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Taomee Holdings Limited (NYSE:TAOM)

Q2 2014 Results Earnings Conference Call

August 26, 2014 8:00 a.m. ET

Executives

Angela Wang – Investor Relations

Benson Haibing Wang – Co-Founder, Director and Chief Executive Officer

Sam Lawn – Chief Financial Officer

Analysts

NA You – ICBC

Natalie Wu - CICC

George Askew - Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2014 Taomee Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator instructions) I must advise you that this conference is being recorded today, Tuesday, 26 August 2014.

I would now like to hand the conference over to your host today, Ms. Angela Wang. Thank you and please go ahead.

Angela Wang

Thank you, operator. Good morning and good evening, ladies and gentlemen. Welcome to the second quarter 2014 earnings conference call for Taomee Holdings Limited. Our earnings press release was distributed earlier today and you can find a copy on our IR Web site.

With me today are Mr. Benson Wang, our CEO, and Mr. Sam Lawn, our CFO. Following their prepared remarks Benson and Sam will be happy to take up your questions.

Before we continue please note that this discussion today will contain forward-looking statements which are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not entirely limited to those outlined in our annual report on Form 20-F and other documents filed with U.S. SEC. Taomee does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Our earnings release in this call includes discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of our unaudited non-GAAP measures to the unaudited GAAP measures and is available on our IR website. All financial figures reported on this earnings call, unless otherwise stated, will be in U.S. dollars.

As a reminder, this conference call is being recorded and a webcast will also be available on Taomee’s IR website. Now I would like to turn this call over to our CEO, Mr. Benson Wang.

Benson Haibing Wang

Thank you, Angela. Good morning and good evening to everyone. Thank you for joining us today and welcome to our Q2 2014 earnings call. As we anticipated in our earnings call last quarter, Q2 2014 was the start of our transitional period in the investment cycle. The revenues were down first year-over-year and sequentially. I am quite encouraged by the recent realignment of our teams and the initiatives we have set moving forward.

As I mentioned last quarter, competition remains intense in our sector. China's children entertainment industry remains attractive market that continues to grow in prospects each year. And we are dedicated in dominating this space. In order to increase and maintain our leadership position, we need to expand our franchises to new users and deepen engagement with our existing users. We also need to deliver new and innovative products that are adaptive to China's changing entertainment demands while web gaming growth is slowing down due to mobile advancement. We believe our online franchisees still have few room to grow in the coming years. That said, mobile will be our next frontier as we continue to develop mobile games and applications to tap into this whole new entertainment world that is forming in China.

What we have truly focused on this quarter and we will continue to do so for the rest of the year, is completely integrate our web, mobile, media entertainment and off-line businesses to unilaterally promote our franchises. The past few years we have been establishing each business unit and integrating their ability to leverage our franchises. But now it's time to unify them to be the foundation of how franchises are first created and marketed.

It will not be a easy task. But if we are successful, this will be a huge advantage unique only to Taomee. Our current core capabilities offer us a distinct position in the market and we look to further leverage them while exploring new opportunities. To that effect, I would also like to highlight this quarter in particular, calendar the offshore launch of our mobile game, Reverse World, from our Glove Games division. We have been working on our mobile pipeline for over two years now and are slated to release at least 2 to 3 more games before the end of the year.

As we continue to invest in our business, we anticipate mobile to become increasingly important to our overall strategy of introducing franchises to users. We will provide further updates on our mobile games for both China's domestic and international markets in the next coming quarters.

Overall, our business remains healthy and on track to execute our long-term strategies. We remain focused on our properties and confident in our objective to seamlessly integrate web, mobile, media and off-line product to promote our franchises. This is an area where I personally will spend majority of my time on. Our strategy remains unchanged but just much more clear and focused. Going forward we will continue to further invest in our three major growth initiatives. The media expansion of our top franchises, mobile gaming and complete integration of our business lines.

We continue to seek 2014 as the major investment and transition year for us, with much of our efforts starting to pay off towards the end of the year and heading into 2015. I will now turn the call over to Sam to discuss our financial performance in the quarter. Thank you.

Sam Lawn

Thank you, Benson, and hello everyone. Let's go over the second quarter results and recent highlights. Then we will open up the line for questions.

As Benson mentioned, in addition to our focus on new product development, we have been keeping a close eye on expense control. Cost of goods sold has been flat for three quarters in a row. Product development expenses were virtually flat year-over-year and up 8% sequentially. Sales and marketing are seasonally up in the second quarter flowing to the third quarter due to movie promotional costs but has otherwise remained stable.

G&A, excluding transfer pricing tax has overall maintained stable for the past four quarters and actually down about 10% year-over-year. Even with the increasing investments in our top franchises and mobile gaming, we are maintaining good stewardship of the assets entrusted to us.

Total revenues in Q2 decreased 12.4% year-over-year and 10% sequentially to 10.5 million, still within our revenue guidance. Our online business declined a slight 2.9% year-over-year to 8.4 million, a combined result of an 11% ARPU increase over the same period last year, coupled with 15% year-over-year decline in active paying accounts. While active paying accounts dropped, total active accounts remained at healthy levels of 41.9 million, an increase of 3% year-over-year. Our monthly average page use or monthly average unique visitors to our non-gaming sites were approximately 132 million and 24 million respectively in the second quarter. Both of which are down quarter-over-quarter and year-over-year as a direct result of competition and also the migration of user habits towards mobile mediums for entertainment.

Our offline business declined 7.1% sequentially and 36.5% compared to a year ago, driven largely by a decline in our toys business. As we said in last quarter's earnings call, this revenue channel, particularly the toys business, is hit driven, based on new toy releases coupled with media promotions such as movies and TV series. Much of the toy product pipeline this year is aimed to launch in the fourth quarter, thus we expect a few choppy trends in the short term.

Total second quarter gross profit margin was 71.3% versus 73.0% in the first quarter and 70.8% in the same period of last year. Online gross margin was 79.8%, an increase from 79.4% in the first quarter and 79.5% in the second quarter of 2013. Q2 gross margin for offline business decreased sequentially 38.3% versus 47.3% in the prior quarter and 48.8% in the same period of last year. This was largely due to an increase in licensing related costs.

Turning now to operating expenses for the quarter. Product development expenses were 2.4 million, up slightly from 3.2 million last quarter and similarly up slightly from 3.3 million in the same quarter a year ago. The increase was a result of an increase in payroll expenses, partially offset by a decrease in interactive toy designs. Sales and marketing expenses were 2.9 million, up 43.2% sequentially from 2.0 million and up 22.6% from 2.4 million in the second quarter of last year. As mentioned earlier, these increases also reflect higher the film promotional costs as the children's film industry continues to increase in competition.

G&A expenses in the second quarter were 3.1 million, down 15.6% from 3.6 million last quarter but also up 4.1% from 3.0 million in the same quarter a year ago. The sequential decrease is due to lower indirect tax costs while the year-on-year increase is mainly due to increased indirect taxes related to intercompany charges and professional fees. In the second quarter operating loss was 1.8 million compared to 0.5 million profit in the first quarter of 2014 and 0.5 million loss in the same quarter a year ago. Second quarter 2014 GAAP net loss was 0.8 million compared to 0.5 million income in the first quarter of 2014 and a 0.3 million profit in the second quarter of 2013.

Q2 GAAP diluted loss per ADS was $0.02 compared to again a $0.01 a quarter ago and similarly in the same period last year. Q2 non-GAAP net loss was 0.2 million compared to 1.2 million profit in the first quarter of 2014 and 1.6 million in the second quarter of 2013. Non-GAAP loss per ADS on a diluted basis was $0.01 compared to a non-GAAP profit of $0.03 in the previous quarter and $0.04 in the same quarter last year.

Turning to some key financial figures. We finished the second quarter of 2014 with approximately 104 million of cash and cash equivalents and short-term investments versus 111 million at the end of the first quarter and there is no outstanding debt. The majority of our cash decrease was due to our stock buyback program.

Total share-based compensation was 0.6 million in the second quarter of 2014, similar to 0.6 million in the first quarter of 2014 and 0.3 million in the second quarter of 2013. Capital expenditures were 0.3 million in the quarter versus 0.5 million in the first quarter and 0.3 million in the second quarter of 2013.

And finally let's turn to the outlook for third quarter of 2014. We are guiding total net revenues to be within the range of 12.7 million to 13.2 million, representing a decrease of 16% and 20% year-over-year. While third quarter has been our strongest quarter historically, this year in the third quarter we will see the confluence of more competitive films released at the same time, plus a possible prolonged slowdown in our toy business which is keeping visibility a bit lower than usual. As Benson mentioned before, many of our investment initiatives this year should potentially began to gain traction towards the end of the year. Particularly mobile games and increasing promotional synergies between our different businesses. This forecast is preliminary and subject to change.

Now a few comments from me strategically. As we stated last quarter, 2014 is a year of transition for Taomee. It is here that we begin to put the Cs in our place for our future engines of growth. I have been asked by investors, if new games is what we need, why not fit several teams to the development task and see what comes out. This is not how we run our business. And I think right now it will be a good time to explain our process because it is part of our differentiation as a company.

It turns out that developing a game whether online or mobile is not a straight-forward manufacturing process. Rather, there is subtle art to it as well as a lot of back and forth tweaking based on user feedback and our own data about user play. Once we get characters or storylines that work, we still have to integrate that into a compelling game play. At the same time, our recently realigned organizations allow us to integrate the efforts of the game developers more tightly with those of the toys, movie and licensing divisions.

What we have done in the past is built businesses that leverage our franchises but never were really part of the initial promotion and continual marketing of it. There is a huge difference between the two. This integration is no small feat but what will ultimately separate us from just a pure gaming company. From a cost perspective, it will be prohibitive to take a shotgun approach and try many storylines simultaneously. We could do that if we were a much larger company with numerous established franchises to support new developments. The costs could be offset by the overall larger revenue stream of multiple ongoing franchises.

From our perspective, we believe it is more judicious to work on a few well chosen projects, craft them to perfection and then focus on the complexities of fully integrating them with our multiple business lines. By doing so, we increase the probability of the franchise's success while maximizing the return on our investment. So why increase the complexity of the development by integrating with multiple delivery channels? Well, in our view once a franchise property is developed, it is a valuable asset and will become even more so in China's developing economic landscape. Being able to deliver over multiple channels not only leverages the success of that franchise property financially but also from a competitive perspective, as it increases the stickiness of our offering with core customers.

Consider our experience MOLE'S and SEER. Playing it online was fun and compelling to begin with. But then when the children go to school and they see other kids with MOLE'S and SEER books, lunchboxes, backpacks and what have you, while as we sell in not just movie, this reinforces the coolest factor for kids and differentiates our franchises from being just a game. We recognize that this integration process is not easy and we have to yet perfect the formula. It increases the complexity much further, lengthens the process and is much more work. But we believe this is the right strategy to execute on because it's a hard capability to duplicate and adds value to our customers and partners. This is our differentiation in the marketplace and over the long-term this is what competitive advantage is about. Doing something that adds value and is hard for others to duplicate.

Lastly, I wanted to spend a moment on our strategy entering mobile games. As you know we have created a division focused on mobile games and we have branded it Glove Games. We did this because mobile is emerging as a main form of entertainment medium with gaming often as a first gateway. What we have learned so far is that monetization for children versus adult gaming is actually quite different and we are quickly adapting our strategies capitalize on what works with our current and upcoming franchises. We are still developing our edge in this sector as Gloves Games will be working on mobile games for consumers of all ages. It's an exciting new frontier and we look forward to updating you more in the future.

This concludes our prepared remarks today. I would like to now turn the call to the operator for questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of NA You from ICBC. Please ask your question.

NA You – ICBC

I have two questions here. The company mentioned that 2014 is still an investment year for you and actually I wanted to know how many quarters would you expect to be investing for? Do you expect to be cash flow positive in the third quarter of this year? And after that I will follow on with my second question.

Sam Lawn

Hi, You NA, this is Sam. I will take the question. I think 2014 and heading into probably the second half 2015, we will be continuing to invest in our businesses. For example, we will double some of our efforts in our largest franchise, SEER, in terms of creating more cartoons. We will invest more in movies and really getting the media franchise out. Our costs are actually pretty controlled. If you look at some of our cost structure, it's actually risen really slightly. And some of them, which has to be drop year-over-year and even sequentially. What really actually has hit our P&L is actually the revenue side. So upon both of our initiatives and products that we are working and investing on.

As Benson mentioned earlier, we hope to see some results starting towards the end of the year when we have maybe three -- at least three if not four, mobile games already in play. That should generate some revenues. But really the synergy is from everything that we are working on are starting to take effect towards the first half of 2015. So it's really our revenue growth catching up much faster than expense. So that's really, I think that probably answers your question.

NA You – ICBC

Thank you. My second question is regarding to your recently launched moving Seer 4. In terms of your current performance, do you think it will surpass last year's movie Seer 3? Also can you give us more color on the revenue share about this movie? Thank you.

Sam Lawn

I will explain that a little bit. So our movie this summer so far has done -- I think has done up to the expectations considering increased competition and we definitely have one of our largest competitors launch their movie at the same date as us. But overall the results that we have seen so far, two things that we saw that were very encouraging, is that one, we definitely beat out the competition in terms of the sales box office. Even though I think it probably affected the overall, spread the pie a little bit more thin. But then that kind of proves that how strong our franchise is and how popular it is.

And then second, the feedback that we have gotten and in terms of just some of the data that we have collected is, over 90% of viewers really enjoyed and had positive feedback on the movie and it's the quality itself. And I think that speaks for the fact that we have been in the movie business now for about 3-4 years. We understand how the business works and we continue to increase and improve on our franchise and IP quality.

NA You – ICBC

Thank you, Benson and Sam. That was helpful. I have one quick follow-up regarding to the mobile business. Just wanted to know if there are any updates and more color about the mobile business and also what's the revenue contribution from this business segment and is that under your expectations? Thank you.

Sam Lawn

Are you talking about the movies, You NA, with the mobile?

NA You – ICBC

The mobile, yes. The mobile business. Yes. Any updates and color about this business? Also the revenue contribution from the segment?

Sam Lawn

I will take this question then. I think it's probably a little early to give an exact forecast in terms of what percentage or how much our mobile gaming will contribute in terms of our revenues. But we do expect that moving into 2015, it will be a significant contributor to our P&L. Mainly because of the fact that we do a minimum three if not four games launching by the end of the year. And our first game, Reverse World, right now has proven up to expectations. Now we will continue to tweak and adjust the game according to the feedback that we have gotten. But I think in terms of how well it is doing, it is starting to provide some revenue. We should see some revenue in the third quarter but as you so it's really ramping up in the fourth quarter, particularly when it starts launching in Korea. It was just launched in the U.S., about a week ago. So we should see some of that reflect upon our P&L late in the third and fully in the fourth.

And in the fourth we have Teenage Mutant Ninja Turtles, a mobile game that's coming up. And it has movies that are coming out with it as well. So that should give us some leverage in the market, as well as to other mobile games that we are launching. So we are pretty confident but as you know the gaming business is very hit or miss. So it's hard to estimate exactly but we are pretty confident and we are pretty encouraged by the pipeline that we have this year.

Operator

Thank you. Your next question comes from the line of Natalie Wu from CICC. Please ask your question.

Natalie Wu - CICC

Thanks for taking my question and I have a couple of questions here. The first is, can you help us understand the performance of Reverse World, both Chinese and English versions. And can you give us more color how your mobile games -- can you tell us more about the types our operation plans? Would it be a self publishing or is still published out like Reverse World. And I will have a follow-up question.

Sam Lawn

Hi, Natalie, give us a second real quick.

Natalie Wu - CICC

Okay.

Sam Lawn

Hi, Natalie. I will take this question. I think it's somewhat similar to what You NA just asked. Like I said before, it's a bit hard to estimate exactly what percentage or in what amount of contribution that we are expecting. But so far Reverse World has done -- has been performing up to our expectations based on the fact that it is our first mobile game that we released. Mobile gaming from Glove Games. And we are continuing to tweak it. I think it has done pretty, fairly well, and that's for the China side. For the U.S. side, it was just released about a week ago so we don't have exact concrete evidence on it yet. But I suspect that it should do fairly, on a fair average. And then on the Korean side, it will launch in the next week or two, so we are looking to that as well.

I think when we have -- when we report our third quarter earnings, we will probably have better color on exactly how these games are doing internationally. At the same time, we will probably have just released 2 to 3 other games. And Benson will fill in some of the other spots, questions you are asking?

Benson Haibing Wang

[Foreign Language]

Sam Lawn

So let me translate that. First is, we are quite encouraged actually by the current result is that we have from Reverse World and we will continue to tweak on it and build upon what we have on that. Second is -- another one is, we are continuing to invest in mobile. We are expanding on the team. We are expanding its capabilities in terms of -- and we are investigating whether we are going to operate it ourselves or still be a content provider only and work with publishers. And the third is, Benson does expect our mobile games to contribute significant amounts of our revenues in the upcoming -- probably towards, I think towards next year.

Natalie Wu - CICC

Thanks. Hi, Benson, you mentioned that you combine the, utilize the IP in your future mobile games. Do you mean that you will combine the character of your virtual worlds in your future mobile games? If so, what will be your target player? Like children and the teenagers.

Benson Haibing Wang

[Foreign Language]

Natalie Wu - CICC

Okay thanks, Benson. I still have a question regarding your virtual worlds business, if I may. I notice that the paying conversion ratio of your virtual worlds actually went through some decline in the second quarter. So can you explain as well as the future change? Thanks.

Benson Haibing Wang

[Foreign Language]

Sam Lawn

I will quickly summarize what Benson just said. So we did recognize our active paying users when down although our active users went up slightly year over year. I think there's probably two main reasons for it. One is the mobile trend that we are seeing, in which users, consumers themselves are moving towards mobile as the entertainment medium versus PC. So that's a natural, I think industry wide effect. The second is, our business model has in the past year or two, really revolves around our IP. And really concentrating on the franchise itself and not everything based on the games. So thus our gaming play is less, I would say focused on the monetization than our competitors. And that is the place that we are actually looking to improve as well.

Now if you look at our business in the past year or two, we are not released any new virtual worlds as we are kind of looking at the market and seeing what our strategy and where we stand in the marketplace. That being said, we do have a new virtual world that we are releasing sometime in October or sometime in the fourth quarter this year. We hope the style of the play is really up to what the consumer is used to now. But then again our business overall is still looking at the IP more importantly.

Operator

Thank you. Your next question comes from the line of George Askew from Stifel. Please ask your question.

George Askew - Stifel Nicolaus

Sam, in your comments you used the phrase, lengthens the process, the integration process is not easy and it's complex, and it lengthens the process. I'm curious how you guys are thinking about the pipeline? Obviously right now you have got a mobile game pipeline that may be is not so long but a pipeline that is starts with creative and runs all the way through the various segments? Is that a one-year, three year sort of process?

Sam Lawn

The release time is actually not prolonged. I guess (indiscernible) aren't clear was, it lengthens the process in the fact that that will probably have to put in more man-hours to get all the teams in line. But the release dates obviously cannot be affected. We still have to release games in time, virtual worlds in time, products in time, movies in time, et cetera. It's more, right now, historically what we have done in the past few years is, we have built a toy business. We have built a licensing business. We have built a movie business. We have built a cartoon and books business and a gaming business. And we have built an IP that spawned of the game parts. And each businesses, we are taking this IP and leveraging it. Leveraging the title and the character to kind of run itself. What we have never really done is incorporate everything together fully in terms of, okay, let's say we have a new IP today or we have new characters than the existing franchise, how do we leveraged this? How do we make sure that next year in our toy business or our licensing business or games, that this character is fully utilized and everybody kind of cross-markets together.

If it's a style of play, can be integrated for online and offline together. If it's a type of a storyline, how does it match where the movie, you see it in the movies and we see it in episode 35 to 40 and then it also going to be a level inside the games. That has not been completely, actually fully integrated at all and that is something that we are trying to do right now because we feel like that our franchises are ready. Our individual divisions are somewhat mature enough to handle this. I think everybody knows their own business well enough to say, okay, now we can get together and really create this line.

George Askew - Stifel Nicolaus

Got it. Okay. Yes, that's a great explanation. All right. I think I get it a bit. My second question is, as you go through this realignment how does that change your perspective our intentions regarding your use of cash or $104 million of cash?

Sam Lawn

I will take this question as well and Benson can add to it afterwards. You know we are definitely increasing investment in the spending of some of the areas that we feel are necessary. For example, we are doubling the amount of episodes of cartoons for our Seer program for next year. That is our largest franchise and we do feel it has quite a bit of room to grow within China. And at the same time, this new (indiscernible) is around 52 series per year. Now we are doubling that for next year. Now part of this is stabilization, it really needs to work together with our gaming team, our licensing division team and our toys team at the same time. So this is an area of investment.

We are also going to invest continually in our mobile gaming as well. Mobile, again, right now Glove Games is really about, I think it makes games for all, consumers of all ages. Predominantly more adult gaming as well. But this is kind of the frontier of Taomee used to be. We need to understand how mobile gaming works. And eventually our franchises are all going to have mobile versions as well. So it all slowly integrates together in the short term. At the same time we are definitely being very prudent with the way we control our costs. If you look at our cost structure, we are still pretty effective in the way we are controlling it. But we are going to invest in the areas that will make the biggest difference for our company.

George Askew - Stifel Nicolaus

I was hoping to hear the word acquisition. I mean are you guys -- why don't you take some of that cash and buy some assets that would sort of -- you can kind of fit into your new integrated structure and jump start?

Sam Lawn

That's actually a great question. I kind of wanted to save that part for probably the next two or three quarters. What we want to do is really take our SEER IP and really throw it inside our integration plan. And if that works and we see some strong results in the next two or three quarters, because it does take two or three quarters to get everything in line. The new episodes out, movies and play and everything else kind of starting to gain traction. If that works, then we know formula is set and we can easily plug in any domestic or foreign IP into this formula and really make a big splash. But right now we have a pretty strong IP within our own hands and we want to prove that this strategy really works. So I guess that kind of answers your question?

George Askew - Stifel Nicolaus

Yes. No, that does, that does. That's good to hear. Thank you.

Operator

Thank you. Your next question comes from the line of [John Smidt from Westmount Capital] (ph). Please ask your question.

Unidentified Analyst

I think you mentioned something about the Mutant Ninja Turtles. Did you say when you expect to see the introduction of that and when to start monetization? And is that a mobile game or a standard online game? That's the first, please.

Benson Haibing Wang

[Foreign Language]

Sam Lawn

So it's a mobile game and we anticipate to have it launched somewhere around October to November time.

Unidentified Analyst

Great. And then is the monetization immediately?

Sam Lawn

It will definitely go through some beta testing beforehand like all mobile games. But given the fact that it has such a strong IP and the movie was just released in the U.S. And the movie, they haven't announced exactly when they will release in China but we are definitely keeping an eye on that and trying to sync the same time that we release the games with the movies. I think it's got pretty positive leverage on the market. So monetization wise, like most mobile games, we have the beta launch beforehand. We have the official launch and try to time it with the movies. And it takes a few weeks if not a month or two to kind of gain traction and then we will see where, how high it could go. But in terms of, given the launch period is October to November, the true, I think, contribution to our revenue line will probably be in the first quarter. Then you will see a full quarter's worth of contribution.

Unidentified Analyst

Okay, got you. So can you just correct me if I'm wrong, so on top of your current revenue streams like MOLE'S WORLD and SEER, the emerging new streams that we should be watching for our number one is Reverse World and then Teenage Mutant Ninja Turtles. And then is this correct, two or three more coming soon, are we able to say what they are yet?

Sam Lawn

We have quoted them but we will definitely give more color in the third quarter announcements. But for Reverse World right now we have one version out which is China. And then the U.S. version was just launched last week. And then we have the Korean version launching in the next week or two. For Teenage Mutant Ninja Turtles, it's already pretty much set. Either late October or November that will come out. And then we have another game, two games that are coming out by the end of the year. So overall, we have quite a bit of healthy pipeline. We are also already working on games for 2015 and that's not even including some of the games that are going to be licensed internationally also. So it's a pretty healthy pipeline that we have. But again, we try to be more conservative because the gaming industry is just a hit or miss sector.

Unidentified Analyst

Okay, got it. So there is no way to pre-announce the other two games coming out by end of year, correct? We can't talk about what the titles are, what they are about, what kind of games they are?

Sam Lawn

They are RPG games. They are definitely RPG games similar to Reverse World, similar to Teenage Mutant Ninja Turtles. The name we have not disclosed yet and we are still kind of finalizing the final name, actually. But then it's RPG types.

Unidentified Analyst

Okay, that's helpful. And then lastly, I noticed your ARPU trends -- actually the ARPU trends have been ticking up the last couple of quarters. Kind of wondering if you can talk a little bit about where those are filling? Do you expect ARPU to remain at this level, kind of keep going up? Do you expect them to drop? It will be helpful if you can share that. Thanks.

Sam Lawn

You know while ARPU is important to us, I think we definitely look just as importantly if not even more important, is really the number of active users and the number of active paying users. As ARPU can always shoot up but if you don't have that many active paying users that really doesn't mean much. So as Benson mentioned earlier, we focus on our games primarily also around our franchise, the IP itself. So in some aspects, we probably lost out in terms of monetization capabilities versus our competitors. Now that's something that we are definitely working on. And we are hoping to see some of that reverse towards the fourth quarter. We are putting some new gameplays, some new styles in. But that does take time to reflect. So hopefully in the third -- sorry, not the third but really the fourth quarter you should see some reversal in that. The ARPU, it is important but right now we are more focused on the active paying users number.

Unidentified Analyst

Got it. I guess the only thought is, if the ARPU continues to tick up, it can partially offset some declines in your active user base until your active user base starts growing again.

Sam Lawn

Yes. Our active play users are still pretty healthy. That number is still healthy and at least growing. It's the active paying users that are going down. Now if you look at some of our competition, we know that the ARPU can definitely be much higher. We know that the active paying user penetration could also be higher as well. So these are all, stats that we know they are achievable and that we are working towards.

Operator

Thank you. (Operator Instructions) There are no further questions at this time. I will now like to hand the conference back to today's presenter. Please continue.

Sam Lawn

Thanks everyone for listening to the call and we will see you next quarter. Thank you.

Operator

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

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Source: Taomee Holdings' (TAOM) CEO Benson Wang on Q2 2014 Results - Earnings Call Transcript

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