Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Shanda Interactive Entertainment Limited (NASDAQ:SNDA)

Q3 2008 Earnings Call Transcript

December 1, 2008, 8:00 pm ET

Executives

Maggie Yun Zhou – IR Manager

Tianqiao Chen – CEO

Alan Qunzhao Tan – President and Chief Technology Officer

Grace Wu – CFO

Analysts

Dick Wei – JP Morgan

Eddie Leung – Merrill Lynch

Alicia Yap – Citigroup

Paul Keung – Oppenheimer

Tian Hou – Pali Capital

Ming Zhao – SIG

Tony Gikas – Piper Jaffray

Lisa Yan [ph] – Morgan Stanley

Operator

Welcome to Shanda Interactive Entertainment 2008 third quarter earnings conference call. The conference call will be recorded and available for replay in its entirety. A copy of Shanda’s third quarter 2008 announcement can be found and downloaded from its corporate website, www.snda.com. (Operator instructions) I would now like to turn the call over to Ms. Maggie Zhou, Shanda’s IR Manager. Please proceed, ma’am.

Maggie Yun Zhou

Thank you. Good morning and good evening to all participants. On behalf of Shanda, I would like to welcome everyone to our third quarter 2008 results conference call. Here with us today are Mr. Tianqiao Chen, our Chairman and CEO; Mr. Alan Qunzhao Tan, our President and Chief Technology Officer; and Ms. Grace Wu, our Chief Financial Officer.

Before we begin, I would also like to remind you that management’s comments during the call will include forward-looking statements that are based on our current expectations and are intended to qualify for the Safe Harbor from liability for such statements established in the US Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact during the conference call are forward-looking statements, which are subject to significant risks and uncertainties.

Actual results may differ materially from those contained in the forward-looking statements. So please do take a minute to read the Safe Harbor statements in Shanda Interactive Entertainment’s third quarter 2008 press release. In addition, please note for discussion purposes, all numbers were translated into US dollars based on the exchange rate of RMB 6.8183 per US dollar.

Now with that, I would like to turn the call over to our Chairman and CEO, Mr. Tianqiao Chen.

Tianqiao Chen

Thank you, Maggie. Despite the global financial turmoil, Shanda achieved another record result in the third quarter of 2008. Total net revenue increased 42.7% year-over-year and 11.8% quarter-over-quarter to $137.3 million, exceeding the company’s guidance of 6% to 9% quarter-over-quarter growth. Operating profit increased 50% year-over-year and 13.7% quarter-over-quarter to $56 million, and the net income increased 41.1% year-over-year and 20.5% quarter-over-quarter to $49.4 million.

We believe the online entertainment industry in China will remain resilient in the face of economic downturn, as it provides an expansive entertainment – inexpensive entertainment solutions for all user base. Shanda is fully committed to continue its investment and innovation by providing customers and partners with diversified, high quality content platforms and value-added service via our superior service infrastructure. We view the current economic slowdown as an opportunity to further expand in preparation for the next stage of growth.

As a result, we pledge to not reduce the compensation or benefits of our employees. Additionally, Shanda group just initiated a large scale campus recruiting program across China. We are working relentlessly to enhance our operation platform while including up the most diversified content offerings in the industry through Shanda Games and Shanda Literature. In addition, Shanda Online serves as the service infrastructure platform for interactive entertainment content to bring the best quality of service to our users.

Shanda Online has built up a nationwide distribution channel with over 320,000 distribution points, nearly 100,000 Internet café. Its highly regarded online payment system now have been nearly 40% of its sales coming from direct payment transactions. Shanda Online also specializes in data processing online security, technical support and customer relationship management system.

We will continue to invest in Shanda Online service infrastructure platform to better service our users and partners and expand our services to non-affiliate operators. During the third quarter, our commitment in technology advancement continued to bear fruits. Our innovation solutions significantly enhanced our server efficiency, which allowed us to support more games with lower number of servers.

Furthermore, our industry leadership was recognized with a total of 14 national awards since July, including Award for Corporate Social Responsibility, and Award for Innovation and Breakthrough received at the China International Digital Content Expo, and the World Intellectual Property Organization Award for Outstanding Inventors. These orders demonstrate Shanda’s relentless commitment to innovation as well as its significant contribution to the industry and society.

In summary, we believe our investment in talents and services and our 3C strategy will continue to help us capture future opportunities in the industry and pave the way for long-term sustainable growth. Now I would turn the call over to Alan, our President and Chief Technology Officer.

Alan Qunzhao Tan

Thanks, Tianqiao. And welcome, everyone. First, I would like to take a few minutes to review our online game business. In the third quarter of 2008, online game revenues grew 40.7% year-over-year and 11.1% quarter-on-quarter to another record high of $130.8 million, primarily driven by our successful execution of portfolio strategy, the release of expansion packs and enhanced thickness of user communities [ph].

During the third quarter, we released a total of 42 expansion packs, together with a series of online and offline promotions organized during the summer holidays to enhance user interaction. Also in the third quarter, we launched a full commercial service for two MMORPG titles namely (inaudible) and the Tales of Dragon. And the better half team [ph] for two MMORPGs and the two casual games, all were well received by our users.

As a result, net revenues from our MMORPGs in the third quarter rose 11% quarter-over-quarter and 39.9% year-over-year to $113.2 million, contributed by both growth in existing titles as well as new titles mentioned above. Active paying accounts for MMORPGs grew 22.4% quarter-over-quarter to a record 5.2 million, contributed from both higher conversion from players to paying customers and new users attracted. Since new paying accounts temporarily start at a lower spending level, ARPU for MMORPGs were diluted by 9.3% quarter-over-quarter to 49.6 RMB in Q3 2008.

Revenues from casual games increased 11.3% quarter-over-quarter and 45.7% year-over-year to $17.6 million, some of these [ph] by seasonal strength. Active paying accounts for casual games rose 7.4% quarter-over-quarter to 1.8 million, and ARPU for casual games increased 3.7% sequentially to 22.6 RMB for the third quarter.

Looking into the fourth quarter, we are pleased to report new progress in Shanda Games multi-channel sourcing strategy (inaudible) to which have acquired global license rights, we will start open beta testing in China this month. Company of Heroes Online, which we co-develop with THQ, is expected to commence closed beta testing by the end of this year. We also plan to start a closed beta testing for Creation of the Gods also and (inaudible).

In addition, Shanda Games allows the investment in two game studios, (inaudible) both are promising web game developers and operators. Shanda first (inaudible) in China. Our turnkey online game studios (inaudible) for this unique online networking opportunity to share and discuss new issues and the strategic perspective confronting business. At the same time, our dedication in technology continues to pay off.

We have recently implemented an innovative solution based on virtualization that significantly improves our efficiency. This technology was piloted in two games and operations in Q3. And we plan to implement this technology for most of our games in future. All these demonstrate Shanda’s openness and commitment to encourage and to boost [ph] the creativity and innovation in the interactive entertainment industry.

Overall, Shanda Games now has in operation 13 MMORPGs and 10 casual games. Our pipeline in the next 12 to 18 months include 10 MMORPGs and six casual games. Together with our number one (inaudible) chess and ball game platforms (inaudible). We aim to provide a rich, +significant content in the market.

Furthermore, as Shanda strives to deliver the most diversified content offering for our users, our online literature business continues to flourish. During the third quarter, Shanda Literature in partnership with Chinese Writers Association initiated a well-received nationwide online campaign to launch literary works of highly regarded writers online and to further expand its writers' pool.

In the third quarter, SDL (inaudible) literature website combined to generate over 200 million average daily page views, updated over 27 million Chinese characters daily. They have accomplished over 29 billion Chinese characters. All these encouraging results further strengthen SDL’s leading position in the online literature industry. I’m proud of (inaudible) received numerous industry recognitions for our efforts. In the third quarter, four of Shanda Games titles were awarded at China Joy, including the most favorite title among players and the best of web game, while our Shanda Literature was awarded as Best Literature Website in 2008 by General Administration of Press and Publication. Shanda is committed to continue to offer fine and high quality entertainment experience to our users.

Now I would like to turn the call over to our Chief Financial Officer, Ms. Grace Wu.

Grace Wu

Thank you, Alan. During the third quarter, both our net revenues and operating income achieved record highs of $137.3 million and $56 million respectively, representing 11.8% and 13.7% quarter-over-quarter growth. Other revenues in Q3 increased 28.7% quarter-over-quarter and 98.6% year-over-year on business trends to $5 million.

Gross profit was $100.2 million in the third quarter, that compared with $89.5 million in the second quarter and $66.6 million for the same period in 2007. Gross margin for the third quarter of 2008 was 73% compared with 72.8% in the second quarter and 69.2% a year ago. Income from operations was $66 million, up 13.7% quarter-over-quarter and 50% year-over-year. Operating margin remained relatively stable in Q3 at 40.7% versus 40.1% in Q2 and compared with 38.7% in Q3 ’07.

Product development expenses decreased 4% quarter-over-quarter to $9.5 million in the third quarter, primarily due to decrease in R&D expenses based in Korean Won. Sales and marketing expenses increased 11.4% sequentially. This increase in Q3 was mainly due to higher marketing and promotional expenses related to China Joy and summer holidays.

G&A expenses increased 16.6% quarter-over-quarter to $20.1 million, primarily reflecting changes in position expenses, staff-related salary and warfare expenses, and business tax for inter-company transactions. Share based compensation was $1.7 million in the third quarter compared with $2.2 million in the second quarter of 2008 and $2.2 million in the same period last year.

Net non-operating income for the third quarter was $7.2 million compared with $0.8 million in the second quarter of ’08 and $4.8 million in the third quarter of 2007. The quarter-over-quarter difference mainly reflected $6 million of government financial incentives receipt in the third quarter compared with $0.8 million receipt in Q2 and $2.2 million receipt in third quarter of 2007. Our receipt of government financial incentives is subject to a time lags and government administrative practices. We expect we will continue to receive government subsidies going forward.

Income tax expenses for the third quarter was $13.7 million compared with $9.0 million in Q2 ’08 and $7.0 million in Q3 ’07. The effective tax rate was 21.5% in Q3 compared with 18% in Q2 and 16.4% in Q3 ’07. The increase in effective income tax rate was mainly due to a periodical assessment of the tax benefits from those temporary deductible differences at our subsidiaries, which resulted in an increase of approximately $2 million income tax expense in the third quarter of 2008.

Effective January 1, 2008, the Chinese government adopted a new income tax law that unified the enterprise income tax payable by domestic and foreign investor enterprises at 25%. The company subsidiaries at VIEs are currently in the process of applying for the new and high technology enterprises tax treatment pursuant to the working guidelines for assessment of new high-technology enterprises issued by the Chinese tax authorities on July 8, 2008.

The new law provides a five-year transition period from its effective date for those enterprise, which were established before the promulgation date of the new tax law and which were entitled to a preferential tax treatment such as a reduced tax rate or a tax holiday. The company expects to reverse any excess tax provisions in subsequent periods as and when the subsidiaries and VIEs are deemed to qualify as high and new technology enterprises or are entitled to other tax incentives, which the company expects will be partially offset by the expected reduction to the company’s deferred tax assets recorded at a lower preferential tax rate.

Net income in Q3 ‘08 was $49.4 million compared with $41.0 million in Q2 and $35.0 million a year ago. Diluted earnings per ADS were $0.68 in Q3 ‘08 compared with $0.56 in Q2 ‘08 and $0.48 in Q3 ‘07. Non-GAAP net income, which excludes share-based compensation, was $51.1 million in Q3 ‘08 compared with $43.3 million in Q2 ‘08 and $37.2 million in Q3 ‘07. Non-GAAP diluted earnings per ADS were $0.70 in Q3 ’08 compared with $0.58 in Q2 and $0.50 in Q3 ‘07.

For the first nine months ended September 30, 2008, consolidated net revenues totaled $374.6 million to 45.7% year-over-year growth. Operating income amounted $150.9 million, up 42.3% year-over-year and net income totaled $132.8 million. Diluted earnings per ADS were $1.82. Non-GAAP earnings per ADS were $1.90.

Turning to our balance sheet, cash and cash equivalents as of September 30th totaled $458.3 million. Including short-term investment and marketable securities, it will be $587.5 million. Deferred revenues increased 13.5% quarter-over-quarter to $71 million in the third quarter of 2008, mainly attributed to the increased prepaid card sales ahead of China’s national holiday in October.

On September 8, 2008, the company’s Board authorized a share repurchase program of up to $200 million of Shanda’s outstanding ADSS for a period of 12 months. On September 16, 2008, the company closed the sale of an aggregated $175 million of convertible senior notes due 2011. Proceeds from the converted offering were to fund and accelerate share buyback program. As of September 30, 2008, the company had repurchased around 3.3 million ADSS.

Before I turn to Q4 ‘08 guidance, we caution that we cannot predict the future exchange rate of Renminbi nor Korean Won against the US dollar and therefore cannot accurately or with any degree of certainty estimate the effect of any change in exchange rates on our financial results.

Accordingly, in giving our financial targets below, we assume no change in exchange rate in Q4 ’08. Our actual results could differ from our financial targets for various reasons, as stated in the Safe Harbor notice in the press release, including changes in the exchange rate. Now based on the company’s current operations, we expect our consolidated net revenues for the fourth quarter of 2008 to increase by a rate in the range of 5% to 8% quarter-over-quarter, our operating margin for the fourth quarter to be similar to that of Q3 ‘08.

That concludes my financial discussion. I will now turn the call back to Maggie.

Maggie Yun Zhou

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Dick Wei with JP Morgan. Please proceed with your question.

Dick Wei – JP Morgan

Hi, morning. Congrats on a good quarter. Just two questions. First of all, can you give some update on Changchun Online and also Aon [ph] regarding the game line schedule and also the business model? And then secondly, I guess the management commented that the R&D expense is going to go up, or is it going to be more like flattish given the macro situation? In particular, maybe if I can get some sense or is it still early stage [ph] to acquire a game team that would be great. Thanks.

Tianqiao Chen

(Interpreted) To answer your first question on Changchun Online, currently it’s progressing very well and we are continuing to improving the games to enhance the user experience based on the feedback on closed beta testing. And we will announce the open beta testing timing when it’s appropriate. Our goal is always to bringing our users the best entertainment experience online. For Aon, we are planning to initiate a small-scale closed beta testing in China to (inaudible) to further enhance it again. And based on the closed beta testing results, we will provide a better plan for the open beta testing timing. And to your – sorry, Dick, may I – would you please repeat your second question?

Dick Wei – JP Morgan

Yes?

Grace Wu

Hi, Dick. This is Grace. I think I’ve somehow missed part of your second question. So if you can repeat that, that would be great.

Dick Wei – JP Morgan

Yes, sure. It’s just – I wanted to – the R&D expense trend going forward. I think in the remarks you mentioned that your current salary is – R&D salary is not going to be touched. So I just want to see if you are going to –?

Grace Wu

I’m sorry?

Dick Wei – JP Morgan

Okay, yes. So – the R&D expense trend, if you can comment on that. And also regarding to buying a game team or acquiring game team, does it get shipped at this stage or is it actually still at a relatively high price?

Grace Wu

Actually we are very proud of our multi-channel sourcing strategy for our online games. That includes, of course, in-house development, licensing, co-development, and investment. As Alan mentioned earlier during his discussion, we are very proud to announce the two latest investment in two promising web game studios just recently with Aon and Tai Chi. And we continue to look for good opportunity to enhance our R&D talents. And we are also committed to continue to invest in talents and be open-minded with different studios. So the R&D expense trend, as you mentioned earlier, would be a mix of combination of all, including our in-house development efforts as well as the investment efforts. I think it will probably be in the range of similar percentage of revenues to the – for the first nine months of 2008. But from time to time, our annual basis I think will be relatively similar. From time to time if we find a good opportunity to invest in new games, we will continue to do so. Third quarter’s R&D expenses were obviously lower as a percentage of revenues which is only because the cost related to Actoz, our subsidiary in Korea, would be lower due to the depreciating Korean Won. So that has some savings on R&D expenses. So I would think second quarter would be probably a better reference point to project a future trend.

Dick Wei – JP Morgan

Great. That’s very helpful. Thanks.

Grace Wu

Thank you.

Operator

Your next question comes from the line of Eddie Leung with Merrill Lynch. Please proceed with your question.

Eddie Leung – Merrill Lynch

Hi, good morning, guys. I have a few questions. The first one is, when we look at your balance sheet, is the increasing goodwill and intangibles related to your recent investments in the web game companies?

Grace Wu

Well, the intangible assets are related to an IP we acquired and also we licensed. So it’s reflective of the online game related IPs.

Eddie Leung – Merrill Lynch

Right. So the recent investments in the web game companies, will it be reflected in your balance sheet in the fourth quarter?

Grace Wu

No, it’s very limited. We only take a small equity (inaudible) that. So the net intangible assets are mainly due to effect IP investment. But for the group, well, I think that’s related to the early and long-term investment we’ve made.

Eddie Leung – Merrill Lynch

Got that. And could you by any chance [ph] give us an update on the headcounts as well as your conversion rate?

Grace Wu

Headcount? The first question is regarding headcount, right?

Eddie Leung – Merrill Lynch

Right. And the second one is your conversion rate as compared to last quarter.

Grace Wu

Conversion rate – sorry, just want to clarify that. The first question is regarding the total headcount, number of employees for the Shanda Group or for the paying accounts? Because the second question seems to –

Eddie Leung – Merrill Lynch

Headcount.

Grace Wu

Headcounts, okay. We are very pleased to report that currently our total number of employees is still around 2,000. And therefore I think the revenue contribution per employee help us to remain in the leading position in the industry. So we have very productive employees. And the second question, I’d defer that to Alan. Conversion rates. The conversion rate for third quarter is over 9%. But I –

Eddie Leung – Merrill Lynch

Yes, got that. And my final question is, could you comment on the increasing new users in the quarter? I know you guys don’t break down the games – don’t break down the game revenues, but it’s okay. We just want to know where the new users are coming from. Are they coming from more from the old games or some of the new games? Thanks.

Grace Wu

Well, I think it’s a combination of both and also from new content, as we have a very successful Shanda Online servicing for such a platform. That’s post both Shanda Games and Shanda Literature, we actually do a lot of cross-selling [ph] across different game platforms and literature platforms. And also the marketing promotion activities also attract new users outside of the Shanda password holders. But we also have a lot of cross-selling team games. That we think is a combination of all these above.

Eddie Leung – Merrill Lynch

That’s what has changed it in the quarter because the increase in active accounts has been pretty impressive. So in the third quarter, what have you done differently from the same quarter last year to trigger the much faster increase in active accounts?

Tianqiao Chen

(Interpreted) I already indicated that due to the combination of business trend, we have attracted more users to (inaudible) summer holiday students and also the large scale marketing campaigns and promotional activities launched during the third quarter and also there is cross-selling between our different platforms.

Eddie Leung – Merrill Lynch

Got it. Thank you very much.

Operator

Your next question comes from the line of Alicia Yap with Citigroup. Please proceed with your question.

Alicia Yap – Citigroup

Thank you. Good morning. Congratulations on the strong quarter. I have just two quick questions. First of all, can you give us some color in terms of your strong MMORPG this quarter? Was that mainly attributed to the strong contribution from your new games (inaudible). And what is your expectation for that game for the fourth quarter? And then I have a couple of follow-ups.

Tianqiao Chen

(Interpreted) Actually the strength for Q3 MMORPG performance resulted from both existing games and the launch of the new games. So that is including expansion packs for (inaudible) mentioned and also the contribution from new games with the strength from actually all these above.

Alicia Yap – Citigroup

And can you actually tell us what is the current trend in terms of the trends (inaudible) for the fourth quarter – the October trend?

Tianqiao Chen

(Interpreted) The guidance 5% to 8% quarter-over-quarter revenue growth for the fourth quarter, that already compose the expectation for both the existing games and contribution of our new games for all our MMORPGs and casual games. So that increased translation as well.

Alicia Yap – Citigroup

I see, okay. And then my second question is regarding Aon, so with the strong contribute in Korea, what is the expectation for China launch and what is the current state of the game in terms of your localization publishing rights approval and to see some [ph] testing? I know you’re going to roll out a small scale testing soon. But are you all done with your localization, and have you got your publication rights approval?

Tianqiao Chen

(Interpreted) We are very pleased Aon is highly anticipated by our users and potential new users as well as other games in the pipeline. Currently we are planning to launch a small scale closed beta testing for Aon – technical testing for Aon and we will collect recharge [ph] from that technical testing to see how we can further improve the game to prepare for the later closed beta testing. All the works related to Aon has been progressing smoothly.

Alicia Yap – Citigroup

Do you think you will expect that to be launched in 2009 – within 2009?

Alan Qunzhao Tan

(Interpreted) Yes. We feel like 2009 is a reasonable time frame for the launch of Aon.

Alicia Yap – Citigroup

Okay, thank you.

Operator

Your next question comes from the line of Paul Keung with Oppenheimer. Please proceed with your question.

Tianqiao Chen

Hello?

Paul Keung – Oppenheimer

Yes. Just a quick question. Can you just let us know what is the percentage of sales and marketing team as of total headcount?

Grace Wu

Probably about 10% of our total employees. So roughly 200 in sales and marketing team.

Paul Keung – Oppenheimer

Okay. Do you intend to take any steps to sort of like grow that S&M team because given that your ARPU has slightly decreased maybe because it’s been diluted by the new titles that came out? Can you just comment on any strategies to better monetize the new titles just to increase the ARPU going forward?

Grace Wu

Paul, I think you probably asked two questions. First is that we have the intention to expand our sales and team. And second is the strategy how we try to increase the ARPU.

Paul Keung – Oppenheimer

Yes.

Grace Wu

But I would think those are two separate topics.

Paul Keung – Oppenheimer

Yes, okay.

Tianqiao Chen

(Interpreted) Currently we are leveraging the powerful path from our Shanda Online to enhance our sales and marketing effort together with our local offices and the sales and marketing team. We will take different initiatives to adjust the sales and marketing effort based on different needs, even seasonality where (inaudible). But we believe that the (inaudible) sales and marketing team will remain relatively stable in the near future because we can leverage the power of the SDL online. For the second question, I think the growth of ARPU is always a very important – there might be some seasonal impact for ARPU, but also together is the combination of the growth of active paying account and also how to manage the increase of ARPU for existing paying accounts. And so certain quarter due to the seasonal effect would see high-growth active paying accounts that will usually dilute the ARPU from time to time, because the new paying accounts spend usually less compared to the existing active paying accounts.

Paul Keung – Oppenheimer

Thank you.

Grace Wu

Thank you.

Operator

Your next question comes from the line of Tian Hou with Pali Capital. Please proceed with your question.

Tian Hou – Pali Capital

Hi, good morning. I have a question regarding your online literature. And can you give us some details about, for example, what is the business model, how you charge people? You have so many people come to the website to visit to read. And I understand not all the readings are free, so you trust in revenues (inaudible) money. So can you just give us some details about how does online literature work?

Tianqiao Chen

(Interpreted) Shanda Online is a new business that we have been preparing for a long time, and we established a business unit in July this year. And Shanda Literature is by nature a Web 2.0 concept. Users can register and publish their own literary works. And also they can read other people’s literary works online. Because it’s a user-generated literary work, they encourage many users to publish their work online. And high quality literary works attract more users to read and actually pay for the content. Many of the writers, they can receive more than 1 million Renminbi income annually based on their work they published. That makes this Shanda Literature the most successful literary website in China in terms of commercialization and its Web 2.0 concept. Does that answer your question, Tian?

Tian Hou – Pali Capital

Actually I just want to know – (Foreign Language).

Tianqiao Chen

(Interpreted) Shanda Literature as well as Shanda Games are supported by the service platform of Shanda Online. All the Shanda password holders can charge their Shanda account and also we have different methods including e-source, online card payment and also prepaid cards to put money in their account and spend on order content available on Shanda Online. And also Shanda Literature currently charge its users based on the efficient [ph] model, but it’s not really by time but by number of Chinese characters they read. And we will – we actually provide our writers very high sharing of their work.

Tian Hou – Pali Capital

(Foreign Language)

Tianqiao Chen

(Interpreted) Yes, it’s actually charged by the number of Chinese characters they read. But usually the first couple of thousand of characters would be free. If the work is good, it attracts users. The readers will be willing to pay for the next couple of thousand characters. We have different systems to charge different level of users. For example, the normal users pay a little bit more than the VIP users for the same number of characters. Therefore it’s very common to see literary works of more than hundreds of thousands of Chinese characters or a million of Chinese characters online.

Tian Hou – Pali Capital

So how much contribution did Shanda Literature made in Q3?

Grace Wu

Currently the revenue contribution is still very small, although the revenue growth is very encouraging. All the Shanda Literature contributor revenues together with our advertising revenues and revenues from other contents are part of our other revenues reported.

Tian Hou – Pali Capital

Thank you.

Tianqiao Chen

(Interpreted) Thank you.

Operator

Your next question comes from the line of Ming Zhao with SIG. Please proceed with your question.

Ming Zhao – SIG

Thank you for taking my question. Grace, I want to have more color on your accounts receivable increase. The quarter-over-quarter increase is very big, as much as $31 million. Is that for one game, two games or more games? And how should we be looking at the amortization going forward?

Grace Wu

All right. That’s really related – the accounts receivable increase in the third quarter was mainly resulting from the new payment channels we initiated. It’s a B2C business, and then there is such a payment our users pay to put money into their Shanda account through their bank cards and we haven’t received from the bank because it’s a national holiday early October and actually end of September is also a long weekend. And therefore the balance is a little bit high relative to the second quarter.

Ming Zhao – SIG

Sorry, I’m asking about the –?

Grace Wu

Accounts receivables?

Ming Zhao – SIG

No, intangibles.

Grace Wu

Sorry, I misunderstood you. Would you repeat your question again?

Ming Zhao – SIG

Yes, sure. The intangible went by $31 million. I wanted to ask is this for acquiring one game IP or two games or more games? And how should we be looking at the amortization of tangibles going forward?

Grace Wu

Okay. There are a couple of new IPs we acquired during the third quarter. And also to a take a prudent approach, we also started to amortize some of the IPs that we initiated closed beta testing. Therefore they are moved to intangibles. So it’s a combination of a couple of different IPs.

Ming Zhao – SIG

Do you think the cost of acquiring these IP is going higher, because this quarter-over-quarter increase is pretty significant?

Grace Wu

Not really. Actually we have a very stringent evaluation process to evaluate all the different IPs were to acquired. But then the differences (inaudible) license when we pay for the licensing fees, they would be put into a different item that would – when we start to amortize them, they would be moved to intangible assets. So it’s really accounting treatment change. They are put into different categories believing on our balance sheet. But there are actually a couple of new IP added in the third quarter, you’re right.

Ming Zhao – SIG

Okay, thank you.

Grace Wu

Thank you.

Operator

Your next question comes from the line of Tony Gikas with Piper Jaffray. Please proceed with your question.

Tony Gikas – Piper Jaffray

Good morning, and thank you for taking my questions. Could you just comment – could you give us the diluted share count at the end of the quarter so the – the share count right at the quarter-end?

Grace Wu

Just a second. Okay. It’s a little bit complicated because the weighted average diluted share count as of the end of the third quarter a little bit tricky. For most of the quarter, the number stayed stable. However, towards the end of the quarter, we have initiated a share buyback program and therefore some shares were bought back and canceled outstanding shares. So I can give you a rough estimate, but the actual numbers will be a little bit different because the accounting treatment for weighted average. So it’s roughly about 72.8 million ADS outstanding for the diluted share count as of Q3 ’08.

Tony Gikas – Piper Jaffray

Yes, but do you – that was the average weighted share count during the quarter. What was the actual share count right at the end of the quarter that included the 3.3 million that you repurchased? Was it 69 million or 70 million?

Grace Wu

Well, it’s close to 70 million.

Tony Gikas – Piper Jaffray

70?

Grace Wu

Yes, 69 million to 70 million.

Tony Gikas – Piper Jaffray

Okay. And then could you comment on your repurchase thus far this quarter? And then the second part of the question here, how game trends progressed? You’ve been through two months now during the December quarter. Have you seen a little bit of a slowdown? I’m guessing just judging by the guidance that you are giving for the quarter, it looks like things may have slowed down a little bit. Maybe you could just comment on current trends.

Grace Wu

For the game trends for fourth quarter, actually we see better than seasonal effect, which is usually first quarter and third quarter are high season for online game business, and second quarter and fourth quarter are slower. We actually see pretty good business trends in this quarter. And therefore we guided sequential growth from 5% to 8%.

Tony Gikas – Piper Jaffray

Okay. And could you maybe just comment a little bit on use of excess cash and why did you borrow money? You know, did the $175 million debt offering during the quarter to buy back stock when you already had quite a bit of excess cash?

Grace Wu

Well, in (inaudible) of slowing macro economy, although we see very strong trend in our business and we believe the entertainment industry would be resilient relative to other industries in a slowing economy, we still would like to leverage our strong capital structure so we can advantage our shareholders to create shareholders value while we can maintain a very strong cash position for liquidity and also the potentials due to flexibility. As Mr. Chen mentioned in this discussion, we are still very committed to continue to foster creativity innovation or continue to invest in this type of environment, invest in talent and also our service and continue to expand our business to create long-term values for our shareholders. So as a combination, we made a decision to raise our strong capital structure, raise some money, and on the other hand, we also want to buy back shares to enhance our shareholder value.

Tony Gikas – Piper Jaffray

Okay. And then just the last part of the question, can you comment on you repurchases thus far in the December quarter?

Grace Wu

We mentioned earlier that that part of the $175 million in aggregate convertible bond offering will be used to fund repurchase plan, which is total of $200 million approved by our Board of Directors. We have 12 months to execute that plan and at the end of the third quarter, we bought back 3.3 million ADSS. The program is still ongoing, and we will report our progress when we announce our fourth quarter results.

Tony Gikas – Piper Jaffray

Okay. Thank you. And congratulations on a good quarter.

Operator

Your next question comes from the line of Lisa Yan [ph] with Morgan Stanley. Please proceed with your question.

Lisa Yan – Morgan Stanley

Hi, good morning. Thanks for taking my questions. I’ve got two questions. My first is a follow-up online literature business. Can you give us – I just want to know how much percentage of users on online literature business are prying and what is the average revenue amount from the users, and how you have attained so many writers and how many writers have you signed? Are they on exclusive phase? And who owns the IP? Hello?

Grace Wu

Well, yes. The business model, as we mentioned earlier, currently the main revenue contribution for Shanda Literature is from actually user subscribed content. However, we also develop other business model to leverage the very large user accounts for Shanda Literature like advertising. For paying users, the portion is still very, very small at this moment, but we see actually it has a very healthy growth over time. And then for the IP, there are different types of treatment we use, and we also have different categories for our writers. Some of them we will have closure agreement or sometimes we acquire the IPs. So (inaudible) differently from time to time in terms of different categories.

Lisa Yan – Morgan Stanley

Though the conversion rate actually lower than your online game conversion rate for paying users?

Grace Wu

Currently (inaudible) lower because it has actually a very high number of users using that one. And we are gradually converting the readers to about eight [ph] readers.

Lisa Yan – Morgan Stanley

And how many users do you think you have?

Grace Wu

Currently it’s over 20 million users.

Lisa Yan – Morgan Stanley

Okay, thank you.

Operator

And this concludes the question-and-answer of today’s call. I would now like to turn the call back over to Maggie Zhou for closing remarks.

Maggie Yun Zhou

That concludes our third quarter earnings conference call. Thank you, everyone, for joining us today.

Tianqiao Chen

Thank you.

Grace Wu

Thank you. Please feel free to contact our IR team or myself if you have any further questions. Good day, everyone, and good evening for the investors in the US.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts