SOHU / CYOU Joint Presentation March 2010 1 SOHU.COM INC. - - PowerPoint PPT Presentation

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SOHU.COM INC. (NASDAQ: SOHU)

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SOHU / CYOU Joint Presentation

March 2010

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This presentation contains forward-looking statements, including, among other things, a statement of Sohu’s expectations regarding future profitability. 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. Potential risks and uncertainties include, but are not limited to, the current global financial and credit markets crisis and its potential impact on the Chinese economy, the slower growth the Chinese economy experienced during the latter half of 2008 and in 2009, which could continue through 2010, the uncertain regulatory landscape in the People's Republic of China, fluctuations in Sohu's quarterly operating results, EPS dilution resulting from Changyou’s initial public offering, Sohu’s historical and possible future losses and limited operating history, and the company's reliance on online advertising sales, online games and wireless services (most wireless revenues are collected from a few mobile telecom operators) for its revenues. Further information regarding these and other risks is included in Sohu's Annual Report on Form 10K, its quarterly reports on Form 10Q, and in its other filings with the Securities and Exchange Commission.

Safe Harbor Statement

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Cross Fertilization

• Diversified game portfolio
• Acquisition of new users,

particularly teenagers

• Contribution of revenues/

earnings/ strong cash flows

Changyou - Leading MMORPG Company

• Strong brand recognition
• User base of more than

250m

• Extensive advertising

resources

• Industry expertise of

17173.com – China's largest gaming portal

Sohu Portal - Leading Mainstream Media Platform

Unique Combination of Two Strong Businesses:

• Portal business: one of the most powerful mainstream media platforms in China, regaining

momentum amidst economic recovery in 2010

• Online game business conducted by Changyou: a leading player in the MMORPG

industry, an effective way to drive high growth and high profitability as well as to generate strong cash flows

• Unique combination of the two businesses secures long-term and sustainable growth

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4 * Non-GAAP operating income, net income and diluted EPS exclude the impact of share-based granted to employees. 2009 Q4 2009 Q3

Y-o-Y %

2009FY 2008FY

Y-o-Y %

2010 Q1 Guidance Total revenues Brand advertising Online games (CYOU) $135.8m $45.9m $70.7m $136.6m $48.5m $68.7m 12% 2% 21% $515.2m $177.1m $267.6m $429.1m $169.3m $201.8m 20% 5% 33% $123m~128m $38m~40m $70m~73m Operating margin (non- GAAP)* 42% 42% N/A 43% 41% N/A N/A Net income before NCI (non-GAAP)* $50.3m $51.6m

• 15%

$197.7m $169.2m 17% $45m~47.5m Net income after NCI for diluted EPS (non-GAAP) $35.8m $37.4m N/A $155.3m $169.3m

• 8%

$31m~33m Diluted EPS after NCI (non-GAAP) $0.92 $0.96 N/A $3.98 $4.29

• 7%

$0.78~0.83 Cash Balance $564m $596m N/A $564m $314m 80% N/A Debt Balance $0 $0 N/A $0 $0 N/A N/A Cash inflow from

• perations

$67m $65m 16% $235m $218m 10% N/A

Financial Track Record

Record Full Record Full-

• Year

Year Total Revenues Total Revenues Ranked by Fortune magazine as the third-fastest growing U.S.-listed company based on financial performance over the past three years.

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• Mr. Xiaojian Hong

Chief Technology Officer 6

Strong Results Delivered by an Experienced and Focused Team

• Mr. Alex Ho

Chief Financial Officer 6

• Ms. Belinda Wang

Co-President and Chief Operating Officer 7

• Mr. Dewen Chen

President and Chief Operating Officer 6

• Ms. Carol Yu

Co-President and Chief Financial Officer 11

• Dr. Charles Zhang

Chief Executive Officer 14

• Mr. Tao Wang

Chief Executive Officer 6 Title Years Years Title

• Mr. Xiaochuan Wang

Chief Technology Officer 10

• The management team has been making all the right moves over the past 5+ years and

is flush with confidence and strong execution capability.

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Portal Business: Advertising

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China Online Advertising Industry

• More advertising spending anticipated in 2010

− Events such as the World Cup, Asian games and World Expo are expected to drive advertising spending growth − Advertisers’ sentiments improved in a better economic environment Advertisers more confident in 2010 outlook Process of annual negotiation accelerating − Online media continues to gain market share from traditional media Greater efficiency and effectiveness Better ability to directly measure results

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SOHU Brand Advertising Performance by Industry

• Top 3 industries (auto, real estate and online games) contributed over 50% of brand

advertising revenues in 2009 Q4

• Fastest growing sectors in 2009 Q4: consumer electronics, retail clothing and auto

industry

• Auto:

− Expect to grow modestly in 2010 as government encourages auto sales in lower- tier cities, and more marketing activities are coming surrounding major events

• Real estate:

− Cautiously positive on the property market and expect moderate growth - government moves to curb speculation and cool down the market will benefit real estate industry for the long run

• Online games:

− As 17173 remain No.1 online game portal and default marketing platform for most online games, we expect revenue growth from major online game

• perators as well as small operators
• FMCG: Continuous growth expected
• Revenue growth for 2010 will be in line with industry as compared with 2008, before

the economic downturn

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Expanded Efforts in Video Content Offering

• Fighting piracy through the China Online Video Anti-Piracy Alliance generates positive

results − Pressures local video sites to increasingly remove pirated content − Makes Sohu the partner of choice for many leading global and local media companies e.g. Exclusive broadcasting for the premiere of “The Qin Empire,” a popular TV drama in China, before it aired on TV stations − Raises hurdles for existing online video sites engaged in online video piracy − Provides Sohu ample opportunities to increase both users and advertising revenues

• Largest online library of authorized high-definition video content
• Quality self-produced programs also broadly circulated by local TV stations
• Average daily video views and revenues from TV channel up by ~30% Q-o-Q
• Meaningful revenues from video advertising expected in 2 to 3 years

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Continuing to Update Technology and Product Quality

Sogou Pinyin

• Continuous updates help to secure market leadership

position while increasing user stickiness

• Installed on 70%~80% of PCs in China and continues

to increase − Over 100 million weekly active unique users − Timely collection of user behavior helps to increase effectiveness of targeted marketing on Sohu platform − Supported by a vast word database (including 1 billion Chinese names) to increase typing efficiency − Mobile version continues to grow in popularity and will help Sohu users watch online videos through their mobile handsets with the future widespread implementation of 3G technology

• To cross-market our other leading products such as online video and news sites

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Continuous Investment in Marketing

• Sohu plans to implement marketing activities that will further promote
• ur products, such as high definition video content in 2010
• Great success with “Browse Sohu, Know the World” marketing

campaign in 2009 − Average daily unique visitors to Sohu news channel increased approximately 20% Y-o-Y in 2009 FY − Number of people frequently surfed Sohu increased 10% Q-o-Q in 2009 Q4 (Based on third- party research)

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Sohu Portal Employees % Content 1,438 55% Tech 777 30% Sales & CS 296 11% Back office 118 4% Total 2,629 100%

Resource Allocation Focused on Content and Technology

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Online Games: CYOU

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Industry Update

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• At the CGIAC meeting on January 20, 2010, Chinese government officials stated that the government will:
• Support and encourage original game content developed by Chinese

companies;

• Encourage investments in advanced technologies and talent training;
• Foster and support more top-tier local online game companies to enter international markets.
• To promote the healthy growth and long-term prosperity of the industry, the government will effectively

monitor and enforce distribution of online game licenses and implementation of an online game rating system.

• As a leader in China’s online games industry, Changyou will comply with the rules and practices of relevant

government authorities in China and continue to support the Chinese government in developing future guidelines for the industry.

Source: CNNIC, Analysys, IDC’s China Gaming 2009-2013 Forecast and Analysis

Internet user growth drives the expansion of the online game market in China

China’s Growing Online Game Market

Government supports domestically developed online games and focuses on the long-term prosperity of the industry

137.0 162.0 210.0 253.0 298.0 338.0 384.0 100 200 300 400 500 2H06 1H07 2H07 1H08 2H08 1H09 2H09

Internet Users in China

3.9 5.2 6.3 8.5 9.8 11.7 14.1 0.0 5.0 10.0 15.0 2H06 1H07 2H07 1H08 2H08 1H09 2H09

China online game revenue

China – world’s largest Internet market and still growing

(In RMB billions)

Macro trends driving robust online game revenue growth

2H06A – 2H09A CAGR: 53.5% 2H06A – 2H09A CAGR: 41.0%

(In millions)

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Financial Overview

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2009 Q4 2009 Q3 2008 Q4 Q-o-Q Y-o-Y 2010 Q1 Guidance Total revenues Game operation revenues Overseas licensing revenues $70.7m $68.6m $2.1m $68.7m $66.9m $1.8m $58.4m $56.4m $2.0m 3% 3% 15% 21% 22% 5% $70.0m~73.0m N/A N/A Gross margin (non-GAAP)* 92% 93% 93% N/A N/A N/A Operating margin (non-GAAP)* 67% 67% 60% N/A N/A N/A Net income (non-GAAP)* $42.2m $41.3m $30.3m 2% 39% $41.0m~42.5m Diluted EPS (non-GAAP)* $0.96 $0.96 N/A 6% 6% $0.77~0.80 Cash Balance $226.9m $216.1m** $134.4m 5% 69% N/A Debt Balance $0 $0 $0 N/A N/A N/A Cash inflow from operations $46.2m $46.2m $27.2m 70% N/A N/A

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* Non-GAAP numbers exclude share-based compensation costs. ** Net of US$96.8 million pre-IPO cash dividend payable to Sohu, which was declared on April 1, 2009 as disclosed in the IPO

• prospectus. This dividend was paid to Sohu during 2009 Q4.

Strong Financial Track Record

Changyou is a highly profitable online game developer with a strong, debt-free balance sheet and rich cash flows.

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Business Highlights

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TLBB: Enhancements to the in-game community and chat platform and the release of new virtual items for the holiday season helped improved in-game experience of game players and extend TLBB’s lifecycle. PCU reached a high of 870,000 in the fourth quarter of 2009. Released “Jian Ying Xia Qing” in January with new riding animals, virtual pets and online activities. Next expansion pack for TLBB is planned for April. Blade Online series (Blade Online and Blade Hero 2): User base of Blade Online series grew as Blade Hero 2 continues to gain traction amongst users in the fourth quarter. Aim to further differentiate the two games in the series by having separate R&D teams responsible for developing new game content. 19

Aggregate Registered Accounts

Note: (1) Source: Company data and Morgan Stanley Research (In millions)

Solid Growth Momentum in Existing Games

Aggregate APA

(In thousands)

ARPU(1) as a Percentage of Peers’

Regular game content updates drives steady expansion of user base with potential for further upside growth in ARPU

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User-centric game development model and solid operation strategy deliver organic growth and maintain healthiness of games.

75%

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New Game Developments

Game title Immortal Faith (“IF”) Description and Features

Licensed from 3rd

party with permanent

• perating rights and

source code

2D game based on

Chinese myths and folklores

Targets hardcore

gamers with emphasis on fighting

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Development Progress

Continues to undergo

close beta testing Duke of Mount Deer (“DMD”)

Developed in-house Cartoon-style martial arts

game with selectable 2D, 2.5D and 3D graphic modes

Adapted from the popular

Chinese novel “Duke of Mount Deer” written by Louis Cha

Targets a broader

audience with cartoon- style graphics and creative game-play

Tested new dungeons

and weapons in the closed beta version of the game

Weekly updates by team

• f over 160 game

engineers to enrich game content and improve user experience Zhong Hua Ying Xiong (“ZHYX”)

Licensed from 3rd

party with exclusive

• perating rights in

China

3D martial-arts game Based on a popular

story from a widely read Hong Kong comic book

Targets gamers who

enjoy comic books and prefer 3D graphics

Completed

translation of the game into simplified Chinese

Localization of the

game for the Chinese market near finalization

Entered technical

close beta testing in February 2010 Legend of Ancient World (“LAW”)

Licensed from 3rd

party with permanent

• perating rights and

source code

2.5D fantasy game Targets game

players in late-teens to late 20s who enjoy reading fantasy literature

Continues to

undergo technical close beta testing Da Hua Shui Hu (“DHSH”)

Entered close beta

testing in January 2010

Released new virtual

items and activities in the close beta version

• f the game

Licensed from 3rd party

with exclusive

• perating rights in

China

2D turn-based, cartoon-

style game

Based on the Chinese

classical novel “Outlaws of the Marsh”

Targets gamers who

enjoy community building and prefer 2D graphics

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Gaining International Exposure with Strategic Overseas Expansion

Domestic market Export market Market for self-operations

Export Strategy

We began open beta testing in the U.S. for the English version of TLBB, named “Dragon Oath,” in December 2009 Our objective is to deepen our understanding

• f Western gaming markets and gain valuable

insight on user protection and customer service standards so as to introduce these back in China

Self-Operation Strategy

Our flagship game, TLBB, has been licensed to game operators in Vietnam, Taiwan, Hong Kong, Malaysia and Singapore We will pursue strategic licensing opportunities to selective countries to broaden our exposure to different online game markets and cultures

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Recruit top-notch talent Train and incentivize R&D engineers Streamlined hiring and training practices strengthen foundation for long-term growth.

Total employees was approximately 1,250 as of December 2009 Launched nationwide university recruitment plan to hire fresh graduates from leading universities across China Plan to expand total headcount to approximately 2,600 employees by the end of 2010

Building Human Capital for Long-term Development

TLBB’s well-established game development

platform is a training base for R&D talent

Experienced game development personnel

provide valuable guidance to new hires and help them assimilate into Changyou’s culture

After new hires are properly trained, core

developers are allocated to new game projects

The team currently working on TLBB is already

the third generation of game developers

Unique incentive systems ensure maximum

sharing of experience and know-how

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R&D Headcount and Breakdown

220 528

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Key Investment Takeaways

• Winning formula: two strong businesses to deliver sustainable growth

through various economic cycles

• Strong, debt-free balance sheets: combined cash balance of nearly

$600 million with quarterly cash flow around $67 million

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Thank You!