By firstname.lastname@example.org (InfoseekChina)
(Sohu) Sohu.com Inc. (NASDAQ: SOHU), a Delaware corporation organized in 1996, is a leading Chinese online media, search and game service group providing comprehensive online products and services on PCs and mobile devices in the People’s Republic of China (the “PRC” or “China”).
Our businesses are conducted by Sohu.com Inc. and its subsidiaries and variable interest entities (“VIEs”) (collectively referred to as the “Sohu Group” or “the Group”). The Sohu Group consists of Sohu, which when referred to in this report, unless the context requires otherwise, excludes the businesses and the corresponding subsidiaries and VIEs of Sogou Inc. (“Sogou”) and Changyou.com Limited (“Changyou”), Sogou and Changyou. Sogou and Changyou are indirect controlled subsidiaries of Sohu.com Inc. Sohu is a leading Chinese language online media content and services provider. Sogou is a leading online search, client software and mobile Internet product provider in China. Changyou is a leading online game developer and operator in China as measured by the popularity of its PC game TLBB and its mobile game TLBB 3D, and engages primarily in the development, operation and licensing of online games for PCs and mobile devices. Most of our operations are conducted through our indirect wholly-owned and majority-owned China-based subsidiaries and VIEs.
Factors and Trends Affecting our Business
With the accelerated shift in user activities from desktop computers (“PCs”) to mobile devices and an increase in the number of Internet users, the usage of various kinds of mobile Internet services continued to accelerate at a fast pace during the second quarter of 2015. As of the end of June 2015, according to CNNIC, mobile internet users had reached 594 million, an increase of 7% from the end of 2014. At Sohu, we focused our efforts on developing a portfolio of leading mobile products across our business lines that we believed our users would like. Our key products continued to gain traction in terms of traffic. For example, during the second quarter of 2015, mobile traffic for online video increased by 66% as compared to the corresponding period in 2014 and contributed more than 60% of our total traffic. Sogou posted strong growth in search traffic and as of the end of June 2015 mobile search traffic nearly equaled PC search traffic. The monetization of mobile traffic is also progressing well, as advertisers have begun to increase their budgets allocated to this area.
For Sohu Media Portal, the transition from a PC portal to a leading mobile news platform is well on track. In the second quarter, we focused our efforts on improving our popular mobile news products.
For example, we refined the design of the Sohu News mobile app, allowing people to conveniently set their own preferences. In the meantime, we strove to generate unique content to drive up traffic.
Online video is one of the top Internet services in China, and Sohu Video is a leading video service provider in China. We noted an accelerating trend away from television toward streaming video, which is important specifically to Sohu’s online video business, as advertising dollars shift from television to online video. In the second quarter of 2015 we saw user base expansion and increased advertising revenues generated from our video business. In the meantime, as competition intensified, the major players stepped up their content spending to attract viewers. The average licensing fee for premium content grew significantly as compared to 2014. As a result, despite solid revenue growth, our online video business continued to incur operating losses. We expect that the industry-wide unfavorable cost structure will continue to overshadow the profitability outlook for the entire industry, including us, in the near term. We remain optimistic about the long-term prospects of the online video business, which is a strategic key business line for Sohu. For 2015, our content strategy has been to rationalize our spending on licensed content while we focus more on original and professionally-generated content.
On September 16, 2013, we entered into a strategic cooperation with Tencent Holding Limited (Tencent Holding Limited together with its subsidiaries, “Tencent”) for our search and Web directory business, in connection with which Tencent invested in Sogou. We believe that this strategic cooperation has reinforced Sogou as a leader in the large and fast-growing China market for search and Internet services, particularly for the mobile end. In the online search sector, Sogou is one of the top three PC search players in China, and we have demonstrated greater potential in mobile search.
With deepening cooperation with Tencent’s various products, Sogou has brought unique capabilities to its mobile search and further enhanced its competitiveness. Improving search quality and expanding channels helped Sogou to grow its search traffic quickly. As of the end of June 2015, aggregate search traffic had continued to increase, and mobile search traffic had jumped more than 110% year over year. In the second quarter of 2015, aggregate paid clicks and cost-per-click continued to grow, with improving mobile monetization.
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For Changyou’s PC game business, Tian Long Ba Bu (“TLBB”), a PC game which we developed and currently operate in China, continues to deliver solid revenues and profitability. However, initial performance from new PC games launched recently was less promising, and Changyou plans to be conservative in rolling out new PC games going forward. For Changyou’s mobile game business, revenues from TLBB 3D, which was launched in the fourth quarter of 2014, declined sequentially by roughly 20%, which is consistent with the general life cycle of a mobile game. We expect further decline in TLBB 3D’s revenue in the second half of the year. Changyou launched two new mobile games in the second quarter in 2015, but the results were less than satisfactory. Nonetheless, Changyou will continue to scale up research and development efforts with improved operating efficiencies and remains committed to introducing high quality mobile games to the market. For the three months ended June 30, 2015, the PC games and mobile games that Changyou operates had approximately 10.1 million total average monthly active accounts and approximately 2.5 million total average monthly active paying accounts. Changyou’s platform channel business achieved further margin improvements as a result of continued efforts in cost rationalization.
Through the operation of Sohu, Sogou and Changyou, we generate online advertising revenues (including brand advertising revenues and search and Web directory revenues), online games revenues and others revenues. Online advertising and online games are our core businesses. For the three months ended June 30, 2015, total revenues generated by Sohu, Sogou and Changyou were approximately $493.6 million, including:
$136.1 million in brand advertising revenues, of which $52.3 million was from Sohu Media Portal, $56.8 million was from Sohu Video, and $27.0 million was from Focus; and
$8.3 million in others revenues, mainly attributable to Sohu’s offering of mobile-related services and mobile products, and sub-licensing of purchased video content to third parties.
Total revenues generated by Sohu were $144.4 million.
$135.2 million in search and Web directory revenues (formerly referred to as “search and others” revenues); and
$12.2 million in others revenues, primarily attributable to Sogou’s offering of Internet value-added services (or “IVAS”) with respect to the operation of Web games and mobile games as well as other services and products provided to users.
Total revenues generated by Sogou were $147.4 million.
$172.4 million in online game revenues;
$14.7 million in brand advertising revenues, mainly attributable to Changyou’s 17173.com Website; and
$14.7 million in others revenues attributable to Changyou’s operation of the platform channel business, including RaidCall, the Dolphin Browser and other software applications; and Changyou’s cinema advertising revenues.
Total revenues generated by Changyou were $201.8 million.
For the three months ended June 30, 2015 our total brand advertising revenues were $150.8 million, total search and Web directory revenues were $135.2 million, total online game revenues were $172.4 million, and total others revenues were $35.2 million.
Brand Advertising Business
Sohu’s main business is the brand advertising business, which offers to users, over our matrices of Chinese language online media, various content, products and services across multiple Internet-enabled devices, such as PCs, mobile phones and tablets. The majority of our products and services are provided through Sohu Media Portal, Sohu Video and Focus.
Sohu Media Portal. Sohu Media Portal provides our users comprehensive online content, including news, entertainment, sports, automobile, business and finance, through www.sohu.com for PCs, the mobile portal m.sohu.com and the mobile phone application Sohu News APP;
Sohu Video. Sohu Video is a leading online video service provider in China through tv.sohu.com for PCs and the mobile phone application Sohu Video APP; and Focus. Focus (www.focus.cn) is a leading online real estate information provider in China.
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Revenues generated by the brand advertising business are classified as brand advertising revenues in our consolidated statements of comprehensive income.
Sohu also engages in the others business, which includes mobile-related services and mobile products offered in cooperation with China mobile network operators to mobile phone users and to China mobile network operators, and sub-licensing of purchased video content to third parties. Revenues generated by Sohu from the others business are classified as others revenues in our consolidated statements of comprehensive income.
Search and Web Directory Business
The search and Web directory business primarily offers advertisers pay-for-click services, as well as online marketing services on Web directories operated by Sogou. Pay-for-click services enable advertisers’ promotional links to be displayed on the Sogou search result pages and Sogou Website Alliance members’ Websites where the links are relevant to the subject and content of such Web pages. Both pay-for-click services and online marketing services on Web directories operated by Sogou expand distribution of our advertisers’ Website links and advertisements by leveraging traffic on Sogou Website Alliance members’ Websites. Our search and Web directory business benefits significantly from our collaboration with Tencent, which provides us access to traffic generated from users of products and services provided by Tencent.
Revenues generated by the search and Web directory business are classified as search and Web directory revenues in our consolidated statements of comprehensive income.
Sogou also engages in the others business by primarily offering IVAS with respect to the operation of Web games and mobile games developed by third parties as well as other services and products provided to users. Revenues generated by Sogou from the others business are classified as others revenues in our consolidated statements of comprehensive income.
Changyou has three businesses, consisting of the online game business, the platform channel business and the others business.
Online Game Business
Changyou’s online game business offers to game players PC games which are online games designed primarily for playing on PCs; mobile games, which are played on mobile devices with an Internet connection; and Web games, which are online games played over the Internet using a Web browser.
Changyou’s PC games and mobile games are mainly MMOGs, which are interactive online games that may be played simultaneously by hundreds of thousands of game players. All of Changyou’s games are operated under the item-based revenue model, where game players play the games for free but can purchase virtual items to enhance the game-playing experience. Revenues derived from the operation of online games are classified as online game revenues in the Sohu Group’s consolidated statements of comprehensive income.
Platform Channel Business
Changyou also owns and operates a number of Web properties and software applications for PCs and mobile devices (collectively referred to as “platform channels”), including the 17173.com Website, one of the leading information portals for game players in China; RaidCall, which provides online music and entertainment services, primarily in Taiwan; and the Dolphin Browser, a gateway to a host of user activities on mobile devices, with the majority of its users based in Europe, Russia and Japan.
Changyou’s platform channels serve various needs of its users and help Changyou reach more user communities and conduct cross-promotions of its games and services. Revenues generated by 17173.com Website are classified as brand advertising revenues, and revenues generated by RaidCall and the Dolphin Browser are classified as others revenues in our consolidated statements of comprehensive income.
Changyou also operates a cinema advertising business, which consists of Changyou offering slots for advertisements to be shown in cinemas before the screening of movies. Revenues generated by Changyou’s cinema advertising business are classified as others revenues in our consolidated statements of comprehensive income.
Source:: Sohu Files SEC form 10-Q, Quarterly Report