Shanda Interactive Entertainment Ltd ADR (SNDA) must have missed the recessionary memo. The Chinese gaming company continues to grow earnings and sales despite weakness in the global economy. Last quarter Shanda cleared $136.7 million in revenues and handily beat consensus expectations with EPS reported at $0.68 per share. In fact, this was the 10th consecutive time the company has beat consensus expectations.
A few years back, investors were a bit skeptical about the revenue model for many of the firms in the industry. Typically, online games are available for free or for a very small charge. This yields a large number of “non-paying” customers who use the game but do not add to the revenue base. But premium products within the game are sold to a handful of subscribers and this revenue is enough to drive margins to extravagant levels. For the last quarter, SNDA posted a gross margin of 73%.
Another profitable source of revenue has turned out to be in-game advertising. With 77 million total users, it would make sense for an advertiser to pay premium dollars to feature their product within a particular game. Currently Shanda has more than 20 games in operation. This provides a significant amount of non-traditional advertising space.
Shanda has worked hard to build the largest online game revenue base in China. Currently, the company receives roughly 70% of revenue from its two most popular games: “World of Legend,” and “Legend of Mir 2.” Initial reactions may be that the company is not well diversified, but it is interesting to note that these two games have been in existence for more than 7 years. So obviously the company is talented at managing the progression of these games to keep players interested for so long.
But Shanda is not sitting back and enjoying its
