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Sohu.com Inc. (NASDAQ:SOHU)

Q1 2012 Earnings Call

April 30, 2012 8:30 am ET

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

Alicia Yap – Barclays Capital

Eddie Leung – Bank of America/Merrill Lynch

Jialong Shi – CLSA

Catherine Leung – Goldman Sachs

Mark Marostica – Piper Jaffray

Jiong Shao – Macquarie

Operator

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu’s First Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. Today's conference 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, Tip Fleming from Christensen. Please go ahead, sir.

Tip Fleming

Thank you, Operator. Thank you all for joining us today to discuss Sohu.com’s first quarter 2012 results. On the call 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. Also with us from Changyou are Chief Executive Offiecr, Tao Wang; President and Chief Operating Officer, Dewen Chen; and Chief Financial Officer, Alex Ho; as well we also have CEO of Sogou, Xiaochuan Wang; Vice President of Sohu and CEO of Sohu Video, Ye 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 contained in any forward-looking statement. 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 most recent annual report on Form 10-K.

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

Dr. Charles Zhang

Thank you and thanks everyone for joining our call. In the first quarter, our financial results were mixed. Our brand advertising business got off to a slow start mainly due to the early Chinese New Year holiday and the softening macroeconomic conditions in China. Some of our advertising customers were cautious with its spending due to concerns about the slow down in China’s economic growth. As a result, brand advertising revenue grew to slower than that in a normal year.

The good news is that search revenues and our overall Sogou business continued to deliver solid growth. And we are pleased with the better than expected results of Changyou, our online game subsidiary. Changyou’s flagship games, Tian Long Ba Bu and DDTank, continue to rank among the top games in China in the MMO and Web-based game categories, respectively.

Shen Qu, a new Web-based game, was well-received by gamers upon launch, adding to the top-line results. For the remainder of 2012, Changyou has four new games due for launch that feature different genres and graphic styles, and are expected to draw new communities of users while expanding our user base.

Now, I would like to share some first quarter financial highlights with you. Total revenue were US$227 million, up 30% year-over-year and are down 8% quarter-over-quarter. Net brand advertising revenue were US$61 million, up 7% year-over-year and in line with our prior guidance.

Sogou revenues were US$23 million, exceeding our guidance of US$21 million. This was 184% year-over-year and down 1% quarter-over-quarter.

Online games revenue reached a quarterly record of US$127 million, up 34% year-over-year and 3% quarter-over-quarter. Non-GAAP diluted EPS or US$0.61, excluding the high-end of our guidance by US$0.06, (inaudible).

Despite unfavorable operating environment for brand advertising revenues were few committed for our strategy that [stands] around our important segments, in particular, online video.

We clearly understand that Internet business is evolving tremendously in China, the chance for our opportunities and the challenges, which we need to proactively [move] on.

Due to a heavy investment in human capital and the premium content, we are inevitably experiencing temporary pressure financially due to the conditions herein.

However with our total ability to execute, we believe with the investments will enhance our strong position in the market over the long run.

Now, let me discuss our online video business in more detail. In the first quarter, we continue to focus on attracting viewers to Sohu video platform with compelling content and improved (inaudible).

Starting from Chinese New Year, we broadcasted our hit TV drama “Country Love Serenade”, directed by Zhao Benshan a famous comedian in China on an exclusive basis. The hit drama attracted over up to 260 million video views in the first of 30 days of broadcast, a new record for a single TV drama on our video platforms.

Needless to say, we have a pipeline; it’s rather rest of 2012 that continues to be the early of the industry.

For example, in the second quarter, we are due to broadcast the most anticipated TV series in 2012 called (inaudible), which is seen around a medical system in China and a featuring by the utmost top (inaudible) in China. Even before it did air, this TV series is already one of the most talked about topics on the streets.

Original Content is another important piece of our common strategy. Not only have we made many popular shows and the web dramas ourselves, we also have successfully developed partnerships with major studios and TV network in China to jointly produce and distribute high quality programs.

Partnering with the Hunan Satellite TV, a leading China TV station, we recently launched a national reality talent competition show called, [up juniors] (inaudible) we call that auditions across the country and so far had received more than 155 applicants online or off-line.

In the coming months, we will broadcast (inaudible) episodes show on our platform and the final contestants will be [paid] during our primetime program on Hunan TV, and then results of our efforts. We have achieved a solid pace of user acquisition. From March 2012, according to comScore, our monthly unique visitors and the video viewers increased sequentially by 13% and 10% respectively.

I’ll comment on cost side, after a sharp increase in 2011, pricing has been increasing over the past few months. Major players become more rational in bidding for new content. Lastly, we joined hands with (inaudible) TV and ITE and formed an alliance on content purchasing and broadcasting.

We uniquely (inaudible) a powerful platforms will put us at a favorable position in getting the best content at the best prices. Overtime, we expect price increase turn to a level that better reflect the two commercial values. That being said, we expect cost pressure will persist throughout 2012 as most content to be broadcasted was acquired during the 2011 period at a higher cost base.

Recently on the sales side, we decide to build a dedicated sales team for our video business based on the following consideration. First, the Sohu Group, for Sohu Group there is a growing strategic importance of our video business. Second, as TV advertisers allocate greater budgets to online video, the market size is expanding rapidly. These traditional TV (inaudible) had a different demand and a different evaluation methodology for video advertising, as compared to total (inaudible).

Lastly, with a dedicated team, we’ll be able to minimize cannibalization, between our portal and video sales.

Moving to the industry landscape, we are aware that online video business in this industry is starting to see some consolidation. We intend to be optimistic when considering financial acquisition is optimally inline with our long-term strategy.

Whether such opportunities would materialize with our unparalleled experience in entrainment industry and our strong balance sheet, we are confident that we will remain a leading player with our comprehensive online video platform.

Now, let me turn to the Sohu business. In the first quarter, despite the slow seasonality, Sohu delivered solid performance. Revenues rose 184% on a year-over-year basis through US$23 million. The operating metrics are also encouraged. Sohu’s core products continue to gain users.

In March, Sohu search daily page views increased by 65% annually. Sohu products market share rose to 7.4% from 4.8% a year ago, according to web analytics firm CNVV.

Looking at 2012, we expect Sohu for maintaining a fast pace of revenue growth supported by a continued traffic increase, and improved monetization.

In the meantime, we’ll continue to invest aggressively in a number of areas, especially, the expansion of our R&D team and partner network. And to upgrade our infrastructure, we improved service quality.

Moving on, I’d like to discuss our online game business. In the first quarter for our MMO Games Tian Long Ba Bu continue to hold a leading position among the MMO Games in China and gamers explores new features such as cross server battles and a team-based mission in Tian Long Ba Bu 3. With the release of Tian Long Ba Bu 3 we noted a 25% increase in average play time per gamer.

Looking ahead, we plan to launch four MMO games in 2012, among which a 3D Q-style turn-based (inaudible) playing game (inaudible) is due to release in the second quarter. All four of MMO games in our hotlines are undergoing close data transitioning.

Moving to our web-based games, DDTank had another solid quarter. The game continues to be one of the most popular web-based games on a social networking website and online game portals in China. (Inaudible) Shen Qu, a new web-based game developed by 7Road, quickly gained gamers interest across China.

Regarding Changyou’s platform based, after acquisition of 17173 Business in late 2011, the developers began to work on advertising first time and one time in three websites and underlying technology, adding functionality’s and enhancing interactivity’s. We aim to enhance with retention of web traffic and increased user subscription for our platform (inaudible).

In addition, we’re expanding 17173’s news coverage to include not only traditional MMO games, but web-based games and the mobile games as well.

In conclusion, our game portfolio remains strong in our MMO games. And we have still rapid growth in web based games, since we entered the category last year.

We’re looking to further expand our product offerings and attract new gamers this year with our game pipeline. Going forward we will continue working on our platform strategy using one-time (inaudible) at a based who launched new services and the products for gamers and creates an active online game platform in China.

I'll now pass the call over to Belinda for an overview of our brand advertising business. Belinda?

Belinda Wang

Thank you, Charles. We had a challenging first quarter in our brand advertising business. The economic slowdown in China in early year of 2012 clearly had an impact on advertiser sentiment. Because of lackluster auto sales and the slowing real estate market, many automakers and real estate developers decided to defer their marketing plans. While the overall market was soft, e-commerce and the fast-moving consumer goods sectors performed relatively well, each posting over 30% year-on-year revenue growth in the first quarter,

Brand ad revenues for the first quarter increased by 7% year-over-year. For easier comparison with our peers, our gross brand advertising revenue before business tax was US$67 million and the net brand advertising revenue was US$61 million.

As we progress towards the end of the April, it does not appear that advertiser’s activity are rebounding as strongly as we had hoped. As mentioned by Charles, we decided to setup a dedicated video sales team. With this we expect to undergo a transition period.

Please turn to current information, for the second quarter we expect, first for Sohu Group including 17173 brand ad revenues before business tax to be between US$74 million and US$78 million. Second, net brand ad revenues to be between US$68 million and US$71 million, this implies a substantial increase of 12% to 16%.

Now I’ll 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. Hello everyone. I will now take you through our financials for the first quarter. One, revenues, total revenues were US$227 million, up 30% year-over-year and down 8% quarter-over-quarter. Brand advertising revenues were US$61 million, up 7% year-over-year, and down 22% quarter-over-quarter.

During the first quarter, Changyou integrated the 17173 Business and aims to make 17173 the platform for new services and products targeted for gamers over this coming year. Brand advertising revenues from the 17173 Business, which decreased 34% quarter-over-quarter and increased 4% year-over-year to US$8.2million, total revenues were US$23 million, up 184% year-over-year, and down 1% quarter-over-quarter. Of this, search-related revenues were US$22 million, up 171% year-over-year and down 6% quarter-over-quarter. The number of search customers and average spending customer increased by 69% and 37% year-over-year.

Online games revenue reached a quarterly record of US$127 million, up 34% year-over-year and 3% quarter-over-quarter. Wireless revenues were US$13 million, a year-over-year increase of 14% and quarter-over-quarter decrease of 8%.

Now, let me provide some more details about our financials. From now on, most of the figures discussed will be non-GAAP. As a reminder, you will find a reconciliation of these non-GAAP measures in our official earning release.

Two, gross margins, non-GAAP gross margin for the first quarter was 65% compared to 71% in the previous quarter, and 73% for the same period last year.

Three, operating expenses, non-GAAP operating expenses for the first quarter of 2012 totaled US$92 million, a decrease of 2% from the previous quarter, and an increase of 55% from the same period last year. The year-over-year increase in non-GAAP operating expenses was primarily due to an increase in number of employees and higher expenses associated with marketing and promotion activities.

Four, operating margins, non-GAAP operating margin was 24%, compared with 33% in the previous quarter, and 39% in the same period 2011.

Five, income tax expense; for the first quarter of 2012, GAAP income tax expense was US$19 million. Excluding a non-cash income tax expense of US$1 million recorded for tax benefits from share-based awards.

Non-GAAP income tax expense were US$18 million, compared with US$10 million in the previous quarter. The increase in income tax expense was primarily due to the increase in applicable tax rate for the major operating entities.

Six, net income; before deducting the share of net income pertaining to the non-controlling interest, non-GAAP net income was US$45 million. Non-GAAP net income attributable to Sohu.com, Inc. was US$24 million or US$0.61 per fully diluted share, which was ahead of our expectations.

Seven, net margin; non-GAAP net margin before deducting the share of net income pertaining to the non-controlling interest was 20%, compared with 31% previous quarter, and 35% in the same period of 2011.

Eight, moving on to the balance sheet and cash flow statement. For the first quarter, we generated over US$73 million in operating cash flow, of which Changyou generated US$56 million, while the other business units generated US$17 million. The US$17 million cash flow generated by the other business units include US$13 million received from Changyou, as advanced payments related to the service and advertising agreements as a part of Changyou's acquisition of 17173 from Sohu. As of March 31, Sohu Group’s cash balance was US$761 million.

As of March 31, 2012, net accounts receivable was US$84 million, compared with US$87 million at the end of the fourth quarter of 2011.

Brand advertising DSO for the first quarter was 76 days, compared with 58 days in the previous quarter and 63 days in the first quarter of 2011.

Stock purchase program; on August 29, 2011, Sohu Board of Directors authorized a combined share purchase program of up to US$100 million. As of March 31, 2012, we have repurchased 500,000 Sohu’s ordinary shares and purchased 750,000 Changyou’s ADS’s at an aggregated cost of approximately US$55 million.

Our outlook for the second quarter of 2012 is as follows. We are expecting, total revenues to be between US$244 million to US$250 million. Brand advertising revenues to be between US$68 million and US$71 million. This implies a sequential increase of 12% to 16% and a flat to an increase of 5% year-over-year. This includes revenues from 17173 of US$8.5 million to US$9.5 million, which implies a sequential increase of 4% to 16% and an year-over-year increase of 3% to 15%.

Sogou revenues to be around US$29 million, a majority of which will be from the search related business, implying a sequential increase of about 28% and an annual increase of 113%. Online games revenues to be between US$130 million to US$133 million. This implies sequential increase of 2% to 4% and represents annual growth of 28% to 31%. Before deducting the share of non-GAAP net income pertaining to the non-controlling interest, non-GAAP net income is expected to be between US$34 million to US$37 million.

Non-GAAP net income attributable to Sohu.com, Inc. to be between US$15.5 million and US$17.5 million, and non-GAAP fully diluted earnings per share to be between US$0.40 and US$0.45.

Assuming no new grants of share-based awards, we estimate that the compensation expense and income tax expense relating to share-based awards to between US$3 million to US$4 million. The estimated impact of this expense is expected to reduce Sohu’s fully diluted earnings per share for the second quarter under U.S. GAAP by US$0.08 to US$0.10.

In summary, we are pleased with the healthy momentum in our Sogou and Changyou businesses, and we are confident that our investments in online video will bring strategic value to Sohu’s future competitiveness. This concludes our prepared remarks. Thank you for joining the call today. Operator, we would now like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Dick Wei of JP Morgan.

Dick Wei – JP Morgan

Hello, and thank you for taking my question. My question is about a video, if management can discuss the video advertising revenue for the quarter and so, what is the sales trend going to be like, keeping the sales team transition [in light of] video revenue will be like under a couple of quarters maybe also for this year as well and if...

Carol Yu

Okay. (Inaudible)

Dick Wei – JP Morgan

Okay, about the cost?

Dr. Charles Zhang

Cannot hear you.

Carol Yu

Dick, we cannot hear you the line is very bad, can you choose speak slower and shorter?

Dick Wei – JPMorgan

Okay, yeah. Hope, this is better. So if you can discuss your video ad revenue for the quarter.

Carol Yu

Slowly.

Dick Wei – JPMorgan

And then also how does that look like for next couple of quarters, given the sales team transition, and then also the video cost amortization for the next couple of quarters that will be great? Thank you.

Dr. Charles Zhang

I think we made a important decision tribute our dedicated sales team winning the Sohu video organization before the video sales are winning the portal sales team and to in order to have the total marketing package for advertisers, but then there is the problem that there is no dedicated sales team to specially address the needs of the video advertisers. So we are in a transition period that we believe that the – with a dedicated sales team, my focus been also closer to the content and product production. I think our video advertising sales will significantly improve in the future.

And also because some of the exclusive titles, content titles we bought, our we bought the peak of the price last year, the most incentive (inaudible) and so we’ll have tentative pressure of our common costs, but as I said that there is already the price easing and because of the other video size website they all be coming rational in bidding so, if going to improve this year, and yeah…

Carol Yu

Dick, hello.

Dick Wei – JPMorgan

Yeah, hi, can you hear me. Hello, Carol.

Carol Yu

Yes. I think you’re asking about amortization right?

Dick Wei – JPMorgan

That’s correct.

Carol Yu

Okay. I’ll just give you a complete picture of TV content purchase situation for the year 2012.

For content that’s going to be broadcasted on Sohu Video, the contract amount in total is US$48 million. This is included those repurchased last year, and those who are going to purchase for the rest of the year. So the total budget that we’re working at is US$48 million.

In terms of cash flow, we already paid US$70 million as of last year and then we expect to pay the balance of US$31 million this year, of which US$5 million has been paid during Q1.

In terms of amortization for content service broadcast of this year, the amortization expense is US$28 million and for those had purchased or broadcast of last year, the carry forward impact is about US$19 million, so total is US$47 million.

Dick Wei – JPMorgan

All right, great. And let me just go back to the revenue question. What is the target for the year for video advertising, given the changes?

Carol Yu

Yeah, actually in the first quarter, we achieved about over 90% total sales growth rate on our video brand advertising revenue, compared to the same period of last year, but as we mentioned earlier by Charles we have decided to set up a dedicated team in Sohu on a video organization. So we will undergo a transition period I know we will see a slower growth rate in the – yeah, the late three quarters this year. Yeah, so it’s still early to predict the total picture of the whole year 2012.

Dr. Charles Zhang

I think Q2 and Q3 – Q4 actually [was an increment.]

Operator

Okay, your next question comes from the line of Alicia Yap of Barclays.

Alicia Yap – Barclays Capital

Good evening, thanks for taking my questions. My question is also related to video. Just wanted to understand a little bit more on alliance with Qiyi and Tencent on the content purchase. So, can you elaborate how the cost will be split, would that be equally and will the alliance be focusing on by order future content or will you still go out on your own to be on some content independently. Thank you.

Dr. Charles Zhang

So in principle, the alliances what we do, the comment called for some hot TV episode reductions by two-third basically a one-third we will pay one-third of the price if we went to buy alone, so day-to-day pricing alliances as well as leveraged.

Carol Yu

Yeah, Alicia I think the answer is yes. We wish to split the cost equally and the alliance will cover the big purchases that hit big drama. But I do believe each of us – the three of us will also go out and buy smaller content from time-to-time as well. So it would not be covering 100% of everybody’s content, I don’t think that’s at all feasible.

Alicia Yap – Barclays Capital

I see, can I sort of ask, for how long this alliance will last?

Belinda Wang

There is unspecified period, we are doing this as long as we want to.

Alicia Yap – Barclays Capital

Okay, great, thank you. I will get back to the queue. Thanks.

Operator

[Philip] your line is open.

Unidentified Analyst

Hello, can you hear me.

Belinda Wang

Yes.

Unidentified Analyst

All right. Hello, hi, evening, thanks for taking my question. I’ve a question about your advertising outlook. Could you please share with us a bit more about the recent trend for auto and properties sector based on your discussion with the advertisers and also – and when do you expect the advertising spending for them to come back? Thank you.

Carol Yu

As we mentioned in our script, we went through a slow quarter in the first quarter of 2012 and the second quarter we have give our guidance. That according to the contract framework we have signed that with our major advertisers, we can – actually we’ll be more optimistic about the second half of the 2012.

Unidentified Analyst

Are you seeing some appetite that’s delaying the spending in Olympic period?

Belinda Wang

Olympic? Say that again.

Unidentified Analyst

I’m just wondering is there any marketing campaign postponed for the summer Olympics period that they allow you to see a more optimistic view and things like that?

Belinda Wang

We can see some advertisers postpone their marketing plans especially in the automobile and the real estate sectors, because the auto – the new car sales slow down this year and the regulations on real estate industry really impact some real estate developers marketing plan. But we have them to see some sign about the marketing plans around Olympic games, so still too early to predict whatever happened about this major advertisers to consider about the Olympic game marketing plans.

Unidentified Analyst

Okay, thank you.

Operator

Your next question comes from the line of Eddie Leung of Merrill Lynch.

Eddie Leung – Bank of America/Merrill Lynch

Hi, good evening. Thank you for attending my question. I have a question on your search basis, could you help us to understand more about the advertisers on your search platform? What are the top industries and are we seeing better momentum from the so called (inaudible) from the larger advertisers? Any color would be useful. Thank you.

[Foreign Language]

Dr. Charles Zhang

So the top five categories are e-commerce, IT Service and the other potential level…

[Foreign Language]

Dr. Charles Zhang

Okay, text and services (inaudible).

[Foreign Language]

Belinda Wang

Commercial businesses

Dr. Charles Zhang

Commercial services like insurance or education, yeah, and…

[Foreign Language]

Dr. Charles Zhang

So with a 100% growth from the year so, it’s definitely a growth aspect during that time.

[Multiple Speakers]

Eddie Leung – Bank of America/Merrill Lynch

Are we going to see fast growth at the moment from the Sohu SMEs or from the large advertisers?

[Foreign Language]

Dr. Charles Zhang

Smallest, SMEs.

Belinda Wang

Yeah, I mean SMEs.

Eddie Leung – Bank of America/Merrill Lynch

Thank you.

Operator

And are you ready for the next question? Mr. Fleming?

Tip Fleming

Yes, please.

Operator

Thank you. Your next question comes from the line of Jialong Shi of CLSA.

Jialong Shi – CLSA

Thank you. My first question is a follow-up on to the previous question. May be could you repeat, because I didn’t get it, could you repeat your top five advertising categories and their growth rate?

Dr. Charles Zhang

You mean for search right?

Jialong Shi – CLSA

No, no, brand advertising.

Dr. Charles Zhang

Oh, brand.

Carol Yu

The top advertising industry structures include transportation, online game, real estate, e-commerce and FMCG.

Jialong Shi – CLSA

And also I have a follow-up question on 17173. I recall (inaudible) just mentioned over the time of conference call, 17173 it seems to be going through a changing strategy from sales oriented to a product oriented. So, just want to – does that mean 17173 will gradually evolve into a game operation platform from current marketing platform or in other words, are you going to take few advertisements from your competitors going forward on 17173?

[Foreign Language]

Belinda Wang

For the 17173 Business it is currently, it does have a game operation platform where it jointly operates web-based games, but it’s under a separate domain name, its called 3711.com.

[Foreign Language]

Belinda Wang

But because 103 already has this domain under the radiance of business, we are not using – we are not focusing out from a strategic point of view specifically, on despite of this business?

Unidentified Company Representative

[Foreign Language]

Belinda Wang

In the next month, we will rethink our strategy on the game joined operation business and we could share more details next quarter.

Unidentified Company Representative

[Foreign Language]

Belinda Wang

Because 17173’s main audience is gamers. The most important works that we have to do right now is to discover and understand the needs of our audience.

Unidentified Company Representative

[Foreign Language]

Belinda Wang

For the management’s in terms of management’s time we will not put to much focus on the online advertising business. But I want some of them free and the online advertising business the 17173 will continue to grow and operate as usual and grow with the industry growth rate.

Unidentified Company Representative

[Foreign Language]

Belinda Wang

We hope to be able to expand 17173’s business and discover new areas of growth in terms of, for example on the web based games, mobile games side and also overseas. Thank you.

Jialong Shi – CLSA

Thank you.

Operator

Your next question comes from the line of Catherine Leung of Goldman Sachs.

Catherine Leung – Goldman Sachs

Hi, I am just curious; would you expect the set up of your dedicated video sales team to create any disruption on the rest of your total advertising business? Thank you.

Dr. Charles Zhang

I think that the impact is minimum.

For short-term there is some, but the long-term there is a minimum. It’s because the bandwidth sales team are actually targeting a set of new kind of advertisers, most of them from traditional TV advertisers. And also on behalf for even for one advertiser they are, they have two type of needs. They needed to do marketing on portal at the same time they need to allocate budgets on video, so it’s their overall marketing trend. So, where actually it’s kind of ambitious, and we’re actually expanding the advertiser customer base.

Catherine Leung – Goldman Sachs

And so, is this same advertiser wanted to advertise both on your portal and for your video channels, would you be sending the same sales person or would two different sales people visit this customer?

Belinda Wang

Yeah, we’ll send out two dedicated salesperson to speak about the two different web properties that is portal and online video.

Dr. Charles Zhang

So you (inaudible)

Catherine Leung – Goldman Sachs

Yeah, there was a joint sales force, yeah.

Dr. Charles Zhang

With some focus, we will, because we will also, I mean in the same company and we will (inaudible) discuss the original need of the customers and to understand that their marketing enterprise and then decide which team will take lead.

Catherine Leung – Goldman Sachs

Okay, understood. Thank you.

Operator

The next question comes from the line of Mark Marostica of Piper Jaffray.

Mark Marostica – Piper Jaffray

Yes, thank you for taking my question. With the weakness in auto and also the real estate markets I’m curious if you’re evaluating whether or not to rationalize the size of your brand or portal sales team at all or do you feel that the team in place today is the team that you’ll continue with going forward?

Belinda Wang

What do you exactly mean by rationalize, we are – our focus is that we want to have a dedicated sales team. So we’ll be hiring more people.

Mark Marostica – Piper Jaffray

Yeah, what I’m getting at here is I’ve – just recognizing that from your comments that portal is facing some challenges, and as you build your online video dedicated sales team I’m curious whether or not you’re looking at perhaps shrinking your portal sales team at all, if there is a relationship there, or if that’s not the case and I’m not planning to…

Belinda Wang

No, there is no relationship there.

Dr. Charles Zhang

Okay, fair enough. I think the Internet user base still grow in China and also the consumption on the Internet are much deeper, and then more – so that the Internet platform as advertising marketing platform is still yet to be realized by more advertisers and the potential is still there, they’re more potentials than (inaudible) [to each portal]. So you kind of downsizing our sales team, when you’ve actually expanding, now especially with the video sales and also portal sales, we all have new opportunities because our portal site in terms of content and traffic. We are undergoing some innovative revolution or to basically at the time of what 2.0 how to provide people with the best news and the most related news and also use a generic content also video content and pictures and everything. So even the photocells find there’s the new optimism that’s all we need to continue to expand these types of shrinkings.

Mark Marostica – Piper Jaffray

Thanks for the color.

Operator

Your next question comes from the line of Shao, Jiong of Macquarie

Jiong Shao – Macquarie

Hi, thank you very much for taking my question. Can you hear me okay?

Jiong Shao – Macquarie

Okay, great. I have a two-part question on your video business. Firstly, could you please remind us your content cost amortization schedule? And secondly, I think I heard Charles, who was talking about, and so who would be optimistic in terms of potentially acquiring other video players, I was wondering could you please elaborate a bit on sort of the characteristics, and a metrics you would be looking at it, when you’re looking at the potential acquisition targets? Thank you.

Carol Yu

On the amortization part, our policy is to amortize 50% on, 50% for the first six months after launch, after broadcasting, and then 30% in the following six months, and then with the balance of the 20% over the following one year, so it’s 80% in the first year, and then 20% in the second year.

Jiong Shao – Macquarie

Considering the, there was some of the industry merger & acquisition mergers we doesn’t pay. Keep our remind open to optimize this for consolidation, but with or without we need to and to maintain or to continue to develop our own SOHU’s issues, own core competitive advantage of which is basically our understanding of (inaudible) industry and as I’m the marketing capability and our capability and also our technology division capability.

So we believe that, the video are basically, a motion picture phenomenon is mostly related to entertainment, unlike the photon side of were, you provide so many channels and for information consumption to all, so many areas. For video entertainment that its key applications and with this – traditionally our understanding and competitive advantage so even with consolidation work and it to maintain stand off were interrupted our core competent and even without the I think we’ll be able to maintain or to continue to maintain our leadership provision actually in the past two quarters Sohu even without the our competitors on Sohu’s and the video is traffic. Actually it go faster than our competitors.

Operator

Thank you for participating in today’s conference. You may now disconnect. I would like to turn the call back over to Tip for closing remarks.

Tip Fleming

Thank you everyone for joining the call today. If you have any further questions, please don’t hesitate to contact us or the company directly. Thank you.

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