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Shanda Interactive Entertainment Ltd (NASDAQ:SNDA)

Q2 2009 Earnings Call

September 3, 2009 9:00 pm ET

Executives

Vivian Chen - Investor Relations Manager

Grace Wu - Chief Financial Officer

Alan Qunzhao Tan - President and Chief Technology Officer

Tianqiao Chen - Chairman of the Board, Chief Executive Officer

Analysts

Alicia Yapp - Citigroup

Eddie Leung - Banc of America Merrill Lynch

Tian X. Hou - Pali Capital

Lisa Yeung - Morgan Stanley

James Lee - Sterne Agee

Yvonne Yang - BNP

Operator

Welcome to the Shanda Interactive Entertainment 2009 second quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Vivian Chen, Shanda's IR manager. Please proceed, Madam.

Vivian Chen

Thank you. Good morning and good evening to all participants. On behalf of Shanda, I would like to welcome everyone to our second quarter 2009 results conference call. Here with us today are Mr. Tianqiao Chen, our Chairman and CEO; Mr. Alan Qunzhao Tan, our President and Chief Technology Officer; and Ms. Grace Wu, our Chief Financial Officer.

Before we begin, I would also like to remind you that management’s comments during the call will include forward-looking statements that are based on our current expectations and are intended to qualify for the safe harbor from liability for such statements established in the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts during the conference call are forward-looking statements which are subject to significant risks and uncertainties. Actual results may differ materially from those contained in the forward-looking statements, so please do take a minute to read the Safe Harbor statement in Shanda Interactive Entertainment’s second quarter 2009 press release.

In addition, please note for discussion purposes, all numbers were translated into U.S. dollars based on the exchange rate of RMB6.8319 per U.S. dollar.

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

Grace Wu

Thank you, Vivian. Good morning, everyone, and good evening for our friends in the U.S. Shanda achieved another record result in the second quarter of 2009. Consolidated net revenues increased 47.7% year over year and 11.8% quarter over quarter to $181.1 million, exceeding the company’s guidance of 8% to 10% quarter over quarter growth.

MMORPGs related revenue increased 54.6% year over year and 13.8% quarter over quarter to $157.3 million.

Casual game related revenues, which include revenues related to events casual games, online chance and board game platforms, and [inaudible] platforms, increased 4.3% year over year and 12.7% quarter over quarter to $15.1 million.

Other revenues increased 33.6% sequentially and 70.6% year over year to $8.7 million. Alan will provide more details in his discussions of business updates later.

Gross profit was $131.6 million in the second quarter, increased 12.3% compared with the previous quarter and 47.4% year over year. Gross margin was 72.7% compared with 72.3% in the first quarter of 2009 and 72.8% in the same period a year ago. Product development expenses decreased 9% Q-on-Q to $13.2 million in Q209, mainly due to a performance based bonus for fiscal year 2008 that was distributed to our R&D staff in Q109.

Sales and marketing expenses were $18.3 million, increased by 29.1% sequentially, primarily due to increased expenses related to marketing efforts for the launch of new game titles, as well as expansion pack for existing games.

G&A expenses in Q2 were $24.9 million, compared with $21.9 million in Q109, slightly increased from 13.5% in Q1 to 13.8% in Q209 as a percentage of revenue. This is reflected in increasing headcount related expenses and [inaudible] cost expenses associated with our 20-F annual report preparation work and the tender offer of Hurray!

‘s 51% stake.

Income from operations were $75.2 million, up 12.7% quarter over quarter and 53% year-on-year. Operating margin was 41.5% compared with 41.2% in the first quarter while operating margin during the same period a year ago [inaudible].

Share-based compensation was $2.7 million in Q209 compared with $2 million in the first quarter of 2009.

Net [non-operating income] for Q209 was $3.5 million versus $0.1 million in the previous quarter and $0.8 million a year ago. The quarter over quarter change was mainly resulting from the difference in government financial incentives received, which amounted to a $5.3 million in Q209 compared with $0.2 million in Q109 and $0.8 million in the second quarter of 2008.

[inaudible] received a government financial incentives is subject to [time lapse] and government administrative process. We expect we will continue to [receive] government subsidies going forward.

Income tax expenses for the second quarter were $16.2 million compared with $13.9 million in the previous quarter and $9 million in Q208. The effective tax rate of 20.2% in Q209 remained relatively stable compared with Q109, which was also 20.2% and 17.9% in Q208. The year-over-year increase in effective income tax rate was mainly due to the combined impact arising from changes in income tax rate and periodical assessment of the tax benefits we were eligible for, temporary deductible differences, and for our subsidiaries.

Net income in Q209 was $62.5 million, compared with $62.8 million in Q109, and $41 million the same period a year ago. Net margin was 34.5% compared with 32.6% in Q109 and 33.4% in Q208.

Diluted earnings per ADS were $0.90 in Q209, compared with $0.78 in Q1 and $0.56 in Q208.

Non-GAAP operating income, which excludes share-based compensation, totaled $77.9 million in the second quarter of 2009, increased by 13.2% quarter over quarter and 51.6% year-on-year. Non-GAAP operating margin was 43% compared with 42.4% in Q1 and 41.9% in Q208.

Non-GAAP net income was $65.2 million in Q2 versus $54.8 million in Q1 and $43 million in Q208. Non-GAAP diluted earnings per ADS were $0.94 in the second quarter compared with $0.80 in the first quarter and $0.58 in the second quarter of 2008.

For the first half of 2009, consolidated net revenues were $343.1 million. Income from operations totaled $141.8 million, while operating margin was 41.3% and net income for the six months ended June 30, 2009 was $115.3 million. Net margin was 33.6% for the period. Diluted earnings per ADS were $1.68.

Non-GAAP operating income for this period totaled $146.5 million, while non-GAAP operating margin was 42.7%. Non-GAAP net income was $120 million and non-GAAP net margin was 36.8%.

On a non-GAAP basis, the diluted earnings per ADS were $1.74.

Turning to our balance sheet, cash and cash equivalents as of June 30, 2009 totaled $516 million. Deferred revenues increased 16% quarter on quarter to $88.2 million in the second quarter of 2009. Long-term liabilities were $151.2 million, reflecting the convertible notes issued by us in September 2008.

Before I turn to guidance for the third quarter 2009, we caution that we cannot predict the future exchange rate of the RMB or Korean WON against the U.S. dollar and therefore cannot accurately or with any degree of certainty estimate the effect of any change in exchange rate on our financial results. Accordingly, in providing our financial targets, we assume no change in exchange rate for the third quarter 2009. In addition, our actual results could differ from our financial guidance for various reasons, as stated in the Safe Harbor notice in the press release, including changes in exchange rate, as well as the Safe Harbor risk factors as stated in our 20-F annual report filed with the U.S. SEC in 2009.

On July 22nd, we announced the completion of the tender offer for Hurray!. Shanda will [host through] the Shanda Music, our wholly owned subsidiary, approximately 51% of Hurray!’s total outstanding shares. Based on the integration schedule, we expect to consolidate Hurray’s financials starting from September 2009 onward.

Now, based on the company’s current operations, we expect our consolidate net revenues for Q309 to increase by a rate in the range of 8% to 11% quarter over quarter. However, since Shanda again [inaudible] file a registration statement with the U.S. SEC today for initial public offering, it will be difficult for us to estimate the potential impact from share-based compensation related to Shanda [against IPO]. Therefore, the operating margin guidance is provided on a non-GAAP basis, excluding the effect of the share-based compensation. We expect the operating margin for the third quarter 2009 to be similar to that of second quarter 2009, both on a non-GAAP basis.

That concludes my financial discussion. I would like to turn the call over to Alan, our President and Chief Technology Officer, to provide the overall business update. Thank you.

Alan Qunzhao Tan

Thank you, Grace and welcome, everyone. Our major content business has continued their strong growth in the second quarter of 2009. First of all, we would like to provide a brief update on the recent development of our online game business, which is operated under Shanda Games.

During the second quarter of 2009, Shanda Games released a total of 61 expansion packs for games in operation, supplemented by a series of online/offline promotions to further expand the size and loyalty of our user community and enhance the user experience.

For example, following our successful commercial launch of [Aya] on April 16th, we released the first expansion, [Across the Valley], in August, which has quickly gained popularity from users due to its exciting and intriguing game design.

Aside from expansion packs, we also commercially launched two new titles in the second quarter. [Jaz World] in June and [Dello] Live Online in May. [Jaz World] was originally developed by King Soft but tailoring to Shanda Games platform and co-operated by Shanda Games. [Dello] Live Online is co-developed by Shanda Games and Tecmo.

Furthermore, we have started a larger [inaudible] beta testing for three games -- [inaudible] Ghost Fighter Online, [Liu] Online, and The Crossing.

All these games mentioned above have been very well-received during beta testing, which we believe demonstrates the effectiveness of Shanda Games multi-channel selling strategy, [enabling us] to have the wireless reach to serve quality online game titles.

Looking forward in the third quarter, we plan to launch more games to further expand our game portfolio and further diversify our gamer base.

As of August 31st, Shanda Games has 29 games in operations, including 18 MMORPGs and 11 advanced casual games, which are supplemented from our well-established multi-sourcing channels. In addition, we have another 24 games in Shanda Games [inaudible] pipeline, 16 MMORPGs and 8 advanced casual games.

Other than our online game business, I would also like to update the latest progress of our online literature business, SDL. During the second quarter, SDL recorded a daily average page view of closely to $400 million and aggregated number of [titles] published reached 50 million [inaudible] on a daily basis.

Our large user base has formed a virtual community with an independent commercial model focused on reading and commenting on the online literature works, which enriched close interactions between readers and writers.

The number of paying subscribers has continued to grow. In addition to the expansion of the online platform, SDL also took the initiative to promote the convergence between online writing and the mainstream offline writing.

For example, starting from late August, we launched an initiative to invite famous writers from 30 provinces all over China to publish their works online which has worldwide recognition from the public.

Other than the traditional subscription model, we have also started several new business models to further monetize our online literature IPs, including wireless reading, offline publishing, and IP licensing to online game companies and TV movie studios.

In our wireless reading business, SDL is cooperating with telecom operators such as China Mobile to provide handset optimized literature works. We are also heavily promoting our own wireless platform for handset based writing and reading. We launched our first website, [inaudible], last year and we are glad to see the rising of popularity of wireless reading. As of June 30th, the average daily view of [inaudible] website was close to 20 million.

We are pursuing cooperation with different telecom companies.

In our offline publishing business, we have established a strategic alliance with several offline publishers to fully leverage their existing China [inaudible] resources. We believe offline publishing is another opportunity to further monetize the value of our online literature IPs. We are also launching several initiatives to build a copyright agent system to manage all the copyrights related to business in a professional way and provide full support for writers.

In our IP licensing business, we have made excellent progress by cooperating with game companies and TV movie studios. For example, we have exclusively licensed the IP of [Hanon], our best-selling and widely acclaimed [inaudible] for Shanda Games, which we adapted a storyline to develop an online game with the same title. [Hanon] was [inaudible], most searched word in Baidu’s listing during August 2008 to July 2009, which attracted more than 20 million page views on [inaudible].

Furthermore, SDL has built itself into one of the largest IP licenses to TV movie studios in China. As of June 30, 2009, Shanda Literature has successfully licensed 41 [inaudible] IP to movie companies and TV production studios.

We have clearly seen the strong growth of momentum of SDL, which has far outpaced some of our more established businesses. We are fully confident that this strong growth momentum will continue and contribute to our overall business performance in the future.

[inaudible], we would like to update you on the progress we achieved on our platform business, Shanda Online, or SDO. With our open platform strategy, Shanda Online continues to provide its integrated service through the one-stop solution for third-party content providers based on our revenue sharing model. SDO’s one-stop solution will seamlessly integrate its three core modules, namely digital content delivery system, a promotion payment and [committee] system, and a customer relationship management system. For third-party content providers, they could also choose to use each of SDO’s special services.

We observed two effects as a result of Shanda Online’s open platform strategy. On one hand, we observed the increased attraction and the stickiness of our platform by aggregating additional online entertainment offerings. On the other hand, we clearly observed that the value [inaudible] online as a standalone independent platform is widely realized by both third-party partners and users.

In addition to 15 companies who have agreed to use SDO’s integrated services, we also have 52 third party SAPs who are using [inaudible] online’s distribution channels.

In addition to SDO’s integrated service platform solution, SDO also provided security services to its users. SDO has a unique two-factor authentication, Shanda [EC], which has the largest user base in China. As of June 30th, we have sold around 3 million EPs in aggregate to our users. We believe that our diversified content offerings and our open platform will continue to drive the future growth of Shanda and eventually distinguish ourselves as a leading interactive entertainment media group.

Now I will turn the call over to our Chairman and CEO, Mr. Tianqiao Chen, to discuss our strategy and our long-term growth plan.

Tianqiao Chen

Thank you, Alan. It has been Shanda's long-term vision to build up a leading [role] in the interactive entertainment industry. Our strategy is crystal clear -- centralize the platform, decentralize the content. We hope to enrich the life of every member by providing diversified interactive entertainment content on the centralized platform.

We announced today that Shanda Games has filed a registration statement to U.S. SEC for an initial public offer in the form of ADS. The proposed listing of Shanda Games is one of our major steps in the process of separating our content business from our platform business, operations business, which will enable a clearly defined specialization of the business along the entire industry of [inaudible].

The content business completely differs from the platform operation in terms of business model, corporate culture, and core competitiveness. However, while they are different, they are at the same time complementary.

Through the proposed IPO of Shanda Games, we would like to draw even more public attention to the distinctive core business and the different business model of both Shanda Interactive Entertainment and Shanda Games.

We believe the lifting of Shanda Games will further strengthen the focus of management and its [inaudible] of responsibility towards each business operation, but will also help retain talent and thus enhance management accountability for realizing our corporate strategy.

The purposes of Shanda Games listing also include further expanding Shanda Online’s business operation at an independent operation platform, providing operating support for third-party content providers at Shanda and boosting the development of business division through financing.

As such, the present listing plan is the natural expansion of internal organization restructuring of Shanda Online and Shanda Games. It is also a breakthrough made by Shanda Entertainment Interactive as a leader in the diversified online interactive entertainment and media industry.

We intend to continue to enhance the cultivation of new business content and create more value for our shareholders through innovation, investments, and acquisition.

In July, we completed the acquisition of 51% shares in Hurray!. This acquisition is an example of how Shanda has grasped the opportunity of 3G development and implemented the decentralized content and centralized platform strategy with an objective to further expanding the breadth and depth of our entertainment content offering.

With one of the largest original music resources in China, Hurray! is the leading online music and service provider enjoying a unique advantage in the field of digital music. Hurray! is also a leading player in mobile value-added service industry. For these resources of Hurray! and Shanda combined with their complementary content distribution platform as well as user community, we play an increasingly positive role in the 3G development layout of those companies.

The business of Shanda Literature, including advertisement and online literature copyright operation, has undergone a rapid development recently [inaudible] next to the solid foundation laid in the past few years. Shanda Literature is not just a website for literature work but rather it is now a copyright production center and both the Internet and the mobile phones are still the perfect channel for accessing literary works.

Moreover, it is our goal to develop Shanda Literature into a copyright operation company which involves cooperation within operating in a wide range of businesses, including online wireless offline publication games and firms and television -- films and television. Literature is the source of a variety of creative content and is therefore expected to produce the potential synergies with the other entertainment content on the Shanda online platform. We believe that the cross-selling among user communities and different types of entertainment content will enhance the value for the development of online literature business.

Being a service platform open to all, Shanda Online platform serves both content provider and users. Shanda Online core competitive strength lies in its service. We have integrated the resources of Shanda Online into other -- into our three major systems, namely digital content delivery system, DDS system, customer relation management systems, CRM system, and the promotion payment community, PPC system, all of which have developed to a considerable scale in the past few years and are capable of serving different content providers.

After opening these excellent resources to the whole Internet industry, we have established cooperation partnerships with [inaudible] provide services for 15 third-party content providers as of the second quarters.

Earlier today, we announced the appointment of three senior executives within Shanda Online’s management teams. We are delighted to have these three outstanding professionals with strong experience in their respective fields to join us.

Going forward, we will continue to draw on these talent pools, both internally and externally, to support the implementation of our long-term growth strategy. We believe that a listing of Shanda Games will help Shanda Online to continue building on more independent platform business for an all around development and openness.

Recently, Shanda has received both domestic and international [inaudible] reorganization for its fast and sustainable growth. During the 10-year China Online Game industry award ceremony, Shanda ranked highest for all of the three awards. In Fortune Magazine’s list of 100 fastest growing companies, Shanda ranked seventh. In the entertainment industry, Shanda is second in the fast-growing entertainment companies.

We believe a higher quantity and quality of entertainment content will draw more users to Shanda Online’s platform and more users in turn will attract an even higher quantity and quality of content to Shanda Online. We are very confident about future development of Shanda in each of our businesses.

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

Vivian Chen

Thank you, Mr. Chen. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alicia Yapp with Citigroup. Please proceed.

Alicia Yapp - Citigroup

I have a couple of questions. First of all, regarding your existing games, your two main games, [Near To] and [Wu], these two games continue to contribute substantial revenue as disclosed in the filing as well. They contribute about 56% and 21% as of the six months 2009, so do you anticipate the proportions of these to change in the coming years? And how do you balance the risk of any potential deteriorating of the user churn and any revenue loss of these two games?

Tianqiao Chen (Translation)

[Near To] and [Wu] are actually the two leaders [inaudible] in China, and [the two games with the most products]. After many years in operations, these two games with excellent operation [inaudible], are still in a growth stage, including revenue scale as well as the user base.

Actually, around the end of last year, we released a major expansion pack for [Near To], which is called [Near To White Giant]. It is operated in parallel with [Near To] and actually opened up a new user base for us. In terms of contribution, it is actually also very important to constitute to our portfolio.

On the other hand, we also seem to see very high growth from the other games in the portfolio. We always focus on the balanced portfolio approach. Thank you.

Alicia Yapp - Citigroup

Thank you. My second question is regarding your cash. So you have about $778 million in cash as of June and according to the filing, you are going to receive dividend from Shanda Games about $102 million or $103 million, and I think believe that the actual [inaudible] also you are going to get the transfer of about $17 million, so you are going to have close to $1 billion after Shanda Games is listed. So what are you planning to do in terms of your cash from the holding company perspective? And how much do you actually anticipate to have as of the end of September, assuming if you were able to list it by then?

Grace Wu

I will try to answer your question two separate ways. As Shanda Games just filed their registration statement with the U.S. SEC [inaudible], please understand we cannot comment on any potential [inaudible] for this particular matter. But to discuss the cash on the balance sheet and potential cash dividend we are going to receive from subsidiaries and the future cash flow, basically as we commented earlier and also as Mr. Chen mentioned in his report, we hope to raise capital for the ongoing growth initiative for our existing business units, as well as expanding our business so that we can provide an integrated service to our users and also to our customers, as well as to expand and enhance the content offering.

So all the cash on hand will help us to develop a true leading integrated entertainment media company.

Alicia Yapp - Citigroup

I see. Thank you. And lastly just on your guidance on the 3Q, you guided I think 8% to 11% sequentially, so I would assume in the full quarter [inaudible] contribution and with your expansion pack that just released in August, that should kind of help out in terms of the sequential growth, given also your cache of games will be a seasonally strong quarter as well, so can you give us some color in terms of how different for some of the MMO, Ion, and the casual games are performing? Thank you.

Grace Wu

As a general practice, we do not comment on any specific games or specific business. The guidance provided for the whole group revenues and we -- be reminded again that we actually take a portfolio approach to the game business, as well as an integrated business model, so we actually are very proud of how we manage growth over a longer period of time. Therefore, 11% sequential growth is [inaudible] about all the different business performance and also our approach to manage our growth through a portfolio of games.

Alicia Yapp - Citigroup

I see. Thank you. Just lastly on the operating margins that you comment, so you guided us to kind of use the non-GAAP because of some [inaudible], so does that mean that we will have additional costs in some of the -- for example, the professional or maybe consulting fee during the quarter or --

Grace Wu

No, we guided on a non-GAAP basis as I indicated earlier that it shouldn’t -- potential impact on share-based compensation, so that’s the factor we actually subscribe from the original guidance. It was still take into account our [general accrued expenses] or [inaudible]. However, having said that, it will be an upward comparison so when we guide sequentially, we compare to a non-GAAP basis for the second quarter.

Alicia Yapp - Citigroup

I see. Okay, thank you so much.

Operator

Your next question is from Eddie Leung from Banc of America Merrill Lynch.

Eddie Leung - Banc of America Merrill Lynch

Good morning, everyone. My first question is about Shanda Online. You mentioned that in the quarter that you have already provide services to at least a dozen of other service providers, so I am wondering, could you guys give us some examples on how Shanda Online benefited your partners? It would be great to share some metrics so that we know how the platform value can benefit other gaming companies or entertainment companies. Thanks.

Tianqiao Chen (Translation)

Shanda Online’s business strategy is in line with our overall strategy focus, centralized platform and decentralized content. They actually integrated all our user resources, as well as the content [inaudible] service. For example, we combined our powerful distribution channel, as well as also promotion payment systems, the customer relationship management system, as well as the digital content delivery exchange. As of now, there are actually many third-party content providers connected to the integrated platform. Firstly, we’ll be able to benefit from the vast user resources, user base via Shanda Online. And also, the best quality customer service. This will help [inaudible] enhance the content service to the users and will be able to help the growth of the content business for these third-party content providers. The business model we have with these third-party content providers are based on revenue shares business model.

Eddie Leung - Banc of America Merrill Lynch

I understand. My second question is regarding [Near To] -- when we look at the revenue contributions from [Near To] as a percentage of total game revenues in the filings, does that include [Near To] [inaudible] as well?

Grace Wu

Yes, it does.

Eddie Leung - Banc of America Merrill Lynch

Got it. Thank you.

Operator

Your next question is from Tian Hou with Pali Capital.

Tian X. Hou - Pali Capital

Good morning. I have a couple of questions. One is online operations -- Tianqiao mentioned you guys have signed up some other content provider like game operators, so can you give us color on how many game companies have you already signed up and how many of them Shanda has already seen revenue contribution and what’s the upcoming schedule for the revenue contribution from them? That’s number one question.

Number two question is regarding [Aeon], the expansion pack you launched on August 13, so how is that expansion pack going and how the expansion pack has addressed the issue of [inaudible] program? So that’s two questions.

Tianqiao Chen (Translation)

As mentioned in my earlier report, currently we have already signed into a service agreement with 15 Internet content providers. And there are another 52 Internet content providers that are using our distribution channel service, promotion payment service. As we start to promote this integrated service earlier this year, so a lot of content providers, the content is still in the development stage, so as they gradually launch their content on our platform, we start to see this business to grow.

For [Aeon], through the launch of expansion packs in August and the completion of the offering of the expansion pack, we see actually pleasing results of the user feedback and the performance.

Tian X. Hou - Pali Capital

Regarding --

Tianqiao Chen (Translation)

And we see actually the performance is steadily growing.

Tian X. Hou - Pali Capital

Regarding the first question, I also asked how many of those signed companies have already contributed revenue to Shanda Online and what is the schedule for the upcoming revenue contribution?

Tianqiao Chen (Translation)

As mentioned earlier, most of the content providers, the content is still in the development stage or they are in the process of a connection in getting connected to the platform, so after the second quarter, revenue contribution is still very small. Not many content providers started launching their content on the platform yet. However, we expect to see more contribution towards the end of the year.

Tian X. Hou - Pali Capital

Thank you. That’s all my questions.

Operator

Your next question is from Lisa [Yeung] with Morgan Stanley.

Lisa Yeung - Morgan Stanley

I was cut off just now so I am not sure if this question was asked -- so my question will be mainly about Hurray! and your merger strategy. How are you going to integrate Hurray!’s [inaudible] and wireless business --

Grace Wu

Sorry, you are breaking up. We probably have to ask you to ask your question again and speak a bit slowly.

Lisa Yeung - Morgan Stanley

Sorry?

Grace Wu

You were breaking up, so if you can speak louder and a bit slowly?

Lisa Yeung - Morgan Stanley

Okay. My question is about your Hurray! business, Hurray!’s integration. So I want to know how you plan to integrate Hurray! with your other online game business, such as [inaudible] and could you also elaborate more on your strategy on Shanda Music? And also, do you plan to integrate the wireless [inaudible] with Hurray! itself? Thank you.

Tianqiao Chen (Translation)

We completed the tender off on [inaudible] in Hurray! on July 22nd. This is one of the important strategic initiatives we tried to capture the opportunity provided by the [inaudible]. This is in line with our strategy focused decentralized content, centralized platform, so we can further expand the breadth and depth of our entertainment content offering. Hurray! has a very good digital [inaudible]. Hurray! currently controls five music studios which have a lot of valuable music IP and also a composers and singers. In addition to that, Hurray! is also a leading player in mobile value-added service and [inaudible] channels. We have a very good relationship with the [inaudible] operators.

We see very good synergies from these businesses of Hurray! with Shanda, our strategy, as well as our content and service business. Thank you.

Lisa Yeung - Morgan Stanley

Thank you. My second question is about your casual games. I understand the seasonality in the second quarter but in general, your casual games have not been growing as fast as some of your peers, so could you talk a bit more about your strategy in casual games and how do you plan to reinvigorate the growth in the casual business?

Tianqiao Chen (Translation)

Well, Q2 historically is a low season for the casual game business. And in the next coming quarters, we have actually a very rich pipeline that we support new content launched casual games category, and we believe that will enhance the casual game business.

Lisa Yeung - Morgan Stanley

Thank you. My last question is regarding the [inaudible] of your SEG. Are you concerned about the conflict of interest within the group? [inaudible] may then have its own revenue pressure to allocate resources between SEG and third-party games which may probably not benefit the group as a whole?

Tianqiao Chen (Translation)

Actually we [have been preparing] for this business separation for a long time and as of July 1, 2008, we already completed the internal reorganization, especially the different business into independent entities and they are actually operating as independent entities when they sign into service agreements and discuss [inaudible] business. They all signed into the service agreements just like independent parties and also on a group level, we have a clear instruction about their own business focus. Shanda Online is a pure service provider. It provides a content mutual service. It will not enter into operation of the content, including the operation of online games.

Lisa Yeung - Morgan Stanley

Okay, thank you.

Operator

Your next question is from James Lee with Sterne Agee.

James Lee - Sterne Agee

Thanks for taking my questions. I was wondering maybe you can give us some color regarding [Aeon’s] new expansion pack? I understand that was launched in Korea in August -- I was wondering what is the timeframe for a China launch. And also are there any initiatives in the quarter that you are doing in order to continue driving the traffic for [Aeon] going forward? Thank you.

Tianqiao Chen (Translation)

After the initial stage of the 1.0 edition and also we completed the expansion pack upgrade in August, we see actually Ion entering into a stable growth stage. The 1.5 edition is currently scheduled to be launched in the fourth quarter of this year. We also are very confident about this upcoming edition.

James Lee - Sterne Agee

If I could ask a follow-up question about your comment about very confident about 1.5 version of the expansion pack -- can you help us out in terms of understanding what specific feature about this expansion pack would give you the confidence that would be able to drive the traffic for [Aeon]? Also, Grace, if you can help me out with this question in terms of the Hurray! acquisition, the P&L impact, can you help us understand what that might be from the revenue and also from the margin perspective in 3Q, since you incorporate only one month of those numbers?

Tianqiao Chen (Translation)

We believe that the expansion pack operation is really in other regions will provide us actually a very good insight to [inaudible].

Currently, we already see very good results from the 1.2 edition and which will be certain adjustments and enrich the content. It has a positive impact on the user experience. We also are working very closely with the developers of these [inaudible] the operation of this title.

However, I need to remind everyone that we always are proud of our portfolio approach and we focus very much on the portfolio strategy. We try not to be impacted too much by the [inaudible] model.

Grace Wu

And the second question actually is for me. James, you mentioned about the potential impact on consolidating Hurray!’s financial statements. As Hurray! is also a recording company and as you can see from the financial results, currently revenue scale is actually quite small compared to Shanda Group and also, before the tender offer, Hurray! [inaudible] amount of restructuring initiatives to enhance their business and financial performance while to get [inaudible] from [inaudible] and therefore achieve certain impairment charges in the previous quarters. Therefore when we complete acquisition of this 51% stake, Hurray! is [inaudible] actually in a much better stage. We actually see very good business momentum from this company and therefore the consolidation for the September month and onwards, we see would have a very minimum impact on financial performance.

Operator

Your final question comes from the line of Yvonne Yang with BNP. Please proceed.

Yvonne Yang - BNP

My first question is regarding the [inaudible]. After the IPO, do you expect a growth rate of SDO and SDL to outpace [that of SDP]? And if possible, can we have some more color on the revenue breakdown among the three sectors, if possible. Thank you.

And my second question is about [Aeon’s] new expansion pack. I understand that Shanda is very experienced in dealing with the [cheating robot] problem in Korean games and do you think the launch of the new expansion pack is a good timing to further enforce this kind of anti-cheating robot efforts? And is management concerned about the problem right now? Thank you.

Grace Wu

Again, I apologize but because Shanda Games [inaudible] registration statement with the U.S. SEC, so we would have to refrain from commenting on that business. But regarding your question for Shanda Online and Shanda literature business, we actually see very good [inaudible] for these two businesses as well as the other business we operate. Shanda [inaudible] actually had a very impressive growth rate, outpaced the group’s overall growth rate last year. We also are very optimistic about [inaudible] this year.

Tianqiao Chen (Translation)

Regarding your question on [Aeon], allow me to provide a bit more color. As you indicated, robot is nothing new to this industry and we have been very -- accumulate a lot of know-how to chase, about how to combat this robot issue over the years. So working very closely with the developer of [Aeon] and also making a lot of [modification] for the edition 1.2, we do see a very good result of our combating the robot issue in [Aeon]. It encouraged efforts on both sides. There are of course embedded anti-robot features provided by the [Aeon] developer to the game [inaudible]. However, Shanda Games also has existing contribution by providing its in-house development [inaudible] system, which is actually a very successful anti-robot solution. Thank you.

Yvonne Yang - BNP

Thank you.

Vivian Chen

Okay, thanks, everyone. Thanks for joining us today on the earnings call. If you have any further questions, feel free to contact us anytime. Thanks again.

Operator

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

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Source: Shanda Q2 2009 Earnings Call Transcript
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