Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu's First Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks there will be a question-and-answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Eric Yuan, Investor Relations Director of Sohu. Please go ahead, sir.

Thanks, operator. Thank you for joining us today to discuss Sohu's first quarter 2016 results. On the call are Chairman and the Chief Executive Officer, Dr. Charles Zhang; President and CFO, Carol Yu. Also with us from Changyou our Co-CEO Dewen Chan; CFO, Jasmine Zhou; as well as CEO of Sogou, Xiaochuan Wang; VP Finance of Sohu, Steven Sim. 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 statements. 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. With that, I will now turn the call over to Dr. Charles Zhang. Charles, please proceed.

Thank to everyone for joining our call. We got off to a good start this year as we met expectations for both top and bottom line results in the first quarter. For Sohu Media Portal, we worked hard to strengthen our value to users and advertisers, constantly refining our mobile products and advertising system. For Sohu Video, we are prepared to meaningfully step up our investments in content to enhance our competitiveness and stay in the race as a first tier player. Sogou achieved solid traction as its mobile search traffic continued to outgrow the industry. Changyou delivered in line financial results, while it strives to recreate the superior PC game experience on smartphone, in particular leveraging the vast user base of its most popular PC game TLBB. Before I give more details about our key businesses, let me summarize our financial results for the first quarter of 2016. Total revenues, $408 million, down 10% year-over-year and 12% quarter-over-quarter. For the first quarter of 2016, on a year-to-date basis the depreciation of R&D against U.S. dollar impacted our reported financial results. On a constant currency basis, total revenues in the first quarter of 2016 would have been $24 million higher, or down 5% year-over-year. Net brand advertising revenues were $126 million, down 6% year-over-year and 11% quarter-over-quarter. Of this, revenue from Sohu Media Portal, or Sohu.com ex Video, were $45 million, flat year-over-year. Sohu Video were $41 million, down 16% year-over-year. Sogou revenues were $147 million, up 27% year-over-year and down 11% quarter-over-quarter and posted net income of $22 million. Online game revenues were $103 million, down 45% year-over-year and 19% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com Inc. was $22 million, or $0.56 loss per fully diluted share. Now I will go through some of our key businesses. First,…

Thank you, Charles. In the quarter, Sogou's content [indiscernible] and all operating metrics continued to track well. Mobile search traffic more than doubled as compared to the same period of last year now contributing nearly two-thirds of total traffic. Our financial performance also exceeded our previous expectations. In RMB terms, total revenues and non-GAAP net income increased by 35% and 42% respectively. For 2016, we continue to focus on improving the quality of Sogou's core products and enhancing the overall user experience for our collaboration with Tencent, we deepened our cooperation with Wei Xin and refined our algorithm to significantly improve accuracy of our exclusive search function on Wei Xin official account. In the first quarter, daily active users of Sogou who search for Wei Xin content increased by 15% from a year ago, contributing to the healthy growth of mobile search traffic. On the other front, in addition to new text we have [indiscernible] our capability regarding both input and search function using voice and image. With this our products are better received by users, especially on smart phones. Take the voice feature, for example. In the past year, voice search queries and voice input to Sogou mobile keyboard, both increased by more than 100% from a year ago. Sogou mobile keyboard has emerged to be number one mobile app for voice input in China. Looking into 2016 and beyond, we plan to step up research in cutting-edge technology, in particular artificial intelligence, are pushing for breakthrough in visual cognition, natural language understanding, and knowledge representation and reasoning commonly referred to as KR, our goal is to build Sogou into a leading, innovative player in artificial intelligence in China. To that end, we are actively expanding our in-house research team. We are also looking for external collaboration opportunity. Last week, under the leadership of Charles, Sogou probably joined forces with Tsinghua University, China's premier university renowned for its science and engineering achievements, in setting up a joint research institute focusing on artificial intelligence. Leveraging on this new platform we will invite world-class scientists to lead the research programs. Their research findings will be applied to the next generation of Sogou products which will help enhance our competitiveness in the industry. Financially, for the first quarter Sogou total revenues reached $147 million, up 27% year-over-year, keeping the higher end of our prior guidance. On a constant currency basis, total revenues grew 35% as mobile monetization continued to gather momentum. Mobile search revenues contributed 44% of total search revenue, up from 22% a year ago. Non-GAAP net income was $22 million, up 34% from a year ago, or 42% when looking at it in RMB. I will now like to turn the call over to our VP Finance, Steven, who will walk you through group's financial results.

Thank you Xiaochuan. I will walk you through the key financials for the first quarter. The profit and loss numbers mentioned below are all on a non-GAAP basis. For brand ad business, in the first quarter net brand advertising revenues were $126 million, down to [indiscernible] and 11% quarter-over-quarter. Of this, revenues of Sohu Media Portal were $45 million, flat year-over-year. Sohu Media posted net income of $1 million as compared to net income of $2 million in the prior year. Ad revenues of Sohu Video were $41 million, down 16% year-over-year. Sohu video posted net loss of $38 million as compared to net loss of $54 million in the prior year. For Sogou, for the first quarter total revenues were $147 million, up 27% year-over-year and down 11% quarter-over-quarter. Of this, search related revenues were $134 million, up 27% year-over-year and down 12% quarter-over-quarter. Sogou posted net income of $22 million as compared to net income of $16 million in the prior year. For Changyou, for the first quarter total revenues including 17173 were $130 million, down 38% year-over-year and 20% quarter-over-quarter. Changyou posted net income of $31 million as compared to net income of $52 million in the prior year. For the group, in the first quarter total revenues were $408 million, down 10% year-over-year and 12% quarter-over-quarter. Non-GAAP net loss attributable to Sohu.com Inc. was $22 million or $0.56 loss per fully diluted share. For the second quarter of 2016, we estimate total revenues to be between $420 million and $450 million. Brand advertising revenues to be between $125 million and $135 million. This implies an annual decrease of 11% to 17% and a sequential increase of nil to 8%. Sohu Media Portal revenues to be between 35% and 38% of the total brand advertising revenues. Sohu…

Thanks, Steven. With our strong balance sheet and abundant cash on hand, the Sohu Group is well geared up to make investments in strategic areas, such as online video as well as Sogou's artificial intelligence initiative. I believe these investments will yield long-term returns for our shareholders. That concludes our prepared remarks. Operator, we would now like to open the call to questions.

[Operator Instructions] Our first question comes from the line of Dick Wei from Credit Suisse. Please ask your question.

I guess my question is mainly about the content spending. If management can give more color in terms of maybe the area of spending, like type of content, so as maybe the investment amount. And related to the video side, what is the contribution of subscription revenue right now and what's the plan going forward. Thank you.

The content cost basically, the video content, that we are starting from Q1, actually Q2, we ramp up our content purchase, the premium titles, to basically own seven out of ten most popular TV channels.

So the content spending will be mainly in the domestic drama front.

Yes.

What about for the in-house production, as well as some foreign content?

Yes. We also have some production or we call it investment in content because it's really not in-house production. Actually we invest in some production house and producers to produce content. And overall some of those company investments are also becoming quite expensive now.

And so roughly, what is the budget for this year and also how do we see the subscription side revenue contribute to Sohu Video revenue?

So we are not giving out the video content spending budget yet. We have a forecast of Q2 in terms of, you can pick out some of the numbers off of the forecast. And some cost are the video content cost and also marketing for the portals and also for videos. All lumped together. For subscription, I think, we still have a very small base and it really depends on whether we are able to generate, as I said, like 20 to 30 dramas, stories that we can charge subscription for users who watch a few episodes ahead. So we expect a growth, ramp up of subscription user base in the second half of the year once our content investment or self produced content are brought online.

Thank you. Our next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

Could you just give us an update on the pricing trend of your mobile apps on both media portal platform as well as on search? How does that compare with your PC pricing and has it been a key driver for the revenue growth on mobile? Thanks.

So media and search, are two different things. For media, I think the mobile advertising are quite a different format compared with the PC advertising. It's mostly happen with the information screen. It's going down our news app's information screen or new screen, and seven to ten news items will be one embedded advertising . And this could be narrow banner or actually wider, taller banner or even a video clip. So it's not comparable to the PC advertising. The trend is definitely the mobile. Actually the pricing, it's going up, actually. Because we have a better technology to target the -- because we have mobile app, we understand our users much better. So we deliver the right advertiser, right user to the right customers, advertising clients. Then for this kind of position targeted, so we are asking for higher CPM. So the overall average CPM price is going up.

Yes. For the search business we commonly use RPM to look at the monetization capability. On PC, RPM still grew by single digit but its slowing down. And now mobile monetization RPM maintains about 20% growth year on year.

Thank you. Our next question comes from the line of Juan Lin from 86Research. Please go ahead.

I have questions related to Sogou business. The first question is, I am wondering how of Sogou's revenue is contributed from mobile. And second question is, your guidance for Sogou growth indicates a slight growth slowdown from the first quarter. Do you feel that other media platforms are taking market share from advertisers' search budget and whether we should expect further growth slowing down for search related revenue for the rest of the year? Thank you.

[Interpreted] So for mobile search revenue, it accounts for 44% of total search revenue. We are still gaining search market share but for the overall search market, there is some impact from macro and also the big picture is that the overall market is slowing down for search. And for the first quarter we had expected that our revenue growth will slow down and that we will continue to see a singular momentum for the second quarter. So in terms of other forms of media has taken, our share search advertising, we think [indiscernible] is more impacted by newsfeed advertising -- key accounts, right. And the small media business is less impacted.

Thank you. Our next question comes from the line of Thomas Chong of Citigroup. Please go ahead.

I have two questions. The first question is regarding [Changyou] [ph]. Can management give us some color about your strategy in this area and whether you will cooperate with your PGC strategy? And my second question is about the US$120 investment made by Sogou into the joint venture with Tsinghua. Can management give us some color about how much more additional investment should we expect in the coming future? Thanks.

Well, your question is very up to trend. It is very very popular [Changyou] [ph] and mostly happen with live broadcast. We have developed our oven live broadcast already for about two years so we already launched it. And recently we launched the mobile version. So it's called [indiscernible]. So again to market our product, this service and product, aggressively in second half in Q2 this quarter and forward. Since we have advantage of PGC. We have a very highly established PGC offering. It's delayed Internet broadcasting but its related to -- can be cross-promoted with [indiscernible] a live broadcast. And also Sohu's strong presence in the entertainment industry and our basically very good relations with the Chinese celebrities, so that we are getting quite a lot of celebrities to do the [indiscernible]. So we hope that we are, I think we are able to really to meet the challenge and really to launch new home business. For Tsinghua' joint venture, I don’t think for the 30 million -- I don’t think we will invest more. So it's already enough to establish the building and research institute for the research.

Thank you. Our next question comes from the line of Natalie Wu from CICC. Please ask your question.

It's [indiscernible] could you provide assumptions behind the second quarter guidance non-GAAP net income?

The second quarter guidance, net income?

Yes.

Sorry. Please repeat your question.

Could you please provide assumptions behind the guidance of second quarter net income?

You mean the assumption, how we derive the guidance of the second quarter, right?

Yes. That’s right.

Assumption. I think as I said, we are entering 2016, we are wrapping up our video content investment and also the Sohu Media Portal's marketing activity, we will continue our marketing throughout the year. The cost or the spending will be higher compared with the previous year or previous quarters. So that’s why we are entering a larger loss.

Thank you. Our next question comes from the line of Chi Tsang from HSBC. Please ask your question.

Firstly, I was wondering if Charles could just give us an update on his proposed investment? I was wondering if there was anything new regarding that. And secondly I had a couple of questions on Sogou. Can you give us a sense -- and secondly I had a few questions on Sogou. Can you give us a sense of what the overall traffic growth might be? You talked about mobile. I am wondering if total traffic growth including PC and I am wondering, also, what percentage of your queries today are related to [indiscernible] content and how do you expect to monetize those queries. Thank you.

Regarding [indiscernible] I have no comments. I have no comment about that. About Sogou?

[Interpreted] So in terms of traffic, on PC we have started to see that there is a slight decrease in PC traffic. But mobile traffic is still growing nicely. In the first quarter it more than doubled than a year ago. In terms of leasing or QQ related content, actually 60% of Sogou's results include such content. It's part of -- we monetize them directly. So Weixin or QQ but as a part of our overall monetization of Sogou. So it's being indirectly monetized.

Thank you. Our next question comes from the line of Hillman Chan from Macquarie. Please ask your question.

Good evening, management. Thank you for taking my question. Regarding your media portal and search business, can you talk about the momentum of your top contributing industries within them? Thank you.

So we are having, for media portal, actually now first one is the Internet services followed by auto and then IT. And then number 4 is fast moving consumer goods and number five is financial services. So this is a top five industry and sectors that advertise on the Sohu Media Portal.

[Interpreted] For search top verticals remain pretty consistent as in the past quarters. It's still ecommerce, healthcare, business services, gaming and merchant services.

Thank you. Our next question comes from the line of George Meng from Goldman Sachs. Please go ahead.

Thank you very much for taking my question. I have two questions. The first one is regarding your video business. So you talk about your differentiated content strategy in the past, but now you're saying that you're going to step up your content spending, especially on the domestic drama side to basically stay in the league. So is that a change of your overall content strategy? And also I think now, if you look at your top tiers, about one-third of some of the leading players and then you're running at about minus 100% margin. So if you're going to increase your content spending, what's your target for both for the top line as well as for the margin? Should we look for a improved margin or because of the higher content spending we should actually look at in the near-term an even bigger loss on the margin side? And I have a second question, thanks.

Well, I think each video site has a differentiated content strategy but the hottest, the most serious battlefield is still in the -- we call it the head content. The premium titles. So that actually in Q4 last year we kind of typically do that, we stop spending. We reduce the spending and then reduce the -- without a traffic slowdown. So we decided this year that if we are going to compete, we need to match up with the -- well, not the amount but the ownership of the titles similar to our competitors. So we need to basically renter the market and buy top titles, premier content. And as we have got competitors, they are all spending and also price per episode continued to grow, to rise. And only with this head content that become -- people are all buying a phenomenon. All these top shows like the [indiscernible] the broadcast by a major TV station and whole nation was watching. So these top titles, traffic will come to your sight. And then you have other content. You have differentiated strategy, like Sohu's own produced content and also Sohu's PGC and others. That will be rerouting. So the battlefield is still in the head content for now and I don’t see maybe in the next two years continue and I am sure some new things model really to replace this TV like battlefield. That means, of course we are going to smartly market it and also enhance our advertising capability. But short-term we will see worsening margins.

Okay. Great. But when do you expect that margin to turnaround, maybe in 2017 or you don’t really have a target?

We don’t have a target.

Okay. Great. My second question...

Yes. A battlefield from the future. For the future the most application, the video application of Internet.

And my second question is for Xiaochuan especially on the artificial intelligence side. So do you have any near-term tangible revenue contribution plan in mind? Or it's more about the research side? And if it's more on the research side, have you made any material progress in there. And there is that you mentioned on, for example, visual recognition, natural language processing and reasoning? Any color would be very helpful. And lastly, what's going to be the costs associated with this? Is it just going to be one-off with that investment into that JV, or it will be a continued investment? And if so, what's the likely investment on an annual basis? Thanks.

[Interpreted] We have been putting a lot of efforts in artificial intelligence and applied related results into our products. For example, voice recognition technology being used in voice research and image recognition being used in image search. All these AI-powered technologies help improve our search accuracy. Our advantage in this arena is that we have accumulated a lot of related data. For example, the Sogou mobile keyboard that we have had a huge user base and everyday they input a lot of -- they use voice input a lot of time so that gives us opportunity to further improve our voice recognition technology and we use this into a number of scenarios, both inputting and searching for information. And these are very helpful to our product optimization. But we think we still have a lot of room for improvement. First we need to leverage university process to enhance our research capability and for the longer term innovation we also need top talent to join our research programs. So that’s why we leverage this talent to work with Tsinghua university to set up a joint research institute and we hope that can advance or research in AI more quickly. In 2016 R&D expenses accounted for roughly 20% of our total revenue and in this year we increased our spending in proportion with revenue growth and in the next few years we expect to continue to invest progressively to push for some breakthrough in artificial intelligence.

Yes. So it's one time, just small increment.

Thank you. With that ladies and gentlemen, we have come to the end of the conference call for today. Thank you for participating. You may all disconnect.