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Shanda Interactive Entertainment Ltd (NASDAQ:SNDA)

Q3 2009 Earnings Call

December 1, 2009 9:00 pm ET

Executives

Vivian Chen - Investor Relations Manager

Alan Qunzhao Tan - President and Chief Technology Officer

Grace Wu - Chief Financial Officer

Tianqiao Chen - Chairman of the Board, Chief Executive Officer

Analysts

Dick Wei - J.P. Morgan

Jin Yoon - Nomura

Cathie Chen - Goldman Sachs

Alicia Yap - Citigroup

Lisa Yeung - Morgan Stanley

Tian X. Hou - Pali Capital

Yvonne Yang - BNP

Ming Zhao - SIG

Operator

Welcome to the Shanda Interactive Entertainment 2009 third 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.

Vivian Chen

Thank you. Good morning and good evening to all participants. On behalf of Shanda, I would like to welcome everyone to our third quarter 2009 results conference call. Here with us today are 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 third 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 RMB6.8290 per U.S. dollar.

Now with that, I would like to turn the call over to our President and Chief Technology Officer, Mr. Alan Qunzhao Tan.

Alan Qunzhao Tan

Thank you, Vivian and welcome, everyone. Good morning and thank you, everyone, for taking the time to join us on this third quarter conference call. Our CEO and Chairman, Mr. Tianqiao Chen, regrets that he cannot be on the call today due to an urgent matter that he needed to attend to.

On November 28th, we proudly celebrated Shanda's 10-year anniversary. From our beginnings as a developer and an operator of an online virtual community, [inaudible], Shanda has grown into one of China's largest entertainment and media companies. It has been our long-term vision to build a leading role in the interactive entertainment and media industry. Our strategy is clear -- centralize the platform, decentralize the content.

Now, after 10 years of rapid growth through our various subsidiaries and affiliates, Shanda now offers diversified entertainment content, including online games, literature, music and other content offerings to vast base of loyal users.

Also, our integrated service player, Shanda Online, has achieved a critical scale and opened up its industry-leading service resources to the whole Internet industry with the goal of becoming a leading global entertainment media company. Shanda will continue to start out efforts to develop new technologies as well as explore innovative business models to transform the cultural landscape.

This past quarter saw the successful IPO of Shanda Games on the NASDAQ global market on September 25th. It represents a milestone for Shanda in its drive to become the long line entertainment media leader in China. We believe the capital raised by this listing will help us continue to develop and grow as we continue to expand and diversify our business lines and explore M&A and investment opportunities with the potential partners in order to achieve sustainable growth.

In the past summer months, Shanda has accelerated our development towards our goal of building China's premiere online entertainment media company. During the third quarter of 2009, our subsidiary, Shanda Music, successfully acquired a major stake in Hurray!. The transaction has enabled us to further expand the business and depth of our entertainment content offerings and help Shanda to lay the groundwork for future 3G development in China.

In the middle of November, Shanda Pictures, one of our wholly-owned subsidiaries, launched a joint venture with [Hunan] Broadcasting and Television group. One of the most successful Chinese media and entertainment groups, Hunan Broadcasting is a creative force behind some of the most successful television shows and series in China. This partnership will combine the best aspects of the traditional and new media to create exciting content that we believe will entertain people around the world.

The joint venture is expected to be a valuable addition to our entertainment content business in the future.

Shanda aims to achieve synergy with Hunan Broadcasting and Television Group by integrating its own resources of movie scripts, artist agencies, musical score competition, talent and distribution channels with the media resources of Hunan TV.

The two companies will jointly develop the business of movie and TV production and other related operations by combining rich entertainment content with various forms of media. We hope that with Shanda's efforts, Shanda will be able to product its own movie series with international appeal which are the [inaudible].

Moving on to the literature side of our business, Shanda Literature sustained its growth momentum well into the third quarter of 2009. It achieved good results in its online reading, wireless reading, offline book publication, and copyrights business. In the online reading business, Shanda Literature's three literary portals continued to step up efforts to improve users reading experience and to enhance the interaction between readers and their authors. These moves have not only enhanced the exchange but also have raised the standard of the literature [literary works].

Moreover, the increased speed of data transmission and improved layout and design of the website have [passed the way] for increasing the number of subscribers and page views [inaudible].

At the end of the third quarter of 2009, Shanda Literature's three literary portals had a combined average daily page views of over 400 million and a combined average of 56 million updated Chinese [inaudible] per day. The number of accumulated registered subscribers has more than 35 million.

Shanda Literature has established a long-term strategic partnerships with several publishers to explore offline publishing. By the end of the third quarter, Shanda Literature had offered 132 titles for offline publication.

In its copyright statement, Shanda Literature has exchanged the copyright of its novel, [Ghost Fighter], for the copyright to the novel, [inaudible], from a leading Japanese novel provider. The move has enabled the company to export its copyrights and at the same time enhance the variety of its content.

Shanda Literature has also formed partnerships with a number of movie production companies in China. Going forward, we expect Shanda Literature to continue to maximize the value of its copyrights by bringing more high quality literary works to its subscribers.

In the past quarter, Shanda Online has been [inaudible] the scope of its promotion payment community services. With new partners added over the quarter, we now have signed cooperation agreements with 35 banks to provide online payment services, including direct payment through credit card and debit cards. Meanwhile, Shanda Online's network of 320,000 offline sales outlets provides convenient purchasing opportunities and a cash value [services] for our subscribers.

At the 2009 game summit, which was held in the Great Hall of People in Beijing on December 1, 2009, Shanda Online was awarded as the best online game service provider in 2009.

Earlier today, Shanda Online announced the appointment of Dr. Jing Zhu as its Chief Technology Officer. Dr. Zhu has over 15 years experience in Internet research and development. Before joining Shanda Online, Dr. Zhu served as the senior director at Yahoo! from 2001 to 2009 in charge of Yahoo!'s mail, address book contextual advertising team.

Not long ago, we announced several other new appointments to our top management. With these new additions to Shanda Online's teams, we believe that we will together lead Shanda Online to further growth in the future.

Looking forward, Shanda Online plans to continue to actively seek opportunities to enhance the qualities and expand the scope of Shanda Online services by enriching, interactive entertainment content and to build an integrated service center with the latest technologies to better service its users and customers. By adding new content, the integrated platform will attract more users. As it attracts more users, it will attract more content thereby benefiting the platform. We believe this healthy cycle will help Shanda Online build a sustainable and scalable business model for the long-term.

We have been working hard to realize our mission, combining new technologies and innovative models to create a new culture. For decades, we have been exploring new Internet technologies and creating new business models. This effort, which broke new ground for the development of China's online game and Internet literature industry and we will continue this effort to drive the future development of interactive media.

Shanda has been dedicated to the vision of adopting new technologies and new business models to rebuild [the cultural landscape.] We believe that only by applying the latest technology can we keep and [inaudible] our enterprise ahead of its peers. We also believe that only by adopting new business models can we make an enterprise adaptable to changes in the market and thus make its development sustainable. Only by adopting new technology and a new business model can we create new cultural content for our users. In line with this objective, Shanda has established an innovation center, the institute for innovation in technology, to conduct cutting edge research in order to get well-positioned for the next 10 years growth. Especially, we aim to focus on the following three major directions -- first, cloud computing and cloud service. Cloud computing refers to the commercial form of computer science concepts, including distributed computing, [inaudible] computing, and [grid] computing. We are currently creating an Internet platform that provides basic services so that in the future, developers will only have to focus on the most permanent and innovative aspects of the Internet products we are developing.

We are also working on cloud services. Cloud services combines advanced technology and Internet services. We use cloud services to integrate our resources and services for computing, storage, security, technology, payment login verification, customer service, data analysis, and promotion and marketing. Our Internet [customers] can have access to the various kinds of services through the Internet according to their needs. We will also save them the cost of investment in hardware, software, human resources, and the acquisition of [inaudible].

Second, Internet [inaudible]. Internet [inaudible] refers a network of objects such as wireless [inaudible] and sensors. We believe the Internet [inaudible] is the breach between the virtual world and the real world and hence can be used by the interactive entertainment industry to bring the next generation entertainment experience to users.

We are focusing on technological innovation products and applications. In this process, we will collaborate with the various partners to carry out the core technology development, commercialize research results, incubate new business developer applications, and establish a site where we can showcase this exciting new technology application. We will leverage our scale, expertise, and experience in interactive entertainment to provide the next generation of entertainment applications.

Third, virtual reality -- we have been committed to bring exciting entertainment user experience with the latest virtual reality technology. Shanda Interjoy, a subsidiary of Shanda, has established a [inaudible] with the Chinese Academy of Science to carry out research on the technology of virtual reality and artificial intelligence in order to explore the possibilities of a virtual system in the entertainment area.

It has been Shanda's long-term vision to build up a leading role in the interactive entertainment and media industry. Our strategy is very clear -- centralize the platform, decentralize the content. We hope to enrich the life of everybody by providing diversified interactive entertainment content on a centralized platform.

And now I would like to pass the call over to Miss Grace Wu, our Chief Financial Officer.

Grace Wu

Thank you, Alan. For the third quarter of 2009, Shanda achieved another record result. Consolidated Net Revenues increased 48% year over year and 12% quarter over quarter to $202.5 million.

The company started to consolidate Hurray!'s financials from September 2009. Its revenue contribution to Shanda in 3Q was close to 1%.

Shanda Games' revenues increased 45% year over year and 10% quarter over quarter to $186.3 million, while Shanda Online revenues increased 38% year over year and 9% quarter over quarter to $41.5 million. Other revenues include business lines such as Shanda Literature, advertising, online chess and board game platforms, e-sports platforms, as well as [other business] revenues, increased 43% year over year and 24% quarter over quarter to $19.5 million.

Total gross profit was $144.0 million in the third quarter, increased 9% quarter over quarter and 44% year over year. Gross margin was 71.1 % in the third quarter, compared with 72.7% in the second quarter of 2009 and 73% in the same period a year ago.

Gross profit related to Shanda Games was $110.4 million in the third quarter, increased 9% quarter over quarter and 45% year over year. Shanda Games gross margin was 59.3% for the third quarter, compared with 59.7% in the second quarter and 59.1% in the third quarter of 2008.

Gross profit related to Shanda Online was $33.7 million in the third quarter, increased 8% sequentially and 34% year over year. Shanda Online gross margin was 81.3% for the third quarter, compared with 81.9% in the second quarter and 84.2% in the third quarter of 2008.

Other businesses gross profit was $8.3 million in the third quarter, remained relatively flat quarter over quarter and increased 43% year over year. Gross margin for other business was 42.3% for the third quarter compared with 52.5% in the second quarter and then 42.2% in the third quarter of 2008.

[inaudible] expenses increased 10.6% quarter over quarter to $14.6 million in Q309 mainly due to a performance based salary adjustment in Q309 that was distributed to Shanda Game's R&D staff.

Sales and marketing expenses were $21.5 million, increased by 17.3% sequential primarily due to increased expenses related to marketing efforts during China Joy and for the launch of new games, as well as expansion packs for existing titles under Shanda Games.

G&A expenses in Q3 were $33.1 million compared with $24.9 million in Q209, increased by 13.8% in Q2 to 16.4% in Q309 as a percentage of revenue, mainly reflecting an increase in Shanda games IPO related share-based compensation.

For the third quarter, share-based compensation was $12.3 million, compared with $2.7 million in the second quarter of 2009. The sequential increase in operating expenses reflects an increase in share based compensation related to Shanda Games, which recognized accumulated one-time expense due to certain conditions satisfied by the IPO milestone of Shanda Games during the third quarter of 2009.

As a result, income from operations was $74.8 million, operating margin was 36.9% for 3Q09 compared with 41.5% in the second quarter and 40.7% a year ago. Non-GAAP operating income, which excluded the share-based compensation expense impact, totalled $87.1 million in Q3, up 11.9% sequentially and 51.5% year over year. Non-GAAP operating margin was 43%, which remained stable compared to Q209 and 41.9% in Q308.

Net non-operating income for Q309 was $8.2 million compared with $3.5 million in the previous quarter and $7.2 million in the third quarter 2008.

The quarter over quarter change mainly resulted from the difference in government financial incentives received, which amounted to $13.6 million in Q3, compared with [$5.3 million] in Q2, and $5.9 million in the third quarter of 2008.

Our receipt of government financial incentives is subject to time [lag] and government administrative process, which that we will continue to receive government subsidies going forward.

Income tax expenses for the third quarter were $19.2 million, compared with $16.2 million in the previous quarter and $13.7 million in Q308. The effective tax rate was 22.5% in Q3, compared with 20.2% in Q2 and 21.5% in Q308.

Net income attributable to ordinary shareholders in Q309 was $63.7 million compared with $62.5 million in Q209 and $49.4 million in the same period a year ago. Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation, was $76 million in Q3 compared with $65.2 million in Q2 and $51 million in Q308.

Diluted earnings per ADS were $0.90 in Q3 compared with $0.90 in Q2 and $0.68 in Q308, while non-GAAP diluted earnings per ADS were $1.08 in Q309 compared with $0.94 in Q209 and $0.70 in Q308.

For the first nine months of 2009, consolidated net revenue was $546 million. Non-GAAP operating income for this period totalled $234 million, and non-GAAP operating margin was 42.8%. Non-GAAP net income totalled $196 million while non-GAAP net margin was 35.9%.

Non-GAAP diluted earnings per ADS for the nine months were $2.82.

Turning to our balance sheet, cash and cash equivalents as of September 30th totalled $1.6 billion, mainly resulting from the IPO proceeds received from the sale of the secondary shares in Shanda Games during its IPO during the third quarter. Long-term liabilities were $151.5 million, reflecting convertible notes issued by us in September 2008. The result was affected by the adoption of FSB ATD 14-1, the new rule related to the accounting treatment of the convertible bonds which went effective as of January 31, 2009.

Under Shanda's new corporate structure, currently there are two public U.S. listed companies under the group, mainly Shanda Games and Hurray!. Shanda Games' management team already discussed its [business outlook] for Q409 during its earnings call and I believe Hurray!'s management team will also discuss its business operations and strategy in its upcoming announcement.

While the well-established business alliance under Shanda Interactive Entertainment will provide their own discussion regarding their business performance and strategies or other promising content business and service platforms in fast growing segments, which we believe will continue to grow and become a significant contributor to our overall business over the longer term.

Given the fact that a majority of Shanda Interactive Entertainment's business results will be reflected in the two publicly listed companies reported results and to allow investors to focus more on our long-term value and strategy, we will now provide specific quarterly guidance on a consolidated basis.

Having said that, for the fourth quarter of 2009, we believe Shanda Interactive Entertainment will continue to deliver sequential growth on the top line and we still expect to see healthy growth for all the different business segments in the fourth quarter of 2009.

That concludes my report. I will hand it back to Vivian so we can start the Q&A session. Thank you.

Vivian Chen

Operator, we are ready for questions. Please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dick Wei with J.P. Morgan.

Dick Wei - J.P. Morgan

My first question is, is it possible to give more of a breakdown for other revenue where the other revenues attributed to different businesses? Thanks.

Grace Wu

Okay, as we reported earlier, other revenues including the different business lines such as Shanda Literature, advertising business, online chess and board game platforms and e-sports platform, this quarter we also consolidated one month of Hurray! September business performance into our consolidated financial statements so it also reflects one month's contribution from Hurray! September revenues, which excluding Hurray!'s contribution, I would think that Shanda Literature contributed most of the growth for the business segment in other revenues in the third quarter. However, we also see very good growth trends from the other segments.

Dick Wei - J.P. Morgan

So if you were to pick out the top three segments within other revenue, what would those be?

Grace Wu

We probably could not disclose such detailed data but we actually see very good momentum in [the Shanda Literature] business, as well as the other business such as advertising, the board game platforms, the e-sports platform, as well as the other smaller businesses we are incubating.

Dick Wei - J.P. Morgan

And then my second question is in terms of the video business, when do we expect to see some revenue contribution and what is going to be the revenue model for that?

Grace Wu

Sorry, what is the video business you are referring to -- is it the Shanda Pictures joint venture with [inaudible] broadcasting?

Dick Wei - J.P. Morgan

That and as well as the [206] website as well.

Alan Qunzhao Tan (Translation)

We probably will not be able to comment on the potential impacts from [Kulio] as that is actually a proposed merger by Hurray!'s management team coming forward to its shareholders so at this moment, we probably are not in a position to comment on that prospect.

Dick Wei - J.P. Morgan

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Jin Yoon with Nomura.

Jin Yoon - Nomura

Just following on Dick's question regarding your I guess the recent acquisition of a video-sharing business, right now on a standalone basis, is that business profitable incrementally? And if so, how do you make that business scalable once you bring it into the Shanda fold? And I'll have a follow-up question after that. Thanks.

Grace Wu

As we actually discussed earlier, the proposed merger of Hurray! And [Kulio] is actually a transaction to be commented by Hurray!'s management team and board to its shareholders, so although we actually, their shareholders at this moment we actually are not in a position to comment on the specifics for [Kulio's] business performance and the prospects. If possible, we'd like to defer that to Hurray!'s management to discuss.

Jin Yoon - Nomura

Okay. And second of all, your -- I just wanted to talk a little bit about share-based comp -- I'm sorry, your operating expenses going forward. In the third quarter, R&D expenses were relatively flat. Are we going to see any kind of R&D expenditures or a significant growth in expenses associated just outside of gaming? So with the platform or the literature business, are we going to see any kind of growth in -- or significant growth in operating expense there, especially on the R&D front? And I'll get back in the queue. Thanks.

Grace Wu

As Alan already mentioned in his section, Shanda is fully committed to renewed technology development and we -- it is our mission to adopt new technology together with innovative business model to reshape the cultural landscape. Therefore, it is our long-term objective to continue to invest in new technologies. And also supported by that kind of mission, Alan also mentioned the different areas the Shanda [inaudible] Research Institute for the Innovative Technologies will focus on. Therefore, over the next couple of quarters, we expect to see the R&D related expenses will continue to expand.

Jin Yoon - Nomura

Okay. Thanks, Grace.

Operator

Your next question comes from the line of Cathie Chen with Goldman Sachs.

Cathie Chen - Goldman Sachs

I just have a follow-up regarding the other revenue line as well. First, I just wanted to double-check, when you said that the Hurray! contribution was about 1% of revenue in the third quarter, were you talking about total net revenues or gross revenue?

Grace Wu

It's total net revenues. We reported our revenues on a net basis.

Cathie Chen - Goldman Sachs

Okay, got it. And then is there any way you can break out how much SDO revenue is now?

Grace Wu

SDL is part of the other revenue segment, therefore we are not able to provide any details, but SDL, Shanda Literature's performance actually was one of the major drivers for other business growth trend in the third quarter and we expect that to continue into the fourth quarter.

Cathie Chen - Goldman Sachs

Okay, thanks. And then on the margin side, how should we think about the other segment margin? Because I understand that Hurray!'s gross margins are lower, so should we expect that the other gross margin should decline further in the fourth quarter when you have a full quarter consolidation of Hurray!? And then how should we think about that trend, given that a lot of those businesses seem to be more an incubation period outside of literature.

Grace Wu

Most of the business lines in the other business segment are businesses under incubation or fast growing business lines, so they all have their different growth stage. Including Hurray! In that segment for the fourth quarter as a full quarter consolidation, we do expect to see a certain pressure on the margin for that aspect. However, we also expect to see very healthy growth in the fast-growing businesses belonging to other segments.

Cathie Chen - Goldman Sachs

Okay, thank you. And then if I could just ask a last question, I just wanted to check on Shanda Online side, it looks like the overall Shanda online revenue was a little bit slower than the game revenue. How much contribution have you been getting from non-Shanda games revenue for Shanda Online?

Alan Qunzhao Tan (Translation)

As discussed during the earlier section, Shanda Online is one of our main focus to develop fully integrated Internet service platform to service not just Shanda related content providers but also third party content providers.

Currently service to Shanda related content providers such as Shanda Games, Shanda Literature, [inaudible], and many other business lines, while we also see very healthy development in third-party business. And Alan just introduced that actually a lot of important progress we look forward to seeing in the next few quarters and we expect to see very healthy growth contributed by Shanda Online going forward.

Cathie Chen - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Alicia Yap with Citigroup.

Alicia Yap - Citigroup

Three quick questions -- first of all, for your literature business, are you booking the license fee one-time when you sign the contract or are you amortizing once your partner, for example, Shanda Games launched a game and maybe Shanda Movie launched a movie?

Grace Wu

Can I clarify your question regarding the Shanda Literature revenue related to its IP business?

Alicia Yap - Citigroup

Yes, I was just wondering for Shanda Literature, since it licensed the IP to Shanda Games as your other business, for example, the games and the [inaudible] on that, so are you booking your revenues on the licensing fees once you sign the contract or once the partner actually launches the product?

Grace Wu

Well, it depends on the different contractual arrangements. As Alan discussed earlier, [inaudible] copyright business has various forms of business cooperation with different licensees. However, for the related transactions to, for example, when Shanda Literature licenses its IP to Shanda Games to adapt into online games, a group [inaudible] starts, it will be [inaudible]. So it wouldn’t actually affect on the net revenue.

Alicia Yap - Citigroup

I see. And in terms of your JV with Hunan TV, are you actually going to consolidate this business into the other revenue category as well? And when do you think you will see the revenues to come in?

Alan Qunzhao Tan (Translation)

The announced joint venture by Shanda Pictures and Hunan Broadcasting to form the [Shenzhi] Pictures is still undergoing the detailed procedures to form the legal entity. However, the planned project has already been announced in the press conference and the press release. However, the cycle for production, such TV series production or movie production takes a long time. So we don’t expect to see any near-term contribution but for the detailed timetable or development cycle, Alan mentioned that we can probably could reference to the industry's typical cycle.

But we don't see a significant revenue contribution in the near-term.

Alicia Yap - Citigroup

I see, understood. And lastly, can you share with us what are some other areas that you still need to explore and invest in your long-term vision?

Alan Qunzhao Tan (Translation)

We see clear objective to become a leading global entertainment media enterprise. We always and will continue to step up efforts to focus on new technologies, as well as the innovative business models to transform the cultural landscape. So we will continue to focus on cutting-edge research in different [inaudible] technologies and potential new business forms in order to be well-positioned for the next [inaudible].

I think going forward, we are still pretty focused on the overall entertainment sector so the diversified content that will fit in with this strategy and the landscape, we will evaluate the opportunities. However, we will evaluate the opportunities case by case and it will be difficult to say at this moment what kind of M&A or the cooperation we might adopt for future growth.

Alicia Yap - Citigroup

Thank you very much, Alan, Grace, and Vivian.

Operator

Your next question comes from the line of Lisa Yeung with Morgan Stanley.

Lisa Yeung - Morgan Stanley

I have got three questions. My first question is a follow-up on the [inaudible] revenue. My understanding is as you [try to fix a] [inaudible] on Shanda Games, so in theory [inaudible] revenue should grow at least in line with Shanda Games' growth. My question is why is [inaudible] revenue growing actually slower than Shanda Games?

And my second question is regarding your FX in 2010. And my third question is about your stake in Hurray!, because Hurray!'s of [Kulio], your stake in Hurray! probably will be below 40. Do you have any plan to increase your stake in Hurray! and would you continue to consolidate this part of the business?

Alan Qunzhao Tan (Translation)

As Alan just explained, currently Shanda Online provides fundamental services to all the content providers in the Internet industry and we are still focusing on the investment to the fundamental network as well as the increased improvement for the services. And also it still takes time and resources for us to cooperate with third party content providers, so if we just refer to the game development and operation cycle, I believe at this moment, Shanda Online is still in the internal testing phase but going forward, I think with the critical scale has been built, we could foster the overall growth in terms of business operation as well as the revenue growth.

Grace Wu

Okay, and the second question regarding the CapEx plans for 2010, based on a couple of projects we have announced so far and also based on the potential new development we foresee in the next few quarters, we will carefully review all the plans for next year and we will report the plan [inaudible] 2010 when the numbers are available.

I'm sorry, would you repeat your third question again?

Lisa Yeung - Morgan Stanley

My third question is about your Hurray! Stake, because after Hurray!'s acquisition of [Kulio], your stake will be diluted and my question is are you planning to increase your stake in Hurray!? And because your holding on Hurray! is now below 50, will you continue to consolidate it?

Alan Qunzhao Tan (Translation)

First, we respect the work by Hurray!'s board and management team and their efforts to define Hurray!'s overall strategies and direction and we believe that combined with Shanda's resources and well-established platform, Hurray! and Shanda could elaborate to each party's strength to provide for the future growth. And I think -- I believe after the deal closed, the stake of Shanda in Hurray! might change. However, over the longer term, we are very confident about these two companies' growth and we also believe that both [inaudible] and Hurray!'s business will create shareholder value for both parties' shareholders and owners.

Lisa Yeung - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of Tian Hou with Pali Capital.

Tian X. Hou - Pali Capital

My question actually is following upon the previous question -- why the growth of Shanda Online is slower than Shanda Games? (Translation not provided) So that's the first question.

Alan Qunzhao Tan

(Translation Not Provided)

Tian X. Hou - Pali Capital

Okay. So the second question, you made mention of their revenue top line, so Grace, I don’t quite understand this part. So what [inaudible] eliminating?

Grace Wu

Basically, if there are related party transactions that pertain to our wholly-owned subsidiaries or our controlled subsidiaries [we've eliminated], one example was actually discussed earlier, for example, when Shanda Literature's copyright was licensed to Shanda Games and that part of revenue will be booked by Shanda Literature; however, when we report our consolidated revenue results, it will be eliminated.

Tian X. Hou - Pali Capital

Okay, so is the other part of elimination also come from Shanda's -- you know, the operating of Shanda Games?

Grace Wu

I'm sorry, operating of Shanda Games for?

Tian X. Hou - Pali Capital

You know, under -- Shanda Online also has revenue from Shanda Games, right? So is there any revenue you are eliminating from there?

Grace Wu

Shanda Online is actually providing service to Shanda related content providers, including Shanda Games but not limited to Shanda Games. They also provide a service --

Tian X. Hou - Pali Capital

Correct.

Grace Wu

-- to the other board game platform, e-sports platform, and Shanda Literature, et cetera. So all these revenues will be eliminated.

Tian X. Hou - Pali Capital

Okay, got it. Thank you. That's all my questions.

Operator

Your next question comes from the line of Yvonne Yang with BNP.

Yvonne Yang - BNP

My first question is also about the Shanda Online business. Currently how many third-party business partners are there on the SDL platform and regarding the revenue share from the third-party partners, this percentage, is this usually higher than the revenue share from [SDG], Shanda Games? That is my first question.

And my second question is about the future M&A targets. Going forward, will it be primarily on the game content side or other digital entertainment content side and is there any criteria in screening future potential M&A targets? Thanks.

Alan Qunzhao Tan (Translation)

As of November 25th, Shanda Online already signed up to 24 content operators to use its integrated platform service and the ones already connected are in the testing phase, including 14 of them, sorry, one-four.

I'm sorry, we missed your second question.

Yvonne Yang - BNP

My second question is about the future M&A targets -- going forward, will the management think that the potential M&A will be primarily on the game content side or other digital entertainment content like video sharing or mobile music and so on? Will you consider to acquire more game content developers or other digital entertainment content players?

Alan Qunzhao Tan (Translation)

All the strategic investment or acquisition of majority stake will be conducted by Shanda Games, especially focusing on MMORPG or casual games, but if you are referring to online casual games platform such as board, chess game platforms or e-sports platforms, those are community featured game platforms and that kind of investment will be conducted by our online board game platforms or our e-sports platform business lines.

Yvonne Yang - BNP

I see. And also I have a quick follow-up question on the SDL -- for the third-party business partners, I understand that SDL primarily charges on the revenue share basis. Is this revenue share usually higher than the revenue shared from SDG?

Grace Wu

Because SDO's business is a pure service provider, the [inaudible] confidentiality agreement with its customers, we cannot disclose any details in terms of [inaudible] or -- actually we should refrain from SDO's perspective to compare its business trends with different customers because it is against its professionalism, so we probably will not be able to answer that question.

Yvonne Yang - BNP

I see. Thanks very much.

Operator

Your next question comes from the line of Ming Zhao with SIG.

Ming Zhao - SIG

I just have a general question on your cash usage. On the balance sheet, you have $1.5 billion to $1.6 billion of cash and yet you also have convertible debt on your balance sheet, so my question would be what is your plan to use the cash going forward? Do you have anything to share with us at this moment? Thank you.

Grace Wu

As you indicated, our consolidated balance sheet, we have about $1.6 billion in cash. But because as we report it on a consolidated basis, the effective cash sitting on Shanda Games' balance sheet, Shanda Online's balance sheet, Shanda Literature's balance sheet, as well as e-sports platform balance sheet and our board game platform, [inaudible] the balance sheet and many other business lines' balance sheet. So however, we did raise certain proceeds from the IPO of Shanda Games. As Alan mentioned, we believe the capital raised from that transaction, we'll be able to support us to continue to develop and grow in our different business lines, including existing business lines and our future expansion into other entertainment media related business, as well as our investments in the new technology development to support our mission statement, new technology combined with innovative business model to reshape the cultural landscape, and that's our overall objective.

As you already have probably heard from some earlier announcement, we not only have made certain strategic operation announcement or certain small acquisition announcement, we also have recently recruited top talent from -- with outstanding professional and technical backgrounds and we believe these addition of these highly regarded professionals will be able to help us to work faster towards the long-term objective.

Ming Zhao - SIG

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to turn the call over to Ms. Vivian Chen for any closing remarks.

Vivian Chen

Thank you, everyone, for joining us on today's call. And if you have any follow-up questions, feel free to contact us any time. Thank you again. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Shanda Q3 2009 Earnings Call Transcript
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