Eric Yuan - IR Director Charles Zhang - Chairman and CEO Joanna Lv - Acting CFO Dewen Chan - Changyou CEO Jasmine Zhou - Changyou CFO Xiaochuan Wang - Sogou CEO.

Eddie Leung - Merrill Lynch Evan Zhou - Credit Suisse Xueru Zhang - 86Research Alicia Yap - Citi Hillman Chan - Macquarie Natalie Wu - CICC Alex Yao - J.P. Morgan Thomas Chong - BOCI.

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, Mr. Eric Yuan, Investor Relations Director for Sohu. Please go ahead, sir..

Thanks, operator. Thank you for joining us today to discuss Sohu's first quarter 2017 results. On the call are Chairman and Chief Executive Officer, Dr. Charles Zhang; Acting CFO, Joanna Lv. Also with us from Changyou are CEO Dewen Chan; CFO, Jasmine Zhou; and Sogou CEO, Xiaochuan Wang.

Before management begins their prepared remarks, I would like to remind you of the Company's Safe Harbor statements in connection with today's conference call. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements.

These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties.

We caution you that a number of the 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 statements 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, and thanks to everyone for joining our call. We are off to a solid start in 2017 as we delivered inline results in the first quarter. For Sohu Media Portal, we launched a re-designed front page of our PC portal and channels to meet the changing habits of users in the media era.

For Sohu Video, we continued to shift more resources to self-produced content, and made subscription business one of our key priorities this year. Sogou achieved better-than-expected top-line results as its mobile search traffic maintained robust growth.

Changyou's online game business performed well in the first quarter and our new Legacy TLBB mobile game is set to debut in mid-May. Before I give more details about our key businesses, let me summarize the financial results for the first quarter. Total revenues $374 million, down 8% year-over-year and 9% quarter-over-quarter.

These results were negatively affected by the depreciation of the RMB.

With on a constant currency basis, total revenues would have been $20 million more, or a decline of 3% year-over-year; net-brand advertising revenues $81 million, down 35% year-over-year and 18% quarter-over-quarter; Sogou revenues $162 million, up 10% year-over-year and down 5% quarter-over-quarter; online game revenues $85 million, down 17% year-over-year and 11% quarter-over-quarter; non-GAAP net loss attributable to Sohu.com Inc.

was $68 million loss or a loss of $1.75 per fully diluted share. Now let me go through some of our key businesses. First, media business. Sohu Media Portal, we have a 3D platform for media portal. The PC portal, the each five or portals and the Sohu News App application. Thanks to the fast penetration of various mobile applications.

Our users already get used to using the stream of information just straight on their mobile devices. To better serve such a change of habit, we’ve overhauled the design of the front page of PC and portal, PC portal and give our users a clean and a consistent feeling when they visit our websites.

While you have seen the overall experience of our PC users who is in line, or in time in the high quality use information introduction per machine, our growth to help premium content has also increased at the higher efficiency.

On the content side, in the first quarter we continued to focus on our efforts to develop the partnership with third-party authors, contributors who have now covered nearly 400,000 independent content accounts who provide us a wide variety of stories.

Our growth to use of technology as a portal aesthetic and take the most interesting and best quality comments from such a large pool and let our users get them after – ask for further. Also there is a clear sign that the usage of short format – short form video in the mobile news products has exploded.

To capture this trend, we have significantly increased the number of video-based articles when they are in use and integrate more TPC content from the Sohu videos.

In terms of financial performance, in the first quarter, brand advertisers performance was still disappointing while we see some recovery signs as some domestic brands began to launch more marketing campaigns.

At the same time we will continue to see growth from SME customers and have developed new App products to address this more sophisticated demand.

Now moving to Sohu Videos, we have made effort in 2017 to rationalize the cost structure and in the mean time, we are actively exploring the new growth opportunities derived from the large subscription markets. As such, there are three important initiatives for us.

First we invest talents who give a stronger pipeline of self-produced dramas which tend to enjoy better value for money compared to traditional TV dramas. Second, and we expect use of our exclusive content to grow subscription base, subscriber base, user base.

In the first quarter for content the ten most watched dramas, Sohu Video has six of the best most popular ten including Life After Life, Blooms Over Blooms, [Foreign Language] and [Foreign Language] for example.

For us the past quarter it was a light season in terms of original dramas, but we still manage to release a few popular self-produced drama shows like reborn of monks, [Foreign Language]. We also exclusively bought some less expensive web dramas and movies to replenish our libraries for paid users.

Among them are amazing detective [Foreign Language] have attracted some paid users. As the summer season approaches, our portfolio of original content is getting better.

We are about to launch several sequels of our most popular series such as Campus Beauty, Tie Shen Xiao Hua; The Monster Killer, Wu Xin [Foreign Language] as a sequel of the channel we are looking. And few highly anticipated new titles such as Die Now, Liar Hunter Acts, and the Big Boss [Foreign Language].

In terms of number of self-produced developed dramas in 2017 is expected to be between 20 and 30 compared with 17 in 2016. The popularity of these shows were been crucial to us as we seek to expand our paid user base who come to our platform for exclusive content.

Financially, we expect advertising sales to bottom up from the second quarter, meanwhile, supported with our original dramas subscription revenue will also ramp up. Look ahead, the overall content spending for Sohu Video will remain at a high level throughout 2017.

However, the changes we are putting in place should gradually improve our cost structure and bottom-line results over time and especially in 2018. Next moving to Sogou. Driven by a strong mobile search traffic, Sogou revenue growth reaccelerated in the first quarter. We also upbeat about the long-term prospects for our search business.

Xiaochuan will update you more details about in my remarks – after my remarks. Lastly, Changyou, both top-line and bottom-line quartile met with our prior expectations in the first quarter largely driven by the solid performance of TLBB PC and 3D mobile games.

In 2017, Changyou will concentrate its R&D capability in two of the most promising categories of the mobile game market that is MMO, RPG and casual games. In terms of our highly anticipated mobile games Legacy TLBB, we conducted another round of test in March and the results are significantly better than the first round of tests.

In particular, we saw a major improvement in our user behavior among non-core users after we adjusted introductory sessions for new players and simplified some of the game plays. The open beta testing is now scheduled to start in mid-May. Now I’ll pass the call over to Xiaochuan to give an overview of Sogou business.

Xiaochuan?.

Okay, Charles. [Foreign Language] Thank you Charles. In the first quarter, Sogou got off to a good start in core search business as well as our exciting initiatives in artificial intelligence. As of March, aggregate search traffic grew 26% from a year ago with mobile search app more than 60%.

The number of active users of Sogou mobile keywords grew over 60% from a year ago solidifying its position as a number three mobile app in China in terms of TAU.

Total revenues for the first quarter reached RMB 1.12 billion or 16% year-on-year which was ahead of our prior expectations and also faster than that of the industry set a decent growth of mobile search performance.

[Foreign Language] During the first quarter, we continue to use our competitive edge with differentiated content with a number of verticals. For example, we consistently upgraded the healthcare channel, Sogou Wise Doctor improving and enriching the search results.

We are dropping more authoritative healthcare information through our platform including encyclopedia entries on diseases and the respective symptoms.

On top of that, we’ve posted the content with detailed information on hospitals and doctors to help users get healthcare services more conveniently with this efforts, our healthcare search service is now in a top-class in the industry.

[Foreign Language] In the past quarter, we also made encouraging progress in AI space such as voice technology and machine translation, Sogou mobile keyboard remained the number one mobile App for voice input in China as data voice input more than doubled from a year ago to 240 million times in addition to our proprietary machine translation technology have been applied to our products.

So we simply rolled our Chinese to English in voice enabled translation functions in Sogou mobile keyboard which are well received by users. [Foreign Language] Turning to the financials, total revenues for the first quarter reached $162 million, up 10% year-on-year.

In R&D terms, revenues were up 16% year-on-year, mobile search revenues contributed 73% of total search revenues, up from 44% a year ago. Non-GAAP net income was $12.6 million compared with $21.8 million in the same period of last year.

I would now like to turn the call over to our acting CFO, Joanna, who will walk you through the Group’s financial results..

Thank you, Xiaochuan. I will walk you through the key financials for our four major segments for the first quarter of 2017. The profit and loss numbers mentioned below are all on a non-GAAP basis. For Sohu Media Portal, in the first quarter, revenues were $37 million, down 18% year-over-year.

The quarterly loss was $15 million, compared with net income of $1 million in the first quarter of 2016. For Sohu Video, in the first quarter, revenues were $37 million, down 32% from a year ago. Of this, advertising revenue were $22 million. The quarterly loss was $70 million compared with a net loss of $38 million in the same quarter last year.

For Sogou, total revenues in the first quarter were $162 million, up 10% year-over-year and down 5% quarter-over-quarter. Of this, search related revenues were $132 million, up 6% year-over-year and down 7% quarter-over-quarter. Sogou posted net income of $30 million, compared with net income of $22 million in the same quarter last year.

For Changyou, for the first quarter, total revenues, including 17173, were $120 million, down 8% year-over-year and quarter-over-quarter. Changyou posted net income of $35 million, compared with net income of $31 million in the first quarter last year.

For the second quarter of 2017, we expect, total revenues to be between $390 million and $420 million. Brand advertising revenues to be between $85 million and $95 million; this implies an annual decrease of 16% to 25% and a sequential increase of 4% to 17%.

Sogou revenues to be between $190 million and $200 million; this implies an annual increase of 8% to 14% and a sequential increase of 17% to 23%. Online game revenues to be between $75 million and $85 million; this implies an annual decrease of 14% to 24% and a sequential decrease of nil to 12%.

Before deducting the share of non-GAAP net income pertaining to non-controlling interest, non-GAAP net loss to be between $50 million and $60 million. Assuming no new grants of share-based awards and that the market price of our shares is unchanged; we estimate that compensation expense relating to share-based awards will be around $4 million.

Including the impact of these share-based awards, GAAP net loss before non-controlling interest to be between $54 million and $64 million. Non-GAAP net loss attributable to Sohu.com Inc. to be between $70 million and $80 million, and non-GAAP loss per fully-diluted share to be between $1.80 and $2.05.

Including the impact of the aforementioned share-based awards, and $1 million to $5 million of Sohu's economic interests in Changyou and Sogou, GAAP net loss attributable to Sohu.com Inc. to be between $79 million and $89 million, and GAAP loss per fully diluted share to be between $2.05 and $2.30.

For the second quarter 2017 guidance, the company has adopted a presumed exchange rate of RMB7.00 to $1.00, as compared with the actual exchange rate of approximately RMB6.53 to $1.00 for the second quarter of 2016, and RMB6.88 to $1.00 for the first quarter of 2017.

The guidance does not include impact of Changyou's Legacy TLBB Mobile game, which is scheduled to launch in May 2017. This concludes our prepared remarks. Operator, we would now like to open the call to questions..

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from the line of Mr. Eddie Leung of Merrill Lynch Investment Banking. Go ahead. Please ask your question..

Thank you for taking my questions. Just a couple of questions on Sogou. I am wondering if you can share any thoughts on the competition for advertising purchase between search and mobile use first. And then, just a housekeeping question. I am wondering if Xiaochuan also share the number of advertisers for Sogou in the first quarter 2017. Thank you..

[Foreign Language] Newsfeed versus search, I think for large customers if they look for branding exposure as a newsfeed maybe a better choice, but search has always some performance and the long tale – for customers who are looking this regard search has exactly a better choice.

[Foreign Language] So, to wrap up in general we don’t see too much impact from newsfeed as to search has. In terms of the numbers, search advertisers in Q1, we have over 60,000 customers which represented double-digit growth from a year ago..

Thank you. And your next question comes from the line of Mr. Evan Zhou of Credit Suisse. Go ahead. Please ask your question. .

Hi, it’s Evan Zhou. Thank you for taking my questions. I have a question regarding Sogou. Wondering if Xiaochuan can give us an update about our current kind of mobile exposure traffic mix, specifically, I think you mentioned that the mobile search related traffic up by 50% year-over-year.

That’s on what metric? Is it on like page clicks or any other metrics that you are able to amplify? And also in terms of I remembered – we’ve been having a great portal where traffic contributed by our PC browser cache.

So I think now it is – like the over 72% of the mobile exposed revenue from mobile, what kind of the major contributor on our product side for the mobile side? And lastly, I noticed that there is a slightly kind of margin for the search business for overall for this quarter both on a quarter-on-quarter and year-on-year basis.

Wondering what’s kind of the driver behind that? That would be helpful. Thank you..

[Foreign Language] So, first maybe starting from profit margin decline, so as you factored here, first the search business continued to shrink in the first quarter, second, revenue mix increasingly shifted to mobile search which has a relatively lower gross margin and lastly, we continue to beef up our R&D spend.

[Foreign Language] So, in terms of customer sectors they are largely the same as prior quarters. The top five sectors are e-commerce, healthcare, gaming, business related and merchant services. [Foreign Language] In terms of mobile traffic, search traffic, traffic from Sogou’s organic and the required traffic are even faster by Q1.

Tencent actually contributed less than 40% of our mobile traffic. [Foreign Language] Because we have more acquired traffic on mobile side, so that contributed to the margin decline..

Well, great. Thanks for the color, Xiaochuan..

Your next question comes from the line of Mr. Juan Lin of 86Research. Go ahead. Please ask your question..

Good morning, management. This is Xueru on behalf of Juan. Thank you for taking my question. I also have one question on Sogou. So the mobile search traffic grew by over 50% and its revenue growth is around 80%.

So can anybody tell me between the traffic growth, so, and what’s the reason behind the revenue improvement of the mobile search monetization?.

[Foreign Language] I think the major reason for that is you know PC RTM used to be higher than mobile, but now mobile traffic accounted for a much larger portion. So that – which led to the mobile search revenue outpacing the growth of mobile traffic..

Outpace. Yes, revenue growth outpaced by traffic growth..

That’s very helpful. Thank you..

Next question comes from the line of Alicia Yap of Citigroup. Go ahead. Please ask your question..

Hi, thank you. Good evening management. Thanks for taking my questions. I have two questions. Number one is related to your earnings guidance. So your guidance for the 2Q revenues actually shows about 4% to 12% sequential increase, but then the last guidance is actually wider than the first quarter.

So can you give us some color where would be the spending increase for the second quarter? Is that more related to the video content cost? What about some of the operating expenses expectations? So, any color you could share would be appreciated. And then second question basically related to Sohu Video revenues.

So what is your expectation for the revenue mix between the subscription revenue versus the video advertising revenue, say, by the end of this year? So what are the tractions for your subscription growth so far? Thank you..

This is Charles. The first question, involves actually mostly incurred due to the video content because we made some commitment last year of the purchase of some large content basically advertising based and it was very expensive and will be broadcasted throughout the year this year and so that the loss was incurred.

So that is why cost is higher, yes, cost is higher. Video content. By the end of the year, - by the end of the year. I think it’s the past, actually, I think it’s a premium based paid revenue should surpass the advertising by the end of the year. .

Alicia, this is Dewen, just to add some color, in Q1, about 60% of the Sohu Video’s revenue were from advertising and 40% from the non-advertising, which includes subscription revenue..

I see.

But then Charles mentioned, by the end of this year, he expects the subscription revenue should surpass the advertising revenue, right?.

Yes. Non-advertising, or non-advertising surpass to, if you have the revenue from the large broadcast, in terms of new growth..

I see. Okay..

I depends, it really depends on our content, self-produced content’s success if we have really lot of big hit for our self-production then..

Will you able to share the numbers of subscriber currently?.

No. I can’t..

Okay, thank you..

Our next question comes from the line of Hillman Chan of Macquarie. Go ahead. Please ask your question..

Hi. Thank you management for taking my question. I also have a question regarding the video business.

Could you share more on reality to grow the paying subscription base? And related to that, the content spending and the type of content for that? And the other question is about the consumption pattern between the paying subscribers and also the non-paying video watchers any kind of would be helpful. Thank you. .

Well, so the – our strategy in growing paid subscriber base, it certainly depends on the exclusive self-produced or acquired content.

So, we had some good success last year with the titles like [Foreign Language] and also , so this year will be a year with the sequels of those successful drama series and that’s clearly it is a time of habit, because the brand already is there and lot of users look forward to watch the second season.

And also these kind of spending like RMB100 million or RMB200 million, to buy those TPC content that, or we keep the cost of each production of self-produced content below like $30 million, I mean, $20 million or $30 million and so that we can make sure that we have a few production that starts – brought on each month.

So that keep the kind of subscription users to continue their subscriptions.

So – and also there is charging that select the kind of video the – basically about what kind of – this kind of viewers like and also the production quality there is a lot of – and also we bought some kind of exclusive for subscription like exactly – we bought exclusively readymade product as if purchased in subscription media has some good results.

.

Okay, all right. Thank you, Charles..

Your next question comes from the line of Natalie Wu of CICC. Go ahead. Please ask your question Wu..

Hi, good evening management. Thanks for taking my questions. So my question is majorly regarding Sogou.

Your search business, can you share with us more details on the organic traffic contribution and the external traffic contribution of both PC and the mobile side? And also, Sogou search rather actually performed much better than your traffic related to guidance in the first quarter.

I was just wondering what kind of the industry in specific advertisers is driving outlook stronger than expected throughout your approach? And lastly, given that – I know that it has established with search application business units, so just wondering if Sogou has anything to do with that deal? And if not, will this affect the collaboration between – will it lift for the advertisers to shift away of the search related that I was expecting.

Thank you..

[Foreign Language] So, regarding your question on just larger search advertising, advertising search, we actually have some common ground with Tencent that is Tencent, we are not enter into general search. If they decide to do so, that should be Sogou. That should be a collaboration with Sogou.

[Foreign Language] So, in terms of acquired traffic, we have one search from acquired – traffic acquisition of mobile. [Foreign Language] The stronger than expected Q1 revenue growth is mainly due to better designed in mobile search traffic..

Very helpful. Thank you..

Thank you. The next question comes from the line of Mr. Alex Yao of J.P.Morgan. Go ahead. Please ask your question..

Hi, good evening everyone. Thank you for taking my question. I have a follow-up question on the video strategy.

Firstly, can you give us an update on your content budget this year for video content? Secondly, what portion of your video budget will be allocated to the in-house production versus licensed content from third-party? And lastly, how do you think the competition in t he in-house production, most of the online video platforms are shifting focus more towards the original content or in-house production.

They are going to be a new competition towards production capability in terms of actor, actress or producers, et cetera, et cetera?.

Yes, in terms of allocation, about half and half, right. Yes, so overall content spending is a little bit more than in 2016 budget and about half and half right. Yes, about 40% except for the in-house production or they are content for paid users.

And the 60% was for the advertising based content and this number will – in 2018 will be dependent of the content for paid users who have increased much larger.

And for your second question regarding the rising cost and the competition in the production, or introduction yes, it is, by the way we want to make sure that we will produce this kind of like, $20 million, $30 million on the per drama kind of production and five – basically- again there is another realm of inflation of coming caught, because we believe that it’s really to have a great story and it’s really mainly dependent on the story itself and on the screenplay and the ideas and other things, money is not only the problem and also if you have some really content because it’s worth, it’s exclusive, so that users continue to come to your platform.

So the video business is a business like the – it’s not like the network or other kind of – just rather give you a unique type of content and then people continue to come to you and we want to make basically a ton of video business into a more than anything business, instead of the money losing business like it is now. .

All right.

I just as a quick follow-up, when do you expect Sohu Video can be profitable?.

Yes, so in 2019..

Thank you..

Your next question comes from the line of Thomas Chong of BOCI. Go ahead. Please ask your question..

Thanks management for taking my question. I have two quick questions. The first question is about the advertising sentiment this year. I was seeing it turns better, compared to last year. And my second question is, management comments about the trend, the advertising trend for internet services, as well as auto spend..

The overall trend seems better than last year, right. It was been kind of come back with game industry and the ARPU come back a little bit, and in terms of categories of industries, all industries are….

Yes, I think for all the industry, Thomas, we think some domestic brands were – as we mentioned will launch more marketing campaigns to promote their new models..

And I think one of the more robust sector is really the SM – small media enterprise and as we – our user base cover, conveniently cover especially with what portal and users and PC combined , so we have a large base that has a sizable number of users in a local city, second tier or third tier cities that how we were moving to develop more those kinds of local SMEs to those kind of – and China is so big and there are many, many small media companies who will find the Sohu Media platform to be effective in marketing their products to their local towns and citifies, that’s what’s is the future driver of our advertising business.

.

Thank you..

[Operator Instructions] There are no further question at this time. I would now like to hand the conference back to today’s presenters. Please continue..

Yes, okay. Thank you for joining us. Have a good evening and good morning, good day. Bye. .

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect..