China Mobile Games & Entertainment Group's (CMGE) CEO Ken Xiao on Q2 2014 Results - Earnings Call Transcript

| About: China Mobile (CMGE)

China Mobile Games & Entertainment Group Ltd (NASDAQ:CMGE)

Q2 2014 Earnings Conference Call

August 18, 2014 08:00 AM ET


Hannah Lo - IR

Ken Chang - CFO

Ken Xiao - CEO

Dino Ying - COO

Hendrick Sin - Vice Chairman of the Board


Alicia Yap - Barclays

Stefan Zhang - China Renaissance

Chao Wang - Nomura

Jialun Xu - Credit Suisse


Ladies and gentlemen, thank you for standing by and welcome to the China Mobile Games & Entertainment Group Limited Q2 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode, there were be presentation followed by question-and-answer session (Operator Instructions). I must advice you that this conference is being recorded today, Monday the 18th of August, 2014.

I would now like to hand the conference over to your host today, Ms. Hannah Lo. Thank you. Please go ahead.

Hannah Lo

Thank you, Operator. Good morning, everyone. Welcome to the CMGE second quarter 2014 earnings conference call. The Company distributed its earnings press release earlier this morning, and you can find a copy on CMGE’s Web site at On call today are Mr. Hendrick Sin, Vice Chairman of the Board; Mr. Ken Jian Xiao, Chief Executive Officer; Mr. Ken Chang, Chief Financial Officer; and Mr. Dino Ying Shuling, Chief Operating Officer. Mr. Ken Xiao Chang will begin with the high level discussion of the Company’s various operations and highlights and Mr. Ken Xiao will illustrate the progress on the organizational restructuring in our publications business in June. Finally, Mr. Ken Xiao will provide an overview of the Company’s second quarter 2014 financial results. After the prepared remarks, management will be available to answer your questions.

Before we begin I would like to remind you that our discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts including statements about CMGE’s beliefs and expectations are forward-looking statements and therefore involving inherent risks and uncertainties, as such the company’s future results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties are included in the company’s annual report and other documents filed with the U.S. Securities and Exchange Commission. CMGE does not undertake any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference call is being recorded. The addition of audio webcast of this conference call is available under company’s investor relations website.

I will now turn the call over to Mr. Xiao. Ken please go ahead.

Ken Chang

Thank you, Hannah. Good day everyone and thank you for joining our second quarter earnings conference call. We’re pleased with our continued strong financial performance in the second quarter. I would like to update everyone with a number of exciting developments and achievements with respect to CMGE's self-developed games, game publishing, intellectual properties, user acquisitions, game engine and user community development. We believe these developments and achievements have positioned our company for long-term growth.

So in self-developed games, CMGE currently has 21 game development workshops. In the second quarter, we continue to develop many mobile games based on the intellectual properties that we have already acquired, with majority of them expected to launch in the third and the fourth quarter. Beginning in September, we plan to launch one popular self-developed game each month. At the end of September, CMGE plans to launch a MMOARPG, The New Legend. The game is based on the Legend series, the name rights of which Shanda Games has authorized us to use. This is the first official mobile game based on The Legend series. The World of Legend has accumulated an extensive player base over the last 11 years in China. The New Legend will be the first official mobile game of this series incorporating real-time communication, allowing players to interact by voice in real-time. Our first large scale ARPG, Shang Gu Dou Hun will enter open beta testing in early October. The closed beta testing of another mobile game, Xing Yue Chuan Qi, will be conducted during early November and is scheduled to be launched simultaneously with the TV drama of the same time.

Publishing business, in the second quarter, we launched four new games, namely, Super Hero, Barcode Footballer, Bu Bu Jing Qing and Da Nao Tian Gong HD. Among these games, it's worth mentioning that Super Hero has been extremely successful. Within two days of its launch in Apple App Stores on June 12, it was ranked number one among the free-download games and number nine among the best-selling games and has remained one of the top games. Despite launching on Apple App Stores in June, Super Hero has already generated monthly gross billings over 40 million in June. In addition, the monthly gross billings for Da Nao Tian Gong HD reached over RMB8 million and conducted open beta testing on July the 11.

Among our products published overseas in Taiwan, Hong Kong & Macau, including Wu Shuang San Guo, Monster Island, Da Hua Xi You and Wei Shou Lai Xi, Monster Island and Da Hua Xi You have been consistently ranked among the top 20 paid games in iOS. In addition, Da Hua Xi You has continuously ranked among the top five free games for iOS.

For the third quarter, CMGE has more exciting games in the pipeline to be published overseas, including games such as Chao Shen Xue Yuan, Chao Shen Lian Meng, Chao Shen Xiao Jing Ling and Da Nao Tian Gong HD. In addition, we expect to begin promoting Re Xue Zhan Ji in Hong Kong, Macau and Taiwan in September, which we previously beta tested in China.

In the area of intellectual property, so far in 2014, we have already made many exciting achievements in our IP cooperation. In the area of animation, CMGE has been authorized by Toei Animation and has already begun to develop mobile games based on the famous Japanese animation One Piece and Ikkyu San. In addition, we have formed a strategic partnership with GREE to co-develop and publish the first official mobile game based on the famous animation, Naruto, in China.

In terms of classic games, we have been granted the exclusive right by Koei Tecmo to publish a mobile game version of Uncharted Water 5 in China. CMGE has also signed an agreement with SNK Playmore to publish classic games such as King of Fighters' 97, Samurai Spirits II, Metal Slug, as well as to develop card games based on Samurai Spirits. In the area of television drama, CMGE has obtained exclusive rights to produce mobile games based on Bu Bu Jing Qing and Xing Yue Chuan Qi.

Finally, we have obtained rights from the Shaolin Temple Shaolin Xu to develop mobile games with themes based on Shaolin Temple.

In the area of user acquisition, we have pre-installed our game center on over 35 million handsets by the second half of this year and we are on target to pre-install on over 80 million handsets for the full 2014 year. CMGE has entered into a strategic cooperation with a number of free WiFi service providers and has been intensifying its cooperation with companies such as Bus Online Holdings and many others.

Game Engine and User Community. CMGE has invested in and formed strategic partnership with Beijing Super Flash. Our strategic partnership will allow us to add many more outstanding games to our game pipeline. In addition, CMGE previously invested in Yunva Technology and in the second quarter, we began incorporating its two major products, YAYA Yu Yin and WAYA Shi Pin into CMGE's products, including a series of poker games with live interactive voice and video communication that CMGE plans to launch in August. Moreover, in many upcoming social games published by CMGE, we will incorporate YAYA Yu Yin to facilitate real-time communication among players.

Finally, during the second quarter, CMGE invested and entered into a strategic cooperation with Jin Huan Tian Lang, which has a history of over 10 years dedicated to establish social platform based on poker games with multiple social functions, such as buddy system, instant messagings, virtual marriage, forums, photo albums and auctions and many others. Currently, Jin Huan Tian Lang has monthly gross billings of over RMB45 million and MAU over 20 million.

Now I would like to turn to our CEO, Ken Xiao and our COO, Dino Ying to illustrate our recent restructuring efforts.

Ken Xiao

Okay. So I will translate what Ken Xiao has just mentioned. So first of all CMGE has transitioned very successfully from feature phone into smartphones over the last two years. And in the past one year we actually have made great progress in our self-developed games and publishing business and became the largest publisher and the leading game developer of mobile games in China. So in order to streamline the company’s operation to better position for the profitable and long-term growth we implemented this organizational restructuring recently and there are three reasons for the restructuring. Firstly we centralized the publishing distance to Beijing to improve the operational efficiency.

The publishing team focused to launch one hit had extra new game issuance for example we have a redone that like Super Hero. And in the next two months we will be launching, we believe, our great games such as Crisis Action, Shang Gu Dou Hun and the game we call created with Koei Tecmo called Unchartered Water 5. All the mentioned games will be published by teams located in Beijing.

Secondly, CMGE has already made many exciting achievements in the IP cooperations. For example we announced previously in our Shanghai press conference that we are paying a lot of World Cup IP such as One Piece, Ikkyu San from Toei Animation, Naruto from GREE, Samurai Spirits is from SNK Playmore and a lot of the IP that we have already acquired we will start developing these games and a lot of these games we will be launching towards the end of the year or early next year.

We aligned a publishing team in Shenzhen into a new team called [indiscernible] Game focusing and publishing our self-developed mobile games. In that game we aim to become the top five game developers in China and the realignment of the publishing business for the self-developed games is very necessary.

And thirdly, we wanted to review and structurally realign our publishing business, share the key and common supporting team within a group to enhance productivity and enhance efficiency. As a result, operational costs shall be reduced subsequently. With the self-develop and publishing business ongoing, we have to conduct the organizational restructuring for the future sustainable and potentially explosive growth.

The organization restructuring has been completed as expected. Mr. Dino Ying will supervise our mobile game publishing business for the third party content providers and he will be directly reporting to CEO, Ken Xiao. Other employees who have been suspended previously now have already been reassigned to new positions and have been working diligently for the Group. We believe this organization restructuring has a long-term benefit for CMGE.

Dino Ying

Our COO, Mr. Dino Ying has mentioned basically the benefits of the restructuring. So first of all he mentioned that within our group there are a lot of common resources team that can be shared to the self-developing business as well as our publishing business. So for example there are like some sort of core technology department that can be shared for example and this can lead to a pretty significant cost saving and efficiency within the whole group.

And secondly with organizational restructuring this should be able to enhance the success way of our game product and for example in January we have launched a successful game product called Minion Rush where resources from overseas and we have a lot of downloads and record pretty significant revenue also for CMGE.

And in May we have another great product called the Super Hero as I previously mentioned as well. And we first launched it in May and we openly paid it half that in June and July and this game as mentioned has generated over 40 million of gross billings. And in August with early we have launched another -- we have beta tested another new games called Everyday Hero [indiscernible] and this has already grabbed pretty good initial success too.

So this actually proved that in our recent restructuring we actually have a more few products in the shop here time. And we actually have seen the initial benefits of the recent restructuring already. So this is something that we can look forward for more benefits to come. And this Hero series is sort of three episodes, the first episode is Super Hero, the second episode is Everyday Hero. So again we’re looking for more and more sort of potential success for this Hero series. Thank you.

Okay. So turning to the financials just to mention a few more points here, in terms of quarter two financials net revenues were 274 million, an increase of 280% from second quarter of last year and increase of 28% from previous quarter. And gross margin is 61% in the second quarter compared with 46% in the second quarter of last year, 63% in the previous quarter.

Operating expenses were about 124 million during the second quarter compared with 97.4 million in the first quarter. Operating expenses as a percentage to revenue were comparable to the previous quarter. Selling expense as a percentage of revenue was 25%, a decrease from 26.5% from the previous quarter. Selling expense as a percentage of revenue decreased sequentially because of the effective marketing, cost control and an increase in revenue.

G&A expenses as a percentage of revenue were 11.8%, an increase from 10.8% in the previous quarter. G&A expenses as a percentage of revenue increased because of higher share-based compensation incurred to motivate and reward our staff, increased overhead for expansion of our overseas business as well as a RMB1 million provisional costs related to our voluntary independent investigation. Other income at RMB2.9 million during the second quarter mainly represented the government grant and the foreign exchange gain due to the stronger RMB exchange rate relative to the US dollar. We also had an income tax benefit of 4.4 million for the second quarter.

The income tax benefit was due to the tax benefit we obtained in the second quarter and the reversal of tax provision for the previous quarter. Net income for the second quarter was 54.9 million or $8.8 million compared with net income of 24.7 million in the first quarter. Net income was 58.2% higher quarter over quarter. Basic and diluted earnings per ADS during the second quarter of 2014 were $0.28 and $0.27 respectively.

Finally for the third quarter the company expects its total revenue to be RMB330 million and RMB350 million. This represents 20.1% and 27% revenue increase from the second quarter.

Thank you. Operator, please turn it to Q&A.

Question-and-Answer Session


(Operator Instructions). The first question comes from the line -- from CICC. Please ask your question. Ms. Hu, your line is open you may un-mute locally.

Unidentified Analyst

I have two questions, the first one is, how much have Joyful Da Ying Jia contributed your revenue in the second quarter and how your view is future growth given the few competition in broad game industry? And the second is, can you share with non-GAAP net margin change in 2014 and 2015. I mean you guided net margin like 15% to 20% before if I recall correctly, but after this reorganization and reassignment will you enhance your operation efficiency and make your net margin a step higher? Thanks.

Unidentified Company Representative

Okay. So first of all regarding the Joyful Da Ying Jia, Joyful Da Ying Jia in the second also has a growth against the first quarter and Joyful Da Ying Jia revenue roughly represent about 25% of the total revenue. Okay, so this answers your question. And also we believe that Joyful Da Ying Jia and other poker game as a whole poker game series will continue to contribute more growth in the coming quarter. Also as mentioned we will have the new version of the poker game series, I think this will bring our poker games series to another revenue level.

In regarding to the second question, regarding non-GAAP margin or net margin, we believe that the restructuring will have a pretty good long-term benefit for the cost control and the cost efficiency as mentioned by Jian Xiao, Dino and myself. I think that, so first of all currently we have already made some restructuring or redundancy in terms of headcounts. So this definitely will contribute some reduction to the headcount fixed cost in the third quarter and in the fourth quarter and in the future.

In terms of margin change I would say as you can see we have pretty big jump of our operating profit margin from the fourth quarter to the first quarter and from the first quarter to second quarter we have a pretty good jump in the net margin held by also some other income as well. I think we should be able to enjoy a lot more operational efficiency and the benefit of the restructuring starting from if not the third quarter it will be from the fourth quarter and I think in terms of the sort of margin we should look at sort of more on the upside in the coming quarter due to a few reasons.

First of all, we are giving out more bullish, guidance on the revenue side. On the revenue side we are forecasting roughly about 20% to 30% growth against the second quarter. So with the growth in the revenue we believe the operation efficiency should improve and the operating cost and our gross profit margin hopefully should be able to improve in the coming quarters.

And also secondly is that our subsidiary has received the tax benefit so that we can enjoy some tax benefit in the next coming at least 1.5 years. So, definitely that we improve our net margin.

So if you look at our operating margin I think should be on upside and net margin should be helped by other factors as mentioned too. Thank you.

Unidentified Analyst

Thanks. That’s very helpful. Just a quick follow up, did you mention that in the coming one and half year -- do you have the income tax benefit instead of income tax expense?

Unidentified Company Representative

Okay, so we have two subsidiary that we see at the tax benefit so it’s first two years free of tax and the following three years period after the two years half of the tax rate, half of the normal tax rate [Foreign Language]. So this will significantly improve our tax efficiency in the coming quarters.


Thank you for the questions. The next question comes from the line Alicia Yap from Barclays. Please ask your question.

Alicia Yap - Barclays

Hi, good evening everyone. Thanks for taking my questions. I have two questions, number one is regarding the comment that you have on your press release which you noted that Super Hero has been extremely successful since the launch on the Android and iOS. I wanted to get your view what are the typical industry retention rates for the games launch for the next day and the seven day for normal games in the market? Because you mentioned Super Hero was very successful with about 55% retention rate the next day and 30% seven days. So I just wanted to get a sense like what are some of the normal games or what are the percentage of the retention rate comparisons? And then in related to that when you mentioned the 40 million monthly gross billing, is that only on the iOS or is it including the Android as well?

Unidentified Company Representative

Okay, so regarding retention rate, I think Shuling Ying can answer this question.

Unidentified Company Representative

Okay, so on the Super Hero -- on the retention rate Dino mentioned that basically for the sort of good games the next day retention is roughly about 20%, the seven day retention is about 18% to 20%. And currently Super Hero has a one month retention rate of 20%. And this is considered to be very high because this one month retention rate is already better and the average retention rate of the following day retention rate of the following day retention rate of a lot of good products which is around 20%. And CMGE is very focusing on the long term retention of the user in the product. So this is the answer from Dino.

And regarding our 40 million gross billings, the answer is it includes both the iOS and Android. And I want to stress that we only launched the product on June the 12 on iOS. So effectively in June we only have roughly half a month for the iOS revenue. Thank you.

Alicia Yap - Barclays

I see, that’s very helpful. My second question is actually still wanted to get a little bit more clarifications on the reassignments of Dino to the COO. Also wanted to know because I think the press release also mentioned the previous COO announced is the Senior Vice Presidents. So just wanted to get a little bit more clarities on these two role changes? Thank you.

Unidentified Company Representative

Okay, thank you. So this one I will give it to Ken Xiao to respond.

Okay. Jian Xiao explained more details about the rational, how Shuling Ying is being assigned to COO and sustain Ex-COO Mr. Hu was assigned to SVP. Now first of all he mentioned currently there is a quite a bit of confusion between the President role and the COO role especially in overseas market he thinks that President sometimes is the COO or COO is the President sometimes it’s a little bit confusing. And the major sort of function of the role of Shuling Ying is responsible for the publishing business. And for publishing business there is a lot of business activities facing the business partner. And by renaming from the President into COO, Jian Xiao thinks that he can satisfy the business demand and this is more matching to the job description and the job demand of what Mr. Shuling Ying is clearly handling.

And regarding the ex-COO, Mr. Hu being re-assigned into SVP, Mr. Hu was previously more sort of in-charge of our self-developed games of our R&D and he is more sort of facing internally rather than externally. So after discussion internally, after board meetings and also we have collectively decided that Mr. Hu is more suitable for the title of SVP which is more sort of in control of R&D and facilitating our investment decisions.

So this is something that we believe is more in line of what their [indiscernible] and subsequently we decided in this way. Thank you.


Thank you for the questions. Your next question comes from the line of [indiscernible] from Macquarie. Please ask your question.

Unidentified Analyst

I have couple of, firstly you mention about the pre-installation -- this year I was wondering could you talk about the cost for the pre-installation space and how the pricing has changed over the last few months and what’s your expectation for the forward pricing and do you install your game center or you have sort of pre-installed games so if you can talk about it will be great. The second question is really very sort of [indiscernible] question I was hoping and thought about you have observed in big mobile game industry trend over the last six to nine months, anything you can share with us in terms of trend anything in pricing, in customer acquisition cost.

Unidentified Company Representative

Okay. On your first question I will answer on the second question I’ll refer to our CEO Jian Xiao, okay. So on the first question regarding pre-installations, currently our pre-installation cost is below compared with our competitors I think two major reasons. First is that even in the old feature phone days we have been the number one pre-installations of mobile games in China so we actually have all the relationship with the handset makers and all that and this has been the strength for us for many-many years. And secondly is that we have this strategic partnership with MediaTek and MediaTek currently is our first largest shareholder. And so with that there is a lot of support and endorsement from MediaTek allowing us to be able to work very closely and cost effectively with the handset makers.

So in terms of the products we -- the preinstalled Game Center mainly and sometimes with our games into the handset. And the way we cooperate is we preinstall our Game Center mainly Game Center into the MediaTek chipset and even before the shipment they have our products that are CMGE products. But of course we also have need to work with the handset makers in order to turn the application off right but because of our long term relationship with lot of handset makers we have been making this strategic partnership and our cooperation with all these pre-installation were effectively run. So, all in all with all these two reasons that I mentioned our effective cost is (there to be compared with our) [ph] competitors.

I would say by and large roughly about -- we only incurred roughly about 30% of our gross billings that are incurred with the pre-installation cost, so roughly speaking this is -- I think this is quite low in the industry standard. I think I cannot give you a precise cost for pre-installations or the trend, because I believe that our trend has been quite different with the other competitors. But definitely this is one of the strength that CMGE is bringing in is that first of all we understand that our business partner MediaTek is shipping more and more chipsets with a significant growth year after year and while we we're maintaining the relationship with handset makers and we are also improving the Game Center product. Now right now I think we have a pretty good Game Center product well-liked by the handset makers and our business partner MediaTek.

So on the second question let me turn it to Ken Xiao.

Okay. So I will translate what Jian Xiao and Shuling has mentioned. So Jian Xiao has mentioned five points regarding the recent [indiscernible] in the mobile game market. First of all is on the, in the first half he’s witnessing that the number of games that generate revenue over RMB10 million what we call the so called [indiscernible] game has been fewer than before and he is seeing more product becoming more focused and as the product is becoming more focused the CDs relying more on the larger publishing game platform like CMGE to publish games. And it also means that the sort of weaker CP, content provider will potentially have a sort of a fewer chip products or in the other words their success rate become lower. So this is the first point that he mentioned.

Second point he mentioned is that, the entertainment business and the game business, the mobile game business is becoming more integrated. So for example we will see some of the game products can be on comic, can be on online fictions, can be on movies and sometimes the game can generate the products like the comic or the movie product or on the other hand the movie product, the comic product can generate the gains. So it become more integrated.

So in regards of that, CMGE is also in the position to self-develop by our IP also as announced in the Shanghai press conference we are self-developing our IP called Hero's Blade [indiscernible] and on which we will be producing a comics and a lot of diverse products on the top of this IP. And we believe this is one of the very obviously trend that we are seeing.

The third points Ken Xiao has mentioned is that again is on IP because there are just so many products on the similar ideas or sometimes theme or playing methods so a lot of game companies are trying to get more IP, so get more uniqueness in the game. So in regard of this CMGE is more advanced in positioning ourselves because even about a year ago, one and half years ago we have been already trying to cooperate with different business partners strategically positioning certain areas in order to acquire the IP. So as a result of that we are able to acquire many top IPs that we recently announced.

Number four, regarding the platform sort of user traffic, I think the traditional way of looking at this is the PAT like Baidu, Alibaba and Tencent, Qi Hu, all this kind of platform they basically have -- they occupy the top chart in terms of the user traffic. And the trend is still -- is that however we are seeing the second source of the platform traffic coming from the hazard manufactures and the hazard manufacturers they’re having their own app stores or they are trying to attract the traffic in their own way so we are seeing the sort of second source of the traffic.

The first sort of traffic we are seeing is merging and potentially the speed of the merging will accelerate toward the end of this year is the WiFi -- through WiFi system. We are seeing a significant growth of the pre-WiFi service being provided in transportations, in buildings, et cetera, et cetera. And big company like Qi Hu, Alibaba are trying to position to acquire more user in the free WiFi environment. And again CMGE has been very early in this user acquisition and as mentioned we have positioning this area also since more than six months ago.

Number five, regarding the platform, a lot of game companies also trying to develop their own platform in order to drive their own user traffic. This is easier said than done. However, Ken Xiao thinks that CMGE has a pretty good chance and we have been strategically positioned in certain area. For example, we have invested in a company that for example is called Yunva Technology very good at voice communication technology and this potentially can become like YY equivalent in the mobile area because they have quick technology. And so far we haven’t seen a lot of this kind of two in the mobile games and this can be extremely scalable.

Number two is that we also invested in another company called Jin Huan Tian Lang and this company is a very pioneer in the poker game social platform. And currently already have more than 20 million. So strategically working with those and we are building the platform hopefully our own platform can emerge into certain scale.

Now and we’ve already said Dino also has mentioned another two points, first is that he mentioned that in the first half we have seen the huge revenue game like (Ji Zhan San Guo or Xing Yue Chuan Qi) or our own [indiscernible] Super Hero that generate really great revenue. For example our Super Hero generated more than 40 million plus [indiscernible], so compared with big games last year only generated more than 10 million, the scale of the top games this year has been tremendously increased. So potentially I think in the second half we can see more games can generate revenue in much bigger scale who knows it can be 100 million, 200 million it can be additional more, they can be increasing number of games that generate let’s say 100 million, 150 million, et cetera, because the market has obviously grown more.

The second point Dino has mentioned is that currently we are seeing the platform getting more diversified. For example the top-five platforms we are seeing actually as an aggregate we are seeing -- the aggregate target is actually sort of decelerating or slowing down. On the other hand the other platform, other than the top five are gaining market share or are gaining more target flow.

So what we are seeing in this situation is that maybe we are not seeing the sort of monopoly in the PC games, where only a few platforms drive the majority of the flow. And here potentially other platform can have some chance and the diversified situation can give game company likes us more opportunity to penetrate. Thank you.


Thank you. We will now move on to the next question, comes from the line of [indiscernible] from Merrill Lynch. Please ask your question.

Unidentified Analyst

Two questions. The first one perhaps is on more housekeeping. I am wondering if Ken give us some color on the MAU of your smartphone gaming as far as other proportion of revenues from your in-house development teams. And if I can perhaps get a picture, because CMGE is going to launch more self-developed games, so how would team would balance between the interest of your third-party developers as well as providing some support to your in-house gaming teams?

Unidentified Company Representative

So in terms of MAU, in terms of quarterly MAU, we have about 30 million of MAU per quarter. And in-house MAU is roughly about one-third of the numbers. And for the paying users and the rest, you can refer to our press release, I think we have more clarity on that. We do not disclose MAU on the quarterly basis.

And secondly on this question, let me refer to Ken Xiao, maybe Ken Xiao can better answer this question.

Ken Xiao

So right now we’re basically separating the publishing team for the self-developed games and publishing team for the third-party games. And basically they have their own, there is a bit of firewall between the two teams. So most importantly is we coordinate the schedule, the launching schedule, the beta taxing schedule well in order to avoid overlaps and we have to make sure that we are not overlapping the resources on the two and we competing our products no matter it’s self-developed products or third party products against other competitors, not against each other, not against self-developed products and third party products. And we also have these two separate teams that they’re not competing with product but they also will have their own motivation and drive to have the separate team. So with that we believe that we can facilitate the resources coordination and the schedule handling better in this way.


Thank you for the question. The next question comes from the line of Stefan Zhang from China Renaissance. Please ask your question.

Stefan Zhang - China Renaissance

Hi, hello guys thanks for taking the question and congratulations for strong quarter. I have two questions. We know the [indiscernible] and other like big players in market such focus on mid-core, hardcore games and how do it affect the market to go like, would that be like most of the income come from hardcore games and the games only can pay it but just revenue from live games or casual games, how do it [indiscernible] like in the following quarters this year? And also how do we expect your game business to play overall business? Thanks.

Unidentified Company Representative

For the first question I think I can refer maybe Dino, maybe he can answer this question.

Okay. So on the first question Dino explained that he is still seeing the whole mobile game market to grow significantly in the second half of the year especially on the mid-core to hardcore game. So that’s why some of our mid-core, hardcore games like Super Hero has or Everyday Hero has already grabbed good success so far. And we also believe that the casual game will continue to grow but may not be as hardcore as the mid-core or the heavy core type of hardcore type of games. So for CMG we are -- for the games that we license or we acquire we publish for third party. We always prepare at least half a year earlier before the launch, so this is also what we are seeing as a trend that the mid-core and the hard core games will continue to accelerate so that’s why in our pipeline we are also well positioned for that but also we are seeing a pretty good chance for the casual game as well, so also in our pipeline we are seeing that, but for the casual game we are targeting strategically. It has to go to the right platform because casual game can be very crowded, so this is something that I think competitors and game company has to been aware of.

So the game engine actually give us a lot of benefits in the future, so first of all we are already seeing immediate benefits in the coming September we are cooperating with one of the major PC game company and we are development a RPG game came from this engine and the product will be launched very, very soon. And the beauty of this engine is it can develop the games in a very speedy manner compared with the other engines and the game developers can develop games very effectively and efficiently using this engine. So first of all we are already seeing immediate effect.

Second is that also we have a lot of the pipelines also using this engine including the game we are going to launch together with a TV drama called Xing Yue Chuan Qi is also based on this engine.

And number three is that a lot of animation IP that we acquired we are also using this engine to generate games using this engine again because of the efficiency. I think we can beat other competitors in terms of timing.

Number four is that this already has a very good track record. For example they have this game called [indiscernible] game already have a great track record, monthly gross billings over RMB10 million. So there is a good track record already we are seeing and we are seeing also a lot of PC game companies lining up, relying on this game engine to produce new products. And we are seeing five to six new products being converted from the PC games into the mobile games. And with our involvement with this company, with our investment in this company, we have the priority to be involved, to be publishing the new products in the top line. So with this priority I think we also have with our self-develop and publishing business overall. Thank you.


Thank you. Your next question comes from the line of Chao Wang from Nomura. Please ask your question.

Chao Wang - Nomura

Hi, good evening. Thanks for taking my questions. I have a question on those IP that you acquired recently. So wonder what's the CapEx related to that and the amortization schedule and the revenue sharing and also how do you plan to deal with the [indiscernible] IP and copyright issue? Thank you.

Unidentified Company Representative

So for the IP we are acquiring -- actually we’re locking into the IP owners -- negotiation with the IP owners in the early days. And we have actually locked into very low cost actually, very, very low cost. I think investors can imagine even with the top IP. And this is pretty good bargain for us. I cannot reveal for the cost, I cannot reveal the cost, but this is very, very low cost. So in other words this has been great and in terms of the arrangement, usually we just give a prepayment there is no, unlike the licensed games, when we cooperate with the Japanese IP holder, we give them the prepayment or what we call [indiscernible] guarantee and this is offset both by the future revenue. So in other words this is unlike contract fee, we do not need to amortize them. We do not need to amortize them. So this is a great benefit as well.

And in terms of copyright, let me have Ken Xiao to answer this.

Ken Xiao

So regarding the anti-piracy thing, we have been working very closely with the IP owners and it just happened that some of the Japanese companies they are in holiday recently. But after they come back and we confirm with our standing, we will be launching the campaign as soon as next week or this week even. And we will first of all doing a lot of a press related, media related campaign on the anti-piracy thing. And so far, we have already done a lot of research. We have collected a lot of pirated games' information and who made the games what are those, what are the revenues et cetera, et cetera. So we already have a database on all this information. And we have been working or we will be working with the major distribution channel including the Apple iOS and a lot of other distribution channel to potentially to remove all these piracy copies off the racks.

And finally we will enforce it more decisively and aggressively by taking legal action if they are still on the racks. So in short term we’ll do the campaign very aggressively. Thank you.


Thank you for the questions. Next question comes from the line of Zhen XU from (Wealth Oasis) [ph]. Please ask your question.

Unidentified Analyst

Thanks for taking my questions and congratulations for the solid performance and the guidance for next quarter. Can you elaborate some [indiscernible] how we make the progress on developing our business overseas, can we bring some good game such as Super Hero to overseas market? Thank you.

Unidentified Company Representative

I actually think there is a lot of good news, there is a lot of good news I think that Dino can explain. Dino?

So [indiscernible] restructuring assets and Jian’s effort on leading our publishing team I think we have very exciting environment in overseas market. So first of all in Taiwan we’re launching the game call Chao Shen Xue Yuan and this is equivalent of Chao Shen Xiao Jing Ling in China as mentioned this is the second episode of the Hero episode and also we are launching Da Nao Tian Gong in overseas market.

And in Korea we’re launching the game which is a war game, is tank related games in Korea and also the same game is also being launched in Russia. So these games in Korea and Russia has already attracted lot of users and so far the result has been tremendous. So all these games that I mentioned, all these four games should be able to give overseas performing the boost in Q3 and Q4.

And regarding Super Hero Chao Shen Xue Yuan we can actually replicate our success potentially in Hong Kong, Macau and Taiwan. We will be launching very soon in Hong Kong, Macau and Taiwan and in fact in Taiwan we are warming up the marketing activities in Taiwan. And so far one of the indication of popularity in the ranking, this game is ranked number one in the popularity ranking in Taiwan.

So hopefully all these overseas effort will become more mature and produce more growth in the coming quarters. Thank you.

Unidentified Analyst

Thank you. It’s very helpful. Can we ask another full on question? I'd like to -- I’m wondering can you elaborate some difference between [indiscernible] different game, but different market capital. Can you give some color different business and different game sale? Thank you.

Unidentified Company Representative

Yes I will translate for [indiscernible]. So thanks for the question about iDreamSky. We believe iDreamSky is a very good company. We also know them very well. And we see the following few distinction or differentiation from our company, number one is on the self-development of mobile games as a proven developer of games for example in PAT games our Joyful series has won lot of awards and gave us a lot of revenue in the past. So we have accumulated a lot of experience in self-developed games and now we have a lot of IP acquired and also we have a game engine that helps us to develop games in an efficient manner. So we think we are quite ahead on the self-development games compared to this competitor.

And number two is on the publishing side, you see we have the biggest ranking on publishing and in terms of cross billing. So it’s not based on number of users including users that did not pay. So we can only people that pay and that is more a fair reflection of the market positions and in terms of that we are number one, iDreamSky is number two.

And in publishing they focus on casual games or single player game and they focus on introducing foreign games into China. While CMGE focus on social games where we introduced, where we publish overseas games and domestic games and also our self-developed games. We’re focused more on social games or the hardcore games. And we believe hardcore games have longer life cycle and also have more revenue generation capabilities.

But having said that, we are also good at introducing single player game or casual game to China as evident in our game called Minion Rush has generated a lot of success. It’s a single-player game from the U.S. has carried a lot of success for us as you all know. So we are also good at single-player game but we focus on social games because it’s a pretty, is a market that require a lot of know how. And in terms of casual games, what we see in the market is, the competition is very high because all platforms including, the big platforms, Tencent, Qihoo, Baidu, they all are trying to enter into these market. So it’s a very competitive market.

And for social games, we believe it is less competitive and also has a bigger chance of success, that’s why we are focused on it. And that’s why we stay ahead of others, we believe not only ahead of iDreamSky also and others in terms of the hardcore games and our social games.

So and lastly I think our difference also lies in the overseas business. We have come ahead of others including iDreamSky on overseas business because we have a lot of success domestically, we are bringing more games to overseas and also having some initial success. So in terms of market capitalization our CEO thinks that actually involve a lot of reasons and lot of -- I guess it’s pretty difficult to comment on market cap. But what we are committed is to unlock our value further so that’s why you see our reorganization carryout in June and also you saw many of our initiatives that we announced today and previously in making our business better than ever. So I think I urge you to look at our Q1 -- Q2 results compared to other competitors also pay attention to our future results announcement that we also incorporate our success in reorganization. Thank you.


Thank you. Your last question comes from the line of Jialun Xu from Credit Suisse.

Jialun Xu - Credit Suisse

I have a question about the free WiFi service. I think management mentioned earlier this free WiFi will become a very substantial game distribution channel in the future. Can you guys give us like rough idea how big this channel could eventually become? And based on your current testing, do you have any metrics with regard to [indiscernible] conversion rate and the retention rate. How are these metrics compared to the mainstream distribution channels?

And also if we look at the cost structure of this free WiFi service as a game distribution channel, what are its major costs? How this user acquisition costs compared to the mainstream distribution channel?

Unidentified Company Representative

Okay. So regarding, we have been actually starting up with a lot of company that associated with covering the free Wi-Fi for buses and for rail, for trains et cetera, a lot of them we already have signed a corporational agreement and some of them we actually helping them to operate the whole gaming system, mobile gaming system in the network. And however a lot of these companies they are doing testing only, so meaning they are maybe just open to certain train station or certain line of buses or certain lines of trains. So for example we have collected some data on -- we have some testing spots on the Beijing West railroad station where we have collected some data. So for example on that station about 1,000 users that activated into the system roughly about 80 of them downloaded our Game Center and after that basically the conversion rate and then the retention rate and all that are quite similar to other distribution channels.

And what Ken Xiao mentioned is that so far the data is still quite limited because a lot of the free WiFi coverage is being done in the second half and extending through the first half of next year. And we believe that the traffic will be more pronounced for us to be running more efficiently or the traffic will be more pronounced for us to give good results later in the next few quarters. So, so-far, we’re still watching this data but the data is not too different than the traditional distribution channel at the moment.

Now regarding the cost we are now running a sort of revenue sharing model with the free WiFi providers. The providers are responsible to provide the hardware so in other words we are not responsible for the hardware and we are responsible for the software sort of contribution. So, we are seeing the revenues so usually after distribution cost like platform cost, payment cost we will split about 50-50 with the free WiFi providers. So in other words we do not see sort of a fixed CapEx on this in evolvement because again we do not need to invest a lot for the hardware. And we are providing the software which we already have already produced. Thank you.


Thank you. Now I would like to hand the call back to the management for any closing remarks please.

Hendrick Sin

Okay. So thank you for the concluding remark. My name is Hendrick, I am the Vice Chairmen of the company. I would like to show our friends here, analysts and investors a picture. CMGE has positioned itself very strategically. So let’s look at this picture in a few different aspects. On the game content side, we have aggregated a lot of good contents; number one is our self-developed contents. We have strong development capabilities since we have a team of developers that have been following us since feature phone days to now smartphone days and also we have IP ranks acquired that will enhance our success rate we believe on launching self-developed games.

So we have a game engine that have such to develop games in more efficient manner as described by our team earlier. So also we work with many third parties including international names to bring good games from overseas to China. Also, we have been investing in other game companies also with a view that we should cooperate on either sharing content or resources or community. So all in all that will give us a strong source of game contents, so this is on the content side.

On the distribution side, we work very much -- very closely with many partners. So, for example the Game Center we have pre-installed in very huge number of handsets in China, so my CFO just mentioned 80 million for this year. So this I would like all of you to understand this is a very remarkable number, 80 million handsets have got our Game Center on it this year.

And we also work very closely with WiFi vendors where they also install our Game Center and allow our games to distribute to many, many environment that give you free data access. And also games are available in all major platform, work very well with all major platform from Baidu to Tencent to Qi Hu to UC, we work very well with them. And also the operators. As you all know, we have a long standing track record with the three operators, particularly China Mobile.

So as you see our distribution is very strong and very uniquely positioned so as to distribute many, many good contents I just mentioned earlier. And also we have on top of that we also have been building our overseas business. So hopefully that will become our major additional source of income. Our overseas business is doing very well with some initial success as mentioned by the team and I urge you to be patient and to see -- you may see more and more progress in the near future. And also we have implemented a cost saving reorganization. And as mentioned by the team you noticed was a hard decision but to make us more cost efficient we have to do it.

Please trust us, we have gone through the feature to the smartphone base. At that time, the restructuring was more severe. But we survive, would become a much company and we will also do a good job this time, so the reorganization have caused a lot of speculations but this is no more than a reorganization to make our business more healthier. So our CEO has already mentioned all the benefits and what we have done and we believe this cost saving will be very noticeable in the coming quarters.

And we have -- on the corporate governance side, we had -- because of some baseless market rumors, we have spent some resources to clear that. And as you saw our announcement on 26th of June as we said we rejected these allegations about the reorganization rumors and also we have asked our independent directors which comprised mainly investors and its regulators to do an independent investigation together with [indiscernible] and one of the big four firms to do this. And as you see from last (first day) [ph] results, it was a very conclusive result that saw no evidence of any of these baseless rumors or allegations.

And in fact the reason why we did this additional work because we didn’t even have to do this additional independent investigation. We volunteered to do it because we want to preserve the highest corporate governance standard and where we believe this is our core competence. We value investors' confidence and we value importance of corporate governance.

So I will like to conclude that we believe there were some miscommunications or there were some market speculations that caused us some correction in the share price. And to show the management team have a lot of confidence about our future growth and our -- we believe we are undervalue, the management team led by CEO and our COO has initiated management buyback program as you can see from the announcement today. So initially we start off with RMB20 million management buyback program and to show that we are committed to building investor confidence. And alongside while we build a better future of our company we believe we have a very promising future. Thank you very much.


Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect the lines.

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