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Shanda Games (NASDAQ:GAME)

Q3 2009 Earnings Call Transcript Introductory Remarks

December 1, 2009 08:00 pm ET

Executives

Maggie Zhou – Investor Relations Manager

Diana Li – CEO

Richard Wei – CFO

Operator

Welcome to Shanda Games Limited third quarter 2009 results conference call. The conference call will be recorded and available for reply in its entirety. A copy of Shanda Games’ third quarter 2009 results announcement can be found and downloaded from its corporate website, www.shandagames.com. At this time, all lines have been placed on listen only mode and the floor will be open for questions following today's presentation.

I would now like to turn the call over to Ms. Maggie Zhou, Shanda Games’ IR Manager. Please proceed, ma’am.

Maggie Zhou

Thank you. Good morning and good evening to all participants. On behalf of Shanda Games, I would like to welcome everyone to our third quarter 2009 results conference call. Here with us today are Ms. Diana Li, our Chief Executive Officer, and Mr. Richard Wei, our Chief Financial Officer.

Before we begin, I would also like to remind you that management comments during the call will include forward-looking statements that are based on our current expectation 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 fact 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 Harbour Statement in Shanda Games’ third quarter 2009 press release. In addition, please note for discussion purpose, all numbers were translated into US$ based on the exchange rate of RMB6.8290 per US$.

Now, with that, I would like to turn the call over to our Chief Executive Officer, Ms. Diana Li.

Diana Li

Thank you, Maggie. Hello to everyone on the call, and thank you for joining us today.

I'm delighted to be here today to discuss our earnings results with you for the first time after Shanda Games’ Nasdaq IPO. As a standalone public company with solid strategies for growth, a leading portfolio and pipeline of games, huge user base and strategic synergies with our parent company, Shanda Interactive, we are very excited about the opportunities ahead.

Our September IPO came on the heels of another quarter of solid growth. In the third quarter, strong top line growth of 45% year-over-year and 10% quarter-over-quarter was driven by successful expansion of existing games as well as several new game launches, and benefited from the favorable seasonality of the summer holiday. APA and ARPU increased sequentially, both for MMORPGs and for advanced casual games. And the bottom line saw healthy growth as well. These results reflect our ability to both attract new users and deliver a great experience to our existing users.

As you know, Shanda Games has long been a leader in China’s online game market. Our success is based on several key pillars. One, we run a portfolio of leading game franchises that continue to grow and attract new generations of users. Two, we have a deep ability to source new games through multiple channels. Three, we possess unrivaled expertise in managing game operations through our years of experience in understanding the local market and continual R&D investment in technology. Four, as a pure-play gaming company we are able to attract and retain top talent through creative incentive methods.

Let me take a few minutes to discuss each of these areas in more detail before handing the call to Richard Wei, our CFO, who will take you through the financials.

As of today, with 32 games in operation, including 21 MMORPGs and 11 advanced casual games – Shanda Games has by far the most diverse, robust portfolio in our market. Since 2001, when we launched our first game, we have been introducing several new games every year across a range of segments and genres, and our capacity to develop and launch new games has increased accordingly. In the past we were only able to introduce one new game per year, and we are now able to introduce as many as four per quarter.

In the third quarter we continued to leverage and expand upon the success of our most popular franchises, Mir and Woool. We launched Mir2 Return, the second major follow-up to our perennial hit franchise Mir2. We also continued to invest in the Woool franchise, and I am pleased to announce that the new game in the Woool series, called Legend of Heroes, started testing in the fourth quarter. In developing our game franchises we spend lots of time researching the needs and wants of our users, and the expansion packs and game sequels we release as a result specifically address our users' preferences. Moreover, consistently introducing creative new elements to games and expansion packs allow us to enter new genres, thus attracting new user segments and minimizing cannibalization with our existing popular games. We believe these are key to maintaining and increasing our long-term base of loyal users. The fact that we can keep our older series alive and fresh speaks to our ability to innovate and expand and underlines our profound user insight.

Also important to our success is our ability to develop and operate new hit games which demonstrates our execution ability and creativity as well as the benefits of our multi-sourcing strategy. During the third quarter we fully commercialized four new MMORPGs: Ghost Raider, a side-scrolling 3D action game, Luvinia, a 3D fantasy game, ZU Online, a 3D martial arts adventure game, and Yuyan Online, a 2.5D martial arts adventure game.

We currently have 27 games in our pipeline, including 19 MMORPGs and 8 advanced casual games, and we are constantly adding new ones. Our multi-faceted approach to sourcing new games, which includes licensing, partnership, in-house development, co-development, and acquisitions, allows us to source the best ideas and ensures we capture creativity from local developers who are closest to online game players in China. Following on this strategy, in the third quarter we successfully acquired Simo Technologies, the Chengdu-based game developer behind the 3D fantasy MMORPG Louvinia Online. We also continued our efforts to develop innovative new games in-house, especially our upcoming World Zero, the next-generation MMORPG. With deep channels bringing new games into our pipeline, we are able to maintain a rich and robust pipeline that attracts new gamers across all segments. New games that further diversify our portfolio and bring new users to our platform are crucial in driving shareholder value, and we are focused on creating the best opportunities on this front.

Successfully marketing and promoting our new games is also important to our success, and Shanda Games’ creativity on this front has allowed us to continue driving excitement for our new products. A great example of this is AION, our first large-scale 3D MMORPG and the most successful of its kind launched in China in 2009 measured by number of users. We launched AION in June 2009 and are now in the process of rolling out AION version 1.5, which we recently took on the road to promote on a series of local stops throughout various regions of China. User feedback on version 1.5 has been very positive, and we have found this innovative “road show” approach to marketing has both enhanced user stickiness and driven APA and ARPU. Through this approach we have launched AION 1.5 in several key markets in China, and we look forward to making it available to the rest of the country later this month.

Finally, as a pure-play online games company, we are now more than ever able to attract and retain top talent, and managing them effectively, by implementing creative measures that foster growth and innovation. Our ability to maintain effective internal management strategies will be a pillar of our continued success.

Now let me discuss briefly a few of the strategies we have in place to deliver growth in the quarters ahead.

First, we will continue to source new games aggressively through our multiple channels. Of note, we have recently made strides in our open strategy, specifically our cooperation with Kingsoft, with which we launched JX World this past June. We’re encouraged by the positive feedback JX World has received from our users, and we’re excited to announce that we have decided to deepen this relationship by signing on with Kingsoft to operate JX3 Online, a new 3D MMORPG, on our platform. Cooperation with leading developers like Kingsoft is an important part of our sourcing model, and we look forward to continuing to find mutually beneficial arrangements that allow us to enhance user experience.

Second, we will push forward with cross-platform offerings that leverage the synergies we have with our parent company, Shanda Interactive. In particular, we have several games in the pipeline that build off of successful Shanda Literature online novels, which we have licensed and are in various stages of developing. Ghost Raider, which was fully commercialized in August, Legend of Immortal which will be out in the first half of next year, and Crouching Dragon, are all based on extremely popular Shanda Literature online novels that command a huge following. We also see a lot of potential in cross-technology content, such as mobile gaming, which is an especially exciting area now that 3G technology is being rolled out in China. In looking to take advantage of the potential here we are taking a multi-platform approach to some of our new games, such as Crouching Dragon, which will have versions for the web, PC and mobile. Developing games like these demonstrates Shanda Games’ ability to source content across various platforms and underlines the wealth of synergies that exist with our parent company.

Third, we will remain focused on expanding our overseas business. We are currently exporting to over 45 other countries and regions, including Korea, India, Russia, Southeast Asia and the Middle East. We will continue to export our games to regions outside of China and will look to take advantage of exciting new opportunities that arise in the international sphere.

Thank you again for your time today. All of us at Shanda Games are very excited to begin our new life as a standalone public company with a sharper focus and greater flexibility to pursue strategic opportunities that will enhance our position as the leading pure-play online game company in China.

With that, I will hand the call over to Richard.

Richard Wei

Thank you, Diana.

Our full earnings release with financial statements is available on our web site as well as most major financial portals. In the interest of time, let me quickly take you through some of the key numbers in our Q3 results and provide an outlook for Q4. We will take questions afterwards.

In Q3, our revenues increased 45% YoY and 10% sequentially to a record high of RMB 1,272 million ($186 million).

MMORPG revenues increased 9% sequentially to RMB 1,181 million ($173 million) and accounted for approximately 93% of total revenues. Active Paying Accounts for MMORPG increased 6% sequentially to 9.06 million. ARPU increased 4% sequentially to RMB 43.4 per month.

Advanced casual game revenues increased 21% sequentially to RMB 87 million ($13 million). Active Paying Accounts increased 5% sequentially to 1.21 million. ARPU increased 15% sequentially to RMB 24.1 per month.

Gross margin in Q3 was 59.3%, relatively stable compared with 59.1% in Q3 2008 and 59.7% in Q2 2009.

Moving on to operating expenses, in Q3, Product Development expenses increased 15% sequentially to RMB 82 million, mainly due to a performance-based payroll increase for some of our developers and an increase in Product Development headcount.

Sales and Marketing expenses increased 11% sequentially to RMB 122 million, primarily due to increased expenses related to marketing efforts for nationwide promotional activities during the summer holiday season.

G&A expenses increased 61% sequentially to RMB 128 million, primarily due to an increase of share-based compensation from RMB 9 million to RMB 74 million. The RMB 74 million amount included an accumulated expense of RMB 62 million recognized due to the consummation of the Company’s IPO.

Non-GAAP operating margin was 39.0% in Q3, up from 35.7% in Q3 2008 and 38.1% in Q2 2009. Our non-GAAP calculation excludes the impact of share-based compensation.

In non-operating income, the Company recognized RMB 63 million in government subsidies, which were calculated with reference to taxable revenues and taxable income.

Non-GAAP net income totaled RMB 442 million ($64.7 million), an increase of 65% YoY and an increase of 18% sequentially.

Non-GAAP earnings per ADS on a fully diluted basis were RMB 1.58 ($0.24), up from RMB 0.98 from Q3 2008 and RMB 1.36 in Q2 2009.

For the first nine months of 2009, total revenues were RMB 3,471 million ($508 million), up 44% from the same period in 2008.

Diluted earnings per ADS for the nine-month period were $0.56. Non-GAAP diluted earnings per ADS were $0.60.

Turning to our balance sheet, Cash and equivalents increased from RMB 1,080 million at the end of Q2 2009 to RMB 2,408 million ($353 million) at the end of Q3 2009. The increase came primarily from the IPO proceeds and cash flow generated from operations.

Before I turn to guidance for Q4 2009, let me provide a word of caution. Our actual results could differ from our financial guidance for various reasons, as stated in the Safe Harbor notice in our press release. Now, based on our current operations, we expect our Q4 revenues to grow by approximately 3-5% from Q3. We also expect to maintain stable non-GAAP operating margin.

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

Question-and-Answer Session

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