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Giant Interactive Group Inc. (NYSE:GA)

Q1 2009 Earnings Call

May 26, 2009 8:00 am ET

Executives

Rich Chiang - Investor Relations Manager

Eric He - Chief Financial Officer

Wei Liu - President

Yuzhu Shi - Chairman, Chief Executive Officer

Analysts

Alicia Yap - Citigroup

Jenny Wu - Morgan Stanley

Wendy Huang - RBS

Andrey Glukhov - Brean Murray, Carret & Co

Atul Bagga - ThinkEquity

Eddie Leung - Banc of America Merrill Lynch

James Lee - Sterne Agee

Operator

Good morning, ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group’s first quarter 2009 earnings conference call. (Operator Instructions) Now I would like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Manager of Giant Interactive Inc. You may proceed, sir.

Rich Chiang

Thank you. Good morning, ladies and gentlemen. Welcome to the first quarter 2009 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 through our prepared remarks, we will refer to our results presentation which can be downloaded from our website 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 on this call that are not strictly historical in nature constitute forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and section 21-E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, and other 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 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 18, 2008.

All forward-looking statements are qualified in their entirety by this cautionary statement and Giant undertakes no obligation to revise or update this information to reflect events or circumstances after the date thereof.

In addition, please note that references in this presentation to dollars refer to U.S. dollars.

Now I would like to pass the call over to Eric He, our Chief Financial Officer.

Eric He

Thank you, Rich. Good morning and good evening, everyone. Thank you for joining us today for the first quarter of 2009. The results of our key operating metrics were mixed due in part to the relatively strong performance from the previous quarter.

As shown on slide 6, the total active paying accounts, or APA, were 1,236,000, representing a 4.2% sequential decrease from the fourth quarter of 2008 and a 14.5% decrease year over year. Average revenue per users, or ARPU, was RMB299.7 on a quarterly basis, representing a 9.9% increase sequentially and a 7.8% decrease year over year.

Average concurrent users, or ACUs, was 531,000, a decrease of 4.4% sequentially and 2.8% year over year.

Peak Concurrent Users, or PCUs, increased 4.4% from the previous quarter but decreased from 4.5% year over year to 1,572,000.

Despite these mixed operational figures, our first quarter financials remain healthy, as shown on slide seven. Net revenue for the quarter was in line to our previous guidance, increasing 5.8% sequentially to $54.7 million, which represented a decrease of 20.8% year over year while net income decreased 20.1% sequentially to $33.9 million, which was a year-over-year decline of 31.5%.

Gross profit increased 5.9% sequentially to $45.9 million, while decreasing 25.4% year over year. Gross margin remained flat sequentially at a healthy 84% but this was down somewhat from 89% in the prior year period.

We continue to maintain a close eye on expenses, which we will discuss next on slide eight. Operating expenses for the quarter totaled $12 million, representing a 1.2% sequential decline and a 17.9% year-over-year decrease. R&D spending increased 28.8% sequentially and 172.9% year over year due to higher payrolls as a result of increased recruitment efforts and the expanded R&D departments to support new game development, and a continued enhancement of existing games.

In addition, sales and marketing expenses declined 33.4% sequentially and 53.4% year over year, due to our tighter cost controls [over the liaison] personnel and our marketing campaigns.

General and administrative expenses were down 29.7% sequentially and up 4.6% year over year.

Both basic and diluted EPS for the quarter were about $0.15, both down about 16.7% sequentially. Basic EPS was down 25% year over year and diluted EPS was down 21.1% year over year.

Moving to the balance sheet on slide nine, cash and cash equivalents and short-term investments combined as of March 31, 2009, increased to $762.6 million. This increase was primarily due to operating cash inflow during the quarter, which was partially offset by the use of some cash to fund our share repurchase program. Although we had a relatively good start in 2009, we were continuing enhancing our flagship game, ZT Online, in order to extend its popularity and strengthen its communities, as well as to prepare the commercial launch of our new games in order to position Giant to deliver sustainable, long-term growth.

Now, in light of our growth strategy, let me turn to some of this progress we made in the first quarter across our operations on slide 11.

First, we are pleased that the past March was the third anniversary of our flagship game, ZT Online’s open beta test and it’s still going robust. We have continued to introduce many new and innovative in-game features and activities to enhance ZT’s interactivity on a large scale, and to meet our players’ evolving preferences.

Additionally, we are pleased to see both ZT Online [inaudible] and ZT Online Classic Editions are maintaining their momentum. Currently, we are planning to launch the largest expansion packs to date for ZT Online in July 2009 in order to further enhance its popularity.

For Giant Online, our second internally developed MMO, we not only continue to integrate new features and content but also unlocked inter-shard play functions in order to provide more player interactivity. The official version of the Giant Online is currently under engineering testing.

As for King of Kings III, a 3D free-to-play medieval magical MMORPG, in the first quarter we began limited closed beta testing of the game with limited number of users. The current testing phase is mainly focused on the questing system, skills system, and weapons system, as well as game stability and system compatibility.

For ZT Online II, the newly self-developed sequel to our flagship games with more advanced and enriched game play, we have completed the majority of the basic game design and currently plan to begin engineering testing in the third quarter 2009.

For Empire Sports, the 3D MMORPG game featuring a wide range of sports events, we are continuing to localizing the game features and functionalities for the Chinese markets. So far, based on our internal testing, the nature of the game is geared more towards professional athletes with relatively advanced player maneuvering. As a result, we are currently re-evaluating the operating business model and revamping some of the game features with our partner.

Our first project resulting from our Win@Giant Program incubation program is called My Sweetie. This is a 2.5D casual MMORPG that allows gamers to create a character, virtual pets, and interact with other players online. My Sweetie entered into closed beta testing on May 22nd.

For the 150 million share repurchase program we announced last year, as of March 31, 2009 we have repurchased an aggregate of $16.5 million ADSs on open market for the total consideration of $106.9 million. We will continue purchasing shares during the timeframe authorized by the board and as defined by the SEC regulations.

In addition, the cash dividend we declared last quarter was fully paid on April 14, 2009, for a total consideration of $40.6 million.

Finally, on the organizational front, currently in the second quarter we are in the process of re-evaluating and reorganizing some of our R&D teams according to their respective game projects and tasks in order to establish several independently run R&D entities. We believe this structure will promote a stronger sense of entrepreneurial-ship and creativity within our project teams, resulting in a better aligned incentive system for our R&D personnel.

This completes my update on the first quarter of 2009 activities. Now, looking ahead to the second quarter of 2009, in anticipation of our ZT Online expansion pack in July, we have de-emphasized our sales and marketing activities in the near-term. As a result, based on our current estimates, we expect to generate total net revenue in the range of RMB343 million to RMB373 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 upcoming ZT Online expansion pack and the progress of all of our seven pipeline games currently under development. As we continue to strengthen our R&D capabilities, leverage our extensive sales and marketing networks and keep players engaged via constant updates and enhancements, we are confident in our abilities to deliver continued sustainable growth and ultimately create long-term shareholder 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 Alicia Yap from Citigroup.

Alicia Yap - Citigroup

Thank you. Good evening. I have two questions -- number one, can you elaborate a little bit more detail in terms of your second quarter guidance? What are some of the latest changes or development in ZT Online that lead you to provide a flat to 8% sequentially down on your top line guidance? And will the decline come from a decline in your ARPU or a drop in your active paying customer?

Eric He

While the translator is translating to Ms. Liu, President Liu, let me answer the ARPU and APA question first and then President Liu will answer the first part of the question. In terms of ARPU and APA, I believe that within the 5% to 10% fluctuations is quite normal for us, so for example, in the first quarter of 2009, our total revenue actually was up about 5% or so from the fourth quarter levels. So you have seen that APA number it just so happens dropped about 5%, so you will see the ARPU number actually increase by 10%. All of this fluctuation, 5% to 10% are within the 10% range is quite normal for us. So moving forward, we do believe that ARPU number or APA number will tend to fluctuate within the 10% range, up 5% or down 5% is quite normal for us, so it is difficult for us to project that in the second quarter or second half of this year, which number is going up or down for a couple of percentage points. So I think this part of the question, it is quite difficult to predict.

Let me just hand it over to President Liu. She will answer the first part of the question for you.

Wei Liu (Translation)

For the second quarter 2009 guidance given in our earnings release, we based that on the fact that we now plan to release the largest expansion pack for ZT Online in July. This expansion pack contains two brand-new features. One is the [parenthood] simulation feature and the team invasion feature. Both of these -- with both of these features, our goal is to increase playability and interactivity among our gamers.

Currently we are testing this new expansion pack and in the first half of this year, we have decreased our marketing activities. As you can see from our earnings release, we have decreased sales and marketing expenses. So this leads us to our second quarter guidance and -- but in July when we release this expansion pack, we expect that sales -- we expect to launch our sales and marketing campaign to go along with it.

Eric He

Just to add a final point, we believe that expansion pack should be able to create a great deal of gamers to play the game and also in terms, hopefully as well as the revenue.

Alicia Yap - Citigroup

I see. Can I just follow-up so that -- so this is more your internal factors and you have not seen any impact on ZT Online from the recent launch of Ion, right?

Wei Liu (Translation)

Yes, that’s correct. This decision is an internal decision in collaboration between our R&D and sales and marketing departments. We don’t really see much impact from other games in the marketplace.

Alicia Yap - Citigroup

I see. Thank you. And my second question is in terms of your operating expenses -- so given your G&A and sales and marketing came in lower than expectations this quarter, what should we be expecting in the second quarter for the G&A and will you continue to control your costs going forward? And given your recent restructuring on your R&D team, what should we be expecting on the R&D expenses going forward?

Eric He

Well, that’s a very good question, actually, Alicia. For us, one of the tasks that is undertaking right now is we would like to control our costs and expense ratio at a very reasonable level. As you can see, that sales and marketing has been declining -- has been in a declining mode from the fourth quarter to the first quarter. I think mainly that is because what President Liu just mentioned, that we have minimized or we have de-emphasized our sales and marketing activities.

In terms of G&A expenses that you ask, I think that we believe from the first quarter level still represent a very controlled phase of G&A expenses. Moving forward, I think -- I don’t have any good reason to see the G&A to pop up again, so I would say that this G&A expense level should be controlled at the very suitable level.

Moving forward, as you mentioned about the restructuring organizational changes for us, and I think the original idea is to rekindle the entrepreneurial-ship and also this creativity from the R&D personnel. I think one of the by-products or the side effects of that is that we actually will keep the R&D expenses or spending at the low level, so I would expect that R&D numbers, R&D expenses moving forward will actually decline, start to decline a little bit from the first quarter’s level.

Alicia Yap - Citigroup

I see. Thank you.

Operator

Our next question comes from the line of Jenny Wu from Morgan Stanley.

Jenny Wu - Morgan Stanley

Thank you for taking my questions. One question -- based on the game pipeline you presented us, it seems like it’s very [inaudible] in the second half, and based on our understanding, in the second half of this year, the competitive landscape in China is very fierce and a lot of competitors [draw out] a lot of new games. So my question is that within your game pipeline, which games do you have high expectations and what kind of PCU level that those games expect to reach, and what strategies you may have to make sure those games will be successful? Thank you.

Wei Liu (Translation)

Yes, indeed, currently our pipeline for the second half of 2009 and 2010 seems very robust at this point. We have seven games in development. Of those, four should be able to be tested by gamers in 2009, three of them are MMORPGs. The first one is the sequel to our flagship game, ZT Online, ZT Online 2. The other two MMORPGs are both 3D -- one is King of Kings III and the other is a game being developed by our R&D office in Sichuan Province.

The fourth game is actually a web game that has been in development for about a half-a-year so far and after that, we have -- we are planning three new games that should be launched in 2010. And these seven games do not include other projects we have in various programs such as our Win@Giant incubation program and other acquisitions or external games.

And for our existing games, yes, we also have the largest expansion pack to date that will be rolled out for ZT Online in July. We have our official version of Giant Online -- that should come out this year. That is an enhanced version of the game based on the feedback we’ve collected from gamers thus far. So going forward, yes, we will still focus on self-development and of course, our focus strategy on each game to try to raise the success rate of each individual games.

So for the three games that we are planning to launch in 2009, overall we are pretty confident in all of them. First of all, we have ZT Online II, which is the sequel to our flagship game, and obviously there’s a lot of loyal fans of this series, of the ZT Online series. And for the sequel, we are adding a lot of new features into the game throughout the development of the original ZT Online over the past couple of years. We have discovered and developed a lot of new server technology, better balancing, more efficient economic system that we always want to add it -- we always want to add to the original games but could not, and the sequel will give us a good opportunity to add all those features in along with a new design and graphics and a brand new look to the game. So we are very confident in the success rate of ZT Online II.

King of Kings III also has a lot of loyal fans, this series, as the King of Kings is a very renowned series in this region of the world. During the first quarter, King of Kings III entered into limited closed beta testing and so far it’s received a lot of good feedback from gamers as they are enjoying playing the game.

And then the third MMORPG is a 3D game developed by our [Chengdu] office in Sichuan Province. They have created a brand new 3D engine which should be regarded as one of the best 3D engines to be developed in China.

So overall, we are very confident in our new games.

I think your question is what is the definition in our mind that for a successful game in terms of PCUs or ACUs. Internally, we have how we define the success of a game is we have three different brackets measured by PCU. For us, a game that reaches 200,000 PCUs will be considered a small success. A game that reaches 400,000 PCUs would be considered a medium success. Up to this point, there still hasn’t been that many games in China that have managed to reach this level.

And for us, a game that can reach 1 million PCUs would be considered a large success and obviously there are only a handful of these games in China.

Jenny Wu - Morgan Stanley

That’s very helpful. Thank you very much. That’s all my questions.

Operator

Our next question comes from the line of Wendy Huang from Royal Bank of Scotland.

Wendy Huang - RBS

Thanks for taking my questions. Just a housekeeping question -- first, could you elaborate maybe the sequential decline in your deferred revenue and advantage from distributors on the balance sheet?

Eric He

Wendy, let me answer your question here -- for deferred revenue, I believe for most of you know the definition of that. That is the money that we have received from the users; however, because of some of the services we haven’t rendered in accounting definition, so we couldn’t recognize all this money that we had reserved, we had received. So that will -- that part of the money will become a deferred revenue.

For deferred revenue balances for the last couple of quarters has been quite stable. I think the reason that the deferred revenue balance has been stable is because that for part of the deferred revenue that we have reserved in previous quarters actually come to the realization in the current quarter -- for example, in the first quarter of 2009. But at the same time, some of the new money spent in the money becomes deferred revenue, so this in and out effect actually in the first quarter tends to be equal at this moment. So you will see that deferred revenue actually has been quite stable for the last couple of quarters.

I hope that this part of the question answers your -- this part of the answer answers your questions.

Wendy Huang - RBS

Should I take that as an indication for the slowing growth for the upcoming quarter?

Eric He

I’m sorry, can you repeat the question?

Wendy Huang - RBS

Should I take that as an indicator for the slow growth for the upcoming quarter?

Eric He

Not necessarily -- this deferred revenue balance really is depicted by the behavior or users, so when users, they use up some of their items and then the consumption of the deferred revenue will go faster and visa versa. So this really depends on the behavior of our users for our games.

Wendy Huang - RBS

Okay. My second question, you still have $43 million share buy-back quota as of Q109. So in the past two quarters, actually the share base reduction has caused some impact on the EPS calculation -- how should we look at that in the second quarter?

Eric He

In August of 2008, that was last year, the board authorized $150 million repurchase program for us. In the fourth quarter of last year, we have aggressively repurchased many shares of our own ADSs. In the first quarter of 2009, we continued our repurchase program; however, our repurchase program in the first quarter was significantly lower than the fourth quarter of last year. So far we are executing our repurchase program according to our board’s decision, so we believe that we still have a couple of months to reach the board’s authorization, which is a year. So for next three, four months time period, we will still be able to use up that $43 million. It’s really -- we are executing the decision of our board.

Wendy Huang - RBS

Okay. My last question is about your overseas revenue. It seems that that part of the revenue, although it’s a small base but it looks quite volatile. I just want to understand what is your current overseas expansion plan? And also, how many countries you have the footprint now and also whether the license fee or the royalty fee contributes the majority of that part?

Eric He

Yes, you are absolutely right -- the overseas market has never been a very focused market for us. Our focus has been in the local domestic China market. For the time being, we have two major markets in overseas arena -- one is Taiwan, Hong Kong. That is our first overseas market. Then we developed a second one, which is [in Vietnam]. Those numbers tend to fluctuate depending on their business situation over there.

We do expect that we will continue to expand into other areas, so I think so far we still believe the overseas market, although at a very small base, I think the momentum is quite healthy at this moment.

Wendy Huang - RBS

If I look at your competitor, Perfect World, they have expanded to more than 50 countries and [inaudible], so what is to prevent you to export Giant to -- I mean, more countries?

Eric He

Well, as I said, our strategy actually is very different from Perfect World’s strategy. Our strategy first comes into our strategy is our domestic Chinese market, instead of the overseas market. I think this is a different emphasis for -- between those two companies.

Wendy Huang - RBS

Okay. Thank you. That’s all my questions.

Operator

Our next question comes from the line of Andrey Glukhov from Brean Murray.

Andrey Glukhov - Brean Murray, Carret & Co.

Thanks for taking the question. Two things -- first, Eric, if I look at the underlying trends in the games, I think your press release alluded to the fact that ZT Classic is actually doing very well and continues to grow, so to the extent you guys are anticipating a potential decline in revenue in Q2, what are you starting to see in ZT Online? Are you basically just cooling the game off in front of the new expansion pack launch? Or is there some further move of players between Classic and online version?

Eric He

Thank you. Let me try to translate this question to President Liu. I think she will be the best person to answer the questions.

Wei Liu (Translation)

Let me just briefly give an overview of this strategy behind the ZT Online series. First of all, we have the strategy for so-called old games in the original ZT Online. For this game, it has an extremely large user base and so we need to -- we want to launch new expansion packs, new features on a regular basis to stabilize and to grow the user base even further.

Now, for the new parts, what we call the ZT series, which includes the classic edition and other versions of ZT Online, such as the upcoming ZT Online II, we want to sort of leverage the loyalty, the fame of the ZT Online series, the name, and attract lots of other segments of users.

For example, in Classic Edition when we launched it last fall, it attracted lots of older or former players of ZT Online back into the series. And with the upcoming ZT Online II, we hope to get a lot of brand new users to the series as well.

So in the original ZT Online, recently we’ve decreased or streamlined the marketing campaigns associated with this game, just in order to gear up for the large expansion pack that we plan to roll out in July. But once we do that, we expect to ramp up our sales and marketing activities once again and push the game.

Andrey Glukhov - Brean Murray, Carret & Co.

Okay. And secondly, once you go through anticipated ramp on sales and marketing, where would you anticipate the operating margin be as you exit the year?

Eric He

Well, yes, as you know, our cost control and expense ratio has been very stable. Actually, it’s in decline. For sales and marketing, it’s definitely related to our promotional activities for our games.

In the third quarter, as we mentioned that we are going to launch a large expansion pack for ZT Online, that certainly will tend to raise the sales and marketing a little bit. However, we would like to see a very controlled pace increase for our sales and marketing expenses associated with that activity.

In the third quarter, other than that, we also will see that King of Kings may launch some kind of a limited, closed beta testing. For that part of the business, we’ll come into some associated increase in our sales and marketing as well.

So I would say in overall in the third quarter, the sales and marketing expenses may be higher a little bit compared with the second quarter but not dramatically.

I think for the fourth quarter, we may see a little more as well but overall I think we would like to see that operating expenses or the operating margin has been in a very adequate and reasonable level.

Andrey Glukhov - Brean Murray, Carret & Co.

Thank you.

Operator

Our next question comes from the line of Atul Bagga from ThinkEquity. Atul, you may proceed.

Atul Bagga - ThinkEquity

Thanks for taking my call. A couple of questions for you guys -- one about, can you talk about the competitive landscape? Are you seeing it is becoming tougher to launch new games, easier to launch new games? And a related question on that -- so when you think about marketing on new games, launch of new games, first can you talk about how much of this first quarter savings came from the reduction in headcount versus the reduction in marketing campaign and how do you expect -- where do you expect the ramp-up to be? Is it more going to be the headcount or is it more on the campaign expenses? Thank you.

Eric He

Let me address your question first on the expenses side -- in the first quarter, as you can see that our sales and marketing expenses has been reduced by more than 30%, close to one-third of the fourth quarter’s level. I think for part of that, maybe 70% or 60% of that part of the reduction is associated with advertisement and the rest of the 20%, 30% actually is associated with other optimization of our personnel.

So for that part of the business, it’s mainly because we have controlled our cost, expenses in a very conscious way.

For R&D, as you can see for the first quarter, we continue to add on our headcounts but as I mentioned before, moving forward into the second quarter and the rest of the year, you will see that R&D expenditures or spending will tend to actually come down a little bit. So I think for your question, it is mainly on the marketing side. That is pretty much our expectation moving forward.

I will let President Liu to answer the rest of the questions for you.

Wei Liu (Translation)

Just to comment on the competitive landscape, yes indeed, we believe that the industry is becoming more and more competitive as time goes on but the industry as a whole remains one of the fastest growing industries. In the first quarter, we have seen some figures from some independent reports that state that although the Internet sector is slowing down but games, online games are still growing. So this is a very healthy industry.

Our strategy in this industry is to develop the best games as possible. What we mean by that is a combination of tailoring our games to be suitable for local Chinese gamers as preferences and tastes, making the game interactive for our gamers, and making the game have the highest playability as possible.

Also, obviously each game company would want to launch or have as many good games as possible and find the best content possible. For us, Giant, we are doing two things to actively pursue these goals. First of all, we have our Win@Giant incubation program to find and attract the best developers out there. Second of all, we are in the process of reorganizing our R&D department to spin off certain project teams, certain game teams to raise their level of creativity and entrepreneurship in order to produce even better games for the future. So really it just comes down to having the best people who understand the gaming market here in China.

Operation, operating games is also a key important factor. To understand local gamers and to do everything to satisfy their needs, both online and offline, is very important. We also will want to leverage our sales and marketing capabilities and to invest the other avenues, such as social networking, et cetera.

Atul Bagga - ThinkEquity

And can you give us some update on Win@Giant -- how many projects you have already funded and maybe some talk about the pipeline? And last one, of the seven games that you talked about in the pipeline, where do you have the highest conviction or confidence to emerge as a big [inaudible] for your definition? Thank you.

Eric He

Let me answer the first part of the question, as to the Win@Giant -- so far we have received close to 2,000 projects for Win@Giant. Obviously we don’t have time for every project to have an interview but we have interviewed close to 100 projects of them. So far I think we already picked up five of them into our incubation programs, either that we start working with them or we actually have started nourish the projects already. As to the confidence level for the rest of the pipelines for this year and for next year, I think I will let our President Liu to answer the questions for you.

Wei Liu (Translation)

Yes, for our pipeline, as I mentioned earlier, we have three MMORPGs that we plan to launch in 2009 and also one web game. For each of the new MMORPGs, each one has its own special characteristics or distinctions among them. We are all pretty -- we are pretty confident in the success of each of them but I believe we have the highest hopes for ZT Online II.

Atul Bagga - ThinkEquity

Thank you.

Operator

Our next question comes from the line of Eddie Leung from Banc of America Merrill Lynch.

Eddie Leung - Banc of America Merrill Lynch

Thank you. Good evening. The first question is perhaps Eric, could you share with us the number of R&D staff right now you have, given the reorganizations, and what would your headcount plan on the R&D side for this year and perhaps next year?

Eric He

Yes, R&D has been a very important part of our strategy because as President Liu mentioned that developing our own game and make it big is our primary strategy. So R&D accounts for the bulk of our staff in Shanghai. Currently we roughly have about 1,000 personnel for our R&D. I think as we are undergoing this re-organizational structure, we may see that our internal R&D personnel goes down or declines a little bit. However, as we mentioned that this project and task work may be spinned off as an independent company, that the company will own the majority share of it. So for that particular studio, R&D studio, they may experience an increase on the headcounts for their development, product development persons. So for Giant itself, we see that R&D personnel right now is about 1,000. Moving forward, we think we will see that R&D personnel to pretty much stay in this level or maybe go down a little bit for the rest of the year.

Eddie Leung - Banc of America Merrill Lynch

Got that. And just a follow-up question on the R&D [inaudible], we know that we are looking at a pretty competitive market. Could you give us an update on the -- on let’s say this staff turnover, especially on the R&D side?

Eric He

Sure. I think for our R&D person, has been very, very stable, especially for the middle level and senior level. Those R&D personnel have been with us for at least four or five years. For lower level, entry level or lower level, we see that the turnover rate has been very similar to the industry standards. So overall speaking, our R&D personnel, the turnover rate has been very under control and very normal for us.

Eddie Leung - Banc of America Merrill Lynch

And my final question is on the regulation -- could the management team share with us that would there be any regulatory changes that we should expect?

Eric He

What kind of change?

Eddie Leung - Banc of America Merrill Lynch

Regulation.

Eric He

Oh, regulation changes -- in terms of the government regulation changes, we don’t see any specific or material changes. The government has been focusing on how to protect the under-aged, the person who is below the age of 18. That has been in place for a long time. So as to the new regulation, we haven’t seen anything new and material at this moment.

Eddie Leung - Banc of America Merrill Lynch

Okay, great. That’s all my questions. Thank you very much.

Operator

Our next question comes from the line of James Lee from Sterne Agee.

James Lee - Sterne Agee

Thanks for taking my question -- can you give us any additional color on the Win@Giant initiative? Eric, you had talked about you picked up five projects this year. Can we get a sense what areas have you made investment so far? And the studios invested, are they these new start-ups or are these late-stage studios? And can you talk about what game categories have you invested so far and how much investment so far?

And secondly, it’s about new expansion pack with ZT -- can you help us understand how different that is in terms of features and functions versus the existing version? And maybe help us understand what is the biggest thing that the players are asking you to improve that you are currently working on?

And lastly, I just want to follow-up Alicia’s question about the second quarter assumption -- can you help us understand the revenue distribution between January, February, and March and how much you contributed each of the month in 1Q? And maybe help us understand the recent trend, how does that compare to April and May? Thanks.

Eric He

Wow -- that’s a lot of questions, James. Well, let me try to answer your question for the first part and for the latter parts, I think I would like to direct your attention to President Liu. For the first part, Win@Giant, as we mentioned that we have picked up five games -- I mean, five teams. You know, there are several criteria. Normally for Win@Giant is designed for many different types of projects. For the younger teams, we usually will look at the talents of the team more so if this particular person who has experience developing certain types of the products and that would be a very important criteria for us.

For some mature team, meaning that they already had the products and we would actually like to see the product -- if the product can be complementary to our current product portfolio, for the time being the five projects that we picked up really range from many different types. My Sweetie is the first one, which is casual, a virtual pets type of game. That is very different from what we have, you know, MMORPG, very hard core type of games.

Within our other four teams, actually it has some 2D projects, it has some 3D projects and they have some cute style game plays, so it’s really in many different areas. So I think at this time, we would like to observe their progress first before that we report some details to the public at this moment.

As to the latter part of the questions, actually I would like to direct the questions to Mr. Shi to answer your questions.

Yuzhu Shi

For the new expansion pack in ZT Online, there are going to be two major functionalities, plus dozens of other game plays. The first major functionality is called team invasion, where we have implemented lots of different ancient maps and teams can invade the various maps and take it over depending on how skilled or how powerful each team is. If it’s a weak team, they will take over very few maps; if it’s a stronger team, then they will obviously take over more of the territory. This team invasion function fulfills a lot of combat or PK desire among certain groups of gamers and it should lead to a lot of new types of game play.

In fact, when we have this platform type of play grounds and the gamer actually can make the game play by themselves, they can actually have a diplomatic relationship with somebody else and they also can create some kind of alliances with other kingdoms or other teams. So we believe because of this type of new kind of game plays will really create a lot of innovative game features in the future for us.

The second system actually is what we call the parenthood system. This type of a system is really designed for those gamers who don’t like PK features that much. So it’s very friendly game features. It’s designed for male and females -- they can fall in love at first and then through a process, they can get married, actually they can have their own kids, they can breed, they can actually raise the kids from the very small icons to become larger and larger and become mature. In fact, they can enjoy being parents in the process. So this whole process, it’s another type of game play which is very different from traditional PK type of features for our DT originally.

You know, it is our experience to see that there is some distinguish -- the differences between having a pet or having their own children in game. You know, it is our experience to see that the gamers in fact will put in more association with the children or the kids that they give birth to, they raise, they breed, you know, compared with just having the pets. So we believe that having this parenthood system really can increase the stickiness for our game.

James, did we answer your questions or did we forget any part of the question that you just asked?

James Lee - Sterne Agee

The last question was about 2Q assumption, revenue distribution, monthly basis, January, February and March, and how you compare April and May versus March level.

Eric He

James, for the second quarter, I think we already mentioned very clearly it is because that we are anticipating a big expansion pack for us on ZT in July, so in the first two quarters, in fact, we have put it very lightly or de-emphasized that sales and marketing activities, so we do expect that because of the efforts of the expansion pack, we will see that in terms of gamers numbers and in terms of revenue in the third quarter, should be enhanced.

We have never disclosed any details within our quarter’s revenue in terms of on a monthly basis, so I think at this moment, I won’t be able to very clearly or detail, elaborate on this part of the question for you.

James Lee - Sterne Agee

All right. Thank you so much.

Operator

And at this time, we are showing no further questions available. Mr. Chiang, you may proceed.

Rich Chiang

Thank you very much, Operator. Thank you, everyone else, for joining us today and we hope to -- we look forward to updating you on our progress in the near future.

Operator

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

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