Eric Yuan - IR Charles Zhang - Founder, Chairman, CEO, Lead Director and Chairman of Changyou.Com Xiaochuan Wang - CEO and Director Joanna Lv - Acting CFO.

Alicia Yap - Citigroup Wayne Wang - HSBC Han Joon Kim - Deutsche Bank.

Ladies and gentlemen, thank you for standing by and good evening. Thank you for calling. Thank you for joining Sohu's Third 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 Q&A 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, Eric Yuan, from Investor Relations, Director of Sohu. Thank you, please go ahead, sir..

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

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 you that a number of important factors could cause actual results to differ materially from those containing 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 the most recent annual report on Form 10-K. With that, I will now turn the call over to Dr. Charles Zhang.

Charles?.

Thank you, Eric and thanks to everyone, for joining our call. We had mixed results in the third quarter. While greater efforts are needed to get our brand at the higher end business economic growth track we are pleased with the solid performance of our search and online game businesses.

Total revenues reached $516 million up 26% year-over-year and 12% quarter-over-quarter. For the Sohu Media Portal, we focused on growing the user base by consistently enhancing the content and design of the Sohu News App. Sohu Video witnessed a steady growth of its subscription business, thanks to our newly-released original dramas.

And Sogou's top-line comfortably exceeded its prior guidance, driven by robust growth in mobile search revenues. And for Changyou, its flagship TLBB PC and mobile games performed well and continued to generate strong cash flow for our Group. Let me give more details of our key businesses, summarize the financial results of this quarter.

Total revenue was $516 million up 26% year-over-year and 12% quarter-over-quarter. Net brand advertising revenue was $75 million, down 33% year-over-year and 13% quarter-over-quarter. Sogou revenues were $257 million, up 55% year-over-year and 22% quarter-over-quarter.

Online game revenues were $132 million, up 34% year-over-year and 8% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com was $93 million, or a loss of $2.38 per fully diluted share. Now let me go through some of our key businesses. First of all phone [ph] business.

Smartphone have completely reshaped the online media business in China and have is news feed is become in stream format that users got used to receiving personalized information. In 2017 the market developed quickly and the competition elevated. Established companies are fighting for users, time and attention.

Not only have traditional online news providers increased their investment, but big player in other verticals such as search have also been proactively promoting the news feed features in their core products.

The situation required us to substantially improve the user experience for our Sohu News APP to ensure where we remain our users' premium destination. Specifically we have invested extensively in two key areas, content and technology.

First, we continue to refine our News APPs UI our user interface and enrich our content portfolio by introducing among other things more short form video content. And second, we consistently adjusted algorithm of our recommendation engine which is powered by machine learning technology. Talent is critical to for us to implement these initiatives.

In the third quarter we are able to strengthen our research and development team by hiring dozens of experienced engineers and the smart engineers. We're about to launch a major new version of News APP in November when there which some innovative outreach and algorithms are applied and embedded.

In terms of monetization we continue to see softer band from larger advertisers, the brand advertising that dragged down our overall performance. In the meantime we see smart media enterprise segment actually resilient, actually robust as there were more local advertisers.

New addition wins we’ve made great effort improving our performance ad system which helped increase the clicks used and it's also using a machine learning technology and matching users with advertisers is very technology driven system is being developed and upgraded.

Moving to Sohu Video, in the third quarter we continued to execute our ramped up content strategy which is to focus on in-house developed content production and subscriber base growth, user base growth. While strictly control the cost especially for those head content.

We also partner with more small studios to give our audience a broader selection of interesting short form programs, short form videos that can be exported to Sohu News APP as well. Consumer being not only on Sohu Video APP but also Sohu News APP by users to complement the Sohu News APP as well text based content.

For original content we are now selectively picking those projects with solid screenplays and a reasonable budget. In the first three quarters of 2017 we collectively rollout 14 original dramas. And one of the most popular series in the third quarter was Monster killer. Number two the [indiscernible] Wu Xin Fa Shi.

The show also helped to attract new subscribers to Sohu Video people as sign up in order to watch the first screen, first season. So it actually drives the watching of the season one that contributed to the new user acquisition.

Overall our growing library of exclusive content helped draw new paying customers and subscriber revenue, [indiscernible] revenue was growing steadily.

For the fourth quarter we have a solid pipeline of dramas some of which are based on a strong IP such as Your Highness [indiscernible] is actually a TLBB version of a drama it is in collaboration with [indiscernible] actually in terms of investment and the and the [indiscernible].

Financially, total revenues for Sohu Video $44 million up slightly from prior quarter of this other high revenue of $19 million.

The ramp up in our subsidiary business helped to offset the decline out of having Sohu Video quarterly loss of $60 million as we have stopped applying domestic TV headcount in dramas in 2018 our overall common cost is expected to go down substantially and that should enable us to stem the loss. Next moving to Sogou.

In the third quarter Sogou achieved better than expected financial results well Artificial Intelligent AI technology has been widely applied in various services such as search and machine translation and Xiaochuan will provide more detail in his remarks. And lastly Changyou the third quarter our flagship TLBB PC and mobile games performed quite well.

Our new mobile game, Legacy TLBB remained as one of the most popular MMORPG games in the market. Since its launch in May we have released two news expansion packs. We will continue to improve this socially interactive system winning the game and create new game playing to maximize the longevity of the game.

In terms of game pipeline we plan to launch a new mobile MMORPG game played online. Other new MMO games including [indiscernible] as well as events, casual games, runaway are also under development. These games are currently going through adjustments and the modifications and I expected it to hit the market early next year.

Now, let me turn the call to Joanna Lv, or Xiaochuan, oh I'll turn it to Xiaochuan for Sogou..

Sales [indiscernible] credit growth by the end of September total search traffic grew by 24% from a year ago, mainly driven them by 38% growth in mobile search traffic. Quarter net revenues reached $257 million up 55% year-over-year. Continuously outpacing industry growth.

The user base of our Chinese language input application Sogou mobile keyboard [indiscernible] rapidly up 55% from a year ago. According to a research Sogou mobile keyboard remained the third largest mobile app in China that add by DAU.

Turning to the third quarter, the continued [indiscernible] our competitive advantages in search from channel to content leveraging the robust ecosystem they have viewed and shared away, Tencent. We made new progress with our product called Liberation [ph] with Tencent.

Specifically Tencent began testing the interface of the Sogou search into Weixin which allows its user to access all internet information through our general search function from Weixin. We are currently working closely with Tencent on product testing and ongoing optimizations.

We have also made solid progress in AI technology development and its product applications for voice technology. They processed over 200 million voice inputs a day through Sogou mobile keyboard.

Through our advanced machine translation and image recognition capabilities we are able to translate English wordings on real life objects such as menu and [indiscernible] into Chinese. They also helped [indiscernible] technology in nature language processing. That’s helped us elevate search into pressing an answer.

For example in the healthcare vertical we have developed as much diagnosis system which enables users to conduct some basic sales diagnosis and decide which hospital department to visit through our series of interaction question and answers.

In terms of financial performance Sogou’s third quarter revenue reached $257 million an increase of 55% year-over-year and a 22% quarter-over-quarter. Our guidance and the industry growth, GAAP net income was $31 million compared to $28 million from a year ago and $23.5 million from the previous quarter.

I would now turn the call over to Joanna who will walk you through financial results..

Thank you, Xiaochuan. I will walk you through the key financials of our four major settlements for third quarter of 2017. All of the numbers that I will mention are all on a non-GAAP basis. You may find a reconciliation of non-GAAP to GAAP measures on our IR website. For Sogou Media Portal revenues were $38 million down 21% year-over-year.

The quarterly loss was $17 [ph] million compared with net loss of $6 million in the third quarter of 2016. Sogou Video revenues were $44 million up 25% from a year ago. Of this advertising revenues were $19 million. The quarterly loss was $60 [ph] million compared with a net loss of $86 million in the same quarter last year.

For Sogou total revenue was $257 million up 55% year-over-year and 22% quarter-over-quarter. Of this online search related advertising revenues were $225 million up 50% year-over-year and 21% quarter-over-quarter. Sogou posted net income of $31 million compared with net income of $20 million in the same quarter last year.

For Changyou total revenues including 17173 were $166 million up 22% year-over-year and 10% quarter-over-quarter. Changyou posted a net loss of $5 million. If excluding cash impairment charges Changyou’s non-GAAP net income would have been $56 million compared with net income of $46 million in the third quarter last year.

For Sogou Group total revenues were $516 million up 26% year-over-year and 12% quarter-over-quarter. Non-GAAP net loss was $93 million. If excluding non-cash impairment charges of Changyou non-GAAP net loss would have been $51 million compared with a net loss of $65 million in the same quarter of 2016.

As Sogou has filed registration statement on form F1 with the U.S. Securities and Exchange Committee relating to a proposed initial public offering were are not providing fourth quarter financial guidance for Sogou, also the Sogou Group as a whole. And the review of the proposed Sogou IPO there will be no questions accepted relating to Sogou.

And we also don’t take questions regarding Changyou’s privatization proposal. This concludes our prepared remarks. Operator, we would now like to open the call to questions..

Thank you, Ma’am. [Operator Instructions] Our first question is coming from the line of Alicia Yap from Citigroup. Please ask your question..

Hi, can you hear me okay? Yes so my question is regarding the search testing with Tencent [ph] so we do know how long the testing will last…?.

No question to be asked about Sogou..

Oh, okay, all right.

So then the questions regarding Charles you mentioned in your prepared remarks that some intensified competitions on competing with the mobile resources, so especially I think on the downloads and pre-install right? So, how long do you think these will actually last and compared to few years ago when we see the PC to mobile transition that’s also a lot of companies that are promoting aggressively their mobile apps so versus now compared back then is this year the channel competitions more competitive than few years ago?.

Oh yes, so now it's really there is just more entrants basically you have the browsers like CuCu browsers and the UC browsers are getting into the battle of information streaming, the feed and you have search engines like Baidu search APP that developing information feed under its search box.

So you have just more players competing for peoples' time, peoples or my intentional just random information scoring and this kind of reading behavior. So it's definitely competition is actually more intense than a few years ago..

Because you also mentioned the smartphone shipment has been stopped right? So how long do you think all these intense competitions will last because at the end we are just going to beat up the prices?.

Well it is really the installment or the channels are just one of the factors. And not probably not the most important factor is really because everyone is using smartphones and everyone just trying to download the most popular or the most user friendly or most used, the best APPs.

People are actually, people are just they are so sophisticated, they always choose the best APPs they like so, now the competition is really about the product.

The product is your APP whether you have, the top technology team to develop in the best algorithms and to - the best user profiles and the best content and also the UGC content and provide the most, it is really the competition of technology, machine learning algorithm and the content.

So the companies that have the best culture and technology teams the most like a search engine competition..

I see, okay I have one quick follow up questions regarding our video business.

Do we see any impact in terms of the streaming the broadcasting content during the last few weeks of October given the 19th Congress Meeting was happening, did we see any impact on video business?.

Yes, we do see. There are two sides two aspects, one is some of those especially for some of the head content that's scheduled to be broadcasted on major networks, TV networks actually either postponed or delayed or probably will never be allowed to meet the audience. So, that is a smaller impact on Sohu because we now have much less head content.

But and rely more on our sell in-house or self produced dramas. Another aspect is really the short films the PGCs.

Those kind of short films where there is just a mention stricter requirements or censoring of the so-called problematic videos, definition of problematic can be acquired, is a wide, quite a broad definition, anything any video that can be considered to be of some kind of sensitivity will be just it is not allowed to be streamed.

So it is, has a major impact, yes..

Sure, but now it's over right? So now it's back to more normal is the reason back to normal?.

I think it has some kind of long tail because you know it is doing this post 19th Congress shadow..

Okay, great, thank you, thank you Charles, thank you for the answer..

Right..

Our next question is coming from the line of Wayne Wang from HSBC. Please ask your question..

Thank you, management, for taking my question. I have a question regarding to the Sohu News APP.

So as Charles mentioned that in November we're going to launch a new version, can you share with us more details about what's new in that APP and for example who AI like turns in this APP's functions like you do have a revenue outlook for this APP? Thank you very much..

Yes, I think the November version if you are a user of our Sohu News APP the news channel will be overhauled, completely ramped up with a recognition, new algorithm.

Now if you look at the news APP [indiscernible] the news, top line news, headline news, are all manually or editorial team can power news, but the November version you will have apply a new version, new algorithm and to compete to compute to, it will basically recommend that each individuals based and tailored to each individual's interest about news.

So it will be more and aces this is a new algorithm in that with you know just to improve the ranking. And then it will continue to improve in the future when we have a better user profile and to have a real machine learning calculation.

So it's a new version, it is basically elevated to a new level of sophistication and then from there, from that and then it will continue to improve month after month. So we should expect a steady growth of, you know basically restart the Sohu News APP growth and also the page view.

That means a gradual growth maybe let's say you will probably see at least immediate 30% boost and then you'll see a more gradual, more growth of the page views. And the commercial impact will be to look at our, I mean small media enterprises. The head [indiscernible] is really soft.

The small media if you look at it they actually grow at a 20% I think. I think the Q3 is growth 20% plus over Q2. And so in the next Q1 you will see the immediate reflection of that page view or deal growth will be the small media growth. .

Thank you very much..

[Operator Instructions] Our next question is coming from the line of Han Joon Kim from Deutsche Bank.

Please ask your question?.

Great, thank you very much for the chance to ask questions. I just have one, just on this [indiscernible] level can you just remind us where our cash position is and I guess when you launched your new APP you might need to invest a little bit more.

So as we think about working capital, just kind of remind us where we are and if we have sufficient capital at the current juncture?.

Yes, we have, I think – I will not go into details about the cash flow situation, but you know suffice to say you know we have enough cash to support and also our new version launch is basically a technology and product overhaul that the marketing channel spending remained similar and the increase of DAU and [indiscernible] purely because we have just the products with more sophisticated technology..

Okay, great. Thank you very much..

Okay..

We have no further questions at this time. Ladies and gentlemen let us conclude our conference for today. Thank you for participating. You may all disconnect..