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Giant Interactive Group Inc. (NYSE:GA)

Q4 2008 Earnings Call Transcript

March 5, 2009 8:00 am ET

Executives

Rich Chiang – IR Manager

Eric He – CFO

Wei Liu – President

Yuzhu Shi – Chairman and CEO

Analysts

Wendy Huang – RBS

James Lee – Sterne Agee Capital Market

Jin Yoon – Nomura International

Adam Krejcik – Roth Capital Partners

Atul Bagga – ThinkEquity

Gary Ngan – UBS

Tony Gikas – Piper Jaffray

Tian Hou – Pali Capital

Operator

Good morning ladies and gentlemen, I would like to welcome everyone to Giant Interactive Group fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. Now, I would like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Manager of Giant Interactive, Inc. Please proceed, sir.

Rich Chang

Good morning, ladies and gentlemen. Welcome to the fourth quarter 2008 earnings conference call for Giant Interactive Group. With me today are Mr. Yuzhu Shi, Chairman and Chief Executive Officer; Ms. Wei Liu, President; and Mr. Eric He, Chief Financial Officer.

As we proceed to our prepared remarks, we will refer to our results presentation, which can be downloaded from our Web site at www.ga-me.com. Following the remarks, Mr. Shi, Ms. Liu, and Mr. He will be happy to take your questions.

Before we continue, I would like to remind you that statements from this call that are not historically – that are not strictly historical in nature constitute forward-looking statement within the meaning of Section 27A of the Securities Act of 1933, as amended; and Section 21E of the Securities Exchange Act of 1934, as amended; and, as defined in the Private Securities Litigation Reform Act 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, and similar statements, and include among others, statements regarding our continued efforts to increase shareholder value through strategic investments and expansion or adjustment of game content and features.

Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results of Giant to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, risks – risks and uncertainties related to the progress, timing, costs, and results of game testing and product development; competition from other online game companies; and, the additional risks discussed in filings with the Securities and Exchange Commission, including our annual report on Form 20-F filed on June 18th, 2008.

All forward-looking statements are qualified in their entirety by these cautionary statements, and Giant undertakes no obligation to revise or update this information to reflect events or circumstances after the date hereof. In addition, please note that references in this presentation to dollars refer to US dollars.

Now, I’d like to pass the call over to Eric He, our CFO.

Eric He

Thank you, Rich. Good morning and good evening, everyone. Thank you for joining us today. Before I start the formal remarks, I would like to provide some updates on current global economic conditions. As we have previously mentioned, we have not seen any significant macro impact on our gamers thus far in terms of either traffic or spending. In fact, we have seen steady positive momentum throughout the fourth quarter as noted in our results. While we believe that the high entertainment value at relatively low price points of online games provides the industry with resilience during the economic downturn, we will continue to closely monitor the Chinese consumer market and player spending patterns as we progress into 2009.

Now for the fourth quarter 2008, we are pleased to see that our gamer continued adapting to the new in-game multi-vision structure and have shifted toward purchasing items on a daily consumption basis. As a result, our active paying accounts or APA levels recovered significantly in fourth quarter 2008. We are encouraged by these results as they exceeded our original guidance expectations and strongly support our strategy moving forward.

As a result of these recoveries, almost all of our key financial and operational matrix have increased for the fourth quarter 2008 on a sequential basis. As shown on slide six, total APA was 1,290,000, representing a 37.7% sequential increase over the third quarter of 2008, and an 8.2% decrease year-over-year. Going forward, we will continue to focus on expanding user base in order to ensure long term sustainable revenue growth to extend the life cycle of our games.

Average revenue per user or ARPU was RMB 273 dollars, on a – on quarterly basis, representing a 3.3% decrease sequentially, and an 11.6% decrease year-over-year. Average concurrent users or ACU was 556,000, an increase of 2.4% sequentially, and 8.6% year-over-year. Peak concurrent user or PCU declined by 4.6% from the previous years, but grows by more than 53% year-over-year to 1,505,000.

Due to these improved operational figures, our fourth quarter financials have also increased as shown on slide seven. Net revenue for the quarter exceeded our expectations, increasing 33.2% sequentially to $51.7 million, which represented a decrease of 18.8% year-over-year. Our net income increase 116.5% sequentially to $42.5 million, which was year-over-year decline of 13%. The sequential increase in revenue coupled with efficient control of costs resulted in a gross profit margin of 84% and a net margin of 82.2% goes up sequentially.

We continue to be prudent with our operating costs, which we will discuss next on slide eight. Our operating expenses for the quarter totaled $12.1 million, representing a 22.7% sequential decline and 11.7% year-over-year decrease. R&D spending declined 20.4% sequentially due to a one-time reception game-related R&D services in the third quarter 2008. In addition, sales and marketing expenses declined 4.8% sequentially due to our tighter cost controls over liaison personnel and our more effective advertising campaign.

General and administrative expenses were nearly flat quarter-over-quarter rising 0.8%. Both basic and diluted EPS for the quarter were about $0.18, up about 125% sequentially. Basic EPS was down about 5% year-over-year, while diluted EPS was sustained year-over-year.

Now for the entire fiscal year 2008, as shown on slide nine, net revenue increased by 4.4% from 2007 to $233.3 million. Again, this was due to the continued commercial success of ZT Online. Gross profit for 2008 increased by 1.7% to $201.4 million. Gross margin for 2008 was 86.3%, a slight decrease from 88.6% in 2007.

Our operating expenses for the fiscal year 2008 increased by 49.4% to $59.8 million. The increase was primarily a result of significant expansion of our nationwide sales and marketing and product development teams and other operating expenses incurred to facilitate business growth. Net income decreased by 2% to $162.9 million for the full year 2008. As a result, net income margin declined to 69.8% for the fiscal year 2008, compared to 40 –74.4% in 2007.

Moving to balance sheet on slide ten. Cash, cash equivalents, and short term investments combined as of December 31st, 2008 declined to $741.5 million. This decline was primarily due to the recent share repurchase plan. Our short term investments consist most of time deposits with original maturity more than 90 days, and they are deposited in domestic Chinese banks.

Although we are pleased to – we are pleased with our fourth quarter 2008 results, we are continuing to execute on our strategy, which is to focus on expanding the popularity of our flagship game ZT Online and to commercially launch new games in order to position Giant to deliver sustainable long term growth.

Now, in light of our strategy, let me discuss some of the progress we made in the fourth quarter across our operations. On slide 12, first, to maintain the popularity of ZT Online and to counter impacts from the multi-vision adjustments, we continue to add new and innovative content and features to engage players and to further enhance community effectiveness. Some examples include Master PK Tournament, an enhanced online beauty contest, and many more. We will continue enhancing ZT Online to meet our players’ evolving preferences.

Additionally, we are pleased to see ZT Online in Vietnam continue to grow in popularity. For Giant Online, our second internally developed MNO, we also continue to integrate new features and contents. In the first half of 2009, we plan to incorporate many features, primarily based on player feedback such as a team invasion features and upgraded weapons and items systems. We plan to launch the official version of Giant Online in 2009.

Empire of Sports, which we obtained the China operating rights from Empire of Sports, Limited of Switzerland was officially launched in Europe in December 2008, and is gaining momentum among European gamers. We continue to tailor these games for the Chinese market and plan to launch it into limited closed beta testing at end of second quarter 2009.

As for King of Kings III, we have completed the core game design and functionality, and are now focusing on more detailed optimizations on the game place and 3D client-side engines. We plan to launch King of Kings III into limited closed beta testing at the end of second quarter 2009.

Today, we are also announcing plans for ZT Online II, the sequel to the original ZT Online. This is part of our market segmentation strategy, under which the enhanced graphics and features of ZT Online II will further expand ZT brand, expand player base, and enhance (inaudible) royalties. ZT Online II is currently scheduled to begin beta testing at the end of second quarter 2009.

In addition, to these three Kings in our pipeline, we are also internally developing three (inaudible) games. They are currently in the beginning or middle stage of their development cycles, and we look forward to updating the market when appropriate. We recently launched an incubation program called Win@Giant in order to attract creative and innovative talents to produce additional blockbuster games to broaden our future game pipelines and to diversify our revenue sources.

For the $150 million share repurchase program we announced last year, as of December 31st 2008, we have repurchased an of aggregate of 14.9 million ADSs on open markets for a total consideration of $97.7 million. We will continue purchasing shares during time frame authorized by the Board and as defined by the SEC regulations.

Finally, we are very pleased to announce that our Board has declared a cash dividend of $0.18 per share for shareholders of record on March 27, 2009, to be paid on April 10th, 2009. Our total dividend payment of about $41 million demonstrates our strong commitment to our shareholders as well as our confidence in our continued business growth and strong cash flow position.

This completes my updates on fourth quarter and fiscal year 2008 activities. Now, looking ahead to the first quarter of 2009, based on our current estimates, we expect to generate total net revenue in the range of RMB 370 to RMB 388 million.

In conclusion, we remain confident in our long term outlook and believe that we have many solid opportunities for growth. We are encouraged by the continued positive recovery of ZT Online. In addition, going into 2009, we have a set of solid new games in the pipeline with positive initial test results as we continue to strengthen our R&D capabilities and our sales and marketing networks and keep players engaged via constant upgrades and enhancements. We are confident in our ability to deliver continued sustainable growth, and ultimately create long term shareholders’ value.

This completes our presentation, now we are open to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Wendy Huang with RBS. Please proceed.

Wendy Huang – RBS

Hi, good evening. Thanks for taking my questions. I have two questions. The first, it seems to me that the three new games in the pipeline are all will be launched or start testing in the end of second quarter and probably contribute around in the second half of '09. So are you going to spend a lot of sales marketing expenses for those games? And also, are you going to launch them game by game or whether – are you going to have a very staggering schedule?

Eric He

Okay. Let me direct these questions to our President, Ms. Liu, about these three new games. I think there is some misunderstanding of the three games launch calendars. Let me explain to Ms. Liu.

(Spoken in foreign language).

Wei Liu

(Spoken in foreign language).

Wendy Huang – RBS

(Spoken in foreign language).

Wei Liu

[Interpreted] Let's translate this first. Let me translate the answer into English first. For the three new games in our pipeline, King of Kings III, Empire Sports, and ZT Online II, currently they are all scheduled to be launched into a testing phase at the end of second quarter 2009. This is just for the testing phase where we open the game up and have gamers come and test the game for us, and we collect their feedback and continue revising the game accordingly. Depending on this feedback and the satisfaction of our gamers, then we will decide on the official launch schedule of each game accordingly.

[Interpreted] Under our current plans, if nothing unforeseen happens, then these games will launch – should be launching to open beta testing this year.

Wendy Huang – RBS

Okay. Thanks. Actually, it seems to me that other gaming companies, they also where have many game launches in the second half '09. So are you concerned about the fierce competition from other game players like Perfect World and Shanda?

Eric He

Once again, I would let Ms. Liu to continue to answer your questions. Oh, can you repeat your question again, I'm sorry.

Wendy Huang – RBS

Oh sure. (Spoken in foreign language).

Wei Liu

[Interpreted] In our viewpoint, the entire industry is growing very well, and of course that brings about a lot of competition. But we are very confident in our R&D capabilities, and also, of course, our sales and marketing capabilities. So if we are satisfied with the product, then we will be very confident in launching whenever it's ready.

Wendy Huang – RBS

Okay. My second question is with the revised monetization system for the games, what kind of lifespan do you expect for the ZT Online? When do you expect this game to start aging?

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] After third quarter adjustments in the monetization structure of ZT Online, during the fourth quarter, we are pretty satisfied with the results as users started coming back and started paying again. And this just shows that ZT Online is returning to a steady growth trend. And we are very confident that it can last – the life of the game can last at least five more years.

Wendy Huang – RBS

Okay. Thank you.

Operator

Our next question comes from the line of James Lee with Sterne Agee Capital Market. Please proceed.

James Lee – Sterne Agee Capital Market

Can you guys give more color about your studio investment plan? What kind of – can you give us a sense as to what kind of evaluation stage are you in right now, and maybe Eric or Ms. Liu can comment about the quality of supplier studios out there. Who’s from your firm that's in charge or evaluating these talents? And what kind of criteria do you have when selecting studio investments? Do you prefer maybe early stage where there's a higher risk with a cheaper price, or later stage with a lower risk, but higher price? Thank you.

Eric He

(Spoken in a foreign language).

Wei Liu

[Interpreted] The purpose of our Win@Giant incubation program is to attract R&D talent and content for additional blockbuster games. In China and the game industry in China, domestic developed games are favored, and we want to attract more R&D talents and game content because of this.

Specifically, we're looking for game designers, good people or teams or individuals with game design capabilities. We have a – internally, we have a strategy department and a game testing department to analyze all the applicants. And for all these applicants, we place them in our newly developed incubation department. Once in the incubation department, our company will judge these applicants. And if they meet our criteria, then they can start development. So far we've received a lot of interest, a lot of applicants for our Win@Giant program, and a few have even joined our company and begun the whole process.

James Lee – Sterne Agee Capital Market

Now, if I may ask a follow-up question, you said that there were a number of companies or a lot of companies showing interest. I'm sure they submitted (inaudible) coming in, maybe in a sense of 100 applicants coming in coming in, how many of them do you see as a potential investment?

Eric He

James? Hello?

James Lee – Sterne Agee Capital Market

Yes?

Eric He

Can you repeat that question again because your voice was broken so we didn't hear the whole sentence.

James Lee – Sterne Agee Capital Market

My apologies. I was wondering you guys can comment the quality of the applicants coming in as you evaluate. Maybe as a reference point, of the hundred applicants that's coming, how many of that do you see as a potential suitable investment for your company?

Eric He

Okay. (Spoken in foreign language).

Wei Liu

[Interpreted] For our Win@Giant incubation program, our goal is to attract the individuals or teams with lots of – with highly talented, high level, or very experienced senior developers.

James Lee – Sterne Agee Capital Market

Great. If I ask another different question regarding ZT Online, can you give us a sense how different is the (inaudible) version as your existing version and how do you so design a game and feature to avoid the substitution effect? And what is the overall goal of creating this game in the first place? Are you going after a different demographic versus your existing version? Or are you going after a different niche, consumer group? Just curious, what is the rationale behind that? Thank you.

Eric He

(Spoken in foreign language).

Yuzhu Shi

[Interpreted] Okay. So the sequel to the ZT Online, ZT Online Part II, the original goal for this game was that to design – this game was because – well we've operated ZT Online for quite a while now and there are certain things that we have learned along the way, certain technologies that have been approved. For example, our state of the art server technology has improved tremendously though we have – we cannot retro-fit this technology on to the original ZT Online.

Also, we've gained a lot of feedback from gamers along the years as to various aspects of the game whether game play or balancing issues and we would like to implement or add these changes, but unfortunately it will be very hard to do that because if we change a certain balancing of the game ZT Online's user base is so large that a lot of players would not be up to accept these changes. And so last year, we began initial developments for ZT Online II. And the goal is to try to attract gamers with mid-level spending power. If ZT Online – the original is for high-level spenders. Of course, there – potential (inaudible) is possible, but we'll try to minimize that.

[Interpreted] For the differences or differentiation between ZT – first ZT and ZT Part II I think, we would like to comment that in terms of gameplays, gameplay – we have innovated a lot of new gameplays for ZT II, especially one of the elements that we believe that is very important for online games is because people are looking for some honor or pride for the gamers. And we will develop some of the very innovative gameplays to satisfy gamers' pride or honors. And I think that will be one of the features that you couldn't find in the previous ZT Part I.

James Lee – Sterne Agee Capital Market

All right. Thank you.

Operator

Our next question comes from the line of Jin Yoon with Nomura International. Please proceed.

Jin Yoon – Nomura International

Hi, guys. Can you guys hear me? Hello?

Eric He

Yes.

Jin Yoon – Nomura International

Thanks, guys. Thanks for taking the call. Great quarter. I think it’s a lot better than what anyone, especially the Street has estimated. So congratulations on a great quarter.

Eric He

Thank you.

Jin Yoon – Nomura International

Just a couple of questions for you, it’s quite a turnaround from Q3. Apparently, none of us expected this kind of a bounce back. But looking on a month-over-month basis over the last, let’s say four, five months, where did you see a real pick up of people actually coming back to the game. I’m sure it just didn’t start in October 1st when people started coming back to the game.

And can you give us a trend of that process over the last three or four, five months? And in your Q1 guidance, how much of that is actually more people coming back to the game versus ARPU increasing or new players – incrementally new players who’ve never played ZT Online coming on board? I have a couple of more follow-up questions after that. Thanks, guys.

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] In the fourth quarter our revenue – the increase from our revenue, our APA, is mostly from old or former gamers spending again, contributing to our APA. And the third quarter and fourth quarter is really a very special situation for us, therefore led to the big bounce back. And throughout these couple of months, user numbers were still very healthy. So we foresee – we continue to see a steady growth for ZT Online.

Jin Yoon – Nomura International

But on a month-over-month basis, have you seen particular – what I’m trying to get at is do you see more of these APAs increasing because you anticipate a lot more gamers to come back? Do you expect new incremental gamers? A growth in new incremental gamers? And final question, I want to ask you about ZT Online is how much leakage or how much APAs have you seen – client or how much players have you seen transfer over to your other ZT Online versions, the classic and the pay-to-play? Any transfer of users there? And finally, one final question. Your dividend is I assume it’s a one time special dividend? It’s not going to be anything reoccurring? Correct?

Eric He

No. Dividend will be recurring and it will be consistent in the future.

Jin Yoon – Nomura International

Okay. So every quarter we should expect an $0.18 dividend?

Eric He

No. No. No, every year.

Jin Yoon – Nomura International

Oh, I’m sorry. I’m sorry about that. Yes. Okay.

Eric He

Let me direct the question to President Liu for the previous question. (Spoken in foreign language).

Yuzhu Shi

[Interpreted] During the fourth quarter we did have – we did see some brand new gamers into our game, into ZT Online, primarily because a lot of the old or established gamers in the game they want new friends or new teammates to join them in their various battles and quests so they can team up together. So they get their friends to play or they recruit new teammates and guilds and so forth.

For classic version in the original pay-to-play ZT Online, the game play is very similar. The difference is really just the modification structure. And that’s really up to the gamers. They can actually play one today and play the next – play the other version tomorrow. And for us, the operator, it’s actually – it doesn’t impact us too much.

Jin Yoon – Nomura International

Okay. Thanks, guys.

Operator

Our next question comes from the line of Adam Krejcik with Roth Capital Partners. Please proceed.

Adam Krejcik – Roth Capital Partners

Good. Thanks for taking my call. I have two questions. First on the operating expense line. You guys did a good job controlling those expenses this quarter. I was wondering how sustainable those numbers are going forward? Especially as you guys continue to ramp up your R&D department and launch new games later in the back half of this year. So perhaps on the R&D line, was there any one time items, which skewed it lower in the fourth quarter? And then should we expect the majority of sales and marketing expenses to recur in second half ’09? And perhaps a similar level to last year or are you guys really cutting back on your advertising and promotional tactics?

Eric He

Sure. Adam, let me answer your question. I believe that operating expenses was the result of our very tight control on our costs in the fourth quarter. So we enjoyed a very good operating margin. Of course, many analysts took the financial incentive from the government out to reflect the operational aspect of the business. For that specific government incentive, that is a once a year type of incentive from the government because that is specifically for the qualification of the high-tech business. So that happens in the fourth quarter in 2008 for us.

As to R&D expenses, I think you are absolutely right. As you can see the fourth quarter is being skewed a little bit because fourth quarter R&D, compared with third quarter, actually there was a drop. The simple reason for that is because in the third quarter, we have a one time service charge because we purchased an R&D intangible assets in the third quarter. So that actually made third quarter R&D expenses being bumped up a little bit.

And secondly, because of the share based compensation expenses in the fourth quarter actually dropped because of the differences of methods. Because we had been using accelerated amortization methods for share based comp expenses. So for the first year after the IPO that was the heaviest part. From the second – from the second year on the share based compensation will drop significantly. And most of the share based compensation happens in the R&D department.

So those two effects make the fourth quarter R&D expenses decline sequentially. But we do expect that in 2009, we will ramp up our R&D capability. As you mentioned it very well, we are undergoing many new games coming up. However, I think our R&D expenses will be pretty much in line with our business and revenue growth in 2009.

As to sales and marketing, once again in the third quarter, in the fourth quarter of 2008 we were controlling our sales and marketing expenses very well. I think for a big part of the reason is because during those two quarters of last year we did not have a big launch – product launch during this period. Similarly, if we do not have a very big product launch in the first quarter of 2009, we will probably see very similar situation as we did it in the last two quarter of 2008.

If we go to second half of 2009, it will really depend on the maturity of our product launch. As President Liu just mentioned, if the product is very good, passed all the tests internally, we decided that we want to launch the product in a big way, yes. I think sales and marketing expenses may increase marginally or a little bit in the second half. But I think overall, for the whole year, we should – we should have a goal of controlling our sales and marketing expenses and operating costs in a very manageable way. So we believe that operating margin and the margin itself, if you’ve taken out that one time event, it should be very similar to the margins happen in the fourth quarter of last year.

Adam Krejcik – Roth Capital Partners

Okay. Great. And just going through your balance sheet really fast. Deferred revenue, it’s been flat to slightly downhill the last two quarters. Is there any reason why that’s the case especially as you guys are guiding for some positive sequential growth going forward? I usually thought that was a good indicator and a good area to look for future revenue growth.

Eric He

Yes. Deferred revenue really depends on two things. One is gamers’ behavior. Secondly, in our case because it’s really – depends on the average estimate life of the items; the virtual items. So you’re absolutely right. For the third quarter and the fourth quarter, we had seen that deferred revenue has been very stable. The simple reason is that we can look at the virtual item being purchased or created in those two quarters. They have a relatively shorter average estimate life – lifespan. So that resulted in that deferred revenue had been pretty flat in last two quarters.

Adam Krejcik – Roth Capital Partners

Okay. So for certain items in the last two quarters you’ve just been – the estimated life where you’ve been recognizing faster than some traditional items. Is that what you’re saying?

Eric He

In fact, the items we have, there are thousands of it. For a big portion of that, we actually recognize immediately something like a consumable portions and all those – sometimes immediately, sometimes two or three days. So there’s a mix between so called consumable or the – or the item, which will be deferred. So I think in the third quarter, in the fourth quarter what happens is the mix is more favorable to the consumable.

Adam Krejcik – Roth Capital Partners

Okay. Great. And if I could just ask one last question? And perhaps you don’t have a good answer, but if you were to rank as it stands today, your conviction, out of the three games in your pipeline of Empire Sports, King of Kings III, and ZT Online II. Out of those three, if you were to rank in order perhaps to help us for modeling, which ones would you expect to receive revenues – start generating revenues in second half ’09 from? And that’s it. Thanks a lot.

Eric He

Sure. (Spoken in foreign language).

Wei Liu

[Interpreted] I think for all three games they should all contribute to revenue in 2009. But we are most confident in ZT Online II.

Adam Krejcik – Roth Capital Partners

Thank you very much.

Eric He

Thanks.

Operator

Our next question comes from the line of Atul Bagga with ThinkEquity. Please proceed.

Atul Bagga – ThinkEquity

Hey, guys. Thanks for taking my call. And congratulations on a great quarter.

Eric He

Thank you.

Atul Bagga – ThinkEquity

A couple of questions for you guys. Can you give us some update on 51.com? How do you see social gaming as an opportunity for Giant? How do you plan to monetize that? And also, now that you are launching more games targeted towards younger users, do you see 51.com as a platform for acquiring new players?

Eric He

(Spoken in foreign language).

Yuzhu Shi

[Interpreted] Internally, we do have a small team that looks at casual games, games that are more suitable for social networking platforms. And also, 51 has their own internal team who are developing casual games as well.

[Interpreted] order to attract younger gamers, we – these younger gamers who are – can be found on these social networking platforms. We do have one game that we are internally developing right now. It’s an unnamed game, but it’s a more of a cute, cartoony theme that’s more suitable for a younger generation.

[Interpreted] However, we still will abide by some of the regulations in China that discourages younger, minor gamers from playing video – computer games for extended periods of time. Therefore, we will still limit our games to gamers who are 18 of age and above.

[Interpreted] Not because minor gamers are – don’t have a higher spending power or anything of that nature because we believe that for the minors, the most important thing is their health. And they should continue to grow and study.

Atul Bagga – ThinkEquity

Perfect. It makes sense. And switching gears, it seems like second half is going to be one of the busiest times for Giant in terms of the number of games launched. Can you comment something on scalability of organization? Do you guys think that you have sufficient bandwidth to launch three games in – in maybe like few months period? Or what else you would be doing different in second half of the year versus what you’ve done in the past?

Eric He

You said scalability of what, social marketing? Is that what you said?

Atul Bagga – ThinkEquity

Yes. Exactly.

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] Actually, we’ve been pretty busy in the first half of ’09 not just in the second half of ’09 as the launch dates with testing of our new games would lead you to believe because these games have been in development for quite a while. So our R&D teams have been very occupied and preparing to launch these games in the very near future.

Our sales and marketing department has been getting ready itself. It’s become – we’ve streamlined the department but they’ve become even more efficient at what they do. And they are prepared – getting prepared to effectively launch the new games when they are ready. So we’re very confident that we’re making the right preparations right now to launch, operate, and market the new games when they’re ready.

Atul Bagga – ThinkEquity

Perfect. Thank you. And just a couple of housekeeping questions if I may. Can you help us understand how we should model for government subsidy in 2009? How should we model for tax rates? And – actually these two things if you can help us understand how should we model for these things?

Eric He

For government incentive, as I’ve said, the amount that we have seen there in the fourth quarter that is for high-tech business. We believe that if there’s no accident we are going to continue to be qualified as a high-tech business enterprise in 2009. And also, I think in the previous quarters of 2008 we also was qualified to receive some government incentive from our local municipality government. I think that will continue as well in 2009. Unfortunately, for those kinds of incentive, you won’t be able to model it on a very smooth way. Meaning that it will not come into equal portions for every quarter. I think that would be the difficulties.

As to the tax rates, for 2009 – for 2008 our tax rate was about 9%. However, if you look at our balance sheet – income statement you will see the tax rate was significantly lower. I think that was because of income tax deferred assets being reversed. So it made our marginal tax rate look a bit lower. However, moving forward in 2009 we will see our tax rate – income tax rate at a level of 10%, which is – we are under the tax holiday. We can get 50% deduction of a 20% normal tax rate. So in year 2009, we will have a marginal tax rate of 10%. Moving forward to 2010, the tax rate will become 11% ,then 2012 – then we will go back to the normal tax rate, which is about 25%.

Atul Bagga – ThinkEquity

Perfect. Thank you.

Operator

Our next question comes from the line of Gary Ngan of UBS. Please proceed.

Gary Ngan – UBS

Thank you very much for taking my question. I have read from local press that Giant could be increasing salary across the board of an average of 14%. Can you confirm that and how should we think about it? Is that a 14% sequential increase or year-over-year increase?

Eric He

Okay. (Spoken in foreign language).

Wei Liu

[Interpreted] The salary increase that you mentioned is mostly for our R&D department. The goal of the increase is akin to our Win@Giant incubation program to truly satisfy our core developers. The figures you quoted is probably for a year-over-year comparison. And we believe that salary level – compensation level for the R&D department is very competitive in this landscape right now.

Gary Ngan – UBS

My second question is, can you give us a sense of what’s the paying percentage of total active players in the fourth quarter after you adjust the monetization? And also, perhaps comment on what’s the revenue concentration of that top 5% paying players.

Rich Chiang

As to this paying percentage, I think all paying percentage is pretty much within the range of 8% to 10%, within that boundary. Sometimes we see that it will be a little lower, sometimes we see a little higher; but normally, it’s within this boundary. As for the concentration of the revenue, the top 5% still accounts for a very big portion of our revenue. That is because we are ZT. We are talking about ZT and ZT Online is a very PK-oriented game, so there are a lot of super-rich or high-paying accounts in the game.

Gary Ngan – UBS

If I may just follow-up, so am I right to understand that the shift of monetization strategy doesn’t really change the revenue concentration of the top paying players?

Eric He

We tend to look at the monetization structure change in a different way because a monetization structure change, the purpose of that is we hope to direct our gamers to use daily consumption more instead of going after all those promotional activities, so the way that we are gauging our success is mainly on that part. So we have seen that our goal has been reached or has been met very well. So you can see that in the fourth quarter, the revenue has been coming back very, very strongly. But as to the revenue concentration, we think that our revenue concentration still remains very similar to the previous situation.

Gary Ngan – UBS

Okay. Thank you very much.

Operator

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

Tony Gikas – Piper Jaffray

Hi. Good evening, and my congratulations as well on an improved quarter.

Eric He

Thank you, Tony.

Tony Gikas – Piper Jaffray

A few questions for you, as the economy softens in China, do you anticipate any changes to your pricing strategies? Second part of the question, do you anticipate or have you seen any change in traffic at any of the internet cafes in China over the course of the past six months and do you see any changes looking forward? And then, I have a couple follow-ups.

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] From our viewpoint, so far, we’ve seen minimal impact from the current economic crisis out there. Also, the economy has not impacted the internet café traffic at all. So we believe that online game is still one of the cheapest forms of entertainment here in China and it hasn’t really been impacted very much from what’s going on externally. And from our standpoint, even the players with high spending power, they are continuing to spend.

Tony Gikas – Piper Jaffray

Okay. And then, just looking at the second half of the year when it looks like you might move into open beta on a few new games, some of the other companies have talked about similar – their years look fairly back and loaded with new game releases. Could you just talk about the competition a little bit in the back part of the year? And then, looking to 2010, any visibility on the number of new releases?

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] Besides the three new games that we’ve announced in our pipeline, we have three unnamed games that you have read about in our press release. The first one is being developed by our R&D team in Chengdu in Sichuan province. There’s about – we have a team of about 60 people who are working on this game and currently, it’s a 3D game, 3D MMO centered around a Chinese ancient martial arts theme. Currently, it’s scheduled to begin testing at the end of 2009. We also have two other games that are a little bit earlier in their development stage right now. They began development this year. They’re both 2D games and they should begin testing.

[Interpreted] As for our competition, yes, you are right. Other game companies have mentioned that they are also releasing several new games towards the back end of this year, but we are pretty confident in our pipeline right now. ZT Online II, as you know, the original ZT Online is one of the biggest games in China that break the blockbuster game. It’s a famous game with lots of devoted fans and great following. So we hope to utilize those fans and I think there’s going to be a lot of interest for the sequel.

And we’ve been planning – the sequel has actually – we started planning for it in 2008, so we’re very confident that it should do quite well. King of Kings III is actually also in a similar situation and also has a devoted following. King of Kings I was actually the first online game to be operated in China, and there’s a lot of interest from old games. There’s a lot of interest and buzz surrounding the game right now. And we’ve spent about a year to localize the game from Mainland China and we think these two games will do quite well.

Tony Gikas – Piper Jaffray

Okay. And then, my last question and I know you’re not giving specific earnings guidance for the year, but the street is currently planning EPS down in 2009. Is it possible that EPS in 2009 could be relatively flat to 2008?

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] Let me begin by telling you a little bit about our strategy for 2009. First off, we want to maintain steady growth in our old products such as ZT Online and ZT Online Classic Edition. We want to avoid any such adjustments, big adjustments, such as we made in the third quarter of 2008.

For Giants Online, it opened beta last year and throughout this time, we’ve kept enhancing it from clear feedback. And so, in 2009, we plan to roll out an official version for this game where we’ll open up more multi-station functions. And besides that, we have our new games in our pipeline that should be rolling out in 2009. We are confident that they will contribute to our revenue this year. So I think overall, we are pretty confident about this year’s outlook.

Tony Gikas – Piper Jaffray

Okay. Thank you. Good luck.

Operator

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

Tian Hou – Pali Capital

Thank you for taking my question. I just have one question regarding your pipeline. Regarding the two 3D games, one is the sport game; another one is King of Kings III. We know there is a new game from Chengdu coming to the market, which is Aeon. Aeon has been very successful in Korea, and then we also know it’s a highly anticipated 3D game in China market. So what do you think your game as related to this game? What’s your position? Can I get some comments on that?

Eric He

(Spoken in foreign language).

Wei Liu

[Interpreted] First off, Empire of Sports is actually a very different genre from the PK, Player Kill type of MMR PGs, that’s got King of Kings III and IONR. So it’s a completely different type of a game and it’s very hard to compare them. For Empire of Sports, there’s actually very few sports game in China and even fewer that have multiple sports in the same game. So when we first decided to operate this game, we thought that it would be a great compliment to our current portfolio and a very different game in China.

For King of Kings III, it’s very tough to compare to Ion. As you know, many games that are successful in other countries that are brought over to China aren’t becoming not as successful and games that are successful in China may not be successful overseas. So it’s very hard to tell how that would turn out. All we can do is try to do our best when we launch and operate King of Kings III. And we feel that because of the fan base for King of Kings I, there’s a lot of interest and buzz for Part III right now.

Tian Hou – Pali Capital

Okay. The last question I have is regarding the share counts. What is the total share count at the end of 2008?

Eric He

The share counts, you mean the fully diluted share counts?

Tian Hou – Pali Capital

Yes, fully diluted share count at the end of 2008.

Eric He

I can refer you to our press release. That’s pretty much the end of the 2008 share counts. Can I have the numbers, the press release?

Tian Hou – Pali Capital

Isn’t that an average number for that quarter?

Eric He

No, no, no, no. Okay. Fully diluted share count numbers for 2008 is about 237 million.

Tian Hou – Pali Capital

No, I said at the end of it. Then you bought some shares back, right? So like deduct the 15 million shares you bought back from the Q2 number. Is that the share count at the end of ’08?

Eric He

That is what we call outstanding shares. It’s not the fully dilated basis. Roughly, it’s about 230 million at the end of 2008. 230 million.

Tian Hou – Pali Capital

Okay. Thank you.

Operator

Our last question is a follow question from the line of Wendy Huang with RBS. Please proceed.

Wendy Huang – RBS

Hi, just to follow-up. First, it seems that you had used the two shares of the 150 million share repurchase amount. So could you update us with the progress, share repurchase program, in the first quarter ’09 and do you have any plans to increase the share repurchase amount?

Eric He

Yes. That 150 million share repurchase program was pretty much – there’s about $50 million still left. I think we will execute on the basis of our board’s resolutions and continue to perform the share repurchase program. As to the total execution progress, I think we will wait until next conference call to update you because it’s very dynamic. I don’t have the numbers offhand with me right now for the first quarter, but all I can say is we are continuing our share buyback program at this moment.

Wendy Huang – RBS

Okay. Also, can you provide 2008 CapEx number and the depreciation and depletion?

Eric He

I don’t have that number offhand. If you want, I can email it to you later on.

Wendy Huang – RBS

Okay. And for 2009, I assume there is more maintenance CapEx already. No extraordinary extension rate CapEx.

Eric He

For CapEx, usually, we will plan ahead of the time. So for the servers, if we expect that we will have a new product launch in the second half, we will gradually invest into our CapEx. So I don’t expect at this moment that the CapEx number for 2009 there is a big bump or increase.

Wendy Huang – RBS

Okay. Great. Thank you.

Operator

There are no further questions. You may proceed.

Rich Chang

Thank you, everyone, for joining us today. We look forward to updating you on our progress in the near future.

Operator

Thank you for your participation on today’s conference. This concludes the presentation. Everyone have a great day.

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