Q4 2018 Sogou Inc Earnings Call

Feb 01, 2019 PM UTC 查看原文
SOGO.N - Sogou Inc
Q4 2018 Sogou Inc Earnings Call
Feb 01, 2019 / 12:30PM GMT 

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Corporate Participants
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   *  Jessie Zheng
      Sogou Inc. - IR Director
   *  Xiaochuan Wang
      Sogou Inc. - CEO & Director
   *  Yi Zhou
      Sogou Inc. - CFO

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Conference Call Participants
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   *  Alex C. Yao
      JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research
   *  Alicia Yap
      Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research
   *  Chong Liu
      Goldman Sachs Group Inc., Research Division - Associate
   *  Jialong Shi
      Nomura Securities Co. Ltd., Research Division - Head of China Internet & Media Research and VP
   *  Thomas Chong
      Crédit Suisse AG, Research Division - Regional Head of Internet
   *  Xueru Zhang
      86Research Limited - Analyst

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Presentation
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Operator   [1]
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 Ladies and gentlemen, thank you for standing by, and welcome to Sogou's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded, and if you have any objections, you may disconnect at this time.

 I would now like to turn the call over to your host today, Jessie Zheng, Investor Elections Director of Sogou. Please go ahead.

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 Jessie Zheng,  Sogou Inc. - IR Director   [2]
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 Hello, everyone, and thank you for joining Sogou's Fourth Quarter and Fiscal Year 2018 Earning's Conference Call.

 On the call, our CEO, Xiaochuan Wang; and our CFO, Joe Zhou, will give an overview of the operational and financial results.

 In line with our previous practice on the previous earnings conference call, Xiaochuan's prepared remarks will be made in Xiaochuan's voice using personalized speech synthesis and the style transfer learning technology, which was developed by the Sogou Voice Interaction Technology Center. Xiaochuan will join the Q&A portion of the call in person.

 Before management begins their prepared remarks, I would like to remind you of the company's safe harbor statement in connection with today's conference call. Except for the historical information contained here, the matters discussed in this conference call are forward-looking statements. These statements are based on current plans, estimates and the 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 statements.

 For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission.

 With that, I will now turn the call over to our CEO, Xiaochuan Wang.

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [3]
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 In 2018, we consistently executed our twin-engine strategy with Sogou Search and Sogou Mobile Keyboard, and increasingly integrated AI technology into our product and services to upgrade our core businesses. It has continuously improved our overall competitiveness.

 In Search, we made dedicated efforts to improve the quality of search results, enriched our differentiated contents and continued to upgrade search services to Q&A-based search. As China's second largest search engine, our core Search revenue continues to grow faster than the industry average.

 With Mobile Keyboard, we continued to expand our user base and improve the synergies with Sogou Search to enhance the Mobile Keyboard content and service distribution capabilities.

 By the end of December 2018, Sogou Mobile Keyboard has 430 million DAUs, an increase of 28% from the previous year. This reinforced its position as the third largest Chinese mobile app in terms of DAU, according to our iResearch.

 Now I'll provide an update on each of our 4 businesses, starting with Search. Over the past year, we have focused on delivering faster natural search results to our users to return highly relevant results that more accurately respond to user queries and significantly improve the quality of our search results on long-tail queries. We also enhanced our health care search services by adding and integrating content from authoritative health care institutions and experts both at home and abroad. We've established a health care content ecosystem that has become the industry benchmark, and with the ongoing integration of AI technology, Sogou Search continues to evolve into intelligent Q&A-based search.

 In health care search in the fourth quarter, we've significantly increased the Q&A content on our platform from prominent health care experts and physicians, and we became the first search engine to exclusively offer authoritative medical guidelines endorsed by China's National Health and Family Planning Commission. Driven by these efforts, 65% of total health care search results feature content from authoritative sources in the quarter, up from 50% a year ago. This figure is significantly higher than that of other industry players. As a result, the number of health care queries in Mobile Search has definitely risen with click-through rates continuing to climb as well. At the same time, we continued to upgrade our search services by optimizing our independently developed Q&A technology.

 During the fourth quarter, we reviewed 42% of search queries with the top direct answer results and achieved a 94% accuracy rate. We also introduced an open Q&A platform that provides access to quality content related to a number of sectors. This enhanced the content quality and the accuracy of top direct answer result. The click-through rate for top direct answer result increased to 35% from 32% in the previous quarter.

 Now let me talk about our growth collaboration with Tencent. Over the past year, on top of general search results, Sogou Search has provided additional search services for WeChat users, including vertical search functions such as Sogou Zhihu and Sogou wenwen, our user-editable encyclopedia and interactive Q&A platform, respectively. Sogou search results are also increasingly displayed on the WeChat search platform and the click-through rate has remained at a high level.

 Moving to Sogou Mobile Keyboard. Our core AI technologies, including voice, translation and conversation, has made the Sogou Mobile Keyboard to facilitate more intelligent user interaction and exploration. This has contributed to the rapid growth in our user base. By the end of December 2018, Sogou Mobile Keyboard received up to 540 million voice requests a day. With daily average voice requests up 69% from a year ago, this strengthened Sogou Mobile Keyboard's position as the largest voice app in China. With the multilingual translation function, Sogou Mobile Keyboard also enables users to overcome communication barriers for both spoken and text-based conversations. Daily translation requests increased by 60% from a year ago.

 Sogou's smart reply function, which leverages our conversation technology to provide a diverse range of automated personalized reply options also proved increasingly popular among users.

 The continuous evolution of our conversation technology enhances the facility of our Mobile Keyboard to predict user intent, thereby, improving the content recommendation function in user chat. This has gradually improved Sogou Mobile Keyboard's ability to distribute content and services that benefit users on a real-time basis.

 Turning to our smart hardware business, we continued to upgrade the segment by shifting the focus of our R&D and sales through AI-enabled hardware. In 2018, we launched a number of new hardware products that better utilize our core AI competencies. Our smart translation devices, such as the Sogou Travel Translator, Sogou's smart translation recorder, and Sogou Translator Pro were all well received by the market in line with our new strategy with accelerated product upgrade, expanded use cases and established core competencies such as off-line translation. This had led to a significant improvement in user awareness and recognition of our translation devices and other Sogou-branded hardware products.

 Moving on to our AI strategy. In 2018, we continued to implement our AI strategy of developing language-centric technologies that advance natural human-machine interaction as knowledge computing. Thanks to our achievements in both technology development and application, we have become a leader in several key areas, including voice, computer reason, machine translation and Q&A.

 On the technology front, through ongoing R&D investment, we continued to achieve technological breakthroughs and reinforce our competitive strength. In the fourth quarter, we introduced the innovative Sogou Vocational Avatar, which combines voice, image and other human-machine interaction technology, enabling machines to better imitate human behavior in certain professional areas.

 Our advanced technology also continues to be recognized in global competition. At the recent International Workshop on Spoken Language Translation, a top-tier international machine translation competition, Sogou ranked first in the Baseline Model test, ahead of Sogou's domestic and foreign peers, including iFlytek, Alibaba and the U.S. National Air Force Research Laboratory. This serves as a strong testament to Sogou's industry-leading competency in machine translation.

 In January 2019, we not only came in first in the Conversational Question Answering Challenge, but we also set a new record for all evaluation metrics. Leading AI players including Microsoft, AI2 and Stanford University all participated in the challenge. Our achievement further narrows the gap between human and machine performance. This demonstrates the potential of Sogou's advanced algorithm to drive the application of Q&A technology in search.

 We also continued to explore ways to apply our AI technology in multiple sectors and various commercial settings, laying a solid foundation for future growth.

 In November 2018, during the Fifth World Internet Conference in Wuzhen where we built the world's first AI news anchor in partnership with Xinhua News Agency. By leveraging our Sogou Vocational Avatar technology, the virtual anchor creates a lifelike resemblance of a professional human anchor. The AI news anchor, which is now in daily use, generated widespread interest in the media, education and other industries.

 In addition, our AI-powered simultaneous machine interpretation technology, which is the first to be used in commercial settings, was successfully utilized at number of conferences and international sporting events, including the China Open 2018, Longines Equestrian Beijing Masters and the FINA Swimming World Cup. With these amassed track record, we have set the benchmark for AI interpretation technology in the field of [machine learning]. We've also leveraged our intuitive Q&A capability to bring a new experience with health care and legal search users.

 Our smart diagnosis assistant imitates physician-patient conversation and provides free diagnosis and medical advice.

 Similarly, our Q&A robots embedded in Sogou Lawyer, our legal search service can analyze user responses through a series of question and then provide legal advice, a prediction of the case outcome and the references to similar cases.

 Now I'd like to share some thoughts on 2019. First, on the macro environment in China, we've observed that softness in the Chinese economy has already started to impact the online advertising industry in general from the fourth quarter of 2018. This will probably linger into 2019 with advertiser segment turning even more cautious. We've also seen many players in the Internet sector, especially in innovation areas, start to either scale back or simply become financially inviable.

 Sogou remains fundamentally solid with our high-quality assets, a large and highly engaged user base and an annual revenue size over $1.1 billion. At a time of increasing uncertainties, we see greater opportunities to drive solid business execution, improved organizational efficiency. We'll continue to invest in the leading-edge AI technology for the future. More specifically, we will continue to develop our twin growth engine, Search and Mobile Keyboard, to enhance the overall competitiveness of our products and services. For Search, we will integrate even more differentiated content into our Search ecosystem. We will also continue to optimize our Q&A technology to facilitate intelligent search.

 On Mobile Keyboard, we will continue to push the boundaries of product innovation to showcase the value of Mobile Keyboard as a content and service distribution platform. These initiatives will help increase the organic traffic generated from our large portfolio of products and services. We are committed to developing language-centric AI technologies, and we will continue to pursue technological breakthroughs and develop applications based on our core competencies, including voice, computer vision, machine translation and Q&A.

 In addition to empowering our core businesses across-the-board, we are also at the forefront of exploring new commercial use cases. Our advanced AI success will help Sogou to tap into new gateways, expand application scenarios and increase data capability. This will pave the way for Sogou's continuous development in the area of artificial intelligence.

 Now I will turn the call to Joe who will walk you through our financials.

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 Yi Zhou,  Sogou Inc. - CFO   [4]
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 Thank you, Xiaochuan. Hello, everyone. I'm pleased that we continued to outpace industry growth in our core Search business with Search revenues growing by 17% in constant currency. We were pleased to see increased contribution from organic traffic generated from our own portfolio of products and services. And we delivered $27 million of non-GAAP net income.

 Now I'll walk you through our financials in greater detail, starting with the fourth quarter. Please know that, unless otherwise noted, all monetary amounts that I discussed are in U.S. dollars.

 Also know that I will refer to some non-GAAP numbers, which exclude share-based compensation expenses. You can find the reconciliation of non-GAAP to GAAP measures in our earnings release.

 Total revenues in the first quarter were $298 million. On a constant-currency basis, total revenues in the first quarter would have been $311 million, a 12% increase year-over-year. Search and search-related revenues were $277 million. On a constant-currency basis, search and search-related revenues would have booked a 17% increase year-over-year. The increase was primarily due to growth in auction-based pay-for-click services.

 Auction-based pay-for-click services accounted for 85% of our search and search-related revenues compared to 84% in the corresponding period in 2017. The number of advertisers for our auction-based pay-for-click services was approximately 79,000. The average revenue per advertiser for auction-based pay-for-click services was $3,000.

 Other revenues were $21 million, a 32% decrease year-over-year. The decrease was primarily due to lower sales of smart hardware products due to our continued efforts to upgrade the smart hardware strategy.

 Cost of revenues was $186 million, a 39% increase year-over-year. Traffic acquisition cost, a primary driver of cost of revenues, was $150 million, a 69% increase year-over-year, representing 50% of total revenue compared to 32% in the corresponding period in 2017. The year-over-year increase was driven by price inflation as a result of increased competition. Both GAAP and non-GAAP gross profit were $112 million compared to $144 million in the corresponding period in 2017. Both GAAP and non-GAAP gross margin was 38% compared with 52% a year ago. The decrease primarily resulted from traffic acquisition cost outgrowing revenues.

 Total operating expenses were $99 million, a 19% decrease year-over-year.

 Research and development expenses were $48 million, a 21% decrease year-over-year, representing 16% of total revenues, compared to 22% in the corresponding period in 2017. The decrease was primarily due to a decrease in share-based compensation expenses.

 Sales and marketing expenses were $42 million, a 17% decrease year-over-year, representing 14% of total revenues, compared to 18% in the corresponding period in 2017. The decrease was primarily attributable to a decrease in marketing and promotional spending on some of the company's mobile products and share-based compensation expenses.

 G&A expenses were $9 million, a 19% decrease year-over-year, representing 3% of total revenues, compared to 4% in the corresponding period in 2017. The decrease was primarily due to a decrease in professional fees.

 Operating income was $12 million compared to $20 million in the corresponding period in 2017.

 Non-GAAP operating income was $13 million compared to $43 million in the corresponding period in 2017.

 Other income, net, was $10 million compared with $1 million in the corresponding period in 2017. The increase was primarily due to an increase in the gain from short-term investments.

 Income tax benefit was $4 million compared to income tax expense of $7 million in the corresponding quarter of 2017. The income tax benefit was primarily due to a decrease in taxable income and a larger tax benefit from the renewal of the Key National Software Enterprise status for one of the company's subsidiaries.

 Net income attributable to Sogou was $26 million, a 71% increase year-over-year. Now GAAP net income attributable to Sogou was $27 million, a 28% decrease year-over-year.

 Basic and the diluted earnings per ADS was $0.07. Non-GAAP basic and diluted earnings per ADS were also $0.07.

 As of December 31, 2018, we have cash and cash equivalents and short-term investments of $1 billion. Net operating cash outflow for the first quarter of 2018 was $21 million.

 Capital expenditures for the quarter were $22 million. That was our fourth quarter results.

 Now I'll briefly walk through the highlights of our full year results. Total revenues were $1.1 billion, a 24% increase from 2017. Search and the Search-related revenues were $1 billion, a 28% increase from 2017. Auction-based pay-for-click services accounted for 84% of search and search-related revenues, compared to 83% in 2017. Other revenues were $101 million, a 5% increase from 2017.

 Net income was $99 million, an increase of 20% from 2017. Non-GAAP net income was $113 million, an increase of 7% from 2017.

 Basic and diluted earnings per ADS were $0.25. Noncash basic and the diluted earnings per ADS were $0.29.

 Looking ahead to 2019, given the tougher environment, we will continue to enhance the overall competitiveness of our business while prudently managing our costs and expenses.

 For core Search, we will continue to expand the contribution of our organic traffic and become more selective in traffic acquisition. This strategy will impact the quarter's revenue growth in the near term, but will benefit the sustainable growth of our Search business over the long term as we continuously increase organic traffic and improve monetization. And with greater contribution from organic channels, we expect that TAC-to-revenue ratio will gradually stabilize in 2019.

 For the smart hardware business, we will continue to execute on our upgraded strategy. With more AI-enabled hardware products in the pipeline, we expect our smart hardware business will regain momentum in 2019.

 And finally, turning to guidance. Looking to the first quarter of 2019, we expect the total revenues to be in the range of $231 million to $241 million. This translates into a 1% to 5% increase year-over-year in RMB terms. The guidance takes into account, firstly, the slower growth in quarter's revenues, primarily due to the macro uncertainties, along with our decision to be more selective in traffic acquisition; and secondly, the decrease in other revenues due to the ongoing upgrade of our smart hardware business. Please note that for the first quarter 2019 guidance, we have assumed the exchange rate of RMB 6.9 to the dollar as compared with the actual exchange rate of approximately RMB 6.36 to the dollar for the first quarter of 2018 and RMB 6.91 to the dollar for the fourth quarter of 2018.

 That concludes our prepared remarks.

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 Jessie Zheng,  Sogou Inc. - IR Director   [5]
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 Thank you, Joe. Operator, we'd now like to open the call for questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) And the first question comes from Thomas Chong with Crédit Suisse.

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 Thomas Chong,  Crédit Suisse AG, Research Division - Regional Head of Internet   [2]
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 Regarding the organic traffic strategy, can management provide us some more details about how we are going to have more organic traffic from different perspective like our synergies with our keyboard, Sogou Hao as well as the browsers. Can management go into more details about how we achieve that? And my second question is about the external traffic that we are going to rely less on them in future. Can management talk about the pricing for external traffic in 2019 versus 2018?

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [3]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [4]
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 Okay, so on our organic traffic strategy, I think in 2018, we're improving search quality. We had been able to grow the user base of our browser and app and then drive our organic traffic from these 2 products. We've seen a nearly 40% to 50% growth in traffic from this organic channel. And on mobile keyboard, we have made solid progress in integrating, creating more synergies with search, and we are going to continue to execute on creating greater synergies from mobile keyboard to drive organic traffic for Sogou.

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [5]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [6]
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 I'd like to add one point that in the past, we have been driving our organic traffic from mobile keyboard through our search suggestion function, actually title of -- one of our major competitors have copied this function to use in their product. Obviously, that search suggestion is a very effective way to drive our organic traffic. And this year, we made additional progress in more innovative ways to drive organic traffic such as content and service recommendation as a solution to it.

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 Yi Zhou,  Sogou Inc. - CFO   [7]
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 Okay, let me add one point on that. Regarding the increase of our organic traffic, so I'll give you some numbers. So in Q4 '18, organic traffic contributed 27% of our total traffic comparing to a year ago, 22% contribution. So that's a substantial increase. And with our strategy to expand the contribution, we target to increase the contribution further to around 30% by the end of 2019. And for the second question regarding the price inflation for 2019, so we're still in negotiation with those handset makers. According to current status, comparing to the price as of Q4 '18, the price in 2019 roughly will increase around 20%. That's substantially lower increase comparing to what happened in Q1 '18 comparing to the price of Q4 '17. So together with our strategy to expand our contribution from organic traffic and be more selective on traffic acquisition and the continuing improvement on monetization, we expect the TAC-to-revenue ratio in 2019 will stabilize comparing to that of 2018.

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Operator   [8]
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 And the next question comes from Alex Yao with JPMorgan.

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 Alex C. Yao,  JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research   [9]
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 I have one question for Xiaochuan. I'd be delighted to hear your thoughts on the recent trends that the general search engines in China start to diverting more traffic to its own content vehicle. I think there has been a lot of debates in the recent media reports about Baidu diverting more and more traffic to Baixar Hao as opposed to sending traffic to third-party websites. I think that you guys are also building your own Sogou Hao, which essentially is a content vehicle that created by third-party content contributors that reside on your server. Why are you guys or the general search engine industry moving away from the traditional distributing traffic to the third-party websites kind of the distribution model and adopt this Baixar Hao or Sogou Hao approach.

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 Jessie Zheng,  Sogou Inc. - IR Director   [10]
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 Oh, okay. Just let me translate for Xiaochuan. (foreign language)

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [11]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [12]
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 So to answer your question in a search engine start to direct to its own content ecosystem instead of the third-party websites because in this way, we can improve and ensure the content quality and the follow-up TACs like a better ranking system for the content and a better advertisement-matching system. So in general, this is leveraged to optimize the search result. And on the other hand, using our own content ecosystem is beneficial for us to develop new suite businesses.

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 Alex C. Yao,  JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research   [13]
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 (foreign language) So I have a follow-up question on the monetization from the traffic redistribution in chasm back to the search engine's own content ecosystem. How should we think about the incremental revenue from this traffic distribution in chasm? Does it create additional inventory for keyword search that doesn't have commercial value? I stop here.

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [14]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [15]
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 In industry practice, actually we do want to see that with this traffic inflow, we can increase the opportunity for a distinct edge. But since Sogou Hao is still at a fairly early stage of development, it's very hard for us to share additional metrics.

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Operator   [16]
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 And the next question comes from Bill Liu with Goldman Sachs.

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 Chong Liu,  Goldman Sachs Group Inc., Research Division - Associate   [17]
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 I have 2 questions. First one just to clarify, when Joe said that the TAC may increase 20%, may I clarify that doesn't mean that in Q1 '19, we are looking at $180 million at traffic acquisition cost, which is 20% sequentially increased? Or are you looking at something like $134 million, which is 20% year-on-year increase from Q1? So that's the first question. And the second question is about our collaboration with WeChat search. We know that recently in the event, WeChat Open Class, WeChat search actually did a presentation about brand search product. So I wonder, does that product have any collaboration with our offering? Or is this a independent team from our company? Or is this a collaboration between WeChat group and Sogou?

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 Yi Zhou,  Sogou Inc. - CFO   [18]
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 Yes, okay. I'll take the first one. There are couple of factors affect the absolute amount of TAC. So number one, the pricing, as I mentioned, increased 20% comparing to Q4 '18. And second, the volume. And third, if you calculate the amount in RMB and in U.S. dollar, it's quite different because there are relatively roughly 8% exchange rate difference year-over-year for Q1 '19. So in short, that answer is considering all of this, if you compare the RMB amount of TAC, roughly it will increase 20% year-over-year. If you calculate the amount in U.S. dollar, so a roughly 12% year-over-year growth for Q1. So it's a mixed result from the price information and the volume change.

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [19]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [20]
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 On the WeChat question, the brand search you mentioned has nothing to do with Sogou. I think it's independently developed by the WeChat team. There is no change in our collaboration with WeChat, which our team is still focusing on optimizing the search functionality and that there is no imminent monetization plan.

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Operator   [21]
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 And the next question comes from Xueru Zhang of 86Research.

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 Xueru Zhang,  86Research Limited - Analyst   [22]
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 So my first question is just wondering what's your thoughts on China's search ad market growth going into 2019 on the search macro environment, actually a tougher one you mentioned in the prepared remarks. And how should we think about Sogou's growth profile? What's our major growth driver looking ahead? If you can comment more quantitatively, that would be helpful.

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [23]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [24]
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 For the search industry in general, we expect the top line for search, our industry should be around 10% growth this year. And the traffic should be lower at single-digit growth. And Sogou continue -- will continue to outpace the industry growth in terms of both revenue and traffic.

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 Xiaochuan Wang,  Sogou Inc. - CEO & Director   [25]
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 (foreign language)

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 Jessie Zheng,  Sogou Inc. - IR Director   [26]
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 So this year, as we mentioned earlier, we will continue focusing on increasing our sales-generated traffic from our own portfolio of product services, including browser, app and especially from mobile keyboard. And as I mentioned earlier, we have launched the newer functionalities from our keyboard to more effectively generate organic traffic.

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Operator   [27]
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 (Operator Instructions) And the next question comes from Alicia Yap with Citigroup.

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 Alicia Yap,  Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research   [28]
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 I have 2 quick questions. Number one is how much of the slower guidance you provide for the first quarter is related to the macro weakness, and how much is related to the scale back of the traffic investment? So if we assume you don't scale back on the user acquisition spend, what could be the growth rate purely from the macro impact? Then second is also related to the macro and advertising sentiment. Could you elaborate more detail as related to Sogou, which industry vertical is more impacted by the macro weakness? Isn't that the search should be a better ROI and hence, more resilient in this macro downturn? So any colors will be helpful.

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 Yi Zhou,  Sogou Inc. - CFO   [29]
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 Okay, so regarding the guidance, first for total revenue, in RMB terms, it implies a 1% to 5% year-over-year growth. So among that for search-related revenues, the growth rate is from mid- to high single-digit, and for other revenues, it implies a decrease year-over-year. So for search-related revenues, if you want to see the slowdown between micro factors and our decision to be more selective on traffic acquisition, so roughly I can put it this way. So previously, we expect the industry to have a, say, 10% to 15% annual growth coming from the search advertising revenue. And currently, our view is that sales rate will slow down to less than 10%. So roughly 5% -- 5 basis points impact from the macro environment. And then for the rise, that's roughly -- I mean for the rise, the majority is from our decision to expand organic traffic and be more selective on the traffic acquisition. So maybe you can take Q4 '18 as a benchmark, say, as we mentioned during the call for search-related revenue, in RMB terms, the year-over-year growth rate was 17%. So from that, you can physically deduct 5% as the macro impact. And so after that, for the difference between that and 5% to 10% growth rate for Q1 '19 for search-related revenue, that roughly is the impact from the traffic acquisition. And for those industries, actually we didn't see any particular sectors to be material impact by the macro environment. Instead, we see the macro environment impact our loss industries. But of course, each different industry have its own different growth rate.

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Operator   [30]
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 (Operator Instructions) And the next question will come from Jialong Shi with Nomura.

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 Jialong Shi,  Nomura Securities Co. Ltd., Research Division - Head of China Internet & Media Research and VP   [31]
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 I have 2 questions here. My first question is always about the traffic acquisition cost or TAC. So I just wonder, is that from your search engine competitors? Did you see any other competitors bidding fiercely for external traffic or smartphone pre-installation against you guys? And my second question is also a follow-up on the advertising trend in 1Q. I think Joe Zhou mentioned, macro had a negative impact on your market in 1Q. And so I just wonder if advertisers are beginning to become cautious or are beginning to cut back your advertising budget heading into 1Q. So I just wonder in what stage are they now? Are they begin to -- are they beginning to cut their ad budget across all the media, including both brand ad budget and the performance-based ad budget? Or they are still cutting the ad budget price selectively?

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 Yi Zhou,  Sogou Inc. - CFO   [32]
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 Okay, so for the TAC question, based on our current negotiation with handset makers, the price roughly increased 20% comparing to the price in Q4 '18. So I think that's somehow not determined by ourself. I think that's already a result from the competition from our competitors. So that means all the competitors are not as crazy for the traffic acquisition as last year by offering a very basic price. So I think everyone comes down a lot and tried to balance the growth in revenue growth with the bottom line. For Q1 ad trend, from the Q4, we already started to see the impacts from the macro environment. So if you're comparing to the first half, the revenue growth rate slowed down a little bit. So in Q1 '19, we expect the impact will be deeper. So for the budget allocation, actually we don't have such statistics how they allocate their ad budget, but roughly our feeling is that they will first cut those, say, brand advertising. And after that, they work hard. If they want to cut ad dollars, work hard, so those pay-for-click kind of advertising. And the amount pay-for-performance, so amount pay-for-performance advertising, I think search with relatively high ROI is a better choice. So maybe it's the last one they will cut their budget.

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Operator   [33]
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 And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.

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 Jessie Zheng,  Sogou Inc. - IR Director   [34]
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 Thank you, everyone, for joining today's call and for your continued support for Sogou. We look forward to speaking to you again in the future.

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Operator   [35]
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 Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.




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