Sohu.com (SOHU)

Advertising Cost of Revenues

Advertising cost of revenues increased by $2.8 million to $6.9 million for the three months ended June 30, 2006 as compared to the corresponding period in 2005, and increased by $4.9 million to $12.3 million for the six months ended June 30, 2006 as compared to the corresponding period in 2005.

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Brand advertising. Brand advertising cost of revenues includes personnel costs and personnel overheads relating to our editorial center, content purchases, payments to our business partners, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Brand advertising cost of revenues was $5.6 million and $9.9 million for the three and six months ended June 30, 2006, respectively, as compared to $3.4 million and $6.2 million for the corresponding three and six month periods in 2005. The increase of $2.2 million for the three months ended June 30, 2006 from the corresponding period in 2005 consisted of a $765,000 increase in content purchases, a $449,000 increase in bandwidth leasing costs due to the requirement of the expanded business, a $315,000 increase in personnel expense, a $264,000 expense of share-based compensation due to the adoption of SFAS 123(R), a $217,000 increase in office and depreciation expense and a $190,000 increase in payments to our business partners. The increase of $3.7 million for the six months ended June 30, 2006 from the corresponding period in 2005 consisted of a $903,000 increase in content purchases, a $725,000 increase in personnel expense, a $719,000 increase in bandwidth leasing costs, a $603,000 expense of share-based compensation due to the adoption of SFAS 123(R), a $452,000 increase in payments to our business partners, and a $298,000 increase in office and depreciation expense. Our brand advertising gross margin for the three and six months ended June 30, 2006 was 71% and 72%, respectively, as compared to 75% and 76% for the corresponding periods in 2005, respectively. Our brand advertising gross margin decreased for the three months and six months ended June 30, 2006 mainly because of the required expensing of share-based compensation cost due to the adoption of SFAS 123(R) starting from January 1, 2006, and more spending on content purchases, personal costs and bandwidth leasing costs.

Sponsored search. Sponsored search cost of revenues consisted primarily of payments to our Website Alliance, data collection costs, personnel costs, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Sponsored search cost of revenues was $1.2 million and $2.3 million for the three and six months ended June 30, 2006, respectively, as compared to $699,000 and $1.2 million for the corresponding three and six month periods in 2005. The increase of $500,000 in sponsored search cost of revenues for the three months ended June 30, 2006 as compared to the corresponding period in 2005 resulted from an increase of $282,000 in relevant depreciation and bandwidth leasing costs, an increase of $148,000 in payment to Website Alliances, the expensing of share-based compensation cost of $22,000 due to the adoption of SFAS 123(R) and an increase of $48,000 in other expenses. The increase of $1.1 million in sponsored search cost of revenues for the six months ended June 30, 2006 as compared to the corresponding period in 2005 resulted from an increase of $535,000 in relevant depreciation and bandwidth leasing costs, an increase of $366,000 in payment to Website Alliances, the expensing of share-based compensation cost of $44,000 due to the adoption of SFAS 123(R) and an increase of $155,000 in other expenses. Our sponsored search gross margin for the three and six months ended June 30, 2006 was 65% and 66%, respectively, as compared to 77% and 80% for the corresponding periods in 2005, respectively. Our sponsored search gross margin decreased for the three months and six months ended June 30, 2006 mainly due to increased server depreciation and bandwidth leasing costs.

Advertising Cost of Revenues

Advertising cost of revenues increased by $2.1 million to $5.4 million for the three months ended March 31, 2006 as compared to $3.3 million for the three months ended March 31, 2005.

Brand advertising. Brand advertising cost of revenues includes personnel costs and personnel overheads relating to our editorial center, content purchases, payments to our business partners, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Brand advertising cost of revenues was $4.3 million and $2.8 million for the three months ended March 31, 2006 and 2005, respectively. The increase of $1.5 million consisted of a $410,000 increase in personnel expense, a $339,000 expense of share-based compensation due to the adoption of SFAS 123(R), a $262,000 increase in payments to our business partners, a $270,000 increase in bandwidth leasing costs, a $183,000 increase in content purchases and traveling and entertainment expense, and a $36,000 increase in office and depreciation expense. Our brand advertising gross margin for the three months ended March 31, 2006 and 2005 was 74% and 77%, respectively. Our brand advertising gross margin decreased slightly for the three months ended March 31, 2006 mainly because of the required expensing of share-based compensation cost due to the adoption of SFAS 123(R) starting from January 1, 2006.

Sponsored search. Sponsored search cost of revenues consisted primarily of payments to our Website Alliance, data collection cost, personnel cost, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Sponsored search cost of revenues was $1.1 million for the three months ended March 31, 2006 as compared to $481,000 for the three months ended March 31, 2005. The increase in sponsored search cost of revenues resulted from an increase in payment to Website Alliances of $217,000, an increase in map data collection cost of $171,000, an increase in relevant depreciation and bandwidth leasing costs of $209,000, and the expensing of share-based compensation cost of $22,000 due to the adoption of SFAS 123(R).

Advertising Cost of Revenues

Advertising cost of revenues increased by $4.9 million to $12.1 million for the year ended December 31, 2004 as compared to $7.2 million for the year ended December 31, 2003.

Brand advertising. Brand advertising cost of revenues mainly includes personnel costs and personnel overhead relating to our editorial center, content purchases, payments to our business partners, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Brand advertising cost of revenues was $10.8 million and $6.7 million for the year ended December 31, 2004 and 2003. The increase of $4.1 million consisted of a $1.4 million increase in personnel expense, a $162,000 increase in payments to our business partners, a $151,000 increase in bandwidth leasing costs, a $1.2 million increase in office and depreciation expense, and a $1.2 million increase in content purchases and traveling and entertainment expense. Our brand advertising gross margin for the year ended December 31, 2004 and 2003 was 77% and 72%, respectively. Our brand advertising gross margin improved for the year ended December 31, 2004 because of the fixed nature of some of the brand advertising cost components, which had not increased at the same rate as revenue.

Sponsored search. Sponsored search cost of revenues consisted primarily of payments to our Website alliances, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Sponsored search cost of revenues was $1.3 million for year ended December 31, 2004 as compared to $0.5 million for the year ended December 31, 2003. The increase in sponsored search cost of revenues resulted from an increase of $0.6 million in payments to our Website alliances.

Advertising Cost of Revenues

Advertising cost of revenues increased by $1.6 million to $4.9 million for the three months ended September 30, 2005, as compared to the corresponding period in 2004, and increased by $3.3 million to $12.3 million for the nine months ended September 30, 2005 as compared to the corresponding period in 2004.

Brand advertising. Brand advertising cost of revenues mainly includes personnel costs and personnel overhead, content purchases, payments to our business partners, relevant depreciation and bandwidth cost. Brand advertising cost of revenues was $4.1 million and $10.3 million for the three and nine months ended September 30, 2005, respectively, as compared to $3.0 million and $8.2 million for the corresponding periods in 2004. The increase of $1.1 million for the three months ended September 30, 2005 from the corresponding period in 2004 consisted of a $477,000 increase in personnel expense, a $671,000 increase in payments to our business partners, a $194,000 increase in bandwidth costs, and a $66,000 increase in office and depreciation expense, offset by a $275,000 decrease in content purchases and traveling and entertainment expense. The increase of $2.1 million for the nine months ended September 30, 2005 from the corresponding period in 2004 consisted of a $1.1 million increase in personnel expense, a $934,000 increase in payments to our business partners, a $306,000 increase in bandwidth costs, and a $191,000 increase in office and depreciation expense, offset by a $422,000 decrease in content purchases and traveling and entertainment expense. Our brand advertising gross margin for the three and nine months ended September 30, 2005 was 74% and 75%, respectively, as compared to 77% and 75% for the corresponding periods in 2004, respectively. Our brand advertising gross margin decreased slightly for the three months ended September 30, 2005 mainly because of increased expenditures directly attributable to promotional events for advertisers in the third quarter of 2005.

Sponsored search. Sponsored search cost of revenues consisted primarily of payments to our business partners, data collection cost, relevant depreciation and bandwidth cost. Sponsored search cost of revenues was $0.8 million and $2.0 million for the three and nine months ended September 30, 2005, respectively, as compared to $339,000 and $884,000 for the corresponding three and nine month periods in 2004. The increase in sponsored search cost of revenues resulted from an increase in map data collection cost and an increase in relevant depreciation and bandwidth cost.

Advertising Cost of Revenues

Advertising cost of revenues increased by $0.9 million to $4.3 million for the three months ended June 30, 2005, as compared to the corresponding period in 2004, and increased by $1.6 million to $7.8 million for the six months ended June 30, 2005 as compared to the corresponding period in 2004.

Brand advertising. Brand advertising cost of revenues mainly includes personnel costs and personnel overhead, content purchases, payments to our business partners, depreciation and bandwidth costs. Brand advertising cost of revenues was $3.8 million and $7.1 million for the three and six months ended June 30, 2005, respectively, as compared to $3.1 million and $5.8 million for the corresponding periods in 2004. The increase of $707,000 for the three months ended June 30, 2005 from the corresponding period in 2004 consisted of a $377,000 increase in personnel expense, a $120,000 increase in payments to our business partners, a $111,000 increase in office and depreciation expense, a $59,000 increase of bandwidth costs, a $125,000 increase in traveling and entertainment expenses and other items, partially offset by a $85,000 decrease in content purchases. The increase of $1.3 million for the six months ended June 30, 2005 from the corresponding period in 2004 consisted of a $692,000 increase in personnel expense, a $137,000 increase in payments to our business partners, a $357,000 increase in office and depreciation expense, a $112,000 increase of bandwidth costs, a $157,000 increase in traveling and entertainment expenses and other items, partially offset by a $178,000 decrease in content purchases. Our brand advertising gross margin for the three and six months ended June 30, 2005 was 72% and 73%, respectively, as compared to 71% and 71% for the corresponding periods in 2004, respectively. Our brand advertising gross margins improved because most of our cost are the fixed costs, which do not increase at the same rate as revenue.

Sponsored search. Sponsored search cost of revenues consisted primarily of payments to our business partners. Sponsored search cost of revenues was $453,000 and $746,000 for the three and six months ended June 30, 2005, respectively, as compared to $244,000 and $372,000 for the corresponding three and six month periods in 2004. The increase in sponsored search cost of revenues resulted from an increase in map data collection cost and an increase in the effective revenue sharing ratio to websites alliances. Sponsored search cost of revenues does not include allocations of websites operating costs.

Advertising Cost of Revenues

Advertising cost of revenues increased by $734,000 to $3.5 million for the three months ended March 31, 2005 as compared to $2.8 million for the three months ended March 31, 2004.

Brand advertising. Brand advertising cost of revenues includes personnel costs and personnel overhead, content purchases, depreciation and bandwidth. The increase of $569,000 to $3.2 million for the three months ended March 31, 2005 was primarily due to higher costs with respect to headcount of $314,000, increase of office and depreciation expense of $264,000 and traveling and entertainment of $84,000, offset by a reduction in spending for content of $93,000. Our brand advertising gross margin for the three months ended March 31, 2005 was 73% as compared to 70% for the three months ended March 31, 2004. Our gross margins improved because of the fixed nature of the advertising costs of revenues, which have not increased at the same rate as revenue.

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Sponsored search. Sponsored Search cost of revenues consisted primarily of payments to our partners, which increased by $165,000 to $293,000 for the three months ended March 31, 2005 compared to the corresponding period of 2004. Sponsored search cost of revenues does not include allocations of websites operating costs.

Advertising cost of revenues

Advertising cost of revenues includes personnel costs and personnel overhead, content purchases, depreciation and bandwidth, which are fairly fixed in nature and accordingly did not tend to increase or decrease proportionately with revenue. Our advertising gross margin for the year ended December 31, 2003 was 75% as compared to 57% for the year ended December 31, 2002. Our gross margins improved because of the fixed nature of the advertising costs of revenues, which did not increase at the same rate as revenue.

Advertising cost of revenues was $7.5 million and $5.9 million for the years ended December 31, 2003 and 2002 respectively. The increase of $1.6 million was primarily due to the increase in personnel costs of $900,000 as a result of growth in headcounts and an increase in spending for content of $600,000, as we expanded our channel offerings.