Sohu.com (SOHU)

Fiscal Year 2008 Financial Results

Total revenues for fiscal year 2008 were US$429.1 million, 2.3 times that of fiscal year 2007 revenues of US$188.9 million. Gross margin was 75% in fiscal year 2008, compared with 66% in fiscal year 2007. Non-GAAP gross margin was 75% in fiscal year 2008, an increase from 67% in fiscal year 2007.

Advertising revenues for fiscal year 2008 totaled US$175.9 million, up 48% from US$119.2 million in fiscal year 2007. Advertising revenues consisted of US$169.3 million in brand advertising and US$6.6 million in sponsored search. Brand advertising revenues increased 51% year-on-year, primarily as a result of successful execution of the Company’s Olympic strategy.

In fiscal year 2008, Sohu’s non-advertising revenues totaled US$253.1 million, 3.6 times US$69.7 million in fiscal year 2007. Online game revenues of US$201.8 million for fiscal year 2008 were 4.8 times US$42.1 million in fiscal year 2007. TLBB generated revenue of US$188.9 million in fiscal year 2008 compared with US$35.2 million in fiscal year 2007. Blade Online generated revenue of US$12.9 million in fiscal year 2008 compared with revenue of US$6.9 million in fiscal year 2007. Wireless revenues of US$47.0 million in fiscal year 2008 increased 79% over US$26.3 million in fiscal year 2007.

GAAP net income for fiscal year 2008 totaled US$158.6 million or US$4.06 per fully diluted share. Non-GAAP net income for fiscal year 2008 totaled US$169.3 million or US$4.29 per fully diluted share as compared with non-GAAP net income of US$43.7 million and US$1.12 per fully diluted share for fiscal year 2007.

Non-GAAP operating margin for fiscal year 2008 was 41%, up from 22% in fiscal year 2007. Non-GAAP net margin was 39%, compared with 23% in fiscal year 2007.

Under the US$150 million share repurchase program approved by our Board of Directors in October 2008, we purchased 501,686 shares in the open market during the fourth quarter, at an average price of US$39.86 and total consideration of US$20 million. These purchases speak to management’s great confidence in Sohu’s business and growth prospects. Sohu will continue to execute this program on an opportunistic basis in 2009.

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, “We believe that the results for fiscal year 2008 speak for themselves, with revenues of 2.3 times 2007 revenues, non-GAAP net income 3.9 times that of 2007, non-GAAP operating margin expansion to 41% in 2008 from 22% in 2007, and our cash balance increasing by US$191.7 million during 2008. These results also speak for our belief that management will have the ability to capture opportunities as they arise notwithstanding the more challenging economic environment expected in 2009.”

Third Quarter Financial Results

Total revenues for the third quarter ended September 30, 2008 were US$120.7 million, compared to revenues of US$102.0 million for the second quarter of 2008, and US$51.5 million for the third quarter of 2007.

The gross margin of 74% for the third quarter of 2008 was down from 76% in the second quarter of 2008, and up from 67% in the third quarter of 2007. The non-GAAP gross margin for the third quarter of 2008 of 74% was down from 76% in the second quarter of 2008, and up from 67% in the third quarter of 2007.

Net income for the third quarter of 2008 was US$40.3 million or US$1.02 per fully diluted share. Non-GAAP net income for third quarter of 2008 was US$42.8 million or US$1.08 per fully diluted share. This compares to non-GAAP net income of US$42.3 million or US$1.07 per fully diluted share for the second quarter of 2008 and US$11.7 million or US$0.30 per fully diluted share for the third quarter of 2007.

Advertising revenues for the third quarter of 2008 totaled US$51.1 million, an 18% increase over the second quarter of 2008 and a 62% increase over the third quarter of 2007. Advertising revenues, consisting of US$49.4 million of brand advertising and US$1.7 million of sponsored search, accounted for 42% of total revenues in the third quarter of 2008. Brand advertising revenues for the third quarter of 2008 increased by 18% quarter-on-quarter and 66% year-on-year.

Advertising gross margin for the third quarter of 2008 was 59%, down from 64% in the previous quarter and down from 63% in the third quarter of 2007. Non-GAAP advertising gross margin for the third quarter of 2008 was 60%, down from 65% in the previous quarter and 64% in the third quarter of 2007. The decrease was mainly due to content costs surrounding the Beijing 2008 Olympic Games.

For the third quarter of 2008, Sohu’s non-advertising revenues, which are derived mainly from online games and wireless value-added services, were US$69.5 million, or 58% of total revenues. Online game revenues were US$54.6 million, an increase of 14% quarter-on-quarter and 330% year-on-year, due to the continued strong performance of TLBB and successful revitalization of Blade Online. Wireless revenues were US$14.5 million, a quarter-on-quarter increase of 58% and year-on-year increase of 112%. The quarter-on-quarter increase was primarily because a) our making of one-off tax provision of US$2.1 million in the second quarter which was netted against wireless revenue, and b) stabilization of wireless-related regulatory and business environment throughout the quarter.

Non-advertising gross margin was 84%, flat with the second quarter of 2008 and up from 72% in the third quarter of 2007. Non-GAAP non-advertising gross margin for the third quarter of 2008 was 84%, flat with the previous quarter and up from 72% in the same quarter last year.

For the third quarter of 2008, Sohu’s operating expenses totaled US$45.0 million. Non-GAAP operating expenses totaled US$42.7 million, up 21% from US$35.4 million for the previous quarter and up 79% year-on-year. The year-on-year increase was primarily due to continued investment in product development, marketing expenses for Sohu’s branding as well as an increase in bonuses to reward employees for their contribution to Sohu’s good results. The quarter-on-quarter increase was mainly due to Olympic-related marketing spending.

For the third quarter of 2008, income tax expense was US$5.0 million, compared to US$0.6 million for the previous quarter and US$0.3 million for the same period last year. In the second quarter, we had recorded a one-time income tax reversal of US$4.1 million.

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, “The third quarter of 2008 continues the string of record total revenue and record total net income we have been consistently delivering since the middle of 2007. Management’s confidence in Sohu’s business prospects, our strong cash position, and debt-free balance sheet have led us to put in place yet another stock buyback program of US$150 million, which is the highest share repurchase amount in the Company’s history. This will be the third buyback program we executed during the past 5 years, with previous programs buying back a total of 2.9 million shares.”

Second Quarter Financial Results

Total revenues for the second quarter ended June 30, 2008 were US$102.0 million, compared to revenues of US$84.8 million for the first quarter ended March 31, 2008, and US$39.0 million for the second quarter ended June 30, 2007.

Gross margin of 76% for the second quarter of 2008, was flat with the previous quarter and up from 61% in the same period of 2007.  Non-GAAP gross margin was 76% in the second quarter of 2008, flat with the previous quarter and up from 62% in the same period of 2007. The year-on-year gross margin expansion was mainly from the contribution of TLBB.

Net income for the second quarter of 2008 was US$40.2 million or US$1.02 per fully diluted share.  Non-GAAP net income for second quarter of 2008 was US$42.3 million or US$1.07 per fully diluted share.  This compares to non-GAAP net income of US$25.1 million or US$0.64 per fully diluted share for the first quarter of 2008 and US$8.1 million or US$0.21 per fully diluted share for the second quarter of 2007.

Advertising revenues for the second quarter of 2008 totaled US$43.4 million, a 25% quarter-on-quarter increase and a 53% year-on-year increase.  Advertising revenues, consisting of US$41.7 million in brand advertising and US$1.7 million in sponsored search, accounted for 43% of total revenues in the second quarter of 2008.  Brand advertising revenues for the second quarter of 2008 increased 26% quarter-on-quarter and 57% year-on-year.  

Advertising gross margin for the second quarter of 2008 was 64%, up from 63% in the previous quarter and up from 62% in the second quarter of 2007.  Non-GAAP advertising gross margin for the second quarter of 2008 was 65%, up from 64% in the previous quarter and 64% in the second quarter of 2007.

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For the second quarter of 2008, Sohu's non-advertising revenues, which are derived mainly from online games and wireless value-added services, were US$58.6 million, representing 57% of total revenues.  Online games revenues for second quarter of 2008 were US$47.9 million, increasing 17% quarter-on-quarter and 11.5 times year-on-year, reflecting the growth of TLBB since its commercial launch in May 2007.  Wireless revenues were US$9.2 million, increasing 7% quarter-on-quarter and 39% year-on-year. Non-advertising gross margin was 84%, down from 85% in the previous quarter and up from 56% in second quarter of 2007.  Non-GAAP non-advertising gross margin was 84%, down from 85% in the previous quarter and up from 56% in second quarter of 2007. The year-on-year increase was mainly due to the contribution of TLBB.

For the second quarter of 2008, Sohu's operating expenses totaled US$37.2 million. Non-GAAP operating expenses totaled US$35.4 million, up 15% from the previous quarter and up 111% year-on-year.  The year-on-year increase was primarily due to continued investments in product development, marketing expenses for Sohu branding, as well as an increase in bonuses to reward employees for their contribution to Sohu’s good results.  The quarter-on-quarter increase was mainly due to Olympic-related marketing spending.

For the second quarter of 2008, income tax expense was US$0.6 million, compared to US$9.2 million for the previous quarter and US$0.2 million for the same period last year.

In the first quarter of 2008, Sohu accounted for its PRC income tax based at a statutory tax rate of 25%.  Given Sohu’s technological centric business with strong research and development capabilities, in the second quarter, we were informed by the relevant tax bureau that some of our operating entities will be entitled to certain tax holidays and will be subject to 0% income tax rate for full year 2008 and 12.5% for 2009 through 2011.  Accordingly, in the second quarter, Sohu adopted a 0% income tax rate for these entities and reversed a US$4.1 million related income tax provision that was made in the first quarter of 2008. We expect our overall effective PRC income tax rate for the rest of 2008 to be in the low teens.

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, “The second quarter of 2008 marks the fourth consecutive quarter in which we reported record total revenue and record total net income.  These set of results speak for themselves about the Company’s strategy and management’s execution capabilities.”

First Quarter Financial Results

Total revenues for the first quarter ended March 31, 2008 were US$84.8 million, compared to revenues of US$65.3 million for the fourth quarter ended December 31, 2007, and US$33.1 million for the first quarter ended March 31, 2007.

Gross margin for the first quarter of 2008 was 76%, increased from 71% in the previous quarter and 60% in the same period of 2007.  Non-GAAP gross margin was 76% in the first quarter of 2008, up from 72% in the previous quarter and 61% in the same period of 2007. The gross margin expansion was primarily due to the contribution from TLBB.

Net income for the first quarter of 2008 was US$21.6 million or US$0.55 per fully diluted share.  Non-GAAP net income for first quarter of 2008 was US$25.1 million or US$0.64 per fully diluted share.  This compares to non-GAAP net income of US$17.0 million or US$0.43 per fully diluted share for the fourth quarter of 2007 and US$7.0 million or US$0.18 per fully diluted share for the first quarter of 2007.

Advertising revenues for the first quarter of 2008 totaled US$34.8 million, a 3% quarter-on-quarter increase and a 36% year-on-year increase. Advertising revenues, consisting of US$33.2 million in brand advertising and US$1.6 million in sponsored search, accounted for 41% of total revenues in the first quarter of 2008.  Brand advertising revenues for the first quarter of 2008 increased 3% quarter-on-quarter and 41% year-on-year.  Sponsored search revenues for the first quarter of 2008 were up 5% quarter-on-quarter and down 23% year-on-year.  Advertising gross margin for the first quarter of 2008 was 63%, flat with the previous quarter and up from 62% in the first quarter of 2007.  Non-GAAP advertising gross margin for the first quarter of 2008 was 64%, flat with the previous quarter and the first quarter of 2007.  

For the first quarter of 2008, Sohu's non-advertising revenues, which are derived mainly from online game and wireless value-added services, were US$50.1 million, representing 59% of total revenues.  Online game revenues for first quarter of 2008 increased 71% quarter-on-quarter and 24 times year-on-year.  Wireless revenue increased 17% quarter-on-quarter and 54% year-on-

year.  Non-advertising gross margin was 85%, compared to 79% in the previous quarter and 52% in first quarter of 2007.  Non-GAAP non-advertising gross margin was 85%, compared to 79% in the previous quarter and 52% in first quarter of 2007. Those increases were due to the contribution from TLBB.

For first quarter of 2008, Sohu's operating expenses totaled US$34.0 million. Non-GAAP operating expenses totaled US$30.8 million, up 3% from the previous quarter and up 125% year-on-year.  The year-on-year increase was primarily due to continued investment in product development, marketing expenses for Sohu branding and TLBB, as well as an increase in bonuses to reward employees for their contribution to good results.

For first quarter of 2008, income tax expense was US$ 9.2 million, compared to US$0.7 million for the previous quarter and US$0.3 million for the same period last year.

On January 1, 2008, the newly introduced Corporate Income Tax Laws, which unify the statutory income tax rate of enterprises in China to 25%, became effective.  On April 14, 2008, relevant governmental regulatory authorities released qualification criteria, application procedures and assessment processes for “New Technology Enterprises,” which will be entitled to a favorable statutory tax rate of 15%. Solicitation of actual applications has not yet commenced, however. In addition, there are still divergent views on whether there will be any preconditions for allowing grandfather treatment for the unexpired tax holidays of New Technology Enterprises previously qualified under the old tax laws as of December 31, 2007. Due to uncertainties on (a) whether any of Sohu’s major operating entities in China will eventually be approved for New Technology Enterprise status and (b) whether theses entities will be able to enjoy grandfather treatment for their unexpired tax holidays unconditionally, for the first quarter of 2008, Sohu has accounted for its income tax based on the statutory tax rate of 25%, assuming that it would not enjoy any of the preferential tax treatment mentioned above. Sohu will account for lower tax charges in future quarters if and when confirmation is received from the Chinese tax authorities that any of these operating entities is entitled to be taxed at preferential rates.

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, “Sohu’s outstanding results for the first quarter were driven largely by our focus on innovation, the execution of our strategic goals, and our desire to grow our market share and be the leading Internet provider in China.  Considering the growing Chinese Internet population and Sohu’s strategic vision, we believe that we will continue to enjoy material growth of our businesses in 2008 and beyond.  We clearly have the vision and necessary disciplines in place to continue to return value to our shareholders.”

Fiscal Year 2007 Financial Results

Total revenues for fiscal year 2007 were US$188.9 million, a 41% increase over fiscal year 2006 revenues of US$134.2 million. Gross margin was 66% in fiscal 2007, increased from 64% in fiscal 2006. Non-GAAP gross margin was 67% in fiscal 2007, increased from 65% in fiscal 2006.

Advertising revenues for fiscal year 2007 totaled US$119.2 million, up 30% from US$91.8 million in fiscal 2006. Advertising revenues consisted of US$112.1 million in brand advertising and US$7.1 million in sponsored search. Brand advertising revenues grew 42% year-on-year, attributable to China’s robust online advertising market and stronger market momentum as the Beijing 2008 Olympic Games draw near. Sponsored search revenues decreased 44% year-on-year mainly due to strengthening of our anti-fraudulent click policy starting mid 2006.

In fiscal 2007, Sohu’s non-advertising revenues totaled US$69.7 million, up 64% from US$42.5 million in fiscal 2006.

Net income for fiscal 2007 was US$34.9 million or US$0.90 per fully diluted share. Non-GAAP net income in fiscal 2007 was US$43.7 million or US$1.12 per fully diluted share compared to net income of US$32.8 million or US$0.85 per fully diluted share in fiscal 2006.

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, “Sohu’s outstanding results for the fourth quarter and full year 2007 were driven by our technological capabilities to lead this market and create visionary products that shape the way internet users interface with Chinese web portals. When you combine this with our strong fiscal discipline we see those strategies paying off faster than we anticipated. We believe this multi-pronged approach will continue to further solidify our success.”

Third Quarter Financial Results

Total revenues for third quarter ended September 30, 2007 were US$51.5 million, compared to revenues of US$39.0 million for second quarter ended June 30, 2007, and US$35.4 million for third quarter ended September 30, 2006.

Gross margin of 67% in third quarter of 2007 increased from 61% in the previous quarter and 64% in the same period of 2006. Non-GAAP gross margin was 67% in the third quarter of 2007, up from 62% in the previous quarter and 65% in the same period of 2006. The gross margin expansion was primarily due to the contribution from TLBB.

Net income for third quarter of 2007 was US$9.7 million or US$0.25 per fully diluted share. Non-GAAP net income for third quarter of 2007 was US$11.7 million or US$0.30 per fully diluted share. This compares to non-GAAP net income of US$8.1 million or US$0.21 per fully diluted share for second quarter of 2007 and US$8.5 million or US$0.22 per fully diluted share for third quarter of 2006.

Advertising revenues for third quarter of 2007 totaled US$31.5 million, an 11% quarter-on-quarter increase and a 32% year-on-year increase. Advertising revenues, consisting of US$29.8 million in brand advertising and US$1.7 million in sponsored search, accounted for 61% of total revenues in the third quarter of 2007.  Brand advertising revenues for third quarter of 2007 increased 12% quarter-on-quarter and 42% year-on-year.  Sponsored search revenues for third quarter of 2007 were flat quarter-on-quarter and decreased 39% year-on-year.  Advertising gross margin for third quarter of 2007 was 63%, up from 62% for the previous quarter and down from 69% in the third quarter of 2006. Non-GAAP advertising gross margin for third quarter of 2007 was 64%, flat with the previous quarter and down from 71% in the third quarter of 2006. The year-on-year decrease was mainly due to increased content costs, bandwidth and server depreciation expenses.

For the third quarter of 2007, Sohu's non-advertising revenues, which are derived mainly from online games and wireless value-added services, were US$20.0 million, representing 39% of total revenues. Online games revenues for third quarter of 2007 increased 232% quarter-on-quarter and 473% year-on-year. Wireless revenue increased 4% quarter-on-quarter and decreased 23% year-on-year. Non-advertising gross margin was 72%, compared to 56% in the previous quarter and 54% in third quarter of 2006. Non-GAAP non-advertising gross margin was 72%, compared to 56% in the previous quarter and 54% in third quarter of 2006. Those increases were due to the contribution from TLBB.

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For third quarter of 2007, Sohu's operating expenses totaled US$25.6 million. Non-GAAP operating expenses totaled US$23.9 million, an increase of 43% from the previous quarter and up 58% year-on-year. The increase was primarily due to continued investment in product development and Sohu branding, marketing expenses for TLBB and Sohu 3.0, as well as an increase in bonuses to reward employees for their contribution to good results.

In third quarter 2007, Sohu disposed its equity interest in an associated company, resulted in a gain of $0.6 million.

As of September 30, 2007, subsequent to the redemption of its zero coupon convertible senior notes of $58.5 million in July 2007, Sohu's balance of cash, cash equivalents and investments in marketable debt securities remained at a comfortable level of US$76.9 million, compared to US$113.1 million and US$129.7 million as of June 30, 2007 and December 31, 2006, respectively.  

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, “Management’s focus on technology and long-term vision over the last few years have started to pay off.  Investments in our in-house developed game, Tian Long Ba Bu, our Olympic sponsorship and our stock repurchase programs (under which we repurchased 2.9 million shares since 2004, at an average price of US$18.2) have now been proven to be decisions that contribute to the long-term benefit of the company and to the enhancement of shareholder value.”

Second Quarter Financial Results

Total revenues for second quarter ended June 30, 2007 totaled US$39.0 million, compared to revenues of US$33.1 million for first quarter ended March 31, 2007, and US$34.1 million for second quarter ended June 30, 2006.

Gross margin of 61% in second quarter of 2007 increased from 60% in the previous quarter and decreased from 63% in the same period of 2006. Non-GAAP gross margin was 62% in the second quarter of 2007, up from 61% in the previous quarter and down from 64% in the same period of 2006.

Net income for second quarter of 2007 was US$5.7 million or US$0.15 per fully diluted share. Non-GAAP net income for second quarter of 2007 was US$8.1 million or US$0.21 per fully diluted share. This compares to non-GAAP net income of US$7.0 million or US$0.18 per fully diluted share for first quarter 2007 and US$8.4 million or US$0.22 per fully diluted share for second quarter of 2006 which included a gain on early redemption of convertible notes of US$0.8 million.

Advertising revenues for second quarter of 2007 totaled US$28.4 million, an 11% quarter-on-quarter increase and a 24% year-on-year increase. Advertising revenues, consisting of US$26.6 million in brand advertising and US$1.8 million in sponsored search, accounted for 73% of total revenues in the second quarter of 2007. Brand advertising revenues for second quarter of 2007 increased 13% quarter-on-quarter and 38% year-on-year. Sponsored search revenues for second quarter of 2007 decreased 16% quarter-on-quarter and 50% year-on-year. Advertising gross margin for second quarter of 2007 was 62%, flat with the previous quarter and down from 70% in the second quarter of 2006. Non-GAAP advertising gross margin for second quarter of 2007 was 64%, flat with the previous quarter and down from 71% in the second quarter of 2006.

For the second quarter of 2007, Sohu’s non-advertising revenues, which are derived mainly from wireless value-added services and online games, were US$10.6 million, representing 27% of total revenues. Non-advertising gross margin was 56%, compared to 52% in the previous quarter and 50% in second quarter of 2006. Non-GAAP non-advertising gross margin was 56%, compared to 52% in the previous quarter and 50% in second quarter of 2006. The increase in non-advertising gross margin was primarily due to the commercial launch of TLBB.

For second quarter of 2007, Sohu’s operating expenses totaled US$18.7 million. Non-GAAP operating expenses totaled US$16.7 million, an increase of 22% from the previous quarter and up 19% year-on-year. The quarter-on-quarter and year-over-year increases were mainly due to continued investment in product development and Sohu branding, as well as marketing expenses in promoting TLBB.

As of June 30, 2007, Sohu’s balance of cash, cash equivalents and investments in marketable debt securities was US$113.1 million, compared to US$97.5 million and US$129.7 million as of March 31, 2007 and December 31, 2006, respectively.

Carol Yu, Co-President and CFO of Sohu.com, commented, “We are very pleased with our second quarter results. We look forward to accelerating momentum during the run-up to the Beijing 2008 Olympic Games through continued solid execution of our Olympic strategy. In addition, we will closely monitor progress of TLBB and strive to capitalize on its initial success.”

First Quarter Financial Results

Total revenues for first quarter ended March 31, 2007 totaled US$33.1 million, compared to revenues of US$34.4 million for fourth quarter ended December 31, 2006, and US$30.4 million for first quarter ended March 31, 2006.

Gross margin of 61% in first quarter of 2007 decreased from 63% in the previous quarter and 67% in the same period of 2006. Non-GAAP gross margin was 62% in the first quarter of 2007, down from 65% in the previous quarter and 68% in the same period of 2006.

Net income for first quarter of 2007 was US$4.5 million or US$0.12 per fully diluted share. Non-GAAP net income for first quarter of 2007 was US$7.0 million or US$0.18 per fully diluted share. This compares to non-GAAP net income of US$8.1 million or US$0.21 per fully diluted share for fourth quarter 2006 and US$7.8 million or US$0.20 per fully diluted share for first quarter of 2006.

Advertising revenues for first quarter of 2007 totaled US$25.6 million, a 27% year-on-year increase and a 3% quarter-on-quarter increase. Advertising revenues, consisting of US$23.5 million in brand advertising and US$2.1 million in sponsored search, accounted for 77% of total revenues in the first quarter of 2007. Brand advertising revenues for first quarter of 2007 increased 7% quarter-on-quarter and 41% year-on-year. Sponsored search revenues for first quarter of 2007 decreased 29% quarter-on quarter and 40% year-on-year. Advertising gross margin for first quarter of 2007 was 62%, down from 65% in the previous quarter and 73% in the first quarter of 2006. Non-GAAP advertising gross margin for first quarter of 2007 was 64%, down from 66% in the previous quarter and 75% in the first quarter of 2006. The declines in gross margin were primarily due to the increase in content costs, bandwidth and server depreciation costs.

For the first quarter of 2007, Sohu’s non-advertising revenues, which are derived mainly from wireless value-added services and online games, were US$7.5 million, representing 23% of total revenues. Non-advertising gross margin was 56% compared to 60% in the previous quarter and 55% in first quarter of 2006. Non-GAAP non-advertising gross margin was 56% compared to 60% in the previous quarter and 55% in the first quarter of 2006. The decline in non-advertising gross margin was primarily due to the decreased mix of higher margin revenues, a decrease in gross margin of certain wireless products and the increased server depreciation costs for our existing game.

For first quarter of 2007, Sohu’s operating expenses totaled US$16.0 million. Non-GAAP operating expenses totaled US$13.9 million, a decrease of 4% from the previous quarter and up 9% year-on-year. The quarter-on-quarter decrease was mainly due to the decrease of our marketing expenses, while the year-on-year increase was primarily due to our increased re-investment in R&D for technology projects and product development, and increased marketing expenses for branding.

As of March 31, 2007, Sohu’s balance of cash, cash equivalents and investments in marketable debt securities was US$97.5 million, compared to US$129.7 million and US$137.5 million as of December 31, 2006 and March 31, 2006, respectively. The reduction in cash, cash equivalents and investments in marketable debt securities was due to the company’s purchase of its Beijing headquarters at a purchase price of approximately $35.3 million, in January 2007.

Ms. Carol Yu, Co-president and CFO of Sohu.com, stated, “We are pleased with the financial results we achieved in the first quarter of 2007. Although it was a seasonally weak quarter, our brand advertising revenue reached a historical record and exceeded our guidance. Our investments in premium video content, corporate branding and new products have started to pay off. With the increasing momentum from the rapidly approaching Beijing 2008 Olympics Games and our new online game TLBB, which will be contributing to our results in the second half of 2007, we are well positioned to have a good year.”

Fiscal Year 2006 Financial Results

Total revenues for fiscal year 2006 totaled US$134.2 million, a 28% increase over fiscal year 2005 revenues of US$104.5 million. Gross margin was 65% in fiscal 2006, down from 69% in fiscal 2005. Non-GAAP gross margin was 66% in fiscal 2006, down from 69% in fiscal 2005.

Advertising revenues for fiscal year 2006 totaled US$91.8 million, up 29% from US$70.9 million in fiscal 2005. Brand advertising revenues grew 35%, attributable to China’s robust online advertising market and heightened activity related to the World Cup last summer, whereas sponsored search revenues grew 3% year-on-year.

In fiscal 2006, Sohu’s non-advertising revenues totaled US$42.5 million, up 26% from US$33.7 million in fiscal 2005.

Net income for fiscal 2006 was US$25.9 million or US$0.68 per fully diluted share. Non-GAAP net income in fiscal 2006 was US$32.8 million or US$0.85 per fully diluted share compared to net income of US$29.8 million or US$0.77 per fully diluted share in fiscal 2005.

As of December 31, 2006, Sohu’s cash, cash equivalents and investments in marketable debt securities balance was US$129.7 million, compared to US$120.0 million and US$133.1 million as of September 30, 2006 and December 31, 2005, respectively.

Ms. Carol Yu, Co-president and CFO of Sohu.com, stated, “Our primary focus continues to be on our core advertising business, which contributed 68% of our total revenues for fiscal year 2006. Our outlook remains bullish, especially during the run-up to the 2008 Olympics. Our most enviable role as Internet Sponsor of the Beijing 2008 Olympics is the most important differentiating factor between Sohu and other Internet companies.”

UNAUDITED FINANCIAL RESULTS

Fiscal 2005 Revenues Reach Record US$108.3 million with Fourth Quarter Revenues of US$30.5 million;

Fiscal 2005 Fully Diluted EPS of US$0.77 and Fourth Quarter Fully Diluted EPS of US$0.23

BEIJING, CHINA, February 6, 2006 – Sohu.com Inc. (NASDAQ: SOHU), China’s leading online media, search and mobile value-added services company, today reported unaudited financial results for the fourth quarter and fiscal year ended December 31, 2005.