Transcript Sohu.com Analyst Presentation

Sohu.com
Corporate Presentation
SOHU.COM INC. (NASDAQ: SOHU)
March 2010
Safe Harbor Statement
This presentation contains forward-looking statements. Statements that are not
historical facts, including statements about Sohu and Changyou’s beliefs and
expectations, 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. Potential risks and uncertainties include, but are not limited to, the
current global financial and credit markets crisis and its potential impact on the
Chinese economy, the slower growth the Chinese economy experienced during
the latter half of 2008 and in 2009, which could recur in the future, the uncertain
regulatory landscape in the People's Republic of China, fluctuations in Sohu's
quarterly operating results, and Sohu’s reliance on online advertising sales, online
games and wireless services (most wireless revenues are collected from a few
mobile network operators) for its revenues. Further information regarding these
and other risks is included in Sohu's annual report on Form 10-K for the year
ended December 31, 2010 and Changyou’s annual report on Form 20-F for the
year ended December 31, 2010, and other filings by Sohu and Changyou with the
Securities and Exchange Commission.
2
Unique Combination of Strong Businesses:
Sohu Portal
Changyou
Sogou
Leading Mainstream Media Platform
Leading MMORPG Company
Online Search Subsidiary

Strong brand recognition

User base of over 250m

Extensive advertising
resources

Industry expertise from
17173.com – China's
largest gaming portal


Diversified game
portfolio

Actively acquiring new
users, particularly
teenagers

Contributing revenues/
earnings/ strong cash
flows

Sogou Pinyin is the
dominant software for
Chinese languageinput in China, with
70-80% market share
in China
Sogou Browser has
reached 12% of
computers in China.
Portal business: Traction is picking up as increasingly higher value advertising solutions are
provided to advertising partners around China


Online game business (Changyou): A leading player in the MMORPG industry; effectively
drives high growth and high profitability, as well as generates strong cash flows

Sogou search business: Strategic investment from Alibaba provides great opportunity to
compete and capture market share
3
Financial Track Record
2010 Q3
2010 Q4
Total revenues
Brand advertising
Search
Online games (CYOU)
Wireless and others
$164.1m
$59.1m
$5.4m
$85.6m
$14.0m
$173.2m
$60.1m
$6.6m
$91.7m
$14.8m
6%
2%
23%
7%
5%
$135.8m
$45.9m
$2.9m
$70.7m
$16.3m
27%
31%
126%
30%
-10%
$164.5m~169.5m
$55m~57m
$6.5m
$92m~95m
N/A
-5%~2%
-8%~5%
-1%
0%~4%
N/A
Operating margin (nonGAAP)*
44%
43%
N/A
42%
N/A
N/A
N/A
Net income before NCI
(non-GAAP)*
$61.3m
$64.6m
5%
$50.3m
28%
$54.5m~57m
-16%~-12%
Net income after NCI for
diluted EPS (non-GAAP) *
$45.2m
$47.9m
6%
$35.8m
34%
$40m~42m
-16%~-12%
$1.16
$1.23
6%
$0.92
33%
$1.03~1.08
-16%~-12%
Cash Balance
$535m
$678m
27%
$564m
20%
N/A
N/A
Cash inflow from
operations
$83.6m
$100.3m
20%
$66.6m
51%
N/A
N/A
Diluted EPS after NCI
(non-GAAP) *
*
2009 Q4
Y-o-Y
%
2011 Q1
Guidance
Q-o-Q
%
Q-o-Q
%
Non-GAAP operating income, net income and diluted EPS exclude the impact of share-based awards. Please refer to our earnings release,
which is posted on the IR section of Sohu’s website at http://corp.sohu.com/investorrelations for GAAP numbers.
4
Supplementary Financial Data by Business Lines
2010 Q4
Brand Advertising,
Wireless and Others
Search
Subtotal
Online Games
(before NCI)
Total
Revenue
Non-GAAP
Operating Operating
Profit
Margin
GAAP
Operating Operating
Profit
Margin
$74.9m
$22.2m
30%
$17.4m
23%
$6.6m
$-5.5m
NA
$-6.8m
NA
$81.5m
$16.7m
21%
$10.6m
13%
$91.7m
$57.3m
62%
$55.4m
60%
$173.2m
$74.0m
43%
$66.0m
38%
5
Strong Results Delivered by an Experienced and Focused Team
Title
Dr. Charles Zhang
Years
15
Chief Executive Officer
Ms. Carol Yu
Mr. Tao Wang
8
7
Mr. Alex Ho
7
Chief Financial Officer
12
Mr. Dewen Chen
7
President and Chief
Operating Officer
Co-President and Chief
Operating Officer
Mr. Xiaojian Hong
Mr. Xiaochuan Wang
Years
Chief Executive Officer
Co-President and Chief
Financial Officer
Ms. Belinda Wang
Title
7
11
Chief Technology Officer
Chief Technology Officer

The management team has been making all the right moves over the past 5+ years and
is flush with confidence and strong execution capability
6
Portal Business: Brand Advertising
7
China Online Advertising Industry

Advertisers are optimistic about 2011 outlook.

Online media continues to gain market share from traditional media.
−
Greater efficiency and effectiveness
−
Ongoing advertising budgets shifting from offline to online
−
Internet penetration expansion

Online video is one of the fastest growing segments where Sohu has
secured a leading position.

Steady revenue growth is expected for 2011.
8
SOHU Brand Advertising Performance by Industry

Brand advertising revenue for 2011 Q1 is expected to grow by 39% to 44% Yo-Y.

Fast growing sectors on a Y-o-Y basis for 2010 Q4 are Financial Service, Auto,
Online Games, and FMCG.

FMCG: will be one of the fast growing categories in 2011.

Online video: Fast growth as a percentage of revenue are expected. More
advertisers will start to shift the TV commercial budget to online video in 2011.

Real Estate:
–
New government policies and regulations have had a negative impact on
the volume of sales.
–
Overall, Sohu will see revenue growth, especially from second-tier cities in
2011 Q1, through our efforts to offer more online promotion plans to
advertisers.
9
Online video: one of the fastest growing segments in China

Broadband penetration reached 98.3%, which enables the growing popularity of
high-definition online video.

As of Dec 2010, 62.1% or 284 million of internet users in China are online video
users, increased from 62.6% or 240 million of Chinese internet users one year
ago.

Ad revenues of the online video industry in China are expected to grow over 65%
each year from 2011 to 2013, reaching 11 billion RMB in 2013.
Source: CNNIC and iResearch
10
Online video: our potential future revenue driver
Sohu TV Channel
Content form
Majority long-form
Local and global TV dramas, movies, documentaries, TV shows
and cartoons
Authorized and self-produced
Business model
Cost elements
Business edge
Free streaming video online
Pre-roll ad of ~30 seconds, similar to TV commercials, combined
with other types of online ads
License fee to third party
Bandwidth cost
Largest online library of authorized high-definition video content in
China
High media influence of Sohu platform with more than 250 million
registered users
High marketing value by synchronizing promotional activities
across Sohu matrices
Consistent investment in content offering and technology
11
Online video: our potential future revenue driver (continued)

Sohu typically sign up content owners 6 to 12 months before a TV
drama series is aired.

Sohu was able to successfully obtain 23 out of the 30 most-watched
prime-time TV dramas of 2010 as measured by CSM Media
Research. And of the dramas we secured, 5 were exclusive online.

Unique visitors to Sohu’s video site more than doubled in December
2010 compared with December 2009, surpassing the 100 million
mark.
In December 2010, Sohu video’s market share in terms of time spent grew to 13.4% from 3.4%
in a mere 12-month period, which essentially means we picked up 10 percentage points in
market share from other players.


Average daily video views on our high-definition video channel grew by 40% Q-o-Q in 2010 Q4.

For 2010, gross revenues from online video increased to $28 million, which was approximately
three times that of 2009. The number of advertisers for 2010 increased by 55%.

For 2011, video will be one of our major area of emphasis. We would expect to put in an
appropriate amount of resources into this area in order to stand up to our competitors.
12
Online Search: Sogou
13
Sogou Business
Sogou Pinyin
The dominant
software for
Chinese languageinput in China,
installed on
70%~80% of PCs
in China.
Sogou Browser
Sogou browser has been
installed on roughly 12%
of PCs in China
Average daily users in
2010 Q4 reached 15m,
up 21% Q-o-Q
The latest version
accelerates browsing
speeds by 20% and adds
certain security protection
functions as well as
bandwidth protection
function.
Sogou Search
Sogou search engine
continue to grow in
traffic, though over a
low base. Now it takes
3~4% of the Chinese
market share in terms
of traffic.
Average daily page
views originated from
Sogou.com in 2010
Q4 grew by 20% Q-oQ
Sohu will leverage Sogou Pinyin’s success to promote Sogou Browser, which
in turn will bring traffic to Sogou Search.
14
Search Revenue Mix
US$
million
7.00
0.70
6.00
5.00
0.80
4.00
Paid listing
0.80
3.00
5.90
0.60
0.70
Bid listing
4.60
0.50
2.00
0.50
3.10
0.70
1.00
2.30
2.10
2009 Q4
2010 Q1
1.80
0.90
1.30
2009 Q1
2009 Q2
2009 Q3
2010 Q2
2010 Q3
2010 Q4
15
Sogou Completed the Sale of Newly-issued Series A Preferred Shares

On October 22, 2010, Sogou completed the sale of newly-issued Series A Preferred
Shares to
–
Alibaba Investment Limited;
–
China Web Search (HK) Limited, an investment vehicle of Yunfeng Fund, LP;
and
–
Investment fund of Dr. Charles Zhang, Sohu’s Chairman and CEO.

With its new capital structure in place, Sogou has now transformed into an entity
with laser-sharp focus on its desktop products and online search businesses.

This transformation has helped Sogou team become more committed and
motivated, and helped to further attract talent as well as build confidence amongst
our business partners, most importantly our distributors.

Examples showing that we are working in all fronts with Alibaba Group:
–
In 2010 Q4, search revenue from Taobao increased 137% Q-o-Q.
–
Starting from 2011, Sogou has established a direct sales relationship with
Taobao, replacing the former one via agencies.
–
Sogou search engine has replaced Microsoft Bing to provide technical support to
etao.com owned by Alibaba for its webpage search.
16
Financial Implication of Sogou’s Issuance of Preferred Shares

Sogou received $48 million in proceeds from preferred shareholders, which
will be used to fund Sogou’s operations over the next one to two years.

Sohu will retain 53% of Sogou on a fully-diluted basis, and intends to retain
majority ownership in Sogou.

Going forward, Sohu will continue to consolidate Sogou’s financial
statements, with interest of preferred shareholders to be reflected in Sohu’s
consolidated balance sheet as non-controlling interest.

For 2010 Q4, Sogou’s net losses were around $5.3 million on a pro forma
basis. Starting from 2011 Q2 onwards, Sohu’s diluted EPS calculations will
only include 53% of Sogou’s losses, which is in proportion to our ownership
in Sogou on a fully diluted basis.
17
Resource Allocation Focused on Content and Technology
Sohu non-game
Content
Employees
1,684
Tech
267
Sales & Customer
Service
332
Back office
261
Sogou
417
Total
2,961
18
Online Games: CYOU
19
Industry Update
20
China’s Growing Online Game Market
Internet user growth drives the expansion of the online game market in China
China – world’s largest Internet market and still growing
(In millions)
500
450
400
350
300
250
200
150
100
50
0
(In RMB billions)
384.0
420.0
457.0
338.0
298.0
253.0
210.0
137.0
2H06
Macro trends driving robust online game revenue growth
162.0
1H07
2H07
1H08
2H08
1H09
Internet Users in China
2H09
1H10
2H10
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
14.4
15.6
15.8
11.7
8.5
5.7
9.8
6.3
3.8
2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10
China online game revenue
Government strengthens online games management, encourages creativity and
focuses on healthy and sustainable development of the industry
•
At the CGIAC conference on January 19, 2011, Chinese government officials stated that the government will:
o Introduce policies related to online gaming in China to provide a solid foundation for the sustainable growth of
the industry
o Support and encourage original game content developed by Chinese companies
o Cooperate with online companies to effectively protect intellectual property rights
o Encourage investments in advanced technologies and talent
o Support domestic online games companies to expand overseas
•
We believe the formalization of a standard set of regulations will help the sustained development of the industry.
Changyou will continue to strongly support the work of the regulators and join in the formulation and implementation of
these regulations and make greater contributions to the industry’s development.
Source: CNNIC, Analysys
21
Financial Overview
22
Strong Financial Track Record
2010 Q4
2010 Q3
2009 Q4
QoQ
YoY
2011 Q1
Guidance**
$91.7m
$89.5m
$2.2m
$85.6m
$83.6m
$2.0m
$70.7m
$68.6m
$2.1m
7%
7%
11%
30%
30%
7%
$92.0m~95.0m
N/A
N/A
Gross margin (non-GAAP)*
90%
90%
92%
N/A
N/A
N/A
Operating margin (non-GAAP)*
62%
64%
67%
N/A
N/A
N/A
$49.7 m
$47.1 m
$42.2m
5%
18%
$49.5m~51.0m
$0.93
$0.88
$0.79
6%
18%
$0.93~0.96
Cash Balance
$351.0m
$292.0m
$226.9m
20%
55%
N/A
Debt Balance
$0
$0
$0
N/A
N/A
N/A
$59.3m
$55.5m
$46.2m
28%
28%
N/A
Total revenues
Game operation revenues
Overseas licensing revenues
Net income (non-GAAP)*
Diluted EPS (non-GAAP)*
Cash inflow from operations
* Non-GAAP numbers exclude share-based compensation costs. Please refer to our earnings release, which is posted on the IR
section of Changyou’s website at http://www.changyou.com/ir/ for GAAP numbers.
** The guidance assumes the completion of and includes the Jing Mao acquisition.
Changyou is a highly profitable online game developer with a strong, debt-free
balance sheet and rich cash flows.
23
Business Highlights
24
Franchise Games are Cornerstone of Growth
1
An Award-winning Game
TLBB Remains Our Flagship Game
Launched a hit game
1
Continued to grow user base
The Most-liked Online Game by Game
Players by ChinaJoy for five consecutive
years from 2006 to 2010
2
Formed a large community
Build into an even more valuable franchise
World’s Top Five Most Profitable Game
Franchises in 2009 by Forbes
3
4
We will continue to release expansion packs regularly to
drive the narrative forward and keep the franchise and its
user community vibrant and growing…
•
•
Plan to launch an expansion pack on March 18, 2011, that
is aimed at encouraging user interaction and increasing the
stickiness of the community
Plan to launch TLBB 3, another major expansion pack, in
2H2011 to further enrich the in-game experience of users
and extend the game’s lifespan
The Most-installed MMORPGs in China’s
Internet Café *
1
Fantasy Westward Journey
NetEase
2
TLBB
Changyou
3
Eudemonso
Netdragon
4
Wendao
5
The World of Legend
Guangyu
Shanda Games
User-centric game development model incorporating extensive feedback and solid operating
strategy deliver organic growth and maintain healthy game portfolio
* Data from barchina.net for the period Feb 7-13, 2011
25
Delivering Growth with New Inhouse-developed Games
2
Duke of Mount Deer
Unique features to differentiate game from others on the market
Multiple graphic modes
Social interactive game-play
Cartoonish graphic style
•
•
•
•
•
The first in the industry to allow players
to freely switch between multiple
graphic modes
Vivid graphics and 360 degree viewing
angles
Dawn in the main city
Moon in the sky
•
Target a wide range of people, across
different genders and nationalities
Various forms of social activities to
foster larger community and enhance
gamer stickiness
Team-based activities
Team-based game
Adorable exaggerations of characters
Visually attractive scenery and realistic
weather effects
Adorable characters
Realistic snow view
Latest Progress
Will officially start our nationwide
marketing campaign for the
game in March 2011
Marketing
Will unveil the full version of the
game that contains many times
the amount of content currently
found in the existing version
Game content
Will disclose a number of
technical innovations within the
global online games industry
Technology
Through these efforts, we hope to draw interest from players and attract attention from the media
leading up to DMD’s launch, while offering a unique gaming experience to players in China
26
3
Building
Human Capital for Long-term Development
Dedicated development team and growing talent pool
Attract and train top-notch talent
• We currently operate seven* online games in China and
maintain a dedicated product development team for each
game

• We have multiple product development teams that are
responsible for developing new MMORPGs of various
graphic styles and themes as of December 31, 2010 and four
new games are scheduled to release in 2011, including the
most anticipated “Duke of Mount Deer”
• The number of game engineers has reached 990 as of
December 31, 2010, an increase of over 87% compared to
the end of 2009
• Total employees were approximately 2,110 as of December
31, 2011
Total Headcount
R&D Headcount
3000

Incentivize and retain existing employees
•
•
2000
•
1000
•
•
0
We plan to further invest in and expand our game
development capabilities by continuing to recruit
and train new members to our team
We also plan to recruit more marketing and offline
promotional staff to promote upcoming games
Developed a number of new in-house training programs for
engineers in the past quarters
TLBB’s well-established game development platform is a
training base for R&D talent
Experienced game development personnel provide valuable
guidance to new hires and help them assimilate into
Changyou’s culture
The team currently working on TLBB is already the third
generation of game developers
Unique incentive systems ensure maximum sharing of
experience and know-how
Dec 2008A Jun 2009A Dec 2009A Jun 2010A Dec 2010A
Streamlined hiring and training practices strengthen foundation for long-term growth
* Including Tian Long Ba Bu, Blade Online, Blade Hero 2, Da Hua Shui Hu, Zhong Hua Ying Xiong, Immortal Faith and San Jie Qi Yuan.
27
Key Investment Takeaways

Winning formula: strong brand ad and online game businesses to
deliver sustainable growth through various economic cycles.

Sogou search business is gaining potential to compete and capture
market share.

Strong, debt-free balance sheets and healthy operating cash flows:
combined cash balance of $678 million with quarterly operating cash
flow around $100 million.
28
Thank You!
29