Video will break even in two years

Sohu announced its unaudited third quarter 2012 financial report as of September 30, 2012 on November 5. The financial report shows that Sohu’s revenue for the third quarter was US$285 million, an increase of 23% over the same period of 2011 and an increase of 12% compared with the previous quarter. According to US GAAP, Sohu’s third-quarter net profit was US$24 million, compared to the same period in 2011. It decreased 47%, an increase of 123% from the previous quarter.

After the release of the financial report, executives such as Sohu chief executive Zhang Chaoyang, chief financial officer Yu Chuyuan, chief operating officer Wang Hao, chief executive officer Wang Xiaochuan, and Changyou chief executive Wang Yi attended the conference call, interpreted the key points of the financial report, and answered Ask the analyst.

The following are the main contents of the analyst meeting:

JPMorgan analyst Vidi: With regard to the prospects of the brand advertising business, compared to the same period in history, it seems that the seasonality in the fourth quarter of this year is very good, because the video business is improving? Or is the real estate business changing the accounting method? Or is the advertising market becoming active because of the macroeconomic improvement? What is the reason for the management's opinion? Can you decompose the income from advertising in various industries?

Wang Hao: The advertising demand of the fast moving consumer goods industry is strong, especially our online video content drives the demand of the fast moving consumer goods industry and enhances our ability to provide excellent advertising. In addition, as stated above, the real estate industry has contributed a lot of advertising revenue. Although the real estate industry has not seen a clear signal of policy changes, but developers hope to improve sales performance in the short term, thus promoting our third quarter and fourth quarter advertising Income growth.

In the last quarter, the top three industries for advertising revenue were automobiles, real estate, and FMCG.

Bank of America Merrill Lynch analyst Eddie Leung: Regarding the video business, in the second quarter management was cautious about the short-term development of the video business because the sales team is in a transitional period. Judging from the current situation, The situation in the third quarter is not bad. Can the management comment on the growth of video service revenue in the third quarter? How is it compared to previous expectations? If better than expected, what are the reasons?

Wang Hao: The third quarter was a transition period because we set up a dedicated sales team for the online video division. The team did improve its sales capabilities, especially in the fast moving consumer goods industry. We also saw an increase in the number of advertisers in the industry. Second, the team worked hard to improve the efficiency of our video advertising management system, which helped us to get more revenue from the CPM consumption model.

Barclays analyst Alicia Yap: Regarding the competition in the video and search business, Baidu recently acquired a full stake in the video website iQiyi. Management believes that this will affect the future development of the Sohu video business. What influence? The management once mentioned that Sogou did not see any impact from newcomers to the industry. What management believes that newcomers will have an impact on the search industry in the coming months?

Yu Chuyuan: In the video business, I do not think that Baidu’s acquisition of the remaining equity of Iqiyi will affect Sohu. We are always confident in our video business and are committed to the development of this business. We will always support Sohu's video business. In fact, the video business has been enhanced with commercialization, which gives us greater confidence to drive this business forward.

In the sogou business, 360 search industry newcomers have confirmed the development of browsers through client-side software, and then through the browser to drive the search query flow equation attraction. At present, there are two dominant search companies on the market to prove that this equation is valid and successful. We will continue to develop this model.

Zhang Chaoyang: The entire Sohu platform, including Sohu News, Sohu Home Page, and Sohu News Client has been well developed. Sohu Video will receive overall support from the Sohu platform, including Sohu Homepage, Sohu Mobile, and Sogou Browser.

Citigroup analyst: With regard to the increase in profitability of brand advertising business, what are the management's expectations for the development trend of operating margins and gross profit margins in the fourth quarter and next year?

Yu Chuyuan: The increase in profitability is mainly due to revenue growth. Our spending remains stable. We expect the profit margins in the fourth quarter and 2013 to remain stable.

Yachun Securities Research Analyst Zhao Chunming: Regarding the mobile strategy, besides Sogou Pinyin, the management believes that what products Sohu can use regularly? Sohu's mobile strategy next year is like?

Zhang Chaoyang: As I mentioned earlier, Sogou Pinyin has become one of the top five mobile phone mobile apps. We hope that the Sohu Video and Sohu News apps will also achieve this result. At present, it is the stage to grab market share. We believe that as long as we have a certain market share, we will form a certain business model. So as long as we get users, we can form a business model.

Yu Chuyuan: We will not just copy the PC products to the mobile terminal. What we need to do is, for example, in Sogou, we have three main products, namely Pinyin, browsers and search. We must not only duplicate this on the mobile side. Three products, but also to add more products. At present, we will launch two products on the mobile terminal that have never been launched on the PC. The launch time will be three to six months in the future.

Zhao Chunming: Will Sohu increase investment in mobile business?

Yu Chuyuan: We have always attached importance to the R&D investment of our products, so there will be no significant growth.

Morgan Stanley analyst: Can you disclose the latest number of employees in the sogou business? How many of them are R&D personnel? Can you disclose the third-quarter capital expenditure of the department?

Zhang Chaoyang: At present, Sogou has more than 3,000 employees, of which about 100 are R&D personnel. The total capital expenditure budget for 2012 is 40 million U.S. dollars.

Piper Jaffray Mark Marostica: Wireless revenue fell in the third quarter. Can you predict the next trend?

Wang Hao: The drop in revenue is due to policy and regulatory issues.

Citigroup Analyst: Regarding the search business, is the business under pressure because PC search volume is decreasing?

Wang Xiaochuan: The current situation shows that the growth of PC search users has obviously slowed down, but we believe that the scale of PC users will remain stable in the next two to three years and will not decline. Therefore, we still increase the number of PC search users. As mentioned earlier, we have more product lines in the wireless end.

Citigroup analyst: Does search volume remain stable in the next two to three years?

Wang Xiaochuan: Refers to the overall stability of PC search volume.

JP Morgan analyst Widdy: Can you disclose the third quarter video advertising business income? What is the outlook for the fourth quarter? What are the video expenditures in the fourth quarter and 2013?

Yu Chuyuan: In 2012, the total content purchase cost was 50 million US dollars. We have not yet fixed the 2013 budget because we are very confident in Sohu’s video business, which may increase by 30% or 40%.

Wei Di: How is the revenue of the video advertising business in the third quarter?

Yu Chuyuan: The data cannot be disclosed.

Alicia Yap: What does the management think about the effective commercialization of the mobile search business?

Zhang Chaoyang: It takes a long time to establish the ecological environment for mobile phones. It is not yet time to talk about commercialization, but we will focus on R&D to provide unique products.

Alicia Yap: What is the percentage of mobile search queries that account for Sohu’s total search queries?

Zhang Chaoyang: At present, we do not publish such data.

UBS Analyst: Regarding the expenditure on advertising business, the business cost of advertising business did not increase much in the third quarter, but taking into account that the Olympic Games was held in the third quarter, the content cost of the season should be raised, so why did the third quarter? The expenditure is controlled? Will this control continue?

Yu Chuyuan: The lower content expenditure in the third quarter was due to the depreciation provision for one-off video content that we conducted in the second quarter. The data affected was relatively large. This is our measure to control the total business cost. one.

Lianyungang analyst Wendy Huang: Can you reveal the development trend of the video business in the past three quarters? What is the development trend in the fourth quarter? When will the video service break even?

Yu Chuyuan: I don't expect the video service to achieve balance in 2013, but in the long run, because advertisers are shifting their advertising budget from TV to video, I’m very confident that the business will be in 18-24 months. Realize the balance of payments within. In terms of development trends, Sohu Video has been gaining a good development trend until the second quarter of this year, when we announced the establishment of a dedicated marketing team, so the development slowed in the third quarter, but the fourth quarter will return to the development track. For 2013, our goal is to double growth.

Wendy Huang: Does Sohu anticipate that video service revenue growth will catch up with the video industry's overall growth in the fourth quarter?

Yu Chuyuan: I expect the growth rate to exceed the industry average. We have fallen behind in the past two quarters, so we must catch up.

Macquarie Securities analyst Shao Wei: What is the proportion of the auto industry's advertising revenue of Sohu brand? Most of them come from Japanese car manufacturers?

Wang Hao: The automotive industry still accounts for about 25% of total advertising revenue. In the third quarter, if it is normal, Japanese car manufacturers will contribute 10% to 20% of car advertising revenue.

Shao Ying: Is the third quarter abnormal?

Wang Hao: Yes, affected by the Diaoyu Island incident, the third quarter was an abnormal situation.

Shao Tao: Regarding the search business, how does the management see the difference between CPC and the leading companies in the search industry in terms of CPC, advertisement clickthrough rate and coverage? As Sohu develops to the mobile industry and promotes mobile search, management believes how these indicators will develop in the future?

Zhang Chaoyang: Now our advertising CTR is 80% of Baidu, we are narrowing the gap with Baidu; our CPC is one-third to one-half of Baidu; coverage is close to Baidu's level.