Sohu.com (SOHU)

Carol:

Thank you Charles. I would like to take this opportunity to discuss some key financials for the first quarter 2006.

I. Revenues

We are pleased to report strong record revenues of $31.3 million for the first quarter which exceeded our guidance.

1. Advertising

With advertising revenues of $20.1 million, we experienced a marginal sequential decline of 1% and a year-on-year increase of 35%.

For our search revenues, bid-listing revenues accounted for 30% of our total sponsored search revenue, unchanged from the previous quarter.

2. Wireless:

We have been pleased to see a continued steady recovery of this business. Wireless revenues were $8.0 million, up 10% quarter-on-quarter and 34% year-on-year.

Let me give you a breakdown of wireless revenues for the first quarter:

SMS revenues increased 13% sequentially to $4.7 million after certain technical problems with one of the operator were resolved in the previous quarter.

WAP revenues grew 12% sequentially to $2.5 million, mainly due to product enhancement and better ranking on the Monternet platform.

MMS, IVR and Ring Back Tone services accounted for $0.8 million in total as compared to $0.9 million in the previous quarter.

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3. Other revenues:

Our other revenues mainly included online game revenues which grew 23% sequentially and 54% year-on-year to $2.1 million. The growth was primary driven by the increase of sales of virtual goods in the games.

II. Turning to our gross margins:

Starting from January 1, 2006, share-based compensation expenses are charged to cost of revenues and operating expenses following the adoption of Statement of Financial Accounting Standard 123R. Total share-based compensation expenses for first quarter was $1.7 million. We believe excluding such expense from our non-GAAP financial measure of net income makes a more meaningful comparison of our operation results and improve user’s understanding of our performance, hence we use non-GAAP measures below to explain margin, cost and expense items.

Overall non-GAAP gross margin for the first quarter was 66%, unchanged from 66% in the previous quarter and down from 68% in the first quarter of 2005.

Advertising non-GAAP gross margin was 75%, up from 74% in the previous quarter, but down from 78% in the same period last year. Brand advertising non-GAAP gross margin was 76%, up from 75% in the previous quarter but down from 77% in same period last year. Sponsored search non-GAAP gross margin was 69%, up from 68% in the previous quarter but down from 82% in the same period last year.

Non-advertising non-GAAP gross margin was 51%, an improvement from 50% for the prior quarter, but down from 52% in the first quarter of last year.

III. Operating expenses

For the first quarter, Sohu’s non-GAAP operating expenses totaled $13.0 million, down 9% from previous quarter but up 20% year-on-year. The quarter-to-quarter decrease was primarily due to a one time accounting adjustment regarding an accrual of sales commission during 2005 Q4. Year on year increase primarily related to costs associated with our Olympics sponsorship role and personnel costs.

IV. Operating Margin

Non-GAAP operating margin for the first quarter was 25%, up from 19% in the previous quarter and 23% in the same period last year. GAAP operating margin for the first quarter was 19%.

V. Income tax expense

Starting 2006, the applicable PRC income tax rate for most of our operating entities in the PRC have increased to 7.5%, due to the expiration of income tax holiday. For the first quarter, income tax expense totaled $0.4 million.

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VI. Net Income

Non-GAAP net income for the first quarter was $7.8 million or 20 cents per fully diluted share. This compares to net income of $8.9 million or 23 cents per fully diluted share for the previous quarter and $5.7 million or 15 cents per fully diluted share for first quarter of 2005. GAAP net income for the first quarter 2006 was $6.0 million or 16 cents per fully diluted share.

VII. Balance Sheet.

Let me now make a few comments on the Balance Sheet.

As of March 31, 2006, Sohu’s cash, cash equivalents and investments in marketable debt securities was $137 million, compared to $133 million as of end of last quarter and $129 million as of March 31, 2005.

As of March 31, 2006, our net accounts receivable balance was $24.9 million, an increase of $5.6 million as compared to last quarter. This includes $17.8 million related to our advertising business and $7.1 million related to our wireless business. During the first quarter, we collected sales proceeds totaling $15.5 million for our advertising business. Our DSO for the first quarter was 76 days compared to 62 days in the previous quarter. First quarter advertising DSO was 89 days, compared to 77 days for the fourth quarter. Because we typically receive advertising sales proceeds from third party advertising agencies in the second and fourth quarters based on agency contracts, we normally have higher advertising DSO in the first and third quarters. We continue to closely monitor our accounts receivable.

As of March 31, 2006, our bad debt provision amounted to $1.5 million, compared to $1.2 million as of December 31, 2005. While we consider this level of bad debt provision to be still relatively low as compared to our level of advertising sales, we continue to remain prudent in our revenue recognition policy and strengthening our credit extension.

VIII. And finally, our Business Outlook

You will find detailed guidance for the second quarter 2006 in our earnings release, but I would like to highlight:

In summary, we are pleased with our first quarter 2006 results and believe we are well positioned for further growth. Our healthy brand advertising business combined with a steadily improving search product further supplemented by stable growth on the

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wireless side are all positive factors as we look ahead. We view the World Cup as a near term growth driver and the Olympic sponsorship as a longer term growth catalyst. We strive to brand Sohu as a leading online international sports content provider and global online news and entertainment provider.

We look forward to providing everyone with more updates of our successes for the remainder of 2006 and take this opportunity to thank everyone for their interest and continued support in Sohu’s vision.

That concludes my presentation. Thank you for your attention. I would like to now open the floor for questions. Operator?

(Q&A Session)

Ingrid- Closing Remarks

We would like to thank everyone for participating in today’s call. Please feel free to contact us with any additional questions that you may have. Thank you.

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Carol:

Thank you Charles. I would like to take this opportunity to discuss some key financials to enhance your understanding of our business operations.

I. Revenues

We are pleased to report strong revenues of $28.3 million for the third quarter which came in at the high end of our guidance.

1. Advertising

With advertising revenues of $18.8 million we experienced a healthy 11% sequential and 21% year-on-year improvement. Year-to-Date we are on track to meet our target advertising revenue growth of 25% for the full year 2005.

2. Wireless:

We are very pleased to note that our wireless business is continuing to show healthy signs of recovery. Let me give you a breakdown of the third quarter wireless revenue:

Our SMS services grew 23% quarter-on quarter to US$ 4.2 million.

Our WAP services declined a marginal 2% to US$ 2.1 million.

Our MMS, IVR and RingBackTone services contribute only very small amounts at this stage.

Going forward, we believe we will continue to see modest recovery for this business line.

3. Other revenues:

Our online game revenues grew 8% sequentially to 1.4 million with Blade Online revenues growing 11% sequentially.

II. Turning to our gross margins:

Overall gross margin for the third quarter was 65%, down from 67% in the previous quarter and 68% in the third quarter of 2004. Advertising gross margin was 74% in the third quarter, down from 76% in the second quarter and 79% in the same period last year, but still higher than that of our closest competitor. Gross advertising profit increased to $13.9 million from $12.9 million in the previous quarter.

Non-advertising gross margin was 47% for the third quarter, compared to 51% in the prior quarter and 52% in the third quarter of last year. This was mainly due to a an

alleged penalty of $241,000 charged by Unicom as a result of Unicom’s investigation carried out in the previous quarter and recorded as a cost of revenue in the third quarter. Although we do not believe Sohu had mistakenly charged users that did not subscribe to our services, the possibility of this penalty being reversed is remote and we would prefer to move forward with our business relationship with Unicom and put this behind us.

III. Operating expenses

For the third quarter of 2005, SOHU’s operating expenses totaled US$11.1 million, increasing a modest 3% quarter-on-quarter and 15% year-on-year. The year-on-year increase in operating expenses was mostly due to investment in long-term growth opportunities, primarily in the area of research and development.

IV. Operating Profit Margin

Operating profit margin in the third quarter was 26%, largely unchanged from the previous quarter, but down from 31% in the same period last year.

V. Balance Sheet.

Let me now make a few comments on the Balance Sheet.

Our DSO for Q3 is 82 days compared to 81 days in Q2 (79 days in Q1). Advertising DSO for Q3 is 105 days, up from 89 days in Q2 (93 days in Q1). The increase was due to our bi-annual payment settlement as agreed with advertising agencies coming in at the end of June which made the June quarter DSO shorter than the September quarter. Our September 30th net accounts receivable balance was $ 23.3 million compared to $21.5 million in Q2, ($19.1 million in Q1), including $17.5 million related to our advertising business and $4.5 million to our wireless business.

As of September 30, 2005, our bad debt provision amounted to $1.7 million, as compared to the $1.6 million provision as of June 30, 2005. While we consider this level of bad debt provision to be still relatively low as compared to our level of advertising sales, we continue to pay close attention in remaining prudent in our credit extension policy. We also continue to strengthen our credit extension and revenue recognition policy.

Sohu today announced its Board of Directors has approved a stock repurchase program in which the Company plans to purchase up to US$15 million of its outstanding shares in the open market.

VI. Stock Buyback Program

During previous stock repurchase program, from May 2004 to February 2005, the Company purchased a total of $37.7 million or roughly 6% of the shares outstanding.

Further, since May of 2004, Charles has purchased 550,000 shares in the open market totaling approximately $9.8 million and exercised 566,000 options totaling $1.1 million. Also, in February this year, I purchased 15,000 shares too. We are firm believers in our company’s future and work hard to drive value to our shareholders.

VII. And finally, our Business Outlook

You will find detailed guidance for the fourth quarter in our earnings release, but I would like to highlight:

In summary, we are pleased with our overall results and believe we are well positioned for growth in 2006. Our multi-dimensional strategy of increasing advertising revenue while growing a strong and steady search business is one we believe will have a lasting impact on our development as a company. We view the Olympic sponsorship as a strong growth catalyst that will accelerate our current business model. We are very confident that our positioning and forward strategy is the right mix of what is needed to do to drive results and increase shareholder value.

That concludes my presentation. Thank you for your attention . I would like to now open the floor for questions. Operator?

(Q&A Session)

Ingrid- Closing Remarks

We would like to thank everyone for participating in today’s call. The management team will be on the road in the U.S. to meet with investors in early December. Please contact us with any additional questions that you may have. Thank you.

Carol Yu:

Thank you Charles. I would like to take this opportunity to discuss some key points of our first quarter results to enhance your understanding of our business operations.

I. Revenues

We are pleased to report that revenues of $23.73 million for the first quarter exceeded our guidance.

With advertising revenue of $14.86 million we experienced a seasonal decline of 6% quarter-on-quarter, which was less severe than expected. Our sponsored search grew slightly, by 1%, over the previous quarter despite the negative impact of Chinese New Year. We believe we are still on the right track to reach our full year target of 30% growth for the entire advertising business.

We are very pleased to note that our wireless business is back on a growth track. Let me give you a breakdown:

Our SMS services grew 21% quarter-on quarter to US$ 3.3 million.

Our WAP services grew 38% to US$ 2.1 million, because our strong WAP team is tapping into growing popularity of WAP services, as Charles mentioned earlier.

Our IVR business grew 13% to 470 thousand dollar.

Our MMS and RingBackTone services contribute only very small amounts.

Going forward we believe that we will continue to see a cautious recovery in our wireless business.

II. Turning to our gross margin:

Overall gross margin of 68% was unchanged from the previous two quarters. Our advertising gross margin in Q1 at 76% was 4 basis points lower than in Q4 due to our seasonal sequential decline in sales.

Our non-advertising gross margin in Q1 was up to 55% from 45% in Q4. This was due to the resumption in growth of relatively high margin wireless products, especially WAP products.

III. Operating expenses

Total spending, which consists of operating expenses plus the cost of revenue for advertising amounted to $14.3 million in Q1, as compared to $13.6 million in the fourth quarter. Our professional fees were nearly $1 million lower than in Q4, when we incurred in a first-time one-time cost of professional fees in relation to our SO 404 project. At the same time, we incurred cost increases in Q1 for commissions, extra headcount and benefits, as well as increases in amortization and facilities related to our recent office relocation and a one-time write-off for leasehold improvements. These all together more than offset the reduction in professional fees.

IV. Operating Profit Margin

Operating profit margin in the first quarter was 23%, compared to 25% in the fourth quarter. We are still in the build-up phase of a very promising but competitive market, therefore we need to continue to invest in the future growth of the company.

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V. Balance Sheet.

Let me now make a few comments on the Balance Sheet.

Our DSO for Q1 is 79 days, compared to 74 days in Q4. Advertising DSO is 93 days, up slightly from 92 days in Q4. Our March 31 net accounts receivable balance was $19.1 million, compared to $19.9 million in Q4, including $12.3 million related to our advertising business and $ 5.9 million for our wireless business.

Our bad debts provision for our advertising business as of March 31 2005 amounted to $1.7 million, an increase of $750 thousand compared to the provision as of December 31, 2004. While we consider this level of bad debt provision to be still relatively low as compared to our level of advertising sales, we pay particular attention to continue to be prudent in our credit extension policy.

As in the past, we had regular collections from our mobile operators. I would like you to reassure you that we have never had a bad debt from a mobile operator.

VI. And finally, the Business Outlook

You will find detailed guidance for the second quarter in our earnings release. Let me explain a few key points regarding our guidance.

Before we start the Q&A let me summarize the key points underlying our confidence in SOHU’s long term future.

That concludes my presentation. Thank you for your attention and now I would like to open the floor for questions. Operator?

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