Shanda Q3 2006 Earnings Call Transcript

Nov. 9.06 | About: Shanda Interactive (SNDA)

Shanda Interactive Entertainment Ltd (NASDAQ:SNDA)

Q3 2006 Earnings Conference Call

November 9, 2006 8:00 pm ET

Executives

Donglei Zhou - Director of Business Development & IR

Tianqiao Chen - CEO

Jun Tang - President

Daniel Zhang - CFO

Analysts

Tony Chicas – Piper Jaffray

William Bean – Deutsche Bank

Ming Zhao - Susquehanna

Antonio Tambunan - Bear Stearns

Qi Chen – Shaw Capital Management

Chang Qui – Foran Technology

James Mitchell – Goldman Sachs

Wallace Chung – Credit Suisse

Operator

Welcome to Shanda Interactive third quarter 2006 results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Frank [Lian]. Sir, you may begin. Sir, you may begin your conference.

Frank [Lian]

Thank you, operator and welcome everyone to Shanda’s third quarter 2006 conference call. I would like to give a special thanks to our friends in the U.S. who join this call at a later hour. As always, we appreciate your participation.

With us today on the call are Tianqiao Chen, our CEO; Jun Tang, our President; and Daniel Zhang, our CFO.

After the close of the U.S. market today, Shanda issued its third quarter earnings release. Copies of the release have been sent to you for your information and reference during this call. A copy of the release is also available on Shanda’s corporate website at www.snda.com.

The purpose of this call is to provide investors with some further details regarding our financial results and to provide a general update on the company. Following our formal remarks, we will be happy to take any questions you might have.

Before we begin, I would also like to remind you that during today’s call we will make certain forward-looking statements that 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 during the conference call, other than statements of historical fact, are forward-looking statements.

Although we believe that our expectations expressed in our forward-looking statements are reasonable, we cannot assure you that our expectations will be correct. Risks and uncertainties could cause our actual results to be materially different from our expectations, including the risks set forth in our filings with the U.S. Securities and Exchange Commission.

Now with that, I would like to turn the call over to our CEO, Tianqiao Chen.

Tianqiao Chen

Thank you, Frank and thank you, everyone for joining the conference call. I am pleased with the solid financial results Shanda achieved in the third quarter, including quarter-over-quarter growth in total net revenues and operating income of 7.7%, and 23.4% respectively.

We were also pleased with the continued increase in net income, which grew from $16.7 million in the previous quarter to $18.1 million. This marked the second sequential quarter of growth since initiating our item-based revenue model last year and further validates the scalability and sustainability of the new revenue model.

First, this model is scalable. In the third quarter of 2006 average monthly revenue per active paying account, or ARPU, for MMORPG increased 13.4% to RMB51.6 from RMB45.5 in the previous quarters. The growth of ARPU illustrates that revenue can be scalable on the operation of new models. Under the traditional time play model, game revenues are derived from attracting new players and prolonging their playing time. The item-based model, on the other hand, offers a more flexible way to generate revenues, including attracting more concurrent users, increasing the number of active paying accounts, and growing ARPU. In theory, there is no limit to the growth potential for ARPU under this model.

Secondly, the new model is sustainable. The model transition has changed the user pattern from the traditional come, pay, stay into come, stay, pay which is able to draw more users to play the game content at the beginning. After more than three quarters operation, we have proved that a come, stay, pay model, or a CSP model, is a good way to increase revenue and prolong the lifecycle of our existing games.

In addition, this can provide players with a sustainable community system, thereby ensuring a long-term development of our online game business.

We are pleased to see that after our successful transition, more companies are adopting the new CSP model. Once again, Shanda Interactive proves its position as the industry leader. It has also proven that its core competence lies in its ability to quickly address change in user demand.

In addition, we are very pleased to announce that our revenues have been continually growing in the last one-and-a-half months of the fourth quarter. We are confident that Shanda has positioned itself well to grow its business profitably in the months and years ahead.

Now, turning to our pipeline strategy, which is a topic of considerable interest to many of my investors. This business transformation has introduced new requirements for pipeline construction. If we blindly license hit games, regardless of cost, it will only result in unhealthy competition and a surge in operation expenses. It will also detract operators’ attention away from improving the service provided to users. For Shanda, we believe that online games is a service and a platform, rather than a standalone product. We follow three criteria when constructing our pipeline.

First, our pipeline should stick with our growth strategy and should offer innovative new content, style, or mode of operation. We believe new games are constantly emerging in the industry and a few games will never be all licensed by a certain company. For Shanda, when constructing our pipeline, we will only select titles that we feel are innovative in content, style or modes of operation and we will make the number one hit title in the Chinese market through operation on our platform.

Second, our operational platform and competitive advantage allow us to generate value-added for new games. So another criteria to select new games is discover, recommend, feedback and improvement. Today, we have a fully integrated approach to marketing in very broad and efficient distribution systems. We believe that Shanda has the strongest platform in the online game industry. As our business model trends to a more flexible CSP model, we expect our platform to become more and more important in the future operation of our game business.

Our platform allows us to obtain the valuable user information and recommend game content that is most likely to satisfy their demands. The platform also enables us to collect user feedback quickly and to improve game content according to users needs. Therefore, we have more interest in games which are not famous currently, but with considerable potential. Our aim is to introduce those games to users and improve the game quality throughout our operation.

Third, unlike single PC games, online games have the capacity to grow and expand through auto update. Under the operation of new models, we believe online games should be viewed as a community rather than a standalone product. We believe that the development of new versions of existing games for current paying accounts is as important as the development of new titles. We have already released expansion packs of MIR II, Morph, and Magical Land, under the new model and have plans to launch the next-generation versions for those games in Q4.

Throughout the remainder of 2006 and into 2007, in addition to the launch of new versions of existing games, we plan to release 13 new games, including in-house development and licensed titles. To do this, we restructured the company and introduced new management business model, commonly adopted by game studios so as to benefit the long-term development of our pipeline.

At the same time, we have an advanced game testing center which closely monitors the market and is currently screening content from more than 200 game titles. We are fully aware of marketing and development and are ready to update our pipeline with content that has been approved by our evaluation systems.

In an effort to provide Shanda’s users with the richest game content possible, we tried to stock our pipeline with a balanced mix of licensed and in-house development games, as well as a balance and mix of games developed abroad and domestic.

Now I would like to say a few words about our EZ strategy. The core of our EZ strategy is a leaning-back mode of playing, which is suitable for families to consume entertainment content including games, movies, and music via a large screen display. The introduction of the leaning back concept is a strategic decision to open up important new revenue streams and achieve sustainable benefit in the future. It is based on a development strategy that will launch the new platform, EZ Platform.

Since the launch of EZ Pod, our first product for EZ Platform, on December 1 of last year, we have achieved considerable success. Based on this feedback we believe that online video games is currently the best solution to integrate our EZ strategy with our core business. We believe Shanda has a clear opportunity to help drive adoption of the leaning back or console game experience which is a dominant model of playing in most parts of the world. If we are successful, this will open up a large library of titles that have been proven as hits across the globe, but never been available to Chinese gamers.

In the third quarter, we are pleased to see the continuing growth of registered user figures. We recently surpassed the 100,000 user mark. In addition, we plan to continually improve game content available on our EZ Platform, and present a series of new casual games especially designed for the EZ Platform in the fourth quarter of this year.

In summary, we feel we have completed the transition and have clear visibility on our future direction. With a diversified and appealing pipeline of MMORPG and casual games, a flexible revenue model and a unified platform, we feel confident that our online games business is poised for sustainable and profitable growth in the months and years ahead. We believe Shanda is positioned to continue to lead the online gaming industry in China and, in the process, to create lasting shareholder value.

Thank you.

Jun Tang

Thank you, Tianqiao. Our online game business continued to deliver impressive results in Q3, led by our MMORPG and other item-based revenue model, as well as good performance on our casual games.

Total online game revenue posted a strong 9.4% quarter-over-quarter increase to $51.7 million. Total peak concurrent users in Q3 decreased 8% quarter over quarter to 2.06 million. Our MMORPG games delivered solid gains in Q3, with revenues up 9.1% quarter-over-quarter to $42 million. The sequential growth in MMORPG revenue is primarily due to the improved performance of MIR II, Magic Land, and the commercial launch of Arch Lord.

Total peak concurrent users before MMORPG decreased 20.2% quarter over quarter to 737,000 and total average concurrent users decreased 38% quarter over quarter to 449,000. The user decline is primarily because we implemented anti-robot cheating programs in Q3. Our item-based revenue model continues to show the impressive monetization result in Q3, with 2.1 million active paying accounts, and average monthly revenue per active paying account of RMB51.6 per month.

The ARPU increased to 13.4% in Q3 compared to Q2, mainly as a result of increasing consumer acceptance of the new model and the launch of new expansion packs and more value-added service in MIR II, War, and Magic Land in this quarter. The 3.8% decline in MMORPG active paying accounts as well as PCU and ACU drops in Q3 were attributed to our implementation of anti-robot cheating program. This robot cheating program not only [inaudible] our game environment, but also caused additional server costs. Due to the transition to our new business model, Shanda has implemented anti-robot cheating technology to weed out the players and enhance the integrity of our community. We expect this decline to be temporary.

Turning to the casual games, revenues for the third quarter including revenue from Bianfeng, Haofang and GameABC increased 10.7% quarter over quarter to $9.7 million. This sequential increase in revenue from casual games was attributable to the revenue growth from BNB as well as the seasonality related to the summer holidays during Q3. We are very pleased to see the revenue increase of BNB after the launch of the new expansion packs in this quarter. Also, we began to add in-game advertisements in our casual games. I am glad to see good feedback in this quarter.

Going forward, we will continue to make efforts on this business. Peak concurrent users for all casual games increased 2.4% quarter over quarter to 1.32 million, and average concurrent users increased 0.2% to 620,000 in the third quarter. Active paying accounts for casual games declined 7.7% quarter over quarter to 2.09 million and an average monthly revenue per paying account increased 19.9% quarter over quarter to RMB12.3.

Our game pipeline is strong, and we look forward to several upcoming launches in the fourth quarter of 2006 and in 2007. On the MMO side, Arch Lord was commercialized on July 27 and both the active paying accounts and the ARPU are growing in a very good trend. BDO entered open beta testing on August 28 and got very good feedback for the users. It is scheduled for commercial launch in Q4. In addition, we have MMO and ENF in our 2007 pipeline.

In looking at our casual games pipeline, we have about ten new casual games scheduled to enter open beta testing in Q4 and next year. Those being launched in Q4 are BBQ, DJ Max, and Kung Fu Masters, a martial arts fighting game with unique Chinese style. Overall, we are satisfied with the performance of our online game portfolio in the third quarter. We believe our strong pipeline and diversified game portfolio offering will continue to attract and hold users and help Shanda maintain its leadership position in a competitive market.

With that, I turn the call to Daniel.

Daniel Zhang

Thank you, Jun. Welcome, everyone. Third quarter total net revenue was 55.2 million, representing a 7.7% increase quarter over quarter, and a 12.6% decrease year over year. Other revenues in the third quarter were 3.5 million, mainly derived from platforms such as our EZ initiatives, online advertisement, online literature and others. Revenue contributions from sales of approximately 48,000 sets of EZ Pods was 927,000 in this quarter. Gross margins were 56.2% of net revenue this quarter, down from 56.5% in Q2 2006 and down from 58.9% in Q3 2005.

Income from operations of 14.2 million improved sequentially, driven by higher revenues and lower operating expenses. Total operating expenses decreased 3.7% sequentially. Operating margin increased to 25.8% from 22.5% in Q2 2006. The decrease in operating expenses was mainly due to the decline of EZ initiatives, research and development expenses as well as the sales and marketing expense reduction as the company continues to make strong efforts on controlling budgets.

The increase in G&A expenses was primarily due to an increase in doubtful debts relating to online advertising as well as an increase in share-based compensation. Share-based compensation expenses in Q3 were 1.4 million compared to 750,000 in Q2 2006 as new stock options were issued at the end of June, 2006. The share-based compensation expenses will be stable in the next few quarters.

Other income showed a marginal sequential decline of 3.1% to 6 million. Other revenue mainly consists of government financial incentives of 3.7 million received in Q3 and a foreign exchange gain of 2.6 million. Our receipt of these government financial incentives is subject to time lags and inconsistent government and administrative policy relating to payment time. We expect we will receive government financial incentives in Q4.

Net income in Q3 2006 was 18.1 million compared to a net income of 15.7 million in Q2 2006 and 32.3 million in Q3 2005. Diluted earnings per ADS was $0.26 in Q3 2006 compared to diluted earnings per ADS of $0.24 for Q2 2006 and $0.44 in Q3 2005. The net number of ADS outstanding for Q3 was 72.4 million compared to 72.1 million in the previous quarter, and 73.5 million a year earlier.

The effective tax rate in Q3 is 9.8% compared to 1.5% in Q2. The effective tax rate in 2006 is expected to be 11%.

Turning back to our balance sheet, deferred revenue increased 43.4% quarter over quarter to 26.2 million in Q3, mainly because our distributors became more confident in our new revenue model in Q3, and they purchased more prepaid cards at the end of Q3 to prepare for the national holiday. In addition, long-term prepayments increased 403% quarter over quarter to 11.3 million, primarily attributable to our purchase of [use rights] for the company’s long-term divestments.

That concludes my formal comments. Thank you everyone for joining us today. I would now like to turn the call to Donglei.

Donglei Zhou

We are now opening for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tony Chicas – Piper Jaffray.

Tony Chicas – Piper Jaffray

Good morning, gentlemen and congratulations on a good quarter. A couple of questions for you. What is your cash position today following the sale of your Sina shares? What is your intention with that cash, looking forward?

And a couple of housekeeping questions. The government incentive numbers are running at a run rate of about 25% of net income for this year. How do we plan that for 2007?

The third question would be a tax rate for 2007, please?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Daniel will answer question 2 and 3. Just on the cash position, currently we have about 170 million in cash. That includes all of the cash and RMB we generate from our operations. From the Sina stock sale, we generated 99.1 million cash, so total we have about 260 million to 270 million in cash. So we are very comfortable about that.

On an ongoing basis, we generate actually about 15 million to 20 million cash per quarter from our strong operations. Overall, we are quite comfortable.

Daniel Zhang

For question 2, actually as you know, Shanda received substantial government financial incentives in 2006 and these government financial incentives were basically calculated based on the tax we paid. Now we are in the process of discussions with the new government financial incentive policy with the relevant local government bodies.

To question 3, in 2007 some of our operating companies, their tax holiday will expire in 2007 so basically our assessment for 2007 overall effective tax rate will be around 15%. Thank you.

Tony Chicas – Piper Jaffray

Can I just follow up on those government incentives? Looking to 2007, do you have an estimate of what the dollar amount will be for the year?

Daniel Zhang

So far, I cannot project the whole year qualitative assessment. Actually, we are now in the process of discussion with the local government.

Operator

Your next question comes from William Bean – Deutsche Bank.

William Bean – Deutsche Bank

I was wondering whether you could give us an update on how Arch Lord is going?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Arch Lord already started to contribute revenue in the third quarter and has met our internal expectations. We are actually working on a new expansion pack that will be launched in Q4, so we are very confident about Arch Lord.

William Bean – Deutsche Bank

Do you have any numbers you can give us, to give us a sense of how things are going?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

As is our usual practice, we do not disclose numbers per game.

William Bean – Deutsche Bank

Can you give us a sense of the impact of your anti-robot program? Do you have a sense of the percentage of decline directly from the robot program?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

The robot program is basically a technical user, it is not a real user and they do not contribute significantly into ARPU. Overall, because of the phantom user in the community, it significantly impacts the user experience, and also impacts our new model negatively. So I think most of the impact that Daniel has summarized in terms of user number decline and also paying accounts decline, we believe that has contributed because of the anti-robot program.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

But I am happy to announce that so far into the fourth quarter, the paying accounts number has recovered and also started to increase. So we believe that the impact from the anti-robot is temporary.

Operator

Your next question comes from Ming Zhao – Susquehanna.

Ming Zhao – Susquehanna

Thank you. I have two questions. The first question, I understand that you are running a community right now, but do you worry about the life cycle of your old games? How long do you think MIR II will last in the market? That is my first question.

Second question, on your wireless games part, what is your strategy on the digital? Is there any progress there? Thank you.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

In my speech earlier, I specifically mentioned that we believe the new model actually prolongs the life cycle of our games because essentially the game is turned into an ongoing community rather than a single product.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Based on that community and leveraging Shanda’s brand name, we continue to study our user behavior, our user patterns and understand their demands so we can create new expansion packs to satisfy that demand. So far, I really don’t see much limitation in terms of life cycle.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Just like a long-lasting company such as IBM who started the whole PC industry, because of the users identifying quality PCs with IBM, they recognized the brand, they developed a user loyalty to that brand, and then over time they can extend that to other products. That is how we feel about our users as well. As long as they recognize Shanda’s brand, their use continues to evolve and they continue to pay Shanda. We think over the next couple of quarters we are rolling out new expansion packs for three of our large MMORPGs so we are very comfortable that they will continue to stick with the community.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Digital Red is a big investment that Shanda made in the wireless gaming experience. We believe that as the wireless industry continues to mature and as Shanda’s games continue to prosper, we will find a way to integrate that experience.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

As they continue to dominate the downloadable wireless game space, Digital Red has already started to work on interactive wireless networked games. They are in the development process of moving our successful games such as [Who], Magical Land, Bianfeng onto the wireless interactive networked game platform. So going forward, the Shanda game experience can be enjoyed anywhere, at anytime.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

And also, we are continuing to experiment in some further development of Digital Red and we look forward to continuing to communicate that with our investors.

Operator

Your next question comes from Antonio Tambunan - Bear Stearns.

Antonio Tambunan - Bear Stearns

Just a couple of things. I heard your comment on the cash position, but I missed what your intentions for that cash were. What are your intentions? Are you looking at acquisitions or what? If you could just follow up on that.

My main question is, I’ve got your concurrent users, I’ve got your average paying users. What I don’t have a feel for, especially since you are talking about the wider community, is what your conversion rates are. Meaning, what percentage of your total active gamers are actually paying users, totally or even just casually on the MMORPG? The rates, I just got back from Korea and the rates I am hearing in Korea, the conversion rates are between 10% to 20%. I am wondering if you are within that norm? I am just trying to get a feel for it.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

As to our cash position, of course our large cash position puts us in a very favorable spot as to have more flexibility. Of course, everyone also knows that we do have a convertible bond that is repayable in October of next year. So I think we will have sufficient cash to repay the CD.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

I believe so far our experience in the China market is quite similar to Korea in terms of the conversion rate. We will continue to leverage our core competence in our game operations to continue to increase that.

Antonio Tambunan - Bear Stearns

Lastly, very quickly, just your EZ products. How many have been bought by end consumers to date? How many are being actively used to play games? What trends have you seen in the last two months.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

So far we have already sold about 250,000 units of EZ Pod at a retail price of RMB450 per piece. Currently we have about 100,000 active users.

Antonio Tambunan - Bear Stearns

Thank you.

Operator

Your next question comes from Qi Chen – Shaw Capital Management.

Qi Chen – Shaw Capital Management

Yes, actually I just want to ask what is your strategy for the EZ Pod in the future?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

EZ is obviously easy and relaxed and leaned back, that is how we interpret it. Over the last year, through our efforts in gathering the feedback from our users, we have figured out that the best way to combine our core business together with the leaned back and relaxed strategy is to focus on online video games.

What is video games? Which is basically using a console to play games in a leaned backwards fashion, and online is our core competence. So we are confident we can figure out a way to enjoy this new market.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Probably as most of you know, the consoles are not really allowed to sell in China, and also we did a study to show that the PC configurations are pretty much as good as the Xbox and Playstation. So the best thing is to actually leverage the existing PC user base to give them an online, leaned back, relaxed video game experience.

Qi Chen – Shaw Capital Management

Just quickly to follow up, how many do you predict you are going to sell in 2007?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

We have already started to work on the budgeting plans for next year based on our new strategy and also the new position for our EZ products. So far, we do not have numbers to share with everyone yet, but we are in the process of working on them.

Operator

Your next question comes from Chang Qui – Foran Technology.

Chang Qui – Foran Technology

Good morning. I have a few questions. The first one is, you mentioned you have an expansion pack for MIR II, War, and Magic Land in Q3. My question for you is, the revenue impact for those expansion packs, is that normally a lag of a few months?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

We think the new expansion packs have immediate results in our revenues. In the old come, pay and stay model the existing paying users can enjoy the new expansion packs without contributing any additional revenue. The new revenue only comes from the word of mouth effect and new users start paying.

However, under the current, come, stay and pay model, if the users like the expansion packs and all of the new items they can pay right away. So we feel that this is a much more immediate and objective way of seeing how successful the new expansion packs are. As a matter of fact, some part of the growth in the second quarter and third quarter is mainly derived from the expansion pack.

Chang Qui – Foran Technology

And in this new model, how frequent can you roll out new expansion packs?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

It really depends on the different scale of the expansion packs. If it is just a few items, introducing some new items based on user demand, then we actually do that quite continuously. If it is a more significant, large-scale change, then we do that on a periodical basis.

Either way, we are very confident of our ability to continue to introduce new experiences to our users.

Chang Qui – Foran Technology

Daniel, a few questions for you too. In the product development and also the SG&A, how much of those are stock-based compensation? Can you break out the stock-based compensation from the reported number?

Daniel Zhang

The total stock compensation expense is around $1.4 million. Actually, this shows an increase compared to Q2 because we issued new options at the end of Q2.

Chang Qui – Foran Technology

Thank you.

Operator

Your next question comes from James Mitchell – Goldman Sachs.

James Mitchell – Goldman Sachs

Maybe just to complete the previous question, could you roughly allocate the stock-based comp between the various line items? I think most of it was in G&A.

Daniel Zhang

Yes, most of the stock-based compensation expense is in SG&A, yes.

James Mitchell – Goldman Sachs

And then the balance was a little bit everywhere? The rest of the stock-based comp was in sales and marketing and cost of services?

Daniel Zhang

In sales and marketing and cost of services, the amount is really immaterial, actually.

James Mitchell – Goldman Sachs

Okay, great. And then another financial question. Your licensing expenses were up around 17% year on year, while your game revenue was down fractionally year on year. Is that because your game revenue mix is shifting towards licensed games, or is it because you had to pay one-time licensing costs on Arch Lord or Dungeons and Dragons during the quarter?

Daniel Zhang

No, actually in Q3 the increase in the licensed cost is purely because of the increased revenue of our licensed games. It had no impact from the prepaid, one-time licensed costs for the new game.

James Mitchell – Goldman Sachs

And maybe a final question. You mentioned your casual game revenue was up because of BNB and Maplestory and Get Amped. Are your self-developed casual games contributing materially to your revenue yet?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

The only in-house developed casual game in commercial service is Crazy Cards. Apparently it has about 100,000 users. It started to contribute a substantial amount to our casual game revenue already.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Starting from Q4, we have ten more casual games coming out. As a matter of fact, the more we understand the item-based revenue model for our games, the better we are actually doing with casual games as well. In the previous quarters, BNB has already started to decline, but right now it is growing.

Operator

Your next question comes from Wallace Chung – Credit Suisse.

Wallace Chung – Credit Suisse

Good morning all of you. A couple of questions. Can we understand your target growth for 2007 based on your sustained platform strategy? If you don’t feel comfortable to disclose it, then if it is possible to give us some idea, say assuming Shanda can deliver growth similar to first quarter, how many new games do you have to deliver to the market on a quarterly basis?

Do you have an idea, what is the maximum number of games you can provide in the platform? Thank you.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

We are very confident about ’07 growth, as we have a very strong and diversified pipeline.

Wallace Chung – Credit Suisse

One follow-up. Do you have an exit criteria if certain online games do not reach a certain level, that you may think about leaving the game out of the platform?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Under our current plan, we have a very mature process of selecting and launching games. Some games that are not doing quite as well as the others, we give it a lower level of priority in terms of our resource allocation. We have not yet terminated any games because we feel that our platform, given that it is a very large scale platform, it can pretty much support any game without having to devote a substantial amount of new resources to it. Even those smaller games can break even or even be profitable, slightly profitable, on our platforms.

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

Of course, certain licensed games have a finite number of years in the contract, so when the contract comes to term, then we will terminate that game.

Wallace Chung – Credit Suisse

Just a final follow up. So if you want to measure the success of the game, what are you looking at?

Tianqiao Chen

(Response in Mandarin)

Donglei Zhou

We have about 100 people in our game testing center that are capable of evaluating about 200 games on an ongoing basis. We test the games based on how fun it is, ease of use, and also in terms of technical, whether it is easy for cheating programs and robot programs to be developed, et cetera. We have a standing committee that meets once a month to evaluate and to pass any games that we decided to license or launch. So we welcome any of you to visit our company and I can show you this testing center in more detail.

I think that shall conclude today’s conference call. Please feel free to follow-up with us if you have any additional questions.

Tianqiao Chen

Thank you.

Operator

This concludes tonight’s conference call.

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