Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be Q&A session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the conference over to your host for today's conference call, Eric Yuan, Investor Relations Director for Sohu. Please go ahead, sir.

Okay, thanks, operator. Thank you for joining us today to discuss Sohu's first quarter 2018 results. On the call are Chairman and CEO, Dr. Charles Zhang; CFO, Joanna Lv. Also with us today are Changyou's CEO, Dewen Chen; and CFO, Yaobin Wang; and Sogou's CEO, Xiaochuan Wang; and CFO, Joe Zhou. 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 you, Eric. Thanks to everyone for joining our call. We started 2018 steadily as we delivered better than expected top line growth in the first quarter, mainly driven by the solid performance of our search and online game businesses. Total revenues reached $455 million, up 22% year-over-year. For Sohu.com, our media and video businesses, we have sharpened our focus on key mobile products as we aim to grow the user base and ramp up monetization. At the same time, we are streamlining our organization and significantly reducing video content costs. We believe that these measures will help improve our bottom-line results in upcoming quarters. Sogou's core search revenues rose over 50% year-on-year. During the first quarter, Sogou Mobile Keyboard added 30 million new users, bringing the total DAU to 362 million. For Changyou, thanks to the contribution of its flagship PC and mobile TLBB games, revenues and adjusted profits both topped expectations. Changyou also declared a $500 million special cash dividend to its shareholders in early April. Before I give more details about our key businesses, let me summarize our financial results for the first quarter. Total revenues $455 million, up 22% year-over-year and down 11% quarter-over-quarter. Net brand advertising revenue was $56 million, down 31% year-over-year and 22% quarter-over-quarter. Search and search-related advertising revenues were $222 million, up 55% year-over-year and down 11% quarter-over-quarter. Online game revenues $105 million, up 24% year-over-year and down 4% quarter-over-quarter. Now let me go through some of the key businesses, first of all, the Media Portal business. For the 2018, revising the revenue growth of total Media Portal is our top priority. To achieve this goal, we have been continuously investing in our user acquisition for our key mobile products and exploring ways to improve monetization. We have identified three areas of…

Thank you, Charles. I will walk you through key financials of our four major segments for the first quarter of 2018. All of the numbers that I will mention are all on a non-GAAP basis. You may find a reconciliation of non-GAAP to GAAP measures on our IR Web site. For Sohu Media Portal, revenues were $31 million, down 18% year-over-year. The quarterly loss was $29 million, which compares with the net loss of $60 million in the first quarter of 2017. For Sohu Video, revenues were $31 million, down 16% from a year ago. Of this, advertising revenues were $13 million. The quarterly loss was $48 million, which compares with a net loss of $70 million in the same quarter last year. For Sogou, total revenues were $248 million, up 53% year-over-year and down 11% quarter-over-quarter. Net income was $20 million, up from $13 million in the same quarter last year. For Changyou, total revenues including 17173 were $137 million, up 20% year-over-year and down 5% quarter-over-quarter. Changyou posted a net loss of $16 million compared with net income of $35 million in the same quarter last year, exclude $47 million reporting tax expense due to the dividend. Changyou’s adjusted profit was $31 million in the first quarter of 2018. For the second quarter of 2018, we expect total revenues to be between $485 million and $510 million; brand advertising revenues to be between $65 million and $70 million. This implies annual decrease of 19% to 24% and a sequential increase of 16% to 24%; Sogou revenues to be between $295 million and $305 million. This implies annual increase of 40% to 45% and a sequential increase of 19% to 23%; online game revenues to be between $85 million and $95 million. This implies an annual decrease of 22%…

Thank you. Ladies and gentlemen, we’ll now begin a question-and-answer session [Operator Instructions]. Our first question comes from the line of Thomas Chong from Crédit Suisse.

I have two questions. The first question is about the online video competitive landscape. And Charles comment about how the competitive landscape will evolve given the three payers are competing on content and how we differentiate ourselves from competition given we are transforming more focus on original content and then our losses. And my second question is about the news application market. Can Charles comment about how other peers like the news feed market like [indiscernible] and other competitors versus our application, how we differentiate from competitors? Thank you.

Well, first about the [indiscernible] BHE competition on video. I think the big three video players have been continuing to compete on very extensive content. Our strategy is to, first of all, to have in-house produce more low cost unique content but it’s exclusive only on Sohu so that users -- we continue to get users. And also within -- for the past four years, we’ve been developing this PGC, professionally produced content. That constitute almost like 40% of our content of like five minutes or few minutes from knowledge based video clips. So these all together combined our overall video view both the Sohu video apps and the [X5] are not -- basically remain steady and actually we hope that will grow instead of shrinking. So with our content strategy basically with exclusive unique content and also with PGC that’s our -- we’re basically not buying those, they’re extremely expensive content -- that’s because of the content, because the cost of headcount we stop buying, so the cost structure is improving and I think we can compete without those really expensive content. The second question on the new CPC, so compared with our competitors, Sohu News -- first of all, we’ve been improving the product design the algorithm pretty good, but compared with our competitors, we’re more aimed news instead of aim more on information. We have the information but our brand name and also providing quality news is our hallmark or our competitive advantage. So that’s why we see in last few months basically the consumption of both DAU and the page views have been steadily growing.

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

Two questions if I may. The first one is perhaps for [indiscernible]. I am curious that the outcome of the first quarter revenues, I heard that’s the case with a few reasons in the previous Sogou earnings call. But in hindsight, when you think about the first quarter, which factor actually surprised you most to the upside. So why the outcome would be materially better than your original guidance and perhaps your regional expectations, which factor actually is the key reason? And then secondly perhaps more on the Sogou group. We know that each subsidiaries maybe the Media Portal, the big companies, as well as Sogou subsidiary need certain artificial intelligence engineering talents. So I am just wondering, as a group, how you think about getting synergies across different teams and these teams are perhaps assigned to different subsidiaries. So I don’t know whether this is important or not, but just curious to hear perhaps Charles your thought on that? Thanks.

Our CFO Jo will help me to answer first question.

So in U.S. dollar revenue increased of 53% year-over-year, so roughly 12 percentage points higher than the high end of our guidance. So among the 12% exchange rate movement contributed 4%. So for the rest 8 percentage point is coming from business driven. So the main reason is the traffic growth was a couple of percentage points better than expected set more traffic apart from OEM channels.

Your second is about the synergy between the subsidiaries or the engineers, is that…

The previously -- especially on perhaps the AI teams, because typically I guess your people would like to have data centralized to a place, but you have different subsidiaries and each perhaps has their own data and perhaps have their own AI projects working on. So just wondering whether you think it’s important perhaps to achieve synergies across different subsidies or you’ve actually not aiming for that?

Well, the answer is yes, very important and we’re doing that, because especially for the user profile like -- there is a long term increase and short-term increase like the information stream and news provided a very short-term instance -- the accretive stream information while also -- and provided by the keyboard method and others. So it is a advantage actually of Sohu group that we have so many variety of properties that are collecting or recording people’s behavior, so it’s very important.

Thank you. Our next question comes from the line of Han Joon Kim of Deutsche Bank. Please ask your question.

I just have one, I think Charles I think we talked about streamline utilization and so forth. So just wondering if we have some hard financial targets for that, if you could just remind us the cash burn rate on the Sohu level and what targets do you want to see progressing over the next few quarter or year or two that will be great. Thank you.

Well, I think we definitely are looking at some cost reductions. First of all, as I said on the video top content side and also on the personnel side, because there is some overlapping functions and also some products or developments that are farfetched things not that strongly related to business and to profit. And so we’re looking at, with this cost reduction, we’re looking at mainly 2019 Q1 and Q2 the whole group will be profitable. And then within 2019 media and video will be comfortable that’s how it will go, basically we mean in the next six quarters.

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

Thank you for taking my questions. I’ve got two here, first one is about video strategies. Just wondering what’s your content budget this year? And it would be great if you can help us to divide it into purchase content and if you do see related content on recent budget. And also second one is about the cash adequacy assumption. So just wondering any plan for the company to divest some of your business in terms to generate more adequate cash for your business? Thank you.

So the first question is about the content strategy on the video side, right?

Yes.

So as I said, we will not buy the top head content, we’ll produce our content that is about, let’s say, $100 million. And also the PGC side is actually most likely, but it is revenue sharing even in there. So the next year some -- you are talking about 2019 or 2018. We’re talking about mainly for the video content…

I will answer your second question. I think currently the company does not have any plan to divest any major asset or business. As you know Changyou just announced a special dividend and Sohu received about $300 million in cash. So on the liquidation side quite well at this time. Thank you.

Thank you. The next to ask the question is Alicia Yap of Citigroup. Please go ahead.

Charles, I wanted to follow up just now when you answered Natalie’s question regarding the video content cost. You just say 2018 in total is RMS200 million on the content side…

RMB…

RMB200 million for 2018, okay, and then how much of that for 2017?

For the in-house production of our content it’s about less than RMB200 million, yes.

And then what about for license, are you still planning to do some licensing content?

Almost not…

And so my follow up question on the video side is that, I think you guys have substantially decreased the content cost for the first quarter and you also the see the cost reduce. On the other side, have you seen any disadvantage by not competing for the license content, have you seen your traffic drop because of that, so that’s the video question to ask…

Actually, we are looking at a growth of DAU and also a 5 billion views, because first of all with the lower budget we are generating very unique content that are exclusive on our site. And so that we are getting users and also supplemented by this -- we’ve spent four years to build this PGC, which is a knowledge based -- basically all directory -- it's like a directory of all kind of knowledge based short clips. So maybe we’re -- I don’t know what -- our competitors definitely have lot of more day use and it is really burning money. What we can do is we will make sure that our DAU will not decrease but will continue to increase, and so that -- and improve monetization.

So it seems like…

And also have some new business model, some other business models not just this head content burning at the time…

So it seems like you have been finding maybe a niche here, which is more in the middle at the hybrid, which is the content maybe not as long in terms of the timing but then is also longer than the short from video. So you probably find in the mid-ground as you find some of the users actually attracted to your PGC content. Is it fair to assume that?

I think we make sure that every month we have a new drama that we produce ourselves only on Sohu, and also supplement it with other short clips, shorter short clips of knowledge based PGC.

My second question is actually regarding Sogou, so one of your follow up on the previous call mentioned about [TAC] increase. If you can share about the magnitude of the increase on the year-over-year basis and I think on the previous call, you mentioned probably the [TAC] increase will continue for rest of this year. I thought previously we probably thinking about the [TAC] increase is just temporary. So wanted to know is that because of the competition level that we have to now as that the [TAC] increase will remain the rest of the year. And then second question is on the Sogou part is that, is management can give us the break down in terms of the contribution, revenue contribution by the industry vertical, ranked by contribution and also ranked by the growth rate for this quarter. Thank you.

So we typically renew the contract with contract manufacturer each year. So we have finished our negotiation with OEM channels. So our average price go up 60% comparing to last year. So for the rest of the year, the unit price will be the same.

So you mentioned 60, right, six zero?

Yes, six zero comparing to the last year due to the competition from smaller competitors.

And then the industry vertical…

It’s the same as last quarter. So number one, healthcare and number two, e-commerce and number three, gaming and number four, business services, which is mainly those financial institutions for example insurance company and number five, merchant services is right-sized for franchise. So out of these top five verticals contribute about 80% of our total auction based fixed revenues.

Thank you. Our next question is from Ryan Roberts of MCM Partners. Please go ahead.

I just want to actually just step back on the special quick for the brand advertising just breaking that down. I think you mentioned earlier that the Media Portal revenue was $31 million. What was that number for the year for video, how does that balance out? And also, can you give us an idea. I think you gave us a non-GAAP profit loss -- loss for the quarter. Can you give us an idea of what the EBITDA margins are for those? So I just can get a sense of how much cash you’re burning?

The media is $30 million -- video is not included, the video is -- the advertising is like [12-13]. So the total revenue for Sohu Video in the first quarter is $31 million and of that about $13 million were from advertising and the rest is from other advertising. But the advertising for media and the video is $44 million something…

And could you give us an idea -- I am just trying to get a sense of how the transition from I guess the roll off cost on content, where we are in terms of overall cash burn situation? It looks like its improving and again you gave us a net number. Can you give us maybe an EBITDA number on that?

I mentioned we’re looking at but we don’t have the number now…

And maybe to frame this question a slightly different way. In terms of the -- maybe coming back to what you mentioned earlier, Charles, about the profitability outlook for ’19. Can you give us a sense of -- is that more top line story? Obviously, it is. But vis-à-vis margin growth for your costs -- cost will be pretty stable, or how should we looking at -- looking it to shaping up?

Well, first of all, for the media business, we’re looking at our improvement of the algorithm and the product and the channel marketing and also big data. So we are able to grow user base without much increasing distribution channel spending. And that means we’re creating the inventories of advertising basically information in the inventories without incurring much cost at the media side, and also non-video so that we can sell more advertising, especially information stream advertising. And then on the video side, we already have this in-house production content which we mentioned lower cost. And we just make sure that every month we have a new drama, which cost about below RMB20 million and those with the PGC, so not much cost. And at the time, we are also improving the products, so that we create more -- also more inventories, but not just the pre-video advertising but also the information streams advertising embedded in the video stream, so all this improvement and the sales so that, basically the cost structure improvements and also the top line revenue growth that we are looking at this profitability for 2019.

And the product/personnel cost rationalization. Can you just give us qualitatively an idea of where we are in that process? Charles Zhang\: It’s just -- sometime in the mid of the year we will have some reduction of let’s say 10%. But the major contributor is really -- that's second or the third factor, but the top factor is really stop burning cash and burning money with the top line video content and also improving algorithm and product so that increase inventory.

Thank you. Our next question comes from the line of [indiscernible] [Ritchie Sun] of HSBC. Please ask your question.

So I actually have two questions, so one is I want to ask Charles about, just in generally speaking I think, especially the younger generations have more fair amount of time than before. So in terms of, let’s say, competition between say short form video, so just one from videos. I wonder what’s your thought on that in terms of let’s say the tight spend competition. And then I think the second question is about the dividend distribution that you received from Changyou. So I think regarding that portion of the money, so what would the company actually use going forward given that let’s say the video business is trying to use spend less. So would that be more on the media side or would that be on the usage for the cash? Thank you.

So you mean that the younger generations have more segmented time, right. So that’s why we…

Yes, as said short form video slide also so in partial, the question more popularity especially about younger generation. So let’s say for Sohu Video, I wonder if you have the same target or you have target differently?

I think, first of all, our Sohu Video App, we will produce a shorter drama like maybe 12 episodes and it’s like half an hour. And also we are putting more space to expose our content, the short form content, a few minutes content. And so on this our main app this will be evolvement of the product and interface and content provision. And also we have some of the exploratory efforts some other app of -- and also -- and ultimately in our news app, there’s also consumption of short clips. So yes, this is a trend and we are evolving our products for that. But we’re not giving up -- we're not just to have another -- but we also have our own Sohu network product in the making.

Okay.

And with the dividend, I think we will just fairly make entries, so we don’t have extra cash. We definitely -- our investment -- the money we’ll spend on the news app and improvement on product, on big data, on Sogou, not a lot of actual cash spent to that.

Thank you. Our next question is Juan Lin of 86Research. Please go ahead.

I have two questions. The first one is on Sogou. You previously mentioned top verticals for Sogou search. I am wondering what was the fastest growing vertical in the first quarter. And also for first quarter revenue, you mentioned that 30% improvement for the monetization. Could you please elaborate monetization improvement? For example, how much of that is from CPC improvement and how much of that is CPR improvement? And do you expect monetization improvement to stay at similar level for the rest of the year? The second question is on video. You mentioned that the viewership was stable or influenced for the rest of the year, and wanted to expect PGC content contribution as a percentage of total traffic to continue to increase on the current level. And whether PGC content can you monetize at similar level with licensed content. And if not, what will be the trends for video revenues, going forward? Thank you.

So for faster growing industry, so [indiscernible] has become among the strategic industries. And second for Q1 revenue, so if you see the growth say the 43% year-over-year growth into number of clicks and CPC, so roughly 15% from increase of number of clicks and the 22% from pricing.

On the video side, the PGC now contributing 40% our traffic so people are consuming 40% of traffic of the PGC comment. And then -- so going forward, I am confident we’ll be able to maintain the DAU and with PGC, more PGC exposure. And then previously there was -- the advertising the more the pre-load, pre-roll or pre-load advertising and also exclusion then with the substitutions that you don’t have it, because people already paid monthly fee. But now we have not only the pre-roll or pre-load but the -- into our drama advertising that’s even followed subscription subscribers, because we have to sit. But it does not interrupt viewing experience. And also more importantly with more PGC, this screening embedded advertising in the feed, especially for gaming advertisers like that, so that’s -- so there’s additional two type of advertisers -- I’m sure that be able to monetize better.

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. I would like to hand the conference back to Mr. Eric Yuan for closing remarks.

Thank you all for joining this call. Bye, bye thank you.