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Executives

Rich Chiang - Investor Relations Manager

Wei Liu - President

Eric He - CFO

Hui Yuan - VP of Research and Development

Analyst

Alicia Yap - Citigroup

Atul Bagga - ThinkEquity

Andrey Glukhov - Brean Murray

Vivian Li - Piper Jaffray

Jenny Wu - Morgan Stanley

Gary Ngan - UBS

Wendy Huang - RBS

Giant Interactive Group, Inc. (GA) Q3 2009 Earnings Call November 24, 2009 8:00 PM ET

Operator

Good morning, ladies and gentlemen, I would like to welcome everyone to Giant Interactive Group's Third Quarter 2009 Earnings Conference Call. (Operator's Instructions) After the presentation there will be a question-and-answer session. (Operator's Instructions) Now I would like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Manager of Giant Interactive Inc.

Richard Chiang

Good morning, and good evening ladies and gentlemen. Welcome to the third quarter 2009 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, President; Mr. Eric He, Chief Financial Officer; and Mr. Hui Yuan, Vice President of Research and Development

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, Ms. Liu, and Mr. He, Mr. Ji 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, expect, anticipate, future, intend, plan, believe, estimates, and other similar statements, and include among others, statements regarding our continued efforts to increase shareholder value through strategic investments and expansion or adjustment of game content and features.

Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results of Giant to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, risks 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 19th, 2009.

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 hereof.

In addition, please note that references in the presentation to dollars refer to US 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. As we disclose in our preliminary result announcement last month, our third quarter performance was adversely impacted by our decision to eliminate in game modernization features such as Treasure Box, and ZT Online.

In order to comply with the recent virtual currency regulations passed in China. The calculation of Treasure Box caused a shift in player spending and usage habits throughout the quarter, which has some effect on our operating metrics as shown on slide six. Total Active Paying Accounts or APA was $1.108 million representing a 7.9% sequential decrease and 18.3% year-over-year decline. Average revenue per user or ARPU declined 13.5% from the second quarter 2009 and 8.1% from third quarter last year to RMB259.

Average Concurrent Users or ACU were 426,000 a decrease of 6% sequentially and 21.6% year-over-year. Peak Concurrent Users or PCU declined by 11.1% from the previous quarter and decreased by 18.9% year-over-year to $1.281 million. The shift in gamer spending habits that led to lower operating metrics have also automatically impact our financial results.

Our third quarter 2009 financial highlights are shown on slide seven, net revenue for the quarter was $42.5 million, while this was 23.3% decline from the previous quarter it was a 9.4% improvement from third quarter last year.

This year-over-year increase demonstrated a modest recovery of ZT Online following changes through our monetization structures in the third quarter 2008. Just as ZT Online user numbers have begun to recover following the monetization realignment we introduced a year ago. We are confident in the games ability to maintain a long term positive growth trajectory in its player base following the recent cancellation of Treasure Box. Gross profit decreased 20.9% sequentially to $35.9 million and was down 15.2% year-over-year.

Gross margin of 84.3% was down slightly from 85% in the second quarter of 2009 but was up from 80.1% in the prior year period. Net income attributable to the company's shareholders decreased 14.7% sequentially to $29 million but grew 7.5% year-over-year. Net margin attributable to the company's shareholders was 68.1%, up from 63.7% in the second quarter of 2009 and 50.6% in the third quarter 2008, a testimony to our ability to effectively control costs across the company, which is shown on slide eight.

Operating expenses for the quarter totaled $7.8 million, down 29.3% sequentially and down 50.5% year-over-year. R&D spending decreased 15.4% sequentially, 22.5% from the year ago period. These declines were primarily due to capitalization of certain R&D expenses for development of new games. In addition, sales and marketing expenses increased 25.8% sequentially, primarily because enhanced promotional activities for ZT Online's new expansion packs and preparations for our newly launched games.

However, compared to the third quarter 2008, our sales and marketing expense this quarter were still down 36.3% due to our tighter cost control and more efficient marketing campaigns. General and Administrative expenses were down 15.7% sequentially and also was down 35.2% year-over-year, further evidence of our success in controlling costs. Basic and diluted EPS for the quarters were $0.13 and $0.12 respectively, down slightly from $0.15 in the second quarter 2009. Moving to the balance sheet on slide nine, as of September 30, 2009, cash, cash equivalents, short term investments and Held-To-Maturity Investments combined increased to $759.8 million due to -- mostly to the generation of cash from our operating business.

This past August, our Board of Directors approve a new share repurchase program, authorizing us to repurchase up to 150 million of our ADSs within year though we had not repurchased any shares under this plan as of the end of the third quarter, we remain committed to buying back shares as allowed under open trading window as deemed appropriate by the Board we had just planned.

Now in addition to our financial performance, I’d like to provide some of the updates on our game developments for the third quarter 2009 starting from our flagship ZT Online series. Although, ZT Online was impacted by our decision to cancel Treasure Box in third quarter, we remained committed on ongoing updates and enhancements in order to keep players engaged and ultimately increase the sustainability’s of the game.

As such, we complete the rollout of our new Parenthood Simulations, expansion packs for ZT Online and introduce Unparalleled Martial Arts, expansion packs for ZT Online Classic Edition, continuing to leverage of brand name and success of ZT Online.

Our ZT Online Green editions also entered into limited closed-beta testing with persistent account and monetization features. Green Edition has a revised in-game economy and is aimed at lower spending users. The development of sequel ZT Online II is also on track and is scheduled to commence engineering testing towards the end of 2009. In addition to expanding our ZT Online suite within China, we recently signed agreement with Astrum Nival to operate ZT Online in Russia and other Russian speaking territories.

As you know, we are also actively preparing for the launch of several of our new pipeline games and are excited to expand our product offerings. Several of our games enter into various testing phases in recent months and initial user response has met our internal expectations, slide 13 provides a brief overview of our pipelines.

We release a new set of features and in-game items for Giant Online including military rank, equipment upgrades and a reputation systems. For King of Kings III, a 3D free to play medieval magical MMORPG, in the third quarter we continue to fine tune gameplay, stabilities, graphics and client-side engines based on player feedbacks. In October, we launched a limited closed beta testing with persistent accounts and monetization features.

Dragon Soul is a 3D ancient Chinese PK MMORPG developed by our R&D teams based in Chengdu, Sichuan. We are currently conducting engineering testing and expect to begin limited beta testing in the first quarter of 2010. Golden Land is a self developed medieval strategy web game.

During the third quarter we improved the games stability and concurrent user capacities and we expect to enter a more formal limited close beta testing phase in the fourth quarter 2009. For Empire of Sports a 3D MMORPG game featuring a wide range of sporting events, in third quarter we continue limited engineering testing to optimize the mass user interface and economy systems. We plan to begin limited closed beta testing at end of the fourth quarter 2009.

Now for our Win@Giant Program updates. XT Online is a 2.5D ancient Chinese martial arts MMORPG. We’ve begun conducting limited closed beta testing with persistent accounts at the end of October. Also from our Win@Giant Program, My Sweetie, the 2.5D casual MMORPG which allows gamers to create virtual avatars and raise virtual pets continues to undergo closed beta testing and we are currently focusing on graphics enhancement and on developing a PK battling system.

As you can see, our pipeline continues to grow as we diversify our product portfolio in order to target a broader user universe of players. In order to better align R&D personnel interest and incentives, we recently reorganized our R&D operations. As part of this reorganization’s we have spun-off some of our internal teams, as well as some of the external teams we had invested under our Win@Giant Program as shown on slide 14.

The ZT Online Series remained 100% owned by Giant Interactive, but most of our development teams are now [majorably] owned by Giant. In order to maximize synergies and faster creativities between these teams, Giant Interactive will establish an efficient 2D and 3D research and development platform to allow sharing of development resources, such as tools and designs for all of these affiliated teams.

The company will also encourage sharing of game designs and artistic resources among different teams. Finally, once the products are deemed ready for commercial release, Giant will provide experienced administrative, operational, marketing resources. We believe this R&D model will allow us to establish a flexible, entrepreneurial and highly creative platform, which will help attract the best-in design talents, with the ability to develop the most compelling gaming experiences for our players.

Moving forward, we expect to continue to employ this R&D structures for our future products. Looking ahead, we are optimistic about the growth opportunities and long term outlook of our games. However, we expect continued revenue pressure during the final quarter of 2009 as carryover effect from monetization changes to ZT Online during the third quarter.

Our new games that have entered into limited closed beta testing are meeting initial expectations, but we do not expect significant revenue contribution in a near-term, due to the fact that we are just beginning to introduce monetization features. We hope to see meaningful ramp up in user base and revenue levels in the first half of 2010.

This completes our presentation. We would now take your questions.

Question-and-Answer-Session

Operator

(Operator Instructions). Our first question comes from the line of Alicia Yap with Citigroup.

Alicia Yap - Citigroup

I have three questions. First of all, regarding your soft quarter, could you give us some color on your guidance? Are there any particular reasons you decided not to provide a formal guidance and you mentioned that the ZT will continue to be impacted and then the new games will take time to ramp. So should we expect another sequential decline to your revenues?

Unidentified Company Representative

Let me translate a little bit to our President Liu.

Yes regarding the guidance going forward as we’ll continue to roll out more and more products and games. We feel that we will have lower visibility than previously as we only had one game ZT Online before. So, going forward it will be harder for us to provide a numerical guidance, but we hope to provide a qualitative or directional guidance every quarter. Now as we’ve mentioned previously in the third quarter we were impacted by the cancellation of our Treasure Box function and ZT Online. The third quarter experienced the biggest impact but some of this impact will carry over into the fourth quarter. We believe we may experience some fluctuations in the fourth quarter as well.

Alicia Yap - Citigroup

My second question is regarding the overall gaming industry outlook. So, can we get your view on how you see what is happening in the Chinese gaming market? It seems like many new games are being pushed out and then yet the new games launched also experience difficultly in attracting new user and we also see some old games such at ZT is declining. So is the overall market reaching some maturity saturations or is it something more related to specific company issue and you still have more optimist outlook for the industry.

Unidentified Company Representative

Yes, our outlook for the Chinese online gaming stream were still positive on the industry. We feel that over the next couple of years, it will still maintain positive growth, mostly from the increase in the number of gamers. However, competition is increasing as well. It’s becoming hard and harder to have a very big successful hits games. Therefore our goal is to maintain ZT Online as a successful blockbuster game in China. We will do this by trying to stabilize and grow the ZT Online series utilizing our segmentation strategies and further continuously enhance and update the series to improve the gamers experience. As a result, recently we launched the ZT Online Green Edition and so far it has been pretty good and the PCU has surpassed 200,000 which is we are very satisfied with these results and so this is our goal for the ZT Online series.

Our second strategy to maintain the growth of the company is to beef up our pipeline of games going forward. Previously we had a very thinner pipeline, but in the future starting in 2010 we plan to release three to four new internally developed games either from our internal R&D teams or externally there are [found] through our Win@Giant incubation program. Throughout the past year we have been beefing up our 2D development platform as well as developing 3D engines to further increase our technology.

As through this industry trend or the future, we have two additional points. One is we believe that social networking and gaming will become conversions in the future very soon and certainly is business model or revenue models. We have seen that in 2006, one of the reasons for last two or three years, rapid growth in our industry is because the introduction of our free to play models in 2006.

For our new games, ZT Green version, which actually we are experiencing some kind of new revenue models, which we believe might be interesting points for the future development of this industry, specifically in our Green versions although we have some free-to-play item based kind of the transaction to sell in the game, but mostly for our revenue generation process, we will like to foster a large bazaar in our game and then we can actually levy tariffs over the transactions in the games, so we believe judging from the PCU numbers of the Green version of ZT, we see some very early indication of this model being accepted by the gamers.

Alicia Yap – Citigroup

Okay, thank you for the very detailed answer and my question is actually follow up on your social networking comment. So there were some reported news lately that you have set up your own SMS site on [chilar], so can you share with us your strategies here and how you differentiate your investment in 51.com versus your own SMS?

Unidentified Company Representative

Yes. We believe that the conversions between social networking and online games will be a big event or a big concept going forward into the future even though this will take place over the long term. How our company prepares for this is on several fronts. First of all, we made a strategic investment in 51.com, one of the largest social networking websites or communities in China.

Secondly, currently our CEO Mr. Shi, is leading a team for social games. He is spending around 70% to 80% of his time on this project right now, and our company, our R&D team is also collaborating with an external developer to work on social games as well. Third, we are working on web games as well.

For example our first web game, The Golden Land is to begin beta testing, and all of these strategic fronts are for us to prepare for the convergence of social networking and games into the future. Although, it will happen over the long term, currently we've already seen some examples of this conversion such as $0.10. So their success has been very well noted and we will continue to develop towards this direction in the future.

Unidentified Company Representative

One last point to add. Regarding Mr. Shi game, Mr. Shi is heading this game team. Actually Mr. Shi is developing an MMORPG type of games, but in corporate some of the elements of the social gaming and communities, all those functionalities into the games. So it’s pretty much very long term future projects. I just want to add these points.

Operator

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

Atul Bagga - ThinkEquity

Couple of questions for you guys, can you talk about the linearity of ZT Online and month-over-month how this game has fared for the last three months?

Unidentified Company Representative

Yes, throughout the third quarter, beginning in July, we cancelled the Treasure Box function in ZT Online, so we saw the biggest impact to user numbers revenue in August and September, these metrics came back up but they didn’t recover as significant as we anticipated, therefore leading to the fluctuations throughout the third quarter.

Atul Bagga - ThinkEquity

Just to clarify in October and so far in November, how is the game is performing vis-à-vis September. Is it going down? Is it flat?

Unidentified Company Representative

You are talking about moving toward fourth quarter right?

Atul Bagga - ThinkEquity

Right yes, in October and so far in November as the game performed relatively flat, was it September or is it still down?

Unidentified Company Representative

So far in the fourth quarter in October and November, our business the ZT Online is gradually slowly recovering, but this recovery is mostly in terms of user numbers, while revenue is lagging behind therefore leading to our guidance for the fourth quarter.

Atul Bagga - ThinkEquity

Following upon this question about industry growth, you seem pretty optimistic about the industry over next couple of years. Can you highlight where do you see this growth coming from? Is it more about converting the existing internet user into gaming user or is it more about the growing penetration of internet that’s going to help you guys and if this is more of a later are you seeing growing it in the internet penetration in the smaller cities or is it also in the top gear cities?

Unidentified Company Representative

Okay, I will ask President Liu to answer the question for you.

Unidentified Company Representative

Yes, we still believe that the growth of the industry will come from both things that you mentioned. Currently it’s estimated that there are about 300 million internet users and about only 50 million gamers in China. So in the future moving forward, we believe that more and more internet or social networking users will become gamers, and also we will continue to see further penetration into the lower care markets as well.

Another point is that on the mobile front, currently its estimated that there are about 600 or 700 million mobile phone cell phone users in China. We believe that going forward that this figure and 300 million internet users and 50 million gamers, will this discrepancy will shrink, due to the growth of 3G technologies and so forth. Going forward, there will be a much more convenient ways or additional ways for users to get online and even play games, such as mobile gaming or accessing the internet from their mobile phones.

Atul Bagga - ThinkEquity

The last question is around the social gaming. So you talked about your social gaming strategy and conversions of social media and gaming. I just wanted to clarify, is this only for China market that you agree as a focusing or are you working also for the international market for Facebook and MySpace kind of games, and the reason I’m asking is well I’ve been talking to companies in the US and Europe and in China, it seems like in the Western Hemisphere ARPU on social games could be way higher than the ARPU on the Chinese social network. So, I just wanted to understand is your focus going to more international than China?

Unidentified Company Representative

Currently we are developing social games just for the Chinese market, but we are learning or monitoring the American development as well. We are collaborating with American developers on social games.

Unidentified Company Representative

We actually have a project going on that we have a sort of a core development projects with US-based teams to develop sort of a social or web-based games for ourselves in the future.

Operator

Our next question comes from the line of Andrey Glukhov with Brean Murray. Please proceed with your question.

Andrey Glukhov - Brean Murray

I guess, a couple of questions guys. First of all, if I look at ZT Online, now that you have disabled some of the more aggressive monetization features, presumably the game content resembles that of ZT Classic pretty closely. So are you going to have, given your segmentation strategy, are you going to have to kind of deal with the brands confusion here?

Unidentified Company Representative

No, we don’t believe so. Classic Edition has been launched for over a year now, [cannibalization] between that and ZT Online, the original version has been very minimal. ZT Online is of course geared towards high-spending gamers, but Classic Edition is not only eliminates the Treasure Box function and other aggressive monetization features, as you mentioned, but also has eliminates a lot of game playing functionalities that were introduced into ZT Online after 2007. So there are a lot of big differences in terms of game play as well.

Andrey Glukhov - Brean Murray

If I look at the revenue concentration I guess, can we talk about in a couple of different ways. Now that the ARPU came down, how levered are you guys in terms to the, sort of I guess, total 5% of the paying users and also given that the few games went into monetization mode here what percentage of revenue is accounted for by ZT Online?

Unidentified Company Representative

Currently we don’t see that much change in our revenue concentration. Our new games have new types of monetization such as ZT Online Green Edition, which is launched at the end of October. So it’s very recent so we need some time to monitor how the Green Edition goes.

Unidentified Company Representative

I would like to add that because we have never disclosed percentage of the contribution of each games, but I can roughly tell you that the ZT family or the ZT series accounted for about more than 90% of the revenue so far. So this percentage actually has not changed that much since several quarters ago, because as we mentioned that the new games contribution of revenue still pretty limited and minimal.

Operator

Our next question comes from the line of Vivian Li with Piper Jaffray. Please proceed with your question.

Vivian Li - Piper Jaffray

So for ZT Green edition it has received some positive feedbacks during its beta testing since October and has been interesting new monetization model. Can you comment a little bit more on this model and how do you think you can make this game to gain more attraction in the future. Thank you.

Unidentified Company Representative

Yes, regarding ZT Online Green Editions new revenue model, previously we believe that the transition from time based to an item based games revenue model was a major breakthrough in the Chinese online game industry in the past four years, but we feel that item base is probably not as fresh anymore. So we went about developing a new revenue model that we believe is try to be as fair as the time based model and also not as discouraging to some users as the item based model.

For the Green Edition, we developed a in-game trading system, item trading system that charges fees based on transactions that we charge. So this will accommodate the paying users from inside the game, but as well as receiving a lot of supports from the free users as well.

Unidentified Company Representative

To add another point, judging by the Green Edition’s current PCU levels and positive feedback so far, we are considering utilizing or further developing revenue models in this direction for our future games.

Unidentified Company Representative

One additional point we add is that because as we all know that in the free to play markets, most of the gamers are actually non-paying accounts. So in this way, we actually sort of realign our interest with so called non-paying accounts. So we will win the majority of the players in the games with us so we think the potential of this revenue model will be pretty big.

Operator

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

Jenny Wu - Morgan Stanley

Hi, Lu Zhang, Eric He, and Hui Yuan. Several questions, first of all based on about comment [is seen tonight], ZT Online will continue to trend down in fourth quarter. So what would you expect the revenues from a regional ZT Online to stabilize on q-on-q and especially when should we expect ZT Online the order volume and ARPU to go back to the level in 2Q. Thank you.

Unidentified Company Representative

Yes. User levels for the ZT Online, the original have already stabilized in the fourth quarter due to new features such as recently launched expansion pack. So we hope that other metrics for this games will stabilize in the first quarter of next year.

Jenny Wu - Morgan Stanley

Thank you and the next question is regarding the Green version, since the initial feedback is quite positive. So what kind of a revenue contribution you may expect from this new version where lines go to the normal growth trend.

Unidentified Company Representative

Our ZT Online Green Edition was launched into limited closed beta testing at the end of October. So far we've seen very good user base level, but revenues have been limited, but we hope to see more revenue contributions starting in the first quarter.

Jenny Wu - Morgan Stanley

My third question is regarding your sales and marketing. The expenses into market in 3Q, so was new games to be launched in next several months, should we expect that sales and marketing will continue to trend up as a percentage of revenues? [Round of internally] what is the margin trend in 4Q?

Unidentified Company Representative

Jenny, I will like to answer the question of margin. I think as you can see that in the third quarter, we had a pretty stable margin performance, in wake of this very weak revenue in the third quarter. So I think moving forward, I think margin trend should be maintained in relatively tighter range, but as our President Liu just mentioned, when we launch our new games, inevitably, we will have to spend some money in the marketing campaign. So I think some of the spending that we have to occur or commit may actually bring some pressure on our margins, but I will say it’s pretty much in control and pretty much within a very limited range.

Jenny Wu - Morgan Stanley

My last question is on the game pipeline. You have mentioned that you expect that revenues contributions from the new games will ramp up in first half next year. By this statement, what kind of revenue contributions you expect from these new games?

Unidentified Company Representative

For us we believe that user level is more important at this point than revenue contribution for the games like, Green Edition, King of Kings III, XT Online and other new games that we are launching in the future. We believe that revenue should come automatically as long as we have a followed user base, so we will concentrate on ramping up that user level first.

Operator

Our next question comes from the line of Eddie Leung with Banc of America. Please proceed.

Unidentified Analyst

Hi, I’m Thomas asking questions on behalf of Eddie. Just a quick question, will you give us some color on the total R&D head count for the ZT Online Series? While how many R&D staffs for the other games in the first quarter and what’s your target by the end of this year?

Unidentified Company Representative

Currently, our R&D headcount is roughly around 800 people and of which 200 is for the ZT Online Series. The remaining are working on other projects and games, whether they are the new games being launched in the fourth quarter or games for 2010 and beyond. Next year in 2010, we expect to increase our R&D headcount to roughly about 1,000 people or so and this will kind of account for new projects and games for the future.

Unidentified Company Representative

The figures that Jeff mentioned do not include the personnel that we have got from the Win@Giant incubation program.

Operator

Your next question comes from the line of Gary Ngan with UBS. Please proceed with your question.

Gary Ngan - UBS

I have a follow-up on the ZT Free-to-Play version. I really thought that playing 30 online is such a highly key activity and somewhat more like a lifestyle than just a game for most of these players, especially the high level ones. I can understand why revenues go down due to removal of Treasured Boxes, but can you explain why the number of players or AC, you have been consistently declining and where do you think these players actually go to are they more likely to play another similar style 2D PK MMORPG or are they taking a chance to try new 3D games or other advanced Casual games, just wanted to get your thoughts on it? Thank you.

Unidentified Company Representative

Yes in these past couple of months we have seen that user numbers ACU and PCU have been on the decline and we have been investigating this concept. As we cancelled the Treasure Box function in July, we have seen that this function was actually indeed a significant for us or attraction for some users in our user base. So, when we cancelled them some of the users have lost their goals in the game and therefore they have stopped playing the ZT Online, but in the meantime we have launched new features and recently launched the expansion pack for ZT Online that has helped us to stabilize user levels. So some of these users have comeback after the launch of the expansion pack and we have noticed that, we’ve realized that actually the people who have left the game entirely to play other games is pretty limited, as the other games in the market place are actually very different that are available in China. So, we are very confident in our ability to stabilize our user base going forward over the long-term.

Gary Ngan - UBS

Thank you. Can I ask another follow-up question?

Unidentified Company Representative

Go ahead.

Gary Ngan - UBS

Yes. On the sales and marketing, I know that Giant Group is essentially one of the best in China for sales and marketing. So I want to ask what is your experience in games sales and marketing over the past three years, is that very different from other consumption products in particular, if it’s sales and marketing for gains really, its effect is more useful for attracting new players than actually keeping old players into the game, how should we look at this?

Unidentified Company Representative

Yes, starting in 2006, our company has been, was a pioneer in sales and marketing strategies for online game companies as we introduced concept of having liaison personnel, pushing the games into retail location throughout the country. At the time this was considered very unique characteristic for us, but over the past couple of years, our peers have also adopted this strategy. So I guess our sales and marketing strategy is not as unique any more, therefore we’ve asked our sales marketing teams to penetrate further. We believe that the best way to maintain or retain users into the game is to develop good game and having the game big fun. That in itself is the most important thing for retaining existing users.

Unidentified Company Representative

One small addition, liaison personnel meaning on the ground personnel. Thank you.

Operator

Given the limited time we will take our final set of questions. Our final question is from the line of Wendy Huang with RBS. Please proceed with your question.

Wendy Huang - RBS

Thank you for taking my question. (Foreign Language). I just want to know more about the experiments business mode that you tried on Green ZTs. Thank you.

Unidentified Company Representative

I think that the first point is we want to clarify. We actually have consulted with our regulatory agencies in details. The monetization or revenue models in our Green version, actually it’s all been confined within the game. So I think this is a properly refined and it’s very similar to item based type of the games. I think the governments or the regulatory agency would now like to see any transaction outside the game.

So if you were to use our token on the game points to buy other items in other games and that will be a big problem, but what we are talking about is all within the game. So this is totally in compliance with government agencies regulations. That’s the first point. Then the second point is regarding to the content, we actually created different ways of the content.

A lot of large other games prevent people transacts or trades within the game is because they want to prevent this gold mining company, but because we have a very unique design in our games. In fact, we have very good ways to prevent that through a lot of game designs in our Green version. So we think our design and our model is perfectly in compliance with the government regulations and also we can prevent those gold miners to take advantage of our game.

Wendy Huang - RBS

I just want some clarification on your Q4 guidance, because you just mentioned that ZT free versions usage has been stabilizing in October, so whether the sequential revenue decline you guided for Q4 is mainly from ARPU side, especially ARPU already record historical low in Q3? Also could you remind us of the seasonality for ZT free in Q1?

Unidentified Company Representative

Yes, in the fourth quarter, our user levels have stabilized due to the launch of the newest expansion pack for ZT Online called Parenthood Simulation. As you can tell from the name of the expansion pack, the goals of this expansion pack is to promote interaction among users in the game. Not necessarily to bring in revenue. So in the fourth quarter we did see a revenue level stabilize but the revenue is still experiencing some side effects carried over from the third quarter when we cancelled the Treasure Box.

Unidentified Company Representative

Now looking into the first quarter of 2010, ZT Online has never had much seasonality to begin with, but we will consider the impacts from say holiday such as Chinese New Year, Spring Festival or even there is we experience very cold weather, but so far we expect that in the first quarter things should be pretty stable.

Operator

Yes. There are no additional questions at this time.

Unidentified Company Representative

Okay. Please conclude our conference call please.

Operator

This concludes the presentation. You may now disconnect and have a great day.

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Source: Giant Interactive Group, Inc. Q3 2009 Earnings Call Transcript
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