoyang Zhang : For both the third quarter and fourth quarter, it’s more of the vertical industry, like the real estate. We had some exposure to the real estate industry at some of the companies, yes. Then there’s – secondly, the – yes, there is also some factor of macroeconomic situation, yes. But in terms of regulatory, fan base, those kind of things, there’s very little impacts on the ad revenue. Q – Alicia Yap: Okay. So the same thing for fourth quarter because of the real estate, so that’s why the guidance came in soft? A – Chaoyang Zhang : Yes. But the fourth quarter, the -- I think the impact varies, the impact will be less, right? And we are -- basically, we organized our sales team efforts to expand our ad base and to have new kind of customers to fill into, and yes. Q – Alicia Yap: Maybe can you remind us a little bit your maybe first, top 3 or whatever top 5 category be before, which is like, let’s say, a year ago, what is the top 3 ad category? And then for this year, 3Q, given some like impact, what are the top 3? A – Chaoyang Zhang : Yes. Definitely, the auto is the number one and then FMCG number two and real estate number three, right? So the impact really on the release. And also, there's some -- the pandemic, because our brand advertising depends a lot on the content marketing and events driven advertising. Because of pandemic, some of those major key events, we couldn't do it and we cannot do it. That has some impact. So yes. So the top 3, yes. And also, there's also some kind of impact because of the shortage of chips. So some of those other companies, their marketing plan changed, right, due to lack of chips and the lower production rollout or marketing activities.

I see. Okay. That's very helpful. And then if I have a last one, if I may. The gaming guidance that you have for fourth quarter on the sequential decline, is that because the performance of this Little Raccoon: Heroes, you are expecting them to drop off the performance in fourth quarter? And then any expansion plan -- expansion pack plan for TLBB in the fourth quarter?

Yes, Chen Dewen can answer that.

[Foreign Language]

Yes. The [indiscernible] next quarter revenue was mainly due to Little Raccoon: Heroes decline. And for other TLBB games, we will update for expansion pack regularly.

We have the next question. This is coming from Thomas Chong from Jefferies.

Perhaps a question with regarding to the online games regulatory environment. Can management comment about how the sector is trending? And any color with regard to gaming approvals? And then my second question is about Metaverse. How should we think about this new industry trend and our thoughts about our long-term spending or investment into this area?

[Foreign Language]

We don't have further comments on the approval issues. But for [indiscernible], one of our key titles, we have got the license approval last year and for new TLBB because recently, we don’t – we won’t launch it. So it’s not a big concern for Changyou. A – Dewen Chen: [Foreign Language] A – Chaoyang Zhang : For Metaverse, we actually have built up a small team to do more research and try some new things based on the new opportunities brought by the Metaverse concept. Thank you.

[Operator Instructions] We have the next question. The next one comes from the line of Eddie Leung from Bank of America. Q – Eddie Leung : Just a quick follow-up on the advertising weakness. So we understand that there is a demand issue because some of the advertisers. Could you also talk a little bit about potential you have seen from the data front, including Adpost new privacy policy as well as the new data protection law in China? A – Chaoyang Zhang : That is a small impact or no impact. There is some more stricter requirement for the kind of advertising you can have, the format that – so that like the effects, app front loading page, the area that required to be smaller and not trick people into click it. So those kind of things. But that’s not a major impact on the advertising. And so private policy, yes, we’ve been very – Sohu has been very careful and very compliant with – has been very – we are not very aggressive in terms of collecting users’ data and take advantage of users’ data to do marketing and targeting. So that’s why this kind of policy have least effect or impact on Sohu.

We have the next question. This is coming from the line of Alex Ko from Morgan Stanley.

So one follow-up on the Sohu Media Portal quarterly loss. What is it relative for the social – sorry, for the Sohu Video quarter loss, we’re still having a pretty good cost discipline. So just want to get a sense of like how that investment plan onwards for the Sohu Media Portal and Video business? A – Chaoyang Zhang : So the loss for Sohu Video is increased because the advertising site has more exposure to real estate industry. Well, the Sohu Video advertising are mostly about FMCG advertisers. And also, Sohu Video’s half of the revenue coming from the subscription of dramas, right, the paid subscriptions. That’s why it’s [indiscernible]. And also we do – especially we are, yes, increasing kind of a little bit in the third quarter and in the future, we invest more into user acquisition. So spending on Sohu Video – on Sohu Media first. So that explain why the media loss is larger.

We have the next question. This is coming from the line of Alicia Yap from Citigroup. Q – Alicia Yap: I just have one question on the use of cash. So in addition to the buyback that you announced, would you also consider a onetime special dividend given the amount of the cash that now you have? A – Chaoyang Zhang : Use of cash, first of all, I think the -- besides the buyback, we'll spend -- we'll basically use it for user acquisition because over the last few years, the last 2 or 3 years, we've been innovate on our products, like our better content and better product features with our Media Portal and the Sohu News App and also, the Sohu Video innovations. But we -- in order to basically to prove it, prove the viable those innovations or those product features in the right direction and prove the traction of it, you have to have more users to prove it. So that's why we've been underspending in the last few years, tried to use profitability. So not on user acquisition. So with this newly again, the capital, we'll spend more money to get more users to testify our, basically, our last 2 years product innovation, whether it's viable or not. So you may ask that when is the breakeven point, right? So before we break even, I think we need to have some kind of the user explosion or user base build-up, a major user build-up for a platform like media and video to reach breakeven. So before that point, we need to spend some money on user acquisition. And also, we're going to spend -- also spend some money on artificial intelligence R&D, like the News App's feature, the audio features is a direct application of AI technology. So we need to invest more in R&D so that our product innovation will have a strong technology base support.

Just follow up on your user acquisition. Would that maybe you’re going to push more into lower tier city or any kind of demographic that you are focusing on?

Yes. I think the demographics, I think especially our Sohu News App, we’ll target more younger generation, younger age demographics because Sohu News users has been, in the past, been more kind of a more mid late – mid-80 and with high income and those kind of things, be careful of the major breaking news or international news and those kind of – but we want to develop, acquire more younger users, and yes, into some -- towards third or fourth tier cities.

[Operator Instructions] We have a question coming from the line of Vlad Jiang from Palace Capital.

This is Connie from Palace Capital. And congratulations to Chen on closing Sogou sale and unlocking value. We understand the company has announced the buyback and also, Charles just explained on the potential use of cash or use acquisition and AI R&D. First question would be after the closing of the Sogou sale, so has a very significant firepower, will any other potential future investment area that Sohu have in mind? Will you consider M&A or other investment strategy? It would be great to hear a bit more to elaborate that. A – Chaoyang Zhang : So far, we don't have a plan for a merger acquisition. Mostly we'll really fight our battle in the battle field that we have been doing, where we under spend and now we're going to spend some money. Then as time goes, we'll probably look at some -- we will probably look at some smaller investing in the early-stage companies to and technologies for the purpose strategic investment and to defend our -- basically to -- for technology for the, yes. No major M&A thinking yet or -- yes.

Understood. In terms of technology investment or small-sized company as venture capital investment, any specific like technology or sector Sohu would be particularly interested in? A – Chaoyang Zhang : Yes. As I said, probably artificial intelligence is an area that we're -- we had a Sogou before, and there's some really nice technologies now with Sogou. So we don't have a -- we need to build our own tech center to really build a tech firepower to drive our product innovation. So I think in the artificial intelligence, AI area, like the audio feature and also the digital image, those are really using a lot of AI deep learning technology to build those firms. So I think this for Media Portal, for media and for news and for media and for communication company, our innovation are mostly in terms of human-to-machine interface and this kind of AI application in this area.

My last question would related more to Changyou business. We know that Changyou has great IP attracting loyal gamer base and also has good has – a very good cash-generating abilities. Well, just wondering if you have any capital market strategy for Changyou in the future considering that we have multiple listing market exchange in China, Mainland also in Hong Kong, very attractive for this type of business. Just wondering if there’s something that’s in line with your corporate strategy in the future? A – Chaoyang Zhang : Yes. If it is an attractive option, we will seek that path. Depends on the regulatory requirement for, let's say, for domestic listing, it's kind of regulatory. Right now, it's still not possible. But in other markets, if it is attractive, we can -- we will consider that.

We have no further questions at this moment. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now.