SOHU / CYOU Joint Presentation June 2009 SOHU.COM INC. (NASDAQ: SOHU) 1
Safe Harbor Statement This presentation contains forward-looking statements, including, among other things, a statement of Sohu s expectations regarding future profitability. Forwardlooking 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 first quarter of 2009 which could continue through the remainder of 2009, uncertain regulatory landscape in the People's Republic of China, fluctuations in Sohu's quarterly operating results, 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. 2
Two Core Businesses Sohu Portal - Mainstream Media Platform Changyou - Leading MMORPG Company Strong brand recognition User base of ~250m Advertising resources Industry expertise of 17173 - China's largest gaming portal Cross Fertilize Acquire new users, especially teenagers Contributes to revenue/ earnings/ cash flow Portal business: one of the most powerful mainstream media platforms in China Online game business conducted by CYOU: a leading company in the MMORPG industry The combination of the two businesses enables SOHU to deliver sustainable growth through various economic cycles 3
Successful IPO of Changyou.com (NASDAQ:CYOU) CYOU s IPO on 2 April 2009 was one of the most successful IPOs in US market in the past 12 months IPO provides CYOU the platform and resources to compete head to head with first tier players Sohu, as the majority shareholder, holds approx. 65.7% equity interest (on a fully-diluted basis) and approx. 80.8% voting power Sohu will be a long term beneficiary of Changyou s performance as a leading MMORPG company 4
Financial Track Record 2008 Q4 2009 Q1 Q-o-Q % 2008 Q1 Y-o-Y % 2009 Q2 Guidance Total revenues $121.6m $115.7m -5% $84.8m 36% $121m~125m Brand advertising Online games (CYOU) $45.0m $58.4m $39.1m $61.6m -13% 6% $33.2m $41.0m 18% 50% $42m~44m $63m~65m Operating margin (non-gaap)* 43% 45% N/A 40% N/A N/A Net income before NCI (non-gaap)* $59.0m $46.9m -21% $25.1m 87% $44m~46m Diluted EPS before NCI (non-gaap)* $1.50 $1.20-20% $0.64 88% $1.13~1.18 Net income after NCI (non-gaap) N/A N/A N/A N/A N/A $31m~33m Diluted EPS after NCI (non-gaap) N/A N/A N/A N/A N/A $0.80~0.85 Cash Balance ** $314m $373m 19% $160m 133% N/A Debt Balance $0 $0 N/A $0 N/A N/A Cash inflow from operations $61m $57m -7% $40m 4% N/A * Non-GAAP operating income, net income and diluted EPS exclude the effect of share-based compensation expense under SFAS123R, effective January 1, 2006. ** All are RMB and USD deposits in reputable banks. No derivative transactions. 5
Delivered by a Strong and Stable Team Title Years Title Years Dr. Charles Zhang Chief Executive Officer 13 Mr. Tao Wang Chief Executive Officer 5 Ms. Carol Yu 6 Mr. Alex Ho 5 Chief Financial Officer Chief Financial Officer Ms. Belinda Wang 10 Mr. Dewen Chen 5 Chief Marketing Officer Chief Operating Officer Mr. Xiaojian Hong 5 Chief Technology Officer The management team has been making all the right moves over the past 2+ years and, flush with confidence and strong execution capability. 6
Portal Business: Brand Advertising 7
China Online Advertising in the Weak Economy Online media continues to gain market share from traditional media Ongoing advertising budget shifts from offline to online Expansion of Internet penetration Increase of Internet media consumption rate Advertisers concentrate ad spending on leading Internet sites Benefit of online marketing in a restrained budgetary environment Efficiency and effectiveness Direct measure results 8
Performance by Industry Top 3 industries (auto, online games and real estate) contributed over 40% of brand advertising revenues in Q1 Auto: continues to be top-performing in 2009 New car models in 2009 are expected at the same level of 2008 Continuous shift from offline to online marketing FMCG: less affected by weak economy, continuous growth expected Real estate: Seeing recovery Revenue for Q2 is expected to double that of Q1 Online games: flattish, top game operators continue to promote their products, small operators are largely affected by weak economy 9
Ongoing Investments in Branding, Sales & Marketing, and Technology Paying off Continue to see year-on-year growth in brand ad revenues: Q109: 18% Q209: 0%~5% (guidance) 1H09: 8%~11% (includes Q2 guidance) ($ million) SOHU TENCENT FMCN (Internet Ad) SINA NTES Q108 33.2 20.6 49.6 47.8 11.0 Q109 39.1 21.4 47.2 43.2 6.0 Y-o-Y 18% 4% -5% -10% -45% Continue to see user growth even after the Olympics: For the remaining 4 months in 2008, UV jumped 70%~90% year-on-year In 2009, except for May (with Sichuan earthquake in 2008), UV grew by ~50% yearon-year 10
Branding Campaigns Browse Sohu, Know the World from March to September China Central Television commercials A series of interactive activities with Internet users to raise Sohu's public visibility Complete coverage throughout 1st to 4th tier Chinese cities 11
Step-up Efforts in Video Content High definition online video content on Sohu s TV channel Unique visitors to Sohu s TV channel increased rapidly High quality authorized video products are gaining popularity More Sohu advertisers are seeking ways to build Sohu s TV channel into overall online marketing plans 12
Technology and Product Development Steady investments in upgrading groundbreaking internet tools, such as Sohu Pinyin, Browser, search engine, and SNS product offerings Sogou Pinyin continues to expand market share due to superior product quality and effective marketing campaigns Installed by more than 60% of PCs in China and continues to strengthen the leading position Supported by a vast word database (including 1 billion Chinese names) to increase typing efficiency With ~17,000 Skins downloadable to keep the interface fresh-looking Mobile version well received by users 13
Resource Allocation Focused on Content and Technology Sohu Portal Employees % Content 1,384 56% Tech 663 27% Sales & CS 284 12% Corporate 114 5% Total 2,445 100% 14
Online Games: CYOU 15
Company Overview Business Leading online game developer and operator in China Focus on massively multi-player online role-playing games ( MMORPGs ) under an item-based revenue model Currently operates 2 games Tian Long Ba Bu ("TLBB ) and Blade Online ("BO") Close relationship with Sohu provides a unique competitive advantage Games pipeline: Duke of Mount Deer, Immortal Faith, Legend of the Ancient World Metrics For 1Q09, aggregate peak concurrent users ( PCU ) for both TLBB and BO reached 970,000 and aggregate active paying accounts ( APA ) reached 2.27 million TLBB For 1Q09, approximately 875,000 PCU and 2.11 million APA Key Financial Data (USD million, except for ratios) 1Q08 4Q08 1Q09 QoQ YoY 2Q09E Net revenues 41.0 58.4 61.6 6% 50% 63.0-65.0 Non-GAAP (1) Gross margin 92% 93% 94% N/A N/A Non-GAAP Operating margin 57% 60% 63% N/A N/A Non-GAAP Net income 17.2 30.3 34.4 13% 100% 37.0-38.0 Non-GAAP Net margin 42% 52% 56% N/A N/A Free cash flow (2) 26.0 26.5 61.3 131% 136% Employees (2) 690 total employees (260 R&D employees) as of March 31, 2009 Notes: (1) Excludes share-based compensation expenses (2) Free cash flow = Net cash provided by operating activities - capital expenditure 16
Company History and Key Milestones Stage 1 Entry into online game market Stage 2 In house development of TLBB Stage 3 Strategic expansion Sohu s online games business commenced operations Commercially launched BO Development of TLBB Commercially launched TLBB Numerous awards for TLBB Development of DMD and licensed 2 additional games from third parties Licensed TLBB to Taiwan, Vietnam, Hong Kong, Malaysia and Singapore Carve-out IPO MMORPGs 2000 2003 2004 2007 2008 2009 Sohu completed IPO on NASDAQ Acquired Acquired Launched Official Internet content service sponsor of Beijing 2008 Olympic Games Brand advertising Sponsored search Wireless VAS 17
Game Portfolio Overview Existing games Pipeline games Game title Tian Long Ba Bu ( TLBB ) Blade Online ( BO ) Duke of Mount Deer ( DMD ) Immortal Faith ( IF ) Legend of the Ancient World ( LAW ) Graphics 2.5D 2.5D 2.5D 2D 2.5D Theme Special features Martial arts Adapted from the popular Chinese novel Tian Long Ba Bu written by Louis Cha A combination of both martial arts-stylefighting and community-building among game players Martial-arts-style fighting Set to the backdrop of a Chinese myth First action / fighting online game developed in China Cartoon-style martial Chinese myths and arts folklores Adapted from the popular novel Duke of Mount Deer written by Louis Cha Martial arts and fantasy Set in ancient China at the beginning of Chinese civilization Targets a broader Emphasis on fighting Targets game audience than TLBB players in late-teens by using cartoon-style to late 20s who enjoy graphics and other reading fantasy features literature Developer (Game development time) Developed in house (31 months) Purchased with full development rights Developed in house Licensed from third Licensed from third (23 months) (1) party party Notes: (1) As of the date of this presentation. 18
Investment Highlights 1 Leadership position in China s growing online game market 2 Player feedback system and continual game enhancements ensure sustained long-term franchise 3 Advanced technology and game development platforms 4 Ongoing relationship with Sohu drives significant user traffic and improves games 5 Multi-pronged growth strategy 19
1 Leadership Position in China s Growing Online Game Market The Internet and Gaming Market: China s New Favorite Pastime China has surpassed the US as the largest Internet market and still growing (Million) 500 400 300 200 100 0 233.9 40.2 275.1 48.3 319.0 57.3 348.8 66.5 372.4 389.5 75.7 2007A 2008E 2009E 2010E 2011E 2012E Internet users in China Online game players in China 84.6 70% 60% 50% 40% 30% 20% 10% 0% Increasing paying player penetration 55.7% 56.1% 56.7% 57.3% 58.4% 59.6% 2007A 2008E 2009E 2010E 2011E 2012E Macro trends driving robust online game revenue growth (USD billion) 5.0 4.0 3.0 2.0 1.0 1.4 1.9 07A 12E CAGR: 19.9% 2.4 2.8 3.1 3.4 MMORPGs remain the game of choice for players in China 2007A online game revenues breakdown Casual games 24.0% 0.0 2007A 2008E 2009E 2010E 2011E 2012E China online game revenue Source: IDC s China Gaming End-User Survey 2008 and IDC s China Gaming 2008-2012 Forecast and Analysis. Large market opportunity for Changyou MMORPGs 76.0% 20
1 Leadership Position in China s Growing Online Game Market TLBB: One of the Most Popular Online Game Titles in China One of the most popular online game titles in China Key game features Developed in-house and adapted from the popular Chinese novel Tian Long Ba Bu written by Louis Cha Millions of copies of his novels have been sold in numerous languages Unique combination of two popular game styles - martial arts-style-fighting and community-building Fighting-based games tend to attract high participation in early stages due to exciting content Community-based games have a longer lifespan as relationships among users strengthen over time 2.5D graphics engine Balances graphics quality and PC hardware requirements to maximize game player base in China Numerous awards Best Self- Developed Online Games (1 st Place) ChinaJoy, 2008 Most Liked Online Games by Game Players (1 st Place) ChinaJoy, 2008 Most Popular Martial Arts Online Games Baidu.com s game player survey, 2008 3 rd Most Popular Online Game in China IDC, 2007 2 nd Most Popular Online Game among Locally-developed Online Games IDC, 2007 21
1 Leadership Position in China s Growing Online Game Market Building One of China s Most Powerful Gaming Brands China s online game market has continued to evolve franchise games that grow over a period of several years are a cornerstone of growth 1 2 3 Develop hit game Continue to grow user base Gradual increase in user monetization (Year 1-2) TLBB Success to date Revenues Quarterly PCU Quarterly APA Quarterly ARPU ( million) ( 000) ( 000) (RMB) 70 60 50 40 30 20 10 0 $10.9 3Q07 $56.6 1Q09 1,000 800 600 400 200 0 408 3Q07 875 1Q09 2,500 2,000 1,500 1,000 500 0 693 3Q07 2,110 1Q09 200 150 100 50 0 118 3Q07 176 1Q09 22
2 Collect game player s feedback through multiple channels Player Feedback System and Continual Game Enhancements Ensure Sustained Long-term Franchise The most popular online game portal in China Online surveys Online discussion forums Events for game players In-game instant messaging 24-hour telephone hotline Online and offline research Feedback center and customer service team 260 game development personnel Release regular game updates once a week and expansion packs every few months Product development team Application Data Collection Analysis and Integration Review game player s feedback Timely communicate game player s feedback to product development In-depth analysis of industry data Game operation team Continuous integration of player feedback 23
2 ( 000) 1,200 1,000 800 600 Player Feedback System and Continual Game Enhancements Ensure Sustained Long-term Franchise EP1: Immortal Instruction EP2: Pre-official Version EP3: New Year Version EP4: Desert Castle EP5: War Hero TLBB EP6: Fun in the Imperial Academy EP7: King of Kung Fu EP8: Final Battle EP9: Legend of the Shadow EP10 EP11 400 200 0 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 1Q09 2Q09 3Q09 4Q09 Notes: EP refers to expansion pack. Monthly PCU (May 2007 to Dec 2008)/ Quarterly PCU (2009 Q1) drives continual growth momentum in both PCU and ACU 24
2 ( 000) Player Feedback System and Continual Game Enhancements Ensure Sustained Long-term Franchise BO 100 90 EP1 (1) : Soldiers from Heaven EP2: King Yu s Amazing Ride EP3: Blade 2.0 80 70 Resurrection of Gan Qi(2) 60 50 40 30 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Quarterly PCU Notes: (1) EP refers to expansion pack. (2) Launched by the original developer. drives continual growth momentum in both PCU and ACU 25
3 Advanced Technology and Game Development Platforms Overview of game development platform Uniform online game development platform 2.5D graphics engine Proprietary crossnetworking technology Advanced data protection technology Anti-cheating / Anti-hacking technologies Future games developed using existing uniform platform as blueprint Exciting visuals with relatively low PC hardware requirements Network of middle-man servers Real-time preservation of game players data Protection of integrity of game players accounts and in-game experience Comprehensive game features Local appeal Reliable and stable operation Comprehensive platform ensures a high level of quality for future game offerings 26
4 Ongoing Relationship with Sohu Drives Significant User Traffic and Improves Games Unique relationship brings access to Sohu s 250 million registered users New audience directed to the portal Increased online presence and reach Ongoing relationship bringing mutual benefits Sohu ecosystem Pre-launch game review Strategic guidance Marketing and operational support Marketing across the Sohu Group and through Sohu s single-user ID system Games are reviewed and critiqued by 17173.com s experienced game editors prior to launch Exclusive access to this game development support Sohu remains as our majority shareholder - interest aligned with Changyou Benefits from strategic guidance from Sohu, a leader in China s Internet market for many years Use of Sohu s online payment platform PEAK Marketing services Direct links to TLBB and our other games TLBB ad on 17173.com 27
5 Multi-pronged Growth Strategy 1 Leverage success of TLBB and existing online game development platform to develop new MMORPGs 2 Expand and diversify MMORPG offerings through licensing 3 Continue to employ and improve integrated game player feedback and game enhancement system 4 Selectively expand into international markets 5 Focus on organic growth through building human capital and corporate culture 6 Pursue strategic acquisitions and alliance opportunities We believe that growth opportunities will allow Changyou to become one of the leading online game developers and operators globally 28
Financial Overview 29
Strong Operating and Financial Results Financial summary (USD million) 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09E FY07 FY08 Revenues 41.0 47.9 54.6 58.4 61.6 63.0-65.0 42.1 201.8 Growth 70.8% 16.8% 14.0% 7.0% 5.5% 395.3% 379.3% Gross profit 37.7 44.4 51.1 54.0 58.2 34.8 187.2 Gross margin 92.1% 92.7% 93.6% 92.5% 94.4% 82.6% 92.8% Operating profit 21.2 27.9 32.5 33.8 37.9 5.2 115.4 Operating margin 51.8% 58.2% 59.5% 58.0% 61.5% 12.3% 57.2% Net income 15.2 27.2 (1) 32.1 34.1 (2) 33.5 5.3 108.6 Net margin 37.1% 56.8% 58.8% 58.4% 54.4% 12.6% 53.8% (1,2) EBITDA (3) 6.1 118.0 EBITDA margin 14.5% 58.5% Free cash flow (4) 30.7 126.1 QoQ growth YoY growth Notes: (1) Excludes a non-recurring net tax adjustment amount of US$4.4 million. (2) Excludes a one-time withholding tax of US$5.0 million. (3) EBITDA = operating profit + depreciation + amortization. (4) Free cash flow = net cash provided by operating activities - capital expenditure. 30
Strong Operating and Financial Results (cont d) Solid revenue drivers Aggregate APA ( 000) (RMB) Average ARPU 2,500 2,000 (1) 2,270 2,006 1,980 1,875 1,807 1,758 200 150 142 192 (2) 176 177 195 179 1,500 1,243 1,514 100 85 114 1,000 836 500 347 50 0 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 Q109 QTD @ 2/24 Q209 QTD @ 5/24 0 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 Notes: (1) With a strong focus on expanding our user base, the Company further developed TLBB s free-of-charge playing features in 4Q 2008. As some of the previous low-spending users became non-paying users due to their satisfaction with the enhanced free-of-charge playing features, APA for 4Q 2008 decreased slightly. (2) ARPU for TLBB dropped in 2Q 2008 because the Company focused on enhancing players in-game experiences, converting non-paying game players into paying game players and reducing the launches of new virtual items, with the goal of extending the lifespan of the game. We intend to maintain our ARPU at a level that is attractive to new and existing users. 31
Summary Balance Sheet and Cash Flow Statements Key balance sheet items (USD million) Dec 2008 Mar 2009 Pro Forma (1) Cash and cash equivalents 134.4 195.0 195.0 Short term loan from Sohu 8.5 8.5 8.5 Dividend payable to Sohu -- -- 96.8 IPO proceeds -- -- 55.8 Net cash balance 125.9 186.5 145.5 (2) Notes: (1) Pro forma as adjusted for IPO, as of March 31, 2009. (2) Pro forma net cash balance of $160 million as of May 24, 2009. Key cash flow items (USD million) FY2007 FY2008 1Q09 Change in working capital 13.5 18.2 Net cash provided by operating activities 35.5 133.9 Capital expenditure (4.8) (7.8) Net cash provided by / (used in) financing activities (18.4) (7.3) Free cash flow (3) 30.7 126.1 61.3 Note (3) Free cash flow = Net cash provided by operating activities - capital expenditure. 32
Our Goal: To be the leading online game developer and operator globally Our Unique Formula for Success High-quality games Balanced growth in both user traffic and revenue Ongoing relationship with Sohu 33
Key Investment Takeaways Winning formula - bound to deliver sustainable growth through different economic cycles Strong, debt-free balance sheets - combined cash balance of over $500 million, with quarterly cash flow close to $60 million 34
Thank You! 35
Shareholding Structure of Changyou.com Share- holders Legally owned ADSs % No. of Changyou's ADSs used in computing Sohu's Basic EPS % No. of Changyou's ADSs used in computing Sohu's Diluted EPS % Notes Sohu 35,125,000 68.5% 38,125,000 74.4% 35,125,000 65.7% <1> Wang Tao 7,500,000 14.6% 4,500,000 8.8% 7,500,000 14% CYOU Employee 0.0% 0.0% 2,198,000 4.1% Public shareholders 8,625,000 16.8% 8,625,000 16.8% 8,625,000 16.1% <2> Total 51,250,000 100% 51,250,000 100% 53,448,000 100% <1>Sohu will include 65.7% of Changyou s net income in computing Sohu s diluted earnings per share when all existing restricted shares and restricted share units are fully vested. <2>Sohu s non-controlling interest in Changyou on a fully diluted basis is 34.3%. 36