Tencent-Backed Sogou Sees Profitability as It Mulls IPO

Sogou Inc., a Chinese Internet search-engine operator backed by Tencent Holdings Ltd., predicts it will turn profitable as early as the second quarter helping it to consider an initial public offering.

Sogou plans an IPO in about three years that would value the company in the billions of dollars, Chief Executive Officer Wang Xiaochuan said in an interview April 30. The company’s tie-up with Tencent, which took a 36.5 percent stake in September, has helped boost traffic and advertising, he said.

Sogou is competing against Chinese search giant Baidu Inc. for China’s 618 million Internet users who turn to the Web for information and entertainment content. Tencent, Asia’s largest Internet company, merged its search business called Soso into Sogou and has also been redirecting search traffic from its QQ instant messaging platforms, said Wang.

“An IPO will help our capital structure become more transparent,” said Wang. “Our tie-up with Tencent has been very successful and we’ve seen improvement in our traffic and monetization capabilities.”

Wang declined to be more specific about the destination and valuation of the possible IPO.

Revenue Growth

Sogou, which is controlled by Nasdaq-listed Sohu.com Inc., expects second quarter revenue to climb as much as 80 percent to $90 million. The search engine operator’s revenue rose 78 percent to $70 million in the three months ended March, parent Sohu reported April 28.

Tencent paid $448 million for the stake in Sogou with an option to increase the investment to 40 percent.

Wang said Sogou has been absorbing employees from Tencent’s search engine Soso, including adding about 300 programmers. Sogou’s staff number has increased to about 2,200 from 1,400 to 1,600 people the same time last year, he said.

The company plans to create more channels for people to use its search function. For example, when users of Tencent’s QQ chat on the PC service, the platform will automatically add links to addresses, movies and books, redirecting users to its search services. The companies will need to evaluate the experiment before expanding cooperation into other platforms such as mobile, said Wang.

Sogou has more than 468 million users on its PC platform and its language input mobile app Pinyin has more than 200 million monthly active users, Wang said on an earnings call this week. The CEO said he travels to Tencent’s headquarters in Shenzhen about twice a month to discuss strategies for cooperation with QQ and Tencent’s messaging app WeChat.

Search Share

Sogou accounted for 5.1 percent of search engine queries in China in the fourth quarter, according to data compiled by Bloomberg Industries. Baidu had a 76.9 percent share, while Qihoo 360 Technology Co. had 15.1 percent.

Alibaba Group Holding Ltd., operator of China’s largest e-commerce website, is also planning an IPO and intends to enter the market for mobile search services. Last month the company announced a mobile search venture with UCWeb Inc.

The number of people who accessed the Internet via mobile devices reached 500 million in China by the end of December, according to the China Internet Network Information Center.

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