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Executives

Tip Fleming - Investor Relations, Christensen

Charles Zhang - Chairman and Chief Executive Officer

Belinda Wang - Co-President and Chief Operating Officer

Carol Yu - Co-President and Chief Financial Officer

Analysts

Dick Wei - JP Morgan

Eddie Leung - BofA Merrill Lynch

C Ming Zhao - Susquehanna Financial Group

Jenny Wu - Morgan Stanley

Wallace Cheung - Credit Suisse

Catherine Leung - Goldman Sachs

Wendy Huang - RBS

Gene Munster - Piper Jaffray

Alicia Yap - Citigroup

Sohu.com Inc. (SOHU) Q4 2010 Earnings Call January 31, 2011 8:30 AM ET

Operator

Operator

Ladies and gentlemen, welcome to the Q4 2010 Sohu Earnings Conference Call on the 31st of January 2011. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would now hand the conference to Tip Fleming from Christensen. Please go ahead, sir.

Tip Fleming

Thank you, operator, and thank you for joining us today to discuss Sohu.com’s fourth quarter 2010 results. On the call today are Chairman and Chief Executive Officer, Dr. Charles Zhang; Co-President and Chief Operating Officer, Belinda Wang; Co-President and Chief Financial Officer, Carol Yu; Chief Technology Officer, Xiaochuan Wang; Senior Finance Director, James Deng. Also with us from ChangYou.com are CEO, Mr. Tao Wang; President and Chief Operating Officer, Dewen Chen; and Chief Financial Officer, Alex Ho.

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 involved 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 statement. For more information about the potential risks and uncertainties, please refer to the company’s filings at the Securities and Exchange Commission, including its registration statement and most recent annual report on Form 10-K.

Now let me turn the call over to Dr. Charles Zhang, Chairman and CEO. Charles, please proceed.

Charles Zhang

Thank you. Hello, everyone. Welcome to our call. I am pleased to report another strong quarter with record revenue for the full-year 2010. For the fourth quarter, our financial performance exceeded our expectation, as we achieved record total revenues and record revenues in each of our brand advertising, online game and the search businesses.

In order; total revenues were $173.2 million, up 27% year-over-year and 6% quarter-over-quarter. Gross brand ad revenue before our business tax were $65.6 million. Net brand advertising revenues were $60.1 million, up 31% year-over-year and 2% quarter-over-quarter. Online game revenues were $91.7 million, up 30% year-over-year and 7% quarter-over-quarter. Search revenue was $6.6 million, up 126% year-over-year and 23% quarter-over-quarter.

Non-GAAP diluted EPS were $1.23, up 33% year-over-year and 6% quarter-over-quarter, above the high end of our guidance of $1.15. For the full-year 2010, total revenues were $612.8 million, up 19% year-over-year.

Gross brand ad revenue before business tax were $231.4 million. Net brand advertising revenues were $211.8 million, up 20% year-over-year. Online game revenues were $327.1 million, up 22% year-over-year. Search revenues were $18.6 million, up 120% year-over-year.

Before deducting the share of net income pertaining to the non-controlling interest, non-GAAP net income increased 15% compared with 2009, reaching $226.8 million. Non-GAAP diluted EPS reached $4.21, up 6% year-over-year.

While I am encouraged by these strong results across our multiple business lines, I’m even more excited when we look beyond the financial performance. First, our conscientious efforts in online video and our strategy to secure high quality authorized content have brought our market share from 3.4% to 13.4% in a mere 12-month period. Second, while Tian Long Ba Bu continues to be a strong and popular game, Changyou will unveil the full trial version of the highly anticipated Duke of Mount Deer to players once it officially kicks off the game’s marketing campaign in March. And third, with its new capital structure in place, Sogou’s business is quickly picking up momentum. Over the fourth quarter of 2010, active users of the Sogou browser, related search traffic and search revenue, all grew north of 20% quarter-to-quarter.

Let me start by discussing our online video business in more detail. We continue to put emphasis in this area and execute our strategy to expand our library of authorized high-definition video content, especially for exclusive popular TV dramas. Specifically, we need to sign up content owners 6 to 12 months before TV drama series is aired.

We are pleased that Taobao was able to successfully obtain 23 out of 30 most watched prime-time TV dramas as measured by CSN Media Research. This was more than any other video website in the market and all these dramas were secured by or exclusive online. In contrast, none of the exclusive content purchase by our competitors made this most watched list.

For 2011, we have now secured 85 prime-time TV dramas, of which 24 are exclusive online. This demonstrates not only our talent at identifying popular content six to 12 months in advance, but also our ability to secure content in a highly competitive online video market. After securing authorized premium content and Sogou’s well established immediate influence are clearly giving us a competitive advantage and helping to accelerate user growth.

Based on data from our research, unique visitors to Sogou’s video site more than doubled in December 2010 compared with December 2009, surpassing the 100 million mark. In December 2010, Sohu’s video market share in terms of time spend grew to 13.4% from 3.4% in a matter of 12 months period, which essentially means that we picked up 10 percentage point in the market share from other players. This rise in our user traffic to our online video site helped drive growth in advertisement revenue.

For the full year 2010, gross revenues from online video increased to $28 million, which was approximately three times that of 2009. The number of advertisers for 2010 increased by 55%. The success of IPO and eminent listing plans of our competitors have received a great enthusiasm from Wall Street. This validates our view of strategic importance of online video and a vast potential of this business with Sohu’s overall financial strength, early investment and commitment, we’re highly confident that we will be able to compete favorably in this area.

Now, let me move on to our Sogou search business. With its new capital structure in place, Sogou’s business is quickly picking up the momentum. Sogou has now transformed into an entity with laser sharp focus, par excess top products and online search businesses. The shareholder group includes not only the Alibaba Group and the Sohu, but also its highly motivated and committed management team. This transformation has also helped to further attract talents as well as confidence among our business partners, most importantly our distributors.

We are particularly pleased with the progress of Sogou browser, one of our most strategic product, during the fourth quarter. We launched a new version, which accelerates browsing speed by 20% and adds certain security protection functions as well as bandwidth protection function. These factors contributed to some significant penetration of the Sogou browser in the market, it has now been downloaded to 12% of all PCs in China and average daily users reached 15 million, up 21% quarter-over-quarter.

Increased popularity of our browser in turn helped to drive traffic growth to Sogou search. For the fourth quarter, average daily page views originated from Sogou.com grew by 20% quarter-over-quarter. The increased search traffic boosted search revenues. For the fourth quarter search revenues reached $6.6 million, up 126% year-over-year and 23% quarter-over-quarter.

Regarding our collaboration with Alibaba, our plans are progressing well as planned. For example, for the fourth quarter, search revenue from Taobao increased 137% quarter-over-quarter. Further, starting from the first quarter of 2011 Sogou established a direct sales relationship with Taobao, replacing the former one Video Agencies. Another example is that Sogou search engine has replaced Microsoft search engine Bing to provide technical support to Etao.com owned by Alibaba for its web page search.

Moving on and before I hand over the call to Belinda, I would like to take a moment to discuss Changyou, our online gaming business. First of all, Tian Long Ba Bu entered its fourth year of operation and continues to show strength and healthy growth. And it retained a viable position as one of the most popular MMO games in China. This has enabled Changyou as a whole to achieve the following results in the fourth quarter.

Aggregate registered users reached 111.4 million, up 6% quarter-over-quarter. Aggregate peak concurrent users, PCU, reached 1.03 million, up 5% quarter-over-quarter. Aggregate active paying accounts, APA, reached a record of 2.7 million, up 3% quarter-over-quarter. Average revenue per active paying account, ARPU, for the quarter reached RMB219, a slight increase of 2% quarter-over-quarter and remained at an affordable level.

Second, for Duke of Mount Deer, DMD, we have completed our market research efforts and finalized our marketing trends. In March 2011, we will officially start our national wide marketing campaign.

During the marketing campaign, we will unveil the full version of the game for the first time and make it available for players to try. This full version contains many time the content currently following the existing versions. It also features a number of technical innovations, winning the global online game industry. Through these efforts we hope to draw interest from players and attract attention from the media leading up to the DMD’s launch, we’re offering a unique gaming experience in China.

In conclusion, we are pleased with Changyou performance and Changyou have made progress towards becoming a leading online gaming company in China.

I would like to turn the call to our Co-President and Chief Operating Officer, Belinda Wang, who will update you on our brand advertising business. Belinda?

Belinda Wang

Thank you, Charles. I am pleased to report that we had a solid quarter and a strong year in our brand advertising business. As Charles mentioned, we achieved another record year in terms of our financial performance. Brand ad revenues for the fourth quarter reached a record high, up 31% year-over-year. For easier comparison with other peer companies, our gross brand advertising revenue before business tax was $55.6 million and net brand advertising revenues were $60.1 million.

In the fourth quarter, on a year-over-year basis, financial service, automobile, online game and FMCG are the fastest growing sectors. Brand advertising revenue, historically, the first quarter for our brand advertising business tend to be slow, but the first quarter of 2011 we’re expecting brand advertising revenues before business tax to be between $60 million and $62 million. Net brand advertising revenues to be between $55 million and $57 million, implying a 39% to 44% year-over-year growth and online video revenues to be doubled as compared with the first quarter of 2010.

Now, I’d like to turn the call over to our Co-President and CFO, Carol Yu, who will walk you through the quarter’s financials. Carol?

Carol Yu

Thank you, Belinda, and hello everybody. I will now take you through our financials for the fourth quarter.

One, revenues. Total revenues were $173.2 million, up 27% year-over-year and 6% quarter-over-quarter. This has set a new record and came in well ahead of our expectations.

Brand advertising revenues came ahead of our expectations at $60.1 million, up 31% year-over-year or 2% quarter-over-quarter. Online games revenues were $91.7 million, up 30% year-over-year or 7% quarter-over-quarter. Search revenues were $6.6 million, up 126% year-over-year and 23% quarter-over-quarter.

We are particularly pleased with the 28% quarter-over-quarter increase in witnessing revenue, which totalled $5.9 million. This is primarily attributable to our traffic growth and improved key words matching technology. Wireless revenues were 13.4 million, year-over-year decrease of 8% or sequential increase of 6%.

Now let me provide some more details about Sohu’s financials. From now on most of the figures I'll be discussing will be non-GAAP. The impact of share-based awards, including share-based compensation expense and related non-cash income tax expense, our charge sheet of quarters cost of revenue, operating expenses and income tax expense.

For the fourth quarter, the total share-based compensation expense was $7.9 million. We believe excluding the impact of share-based compensation awards from our non-GAAP financial measures for net income makes a more meaningful comparisons of Sohu operational results and improves investors’ understanding of our performance. So we will also use non-GAAP measures in this discussion to explain margins, costs and expense items.

Two, gross margins. Non-GAAP gross margin for the fourth quarter was 75%, which compares to 74% last quarter and 75% in the fourth quarter of year 2009. Brand advertising non-GAAP gross margin for the fourth quarter was 63%, which compares with 62% last quarter and 65% in the same period of last year. The decline from the fourth quarter of 2009 was primarily due to increased bandwidth costs and advertised video content cost relating to our video strategy.

Online game non-GAAP gross margin was 90% for the fourth quarter, which compares with 90% last quarter and 92% in the fourth quarter of 2009. Search non-GAAP gross margin in the fourth quarter of 2010 was 32% compared with 32% in the third quarter of 2010 and 2% in the fourth quarter of 2009. Wireless non-GAAP gross margin for the fourth quarter was 45%, which compares with 46% in the third quarter of 2010 and 44% in the same period 2009.

Three, operating expenses. Non-GAAP operating expenses for the fourth quarter of 2010 totalled 55.5%, which was an increase of 11% from the third quarter 2010 and an increase of 23% from the same period of 2009. The sequential increase was primarily attributable to the hiring of more game engineers and expenses relating to royalties for license gains in the fourth quarter of 2010.

Four, operating margins. Non-GAAP operating margin was 43%, which was up from 44% in the third quarter of 2010 and 42% in the fourth quarter of 2009.

Five, income tax expense. For the fourth quarter, excluding a non-cash income tax expense reversal of $0.7 million recorded for tax benefits from share-based awards in connection with the recent U.S. Congress's enactment of legislation with favorable tax provisions that were reinstated retroactively to January 1, 2010, non-GAAP income tax expense was $11.1 million, compared with $10.6 million in the previous quarter.

Six, net income. Before deducting the share of net income pertaining to the non-controlling interest, non-GAAP net income was $64.6 million, which was $3.1 million ahead of our expectation and up 5% compared with our third quarter of 2010 and up 28% compared with the same quarter of 2009.

After deducting $16.7 million for the share of net income pertaining to the non-controlling interest, non-GAAP net income was $47.9 million or $1.23 per fully diluted share, which was ahead of our expectation and represented an increase of 6% compared with the third quarter of 2010 and an increase of 34% compared with the same quarter of 2009.

Seven, net margin. Non-GAAP net margin before deducting the share of net income pertaining to the non-controlling interest, which was 37%. This was unchanged from the third quarter of 2010 and the fourth quarter of 2009.

Eight, moving over to the balance sheet and cash flow statement, we continue to maintain a debt-free balance sheet for the fourth quarter. We generated close to $100 million operating cash flow. As of December 31, 2010, our cash balance was $678 million and our net accounts receivable was $62.6 million, which was a decrease from $70 million last quarter.

Brand advertising DSO for the fourth quarter was 66 days, compared with 73 days in the previous quarter and 57 days in the fourth quarter of 2009.

Nine, our outlook for the first quarter of 2011 is as follows. We expect total revenues to be between $164.5 million and $169.5 million. Brand advertising revenues to be between $55 million and $57 million, this implies a sequential decline of 5% to 8% and 39% to 44% year-over-year growth. Total revenues from China to be between $92 million and $95 million. Search revenues to be around $6.5 million.

Before deducting the share of non-GAAP net income pertaining to the non-controlling interest, we estimate our pro forma non-GAAP net income to be between $54.5 million and $57 million. After deducting the share of non-GAAP net income pertaining to the non-controlling interest, we estimate non-GAAP net income to be between $40 million to $42 million and non-GAAP fully diluted earnings per share to be between $1.03 and $1.08.

Assuming no new grants of share-based awards, we estimate that our compensation expenses and income tax expenses relating to share-based awards to be around $5 million to $6 million, which includes $1.5 million to $2 million for Changyou. Considering Sohu’s shares in Changyou, the estimated impact of this expense is expected to reduce Sohu’s fully diluted earnings per share for the fourth quarter of 2011 under U.S. GAAP by $0.11 to $0.13.

In conclusion, while we are pleased with this set of record financial results for both the quarter and for the year, we are even more upbeat about Sohu’s bright future. Our past investments in both online video and search are starting to bear fruit and emerging to be new growth engines for our shareholders.

Thank you everybody for joining the call today. This concludes our prepared remarks. We would now like to open the call up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Dick Wei from JP Morgan. Please go ahead.

Dick Wei - JP Morgan

Hi, thanks for taking my call. My first question is on the advertising outlook for the year, if you can share with us what's the outlook for this year on advertising would be great and I have a follow-up as well. Thanks.

Carol Yu

Advertising outlook for 2011. Actually we cannot give the exact number or even the gross rate, but we believe with higher penetration rate of Internet population, more and more advertisers are willing to shift the more traditional budget allocation to online. So we will see steady growth rate overall online advertising and we believe FMCG will be one of the leading faster-growing industry categories in the year of 2011.

Dick Wei - JP Morgan

Belinda, do you think that advertising growth is going to be -- accelerate this year for SOHU or going to be slower than last year, any sense of that?

Belinda Wang

Yes, so far we cannot give the exact answer on this question because we are signing on the framework contracts with the advertisers and do not…

Charles Zhang

It’s too early?

Belinda Wang

Too early to comment on that. Come on, Dick, it's Chinese New Year, everybody is on holiday.

Dick Wei - JP Morgan

Great. And my next question is for the guidance for wireless revenue, what’s the reason behind a pretty large decline in the guidance and is there any regulatory updates that you can share with us and also maybe the margin for this segment as well?

Charles Zhang

It’s the seasonality and also normally mostly in Q1, the regulatory environment is more severe and controlled tighter. And this wireless revenue is traditionally not really a growing revenue, a decline. And it depends really on the extent of our aggressiveness of our marketing campaign to earn good revenue. So in Q1, we are more conservative on that.

Dick Wei - JP Morgan

So should we expect you to rest of the year to be back at the say 2010 level?

Belinda Wang

Yeah, actually in Q1 we like to invest more on leading, on the mobile, on the wireless value-added service like reading, so downside on the margin, but in the following quarters we will expect a recovery on the margin side.

Charles Zhang

The general trend of value-added service is down, all right, it’s not really up.

Belinda Wang

Yeah.

Charles Zhang

It’s not a big focus here.

Belinda Wang

We will see a slight growth rate on the wireless service.

Dick Wei - JP Morgan

Okay, great. Thank you very much and congrats on a good quarter. Thanks.

Charles Zhang

Thanks a lot.

Operator

Thank you. The next question comes from Eddie Leung. Please go ahead.

Eddie Leung - BofA Merrill Lynch

Hi, good evening everyone. I would like to get a sense from your point of view on how advertisers allocate advertising budgets between TV, online video and the traditional Internet advertising inventory? Thanks.

Belinda Wang

As we mentioned earlier on the call, our online video revenue tripled in the year of 2010, but I think most of this online video revenue budget shifted from the overall online revenues, online advertising revenues. I think this will be the same picture for our competitors on the video side. But I think in the year of 2011 with Sohu’s online videos competitive advantage of authorized high-definition video content and faster growing user traffic we expect a continued faster growing growth rate on online video advertisement revenue and we really expect more advertisers will start to shift the TV commercial budget to online video in this year.

Charles Zhang

So to be more exact, 2010 advertising is $211 million, right?

Belinda Wang

Yeah, yeah.

Charles Zhang

And the video advertising is $28 million.

Belinda Wang

$28 million.

Charles Zhang

So you can see the percentage and this percentage definitely will grow.

Eddie Leung - BofA Merrill Lynch

Thank you, Belinda and Charles. And one last question from me is on the content cost. Could you also give us some sense on the content cost strength you have seen in the market given different video size and perhaps even local TV stations would compete for certain productions? Thanks.

Belinda Wang

Can you repeat your question?

Eddie Leung - BofA Merrill Lynch

Sure, yeah just I want to get sense on how much content cost have been up in January for similar quality of content, as we have heard that lot of video sites are trying to get the good content and so has been demonstrated – obtained, you’ve acquired some good content in the past and also hopefully for this year, so I would like to get a sense on the cost pressure. Thanks.

Charles Zhang

I think in year 2010 the TV drama cost continued to grow and so it’s now – that's the average...

Belinda Wang

It doubled almost every year.

Charles Zhang

No, so it doubled, 2010 doubled.

Eddie Leung - BofA Merrill Lynch

Got you. Thanks.

Charles Zhang

And that's why our advantage is that starting from two years ago would be high quality content that covered two or three years or to five years, three years mostly, we have the advantage over securing high-quality content at relatively a cheaper price earlier than our competitors, so we have the library, online library, TV drama.

Operator

Thank you. The next question comes from Ming Zhao. Please go ahead.

C Ming Zhao - Susquehanna Financial Group

Thank you very much for taking my questions. First question is on the contribution from the industry verticals. Belinda, you talked about the fast growth, fast-growing four sectors, but in terms of the percentage of contribution, can you give us the rank there?

Belinda Wang

Yeah, in the fourth quarter the automobile and real estate and online game accounted for over 60% of the total revenue.

C Ming Zhao - Susquehanna Financial Group

And what about the FMCG?

Charles Zhang

We cannot give…

Belinda Wang

It’s unchanged.

C Ming Zhao - Susquehanna Financial Group

Okay, good. The second question is could you elaborate a little bit more about the relationship between Sogou and Taobao/Alibaba and the economics there, what should we look for in 2011 in terms of the revenue contribution from that?

Belinda Wang

We are only giving out the revenue increase as an example to show that we are working in all fronts with Alibaba and the Toubou Group, but because Sogou like each individual customer only accounts for a very small percentage point, so I don't think there is anything that’s close to significant.

C Ming Zhao - Susquehanna Financial Group

So Sogou’s growth mostly from itself?

Belinda Wang

Yes.

C Ming Zhao - Susquehanna Financial Group

Okay. So currently the relationship, the partnership between the two companies are still limited in the revenue contribution?

Belinda Wang

No, we only give out the two cases. One is we're working with Etao because I remember when we first announced the Alibaba deal, there were lot of investors and analysts asking us about why is Alibaba or Etao using Bing instead of using Sogou. So we’re just giving an update on that and on the revenue, Toubou is obviously one of our biggest customers and revenue from them has been increasing nicely.

We are establishing a direct relationship with Toubou as well. And other plans like we said in the past like working on the e-commerce side or working on getting direct data from Toubou and the like are also rising well. But all these technology takes time to align between the two sites and hopefully in the next, I would say, six months we will be able to report more on the progress.

C Ming Zhao - Susquehanna Financial Group

Okay. And just a follow-up question to that, Carol, if I look at the minority interest quarter-over-quarter, it’s not changed much even after the restructuring of Sogou and why is that? Is that because the profitability of Sogou has improved a lot?

Carol Yu

No, there is a very complicated accounting literature governing how to recognize the minority interest in the case of preferring shares. So following that the minority, the preferred shareholders does not share much in the Sogou loss for the first quarter. So you will be able to see a more meaningful impact starting in Q2, but don’t ask me why, that’s how the literature is covering.

C Ming Zhao - Susquehanna Financial Group

So starting from Q2 this year or the second quarter of this year?

Carol Yu

This year, this year, the next quarter.

C Ming Zhao - Susquehanna Financial Group

2Q, right?

Carol Yu

Yes.

C Ming Zhao - Susquehanna Financial Group

Okay, thank you.

Carol Yu

The next quarter.

Operator

Thank you. The next question comes from Jenny Wu. Please go ahead.

Jenny Wu - Morgan Stanley

Thank you for taking my questions. First one is regarding your video content cost. Please update us your content cost so far and what’s your budget for 2011? And I have a follow-up.

Carol Yu

Budget?

Jenny Wu - Morgan Stanley

Yeah. Content cost?

Carol Yu

Yeah, we are in the process of finalizing our overall budget for the year and we probably would have a better sense on our next conference call. But as we said before, video will be one of our major area of emphasis. We would expect to put in an appropriate amount of resources into this area in order to stand up to our competitors.

Jenny Wu - Morgan Stanley

Okay. Sure. And is it convenient, tell us what’s the revenue contribution from your video now?

Carol Yu

Just as we mentioned in the earlier call…

Charles Zhang

$28 million for the year 2010.

Jenny Wu - Morgan Stanley

Versus the total of 211?

Charles Zhang

Yes, total $211 million advertising revenue and additional $28 million from 2009.

Jenny Wu - Morgan Stanley

Okay. Then how about the earnings, has it break even or still loss making?

Carol Yu

We follow the strategy across in this area, that is still in our investment stage.

Jenny Wu - Morgan Stanley

Sure. And your peers are talking about maybe break even or profitable in three years, is it also your target?

Carol Yu

Well, what I’d say, I am still doing my budget for this year. So I don't have that sort of long-term view to forward-looking in to three years from today.

Jenny Wu - Morgan Stanley

Okay. Sure, thanks.

Charles Zhang

I think most notably it’s really the market share that we grow from 2.4% to 13.4% in a matter of a year.

Jenny Wu - Morgan Stanley

Okay. And then, Carol, how about the margin turn for this year? What kind of margin one should expect?

Carol Yu

Like what I’ve said, I haven’t actually been doing my budget yet, so I would say, given that we are investing more may be some margin compression, but I don't know, I really, I’m thinking a lot, I haven't done my budget yet.

Jenny Wu - Morgan Stanley

Okay, thanks for that.

Operator

Thank you. The next question comes from Wallace Cheung. Please go ahead.

Wallace Cheung - Credit Suisse

Hi, thank you for taking my question and my congratulations on a very good quarter. Question again on the online video business, as I can remember before management mentioned about the online video contribution, it's roughly like high single digits and this time management mentioned they have generally roughly $208 million, so it’s probably like 13% of your full year 2010 revenue, does it mean that’s a big jump in the fourth quarter revenue or if not can you just explain a little bit on quarter-to-quarter video revenue contribution trend versus total net revenue in the last two quarters? And also just want to get a sense on the video part of the margin, is it already gross profit break even and maybe if you can indicate about the gross margin as well? Thank you.

Carol Yu

It's a very long question and you are breaking up so...

Wallace Cheung - Credit Suisse

Sorry about that. Can I keep it short, my question is I think on the online video revenue contribution to the overall brand advertising revenue, what is the percentage trend from the first quarter 2010, fourth quarter 2010, is there a big jump in the fourth quarter? Thank you.

Carol Yu

Actually, we have mentioned that in the earlier call, the online video revenues to be doubled as compared with the first quarter of 2010.

Wallace Cheung - Credit Suisse

Do you mean – compared with Q1, Q2, Q3, Q4 is a percentage of media revenue jumped?

Carol Yu

Yes.

Charles Zhang

It is growing fast.

Wallace Cheung - Credit Suisse

Yeah, thank you. So just a quick follow-up is, to me it’s like in the first quarter guidance it's a very big portion of revenue coming from the online video as well (inaudible) quarter.

Charles Zhang

We don’t give out – do you mean the first quarter of 2011?

Wallace Cheung - Credit Suisse

Yes, yes.

Charles Zhang

We don’t give out the percentage here.

Wallace Cheung - Credit Suisse

But then like a lapful of contribution, is this comparable to the fourth quarter?

Charles Zhang

We don’t know yet.

Wallace Cheung - Credit Suisse

It’s okay. Thank you.

Charles Zhang

You know, I know you want to see a trend how our video business is growing.

Wallace Cheung - Credit Suisse

Yes, this is very strong.

Charles Zhang

Yeah.

Wallace Cheung - Credit Suisse

Okay. Just final question is about growth margin...

Charles Zhang

I think that Q1 is a slow season, everyone know it’s Chinese New Year, it’s not a typical quarter.

Wallace Cheung - Credit Suisse

Okay. Any indication of gross margins?

Charles Zhang

We are not talking about gross margin obviously, we’re in a stage where we need to expand our traffic in market share.

Carol Yu

It’s not a very big piece of business for us yet, so don’t have a license to get level of details.

Wallace Cheung - Credit Suisse

Just quickly one final question, one final question is that do you have any plans like given the fact that the video business is growing very fast, do you have any plan to speed up the video business?

Charles Zhang

We can’t comment on that.

Wallace Cheung - Credit Suisse

Thank you.

Operator

The next question comes from Catherine Leung. Please go ahead.

Catherine Leung - Goldman Sachs

Hi, good evening. I have two questions. My first question is on your margin, I understand that you’re still finalizing your budget for this year, but I was hoping that you could share whatever detail with us and how you’re thinking of the timing of some of your investments considering on the Changyou side, they will be launching the marketing campaign for Duke of Mount Deer in late first quarter of this year? And my second question is also related more to kind of the gross margins for your portal business. As you continue to gain share in video traffic, is there a possibility that this could be reflected in some pressure on your portal gross margins due to the bandwidth cost? Thank you.

Carol Yu

Yes, there would be pressure on the margins. I’m answering your second question because I didn’t hear very well on your first question. Yes, I think there will be some cost pressure, but as we find more advertisers as time goes by, we will have a better sense as to whether how the overall impact that we will be seeing this year.

Catherine Leung - Goldman Sachs

Okay. My first question is really on kind of the timing of your investments into video content and even some of your prior investments into some newer verticals like real estate, are you kind of coordinating the timing of your spend considering that on your online gaming business you'll be launching sort of a major marketing campaign for Duke of Mount Deer in March?

Carol Yu

No, I don't think we will be coordinating as such because for example, the online gaming business, the online video business. If you have good dramas that we need to launch, we need to launch that. I can't say I will only launch it and buy it after Changyou’s major marketing campaign. So we are not looking to seek, to balance, to sacrifice our long-term business competitive advantage for short-term quarterly fluctuations in terms of our profitability.

Catherine Leung - Goldman Sachs

Okay, understood. And just related to that, I mean some of the news regarding your investments into verticals, I know you talked a lot about your online video, but how important right now is investing into some of your verticals like real estate?

Carol Yu

What was your question?

Catherine Leung - Goldman Sachs

My question is, in addition to online video, are there any kind of potential key areas that you're looking to increase investment in this year for your portal?

Carol Yu

Actually we’re looking to, on an overall basis, to make ourselves very competitive against our competitors in each arena. So big verticals are just autos and real estate, we surely will step up our investment in those to compete with competitors in that area.

Catherine Leung - Goldman Sachs

Okay, thank you.

Carol Yu

Welcome.

Operator

Thank you. The next question comes from Wendy Huang. Please go ahead.

Wendy Huang - RBS

Thanks for taking my question. My question is mainly on your search business. You had seen a big jump in Q4 search revenue, but why are you guiding search revenues to be flat in Q1 2011? Is it just being conservative or is it mainly because of the weak seasonality and also is that business making profit that wasn’t there? Thank you.

Carol Yu

We are guiding flat. As with all other advertising businesses in China, Chinese New Year is a seasonality that we cannot reverse. So the business is trending very well, but Chinese New Year, it’s two days away. So, that's it. And no, Sogou is still at the investment stage, so it's not making a profit yet.

Wendy Huang - RBS

Okay. And a follow-up on that, so with the recent alliance with Alibaba Group, how quickly do you think you can reach your 10% to 20% traffic share in China search market?

Charles Zhang

We do not give this schedule, right, if it is a schedule, it is a very competitive market and we are now having a good start with our Sogou browser popularity and – but we don’t give out a time schedule when we can achieve 10% to 20% of the market.

Carol Yu

We want to be credible.

Wendy Huang - RBS

Okay, thank you.

Operator

Thank you. The next question comes from Gene Munster. Please go ahead.

Gene Munster - Piper Jaffray

Good evening and congratulations on a good quarter. Maybe this will be the last question on video there, but you mentioned that your share grew from 3.5% to 13% in 2010, any insight to where that share gain come from, any thoughts in particular? And second is the percentage of content video or percentage of viewers, views on video that are exclusive content, do you have any insight into that? Thank you.

Charles Zhang

First question, I think definitely the traffic, the market share we gained definitely from the loss of our competitors' market share. The reason is that, first of all, the video sharing business model in the early days were really mostly piracy sites but two years ago we started a campaign on fighting online piracy and also with the Chinese government also very forceful on this. So, the fight on online piracy has resulted in a very successful result. So, we are copyrighting our authorized content so then that when people cannot watch those piracy sites and everyone has to do copyright sites and also with our improvement of our product technology and also the --- of our content offering we definitely gained market share from our competitors.

Also, one point I want to make here is that online video business in China is really not video sharing community kind of business; it's really a linear broadcasting content business. So, it's really -- it's not that winner takes all. It allows the multiple competitors and is really competing on content, owner of the content and also overall marketing and the product technology.

Gene Munster - Piper Jaffray

Okay. So I guess you answered. So in terms of your market share gains, as they have come from a bigger and more established companies or more of the smaller, faster growth companies?

Charles Zhang

I think if you look at the ranking of the online video consumption, we're ranking number three now. So we're definitely getting market share from number one, number two.

Gene Munster - Piper Jaffray

Okay. And then just in terms of the percentage of views that you have exclusive content, do you have that number?

Charles Zhang

(Foreign Language) So we don't out, we don’t calculate what’s the content or viewer exclusive, a number exclusive.

Gene Munster - Piper Jaffray

Okay. One just final quick question is you talked about the share shift from television to video spending, has there been a share shift from display to online video?

Charles Zhang

Shares again, do you mean the market share shift?

Gene Munster - Piper Jaffray

Yeah. You’re now just spending, dollar spending shift, in an earlier question you talked about there is dollars going from traditional television to online video. Have you seen, because you do both display and online video, have you seen any of your customers move budget from display to video?

Charles Zhang

(Foreign Language)

Carol Yu

In the year 2010, I think most of the video online budget, most of the online advertising budget are video content, so the overall Internet online marketing budget, but in the year of 2011,we expect, see the trend just as you described is that more and more advertisers will lead into shift the TV commercial budget to online video content.

Gene Munster - Piper Jaffray

Okay. Then how about budgets from display advertising to online video? Do you see display budget being impacted in shifting over to online video?

Carol Yu

Yeah, I think we have part of the TV commercial budget.

(Foreign Language)

Gene Munster - Piper Jaffray

Brand advertising.

Carol Yu

Yeah. I think, yeah, part of the budget are shifted from the traditional online display budget. Yeah.

Gene Munster - Piper Jaffray

Okay, good. Thank you.

Charles Zhang

TV advertising, I mean for video.

Carol Yu

So the businesses have come from two things, why is it from the traditional online advertising budget and why it’s from the traditional TV commercial budget.

Gene Munster - Piper Jaffray

Okay. Thank you.

Operator

Thank you. The final question comes from Alicia Yap. Please go ahead.

Alicia Yap - Citigroup

Hi. Good evening. Thanks for taking my call. Just any update on your miniblog’s tractions. Sohu Weibo recently launched a dating promotion event and it seems to attract strong traction, I mean interest. Any color in terms of the expectation of registered number growth for this year and any trend for monetization?

Charles Zhang

Yeah, this is the area that we didn’t talk about in our script. Definitely, because of our overall efforts in terms of marketing product and technology improvements and also activities like the online dating and other activities, Sohu Weibo has grown multiple times in the past few months. So it is also noted by the Chinese media and I cannot give out the exact number. But we are looking, we started from a low base because we started late, almost a year late. But we are on a good trajectory trend and because of Sohu’s traditional efforts in blogs and the SMS social network products, we have some advantage, but we still have a small space and we look beyond, I mean 2011 we hope that we will continue to grow at similar speed.

Alicia Yap - Citigroup

Can I just follow-up, any monetization plan in place for 2011 and can you share that, I think?

Charles Zhang

No, sorry.

Alicia Yap - Citigroup

Okay. What about will Weibo be the winner takes all or you do you think there will be some chance for the second and third players?

Charles Zhang

Maybe, well, maybe in Silicon Valley, winner takes all but in China it's very complicated. I talk about the video business is the not winner takes all but on the SMS business it's probably a little bit more winner takes all but in China because of the nature of the organization, the competitiveness of the organization, the proprietary technology and a lot of other things, and so that it's also not winner takes all. So we still have a chance. And also even not only Twitter-like miniblog but also the overall social network like Facebook and other areas is widely open.

Alicia Yap - Citigroup

I see. And just a follow up with the latest trend and the traffic competition among the e-commerce company, just wondering if you see any demand from the e-commerce company on your portal advertising? And what is the percentage of revenue contribution from e-commerce company?

Carol Yu

Okay. Actually in the year of 2010 we see the e-commerce company willing to invest a lot of budget online to get a higher IO on their usage return. So, yes. In terms of the percentage we have not calculated yet so maybe we will give you the number later.

Alicia Yap - Citigroup

Sure, sure. Thank you and that's all. Happy New Year.

Charles Zhang

Thank you.

Carol Yu

Thank you.

Operator

Thank you. This does conclude our question-and-answer session. Please continue.

Tip Fleming

Thank you, everyone, for joining our call today. If you have any further questions please don't hesitate to contact us or Sohu directly. Thank you everyone.

Operator

This concludes the Q4 2010 Sohu earnings conference call. Thank you for participating, you may now disconnect.

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