Giant Interactive Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Giant Interactive Group Inc. (GA)
by: SA Transcripts

Operator

Good morning and good evening, ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group's Third Quarter 2013 Earnings Conference Call. (Operator Instructions).

Now I would like to transfer the call to the moderator, Mr. Rich Chang, Giant Interactive's Investor Relations Director.

Rich Chiang

Good morning, ladies and gentlemen. Welcome to the third quarter 2013 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, Chief Executive Officer; Ms. Jazy Zhang, Chief Financial Officer; and Mr. Xuefeng Ji, President.

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, Ms. Zhang and 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 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. Statements in this call contain forward-looking statements within the meaning of Section 27A of the Section 27A of the Securities Act of 1933, as amended, and Section 21E 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 terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates and similar statements, and among others, include statements regarding the company’s expectations for the moderate growth in the fourth quarter 2013, the expected growth of Supreme Tai-Chi and Genesis of the Empire after the games are launched on multiple platforms run by the company's partners, the expected growth of the web game market in China, and the company's ability to gain market share with its new web games; the ability of the company to deliver great mobile games with its in-depth knowledge and experience in marketing and operating games in the Chinese market, as well as its game pipeline; the ability for the company to leverage its collaboration with third-party platforms and to explore new and profitable distribution channels while maintaining industry-leading profitability driven by prudent spending and continuously improving efficiency; the ability of the company to keep up the growth momentum and seize the opportunities with the support of its strong teams of developers led by industry-known chief producers and a diversified game portfolio in the pipeline; and the timetable for testing and release of new games and expansion packs in the company's game pipeline.

These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. Our actual results and financial condition and other circumstances may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

Among the factors that would cause the company's actual results to differ from what the Company currently anticipates may include a deterioration in the performances of the ZT Online 1 Series and ZT Online 2, unexpected delays in developing expansion packs or in the timetable for testing and launching our games, our dependence on the ZT Online franchise which currently account for the majority of our historical net revenues, failure of our web games, MMO pipeline games, or other diversification or distribution efforts to grow as successful as expected, uncertainties with respect to the PRC legal and regulatory environments and the volatility of the markets in which the company operates.

The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 20-F for the fiscal year 2012 as filed with the Securities and Exchange Commission on April 18, 2013, which is available on the Securities and Exchange Commission's website at www.sec.gov. For additional information on these and other important factors that could adversely affect our business, financial condition, results of operations and prospects, see Risk Factors beginning on page 3 of our annual report for fiscal year 2012.

Our actual results of operations for the third quarter of 2013 are not necessarily indicative of our operating results for any future periods. Any projections in this call are based on limited information currently available to the Company, which is subject to change. Although such projections and the factors influencing them will likely change, the company undertakes no obligation to update or revise these forward-looking statements whether as a result of new information, future events or otherwise after the date of this call. Such information speaks only as of the date of this call.

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 our CFO, Jazy Zhang. Jazy?

Jazy Zhang

Thank you, Rich. Good morning and good evening everyone. I will begin by reading the opening remarks from our CEO, Ms. Liu.

We delivered yet another solid quarter, marking 15 quarters of consecutive revenue growth. 2013 has been a pivotal year in our strategic expansion as we continue to grow our client-based game business while diversifying into web and mobile games. This year we launched a new MMO called World of Xianxia and conducted its closed-beta testing in April and open-beta testing in September. This new game has been a success, demonstrating our ability to develop great new franchises outside of our well-known ZT Online series.

Today we are pleased to review our new flagship MMO for 2014 named Jianghu. This new 2D martial arts MMO was developed by a team led by President Ji in the past three years. The game features large-scale PK battles and innovative user-generated content with dynamic game play with an emphasis on gamer engagement on interaction among gamers. Game data metrics are retrieved on a real-time basis and are used to tailor the game play to suit each gamer's playing styles and preferences, to provide each gamer with unique gaming experience. Jianghu is scheduled to enter engineering testing in December 2013.

Besides client-based games, we have made strides in new growth areas such as web games and mobile games. We have begun rolling out our first wave of web games, namely Supreme Tai-Chi and Genesis of the Empire. We began testing these games on several of our web game platform partners, and the initial results have well exceeded our expectations. Based on the results, we expect these games to continue to grow as they are launched on additional platforms going forward.

The success of our web games, although still an early stage, demonstrated our innovative game designs and best-in-class R&D capabilities are not only applicable to client-based MMO games but also to web games and potentially to mobile games. Furthermore, it solidifies our leadership position as the premier content provider in China's online game market. The web game market in China is still growing at about 40% annually. We believe our elite web games will enable us to gain incremental market share.

We are also excited to announce that our internal mobile game studios are set to deliver their first two web games in the coming quarters. Our first mobile game, Kung Fu BBQ, a turn-based card battle game, is expected to begin engineering testing by the end of 2013. Our second mobile game, ZT Online Mobile, a mobile role-playing game set in the ZT Universe, incorporating new strategy game plays and featuring real-time PK battles, is scheduled to begin engineering testing in the first quarter 2014.

While competition in the mobile game space has intensified, especially in the last 12 months, we believe elite games will eventually dominate the mobile game market in terms of revenue, user number and sustainability, relying on years -- our years of experience in developing and operating hit games, our understanding of Chinese gamers and expertise in publishing and marketing, we are making significant progress in cementing Giant's position as the leading developer and publisher of high-quality games regardless of whether they are client-based games, web games or mobile games.

As we transition into 2014, we will keep our recent momentum and continue to execute our long-term strategy as the leading content provider across client-based, web and mobile games, with Jianghu and Cang Tian 2, a licensed MMO game from WeMade of South Korea entering into engineering testing in the coming months, web games beginning to contribute to our top line, several mobile games set to launch in the coming quarters, we now have a robust pipeline for 2014 and beyond. We will continue to collaborate with existing third-party platforms but also explore newer and more cost effective distribution channels.

We aim to achieve these goals while maintaining our industry-leading profitability and giving value back to shareholders in the form of dividends. In the mid to long term, with the support of our strong team of developers led by our industry-known chief producers and a diversified game portfolio in the pipeline, we are optimistic about our future. We believe that we will be able to maintain our growth trajectory and the opportunities we have seized will eventually come to fruition.

This concludes the opening remarks from Ms. Liu, and I will now walk you through our key operational metrics and financials for the third quarter 2013. Please refer to slide nine of our presentation.

In terms of our key operational metrics in the third quarter, active paying accounts or APA were up 0.3% sequentially and up 4.2% year over year to 2.34 million. Average revenue per user or ARPU was RMB245, up 0.5% sequentially and up 2.9% year over year. Average concurrent users or ACU were 607,000, down 0.8% sequentially and up 0.4% year over year. Lastly, our peak concurrent users or PCU were down 2% and down 2.5% year over year to 2.27 million.

The year-over-year rise in APA was primarily in connection with the growth of World of Xianxia and expansion packs for ZT Online series. The year-over-year increase in ARPU was mainly driven by the increase in spending by ZT Online 2 gamers and the launch of World of Xianxia. The sequential decrease in ACU and sequential and year-over-year decreases in PCU were mainly due to further fragmentation of playing time MMO games. The year-over-year increase in ACU was due to the growth of World of Xianxia.

The healthy performance of our core game portfolio contributed to our stable financial performance for the quarter which is illustrated on slide 12 of our presentation.

Net revenue for the quarter was $96.4 million, up 0.3% sequentially and up 8.6% year over year. Our core business online game revenue grew 0.6% sequentially and 11.1% year over year to $95.1 million. The year-over-year increase in online game revenue was mainly due to the launch of World of Xianxia in 2013.

Gross profit for the quarter was $83.7 million, down 0.9% sequentially and up 9.5% year over year. Gross margin was 86.9% in the third quarter 2013 as compared to 87.9% in the second quarter 2013 and remained flat compared to the third quarter 2012.

The operating expenses for the quarter were up 2.9% sequentially and up 15.7% year over year to $26.8 million. As a percentage of revenue, total operating expenses were 27.8% for the third quarter 2013 compared to 27.1% in the second quarter 2013 and 26.1% in the third quarter a year ago. The sequential and year-over-year increases in operating expenses were mainly attributable to the increases in sales and marketing expenses.

Research and -- R&D expenses for the quarter were down 7.1% sequentially and down 1.3% year over year at $12.3 million. As a percentage of revenue, R&D were 12.7% in the third quarter 2013 compared to 13.7% in the second quarter 2013 and 14% in the third quarter 2012. The sequential decrease in the R&D was mainly attributable to higher bonuses accrued during the second quarter as compared to the third quarter this year.

Although total cash compensation for our R&D developers increased year over year due to the increase in staff headcount and salary raises, such an increase was offset by the decrease in share-based compensation expenses which are associated with the restricted shares granted in November 2011 due to the company's accelerated accounting policy in amortizing share-based compensation expenses. These expenses generally decline from period to period.

Sales and marketing expenses for the quarter were up 16.5% sequentially and up 68.2% year over year to $10.3 million. As a percentage of revenue, sales and marketing were 10.7% this quarter compared to 9.2% in the previous quarter and 6.9% in the third quarter 2012. The sequential increase in sales and marketing expenses was mainly for the expansion packs in ZT Online 1 and ZT Online 2. The year-over-year increase in sales and marketing was due to the marketing campaign for the open beta testing for World of Xianxia, as well as for the expansion packs for both ZT Online 1 and ZT Online 2 during the third quarter 2013.

G&A expenses for the quarter were up 2.9% sequentially and down 7% year over year to $5.8 million. As a percentage of revenue, G&A were 6% this quarter compared to 5.9% last quarter and 7% in the same quarter a year ago. The sequential increase was mainly attributable to certain employee benefits and the year-over-year decrease was mainly due to the decrease in share-based compensation expenses associated with restricted shares granted in November 2011 due to the company's accelerated accounting policy in amortizing share-based compensation expense. Those expenses generally decline from period to period.

Moving on to our bottom line, net income attributable to the company's shareholders during the quarter was down 3.2% sequentially and up 14.1% year over year to $58.1 million. The margin of net income attributable to the company's shareholders for the quarter was 60.3%, compared to 62.5% in the previous quarter and 57.4% in the third quarter 2012.

Net GAAP -- sorry. Non-GAAP net income attributable to the company's shareholders during the quarter was down 2.9% sequentially and up 8.8% year over year to $60.9 million. The margin of non-GAAP net income attributable to the company's shareholders were 63.1% compared to 65.2% in the previous quarter and 63% in the third quarter 2012. Basic and diluted earnings per ADS for the quarter were $0.24 and $0.23, respectively, on a GAAP basis, and $0.25 and $0.25, respectively, on a non-GAAP basis.

Moving on to our balance sheet on slide 13. As of September 30, 2013, our cash and cash equivalents, restricted cash and short-term investments totaled $610.3 million compared to $543.8 million as of June 30, 2013. The sequential increase was mainly due to the growth of the company's game operations. We expect revenue for the fourth quarter of 2013 to grow moderately as compared to the third quarter 2013.

This concludes our prepared remarks. Once again thank you for joining us today. We will now open the line for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions).

Your first question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question.

Timothy Chan – Morgan Stanley

Thank you very much for taking my question. Good morning everyone. I have two questions if I may. Number one would be the -- asking about your mobile game promotion strategies. So are you going to rely more on the distribution platform for mobile games or are you going to rely more on your expertise in client-based game promotions to promote the mobile games? What would be a more effective channel in your opinion? Thank you. And I have a follow-up question.

Jazy Zhang

Great question, Tim. Thank you.

(Chinese language spoken)

Wei Liu

(Interpreted). So, so far there are two ways in the industry to promote or to market or distribute their mobile games. The first one is working with various mobile game platforms in China. The second way is to use your own platform and do your own ads and marketing. We would prefer or lean towards the latter, number two, and do it ourselves, our own ads and marketing, because first of all this is a more profitable solution to mobile distribution. As long as you have strong IP and a strong marketing capability, it is very doable. But at the same time, we would also consider working with other platforms to grow our user base even further. So in summary, I guess you can say we'll consider both.

Timothy Chan – Morgan Stanley

Thank you. I have the -- another follow-up question would be more on your voice chatting [Dudu]. I noticed that there has been some selling of virtual items started lately. Could you maybe share some color on what as well?

Jazy Zhang

(Chinese language spoken)

Xuefeng Ji

(Interpreted). Yes. For [Dudu], our voice chat system within our games. Throughout the years we have already simulated lots of data and feedback from our user base. So recently we have added or implemented a couple of initiatives on to this voice chat platform. For example, we recently launched the mobile app version of this chat system. We added video capabilities. And lastly, we added some various value-added services including some items inside the voice chat.

The goal is not to directly monetize our users from a commercial standpoint but it's to add various services onto the platform to raise engagement and to provide a better user experience for our users.

And another goal through some of these new services is to build up or leverage our voice chat system and provide a more comprehensive mobile platform experience for our users. Of course you all know that some of these services are similar to company [YY] which has been very successful in China. However, we're not trying to compete directly with them. We have a slightly different angle, more on the gaming side.

Operator

-- please ask your question.

Unidentified Participant

Hi. Thank you for taking my questions. I have two questions here. The first question is, if China is going to open the console market later, what is the impact and development do you expect to the industry and expect to the company?

And second is to -- just want to get an update on the World of Xianxia, and congratulations on the successful open-beta testing in last quarter. Just want to see like what is management's expectations on the future performance of this game. Thank you.

Jazy Zhang

Thank you, [Veni].

(Chinese language spoken)

Wei Liu

(Interpreted). As far as console games go in China, we don't feel that there will be much impact to the industry through the approval of distribution of console games legitimately, because in the past years in the Chinese market, console games have always been available to gamers and gamers have been playing them for a number of years already.

Xuefeng Ji

As far as World of Xianxia goes, our new flagship game that we launched this year, throughout this year 2013 it has achieved a lot of success. It's been one of the best new games, best new self-developed MMOs in the marketplace, and we're very proud of that. Number two, it's been a successful new IP outside of our ZT franchise. Of course everyone knows that we're very well-known for our ZT franchise, but this really demonstrates that we can develop a great new game outside of the ZT universe. And World of Xianxia will become a new franchise for us going forward.

And C, the success of World of Xianxia has already surpassed or met our expectations. And we expect that going forward into 2014, the game will grow even further.

Operator

Your next question comes from Muzhi Li from Citigroup. Please ask your question.

Muzhi Li – Citigroup

Good morning. Thanks for taking my questions. I have two questions. Number one, what do you think about the mobile and web games revenue in the longer term comparing to the MMOs? And the second question is about the long-term margin trend. What do you think about the fourth quarter and the future margin trends given that the company is expected to launch the mobile game next year, so I suppose, so the marketing expenses might get ramped up? Thank you.

Jazy Zhang

Thank you, Muzhi. I will answer your questions.

We believe that in the next two to three years, in the foreseeable future, we don't think the revenue contribution coming from mobile ramping will be significant. To give you a range, I think it will be below 20% total -- in terms of total contribution to our top line.

And in terms of margin trends for Q4 and going forward, as you know that, as we mentioned earlier, we will -- in our pipeline, we have a major licensed game from WeMade of South Korea. If this game does very well, and we do expect a few percentage points in margin contraction, but overall we do not think our current and future margins will deviate significantly.

Operator

Your next question comes from William Huang from Barclays. Please ask your question.

William Huang – Barclays

Hi, good morning. Thank you for taking my call. I have two questions. First question is about your new game Jianghu. Since this is one of the important titles for next year, can you highlight a bit more on the progress so far? And also potential launch schedule timeline next year. Is there any also initiative on -- new initiation in terms of balancing the game play experience for both paying users and non-paying users?

And I have -- second question is just follow up on the mobile games. I'm just wondering, before you guys kicked off mobile game business, have you internally analyzed the potential long-term mobile game business margin? And how is that compared to Giant's current MMO margins? Thank you.

Jazy Zhang

Thank you, William. I will translate your questions and I will answer your second question later on.

(Chinese language spoken)

Xuefeng Ji

(Interpreted). For Jianghu, our newly-launched new flagship title, self-developed MMO for next year, it's a title that our President, Mr. Xuefeng Ji, has been working on or has been leading since the launch of ZT2. So it's been some time, and the game is almost ready to hit the market. Testing will begin -- engineering testing will begin by the end of this year. And marketing or larger-scale launch is scheduled for the first half of next year.

In terms of game play, it is very different than the ZT series, with focus on interaction and of course some innovative game play that will be implemented. Of course we wish to grow or increase the number of paying users. But at the same time, it's going to also better -- provide a better experience for non-paying or low-paying users as well.

Jazy Zhang

William, I will answer your question with regard to the margin impact on our mobile games. As our CEO, Ms. Liu, mentioned earlier that we generally have two ways to promote and distribute our future mobile games. One is to follow our traditional way of promoting and distributing our self-developed MMOs, in which case we believe the margin will be very similar to our current margin. Secondly, we will work with multiple platform companies to distribute our mobile games, in which case we will book our net revenue share on the top line. And we believe that our net margin for that we expect will be higher because we will not be paying for marketing expenses.

Operator

Your next question comes from Jialong Shi from CLSA. Please ask your question.

Jialong Shi – CLSA

Hi, good morning, Jazy, Rich and [the rest of you]. Thanks for taking my questions. I have two questions. First question is about minority interest. Could you give us some colors why your minority interest was so low this quarter compared to previous quarter? Thank you. I have a follow-on.

Jazy Zhang

Okay. Thank you, Jialong.

Actually this quarter, overall minority interest that comes out is only about RMB4m, lower than that quarter. This is mainly due to our multiple game projects undergoing which are incurring expenses. Normally in our game studio we'll incur net profits instead of losses when they [indiscernible].

Jialong Shi – CLSA

Okay. My second question actually is a follow-up on the previous margin question. Giant has been able to maintain very resilient margins in the past couple of quarters, thanks to strong cost control. Could you give us some colors with regard to how you guys plan to maintain the balance of margin resilience and the investments into new business? Because most of your competitors are making quite aggressive investments nowadays into the new business which inevitably hurt their margins along the way. So if Giant is to maintain margin resilience, it seems like you guys may have to be very restrained on investments which could mean, you know, Giant might be lagging behind your peers into the new area given everyone else is so aggressive nowadays. Could you give us some colors on that? Thank you.

Jazy Zhang

That's a great question. Thank you, Jialong.

(Chinese language spoken)

Wei Liu

(Interpreted). As far as our strategy and why -- at least how we are able to maintain such prime margins in the industry, first of all, it really comes down to our focused strategy on developing elite games. We have always been a developer of great games and we strive to be -- remain as the best content provider in the game industry in China. Every game that we put out has the high quality, has lots of innovations. Our goal is not to create lots of mediocre games. We want to make the best.

So this year has been an important year in that we've continued to grow our core business, our MMO franchises. We've expanded into web games and mobile games. We've so far done a lot of progress and testing on these fronts already.

For example, as an example of our elite strategy, we've so far recently launched two web games, started testing with some of our web game platform partners, Supreme Tai-Chi and Genesis of the Empire. And so far from the initial [text], it has been really, really positive, surpassing our expectations. And we feel that as we launch these web games on more platforms in the fourth quarter, they'll have lots of growth potential left to go.

And as far as mobile games, we have announced two in the pipeline, Kung Fu BBQ and ZT Online Mobile. And of course with a game such as ZT Online Mobile, leveraging our famous franchise, our flagship game series, we're very confident that this game is going to be very successful in the mobile game industry.

So by developing some of the best games out there, being the premier content provider, we are able to maintain very high margins in the business.

And another key reason for our high margins is just due to the experience and diligence from our management team. They have a lot of experience working together and are going to remain very prudent and providing the best value for our loyal shareholders.

Operator

Your next question comes from George Meng from Macquarie. Please ask your question.

George Meng – Macquarie

Hi, good morning, and thank you very much for taking my questions. So I have two questions. The first one is regarding your MMO game pipeline. So Mr. Ji basically mentioned that Jianghu will be like the next major game for next year. And I think you also have ZT 3 and also another game [Jiangho Shudai] in your pipeline. Could you also please comment on that in terms of your expectation on those two games and also the timeline for testing and maybe launch?

(Chinese language spoken)

Xuefeng Ji

(Interpreted). Thanks, George, for your great question, as you seem to be very familiar with our pipeline, even some games that we have not formally announced yet besides Jianghu which we spoke about earlier. You also mentioned ZT Online 3 and another game [Jiangho Shudai] which we have not formally announced. But yes, we do have a very strong pipeline lined up in our core MMO business.

Besides license game, for example Cang Tian 2 for next year, the three games that you mentioned will -- should all be very, you know, important strategic or flagship titles for us down the road.

For ZT Online 3, it's so far going to be in the next iteration in our flagship ZT Online franchise. So it's been two years in development. And one major thing that people notice, it's completely 3D now. Our goal for the graphics of this game is to match the global standard or benchmark for online game graphics for 2014-2015 type of technology.

In terms of game play, there will be a lot of new innovations that you can count on. And by the time it's released, we believe that it will bring about a major revolution for the Chinese online game industry.

For [Jiangho Shudai], another new game that we've been working on, this game will also be -- will be very different from our ZT Online series or World of Xianxia franchises. This game is more of a mobile style, you know, online battle arena style, kind of similar to DOTA and games of that nature. So it's going to be very -- it's going to target users that are much more sophisticated and competitive with -- that wants or likes to play games that are more complex.

So it's certainly going to be a new market for us, new target audience. We've done some small-scale testing so far and the initial feedback has been very positive. So as we go forward, we're going to keep working on the graphics and the user experience to deliver the best game possible.

Another new title that we haven't formally announced but we will touch upon is World of Xianxia 2. For the team that developed World of Xianxia, beside working on new updates and the next expansion pack for the game, they're also working on a sequel to grow this game, this series, into a brand-new franchise for the company, since we have already demonstrated that this type of game has been very successful for us outside of our ZT franchise, and we want to keep catering towards these types of users, these user groups.

So in summary, we do have a very strong MMO or PC game pipeline over the next couple of years. The PC game market, MMO market and overall market in China is still growing very well. So we still want to launch our -- or focus some resources on this sector, especially as some of our peers have given up on the MMO market, PC game market. So therefore we can -- we stand to gain a lot more market share going forward.

George Meng – Macquarie

Thanks. My second question is a follow-up on the sales and marketing expenses. So basically we see that sales and marketing expenses have -- or has been up in the latest quarter. And of course you just said that we will be very disciplined on maintaining margin and also investment as we are going to focus and also focus on unique games. But since we are already like, in terms of pipeline, we are already north of 10% now, do we have a cap going forward on the sales and marketing expenses? Because most of our peers are actually ramping up their sales and marketing expenses quite significantly. Thanks.

Jazy Zhang

Thank you. Even though our total sales and marketing expenses in Q3 is higher than previous quarter, this is mainly due to we launched the marketing campaign to promote World of Xianxia, we did open-beta testing, as well as the expansion -- major expansion packs for ZT Online 1 and 2. That is why Q3 sales and marketing expense is higher.

In terms of percentage of the top line revenue, it's still about 10% -- 10% to 11%. We believe that in Q4 the total marketing expenses will be lower than in Q3. And on a full year basis for 2013, as I mentioned in the beginning of this year, we will be able to maintain our operating margin at between 60% and 65%, as usual. We just -- as Ms. Liu mentioned that we will spend every dollar very prudently. We take responsibility, you know, to add value to shareholders.

Operator

Your next question comes from Andy Yeung from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi, good morning. Thank you for taking my questions. I have two questions about your mobile games. Currently most mobile games in China including ZT Online Mobile developed for the iOS platform first. My first question is why put this on iOS version first given the fact that Android has a much larger market share in China? And I have a follow-up question on that.

Jazy Zhang

Thank you, Andy.

(Chinese language spoken)

Xuefeng Ji

(Interpreted). As for some differences between the iOS and Android platforms, at least for the Chinese market, obviously, like you said, Android market has a larger market share, but iOS has a couple of key advantages for developers. For example, there is only one central app store from Apple, so it's easier to work with, it's easier to -- you don't have to come up with as many different versions, there's less fragmentation on their app store. So therefore it's usually a more preferable process for developers, as long as your app, your game is high quality, it should be -- get approved very easily by Apple.

For Android, there's more fragmentation obviously, but we're seeing a lot of user growth and a lot of propensity to pay, monetization is also growing very well on Android platform. So that is something that we want to consider as well. Also due to all the fragmentation, competition, various app stores, the smaller and medium-sized games sometimes can be -- has a higher chance to succeed.

So as, you know, our CEO Ms. Liu mentioned earlier that one of our focuses for mobile is to promote them, market them ourselves on our sort of -- in our own ways and methods. So we will be probably consider iOS first for our mobile games and then cater towards the Android market.

Andy Yeung – Oppenheimer

Great. My second question is actually about the game type for mobile games. For Kung Fu BBQ, it seems to be a more casual game and ZT Online Mobile seems to be a more sophisticated game that seems more similar to traditional MMORPG. So looking forward like for the mobile strategy, will you be focusing more on the more sophisticated game type or you'll be focusing on the casual game as well?

Jazy Zhang

(Chinese language spoken)

Xuefeng Ji

(Interpreted). Yes. So the types of games or genres for our upcoming mobile games, you know, as we've seen in the mobile game market in past couple of years, there has been a lot of genres popping up, lots of new genres, but the ones that are truly sustainable or last have -- need to have a little bit more hard core, has to have a more sophisticated game play. And the way we approach game design is we have to consider these factors and try to foresee what's going to be sustainable even a year in advance, and cater towards the market, cater towards users.

So as you mentioned, Kung Fu BBQ is slightly more casual. It's a turn-based card battle game, a type of genre that's so far been very successful in Chinese mobile game market. ZT Online Mobile is slightly more hard core. It's a mobile role-playing game based on our ZT franchise, ZT Universe. So of course, as you know, role-playing games are always very favored among Chinese gamers. So we feel that that these two types of games or these two games will have a very good chance of succeeding in the mobile market and remain very sustainable and be successful for over the long term.

So basically whatever is successful in the market, whatever we feel that gamers want and can remain successful over a longer period of time, that's what we're going to try to do.

Operator

Your next question comes from Thomas Chong from BOCI. Please ask your question.

Thomas Chong – BOCI

Hi, good morning. Thanks for taking my questions. I want to go back to the question for MMORPG. Would management talk about how should we think about the lifecycle for a successful MMO title? In the past years we know that successful MMO can last for five to six years. Does management feel that, given the competitive landscape is changing, successful MMO can only last for two to three years?

And my second question is about the games pipeline. You mentioned about a number of different games like ZT 3, World of Xianxia 2. And I just want to get a sense about how we should think about the launch schedule for your various new game titles.

And my third question is about web and mobile games. Can management give us some color about the number of web and mobile games to be launched next year? Thanks.

Jazy Zhang

Thank you, Thomas.

(Chinese language spoken)

Xuefeng Ji

(Interpreted). For lifecycle of PC or MMO games, we don't feel that competition has impacted the potential lifecycle of MMO games because, you know, as a matter of fact, we actually see less competition in this sector for our own MMO games as some of our peers have given up or focused less on this genre.

So I think the key [to this] is that users over the years over the years have become more sophisticated or pickier in the games that they choose to play. But once they do try a good game, a high-quality game such as our ZT or some of the other flagship franchises from our competitors, they really enjoy and tend to stay in the game.

As for the launch schedule of our strong MMO pipeline going forward, as we mentioned, we have a couple, namely Jianghu, Cang Tian 2, ZT Online 3, [Jiangho Shudai]. The various launch dates will be determined through the testing processes for each of these games. But generally there'll probably be one or two flagship launches per year.

And as for our mobile pipeline, besides the two mobile games that we've announced today, we're also currently working on two more mobile games and could have potentially some more next year.

And to summarize our mobile strategy, it's actually quite similar to our MMO strategy in that, you know, we focus on quality over quantity. We don't want to just launch a lot of mediocre games. We want to launch the best -- best high-quality games in the marketplace.

Operator

As there are no further questions at this time, I would like to hand the conference call back to Mr. Rich Chiang. Please continue.

Rich Chiang

Thank you again for joining us today and we look forward to talking with you about our progress in the near future. Have a nice day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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