Welcome to today's first quarter 2011 Sohu earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to our host, Mr. Tip Fleming from Christensen. Please go ahead, sir.

Thank you, operator, and thank you for joining us today to discuss Sohu.com's first quarter 2011 results. On the call today are Chairman and Chief Executive Officer, Dr. Charles Zhang; Co-President and Chief Operating Officer, Belinda Wang; Co-President and Chief Financial Officer, Carol Yu; Chief Technology Officer, Xiaochuan Wang; Vice President of Entertainment Media, Ye Deng; Senior Finance Director, James Deng. Also with us from Changyou are President and Chief Operating Officer, Dewen Chen; and Chief Financial Officer, Alex Ho. Before management begins their prepared remarks, I would like to remind you of the company's Safe Harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements. These statements are based on current plans, estimates, and projections. And therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including its registration statement and most recent Annual Report on Form 10-K. Now, let me turn the call over to Dr. Charles Zhang, Chairman and CEO.

Thank you. Hello, everyone, welcome to our call. I'm pleased to report another solid quarter with record total revenues and the record revenues in our search and online game business. First of all, I would like to start with some quarterly highlights. Total revenues were US$174.4 million, up 35% year-over-year. Gross online brand ad revenues before tax were US$62.4 million. Net online brand ad revenues were US$57.2 million, up 45% year-over-year and ahead of our expectations. Search revenues were US$8 million, up 183% year-over-year and 21% quarter-over-quarter, exceeding our expectations. Online game revenues were at US$94.9 million, up 32% year-over-year and 3% quarter-over-quarter, also exceeding our expectations. Non-GAAP diluted EPS reached US$1.13, up 31% year-over-year and also ahead of our expectation. In addition to our solid financial results, there are a few areas in particular that I would like to highlight. First, online video, our conscientious efforts to expand our library of authorized and self-produced premium content have increased our market share in terms of total time users spent watching online video from 13% in December 2010 to 16% in March 2011. This ranks us second in the market according to iResearch. Secondly, Sogou's business continues its momentum, and over the first quarter of 2011 active users of Sogou's browser, search traffic and search revenue all grew north of 20% quarter-over-quarter. And thirdly, on online games, while our leading game franchise, Tian Long Ba Bu or TLBB, continues to attract new, existing and returning players to its community. Today also marks two significant events for our online game subsidiary Changyou. First, Changyou just unveiled an updated version of its upcoming game Duke of Mount Deer or DMD, and will launch the most-anticipated game this summer. Second, we have entered into a definitive agreement to acquire a majority stake in Shenzhen…

Thank you, Charles. I am pleased to report a solid quarter in our online brand advertising business. U.S. online brand advertising revenues for the first quarter were $57.2 million, up 45% year-over-year, and gross online brand advertising revenues before business tax was $62.4 million. Online video is one of the fastest growing areas. The rise in our user traffic in online video, as Charles mentioned earlier, helped to drive growth in advertising revenue. For the first quarter of 2011, gross revenues from online video increased about 150% year-over-year. The number of advertisers for the first quarter of 2011 increased by 81% year-over-year. In the first quarter on a year-over-year basis, FMCG, apparels, real estate and auto were the fastest growing advertising sectors. Looking forward to the second quarter of 2011, we are expecting gross online brand advertising revenues before business tax to be between $71.5 and $73.5 million, net online brand advertising revenues to be between $65.5 million and $67.5 million. This would represent a year-over-year increase of between 23% and 27%. Now I’d like to turn the call over to our Co-President and CFO, Carol Yu, who will walk you through the quarter’s financials.

Thank you, Belinda, and hello, everybody. I would now take you through our financials of first quarter. Total revenues were $174.4 million, up 35% year-over-year and 1% quarter-over-quarter. This has set a new record and came in well ahead of our expectations. Online brand advertising revenues came ahead of our expectations at $57.2 million, up 45% year-over-year and down 5% quarter-over-quarter. Search revenues were $8 million, up 183% year-over-year and 21% quarter-over-quarter. Search revenue growth is driven primarily by our increased search traffic and startup page businesses. Online game revenues were $94.9 million, up 32% year-over-year or 3% quarter-over-quarter. Wireless revenues were $11.7 million, a year-over-year decrease of 12% or a sequential decrease of 19%. Now, let me provide some more details of our Sohu financials. Most of the figures I will be discussing will be non-GAAP. The impact of share-based awards include share-based compensation expense and related non-cash income tax expense that are charged to the quarter's total revenue, operating expenses and income-tax expense. For the first quarter, the total share-based compensation expense was $5.3 million. We believe, excluding the impact of share-based compensation awards from the non-GAAP financial measures and net income makes a more meaningful comparison of Sohu's operational results and improves investors' understanding of our performance. So we’ll also use non-GAAP measures in this discussion to explain margin, cost and expense items. Non-GAAP gross margin for the first quarter was 74%, which compares with 75% previous quarter and 75% same period of last year. Online brand advertising non-GAAP gross margin for the first quarter was 62% which compares with 63% previous quarter and 59% same period of last year. Search non-GAAP gross margin in the first quarter was 39% compared with 32% in the previous quarter and 3% in the same period of last year. Online…

(Operator Instructions) And our first question comes from the line of Dick Wei with JPMorgan.

I had two questions. My first question is that can Charles or the management team update us on social networking strategy for the whole Sohu group. How should investors think about Chinaren, social games? And thinking of outcome altogether, how should we think about the integration of those and how should we think about the company's principle strategy?

I think in China, there were some previous efforts on the social network attempts like Renren and Kaixin and others. But in the recent year-and-a-half, the most popular phenomenon is really the miniblog. So a miniblog, as you know, has an add over us and the competitors. So our answer to social networks is really to catch up to the phenomenon of miniblog or the Twitter-like services in China. Although we have sort of a late start and our user base is still small, but the speed of growth is quite high, quite good. And we will update in the next few quarters about our progress. But right now, it has a good start, but still a relatively small user base.

Any color for the brand advertising outlook for the full year? Should we be looking for the 45% as a good reference point in Q1 or off the low-20s in Q2?

As we mentioned in the script, we achieved a 45% growth rate in Q1 on a year-on-year basis and according to our guidance for Q2, the second quarter's growth rate will remain from 23% to 27%. So that indicates that for the first half year of 2011, we achieved the growth rate of about 32% to 35%. So far, we cannot give you the guidance for the whole year, but I assume we'll give you the momentum for this whole year in the next quarter conference call. Operator: Our next question comes from the line of Ming Zhao with SIG.

The question is about your online video advertising business. I think you gave us the year-over-year growth for that business. Would you also be able to give us the exact revenue size for the quarter? And also, could you comment on the content and then cost environment in this business. And the last question on online video is, I think you mentioned 145 million unique visitors in March month according to iResearch. Obviously, you have your own backend data. Is that the number estimated by iResearch accurate enough? Can you give us a color?

While we enjoyed a pretty good content growth, we are now breaking up the revenue side with our total advertising revenue right now. And we are still at the stage of growing traffic and improving user experience and growing user base. And in the future at a certain point we'll break up the revenue and business side of on online video business. I think the 145 million unique visitors of iResearch is consistent with our own internal data. And I said, our market share, in terms of time spent has grown from 13% to 19% and now ranked number two in an online review.

Going back to your question on content and bandwidth cost, we're actually happy to see bandwidth cost going up, because that's actually brought about by our increased user level and time spent by users on us. As far as content cost is concerned, we are also actually pretty happy, although I mean content cost has been escalating, but we are actually pretty happy because most of the viewing that we are showing this year was bought last year. So they are actually still at a very reasonable level, when our competitors are now starting to compete more vigorously for a pipeline for next year. And by next year we probably would see monetization actually doing better. So I think we are still pretty comfortable with what we're doing right now.

For the video cost, how long do you amortize the cost usually?

It's actually very similar to our peers. It's around two years.

Two years. And just on those 145 million users, is that for March month only or the quarter?

I think it's for February, right, for the month of February.

(Operator Instructions) Our next question comes from the line of Wendy Huang with RBS Capital Markets.

I just wonder if you can give us some update on your current market share of the search engine by traffic and by revenue.

Our search engine by the traffic is about 4% of the share and our revenue is about 1.6% of the market share.

So are you dearest to your 20% market share target in medium term?

Yes we’ll do that. That’s still our goal. Yes, I’m thinking, in the next few years.

And the next question comes from Andy Yeung with Oppenheimer.

I just want to ask a little bit about M&A strategies at Changyou. And since you have made two recent negotiations, one in the web-based gaming areas, what’s your overall MA strategy particularly in relation to Sohu gaming and wireless gaming areas.

For Changyou, our strategy is we’ll continue to leverage on our rich cash reserve as well as healthy balance sheet and the strong quarterly free cash flow to continue to look for various opportunities such as business partnerships, investments, acquisitions to create value for the shareholders.

May I ask one more question about Sohu's strategies on the search engines business as well as the Sohu’s Weibo business? Any particular insights in terms of your investment strategies in this year?

Sogou strategy and the Weibo strategy?

Are you talking about overall business strategy or M&A strategy?

Overall strategy in terms of like investments, how much are you going to plan to invest to achieve your goal of gaining more market share in the search engine business as well as in the Weibo business?

I think the search business will probably stay at the current level, which is slightly higher than last year, but it be would be at a very similar level at Q1 for the remainder of the year. So you would not expect us to spend aggressively on Sogou, because it's really technology-driven.

And then in terms of investment for Weibo I think that’s a new business for you guys. Are you guys going to ramp up some investments in the area in R&D or maybe also in marketing?

Yes, I think the level of spending will be similar to Q1. Actually in Q1 we have a marketing campaign on buses for promoting Sohu’s Weibo business. And in the future we'll continue at this level. I think most importantly for the Weibo business, really the product and technology development and also the translation products and also creating marketing in connection with our close relationship with the advertisement industry and also celebrities and stars.

Our next question comes from the line of Catherine Leung with Goldman Sachs.

My first question is on your total related sales and marketing spend. It seems like it's increased by about 30% sequentially if we exclude Changyou. Can you elaborate on what drove this increase? Is this mainly related to the Weibo advertising campaign you mentioned or the sales force headcount?

I think it's an overall increase. But as you can see that we have a pretty nice growth in our brand advertising revenue on a year-on-year basis. And what brings us there is we have been doing pretty nice campaigns with our delta marketing efforts. So that explains why. Weibo is our video strategy and is across the board. (inaudible) increase is not aggressive for Q1.

On your video, who do you feel you are getting market share from? And do you feel that your revenue market share is growing in line with the user time spent share or are you getting more cautious with your monetization?

Who do we get market share from? I think from all of them.

From the market, Catherine. What's your second question?

Is your revenue market share for video is growing in line with your user time spent share, or are you being a little bit more prudent with your monetization?

It is little bit lagging, and we will improve that. (technical difficulty) market share of the user traffic and then advertising will follow.

And the next question comes from the line of Gary Ngan with UBS.

So you get your strategy in terms of corporate finance. If we looked at, currently there are quite a few IPOs in the internet sector without much revenues as well. So I guess Sohu does have a lot of very valuable assets, which in the current market can easily be IPOed with a very significant valuation in my view. What are the milestones that the company is looking at before launching these? I guess Sogou is your 20th business at some point. But just want to get your sense of what we should we be looking at in terms of pointers for IPOed assets?

I don't think we are looking at any parameters or metrics before IPOing any underlying businesses. I think the important point is not when to do the IPO; it's when do we think the capital structure that we put in place will help us grow our underlying business more. We don't need financing. As we said we have substantial cash in our bank accounts, so we do not need to raise funds in order to grow our business. We feel that putting in the right capital structure will help us grow our underlying business better.

And the next question comes from the line of Chao Wang with BofA.

My question is regarding the second quarter guidance on brand advertising. Year-over-year growth in second quarter slowed down from first quarter. Could you give us some color on that? And which industries in particular underperformed? Are they real estate or auto?

In the first quarter, we really get, if you like, for revenue growth rate from online video, real estate, and auto. As we mentioned earlier, the growth revenue from online video increased by 150% year-on-year, and we also get 88% growth rate for real estate and over 50% for auto. So we started to get scalable online video advertising revenue in the second quarter of 2010. And so the first quarter of 2010, the revenue base for the online video content was still small. Also as I recall, the first quarter of 2010 is a slow season for the real estate because we were restructuring our focus team. So after continuous efforts I think both of these two business units are on the right track. And the revenues bases have been pretty scalable in the second quarter of 2010. Maybe this can explain a slight slow year-on-year growth rate for the second quarter of this year.

Our next question comes from the line of Muzhi Li with Mizuho Securities.

Would you please briefly introduce the current capital structure of Sogou as an individual company?

Capital structure?

Yes, like the cash position.

Sogou is now owned 48% by preferred shareholders and with less than 10% in aggregate by its management team and less than 5% by the Sohu management. So as a share base in incentives award, and the balance belongs to Sohu.

How much cash do you have?

Sorry, it's 32% by preferred shareholders. Out of 40 (talented bases), assuming all share base were awarded, we will own about 53% of Sogou.

And how much cash do you have that belongs to Sogou?

It's about $38 million. It's ($48 billion), and we spent in the past two quarters about $10 million.

And our next question comes from the line of Jenny Wu of Morgan Stanley.

First of all is advertising; how many advertisers do you have now, especially how many for your online video advertising? Do you see any cannibalization from video on your portal business?

We see the revenue stream comes from the two revenue resources from the advertisers. Part of the revenue comes from the transitional online advertisers who like to allocate more budget on online video content. And we are delighted to see that a lot of transitional TV advertisers are watching closely on the online video growth and have started to allocate a percent of TV budget to test online video. And we believe at this moment that we’ve grown stronger with the online video content impact on the young generation and higher penetration rates of online video users.

Belinda, do you see any cannibalization because of video advertisement business?

I think part of the advertisers would like to allocate some budget on the online video content, but this budget comes from the same concept between Sohu and the advertisers, but we're also delighted to see that some of the advertisers, especially some of the traditional TV advertisers, shifted the TV budget to the online video.

A lot of our advertising share is from the traditional TV advertising.

So how many advertisers do you have for Q1?

Overall advertisers number is over 900, and the online video advertisers number we can give you the growth rate. That is about 88% growth rate in terms of the number of advertisers.

What's the margin trend for this year?

We do expect the margin trend to remain at the similar levels as Q2 for the rest of the year on a net margin basis for the Group.

Thank you. That concludes today's question-and-answer session. At this time, I'd like to turn the call back over to Mr. Fleming for any closing comments.

Thank for joining the call today. If you have any further questions, please do not hesitate to contact us or the company directly. Thank you.

Thank you. Ladies and gentlemen, that concludes today's first quarter 2011 Sohu earnings conference call. Thank you for your participation. You may now disconnect.