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

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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SOHU / CYOU Joint Presentation

November 2010

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

This presentation contains forward-looking statements. Statements that are not historical facts, including statements about Sohu and Changyou’s beliefs and expectations, 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

• 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 recur in the future, the uncertain regulatory landscape in the People's Republic of China, fluctuations in Sohu's quarterly operating results, and Sohu’s reliance on online advertising sales, online games and wireless services (most wireless revenues are collected from a few mobile network operators) for its revenues. Further information regarding these and other risks is included in Sohu's annual report on Form 10-K for the year ended December 31, 2009 and quarterly reports on Form 10-Q for the quarter ended June 30, 2010, Changyou’s annual report on Form 20-F for the year ended December 31, 2009, and other filings by Sohu and Changyou with the Securities and Exchange Commission.

Safe Harbor Statement

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Unique Combination of Strong Businesses:

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• Sogou Pinyin - the

dominant software for Chinese language-input in China, with 70-80% market share in China

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

• Portal business: traction is picking up as increasingly higher value advertising solutions are

provided to our advertising partners around China

• 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

• Sogou search business: Strategic investment from Alibaba provides great opportunity to

compete and capture market share

• Diversified game portfolio
• Acquisition of new users,

particularly teenagers

• Contribution of revenues/

earnings/ strong cash flows

Sogou- Online Search Subsidiary

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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* Non-GAAP operating income, net income and diluted EPS exclude the impact of share-based awards. Please refer to our earnings release, which is posted on the IR section of Sohu’s website at http://corp.sohu.com/investorrelations for GAAP numbers.

Financial Track Record

2010 Q2 2010 Q3 Q-o-Q % 2009 Q3 Y-o-Y % 2010 Q4 Guidance Q-o-Q % Total revenues Brand advertising Search Online games (CYOU) $146.1m $53.2m $3.9m $77.7m $164.1m $59.1m $5.4m $85.6m 12% 11% 38% 10% $136.6m $48.5m $2.3m $68.7m 20% 22% 134% 25% $163m~168m $58m~60m $6m $86m~89m

• 1%~2%
• 2%~2%

11% 0%~4% Operating margin (non- GAAP)* 39% 44% N/A 42% N/A N/A N/A Net income before NCI (non- GAAP)* $52.5m $61.3m 17% $51.6m 19% $59m~61.5m

• 4%~0%

Net income after NCI for diluted EPS (non-GAAP) * $37.5m $45.2m 21% $37.4m 21% $43m~45m

• 5%~0%

Diluted EPS after NCI (non- GAAP) * $0.96 $1.16 21% $0.96 21% $1.10~1.15

• 5%~1%

Cash Balance $599m $535m

• 11%

$597m

• 10%

N/A N/A Cash inflow from operations $58m $84m 45% $65m 29% N/A N/A

Ranked by Fortune magazine as the 12th fastest growing U.S.-listed company based on financial performance over the past three years

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Supplementary Financial Data by Business Lines

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Non-GAAP GAAP 2010 Q3 Revenue Operating Profit Operating Margin Operating Profit Operating Margin Brand Advertising, wireless and others $73.1m $21.5m 29% $17.2m 24% Search $5.4m $-4.9m NA $-5.4m NA Subtotal $78.5m $16.6m 21% $11.8m 15% Online Games (before NCI) $85.6m $55.2m 64% $53.4m 62% Total $164.1m $71.8m 44% $65.2m 40%

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Strong Results Delivered by an Experienced and Focused Team

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• Mr. Xiaojian Hong

Chief Technology Officer 6

• 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

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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Portal Business: Brand Advertising

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

China Online Advertising Industry

• More advertising spending anticipated in 2010

− Recovered from the global financial crisis − Ad spending has been stimulated by events such as World Cup and Asian Games − Online media continues to gain market share from traditional media Greater efficiency and effectiveness Ongoing advertising budgets shifting from offline to online Internet penetration expansion − Online video is one of the fastest growing segments where Sohu has secured a leading position − Optimistic about the remainder of the year

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

SOHU Brand Advertising Performance by Industry

• Brand advertising revenue for 2010 is expected to grow by 18% - 20% as

compared to 2009, or by 24% - 25% as compared to 2008.

• IT-related industries, auto, online games, FMCG were fast growing sectors for

2010 Q3.

• Auto & FMCG: will remain stable revenue growth in 2010 Q4.
• Real Estate:

–

New government policies and regulations have negative impact on the volume of sales.

–

Overall, we’ll see a revenue growth, especially from second-tier cities in 2010 Q4, through our efforts to offer more online promotion plans to advertisers.

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Online video: our potential future revenue driver

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• Online video is one of the fastest growing segments where Sohu has secured a leading

position

– Ad revenues of the online video industry in China are expected to grow 73% in 2010,

and over 65% each year from 2011 to 2013, reaching 11 billion RMB in 2013. (iResearch)

– ComScore and iResearch: for 2010 Q3 Sohu ranked 3rd in terms of the total number of

• nline video views and total effective time spent watching videos in China.
• Further expansion of content offering and improvement on innovative applications to

enhance broadcast solutions for various devices. − E.g., we’ve made all of the content on our video site accessible to iPad and iPhone users to ensure that their user experience will be as dynamic as the devices they are using.

• Average daily video views of high-definition video channel grew by 40% Q-o-Q
• The growing traffic attracted more advertising spending. Video revenues for 2010 Q3

increased 71% Q-o-Q.

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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Online Search: Sogou

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Sogou Business

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Sogou Pinyin The dominant software for Chinese language-input in China, installed

• n 70%~80% of

PCs in China Sogou Browser Sogou Search Sogou browser has been installed on roughly 10% of PCs in China and is No. 3 in terms

• f market share

in China Sogou search engine now has a 1.2% market share based on the latest iResearch report, and is No. 3 in China We’ll leverage Sogou Pinyin’s success to promote Sogou Browser which in turn will bring traffic to Sogou Search

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Search Revenue Mix

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2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 Bid listing $0.9m $1.3m $1.8m $2.3m $2.1m $3.1m $4.6m Paid listing $0.7m $0.5m $0.5m $0.6m $0.7m $0.8m $0.8m Total $1.6m $1.8m $2.3m $2.9m $2.8m $3.9m $5.4m

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Sogou completed the sale of newly-issued Series A Preferred Shares

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• On October 22, 2010, Sogou completed the sale of newly-issued Series A

Preferred Shares to Alibaba Investment Limited, a private investment subsidiary of Alibaba Group Holding Limited, China Web Search (HK) Limited, an investment vehicle of Yunfeng Fund, LP, and the investment fund

• f Dr. Charles Zhang, Sohu’s Chairman and Chief Executive Officer .
• Xiaochuan Wang, Sohu’s CTO, was appointed as the CEO of Sogou.
• Upon closing of the sale, Sogou has been restructured to include our search

business, Sogou Pinyin and Sogou Browser. We will leverage Sogou Pinyin’s success to promote Sogou Browser which in turn will bring traffic to Sogou Search.

• The restructuring in addition to the potential business cooperation with

Alibaba have helped the Sogou team become more committed and motivated

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Financial Implication of Sogou’s issuance of Preferred Shares

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• Sogou received the $48 million proceeds from preferred shareholders, which

will be used to fund Sogou’s operations over the next two years.

• Sohu will retain 53% of Sogou on a fully-diluted basis, and intends to retain

majority ownership in Sogou. Going forward, Sohu will continue to consolidate Sogou’s financial statements, with interest of preferred shareholders to be reflected in our consolidated balance sheet as noncontrolling interest.

• For 2010 Q3, Sogou’s net losses were around $5.0 million on a pro forma
• basis. Starting from 2011 onwards, Sohu’s diluted EPS calculations will only

include 53% of Sogou’s losses, which is in proportion to our ownership in Sogou on a fully diluted basis.

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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Resource Allocation Focused on Content and Technology

Sohu non-game Employees Content 1,527 Tech 231 Sales & CS 323 Back office 243 Subtotal 2,324 Sogou 420 Total 2,744

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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Online Games: CYOU

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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Industry Update

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

3.8 5.7 6.3 8.5 9.8 11.7 14.4 15.6 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10

China online game revenue Source: CNNIC, Analysys

Internet user growth drives the expansion of the online game market in China Government strengthens online games management, encourages creativity and focuses on healthy and sustainable development of the industry

China – world’s largest Internet market and still growing

(In RMB billions)

Macro trends driving robust online game revenue growth

(In millions)

137.0 162.0 210.0 253.0 298.0 338.0 384.0 420.0 50 100 150 200 250 300 350 400 450 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10

Internet users in China

China’s Growing Online Game Market

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• On July 28, 2010, Chinese government officials stated that the government will:
• Introduce policies related to online gaming in China to provide a solid foundation for the sustainable

growth of the industry

• Explore ways to effectively protect intellectual property rights
• Encourage innovation and support domestic online games companies to expand overseas
• We believe the formalization of a standard set of regulations will help the sustained development of the
• industry. Changyou will continue to strongly support the work of the regulators and join in the formulation and

implementation of these regulations and make greater contributions to the industry’s development.

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Financial Overview

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

2010 Q3 2010 Q2 2009 Q3 QoQ YoY 2010 Q4 Guidance Total revenues Game operation revenues Overseas licensing revenues $85.6m $83.6m $2.0m $77.7m $75.6m $2.1m $68.7m $66.9m $1.8m 10% 11%

• 7%

25% 25% 11% $86.0m~89.0m N/A N/A Gross margin (non-GAAP)* 90% 91% 93% N/A N/A N/A Operating margin (non-GAAP)* 64% 63% 67% N/A N/A N/A Net income (non-GAAP)* $47.1 m $44.1 m $41.3m 7% 14% $46.5m~48.0m Diluted EPS (non-GAAP)* $0.88 $0.82 $0.77 7% 14% $0.87~0.90 Cash Balance $292.0m $294.5m $312.9m

• 1%
• 7%

N/A Debt Balance $0 $0 $0 N/A N/A N/A Cash inflow from operations $55.5m $49.2m $46.2m 13% 20% N/A

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

Strong Financial Track Record

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* Non-GAAP numbers exclude share-based compensation costs. Please refer to our earnings release, which is posted on the IR section of Changyou’s website at http://www.changyou.com/ir/ for GAAP numbers.

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Business Highlights

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

1 Solid Growth Momentum in Existing Games

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Diversified Portfolio of Games Adding Incremental Growth TLBB Remains Our Flagship Game

Tian Long Ba Bu (“TLBB”):

• Latest upgrades include new content introduced in July and October

featuring new in-game events and more customization options for avatar and in-game chat to cater to the social needs of today’s youngsters

• Plan to launch TLBB 3, another major expansion pack, in 2011 to further

enrich the in-game experience of users and extend the game’s lifespan

User-centric game development model incorporating extensive feedback and solid operating strategy deliver organic growth and maintain healthy game portfolio

20 40 60 80 100 120 500 1,000 1,500 2,000 2,500 3,000

Aggregate Registered Accounts * Aggregate APA * ARPU * * as a Percentage of Peers’

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

(In millions) (In thousands)

Average:73%

• We are also adding incremental growth from our growing portfolio
• f differentiated games, including Blade Online, Blade Hero 2, Da

Hua Shui Hu, Zhong Hua Ying Xiong and the newly released Immortal Faith

• We’ll continue to update the games based on user feedback

* Comprises the following games operated in China: Tian Long Ba Bu (“TLBB”), Blade Online, Blade Hero 2, Da Hua Shui Hu, Zhong Hua Ying Xiong and Immortal Faith

* * Based on company filings and research

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Solid Growth Momentum in Existing Games(Cont’d)

• Franchise Games are Cornerstone of Growth

TLBB remains our flagship title and a testament to our ability to create a sustained blockbuster

An Award-winning Game

The Most-liked Online Game by Game Players by ChinaJoy for five consecutive years from 2006 to 2010 World’s Top Five Most Profitable Game Franchises in 2009 by Forbes

• To date, we have

released 16 expansion packs based on a vast amount of user feedback

• We will continue to

release expansion packs regularly to grow the community and build TLBB into an even more valuable franchise

* Data from barchina.net for the period Oct 18-24, 2010

The Most-installed MMORPGs in China’s Internet Café *

Fantasy Westward Journey Dragon Nest Wendao 1 2 5 NetEase Changyou TLBB Shanda Games 4 World of Warcraft Netdragon NetEase Launched a hit game

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3

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Year 2-3 Year 4 Year 1

• Launched a hit game that

surpassed 400,000 peak concurrent users during the first month of its launch

• Introduced the first 2.5D

game that combines both martial arts and community-building features in China

• Continued to grow user

base by releasing regular game updates and expansion packs

• The game has become a

leading 2.5D martial arts MMORPG in China’s

• nline game market
• Major expansion pack

TLBB 2 launched in April 2010 with important upgrades, boosting PCU to a record high

• Another major expansion

pack in development for 2011 to further grow the game’s community Continued to grow user base Formed a large community

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Multiple graphic modes Social interactive game-play Cartoonish graphic style

• The first in the industry to allow players

to freely switch between multiple graphic modes

• Vivid graphics and 360 degree viewing

angles

• Target a wide range of people, across

different genders and nationalities

• Various forms of social activities to

foster larger community and enhance gamer stickiness

• Adorable exaggerations of characters
• Visually attractive scenery and realistic

weather effects

Unique features to differentiate game from others on the market

Moon and stars in the sky Dawn in the main city Realistic snow view Adorable characters

Content development for the game has been completed and we are evaluating marketing proposals for the game’s launch

Team-based cooking game Team-based activities

2 Delivering Growth with New Inhouse-developed Games

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Duke of Mount Deer

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Continue to bring new games to market that complement our portfolio and attract different types and demographics of users

Legend of Ancient World (“LAW”) Game title Plan Development Progress Theme

New games put in operation in 2010

Immortal Faith (“IF”)

• 2D mystical

adventure game Da Hua Shui Hu (“DHSH”) Zhong Hua Ying Xiong (“ZHYX”)

• 2D turn-based,

cartoon-style game

• Plan to introduce

expansion pack in 2010Q4 to further stimulate interest from students and casual gamers

• Began open beta

testing on March 18

• Released the first

expansion pack in July

• Continue to work

with developer to launch new virtual in- game items and localize the game for hardcore domestic gamers

• Began open

beta testing on September 9

• 3D martial arts

game

• Plan to introduce

new content based on user feedback in the coming quarters

Upcoming games

• Under close beta

testing

• 2.5D fantasy game
• Plan to launch the

game in December

3 Diversify Game Portfolio through Licensing

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San Jie Qi Yuan (“SJQY”)

• 2D turn-based,

cartoon-style game

• Plan to launch the

game in 2011

• Began open

beta testing on May 20

• Under close beta

testing

• Continue to collect

user feedback and data to fine-tune the game

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Domestic market Export market Market for self-operations

Export Strategy

• We began open beta testing of Dragon Oath,

the English version of TLBB, in the United States in December 2009

• We began open beta testing of TLBB in the

United Kingdom in April 2010

• 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

• Changyou’s TLBB franchise has been licensed

to game operators in Vietnam, Taiwan, Hong Kong, Malaysia, Singapore and Thailand

• We will pursue strategic licensing opportunities

to selective countries to broaden our exposure to different online game markets and cultures

4 Gain International Exposure with Strategic Overseas Expansion

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Streamlined hiring and training practices strengthen foundation for long-term growth

• Added over 300 game engineers in the third

quarter of 2010

• Total employees were approximately 2,050 as of

Sept 30, 2010

• Focused on recruiting fresh graduates from

leading universities across China to enhance our R&D and game operation capabilities

• Plan to recruit another 100 marketing and offline

promotional staff to promote upcoming games

• Developed a number of new in-house training programs for engineers in the third quarter of 2010
• 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

Recruit top-notch talent Train and incentivize R&D engineers

5 Building Human Capital for Long-term Development

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1,000 2,000 3,000 Jun 2009A Dec 2009A Jun 2010A Sep 2010A Dec 2010E

Total Headcount

~2,200

SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

Key Investment Takeaways

• Winning formula: strong brand ad and online game businesses to

deliver sustainable growth through various economic cycles

• Sogou search business is gaining potential to compete and capture

market share

• Strong, debt-free balance sheets and healthy operating cash flows:

combined cash balance of $535 million with quarterly operating cash flow around $84 million

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SOHU.COM INC. (NASDAQ: SOHU) CHANGYOU.COM LIMITED (NASDAQ: CYOU)

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Thank You!