Sohu.com (SOHU)

Cost of Advertising Revenues

Cost of advertising revenues increased by $3.2 million to $16.0 million for the three months ended March 31, 2009 as compared to $12.8 million for the three months ended March 31, 2008.

Brand advertising. Cost of brand advertising revenues 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. Cost of brand advertising revenues was $13.7 million and $11.3 million for the three months ended March 31, 2009 and 2008, respectively. The increase of $2.4 million consisted of a $1.3 million increase in personnel expenses, a $0.7 million increase in

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bandwidth leasing costs due to increased traffic, a $0.5 million increase in content purchases, a $0.3 million increase in depreciation expense, offset by $0.4 million decrease in cost of sale. Our brand advertising gross margins for the three months ended March 31, 2009 and 2008 were 65% and 66%, respectively.

Sponsored search. Cost of sponsored search revenues consists primarily of relevant depreciation of servers and computer equipment, payments to our Website Alliance, bandwidth leasing costs, personnel cost and data collection cost. Cost of sponsored search revenues was $2.3 million for the three months ended March 31, 2009 as compared to $1.5 million for the three months ended March 31, 2008. The increase in cost of sponsored search was primarily due to increase in depreciation and bandwidth leasing costs.

Cost of Advertising Revenues

Cost of advertising revenues increased by $21.8 million to $66.2 million for the year ended December 31, 2008 as compared to $44.4 million for the year ended December 31, 2007.

Brand advertising. Cost of brand advertising revenues includes personnel cost 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. Cost of brand advertising revenues was $59.4 million and $38.7 million for the years ended December 31, 2008 and 2007, respectively. The increase of $20.7 million consisted of a $8.5 million increase in content purchases, a $5.7 million increase in personnel expense, a $3.3 million increase in bandwidth leasing cost to our expanded business, a $1.4 million increase in depreciation expense, a $0.8 million increase in travel and entertainment, a $0.8 million increase in cost of sales and a $0.2 million increase in other costs. Our brand advertising gross margin was both 65% for the years ended December 31, 2008 and 2007.

Sponsored search. Cost of sponsored search revenues consists primarily of relevant depreciation of servers and computer equipment, bandwidth leasing costs, payments to our Website Alliance, personnel costs and data collection costs. Cost of sponsored search revenues was $6.8 million for the year ended December 31, 2008 as compared to $5.6 million for the year ended December 31, 2007. The increase in cost of sponsored search revenues resulted from an increase of $1.2 million in relevant depreciation and bandwidth leasing costs and an increase of $0.3 million in payment to Website alliances, which is offset by a decrease of $0.3 million in other costs. Our sponsored search gross margin for the years ended December 31, 2008 and 2007 was a negative 2% and 21%, respectively. The decrease was mainly due to lower revenue and higher server depreciation and bandwidth leasing costs in relation to the traffic growth of Sogou in 2008.

Cost of Advertising Revenues

Cost of advertising revenues increased by $15.9 million to $44.4 million for the year ended December 31, 2007 as compared to $28.5 million for the year ended December 31, 2006.

Brand advertising. Cost of brand advertising revenues includes personnel cost 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. Cost of brand advertising revenues was $38.7 million and $23.2 million for the years ended December 31, 2007 and 2006, respectively. The increase of $15.5 million consisted of a $4.7 million increase in content purchases, a $3.9 million increase in personnel expense, a $2.6 million increase in payments to our business partners, a $2.1 million increase in bandwidth leasing cost to our expanded business, a $1.4 million increase in depreciation expense and a $0.8 million increase in other costs. Our brand advertising gross margin for the years ended December 31, 2007 and 2006 was 65% and 71%, respectively. The decrease was mainly because of increased spending on content purchases, increase in headcount, bandwidth leasing costs and server depreciation costs.

Sponsored search. Cost of sponsored search revenues consists primarily of relevant depreciation of servers and computer equipment, bandwidth leasing costs, payments to our Website Alliance, personnel costs and data collection cost. Cost of sponsored search revenues was $5.6 million for the year ended December 31, 2007 as compared to $5.2 million for the year ended December 31, 2006. The increase in cost of sponsored search revenues resulted from an increase of $1.0 million in relevant depreciation and bandwidth

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leasing costs, which was offset by a $580,000 decrease in payment to Website alliances. Our sponsored search gross margin for the years ended December 31, 2007 and 2006 was 21% and 59%, respectively. The decrease was mainly due to lower revenue and higher server depreciation and bandwidth leasing costs in relation to the launch of Sogou 3.0 in late 2006.

Cost of Advertising Revenues

Cost of advertising revenues increased by $9.2 million to $20.8 million for the three months ended September 30, 2008 as compared with the corresponding period in 2007, and increased by $17.1 million to $49.1 million for the nine months ended September 30, 2008 as compared with the corresponding period in 2007.

Brand advertising. Cost of brand advertising revenues includes personnel cost 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. Cost of brand advertising revenues was $19.0 million and $44.2 million for the three and nine months ended September 30, 2008, respectively. The increase of $8.7 million for the three months ended September 30, 2008 from the corresponding period in 2007 consisted of a $5.9 million increase in content purchase surrounding the Beijing 2008 Olympic Game, a $1.9 million increase in personnel cost, a $0.8 million in bandwidth leasing costs due to increased traffic on our Websites, a $0.4 million increase in depreciation of servers and computer equipment, and a $0.3 million increase in payments to our business partners, offset by a $0.6 million decease in other costs. The increase of $16.5 million for the nine months ended September 30, 2008 from the corresponding period in 2007 consisted of a $8.3 million increase in content purchase surrounding the Beijing 2008 Olympic Game, a $4.0 million increase in personnel cost, a $2.2 million increase in bandwidth leasing costs due to increased traffic on our Websites, a $0.9 million increase in depreciation of servers and computer equipment, a $0.5 million increase in payments to our business partners, and a $0.6 million increase in other costs. Our brand advertising gross margin for the three and nine months ended September 30, 2008 was 62% and 64%, as compared with 66% and 65% for the corresponding periods in 2007.

Sponsored search. Cost of sponsored search revenues consisted primarily of relevant depreciation of servers and computer equipment, payments to our Website Alliance, bandwidth leasing costs, personnel cost and data collection cost. Cost of sponsored search revenues was $1.8 million and $4.9 million for the three and nine months ended September 30, 2008 as compared with $1.3 million and $4.3 million for the three and nine months ended September 30, 2007. Our sponsored search gross margin for the three and nine months ended September 30, 2008 was a negative 2% and 3%, respectively, as compared with 24% and 23% for the corresponding periods in 2007. The decrease in gross margin was primarily due to higher bandwidth leasing costs to support the increased traffic and a smaller scale of sponsored search revenues.

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Cost of Advertising Revenues

Cost of advertising revenues increased by $4.8 million to $15.5 million for the three months ended June 30, 2008 as compared to the corresponding period in 2007, and increased by $7.9 million to $28.3 million for the six months ended June 30, 2008 as compared to the corresponding period in 2007.

Brand advertising. Cost of brand advertising revenues 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. Cost of brand advertising revenues was $13.9 million and $25.2 million for the three and six months ended June 30, 2008, respectively. The increase of $4.6 million for the three months ended June 30, 2008 from the corresponding period in 2007 consisted of a $1.8 million increase in content purchase, a $1.0 million increase in personnel expense, a $0.9 million in bandwidth leasing costs due to increased traffic of our Websites, a $0.3 million increase in servers depreciation expense, a $0.3 million increase in payments to our business partners, and a $0.3 million increase in other costs. The increase of $7.7 million for the six months ended June 30, 2008 from the corresponding period in 2007 consisted of a $2.5 million increase in content purchase, a $2.2 million increase in personnel expense, a $1.4 million increase in bandwidth leasing costs due to increased traffic of our Websites, a $0.6 million increase in servers depreciation expense, a $0.5 million increase in payments to our business partners, and a $0.5 million increase in other costs. Our brand advertising gross margins for the three and six months ended June 30, 2008 were 67% and 66%, as compared to both 65% for the corresponding periods in 2007.

Sponsored search. Cost of sponsored search revenues consisted primarily of relevant depreciation of servers and computer equipment, payments to our Website Alliance, bandwidth leasing costs, personnel cost and data collection cost. Cost of sponsored search revenues was $1.6 million and $3.1 million for the three and six months ended June 30, 2008 as compared to $1.4 million and $3.0 million for the three and six months ended June 30, 2007. Our sponsored search gross margin for the three and six months ended June 30, 2008 was 5% and 6%, respectively, as compared to 21% and 23% for the corresponding periods in 2007. The decrease in gross margin was primarily due to higher bandwidth leasing costs to support the increased traffic and a smaller scale of sponsored search revenues.

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Cost of Advertising Revenues

Cost of advertising revenues increased by $3.1 million to $12.8 million for the three months ended March 31, 2008 as compared to $9.7 million for the three months ended March 31, 2007.

Brand advertising. Cost of brand advertising revenues 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. Cost of brand advertising revenues was $11.3 million and $8.1 million for the three months ended March 31, 2008 and 2007, respectively. The increase of $3.2 million consisted of a $1.2 million increase in personnel expense, a $0.7 million increase in content purchases, a $0.5 million increase in bandwidth leasing costs due to increased traffic of our Websites, a $0.3 million increase in servers depreciation expense, a $0.2 million increase in payments

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to our business partners, and a $0.3 million increase in other costs. Our brand advertising gross margins for the three months ended March 31, 2008 and 2007 were 66% and 65%, respectively.

Sponsored search. Cost of sponsored search revenues consisted primarily of relevant depreciation of servers and computer equipment, payments to our Website Alliance, bandwidth leasing costs, personnel cost and data collection cost. Cost of sponsored search revenues was $1.5 million for the three months ended March 31, 2008 as compared to $1.6 million for the three months ended March 31, 2007. Our sponsored search gross margin for the years ended March 31, 2008 and 2007 was 6% and 24%, respectively. The decrease was primarily due to higher bandwidth leasing costs to support the increased traffic and a smaller scale of sponsored search revenue.

Cost of Advertising Revenues

Cost of advertising revenues increased by $10.8 million to $28.5 million for the year ended December 31, 2006 as compared to $17.7 million for the year ended December 31, 2005.

Brand advertising. Cost of brand advertising revenues 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. Cost of brand advertising revenues was $23.2 million and $14.6 million for the years ended December 31, 2006 and 2005, respectively. The increase of $8.6 million consisted of a $2.6 million increase in content purchases, a $1.9 million increase in personnel expense, a $1.5 million increase in bandwidth leasing cost to our expanded business, a $1.4 million expense for share-based compensation due to the adoption of SFAS 123(R), a $1.2 million increase in depreciation expense and other costs. Our brand advertising gross margin for the years ended December 31, 2006 and 2005 was 71% and 75%, respectively. Our brand advertising gross margin decreased for the year ended December 31, 2006 mainly because of share-based compensation expense due to the adoption of SFAS 123(R) starting from January 1, 2006, and more spending on content purchases, personnel costs and bandwidth leasing costs.

Sponsored search. Cost of sponsored search revenues consisted primarily of payments to our Website Alliance, data collection cost, personnel costs, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Cost of sponsored search revenues was $5.2 million for the year ended December 31, 2006 as compared to $3.1 million for the year ended December 31, 2005. The increase in cost of sponsored search revenues resulted from an increase of $1.4 million in relevant depreciation and bandwidth leasing costs, an increase of $500,000 in payment to Website alliances and an increase of $200,000 in salary and benefits costs. Our sponsored search gross margin for the years ended December 31, 2006 and 2005 was 59% and 75%, respectively.

Cost of Advertising Revenues

SIZE="2">Cost of advertising revenues increased by $10.8 million to $28.5 million for the year ended December 31, 2006 as compared to $17.7 million for the year ended December 31, 2005.

Cost of Advertising Revenues

Cost of advertising revenues increased by $4.2 million to $11.6 million for the three months ended September 30, 2007 as compared to the corresponding period in 2006, and increased by $12.3 million to $32.0 million for the nine months ended September 30, 2007 as compared to the corresponding period in 2006.

Brand advertising. Cost of brand advertising revenues includes personnel costs and overheads relating to our editorial center, content purchases, payments to our business partners, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Cost of brand advertising revenues was $10.3 million and $27.7 million for the three and nine months ended September 30, 2007, respectively, as compared to $6.2 million and $16.1 million for the corresponding three and nine month periods in 2006. The increase of $4.1 million for the three months ended September 30, 2007 from the corresponding period in 2006 consisted of a $1.3 million increase in content purchases, a $902,000 increase in payments to our business partners, a $739,000 increase in personnel expense, a $617,000 increase in bandwidth leasing costs due to increased traffic of our Websites, a $430,000 increase in office and depreciation expense and a $112,000 increase in other costs. The increase of $11.6 million for the nine months ended September 30, 2007 from the corresponding period in 2006 consisted of a $3.7 million increase in content purchases, a $2.9 million increase in personnel expense, a $1.7 million increase in payments to our business partners, a $1.6 million increase in bandwidth leasing costs, a $1.1 million increase in office and depreciation expense and a $600,000 increase in other costs. Our brand advertising gross margin for the three and nine months ended September 30, 2007 was 66% and 65%, as compared to 71% and 72% for the corresponding periods in 2006, respectively. The decrease was mainly because of increased spending on content costs, bandwidth leasing costs and server depreciation costs.

Sponsored search. Cost of sponsored search revenues consists primarily of payments to our Website Alliance, relevant depreciation of servers and computer equipment, bandwidth leasing costs, personnel costs and data collection cost. Cost of sponsored search revenues was $1.3 million and $4.3 million for the three and nine months ended September 30, 2007, respectively, as compared to $1.2 million and $3.6 million for the corresponding three and nine month periods in 2006. The increase of $700,000 in cost of sponsored search revenues for the nine months ended September 30, 2007 as compared to the corresponding period in 2006 resulted from an increase of $989,000 in relevant depreciation and bandwidth leasing costs, offset by a decrease of $289,000 in other costs. Our sponsored search gross margin for the three and nine months ended September 30, 2007 was 24% and 23%, respectively, as compared to 57% and 64% for the corresponding periods in 2006, respectively. Our sponsored search gross margin decreased for the three and nine months ended September 30, 2007 mainly

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due to lower revenue but higher server depreciation and bandwidth leasing costs in relation to the launch of Sogou 3.0 in late 2006.

Cost of Advertising Revenues

Cost of advertising revenues increased by $3.8 million to $10.7 million for the three months ended June 30, 2007 as compared to the corresponding period in 2006, and increased by $8.1 million to $20.4 million for the six months ended June 30, 2007 as compared to the corresponding period in 2006.

Brand advertising. Cost of brand advertising revenues includes personnel costs and overheads relating to our editorial center, content purchases, payments to our business partners, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Cost of brand advertising revenues was $9.3 million and $17.4 million for the three and six months ended June 30, 2007, respectively, as compared to $5.6 million and $9.9 million for the corresponding three and six month periods in 2006. The increase of $3.7 million for the three months ended June 30, 2007 from the corresponding period in 2006 consisted of a $1.3 million increase in personnel expense, a $946,000 increase in content purchases, a $438,000 increase in payments to our business partners, a $396,000 increase in bandwidth leasing costs due to increased traffic of our Websites, a $337,000 increase in office and depreciation expense and a $283,000 increase in other costs. The increase of $7.5 million for the six months ended June 30, 2007 from the corresponding period in 2006 consisted of a $2.4 million increase in content purchases, a $2.2 million increase in personnel expense, a $969,000 increase in bandwidth leasing costs, a $833,000 increase in payments to our business partners, a $712,000 increase in office and depreciation expense and a $386,000 increase in other costs. Our brand advertising gross margin for the three and six months ended June 30, 2007 was both 65%, as compared to 71% and 72% for the corresponding periods in 2006, respectively. The decrease was mainly because of increased spending on content costs, bandwidth leasing costs and server depreciation costs.

Sponsored search. Cost of sponsored search revenues consists primarily of payments to our Website Alliance, relevant depreciation of servers and computer equipment, bandwidth leasing costs, personnel costs and data collection cost. Cost of sponsored search revenues was $1.4 million and $3.0 million for the three and six months ended June 30, 2007, respectively, as compared to $1.3

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million and $2.3 million for the corresponding three and six month periods in 2006. The increase of $0.1 million in cost of sponsored search revenues for the three months ended June 30, 2007 as compared to the corresponding period in 2006 resulted from an increase of $0.3 million in relevant depreciation and bandwidth leasing costs, offset by a decrease of $0.2 million in payment to Website Alliances. The increase of $0.7 million in cost of sponsored search revenues for the six months ended June 30, 2007 as compared to the corresponding period in 2006 resulted from an increase of $0.8 million in relevant depreciation and bandwidth leasing costs and an increase of $0.2 million in other costs, offset by a decrease of $0.3 million in payment to Website Alliances. Our sponsored search gross margin for the three and six months ended June 30, 2007 was 21% and 23%, respectively, as compared to 65% and 66% for the corresponding periods in 2006, respectively. Our sponsored search gross margin decreased for the three and six months ended June 30, 2007 mainly due to lower revenue but higher server depreciation and bandwidth leasing costs in relation to the launch of Sogou 3.0 in late 2006.

Cost of Advertising Revenues

Cost of advertising revenues increased by $4.3 million to $9.7 million for the three months ended March 31, 2007 as compared to $5.4 million for the three months ended March 31, 2006.

Brand advertising. Cost of brand advertising revenues includes personnel costs and overheads relating to our editorial center, content purchases, payments to our business partners, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Cost of brand advertising revenues was $8.1 million and $4.3 million for the three months ended March 31, 2007 and 2006, respectively. The increase of $3.8 million consisted of a $1.4 million increase in content purchases, a $0.9 million increase in personnel expense, a $0.6 increase in bandwidth leasing costs due to increased traffic of our Websites, a $0.4 increase in payments to our business partners, a $0.4 million increase in servers depreciation expense, and a $0.1 million increase in other costs. Our brand advertising gross margin for the three months ended March 31, 2007 and 2006 was 65% and 74%, respectively. The decrease was mainly because of increased spending on content purchases to obtain premier, differentiated and exclusive content, including video content, partnerships or sponsorships.

Sponsored search. Cost of sponsored search revenues consisted primarily of payments to our Website Alliance, relevant depreciation of servers and computer equipment, bandwidth leasing costs, personnel cost and data collection cost. Cost of sponsored search revenues was $1.6 million for the three months ended March 31, 2007 as compared to $1.1 million for the three months ended March 31, 2006. The increase in cost of sponsored search revenues resulted from an increase of $452,000 in relevant depreciation and bandwidth leasing costs, and a $48,000 increase in personnel expense and payment to Website Alliances.

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Cost of Advertising Revenues

Cost of advertising revenues increased by $5.6 million to $17.7 million for the year ended December 31, 2005 as compared to $12.1 million for the year ended December 31, 2004.

Brand advertising. Cost of brand advertising 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. Cost of brand advertising revenues was $14.6 million and $10.8 million for the years ended December 31, 2005 and 2004. The increase of $3.8 million consisted of a $1.7 million increase in personnel expense, a $1.4 million increase in payments to our business partners, a $540,000 increase in bandwidth leasing costs, and a $472,000 increase in office and depreciation expense, offset by a $312,000 decrease in content purchases and traveling and entertainment expense. Our brand advertising gross margin for the years ended December 31, 2005 and 2004 was 75% and 77%, respectively. Our brand advertising gross margin decreased slightly for the year ended December 31, 2005 mainly because of increased expenditures directly attributable to promotional events for advertisers in 2005.

Sponsored search. Cost of sponsored search revenues consisted primarily of payments to our Website Alliance, data collection cost, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Cost of sponsored search revenues was $3.1 million for the year ended December 31, 2005 as compared to $1.3 million for the year ended December 31, 2004. The increase in cost of sponsored search revenues resulted from an increase in payment to Website alliances, an increase in map data collection cost and an increase in relevant depreciation and bandwidth leasing costs.

Cost of Advertising Revenues

Cost of advertising revenues increased by $2.5 million to $7.4 million for the three months ended September 30, 2006 as compared to the corresponding period in 2005, and increased by $7.4 million to $19.7 million for the nine months ended September 30, 2006 as compared to the corresponding period in 2005.

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Brand advertising. Cost of brand advertising 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. Cost of brand advertising revenues was $6.2 million and $16.1 million for the three and nine months ended September 30, 2006, respectively, as compared to $4.1 million and $10.3 million for the corresponding three and nine month periods in 2005. The increase of $2.1 million for the three months ended September 30, 2006 from the corresponding period in 2005 consisted of a $718,000 increase in content purchases, a $543,000 increase in personnel expense, a $403,000 expense of share-based compensation due to the adoption of SFAS 123(R), a $379,000 increase in office and depreciation expense and other costs, a $346,000 increase in bandwidth leasing costs due to our expanded business, which amounts were offset by a $289,000 decrease in payments to our business partners. The increase of $5.8 million for the nine months ended September 30, 2006 from the corresponding period in 2005 consisted of a $1.6 million increase in content purchases, a $1.3 million increase in personnel expense, a $1.1 million increase in bandwidth leasing costs, a $1.0 million expense of share-based compensation due to the adoption of SFAS 123(R), a $637,000 increase in depreciation expense and other costs and a $163,000 increase in payments to our business partners. Our brand advertising gross margin for the three and nine months ended September 30, 2006 was 71% and 72%, respectively, as compared to 74% and 75% for the corresponding periods in 2005, respectively. Our brand advertising gross margin decreased for the three and nine months ended September 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. Cost of sponsored search 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. Cost of sponsored search revenues was $1.2 million and $3.6 million for the three and nine months ended September 30, 2006, respectively, as compared to $813,000 and $2.0 million for the corresponding three and nine month periods in 2005. The increase of $408,000 in cost of sponsored search revenues for the three months ended September 30, 2006 as compared to the corresponding period in 2005 resulted from an increase of $333,000 in relevant depreciation and bandwidth leasing costs, an increase of $34,000 in payment to Website Alliances, the expensing of share-based compensation cost of $24,000 due to the adoption of SFAS 123(R) and an increase of $17,000 in other expenses. The increase of $1.6 million in cost of sponsored search revenues for the nine months ended September 30, 2006 as compared to the corresponding period in 2005 resulted from an increase of $813,000 in relevant depreciation and bandwidth leasing costs, an increase of $400,000 in payment to Website Alliances, an increase of salary and benefits expense of $190,000, the expensing of share-based compensation cost of $68,000 due to the adoption of SFAS 123(R) and an increase of $129,000 in other expenses. Our sponsored search gross margin for the three and nine months ended September 30, 2006 was 57% and 64%, respectively, as compared to 74% and 78% for the corresponding periods in 2005, respectively. The decrease of gross margin for the three and nine months ended September 30, 2006 mainly due to increase in server depreciation and bandwidth leasing costs as a result of the increase in traffic.