This excerpt taken from the SOHU 8-K filed Aug 2, 2005.
Charles Zhang, Chairman and CEO:
Thank you all for being on our conference call today.
We are pleased to report a solid performance in top and bottom line growth for the second quarter. It is our second quarter of sequential growth after a tough year for our wireless business in 2004, which hurt our overall business performance last year. Now, our recovery is well under way.
The key highlights for our second quarter are:
-Revenues of $25.9 million dollar, growing 9% sequentially, came in at the high end of company guidance.
-Our core business of advertising revenues, which include brand advertising and sponsored search, also came in at the high end of guidance, due to the seasonal uptake of brand advertising in the second quarter and a strong uptake for our promising sponsored search business as our search traffic grows rapidly.
-In our consumer business we enjoy a continuing recovery in our wireless business, despite stricter regulations on new customer acquisition, with sequential growth in wireless revenues for the second quarter in a row.
Now, let me discuss the progress of our business lines.
First, advertising revenues.
Our advertising revenues of $17.0 million dollar met the high end of company guidance. Brand advertising comprised $13.9 million dollar and Sponsored Search $3.1 million dollar, both increasing by 14% over Q1.
In our brand advertising we continued in the second quarter to see strong contributions from advertisers in the dotcom sector, financial services, fast moving consumer goods, as well as real estate advertising. Advertising from automobile manufacturers was stronger than we had seen in recent quarters because of the April autoshow.
In sponsored search, I am happy to report that both the traffic growth and monetization of our search is progressing very well. Our search engine SoGou version 2.0, which we launched during the first quarter, is showing rapid traffic growth. According to Alexa.com, SoGous traffic rank on the top 500 global sites on July 27th was in 35th , up from 228th place three months ago. SoGous current reach of 21,000 per 1 million users is up 365% compared to its values three months ago.
As we have explained before, our key objective for this year is to grow our search traffic, so that we build up a solid basis from which to monetize our search engine. Even though traffic growth currently has priority over our monetization efforts, I am pleased to see that client spending is growing well, increasing 14% quarter-on-quarter, which was in line with our earlier expectation.
Our long-term goal is to make SoGou the #1 search engine for Chinese language search in terms of technology, product and usage. A key component of our drive to grow traffic is our effort to build the largest Chinese language indexed database. Currently our indexed pages in the search engine stand at a little over 1 billion pages, which we believe is the largest Chinese search database in the world.
Naturally we have also engaged SOHUs flagship marketing strength to promote the SoGou brand. I just came back from a mountaineering expedition in Tibet, where I reached the summit of the the 6,200-meter high QiZi peak together with Miss World and 20 Chinese celebrities. The event was widely reported by all media throughout China, which helped to build up SoGou into a household brand name in China. We will continue to make extensive marketing efforts in Q3 and the rest of the year to promote our new upgrades and applications of SoGou, seach dog.
We expect our long-term prospects in online search to be further strengthened with the acquisition of Go2Map, the leading online mapping service provider in China. We closed the acquisition of Go2Map on May 31 and have begun the integration process. We believe the acquisition will enhance our overall competitive strength as a portal and search engine.
Turning now to the outlook for advertising for the remainder of the year:
Year-to-Date we are now at precisely 30% growth over the first half of 2004 for our advertising revenue, consisting of both brand advertising and search revenue. We expect our sponsored search to continue to perform very well and achieve a year-on-year growth rate of more than 30%.
Our sales offices in Beijing, Shanghai and our real estate website Focus are showing healthy growth in brand advertising. However, our South China sales office and the games website 17173 have started to experience some changes in the market place in the last two months. But overall, we need to revise our earlier guidance for annual growth in advertising revenues. We now expect advertising revenues growth for the full year 2005 to be between 20-25% instead of our previous guidance of 30%.
Let me explain what has changed for our South China and 17173 operations in the last two months:
However, we expect overall online advertising to grow to a new level in the next few years with a further ramp-up of the total online population, now at just over 100 million, that will be online via high speed broadband access, which currently 50% of all Chinese online use. This will allow the Internet to compete more effectively with television for multimedia advertising contracts so that our existing advertisers spend more with us and we attract new advertisers to our portal network. We strongly believe the online advertising market in China continues to have long-term and structural growth potential.
We also believe brand advertising continues to be a key growth driver in our business model. We believe SOHUs presence as a leading online media platform is difficult for competitors to challenge and protects our position as a default destination for clients seeking online branding exposure to the Internet mass market. We are also quite unique in that we offer advertising clients both general branding to the mass online population and effective targeting on our popular channels such as news, real estate, online games and automobile channels. We see the increasing competition from verticals and other portals, but a comprehensive player like SOHU is still rare in this space. All in all, we believe SOHU is in a strong position to continue to capture the growth opportunity in online advertising over the long term.
Turning to our other business lines, our non-advertising revenue of $8.9 million dollar came in at the high end of company guidance. Let me now briefly go over each of our non-advertising business lines: wireless business, online games, and e-commerce.
We see a continuing cautious recovery in our wireless business, with 7% sequential growth to $6.4 million dollar. SMS, WAP, IVR and Ringback tones all recorded growth, with WAP showing 2% sequential growth, a little above our expectation. We had guided flat for WAP as a result of the double-confirmation requirement that came into effect at the beginning of the second quarter. Even so, we believe that the fully integrated SOHU-Goodfeel WAP team is taking full advantage of Chinese consumers increasing acceptance of WAP services.
We had an inline quarter for online games, with our two multi-player games Blade online and Knight online performing as expected. Blade is still growing and that growth offset the decline in Knight, which is now a mature game. We are pleased to see that Blade showed growth despite the launch of the popular WOW game in the market. We are committed to online games for the long term and we are encouraged by this incremental progress.
Finally, a few words on e-commerce. Our e-commerce operation has undergone a change in operational model in the course of the second quarter, which affected our revenue this quarter.
Instead of making direct sales to customers, on May 1, we started a new business model mainly for health care products, cosmetics and gifts, whereby suppliers list their products on our website and receive orders directly from customers through the website. SOHU engages third party delivery companies to deliver products to and collect payment from customers.
SOHU now acts as both a retailer and an agent, therefore we record this revenue on a net basis instead of a gross basis. We expect there will be an improvement in profitability as a result. We believe there is an attractive long-term opportunity for e-commerce in China.
Before we move on to the financial presentation, I would like to say that looking at the progress we made in the second quarter, we believe SOHU follows the right strategy of investing in Chinas Internet opportunity through our in-house research
and product development program and by making calculated, strategic acquisitions. We are pleased to see these investments are beginning to pay off even though the overall market is still in a relatively early stage of monetization. We believe we are well positioned to enjoy long-term sustainable growth in Chinas Internet opportunity.
Now I would like to give the floor to our CFO, Carol Yu, for a financial review.
This excerpt taken from the SOHU 8-K filed Feb 9, 2005.
Charles Zhang, Chairman and CEO:
Thank you all for being on this call, especially for those of you in the US who stayed up late to celebrate the outcome of the Super Bowl. Here in China our earnings results come just a day before the fireworks go off for Chinese New Year, which is the reason why we opted this time to do the earnings call before market hours.
We are pleased to report quarterly results that reflect how we were able to execute on our own expectations for the fourth quarter. Both our brand advertising and our sponsored search came in line with our expectations this quarter. Thanks to our strength in proprietary online search, we have not only Advertising but also Sponsored Search to generate long-term scaleable and sustainable growth. Our game operations are on track as well, with Q4 revenues in line with company expectations. Regarding our wireless revenues we believe we have hit the bottom in Q4 and we expect growth to resume from Q1 onwards.
Last month, the China Internet Network Information Center reported there were 94 million internet users in China at the end of 2004. Clearly, the Internet continues to spread rapidly across the society, with usage deepening and expanding to wider segments of society.
As the user population of the Internet continues to grow, Sohus leadership in the Internet market continues to be evident. According to iResearch statistics for December 2004, we were the most trafficked destination for news, a crucially important application of internet use in China. Furthermore, we also topped the iResearch ranks for real estate websites and online games information portals at year-end 2004. We now have well over 100 million registered users for news, email, search on our branded website SoGou, and community exchange in Alumni Club, our SOQ instant messaging and online games message board 17173.com. Our Alumni Club is the largest of our online communities, counting 54 million people who stay in touch online with their former classmates.
We believe for SOHU the worst in our wireless business decline is behind us and 2005 will be a year of recovery and continuing investment in our long-term success. We expect
I spend a great deal of my time on technology and products because we are excited that the rapid user growth of Internet broadband is deepening the use of Internet, for example in Search. We are also excited about the prospects for Sohu in the wireless 3G era, which is just around the corner in China. For competitive reasons I cannot go in detail about what we are currently working on, but I would like you to know that we at Sohu invest heavily in product and technology for our long-term and sustainable growth.
As you may know, our Chief Operating Officer Victor Koo informed the company in November that he would resign effective March 31, 2005. Victor, who could not be on the call today, will then continue to help us out in an advisory capacity until later this year.
We believe the transition is progressing smoothly with Victors assistance, and we are confident Sohu will continue to be effectively organized and managed. Our Vice-Presidents are very capable managers who have considerable experience in running their business lines. They know the ins-and-outs of our business environment extremely well. We strongly believe that in their new direct relationship with the CEO, the current management team can execute on our plan to grow shareholder value.
Just a few days ago, we moved the Sohu headquarters in Beijing to the high-tech district of Haidian, the so-called Silicon Valley of the China. It is a major step towards consolidation of our company, which had been spread out across five different locations in Beijing. While it is taking some adjustment, in particular for our employees, we have allocated the necessary resources to our employee services and human resources departments to assist our employees in making this transition as smooth as possible. For example, we have set up special bus transport to the new office. I believe the office move will be a positive for the company going forward despite the short-term challenges.
Now let me focus in more detail on the business results and outlook for each of our business lines:
Our first business line, Brand Advertising
Again, Q4 was a solid quarter, given that it is traditionally the second weakest advertising quarter of the year after Q1, which is the weakest quarter because it includes Chinese New Year holidays.
The outlook for online advertising in 2005 again is good, but we dont expect the online ad market to grow at the same phenomenal rate as the previous two years. We see increasing competition in this sector, especially from vertical players. We expect the online ad market to grow round 30% in 2005 and Sohu to grow in line with the market. We expect about 15% of our growth to come from rate price increase and the other 15% from volume growth. The latter is based on wider industry developments as follows:
For an update on our second business line of Sponsored Search, I would like to give the floor to our Vice-president Jianjun Wang. Jianjun has led our Search Team for the past 8 years, when we started with our website classification in 1997. Jianjun?