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Shanda Interactive Entertainment Ltd (SNDA)

Q2 2006 Earnings Conference Call

August 15, 2006 9:00 pm ET

Executives

Donglei Zhou - Director of Business Development & IR

Tianqiao Chen - CEO

Jun Tang - President

Daniel Zhang - CFO

Analysts

Paul Keung - CIBC World Markets

Nat Schindler– Piper Jaffray

James Mitchell – Goldman Sachs

Richard Chow - Alliance Bernstein

William Bean – Deutsche Bank

Dick Wei - JP Morgan

Antonio Tambunan - Bear Stearns

Richard Ji - Morgan Stanley

Presentation

Operator

Welcome to today's Shanda Interactive Entertainment second quarter 2006 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Donglei Zhou, Shanda's Director of Business Development and Investor Relations. Donglei, you may begin.

Donglei Zhou

Thank you, operator and welcome everyone to Shanda’s second quarter 2006 conference call. I would also like to give a special thanks to our friends in the U.S. who join this call at a later hour. As always, we appreciate your participation.

With us today on the call are Tianqiao Chen, our CEO; Jun Tang, our President; and Daniel Zhang, our CFO.

After the close of the U.S. market today, Shanda issued its second quarter earnings release. Copies of the release have been sent to you for your information and reference during this call. A copy of the release is also available on Shanda’s corporate website at www.snda.com.

The purpose of this call is to provide investors with some further details regarding our financial results and to provide a general update on the Company. Following our formal remarks, we’ll be happy to take any questions you might have.

Before we begin, I would also like to remind you that during today’s call we will make certain forward-looking statements that are intended to qualify for the Safe Harbor from liability for such statements established in the U.S. Private Securities Litigation Reform Act of 1995. All statements during the conference call, other than statements of historical fact, are forward-looking statements.

Although we believe that our expectations expressed in our forward-looking statements are reasonable, we cannot assure you that our expectations will be correct. Risks and uncertainties could cause our actual results to be materially different from our expectations, including the risks set forth in our filings in the U.S. Security and Exchange Commission. Now with that, I would like to turn the call over to our CEO, Tianqiao Chen.

Tianqiao Chen

Thank you, Donglei and thank you, everyone for joining the conference call. Compared with the previous two quarterly conference calls, this quarter’s results will give you a greater level of confidence on Shanda’s performance.

During the last two quarters, Shanda underwent a transition; launched EZ Pod and experienced significant declines in stock price. I appreciate the continued support and attention extended from our shareholders and analysts during this period, and I am pleased this quarter’s results will come as good news to all.

Our second quarter 2006 financial results showed that Shanda has successfully implemented a key transition in our games business to adopt an item-based revenue model for three of our leading MMORPGs last December. We saw solid revenue and profit growth quarter over quarter. Total net revenue for the quarter grew 18.8% over Q1 2006 levels. Net income increased to $15.7 million [sic-see press release] from $1.5 million in Q1. We also posted increase EZ Pod shipments during the quarter through further cooperation with our business partners.

First of all, I would like to comment on the item-based revenue model in our online game business, which had progressed successfully. During the second quarter, our online game business and especially our MMORPG portfolio performed well under the item-based revenue model. Online game revenues increased 20.8% quarter-over-quarter. We are now over seven months into our shift to the item-based revenue model, and users continue to adapt to this e-commerce style of play that enhances their overall user experience.

Average monthly revenue per active paying accounts for MMORPG increased to RMB45.5 from RMB30.4 in Q1 '06. This is a strong indication of the growing user adoption we are witnessing under the item-based revenue model. In fact, more game companies in Korea, Taiwan, and mainland China have adopted the item-based revenue model since we adopted this model in our games last September.

As the first one to successfully implement the subscription model in China’s online game industry, we have once again proven ourselves to be the industry leader for being one of the first companies to offer its games under the item-based model. We believe the item-based revenue model is sustainable and scalable.

First, on the sustainability side, when the online games became free to all users it was transformed to an entertainment platform from just a game product. From this platform, we can make adjustments very frequently to meet the changing demands of our game users, which greatly prolongs the life of our MMORPG titles.

Second, on the scalability side, this transition changed our business model to an e-commerce model based on interactive marketing. Under this model, we are able to resolve the problems of information flow and logistics flow in the typical e-commerce site. More importantly, not only were we able to expand our user base through such a model, but also we are able to improve our ARPU and we create greater user demand and it satisfies their needs in the virtual community. Accordingly, we fully believe that an item-based model is scalable.

In summary, we believe our solid second quarter financials are proof of new growth Shanda achieved through operating a better platform rather than a simple recovery from a lower level of profitability in the first quarter. The item-based revenue model gives us added confidence that we will achieve meaningful, long-term growth as we develop this model further.

Now, turning to our EZ strategy. First, I would like to emphasis again that our strategic position is to offer our end user more easily accessible and enjoyable ways to navigate Internet entertainment content on their PCs. From sitting up close and leaning forward by using the mouse, to relaxing and leaning back in comfort using a remote console or game pack.

Also, I want to reiterate that Shanda is a content developer and operator and we won’t manufacture and sell the hardware by ourselves. In this case, we will maximize the advantage of our EZ content platform and will form a better cooperation with our partners.

In the second quarter, I am pleased to see further progress in the execution of our partnership strategy. Most of our OEM partners launched their EZ Pod bundled product in this market. We also signed a key partnership with China Netcom and with a subsidiary of China Telecom during the second quarter.

Our EZ Pod gained solid increased shipments in Q2. We sold 61,000 EZ Pod sets during the quarter, compared to 41,000 sets in Q1. The primary source of EZ Pod shipment growth in Q2 came from our OEM partners and China Netcom. So far, the number of users that have registered on our EZ platform has reached approximately 84,000 out of the total 186,000 sets of EZ Pods that we sold as of the end of the second quarter.

Based on the feedback from our EZ Pod users, online video games are still the most application among all of the interactive entertainment offerings. This finding is in line with what happened in the global market, where playing games through consoles in a leaning back fashion is more popular than playing games in a sitting up, close fashion. The initial EZ feedback confirms our belief that online video game consoles should be the primary focus of our home strategy at this current stage, and we will continue to provide a wide variety of video games which are more open, interactive and local than traditional video games; and are played in a leaning back fashion compared with current online games.

In closing, Shanda is making solid progress, executing through its business transition. On our game business side, our titles of our MMORPG saw encouraging growth under the item-based revenue model. At the same time, new titles and a slate of in-house developed and licensed casual games are scheduled to reach the market step by step.

On our EZ business side, we are delighted to see increased shipments of EZ Pod in this quarter, which manifests a further cooperation with big partners and a deeper market penetration. Going forward, our EZ platform will be centered on online video games, aimed at enhancing users interactive entertainment experience at home.

All of these elements point to a steady, growing business in the future. Overall, we believe Shanda is on a good path with strong opportunity for further growth. The steps Shanda has taken today are designed to make us a long-term company, and that creates lasting shareholder value. I will now turn the call over to Jun for expanded color on the game operations.

Jun Tang

Thank you, Tianqiao. Our online game business delivered impressive results in Q2, driven by our MMORPG as the in-game item-based revenue model has gained traction and popularity with users. Total online game revenue posted a strong 20.8% quarter-over-quarter increase to $46.8 million. Total average concurrent users decreased to less than 1% of quarter-over-quarter to approximately 1.34 million. Total peak concurrent users in Q2 decreased 8.7% quarter-over-quarter to 2.24 million.

Our MMORPG games delivered solid gains in Q2. Revenues increased 35.3% quarter-over-quarter to $38.1 million. The sequential growth in MMORPG revenues is primarily due to improved performance of MIR II, War, and Magic Land.

In Q2, we launched the virtual shopping malls, released the new expansion packs and provided more value-added services in the game. Total peak concurrent users for MMORPGs increased 5.6% quarter-over-quarter to 947,000 and the total concurrent users increased to 2.6% quarter-over-quarter to 724,000.

As Tianqiao mentioned, our monetization of the new in-game item-based revenue model has shown impressive results in Q2. In the quarter, we had 2.23 million active paying accounts. Average monthly revenue per active paying account was RMB45.50 per month. The 9.8% decline in MMORPG active paying accounts in Q2 was related to the revenue model change in Q1, which was the first full quarter of the new revenue model. Some users decided to deplete their prepaid card account balance, and then become free players. Therefore, we believe the second quarter APA, active paying account, number is more active in evaluating active paying users.

The ARPU increased 50% in Q2 compared to Q1, mainly because we launched the virtual shopping malls, released the new expansion packs, and provided a more value-added service in Mir II, War and Magic Land in this quarter.

Turning to the casual games, revenues for the second quarter including revenue from Bianfeng, Haofang and GameABC decreased 17.8% quarter-over-quarter to $8.7 million. The sequential decline in revenue from casual games were due to seasonality related to school exams and the World Cup, as well as the continued decline in revenue from BNB.

Peak concurrent users for all casual games decreased 7% quarter-over-quarter to 1.29 million, and average concurrent users decreased to 4.4% to 619,000 in the second quarter. Active paying accounts for casual games has declined 8.3% quarter-over-quarter, to 2.26 million and the average monthly revenue for paying accounts decreased 10.4% quarter-over-quarter to RMB10.2.

Our game pipeline is strong and we look forward to several upcoming launches in the second half of 2006 and early 2007. On the MMO side, ArchLord began open beta testing on June 18th, with PC use exceeding 150,000 by the end of June. As of July 28th, we have launched shopping malls and a full-scale value-added service and virtual items in all of the older servers of ArchLord with encouraging results.

BDO started closed beta testing on June 28th and saw satisfying feedback from the gamers. It is scheduled to enter open beta testing on August 28th. Also, we have active MMO [Majeska] and ENF in our pipeline.

In looking at our casual games pipeline, we plan an open beta launch of at least six new casual games in the next few quarters. Those being launched in Q3 are DJ Max, a Korean musical game; and BBQ, an in-house developed strategy game. Those are scheduled for Q4 2006 and Q1 2007 including a Korean licensed game and three in-house developed strategy, singing and KungFu combat game. Additionally, we have several casual games in our 2007 pipeline.

Overall, we are pleased with the stabilized performance of our online game portfolio in the second quarter, and we believe our strong pipeline with diversified game portfolio offerings will continue to attract users and help Shanda maintain its leadership in the competitive market. With that, I will turn the call over to Daniel.

Daniel Zhang

Thank you, Jun and welcome everyone. As you know, this is my first earnings conference call as Shanda’s CFO. I am very happy to speak with everyone today, and look forward to working with all of you.

Q2 total net revenue was $50.7 million, representing an 18.8% increase quarter-over-quarter and a 24.7% decrease year-over-year. Other revenues in the second quarter were $3.9 million, mainly derived from our platforms such as our EZ initiatives, online advertisements, online literature and others. The revenue contribution from EZ Pod sales was $1.1 million, which was generated by the sales of approximately 61,000 sets of EZ Pod in this quarter.

Gross margin was 56.5% of net revenues this quarter, down from 56.8% in Q1 ’06 and from 58.4% in Q2 ’05. Income from operations of $11.4 million improved sequentially, driven by lower operating expenses. Total operating expenses decreased 21.4% sequentially. Operating margins increased to 32.5% from 5.4% in Q1 ’06.

The decrease in operating expenses was mainly due to better budget control, a decrease in the share-based compensation and the labor cost reduction resulting from restructuring of some departments.

More specifically, product development expenses decreased 11% sequentially, primarily due to the decreased R&D expenses relating to our EZ initiatives. Sales and marketing expenses decreased 39.2% quarter-over-quarter, because the Company continues to leverage promotional synergies tied to its OEM and telecommunications partner relationships.

Share-based compensation expenses were $757,000 in Q3 compared to $1.5 million in Q1 ’06, because certain options granted in 2003 became fully vested in the first quarter. Based on unvested options as of June 30, and excluding any new options that may be granted, we estimate the share-based compensation expenses to be approximately $1.5 million in each of the following quarters in 2006.

Other income showed a sequential increase to $6.2 million as we received financial incentives for $5.7 million from the government during Q2. These financial incentives are subject to [inaudible] relating to payment times.

Net income in Q2 ’06 was $16.7 million compared to net income of $1.5 million in Q1 ’06, and $26.9 million in Q2 ’05. Diluted earnings per ADS were $0.24 for Q2 ’06, compared to diluted earnings per ADS of $0.02 for Q1 2006 and $0.36 in Q2 2005. The net number of ADS outstanding for Q2 was 72.1 million, compared to 72.1 million in the previous quarter, and 72.6 million a year earlier.

The effective tax rate in Q2 is 1.5% compared to 29.2% in Q1. The effective tax rate decreased partially because one of Shanda's operating companies reversed income tax periods accrued totaling $1.4 million in this quarter. We love this reversal. The effective tax rate in Q2 and the first half of 2006 would be 9% and 12.5% respectively. The effective tax rate was determined by the weighted average tax rate of all of our operating companies, which are taxed at different rates.

Moving to the balance sheet, deferred revenue decreased 29.7% quarter-over-quarter to $18.1 million in Q2, mainly because in Q2 our direct sales percentage rose to 25% from 17% in Q1, and turnover of our prepaid cards has increased in Q2 due to the adoption of the item-based model. Additionally, under Shanda’s new discount policy, local distributors [cross-platform] sales is discouraged, which also resulted in lower deferred revenue.

That concludes my formal comments. Thank you everyone for joining us today. I would now like to turn the call back to Donglei.

Donglei Zhou

We will now take any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Paul Keung - CIBC World Markets.

Myresh for Paul Keung – CIBC World Markets

Hello, everyone. This is Myresh for Paul Keung. Good quarter. I have one question. A lot of the upside in Q2 came from higher average revenue per user, or ARPU, due to promotions and better monetization of in-game features. So can Shanda sustain this level of ARPU in the subsequent quarters, or will it be choppy?

Tianqiao Chen

(Translation)

I actually spoke about the sustainability and the scalability in this model. Because we have actually allowed the game to be played for free, we actually changed the game product into a virtual community. As you all know, the life cycle of a virtual community is much longer than a particular product. This model is also scalable, because in essence, it is an e-commerce model.

In e-commerce, or any commerce, 20% of the customers typically contribute to about 80% of your total revenue. That principle will essentially apply to our revenue model going forward.

In theory, there is no upper limit of the ARPU. Unlike the previous model, where essentially the upper limit would be the monthly total spending, which is typically RMB35, or the hourly spending, this item-based revenue model does not have any upper limit. But in practice, this increase of ARPU will be a step-by-step process.

Jun also mentioned that in all of those games that we are now operating for free, we have launched a virtual shopping mall inside of the game. With those kind of shopping malls, we not only meet our users’ demand, but also are creating new demand continuously.

So the key aspect of this business model is actually in its sustainability and scalability.

Myresh for Paul Keung – CIBC World Markets

Thank you.

Operator

Our next question comes from Safa Rashtchy – Piper Jaffray.

Nat Schindler– Piper Jaffray

Hello, great quarter. This is Nat Schindler calling in for Safa Rashtchy. To follow-up on that last question about how ARPU has trended, instead of going forward, let’s look a little bit historically. It went from 30.4 in Q1 to 45.5 on a monthly basis in Q2. How did that trend month-over-month? Was it a linear progression from somewhere below 30 in January up to somewhere above 45 in June?

Tianqiao Chen

(Translation)

Daniel Zhang can comment a little bit more on this, but in general, I think this growth is actually quite smooth except there is some seasonality. For example, the May month, because the first week of May is a public holiday in China more people had free time to play games; and hence, in the that month you will probably see our ARPU a little bit higher.

Also, when we launch new packs or new items, just like in any shopping mall, when you have a particularly new product coming out, that might generate some short term spike in some sales in the period.

Daniel Zhang

I would like to elaborate more in the ARPU and, actually, the ARPU is calculated by the revenue divided to the active paying accounts for the quarter. Actually, in the active paying accounts this quarter, it is not the basic average number of the three months during a quarter. For example, if the one user consumed twice in this quarter, so it is only one active paying account.

In Q2 our ARPU actually showed a steady increase, but also the trend depends on the expansion pack release and the virtual items we have released and we opened our virtual shopping malls. They need attractions and they want to consume, so the ARPU shows an upward trend in this particular period of time.

Nat Schindler– Piper Jaffray

Thank you. Do you have any plans to release an additional expansion pack in Q3 or in Q4? Or something similar to the shopping malls in crossover games?

Tianqiao Chen

(Translation)

In fact, the new model is just like a real shopping mall. Like in the shopping mall, people can buy coats when the weather is getting cold; if they are hungry, they can buy snacks. So this purchase is actually a continuous process. In addition to meeting the demand from our users, we are actually able to create new demand. For example, by introducing new functions.

In the next couple of quarters, we have prepared enough new functions, for example, like special parties or celebrations, and we are confident that those new functions will continue to create additional demand in the consumption.

Operator

Our next question comes from James Mitchell – Goldman Sachs.

James Mitchell – Goldman Sachs

Good morning. Thank you for running through the deferred revenue in so much detail, because it is one of my perennial questions. Two other questions, first, looking at your new title ArchLord, should we expect the percentage of accounts, pay to play and the ARPU among those pay for virtual item accounts to be higher on ArchLord than on your existing games? Given it is designed as a free-to-play title and it is 3D. Or, should we expect it to be initially lower because it is going to take time to build traction first?

The second question, I was quite impressed by your boosting percentage of online transaction revenue from 17% to 25%. Can you talk about how you enabled that? How you encouraged users to shift from prepaid cards to online payments? And also, the economics of the online versus prepaid cards? Thank you.

Tianqiao Chen

(Translation)

It is true that since ArchLord is designed to be an item-based game, the operation of that will be smoother than to suddenly transform a game from a monthly payment model to an item-based model.

But in terms of how we can switch a user into a paying user, I would like to elaborate more. Typically with the growth of the item-based revenue model, it comes from three areas. First, we can attract more and more users by allowing the games to be played for free. Secondly, the free playing users can gradually become paying users. Thirdly, as those paying users start to like the game items more and more and consume more, the ARPU could essentially become higher and higher, as I explained earlier.

ArchLord’s starting point is definitely higher than the other games that we need to make a switch in the middle, but it will still have to go through this kind of a normal progression before it becomes mature. So far, the progress of ArchLord after we started launching the items for sale is within our expectations, and we are very optimistic about its future.

The reason why direct sales continue to increase as a percent of total revenue has three reasons. First of all, in the initial preparation stage we have designed this system to be easily accessible and we have designed a lot of other incentives to encourage the users to use this particular payment method.

Second is that when the users get used to or accustomed to this payment method, they actually begin to trust Shanda’s brand and platform even more. Word of mouth, in fact, of the good initial results is another reason why this continued to grow.

Just to add that I always believed that Shanda's core competence is really in its payment system, how convenient and easy it is; its customer service and various other services that we provide to our users not just by licensing a game and putting it on server.

Given the low penetration of banking card systems in China, the reason why our direct sales, where the end users pay by credit card/debit card continue to improve, has also something to do with the new model launch. Because under the new model, unlike the previous monthly payment model it's more about impulse buying, so the users are demanding a quicker and more convenient payment method and those users can afford to do so. So that's another reason.

Operator

The next question comes from Richard Chow - Alliance Bernstein.

Richard Chow - Alliance Bernstein

Thanks and congratulations for the results. I have several questions. First of all, on the cost of service, on the other side I've seen quite an increase from about 21 million in the last quarter to about 46 million. I wondered what that is? That's my first question.

The second question is regarding the operating expense. I wonder how it was going to trend, especially for the property and sales and marketing?

Daniel Zhang

The increase of other in cost of service in Q2 is mainly due to the following reasons: the first one is the cost of EZ products went up due to the increased shipments; and the second reason is we implemented a customer loyalty program in Q2. Under this program, users are given certain Shanda bonus points based on the money they spend in their accounts. So we accrue the cost of this bonus point and recognize it in other of cost of services.

The third reason is that due to the increase of sales revenue our cost of manufacturing, printing costs, increased accordingly. So that relates to the first question.

The second one is the operating expenses trend. In Q2 our operating expenses show a steady decreasing trend, and due to our better budget control and our internal labor costs restructuring I think the operating expenses will be more stable in the following quarters.

Operator

The next question comes from William Bean – Deutsche Bank.

William Bean – Deutsche Bank

Hi guys, I was wondering if you could give a sense of the difference in ARPU between the various games?

Tianqiao Chen

(Translation)

Well in the past we have not disclosed revenue per game and we have always disclosed revenue per category as in MMORPG and casual game. I would like to say that under the new model, all three games have shown a very good growth. Overall, our APRU has gone up 50% quarter-over-quarter and I think the proportion among the different games remains similar to the previous.

Operator

The next question comes from Dick Wei - JP Morgan.

Dick Wei - JP Morgan

Hi and congratulations on a good quarter. On your projections on the MMORPG side, I am wondering for the community effect, do you see any of the new users coming to play Mir or is it mainly from some of the existing game players who were not active but have played the games before?

Tianqiao Chen

(Translation)

The growth is really coming from some of the users that left Shanda's game before; after seeing this new model, they came back and actually wanted to have that new experience again. Of course we continue to attract some users and at the same time might lose some, so it is a fluid process. Of course at the same time ARPU is increasing, so overall the revenues are increasing.

Operator

The next question comes from Antonio Tambunan - Bear Stearns.

Antonio Tambunan - Bear Stearns

Good morning and congratulations on a great quarter. I have a slight follow up and then a general question. The follow up was on the previous analyst's question on the ARPU trend. I believe -- if I misunderstood then please correct me -- but I believe you said that the ARPU for the quarter was calculated on average base of paying users.

So my question is, how will the actual number of paying users from month to month in the quarter, was there a decline from April until June?

Jun Tang

Okay, I will answer this question. Actually in Q2, our active paying accounts show a decline trend. But this is mainly because some of the users who purchased our prepaid card, we changed the business model last September. They just want to use up the money in the first quarter so they consume in the first quarter. So in the first quarter it shows a greater active paying account. They convert to a free play later, so in the second quarter, the active paying account showed a slightly decreased trend. But we believe that the Q2 number is more accurate to reflect the number of players who use a card to buy virtual items and services.

Antonio Tambunan - Bear Stearns

Yes, I understand for the first and second quarter. I was just trying to get a feeling on the second quarter itself, from May, April and June. Did it stabilize all three months?

Jun Tang

Yes, it's pretty stable.

Antonio Tambunan - Bear Stearns

Okay. My next question is, I'm trying to get a feel of what you guys think on the outlook, with the onslaught of all these new games coming out from The9 and NetEase, as well as Webzine’s Kingdom of Warriors. With all of these games coming out over the next six to eight months, how do you see this impacting your existing games? Because they are MMORPGs, and I do understand that there's a different payment model, but I'm still trying to get a feel for the competitive environment. How do you see all these new games and expansions impacting your user base?

Tianqiao Chen

(Translation)

In fact, there has always been a lot of competitors and Shanda's industry leader position has been challenged over and over again. However we feel that this is a very normal progress and we are very confident and comfortable that we can continue with the best success.

As there are more games coming to the market, I believe that the users are also increasing. The overall user base is enlarging. Also, the structure of that user base is changing as well. Initially the people that were attracted to online games were the typical, hard-core online gamers that would several hours a day playing. Later on, the latecomers are people who might play two to three hours. Now, even more and more users play, but even the newer users could even play less -- maybe a few times a week. The overall user age are also becoming older and older.

So the real competition comes from whether you can stay close and stay true to the user change and the trend in that change and be sensitive to the change in users’ demand, and continue to meet that demand; and in Shanda's case, even creating new demand. So I believe that is where the real competition comes from. Not necessarily by introducing one or two additional games, but rather to keep our understanding and satisfying user demand.

First of all as you all know, is the revenue model change, because increasingly the new users have money, but not the kind of time that the initial hard core set of users have. Whereas the hard core users have a lot of time but do not have the spending or consumption power. First of all, that's not a very healthy of way of playing the games and secondly, that's not where the revenue opportunity is. Overall, essentially with the new revenue model, the allocation of resources is based on the demand and hence the revenue is derived from that as well.

Secondly is that the market is becoming more fragmented. For example, the emergence of music games and sports games. I'm very happy to see that and I feel that for Shanda to continue to be an overall industry leader we need to satisfy the different tastes from that diversified and ever-changing user base. Our games portfolio also need to diversify and change with our users. I don't believe that having just one hot game is a sustainable model.

Thirdly is that Shanda's platform is one that can keep users because I feel that our technical support, our payment, our unified user count and our customer service, all of that, really creates a brand and a platform that our users can identify with. I think that's very necessary going forward.

So in summary, by having diversified and appealing content we can attract users. By having the item revenue model, we can satisfy users demand and by having Shanda's overall unified platform, we are able to keep those users on our platform.

So I believe a developer is always improving his skills. So the second game is better than his first game and next year's game is probably better than this year's game. So we're not in a hurry to have to get all the hot games at this moment. But rather, we're more longer term and we can always get future games if our platform continues to be strong.

Donglei Zhou

I think we have time for one more question if there is any.

Operator

The next question comes from Richard Ji - Morgan Stanley.

Richard Ji - Morgan Stanley

Hi. Actually I have two questions. The first is regarding the breakdown for three of your leading games. I'm particularly interested in the fact of whether these three games expanded similarly or are we seeing a big variation among them? I have a follow-up.

Tianqiao Chen

(Translation)

Yes, actually this question was asked earlier and I would like to reiterate that all three games have benefited from the new revenue model. But in terms of the detailed breakdown, we have never had a habit of disclosing them.

Richard Ji - Morgan Stanley

The second question is regarding your cost savings in the quarter. I want to understand a little better about how much of that cost savings comes from your EZ products versus your core online gaming business? Also, would you be expecting a scaling back of marketing and R&D expense going forward, given rising competition and the potential launch of new games and also your new EZ products?

Daniel Zhang

In Q2, we put effective cost-saving procedures, I think, in both sides. I think in the game side and in the EZ business, we all implemented good budget controls. Actually, I think this is the prime reason for our good operating expense results.

I think going forward, we will continue to implement such budget control procedures and for sales and marketing expenses, we will definitely consume it under, to spend the money under budget and we will carefully evaluate the effectiveness of the sales and marketing activities. So I think going forward, again, the sales and marketing expenses and other operating expenses will be more stable in the following quarter. Thank you.

Donglei Zhou

Thank you. That concludes our conference call today. Thank you everyone for participating.

Operator

This concludes today's conference call, you may now disconnect.

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