Sohu.com's (SOHU) CEO Charles Zhang on Q2 2016 Results - Earnings Call Transcript

| About: Sohu.com Inc. (SOHU)

Sohu.com Inc. (NASDAQ:SOHU)

Q2 2016 Results Earnings Conference Call

August 01, 2016, 08:30 AM ET

Executives

Eric Yuan - Director, IR

Charles Zhang - Chairman and CEO

Joanna Lv - Acting CFO

Dewen Chen - CO-CEO, Changyou.com

Jasmine Zhou - CFO, Changyou.com

Xiaochuan Wang - CEO of Sogou

Analysts

Eddie Leung - Merrill Lynch

Evan Zhou - Credit Suisse

Alicia Yap - Citi Bank

Natalie Wu - CICC

Chi Tsang - HSBC

Alex Yao - JPMorgan

Operator

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's Second Quarter 2016 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 of Sohu. Please go ahead, sir.

Eric Yuan

Thanks, operator. Thank you for joining us today to discuss Sohu's second quarter 2016 results. On the call are Chairman and the CEO, Dr. Charles Zhang; Acting CFO Joanna Lv, also with us from Changyou our CEO Dewen Chan; CFO, Jasmine Zhou; Xiaochuan Wang; CEO of Sogou is also on the call.

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 contained in any forward-looking statements.

For more information about potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including its registration statement and most recent Annual Report on Form 10-K.

With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Charles Zhang

Thank you, Eric. Thank to everyone for joining our call. In the second quarter, despite the fact that we were facing macro headwinds and a challenging operating environment, we managed to deliver a top-line result that is within the range of our prior guidance.

Our brand advertising business was under pressure as large customers cut back their spending. But we did see solid growth from small media enterprises, SME customers that helped partially offset the impact.

For Sohu Media Portal, we further enhanced overall content quality and actively promoted our popular mobile News Service App, News App. Sohu Video stepped up investment in content and marketing as planned and we reorganized the video sales team to improve synergies.

For Sogou, mobile search traffic growth remained robust, with corresponding search revenues approaching 50% of the total search revenues. For Changyou, we are glad to see that games revenues were stable from a quarter ago, while stringent expense control helped its post better than expected profits.

Before I give more detail about our key businesses, let me summarize our financial results for the second quarter of 2016. Total revenues $420 million, down 15% year-over-year and 3% quarter-over-quarter. These results have been negatively affected by the RMB depreciation.

On a constant currency basis, total revenues in the second quarter of 2016 would have been $28 million higher or down 9% year-over-year.

Net brand advertising revenues are $113 million, down 25% year-over-year and 10% quarter-over-quarter or down 20% year-over-year on a constant currency basis. Of this revenues from the Sohu Media Portal are $47 million, and the Sohu Video is $32 million.

Total revenue $176 million, up 19%, year-over-year and 19% quarter-over-quarter. Online game revenues $99 million, down 42% year-over-year and 3% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com Inc. was $63 million, or a loss of $1.62 per fully-diluted share.

Now I'll go through some of the key businesses. First, Media business. Sohu News App and our H5 mobile portal are two key products that we have been constantly working very hard on. Its drive to improve the overall user experience and thickness by frequently launching new upgrades and emulated new features.

On the content side, during the second quarter we continue to make progress in content management and improve the editorial quality. We brought in more popular third party authors who contributed articles and commentaries across a wide range of topics. We also reorganized the in-house news team to generate more good original stories.

In terms of financial performance, we see two distinct trends offsetting one another. Sales from large brand advertisers was soft as they shrank their budget – ad budgets to meet the sluggish economy. This in contrast to solid demand that we saw from SME customers who have been more resilient to the economic cycle. Ad sales from SME were up over 50% from a year ago.

Now moving to Sohu Video. As we mentioned last quarter starting in 2016, our content strategy turned more aggressive as we ramped up investment in top notch TV dramas and self-produced sales developed programs.

In the first half of 2016 Sohu Video broadcasted all of the top five TV dramas, including popular titles such as Ode to Joy, [Foreign Language] and To Be a Better Man [Foreign Language] We also accelerated release of our sales developed content. In the second quarter we rolled out four web dramas and two variety shows. The performance of the drama called the Campus Beauty [Foreign Language] was comparable to a first tier TV series, actually at a much lower cost.

For the second half of 2016, we plan to launch 13 original dramas and shows, including Man with Sword [indiscernible] Medical Examiner [Foreign Language] Total number of self developed dramas in 2016 would reach about 20 compared to seven we launched last year.

In the meantime, we selectively take some high quality TV variety shows and broadcast them exclusively on our platform. On July 8, we partnered with Shenzhen TV to broadcast the third season of the reality show Jiang Zhang. For this reason the show featured a mix of sports and entertainment celebrities, such as Olympic gold medalist Liu Xiang and Guo Xinxin.

Broadcast of this show was time to coincide with the run up to the 2016 Olympic Games which helped attract a larger audience and make it a hot topic across the social networking sites.

On the product front, we launched a new version of our standalone live broadcast App called [Foreign Language] We improved the APP design and allowed each user to quickly sign up as a host and open an individual online showroom. We also embedded the live broadcast feature into our Sohu Video and Sohu News App stream, comment stream making these surveys available to a much larger user base.

On the advertising front, in the second quarter we restructured the sales team for Sohu Video and aimed to take advantage of the cross selling opportunities with Sohu Media portal. We also improved our backend advertising technology as we worked to offer advertisers more sophisticated and a comprehensive solution.

The transition of new sales team, sales leaderships, cost, ad revenue falling short of our prior expectations. However, with the new team gradually get into place - get into place and a stronger pipeline of content, we expect sales improvement in the next two to three quarters.

In our view, online video business in China is evolving quickly as the new opportunities are emerging, such as subscription and the live broadcast services. We are committed to Sohu Video as we believe it is strategically important to the group. We intend to continue to directly invest in content and technology to make sure that we remain the first – in the first year of the industry.

Lastly, I would like to highlight some marketing and promotional efforts we did for Sohu Media portal and Sohu Video in 2016. For Sohu Media portal, our campaigns were mainly aimed at enhancing the Sohu News Apps brand and expanding its user base.

We signed a number of popular celebrities to be our spokes person and we actively cooperated with industry partners on increased installation deals. For Sohu Video our efforts mainly focused on content marketing as we promote the best of our programs on all locations, such as bus and LCD screens in screens in residential buildings. With all the efforts mentioned above, we are able to effectively boost the traffic.

Now, moving over to Sogou. In 2016 Sogou's top priority is still about how to quickly expand the user base of its core search service and gain market share. Sogou has made solid progress in differentiating the search results, while we are also ramping up the efforts in brand building and promotion. Xiaochuan will update you more details after my remarks.

Lastly for Changyou. In the second quarter Changyou posted a fairly stable financial performance. We have been working hard to fortify its mobile game pipeline and saw new – saw an encouraging progress.

In China's mobile game market, there is growth of user end to end of the spectrum, to hard core players prefer MMORPG games, while there are also players who like simple game play and more competitive eSports and SLG types of games.

To adapt to such trend, the Changyou is moving toward a more diversified strategy. MMORPG eSports and car combat as we offer focused categories. In July we launched a mobile game called Harshensega [ph] Harshensega is an MA style RCN card combat game that we licensed from SEGA. With it we are looking to target a niche group of Japanese comic fans. The game helped us again more experience in releasing MME [ph] style mobile games and deepen our relationships with both large Japanese game developer and Apple store.

On MMORPG side, we continue to leverage our well proven team with the extensive experience in MMORPG PC games and the rich library of IT. These assets helped our games obtain the favor of the top mobile games publisher. In addition to legacy TLBB mobile game, we have reached the second strategic agreement with Tencent to let them publish our games [indiscernible] The game is expected to launch – to be launched in the first half of 2017. In the next two to three quarters, Changyou plans to launch of total of eight games and these new games will contribute to the recovery Changyou's top line performance.

Now let me pass the call over to our Xiaochuan Wang for an overview of Sogou business.

Xiaochuan Wang

Thank you, Charles. [Foreign Language] Thank you, Xiaochuan. In the second quarter, Sogou continue to make encouraging programs on multiple fronts, and move ahead with ongoing efforts on product differentiation. Mobile search traffic were near to 80% year-on-year. For Sogou Mobile Keyboard, we continue expand its user base, solidifying its position as the third largest to mobile app in China in terms of daily active users.

In RMB terms, total revenues reached RMB1.15 billion, up 27% year-on-year outpacing the industry, excluding a one-time item, non-GAAP net income would have been RMB220 million, up 30% from a year ago.

[Foreign Language]

In early May, the Wei Zexi healthcare incident led to broad discussion China about the search industry, Sogou appreciates that users are in acute need of reliable healthcare search results and hence has worked efficiently to come up with bold solution.

Only week after the incident, we unveiled a service called Sogou Wise Doctor, providing users with a trustworthy platform for authentic and authoritative healthcare information from reliable websites. These website include Zhihu, the largest online knowledge sharing platform in China, Chingshawen [ph] one of China's largest online healthcare service communities and Wikipedia. This new service is ad free for users. Since launch, Sogou Wise Doctor has received positive response and wider recognition from users.

[Foreign Language]

During the quarter we further enriched our search results by adding more differentiated content. In May we partnered with Microsoft Bing on English and academic search. Supported by the technology of Bing, Sogou Search now provides high quality English webpages and academic materials. Two months after launch traffic on Sogou English and Sogou Academic rose 60%.

[Foreign Language]

We are also marching forward with our efforts in artificial intelligence. In particular, we made notable advances in voice technology, recently we launched a innovative function for Sogou Mobile Keyboard that enable users to conveniently correct any input mistake by voice input. For example, user can simply say, please change he to she, and a program can understand and act accordingly.

The voice input feature on Sogou Mobile Keyboard is now being used over a 140 million times a day, a 55% from year ago, making us the number one mobile app for voice input in China.

[Foreign Language]

Also in the second quarter in recognition of their outstanding performance, Sogou promoted three members of management to be our officers, Mr. Mr. Liu Liring [ph] has been promoted to Chief Operating Officer, Mr. Yanghon Tau [ph] to Chief Technology Officer and Mr. Hong Tau [ph] to Chief Marketing Officer, all of them had being serving our company for over 10 years. They demonstrated superior leadership and contributed to the rapid development of Sogou. I look forward to working closely with them to take Sogou to new heights.

[Foreign Language]

In terms of financial performance, for the second quarter tightened regulatory rules impacted the healthcare ad revenue. Since this sector accounted for a relatively smaller shares of Sogou, total revenue reached $176 million, up 19% year-on-year within the range of our prior guidance. On a constant currency basis, total net revenues grew 27% outpacing the industry.

Mobile search revenues contributed nearly half of total search revenues, up from 24% a year ago. Non-GAAP net income was $5.8 million compared with $27.7 million a year ago, excluding a $27.8 million one-time expense to set up the joint research institute for artificial intelligence with Tsinghua University, non-GAAP net income would have been $33.6 million, a 21% year-on-year or 30% in RMB terms.

[Foreign Language]

For the third quarter new regulations and a higher verification standards for our clients we are implementing will impact our revenue growth. In early July, government authorities outlined the new rules which will be effective on September 1st.

Sogou's online advertising revenue which is the majority of our revenue that will be subject to an additional business tax of 3%. In addition, this quarter Sogou imposed stricter rules of customer verification on all sectors. Our third quarter guidance reflects this new investments.

I would now like to turn the call over to our Acting CFO, Joanna, who will walk you through the group financial results.

Joanna Lv

Thank you, Xiaochuan. I will walk you through the key financials on second quarter. The total loss numbers mentioned below are all on a non-GAAP basis.

For our brand ad business, in the second quarter net brand advertising revenues were $130 million, down 25% year-over-year and 10% quarter-over-quarter. Of this, Sohu Media Portal revenues were $47 million, down 10% year-over-year. Sohu Media posted a net loss of $15 million, compared with a net profit of $8 million in the same quarter last year.

Sohu Video ad revenues were $32 million, down 44% year-over-year. Sohu video posted a net loss of $59 million compared with a net loss of $45 million in the same quarter last year. For Sogou, total revenues in the second quarter were $176 million, up 19% year-over-year and 19% quarter-over-quarter.

Of this, search related revenues were $160 million, up 18% year-over-year and 20% quarter-over-quarter. Sogou posted net income of $6 million compared with net income of $28 million in the same quarter last year.

For Changyou, for the second quarter total revenues including 17173 were $129 million, down 36% year-over-year and 1% quarter-over-quarter. Changyou posted net income of $36 million compared with net income of $62 million in the second quarter last year.

For the group, in the second quarter total revenues were $420 million, down 15% year-over-year and up 3% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com Inc. was $63 million or a loss of $1.62 per fully diluted share.

For the third quarter of 2016, we estimate total revenues to be between $400 million and $430 million. Brand advertising revenues to be between $110 million and $120 million. This implies an annual decrease of 21% to 27% and a sequential decrease of 3% to sequential increase of 6%.

Sohu Media Portal revenues to be between $47 million and $50 million. Sohu Video revenues to be between $32 million and $36 million. Sogou revenues to be between $165 million and $175 million. This implies an annual increase of 2% to 8% and a sequential decrease of 6% to nil.

Online game revenues to be between $90 million and $100 million. This implies an annual decrease of 34% to 41% and a sequential decrease of 9% to a sequential increase of 1%. Before deducting the share of non-GAAP net income pertaining to non-controlling interest, non-GAAP net loss to be between $70 million and $80 million.

Non-GAAP net loss attributable to Sohu.com Inc. to be between $90 million and $100 million, and non-GAAP loss per fully diluted share to be between $2.45 and $2.60. 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 $5 million to $6 million. GAAP net loss attributable to Sohu.com Inc. to be between $100 million and $110 million and GAAP loss per fully diluted share to be between $2.60 and $2.85.

For the first quarter 2016 guidance, the company has adopted and expected exchange rate of RMB6.7 to $1, as compared with the actual exchange rate of approximately RMB6.26 to $1 for the third quarter of 2015, and RMB6.53 to $1 for the second quarter of 2016.

In sum, in the second quarter while our brand advertising business was pressured by our weakened economy, Sogou and Changyou performed well and their financial results were inline with our expectation. With Sogou group strong balance sheet, we are continuously investing I key initiative and diligently develop and promote our leading mobile Internet products. We are confident to continue to drive our growth and generative returns for our shareholders over the long-term.

This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

Eddie Leung

Good evening. Thank you for taking my questions. I have a couple of questions related to the media portal business, given the productivity and the revenues in the near term. The first thing is about the SME advertiser base. I think Charles mentioned that we have seen a pretty good growth in the SME portion. So just wondering how big these SME advertisers revenues are going to be – as a whole portal business.

And then secondly, also about the Mobile News App of the portal business, could you talk a little bit about the traffic share, as well as the revenue share of these mobile initiatives to your portal at the moment? Thanks.

Charles Zhang

So you mean the SMEs percentage of SME revenue over the total revenue of media portfolio…

Eddie Leung

I guess, Charles.

Charles Zhang

Yes, its 22% of the total - the $47 million, I mean, the media revenue. Then the mobile News App, yes, we have the Mobile News App, we have the H5 web portal and also the PC, so that are three products that carry our news and content.

So your question is about how much traffic is - or the revenue from the Mobile News App is that your question?

Eddie Leung

Or if you don't mind, just comment on the trend you have seen on the proportion contribution, either your traffic revenue from mobile and how are we seeing the trend heading into the second half of the year? Thanks.

Charles Zhang

So, yes, definitely the PC traffic has been in a slow declining mode, but the mobile traffic has been growing steadily. And so the news is about compare with March, right, we have like 10% growth from page unique visitors of the Mobile News App.

And the H5 portal, the browser base H5 portal has been stable. That one is stable, has been stayed at actually a fairly large number. But the Mobile News App because of our updates and the promotion it has been steadily, slowly growing.

Eddie Leung

Got it. Thank you.

Operator

Thank you. Your next question comes from the line of Evan Zhou from Credit Suisse. Please ask your question.

Evan Zhou

Hi. Good evening, management. Thank you for taking my questions. Question is on search and then video. So I think for search, could you maybe comment a little more within the impact that you cited from new regulations, are there any specific vertical type of impact from excluding certain type of customers? And specifically, what are the new requirements you implemented for the stricter customer verification processes?

And for video, could you maybe update a little bit on how is harder of the competitive landscape, especially regarding the recent change of the content vetting pattern happening from some of the shares? Thank you.

Charles Zhang

So for search, I would like to try to answer your question, basically you are asking about certain vertical industries that advertisers, is that your question? Basically the medical industry?

Evan Zhou

Maybe not necessarily medical, but any specific vertical guideline more?

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

Okay, to answer your question, as far as the new regulations, it’s basically the Internet advertising law which would become effective on September 1st. It was – our business will be subject to additional 3% business tax. That’s the impact on our P&.

As for the verticals, I think healthcare and financial services will be subject to future control. So our own customer verification, as I mentioned in script – starting from this quarter, so we have started to impose a stricter rules of customer verification on all sector.

Charles Zhang

So your video question, you asked about the – you said content spending pattern, what do you mean?

Evan Zhou

Yes, I mean, I think some of your peers have actually been much, much more aggressive than last year in terms of increasing their content budget and to bid some more top content.

I think we've been getting, doing a very great job in developing in-house content. So maybe, Charles, can you comment on say what's our - thoughts on that?

Charles Zhang

I think compared with Q4 last year, Sohu basically you know, basically we like – we kind of spend a little bit like last year. That actually contributed to the kind of the traffic, there are some traffic data.

But this year we basically re-entered the battlefield and spend more aggressively. So just look at it, as I said, the top five TV dramas you know, our competitors have then we also have it.

So and also TV drama side, because all though the few TV dramas that got broadcasted on the so-called Jianglihu, the leading three or four TV stations, the price for those TV dramas to online rights are sky rocketing.

But the – because the industry we've been started this kind of the exchange sharing trend, so that price has been you know, kind of contend or curtailed a little bit, so now its manageable.

So its – so actually several of us all joined this kind of alliances in sharing the content. So that the content - the cost of content per episode for those few leading – the broadcast by the leading TV stations now basically divided by four, five.

So we're looking at the non-exclusive broadcasting on the TV – on our website, on the several video platform. That means a crazy price of like RMB$9 million or RMB$10 million per episode it will be divided by three or four or four maybe $2 million to $3 million on episode if you want to have the rights.

And that’s the crazy part, but then that only have a few, like you know, but there is lot of others that are not broadcasted by those four TV stations, the price is manageable. This is one thing.

Secondly, Sohu has been more aggressively into self produced or I would say we actually invest, pick the best IP among the – in the market and then with outside investment and our investment to produce a content that’s not necessarily throughout being broadcasted on TV stations or any TV stations but exclusively on our site.

And as I said, the Campus Beauty - is one that created the traffic actually comparable to the big dramas that broadcasted on the TV stations, but with a much lower cost. That’s why we start to moving more you know, forcibly into this – in that content investment or called self-produced content. We have like 20 such dramas compared with last year only seven.

Evan Zhou

That’s helpful. Thanks a lot Charles. Okay, thanks.

Operator

Thank you. The next question comes from the line of Alicia Yap from Citi Bank. Please ask your question.

Alicia Yap

Hi. Good evening, Charles, and all management team. Thanks for taking my questions. My question is also related to the Sogou search business. So there will be several parts of the question.

Number one is that what is the percentage of search revenue coming from medical customers? I understand you guys mentioned it is small portions, but if you can give a range or a rough percentage that would be helpful?

And then second, given the publicity or maybe the credibility suffered by Baidu, has Sogou actually gained some traction or market share from either users or advertisers in the absence of Baidu?

And then lastly, do you expect more regulatory policy and restriction to impose for the search industry in the coming months? If so, what would be the likely measures? Thank you.

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

For first question on healthcare ads, revenues accounted over 10% of search revenue, lower than prior quarters and is the third largest sector in terms of revenue contribution and the ranking is the same as prior quarters.

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

As I mentioned more of the traffic increased by 80% year-over-year and that means we are outpacing the industry. So we do start to gain market share from our competitors.

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

As for the new regulations, we expect – overall it will be beneficial to the healthy development of the search industry. Of course, in the near term our revenues and profit maybe under pressure, but it will have no impact on the long-term development of our business.

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

We are probably see more regulations coming in the future, but again near term top line and bottom line may be pressured, but it has no damage to the long term development of our search business.

Alicia Yap

Okay. Thank you.

Operator

Thank you. The next question comes from the line of Natalie Wu from CICC. Please ask your question.

Natalie Wu

Hi. Good evening, management. I also have some questions on the Sogou search business. So basically what kind of margin will Sogou search in the longer term, will Sogou reach in the longer term? Because as you know, your competitors operating margin is as high as 50% or over 50% for purely search. But your margin, despite growing, is actually growing quite slowly in the last few quarters. So just wondering is there any difference between you and your competitor regarding cost-expenses structures?

And also, actually currently, under your commercial search results, there is a light blue icon of commercial program called [Foreign Language]. So will you change that into advertisements underneath Guangao since September the 1st or just adjusting its color? Thank you.

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

[Foreign Language]

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

On PC 50% to 70% of Baidu and on mobile it’s closer to 60% of Baidu. But I think with – as we continue to gain market share our margins will improve over time.

Charles Zhang

Yes, I think this is actually mathematical problem, as you more have issues, more traffic and than you have more customer base, number of customers than the bidding and matching will be more fully, so you have a higher margin. So it should be growing.

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

As for whether we have changed the labeling for our bouncer link from September 1st, it’s up to more – it’s up to the regulators to come up with more specific implementation rules.

Natalie Wu

So still no visibility by now right?

Xiaochuan Wang

[Foreign Language]

Unidentified Company Speaker

There is no decision has been made on the side of the regulator, so we have to wait and see.

Natalie Wu

Great. Thank you.

Natalie Wu

Thank you. Your next question comes from the lie of Hillman Chan from Macquarie. Please ask your question.

Hillman Chan

Good evening. Thanks, management, for taking my questions. I have a question regarding your media portal and search business. So could management talk about the trend of some of your top contributing industries within search and media portal, such as e-commerce, business services, gaming for search and then for media portal that would be auto, IT and online services, anything that you want to highlight, be it stronger or weaker trend? Thank you.

Charles Zhang

Sector, ad sector. So it’s the media portals advertisers its leading factor, if you compare its actually different from a years ago right, because the leading one is services, like Apps and all those kind of right, and the e-commerce, Apps and the promotions in our industry.

And the second one, historically its auto, so second one is auto, we don’t see real estate here, right. So third one is IT, and - so it’s leading - in terms of ranking its Internet services, e-commerce and auto the big IT and then number four is fast moving consumer goods. Number five is apparel.

Hillman Chan

Could you talk about the growth trends of these verticals, within the portal adds going into third quarter?

Charles Zhang

Yes, I think for the media portal there is head and also I think the small media enterprises are more – re reflective of the trend, actually we see a lot of Internet services Apps promotions once it was you know, Internet and financial services, now it’s all kind of things. Yes, App, mobile applications.

Hillman Chan

Okay. Thank you management.

Charles Zhang

All right. Welcome.

Operator

Thank you. Your next question comes from the line of Chi Tsang from HSBC. Please ask your question.

Chi Tsang

Good morning and good evening, everybody. Thanks for taking my question. I have a couple questions. Firstly, just in terms of the large brand advertisers, I'm wondering if you can comment on what you think has been the changes in sort of sentiment or outlook over the last few months? And related to that, do you think that the advertisers on Sohu are more focused on sort of the global outlook for macro or is it more China specific?

And then secondly, as it relates to video, it seems like you've done a good job in the first half of the year in terms of TV dramas, as well as original programming. For this full year, I'm wondering when we should expect the outlook for revenue for Sohu Video to start stabilizing? Thank you very much.

Charles Zhang

Okay. So the questions are very certain. So first of all its definitely the China outlook, China perspective, so all these state owned companies, the large banks, than IT companies, they've been all - and all auto there are all shrinking their budget because the China economy is really sluggish, actually in the mid or down turn. So it’s really - the advertisers – the big brand advertiser are spending less because of the Chinas economic problems.

But we do see – because of small media enterprises those are, you know, people have still need to continue with the large, so the people need to still - to consume all kind of services, few are growing. So this is your first question.

The second question is that, definitely, yes, we are basically we will enter the battle and have all the top TV dramas, if our competitor have it, we have to it. Although it’s not exclusive and that’s non-exclusivity is that something that we actually promote and try to persuade to the industry to go this way, that’s the only way we can manage the price, because it’s abnormally high. And also the in house produced - I mean, the content production.

So our revenue side it’s only because of the last few months, I mean, last quarter, the Q4 2015 cost our traffic kind of slowdown because of that. But also we have a major sales team in the organization. So these are two factors contributed to the kind of a dip or the revenue reduction.

So now with the new sales team and also actually reporting to media synergy, together we are we're going to have broadened our user advertiser base. So that we have less impact from basically number of customers, so that we'll have less impact because of the few large advertiser spend less. So you already see from a broadcast that the sales revenue will improve in Q2 a little bit and fall in Q4.

Chi Tsang

Can I just ask you how many paying subscribes you have for video please? Thank you.

Charles Zhang

Paying a subscriber, that part I didn’t say, we didn’t encountered, so we still have a small base because that subscription or paid service is to us a small space, because we didn’t produce movies, like you know the short movies that was a driver for subscription before.

But with this new – with this self produced content there are basically weekly updates about 12 to 20 episode, we - all of exclusivity and we have this paid for watching the whole season or pay for watching ahead of two or three episode. So this will drive our paying subscriber base. And also we are also looking at some of movie production. So not it’s too small to talk about.

Chi Tsang

Great. Thank you.

Operator

Thank you. Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question.

Alex Yao

Hi. Good evening, everyone. Thank you for taking my question. I have two questions. One is regarding the real estate business. That part of the business saw a sequential revenue decline. Can you guys talk about the trends there and outlook for the rest of the year?

And then secondly is the high-level strategy question. So the group is facing a lot of challenges from across the board from slowing macro to transition of portal from PC to mobile to search regulation and also aging PC gaming business. Where is your focal point over the next few quarters and how would you allocate resources to address the key issues? Thank you.

Eric Yuan

This is Eric, I will take the first question, I think for focus out there on the real estate vertical, I think we see some gradual recovery in the second half of this year. So maybe second quarter will be the bottom in terms of the revenue. And I think for the full year this vertical, the total revenue will be roughly flattish worth of 2015.

Charles Zhang

Well, your question actually, you said that the group had a lot of challenges because of these problems, but those problems actually are opportunities. First of all, you know, the whole industry has been moving into mobile, that’s why we've been - our focus is really to develop the best App, namely the Sohu News App and the Sohu Video App and the search App and you know, to really have a strong presence on the mobile, Internet.

And that’s why we are actually - if you look at the earnings is really not that good, not because our video revenue it just suffered a little bit for the quarter and industry next. But actually ramp up our spending in marketing and promotion of both News App and the Sohu Video App and content and also we are actually spending more on content purchase. So all these we need to have a strong presence and market share for these important application of information, media and also entertainment.

Second its really that our advertising system enable first of all the media part and now even the video part to move and more sophisticated advertising system that enable to provide a better advertising platform for small media enterprises. And so that that’s where the growth will be.

And so its with the big data and also on our gaming - on third parties, its definitely opportunities because of our competitors you know, the event and incidents and also the search side, I think the - we are just providing now a whole set of new feature that our competitor doesn’t have and we are just providing a better search technology and better search products. That’s explained why our traffic has been growing 80% from the mobile search traffic compared with a year ago.

And for the gaming, I think we already signed you know, basically the TLBB, LXC [ph] and also Shenyuanden with Tencent, so it’s a population platform that we look forward to a successful collaboration and income growth, revenue growth.

Alex Yao

That is very helpful. Thank you.

Operator

Thank you. Ladies and gentlemen, as there are no further questions, we would like to close the conference. Thank you all for joining. You may disconnect the line now. Thank you.

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