Inc. Earnings Call Nuggets: Video Advertising Revenue, iQiyi and Tencent Alliances

On Monday, Inc (NASDAQ:SOHU) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Video Advertising Revenue

Dick Wei – JPMorgan: Question is about video, if management can discuss the video advertising revenue for the quarter, and if so what is the sales trend going to be like given the sales team transition, how does video revenue will be like for next couple of quarters maybe also for this year as well, and if also management can discuss about the cost?

Carol Yu – Co-President and CFO: Dick, we cannot hear you. The line is very bad. Can you just speak slower and shorter?

Dick Wei – JPMorgan: Yeah. I hope this is better, so if you can discuss the video ad revenue for the quarter?

Carol Yu – Co-President and CFO: Slowly.

Dick Wei – JPMorgan: Then also how does it look like for next couple of quarters given the sales team transition, and then also the video cost amortization for next couple of quarters that will be great?

A Closer Look: Earnings Cheat Sheet>>

Charles Zhang – Chairman and CEO: Okay. I think, we made a important decision to build up a dedicated sales team within the Sohu Video organization. Before the video sales went in the portal sales team, and in order to have the total marketing package for advertisers, but then there is the problem that there is no dedicated sales team to especially address the needs of the big advertisers. So, we are in a transition period that we believe that the – with a dedicated sales team, and more focused and also closer to the content and product production, I think, our video online sales will significantly improve in the future, and also because some of the exclusive titles – content titles we bought are – we bought back – pick up the price last year, the most expensive period of time, and so we’ll have some financial pressure of the content cost, but as I said that there is already price easing and because the other video sites – websites are all become rational in bidding, so it’s going to improve this year, and – yeah.

Carol Yu – Co-President and CFO: And then you asked about amortization, right?

Dick Wei – JPMorgan: That’s correct.

Carol Yu – Co-President and CFO: I’ll just give you a complete picture of the content purchase situation for year 2012. For content that’s going to be broadcasted on Sohu Video the contract amount in total is $48 million. This included those repurchased last year and those we were going to purchase for the rest of the year. So, the total budget that we are looking at is $48 million. In terms of cash flow, we already paid $17 million as of last year, and we expect to pay the balance of $31 million this year, of which $5 million has been paid during Q1. In terms of amortization, for content that is broadcasted this year the amortization expense is $28 million and for those that’s broadcasted last year the carry forward impact is about $19 million. So total is $47 million.

Dick Wei – JPMorgan: Why don’t you just go back to the revenue question, what is the target for the year for video advertising given the changes?

Carol Yu – Co-President and CFO: Actually in the first quarter we achieved about over 90% gross rate on our video brand advertising revenue compared to the same period of last year. But as we mentioned earlier by Charles, we have decided to set up a dedicated team in Sohu online video organization, so we will undergo a transition period and we will see slower growth rate in the late three quarters this year. Is that early to predict the total picture of the whole year 2012?

Charles Zhang – Chairman and CEO: I think Q2 and Q3 will (indiscernible) improvements.

iQiyi and Tencent Alliances

Alicia Yap – Barclays Capital: My question is also related to video. Just wanted to understand a little bit more on the alliance with iQiyi and Tencent under content purchase. So, can you elaborate how the costs will be split? Will that be equally? Will the alliance be focusing on buying other future contents or will you still go out on your own to be on some content independently?

Charles Zhang – Chairman and CEO: So in principle, the alliances will reduce the content costs for some hot TV episodes reduction of by two-thirds basically. We will pay one-third of the price if we went to buy alone. So this is the pricing, alliances will leverage.

Carol Yu – Co-President and CFO: Alicia, I think the answer is yes. We will split the costs equally and the alliance will cover the big purchases, the hit big drama, but I do believe each of the three of us will also go out and buy smaller content from time to time as well. So, it would not be covering 100% of everybody’s content. I don’t think that’s at all feasible.

Charles Zhang – Chairman and CEO: I see. Can I follow-up for how long this alliance will last?

Carol Yu – Co-President and CFO: There is unspecified period. We are doing this as long as we want to.

Alicia Yap – Barclays Capital: Thank you, I’ll get back to the queue.