This excerpt taken from the SOHU 8-K filed Feb 9, 2005.
Carol Yu, Chief Financial Officer:
Thank you Charles. Rather than discussing the financial statements item-by-item, let me discuss some key points to enhance your understanding of our business operations.
We are pleased to report that revenues of $24.1 million for the fourth quarter came within our guidance.
Advertising revenue of $15.9 million was a 68% year-on-year improvement and 3% quarter-on-quarter. Our Brand Advertising revenue of $13.2 million performed well even in this relatively weak quarter for advertising in China, with a 2% increase over Q3. Sponsored Search revenue of $2.7 million was a 6% sequential increase over Q3, which reflects our ongoing progress in monetizing our proprietary search technology. Advertising revenue now represents 66% of total revenues. This puts us on very firm ground for long-term sustainable growth of the business.
As mentioned in last quarters call, it is important to note that our reliance on wireless revenue, which has been our most volatile business line in the past 4 quarters, is decreasing. In the just finished fourth quarter wireless revenues contributed 19% to our overall revenues, compared with 31% in the third quarter of 2004.
We believe we have bottomed-out of the SMS services decline in the fourth quarter. Barring any unforeseeable circumstances, we believe we can turn the corner in the first quarter of 2005 and resume wireless revenue growth from there.
II. Now let me make a few points about our gross margin:
Overall gross margin of 68% was unchanged from the previous quarter. Our advertising gross margin in Q4 at 80% was 3 basis points higher than in Q3 at 77% Our non-advertising gross margins in Q4 was down to 45% from 54% in the previous quarter. There were two main reasons for this.
III. Operating expenses
Total spending, which consists of operating expenses plus the cost of revenue for advertising amounted to $ 13.6 million, as compared with $13.2 million in the third quarter. We had a one-time cost of $1 million in professional fees in relation to our SO 404 project.
IV. Operating Profit Margin
Operating profit margin in the fourth quarter was 25%, down from 31% in Q3. We are still in the build-up phase of a very promising but competitive market. Even though we experience a sequential decline of our top line revenue, we need to balance short-term demands with long-term opportunities. We believe we are making the appropriate levels of investment to strengthen our brand and market presence, and grow the business for the long term.
V. Balance Sheet.
Let me now make a few comments on the Balance Sheet.
Our DSO for Q4 is 74 days, unchanged from the third quarter. Our year-end 2004 accounts receivable balance was $19.9 mil (21.2 million in Q3), including $13.9 million related to our advertising business and $4.5 million for wireless business.
While we dont consider this level of receivables a reason for concern, we will strengthen our efforts to collect receivables from our advertising clients so that we can maintain our current low bad debt provision. As in the past, we had regular collections from our mobile operators. I would like you to note 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 first 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 SOHUs long term future.
That concludes my presentation. Thank you for your attention and now I would like to open the floor for questions.