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Sohu.com Inc. (NASDAQ:SOHU)

Q4 2007 Earnings Call

February 4, 2008 8:00 pm ET

Executives

Brandi Piacente - The Piacente Group

Dr. Charles Zhang - Chairman of the Board, Chief Executive Officer

Belinda Wang - Co-President, Chief Marketing Officer

Dr. Gong Yu - Chief Operating Officer

Carol Yu - Co-President, Chief Financial Officer

Analysts

Dick Wei - J.P. Morgan

Jenny Wu - Morgan Stanley

Jason Brueschke - Citigroup

Analyst for Eddie Leung - Merrill Lynch

Leah Hao - Goldman Sachs

Wendy Huang - Bear Stearns

Alicia Yapp - Citigroup

Tian Hou - Pali Capital

C. Ming Zhao - Susquehanna Financial Group

Operator

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to Sohu’s fourth quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Brandi Piacente. Please go ahead.

Brandi Piacente

Thank you for joining Sohu.com to discuss our fourth quarter and fiscal 2007 year-end results. On the call today are Chairman and Chief Executive Officer, Dr. Charles Zhang; Co-President and Chief Marketing Officer, Belinda Wang; Co-President and Chief Financial Officer, Carol Yu; Chief Operating Officer, Gong Yu; and Senior Director of Online Game Business, [Wang Tao].

Before management begins their prepared remarks, I would like to read you the 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.

Potential risks and uncertainties include, but are not limited to, Sohu's historical and possible future losses, limited operating history, uncertain regulatory landscape in the People’s Republic of China, fluctuations in quarterly operating results, and the company’s reliance on online advertising sales, online game revenues, and mobile phone related wireless revenue for its revenues.

Further information regarding these and other risks are included in Sohu's annual report on Form 10-K and other filings with the Securities and Exchange Commission.

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

Dr. Charles Zhang

Thank you, Brandi. Hello, everyone. Welcome to Sohu's fourth quarter and fiscal 2007 year-end financial results conference call. I am very pleased to report another outstanding quarter with record total revenues and earnings. We also achieved record results for the full year ended December 31, 2007.

We are even more pleased to report that we exceeded our raised guidance in each of our revenue categories and earnings for the fourth quarter announced on December 4th. This is a true testament to the strength and accelerated momentum of each of our major business units.

For the fourth quarter, brand advertising revenue reached $32.2 million, representing 46% year-on-year growth. For fiscal 2007, brand advertising revenue grew by 42% year-on-year, despite the FIFA World Cup in 2006.

For the fourth quarter, online game revenue reached $24 million, up more than 10 times year-on-year. For 2007, online game revenues grew by almost four times year-on-year to $42.1 million.

For the fourth quarter, total revenues climbed by 90% year-on-year and reached $65.3 million. For fiscal 2007, it increased by 41% year-on-year to $189 million. Additionally, non-GAAP net income in the fourth quarter increased by 110% to $17 million, and increased by 33% to $43.7 million for 2007.

Sohu's focus on technological innovation and leadership, as well as our strategic vision and execution, have been the cornerstones of our success over this past year. Our long-term commitment to provide Internet users with the best content offerings and innovative online products enable us not only to further enlarge our user base and increase stickiness, but also to capture an accelerating level of advertising dollars to Sohu websites.

Here I would like to emphasize that I am not only confident that fiscal 2008 will be another great year for Sohu's brand advertising business. Instead, with A, the expected continued expansion of total Chinese Internet population and B, our technological leadership and enhanced brand value brought by the Olympic effects, both of which in turn will help Sohu gain market share in terms of Internet users.

So I am equally confident that Sohu will continue to enjoy impressive growth for our brand advertising business in 2009 and beyond.

Now I will begin by discussing Sohu's major achievements. First, products and technology -- by continuing to demonstrate our thought leadership in the Chinese Internet space, we achieved great success in the development of major technology products and initiatives. For example, in Sohu blogs, we have been continuously upgrading our services from fun to personalization, from text to video sharing, and we are encouraged by the users’ response. In the fourth quarter, our registered bloggers further increased by 16% quarter on quarter.

On January 1, 2008, we opened the development platform for Sohu blogs to all third party developers through open widgets. Similar to Facebook, this empowers the developer community to rapidly develop and distribute their widgets to massive Sohu bloggers on the Sohu platform. Sohu bloggers now can choose any of such widgets and apply them to their blogs, according to their own preferences.

Sohu's open widget platform has been well-received by third-party developers and bloggers. We believe it will speed up the process of bloggers converting their Sohu blogs into their personalized portal space, which will further enhance our user base over the long run.

Another example about our technological leadership is our Chinese character input method software, Sogo Pinyin. It continues to expand its features and is demonstrating an impressive rate of market penetration and adoption.

Second, our Olympic strategy -- as the 2008 Olympics draw near, we are continuing to leverage our marketing rights from our role as the exclusive official Internet sponsor of the Beijing Olympic 2008 Olympic Games. This will further reinforce the message to both Internet users and advertisers that we are the portal of choice for the Olympics.

Beginning 2008, we will aggressively utilize our marketing rights as an Olympic sponsor to enhance Sohu's brand value and dominate market awareness. We will execute various marketing content across a range of media, including TV and outdoor billboards. We will also be organizing a series of Olympic related interactive events with Internet users. Such interactive events will be widely timed to coincide with key Olympic events, such as the Olympic torch relay.

For the first quarter of 2008, we’ll invest around $2.5 million for Olympic related marketing activities and a non-recurring marketing project, such as the 10th year anniversary of Sohu Brand and Sohu 2008 New Vision Forum. We believe these investments will enable us to further penetrate our already dominant market share of Chinese Internet users.

Shortly, Belinda will provide a business review of our brand advertising business in a few moments but first let me now briefly discuss our online game business.

Tian Long Ba Bu, or TLBB, continued to do well and solidify its success during the fourth quarter. I am glad to report that the game achieved new peak levels in terms of revenue and number of users. For the fourth quarter, Tian Long Ba Bu’s revenue grew by 102% quarter on quarter to $22 million.

On November 1, 2007, we launched our second expansion pack and with that, Tian Long Ba Bu’s registered user base increased by 29% quarter on quarter to 23 million. Peak concurrent users exceeded 500,000 at the end of 2007. Quarterly active paying accounts exceeded the 1 million milestone, increased to 1.1 million from 690,000, up 59% quarter on quarter.

Quarterly average revenue per active paying accounts, or ARPU value, increased to RMB147 from the previously RMB118 of the previous quarter, an increase of 25%.

Typically, the first quarter in China is a seasonally weak quarter due to the long Chinese New Year holiday. On January 16, 2008, we launched the third expansion pack for Tian Long Ba Bu, which has been well-received by players. Combined with our planned promotional efforts up to the Chinese New Year, we continue to believe Tian Long Ba Bu will be able to achieve 5% to 10% revenue growth for the first quarter sequentially.

With our experience, again through the development and operation of Tian Long Ba Bu, we are now working to expand our game pipeline. Our development progress for our second self-developed, in-house developed game, The Duke of Mount Deer, is on track. We are pleased with the development results so far and now targeting closed beta testing by the end of this year.

In December 2007, we licensed a new RPG game, The Legend of the Ancient Wall, from a local studio with a development team originally from a highly reputable online game company in China. This will be a 2.5D martial arts game and it is expected to be launched in the second half of 2009.

Thank you for your attention. I would like to now turn the call over to Belinda Wang, Co-President and Chief Marketing Officer, for a brief discussion of our progress in the brand advertising business. Belinda.

Belinda Wang

Thank you, Charles. We are excited about the trends driving the strong momentum in the Chinese online advertising market for the first quarter, the top three industries in brand advertising were automobile, online games, and real estate. The fastest growing sectors were online games, fast-moving consumer goods, and financial services.

For the first quarter, the online games vertical increased more than 130% year-on-year, because many new titles launched and the associated expansion of marketing activities.

With numerous IPOs in 2007 within the sector, online game companies are becoming more aggressive in ad spending and promotional campaigns.

Fast-moving consumer goods grew by more than 100% year-on-year, despite being transitionally heavy offline advertisers, the steady conversion ad spend to online platform have continued.

Financial services increased by more than 90% year-on-year due to [heightening] activity in the Chinese stock market and increasing ad spending from banks and [funds]. As Charles mentioned, we are seeing strong momentum as the Olympic Games draws closer. In the fourth quarter, Olympic partners, sponsors, and suppliers, almost doubled their ad spending with Sohu year-on-year. For the full year of 2007, their ad spending with Sohu increased by 74% year-on-year.

Looking ahead for 2008, we believe the growth of our brand advertising business will continue to be robust, primarily driven by the increasing ad spending of Olympic sponsors and the direct competitors.

With that, I would now like to turn the call to Gong Yu, Chief Operating Officer, for a review of website operations.

Dr. Gong Yu

Thanks, Belinda and Sohu continues to establish its opportunities surrounding the Olympics. We furthered our role as the leading online media in China. It brings Sohu's brand recognition and leadership to even higher levels in 2007. As we gear up for Beijing 2008 Olympic Games, our premier content offering and news reporting capabilities have been highly recognized by many well-known entrepreneurs and thought leaders in the areas of politics, economics, science, technology, entertainment, and international affairs.

One example is that in January 2008, Sohu organized the 2008 New Visions Forum in Beijing. It brought together over 400 government officials, permanent [inaudible], industry leaders, media elite and the like. During this industry session, China’s well-respected visionaries expressed their in-depth views on recent eye-catching events that covered many topics, such as political, social, and economic outlook for 2008. They were broadcasted across China through Sohu's portal. The impact and reach of our online reporting abilities across China is well-respected by the industry and has further positioned Sohu as one of the most authoritative online media sources in China.

We are all proud of this achievement and look forward to furthering our development as history unfolds.

With that, I would like to turn the call to Carol, Co-President and Chief Financial Officer, for a review of Sohu's --

Carol Yu

Thank you, Gong Yu and hello, everyone. I will now provide a review of our financial results for the fourth quarter and fiscal year ended December 31, 2007.

Revenues -- for the fourth quarter, total revenues hit a record $65.3 million, exceeding the high end of our guidance by $7.8 million, representing an increase of 27% sequentially and 90% year-on-year. Not only did each of the revenue categories exceed our guidance, which was raised in early December, some exceeded our expectations by a wide margin and reached all-time records.

Advertising -- with total advertising revenues of $33.7 million, we achieved a sequential increase of 7% and a year-on-year increase of 35%.

Brand advertising revenues totaled $32.2 million, representing a quarter-on-quarter increase of 8% and year-on-year increase of 46%.

Sponsored search revenues were $1.5 million, representing a 12% quarter-on-quarter decrease and a 48% decline year-on-year. The year-on-year decline was mainly due to the strengthening of our anti-fraudulent click policy, based on more sophisticated algorithms starting in mid-2006.

For the fourth quarter, through better integration with Sohu portal and fine-tuning of featured search products, such as picture and music, daily page views of Sogo has increased by about 10% sequentially.

Non-ad revenues totaled $31.6 million, exceeding the high end of our guidance by over $6 million, representing an increase of 58% sequentially and 236% year-on-year. Online games revenues were $24 million, an increase of 89% quarter-on-quarter and over 10 times year-on-year, due to the strong performance of TLBB. For the fourth quarter, revenues from TLBB and Blade online were $22 million and $2 million respectively.

Wireless revenues were $7.3 million, a quarter-on-quarter increase of 7% and year-on-year increase of 9%. Sohu is well-positioned to minimize risks associated with the wireless sector, as it now only represents 11% of our total revenue.

Gross margin -- under FAS-123R, share-based compensation expenses are charged to the cost of revenue and operating expenses. Total share-based compensation expense for the fourth quarter of 2007 was $1.9 million. As we believe excluding the share-based compensation expense from a non-GAAP financial measure of net income makes a more meaningful comparison of Sohu's operating results and improves investors understanding of Sohu's performance, we use non-GAAP measures in this discussion to explain margin, cost and expense items.

Non-GAAP gross margin for the fourth quarter was 72%, compared with 67% in the previous quarter and 64% in the fourth quarter of 2006. Gross margin expansion was primarily due to contribution from TLBB.

Non-GAAP advertising gross margin was 64% in the fourth quarter, flat with the previous quarter and decreased from 66% from the same period last year.

Brand advertising non-GAAP gross margin for the fourth quarter was 67%, flat with the previous quarter and down from 70% in the same period last year. The year-on-year decrease was primarily due to increased headcount and bonuses, increased content cost, bandwidth, and server depreciation expense.

Sponsored search non-GAAP gross margin for the first quarter was 12%, down from 24% in the previous quarter and 43% in the same period last year. The year-on-year decrease was primarily due to higher server depreciation expense related to the launch of Sogo 3.0 in late 2006 and a smaller scale of search revenue.

Non-advertising non-GAAP gross margin was 79% for the fourth quarter, up from 72% for the previous quarter and 57% in the fourth quarter of last year.

Online games non-GAAP gross margin for the fourth quarter was 88%, up from 84% in the previous quarter and 60% in the same period last year. The increase correlates to the increase in revenue from TLBB.

Wireless non-GAAP gross margin for the fourth quarter was 56%, up from 52% in the previous quarter and 55% in the same period last year. The quarter-on-quarter increase was mainly due to savings of certain content cost.

Operating expenses -- for the fourth quarter, Sohu's non-GAAP operating expenses totaled $30 million, up 25% from the $23.9 million for the previous quarter and up 111% year-on-year.

The increase was primarily due to our continued investment in product development, marketing expense for Sohu branding and TLBB, as well as an increase in bonuses to reward employees for their contribution to good results

Operating margin -- non-GAAP operating profit margin was 26% for the fourth quarter, up from 21% in the previous quarter and 23% in the same period last year.

Income tax expense -- income tax expense in the fourth quarter was $0.7 million, compared to $0.3 million in the previous quarter.

Net income -- non-GAAP net income for the fourth quarter reached a record high of $17 million, or $0.43 per fully diluted share. Non-GAAP net income increased by 45% sequentially and 110% year-on-year. GAAP net income for the fourth quarter was $15.1 million, or $0.39 per fully diluted share. GAAP net income increased to 56% sequentially and 148% year-on-year.

Net margin -- non-GAAP net margin for the fourth quarter was 26%, compared with 23% in the previous quarter and 24% in the fourth quarter of 2006.

Balance sheet and cash flow -- now I will make a few comments on our balance sheet and cash flow. As of December 31, 2007, our net accounts receivable balance was $27.1 million, a decrease of $7.8 million as compared to $34.9 million last quarter. Our DSO for the fourth quarter was 37 days compared to 58 days for the previous quarter and 62 days for the fourth quarter of 2006.

Fourth quarter brand advertising DSO was 53 days, compared to 75 days for the previous quarter and 58 days from the same quarter last year. We are continuing to closely monitor our accounts receivable and we are pleased with the outcome.

As of December 31, 2007, our bad debt provision totaled $2.1 million, compared to $1.7 million as of September 30, 2007, reflecting our stringent revenue recognition and credit extension policies.

For the fourth quarter, our cash flow from operating activities was $48.5 million, up 111% from $22.9 million for the previous quarter and up 235% year-on-year, mainly due to the cash rich nature of our expanded online game business.

Finally, turning to our business outlook, for the first quarter of 2008, Sohu expects: total revenues to be between $66.5 million to $68.5 million, with advertising of $33.5 million to $34.5 million, and non-ad revenues of $33 million to $34 million; brand advertising revenues of $32 million to $33 million; online game revenue of $25.5 million to $26.5 million; we estimate non-GAAP fully diluted earnings per share to be between $0.43 and $0.45; and assuming no grant of new share-based awards, we estimate share-based compensation expense to be between $3 million to $3.5 million. The expected impact of this expense is expected to reduce fully diluted earnings per share under U.S. GAAP by about $0.08 to $0.09.

In conclusion, Sohu's outstanding results for the fourth quarter and full year 2007 were driven by our technology focus and long-term vision. We are glad to see the pay-off of those strategies. With our proven track record, we will continue to execute and are ready to further solidify our success in 2008.

As Charles said earlier, with expected continued expansion of total Chinese Internet population and our technological leadership, coupled with enhanced brand value brought by our Olympic efforts, all of which will help Sohu gain market share in terms of Internet users as well as advertisers. We are very confident that Sohu will continue to enjoy impressive growth for our brand advertising business in 2008, 2009, and beyond.

This concludes our prepared remarks for today. We will now open the floor for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Dick Wei with J.P. Morgan.

Dick Wei - J.P. Morgan

Good morning, everyone. Congrats on another very strong quarter. I have two questions -- first question, you are expecting -- is that 2008 advertising guidance, are you able to give some sense of how things are looking for the Olympic period and also the 2008, that would be good.

Secondly, I think Charles earlier mentioned about the one-time marketing spending, about $2.5 million. I just wonder if it is only in Q1. Do you plan to make more of these one-time spendings during Q2, Q3, during the actual Olympic period? Thanks.

Carol Yu

Yes, I expected that question, and you expect my answer. We gave out our Q108 guidance of -- I mean, if you take the high end, it would be about 40% year-on-year growth. I think after the Chinese New Year, we’ll have a better sense for the rest of the year but things continue to look good, or else we won’t be able to give out a year-on-year guidance of 40%, on top of a 42% for 2007. That is, assuming a stable currency, so that’s excluding the impact of any further RMB appreciation. So that answers your first question.

The second question is yes, we do expect to continue to have further marketing campaigns to enhance our brand value but we will continue to monitor very closely our operating margin and net margin to ensure that we deliver also very good earnings quarter after quarter to the street.

Dick Wei - J.P. Morgan

Lastly, I just want to reconfirm your prior guidance -- you are still shooting for the mid-20s levels non-GAAP net margin. That is still your target?

Carol Yu

Yes.

Dick Wei - J.P. Morgan

Great, thanks a lot and congrats again.

Carol Yu

Thank you.

Operator

Thank you. Our next question comes from the line of Jenny Wu with Morgan Stanley. Please go ahead.

Jenny Wu - Morgan Stanley

Congratulations on a good quarter and my first question is regarding your advertising pricing strategy. Number one, did Sohu increase the advertising pricing rate card in the first quarter of ’08? If so, by how much? Secondly, did Sohu meanwhile cut back the discount rate? If so, by how much? And lastly, is there going to be another price hike before the Olympic Games? And again, if so, by how much? Thank you.

Carol Yu

When you say discount, you mean what sort of discount? Are you talking about base agencies or whatever, because --

Jenny Wu - Morgan Stanley

Yeah, yeah, right.

Carol Yu

Okay.

Dr. Charles Zhang

Yeah, we did raise the price in Q1 but I want to emphasize and reiterate that advertising is not very -- advertising spending is not very correlated with price increase. It is really the overall spending or the budget a company has for spending on the websites.

Jenny Wu - Morgan Stanley

Okay. Is there any quantitative data for ’08?

Carol Yu

We haven’t released our price in January and the increase of the whole total price is about 15%.

Jenny Wu - Morgan Stanley

Okay. Is there any other price hike before the Olympic Games?

Carol Yu

It is not clear yet but think of considering increasing the investment from the Olympic sponsors and the limited advertising space, we’ll think about increasing our price during the third quarter.

Jenny Wu - Morgan Stanley

And my last question is regarding your first quarter guidance. It looks not very strong. I understand if you’re leaning towards seasonality and apart from that, is there any other reason behind? Thank you.

Carol Yu

Well, it’s a traditionally slow quarter. It’s seasonality. I think like what I said before, Jenny, you look at 40% growth after a 42% growth, I think that’s very strong.

Jenny Wu - Morgan Stanley

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Jason Brueschke with Citigroup. Please go ahead.

Jason Brueschke - Citigroup

Good morning, everyone. Let me add my congratulations and wish you all a happy new year. I have two categories of questions. First of all, the extraordinary strength that you guys saw in the fourth quarter in brand advertising, could you tell us how much of that would you characterize as Olympic related and how much of it would you characterize as independent of the Olympics?

As a follow-on to that, could you tell us, is the strength that you are seeing primarily from new customers or I think as Charles indicated, is it just the demand environment is so strong that you are also seeing price increases from your existing clients?

And then finally, my question on your new branding efforts -- can you give some color on exactly how you are going to be positioning Sohu in the market? Is this anything different than the way you positioned Sohu in the past? Maybe if you could just give us some color on that. Thanks.

Dr. Charles Zhang

So the ad spending correlated to Olympics or not Olympics -- first question.

Carol Yu

In the first quarter, Olympic --

Dr. Charles Zhang

In the fourth quarter.

Carol Yu

In the fourth quarter, yeah. In the first quarter, Olympic partners, sponsors, and suppliers almost doubled their ad spending with Sohu year over year.

Dr. Charles Zhang

For the fourth quarter of 2007.

Carol Yu

And for the full year of 2007, their ad spending with Sohu increased by 74% year-on-year.

Dr. Charles Zhang

So fourth quarter is partly related to the Olympic spending but not all.

Jason Brueschke - Citigroup

Are you seeing an up-tick in addition to these new customers or is this primarily the driver of growth in the fourth quarter was Olympic spending from the Olympic partners, which you already have?

Dr. Charles Zhang

The up-tick should start more in Q2, right? Q2 and Q3 for the Olympic effect.

Carol Yu

I think as we draw closer to the Olympics, you’ll see that impact growing more. And -- I mean, Jason, I understand that you want a number from us but it’s very difficult because I would say that the overall ad market in China, whether it’s Olympic -- you can categorize that as I would say 60% to 70% relating to the Olympics because you’ve got Olympic partners and sponsors advertising aggressively, so their competitors could not just sit there and do nothing. I mean, you can see in the Internet industry right, so that is a more previously competing against each other. That would drive up advertising spending.

So I would say that the market as a whole, because of the Olympics drawing near, people are spending more in terms of pushing and marketing their products aggressively.

Jason Brueschke - Citigroup

Okay, that’s helpful. And then the other half of that was just are you -- I’m sorry?

Dr. Charles Zhang

As Carol just said, it’s very hard to quantify how much is Olympic related and how much is not. But definitely people are planning to spend money in Q4 and they are planning and especially when 2008, they will spend more. The trend is up.

Jason Brueschke - Citigroup

Okay, and then the other way I was kind of looking at that was if you think about your total number of clients, are you seeing a series of new advertisers who haven’t advertised on Sohu in the past? Are you seeing an up-tick yet from that, or is that mostly what the new branding campaign that you are starting in Q1, is that really intended to broaden the base of advertisers in addition to the expected increase in advertising spend around the Olympics?

Belinda Wang

I just give you the number for the full year of 2007, our client number is about 1,070. Compared to the year of 2006, is about 850.

Jason Brueschke - Citigroup

Great. That’s perfect. And then maybe the final question was the new branding campaign, could you help us understand how you are planning on positioning Sohu in the market with this campaign, maybe vis-à-vis your competitors? Thanks.

Dr. Charles Zhang

Our new branding campaign, you mean, who do we position ourselves?

Jason Brueschke - Citigroup

Yes.

Dr. Charles Zhang

Basically Sohu will be the portal of choice of the Olympics. Anyone who -- beside television, there will be another interactive channels 24 hours a day and seven days a week reporting through text and pictures and video, and also interactivity through our web 2.0 products. So a lot athletes will communicate with the users through their blogs through our cooperation with the --

Carol Yu

Yes, Team China.

Dr. Charles Zhang

Team China. That’s where the Chinese Internet users are most interested in, and also as we -- as I said, our marketing campaign will be timed closely with the Olympics, the pace and the events. One of the most important ones is the torch relay project that started in March, late March and we will extend it for over 100 days outside China and within China. There will be two paths -- one is really on the low altitude. Another one is really the torch that ascend on the top of Mount Everest. Both torch relay projects, Sohu as the official sponsor will send a team and closely report, especially the exciting moment when the torch is on top of the Mount Everest. It will be a huge media event and Sohu will be the sponsor, the website to report this event.

Jason Brueschke - Citigroup

Okay, thanks, everyone.

Carol Yu

So in short, it’s --

Dr. Charles Zhang

So portal of choice for the Olympics and we expect during the Olympics, people will -- everyone in China and the world will know that Sohu is a choice for the Olympics. That’s why we will expect a user to switch. Even for people, for users that never use the Sohu before, after the Olympics they will start to use Sohu and that’s why we said that beyond 2008, in 2009 we will see a larger user base and market share, so that it will improve our brand advertising click-through rate so that we expect the post-Olympic brand advertising growth will continue, rather than just the one-time Olympic effect. It’s really the user switch, end user base.

Jason Brueschke - Citigroup

Great. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Eddie Leung with Merrill Lynch. Please go ahead.

Analyst for Eddie Leung - Merrill Lynch

Congratulations on the good results. I’m Thomas asking questions on behalf of Eddie Leung. Two questions -- can you provide a breakdown of 2G and 2.5G revenues under the wireless business? And my second question is what is the tax rate for 2008 after the implementation of the new tax rule this year? Thanks.

Carol Yu

The breakdown for the wireless business was already sent to you in the worksheet, so if you haven’t got that, we will resend that.

The tax rate, because we -- basically all of our operating entities in China are [inaudible] entities, so the tax rate will -- the new rules will not hit us as much as the local entities, so it will remain largely unchanged, with the exception that for some of the entities, we are already moving into from the tax holiday period to the tax pay, but the results, the EPS guidance that we gave out has already taken that into consideration.

Analyst for Eddie Leung - Merrill Lynch

Okay, thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Leah Hao with Goldman Sachs. Please go ahead.

Leah Hao - Goldman Sachs

Congratulations on the good quarter. My first question regarding the advertising market, overall health of the advertising market, basically I was wondering -- with the new addition of advertisers, what kind of revenue concentration you are seeing from the top accounts? Or do you see the smaller accounts actually spent more money and dilute the total revenue concentration among the top spenders?

Carol Yu

It remains pretty stable.

Leah Hao - Goldman Sachs

Okay, so would it be fair to say that the new account addition doesn’t contribute as much as the increase in spending from the top accounts still for the next year?

Carol Yu

I think you will see both growing. You’ll see top accounts actually spending more and then -- but their percentage didn’t go up. The concentration to these accounts didn’t go up because we’ve got new accounts that keep coming in.

Leah Hao - Goldman Sachs

Okay. Thank you. And also related to the advertising side, what is your expectation related to seasonality or the allocation of the total full year ’08 budget into the quarters? I know it’s still early for you to say but what would be the -- your expectation as of now?

Carol Yu

Our expectation right now, the seasonality of course I mean -- typically it’s Q2 and Q3 being the most heavy spend quarters, as far as ad spend is concerned. So you will see that spike even more acute this year with the Olympics. I think that’s pretty obvious.

Leah Hao - Goldman Sachs

Right, or I guess in other words, on a year-on-year basis, would you see -- would you expect Q4 of ’08 will post a pretty big drop-off versus Q4 of ’07 on a year-on-year basis for branded advertising?

Carol Yu

I don’t think so because you will -- actually post Olympics, you will see a lot of celebrations and after, post-events coming. We would actually -- the seasonality will be a spike for Q3 but we don’t see a major fall-off after the Olympics.

Dr. Charles Zhang

There is going to be a long tail of the Olympics effect.

Leah Hao - Goldman Sachs

Thank you. That’s helpful. Lastly, regarding your marketing budget for full year of ’08, what is your plan regarding the increase in marketing expense for breaking down by different categories, either it’s game, you know, for Tian Long Ba Bu, or branded advertising, what will be the approximate proportion with your marketing budget, please?

Dr. Charles Zhang

I think online games will have its regular marketing spending as previous quarters. It’s because the quality of the game continues to get new users by itself without a large spending on marketing. Our marketing will continue to be the overall Sohu brand and also the Sohu media platform, and the web 2.0 products and blogs and the space products for 2008 definitely will continue to spend on Sogo, the search engine and Pinyin method, which we still hope that in the future will provide a growth engine for Sohu.

Here I want to -- because it seems not many people are asking questions about Tian Long Ba Bu and online games and the focus is on advertising, here I want to point out a link, an important point is that Tian Long Ba Bu's game is a little bit different from other standalone game companies’ game, by pure marketing and really our marketing campaign to get users.

Tian Long Ba Bu grows out of the Sohu platform and we now already have 23 million registered users and daily active users, 1.5 million active users every day. And we have a game information portal, 17173, which will help us. We made the right acquisition a few years ago so that that game information portal helps us to capture the online game boom, the advertising dollar.

At the same time, the 17173 platform also helped to get new users for Tian Long Ba Bu but the users of Tian Long Ba Bu actually increased the stickiness of the overall Sohu platform, so that daily 1.5 million average users will also be the Sohu Passport users and the Sohu Matrix users, and that will basically to overlap and to interact with the existing Sohu Matrix users to make the user base larger and stickier. That will improve the group click-through rate of brand advertising. So that means Tian Long Ba Bu and Sohu games is not a standalone game. It will help -- Tian Long Ba Bu's growth will help overall Sohu brand advertising in the future. That’s a very important point that is sometimes missed by the street.

Leah Hao - Goldman Sachs

Thank you.

Operator

Thank you. Our next question comes from Wendy Huang with Bear Stearns. Please go ahead.

Wendy Huang - Bear Stearns

Good morning. Thanks for taking my questions. First, in terms of your advertiser categories, you just mentioned in your prepared remarks that advertising expenditures from financial advertisers grew 90% year over year, so going forward, do you expect the same robust growth in 2008? Will you be affected by the market weakness? And I have a follow-up.

Belinda Wang

We still expect a high growth rate from financial categories in 2008 because of the banks and the funds will continue to invest online heavily.

Wendy Huang - Bear Stearns

Okay, thanks. And secondly in terms of your direct sales force, could you maybe provide some data about the year-over-year growth in terms of a sales team expansion?

Carol Yu

The headcount for the direct sales team grew about 30% in 2007.

Wendy Huang - Bear Stearns

So how much of your -- what percentage of your advertising revenue is generated by the direct sales and how much is generated by the agency sales?

Carol Yu

The direct sales accounts for about 10% of the total revenue in 2007.

Wendy Huang - Bear Stearns

Finally, in terms of the Focus Media, Focus Media recently having and trying to consolidate the new media agencies in China, so will that affect your brand advertising business?

Carol Yu

The total picture is not clear yet. We are still in the process of negotiating the rebate plan with the agencies, including Focus Media, which accounts for about 30% of our total revenue.

But we will -- we will -- our strengthening our direct sales team strengthens the power of our direct sales team and influences clients directly. And then secondly, we are also control our rebate costs under careful calculation.

Wendy Huang - Bear Stearns

Okay, so 90% of your revenue is still generated by the agency sales and Focus Media agencies accounted for 30% -- does this mean that Focus Media agencies, they actually will impact 27% of your total advertising revenue?

Carol Yu

They accounted for 30% of our total revenue on the channel side -- yeah, 27%, yes. You are correct.

Wendy Huang - Bear Stearns

So they are the number one agency for you?

Carol Yu

After the consolidation, they will be the number one.

Wendy Huang - Bear Stearns

Okay, thanks. That’s great. Thank you.

Operator

Thank you. Our next question comes from Alicia Yapp from Citigroup. Please go ahead.

Alicia Yapp - Citigroup

I have two questions regarding the online games. First of all, can you tell us, have you seen any impact from the recent snow storm? Specifically, any up-take or slow down in terms of the daily user traffic? And I have one more follow-up.

Dr. Charles Zhang

So for the whole, it’s 5% down -- I mean, some negative impact but overall, it’s not much impact. It’s already recovered, right? Because recently -- yeah, overall it’s not --

Alicia Yapp - Citigroup

Okay.

Dr. Charles Zhang

Because the Spring Festival, people are -- a lot of people are spending a longer time on the road than last year, so no time to go to Internet cafes and head home to play games, but it’s temporary.

Alicia Yapp - Citigroup

Have you seen any power outages that actually impact the café business?

Carol Yu

On an overall basis, I think you can read it like this -- up to today, we have taken into consideration one, the negative impact brought by the snow storm, if any; and second is the negative impact that may be brought about through the Chinese New Year. We have been very closely monitoring the situation and yet we still give out the guidance that we give out today. So all these factors negative have already been taken into the Q1 impact, the Q1 guidance, which we think we’re still looking to do 5% to 10% growth quarter on quarter.

Operator

Thank you. Our next question comes from Tian Hou with Pali Capital.

Tian Hou - Pali Capital

Congratulations on the quarter first, and Happy New Year. So the question is regarding -- you know, the question nobody asked but I guess that’s the only question left for me is regarding the wireless business. So Q4, you didn’t do much marketing for that and that doesn’t have a lot of cost but the revenue increased. So I just wonder what’s going to happen in 2008. What’s your take on that?

Dr. Charles Zhang

(Translation Not Provided)

Tian Hou - Pali Capital

Okay, the question is -- Q4, Tian Long Ba Bu grew rapidly, so what is Mr. Wang’s view on 2008?

(Translation Not Provided)

Brandi Piacente

Tian, can I just ask you to translate your questions in English after Chinese please? Thank you.

Tian Hou - Pali Capital

Okay. The last question was about the new game, Lù Dǐng Jì, I was asking about when -- Q408, is that the beta testing or commercial launch?

Brandi Piacente

Great, and can we have the answer translated into English, please?

Tian Hou - Pali Capital

Okay, the answer is Q4 is going to be beta testing.

Brandi Piacente

Great. Thank you.

Tian Hou - Pali Capital

Okay, so the last question will be Carol, it’s for you -- the tax rate, effective tax rate, what is going to happen in 2009?

Carol Yu

Fifteen-percent.

Tian Hou - Pali Capital

Fifteen-percent, okay. Thank you. That’s all my questions.

Operator

Thank you. Our next question comes from the line of C. Ming Zhao with Susquehanna Financial Group.

C. Ming Zhao - Susquehanna Financial Group

Thank you. Congratulations. What a year for you guys in 2007. Happy Chinese New Year. My first question is about your advertising -- you have mentioned several categories that are booking triple-digit growth. I think you booked 46% year-over-year growth on the brand advertising, so there was some sector that have dragged the growth. Is this real estate?

And a related question is from your operations, do you really see any slowdown in the macro-economy due to the tight monetary environment?

Carol Yu

What’s your first question, Ming? I didn’t get it.

C. Ming Zhao - Susquehanna Financial Group

My first question is has real estate growth decelerated?

Carol Yu

Okay, so first question is real estate, second question is macro-economy, right?

C. Ming Zhao - Susquehanna Financial Group

Yeah, do you feel any slowdown in the economy at all?

Carol Yu

I did, to answer your second question.

C. Ming Zhao - Susquehanna Financial Group

How big of an impact is that on your business?

Dr. Charles Zhang

So Gong Yu’s answer for real estate is that in 2008, real estate advertising will be a little bit better than 2007 because Gong Yu is also in charge of focus.cn, which is a real estate portal.

C. Ming Zhao - Susquehanna Financial Group

Okay, and --

Carol Yu

And for the macro-economy, I think we are still pretty -- I think the government, what they are trying to do is to make sure that things just didn’t get out of hand, instead of trying to crack down and turn it into something, a real slowdown. They just want to make sure that GDP growth is pretty much growing as planned.

Dr. Charles Zhang

And also, as Q4 demonstrated, that the online game and fast-moving consumer goods companies are spending more, so in 2008 we believe these two sectors will continue and especially consumer good companies will not be much affected by the overall economy, as people are going to continue to consume and spend.

C. Ming Zhao - Susquehanna Financial Group

Just to clarify, is advertising from real estate, has that sector decreased or just growth eased in the fourth quarter?

Dr. Charles Zhang

Yeah, it increased in the fourth quarter.

C. Ming Zhao - Susquehanna Financial Group

I see. My next question is about the games. When we look at the growth in the game business, one big driver is obviously the monetization level. It’s up pretty decently quarter over quarter and I just want to get a sense about what level the monetization you feel, sort of a more sustainable level in the future. At the current stage, are we at 25% of that or 50% of that or 75% of that? Can you comment on that?

Carol Yu

Our target for a sustainable level on a long-term basis is about RMB170 ARPU -- 170.

C. Ming Zhao - Susquehanna Financial Group

So it’s lower than the fourth quarter level, is that the case?

Carol Yu

No, the fourth quarter is 147.

C. Ming Zhao - Susquehanna Financial Group

147 is the fourth quarter and what is your sustainable level?

Carol Yu

170.

C. Ming Zhao - Susquehanna Financial Group

170, okay. Okay, that’s good. And last question, just to clarify -- many people were asking this question about the branding investment. Is this $2.5 million, does that include anything that’s related to your spending on CCTV advertisement?

Carol Yu

Yes.

C. Ming Zhao - Susquehanna Financial Group

So that’s already included?

Carol Yu

Yes.

C. Ming Zhao - Susquehanna Financial Group

Okay, great. All right. Thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to Brandi Piacente for any closing remarks.

Brandi Piacente

We very much appreciate everyone’s participation in today’s call. Please feel free to contact us with any additional questions that you may have and thank you.

Operator

Ladies and gentlemen, this concludes the Sohu fourth quarter 2007 earnings conference call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3000 or 800-405-2236 and enter passcode 11107529. ACT would like to thank you for your participation. You may now disconnect.

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