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Giant Interactive Group, Inc. (NYSE:GA)

Q4 2010 Earnings Call

February 22, 2011 08:00 PM ET

Executives

Richard Chiang – Manager, IR

Eric He – CFO

Wei Liu – President

Xuefeng Ji – VP, Research and Development

Analysts

Alicia Yap – Citigroup

Lisa Yuan – Goldman Sachs

Jenny Wu – Morgan Stanley

Eddie Leung – Merrill Lynch

Mark Marostica – Piper Jaffray

Wendy Huang – RBS

Gary Ngan – UBS

Atul Bagga – ThinkEquity

Adam Krejcik – Roth Capital Partners

George [ph] – Nomura

Operator

Good morning and good evening, ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group’s Fourth Quarter and Full Year 2010 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time, if you would like to ask a question.

Now, I would like to transfer the call to moderator, Mr. Rich Chiang, Investor Relations Manager of Giant Interactive.

Richard Chiang

Good morning, ladies and gentlemen. Welcome to the fourth quarter and full year 2010 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, President; Mr. Eric He, Chief Financial Officer; Mr. Xuefeng Ji, Vice President of Research and Development.

As we proceed through our prepared remarks, we will refer to our results presentation, which can be downloaded from our website, at www.ga-me.com. Following the remarks, Ms. Liu, Mr. He and Mr. Ji will be happy to take your questions.

Before we continue, I would like to remind you that statements on this call that are not strictly historical in nature constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar statements and include, among others, statements regarding our continued efforts to increase shareholder value through strategic investments and expansion or adjustment of game content and features.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results of Giant to be materially different from historical results or from any results expressed or implied by such forward-looking statements.

These factors include, but are not limited to risks and uncertainties related to the progress, timing, costs and results of game testing and product development. Competition from other online game companies and the additional risks discussed in filings with the Securities and Exchange Commission, including our annual report on Form 20-F filed on June 7, 2010.

All forward-looking statements are qualified in their entirety by this cautionary statement, and Giant undertakes no obligation to revise or update this information to reflect events or circumstances after the date hereof. In addition, please note that references in the presentation to dollars refer to U.S. dollars.

Now, I’d like to pass the call over to Eric He, our Chief Financial Officer.

Eric He

Thank you, Rich. Good morning and good evening, everyone. Thank you for joining us today. We ended the 2010 with another quarter of top and bottom line growth. Throughout the year our ZT Online segmentation strategy and our commitment to ongoing enhancements encourage a steady return of end game spending.

In addition to ongoing success of our ZT Series of games, we are moving forward with the components for our pipeline games, which will position us for sustained growth in the long run. In November, we commenced unlimited closed beta testing for ZT Online 2. So far reception of the game has been very encouraging as PCU has already approached 200,000 peak concurrent users with minimum marketing support.

We view this as a positive sign that ZT Online 2 will continue to grow in popularity going forward. The strength of ZT Online Series, the introduction of ZT Online 2 and suite of pipeline games all provide a solid foundation for the future growth and we are excited about the opportunities in front us.

With a solid strategy for growing the games couple with effective cost structures we are confident in our ability to deliver encouraging results going into 2011. Our key operational metrics on slide six.

Total active paying accounts or APA grew 13.1% sequentially and grew 48.8% year-over-year to 1.69 million. Average revenue per user or ARPU was RMB215, down 4.3% over last quarter, and down 10.6% over the fourth quarter in 2009. Average concurrent users or ACU was 584,000, and 8.5% sequential increase and a 20.3% increase year-over-year. Peak Concurrent Users or PCU was up 16.9% sequentially and up 23.2% year-over-year to 1.71 million.

We are very pleased with this key performance indicator as the rising ACU, PCU, APA all signify the growing popularity of our games and more important the increase number of gamers who are choosing to pay in the games.

We also – we are also – we also view the rising APA coupled with slight decline in ARPU as an encouraging sign that our strategy to attract users across a broader range of spending habit is working. Thus, creating a healthier and more sustainable revenue base.

Once again, this improving operating metrics have lent us – lend themselves to a solid test of financial results as seen on slide seven. Net revenue for the quarter was 55.8 million, representing an 8.7% increase from the third quarter 2010 and 33.4% increase from the fourth quarter last year.

For the full year 2010, net revenue totaled 201.9 million, up 2.2% from 2009. These increases occurred, thanks to our efforts to further segment our ZT Online series and add other new games to our portfolio in order to engage more players throughout the year.

Gross profit for the fourth quarter of 2010 was 47.1 million representing a 7.9% sequential increase and a 34.4% year-over-year rise. Gross margin of 84.5% was down slightly from 85.2% in the previous quarter but up from 83.9% in the fourth quarter 2009. Gross profit in the fiscal year 2010 was 171.8 million, up 3.1% from 2009. Gross margin for the year rose to 85.1% compared with 84.3% in 2009 as we grew our revenue base for maintaining a prudent cost structure.

Total operating expenses for the fourth quarter were 25.5 million, up 78.5% sequentially as we had 7 million impairment loss related to King of Kings III and a reduction in a government financial incentives.

For the full year, the total operating expenses increased 60.6% to 60.3 million, as we boost R&D spending in order to expand our pipeline conducted at several marketing campaigns and received fewer government financial incentives throughout a year.

In terms of R&D expenses rose 26.6% sequentially and 141% year-over-year to 10.1 million in a fourth quarter. For the full year R&D expenses grew 64.1% over 2009, as we expand our resources to support the development and enhancement of new and existing games.

Sales and marketing expenses were down 18.4% sequentially and 12.2% year-over-year in a fourth quarter due to fewer marketing campaigns. However for the full year S&M spending was up 19.6% over 2009 as we bolstered around games launches throughout the years.

General and administrative expenses rose 2.8% from the last quarter and 4.3% from the fourth quarter 2009, as we paid our bonuses and incur some team building expenses. However, thanks to our strict cost control, we reduced G&A expanding over the course of 2010 by 1.6% compared to fiscal 2009.

Net income attributable to the company’s shareholders in a fourth quarter rose 10.8% sequentially and 16.9% year-over-year to 35 million, representing a margin of 62.8%. Net income attributable to the company’s shareholders for the full year was down 5.6% compared to 2009. Basic and diluted earnings per ADS were $0.15 for the fourth quarter 2010 and full year were $0.54 and $0.53 respectively.

Moving to our balance sheet. As seen on the slide nine, as to December 31, 2010, cash, cash equivalents and short-term investments totaled 913.7 million, an increase from September 30, 2010 attributable to the cash generated from the operations this quarter.

Our Board of Director has also approved a cash dividend of $0.18 per ordinary shares payable on April 8th to shareholders of records on March 18. This dividend will represent a pay down of approximately 41.5 million and is representative of our commitment to return value through our shareholders.

We are encouraged by our financial performance, both on the quarter and throughout 2010 we are able to successfully grow the business thanks to our efforts to enhance our existing games, introduce new games and further segment our ZT Online series.

We remain ardently focused on building the best and most innovative portfolio of games possible and continue to make solid progress on this front. We continue to keep players engaged and attract former player back to the games in our flagship ZT Online via ongoing enhancement and upgrades.

The fourth quarter was no exception as we celebrate the sixth anniversary of the company’s incorporation on growing optimization of features and functions are possible help build the user base of ZT Online – additions while new features including Weather and Magic system enabled ZT Online bringing addition to continue performing well.

November 2010 mark an important milestone for the highly anticipated ZT Online 2 as this game entered into limited close beta testing.

Interest from gamers have been very strong as the gamer – as the game approached 200,000 PCU without any significant or large scale marketing campaigns. We are excited to see ZT Online beginning to gain tractions and look forward to launching this game into official close beta testing supported by the large scale marketing in the second quarter of this year.

Beyond ZT Online games we also remain committed to expanding our portfolio – product portfolios both through internally developed games and localization of licensed games. In the fourth quarter we continue to add contents to Giant Online’s most recent expansion packs and currently developing its next expansion packs which is scheduled to be released in the first half of this year.

We made solid progress on optimizing and adding new features on XT Online, which we plan on launching into open beta testing this year. In December we entered into a JV with Huayi Brothers to cooperate on King of Kings III. As we mentioned last quarters, we are also actively signing licensing agreement with overseas markets in order to expand our geographical footprint and create another source of additional revenue.

Golden Land was one of the most popular web games in both Taiwan and Japan in the fourth quarter with localized Portuguese version undergoing internal testing for launch in Brazil. We have also signed agreements in both Korea, Thailand and look forward undergoing internal testing in those markets in the first quarters.

Dragon Soul which is in – which in the fourth quarter introduced its first expansion pack, will also extend its reach beyond the home market. Within our licensing, also enter into limited engineer testing in November 2010 and has thus received encouraging feedback from the gamers.

As we look forward to these games launched in 2011, we will do additional testing in second quarter to ensure this game is tailored to target audience’s preferences. Allods online has been translated into Chinese and developers continue to legalize this game for the Chinese markets.

In summary, our progress on the development front in enabling us to build upon our trend of topline expansion is positioning us for the long-term growth. We’re committed to both our segmentation and diversification strategy which will continuously help broaden our user base and further strengthen our revenue stream.

As we enter 2011, we’re encouraged by our recent performance, development efforts, adaptation of new games as a key online series continue remain healthy build upon its success as ZT Online 2 gain tractions.

We expect to receive continue topline growth in the first quarter of 2011 along with our initiative to grow our revenue base. We’re also committed to prudently managing our cost structure and delivering value to the shareholders via annual dividend.

Once again, thank you for joining us today. We’re now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Alicia Yap with Citigroup. Please proceed.

Alicia Yap – Citigroup

Hi. Good morning. Congratulations on the solid quarter. My first question is with your ZT 2 to start official close data testing in second quarter. Can you share with us how much should we expect the sales and marketing expense to increase by in the next couple of quarters and what will be the margin trend for this year?

Wei Liu

(Foreign Language – Chinese). Hi, Alicia. ZT 2, we are planning to launch and – official close data testing during the second quarter. And undoubtedly sales and marketing expenses for Q2 to Q4 should increase as a result of this. But we will control it and keep it at appropriate level – appropriate percentage compared to our revenue based on past quarters.

Richard Chiang

Tag along to – President Liu’s answer – to answer your question is on the margin side. I think you two are conscious to maintain our appropriate percentage of expenses to our revenue. I think our margin will keep on a very stable level for next couple of quarters.

Alicia Yap – Citigroup

I see. Understand. The second question is for your ZT 2. What are the innovative features you believe more attracted to gamers, any major difference in featuring game play between the current versions and upcoming efficient closed data versions/

Richard Chiang

(Foreign Language – Chinese) I will ask our lead of R&D Mr. Ji to answer the questions.

Xuefeng Ji

(Foreign Language – Chinese) ZT 2 currently in its testing phase. We have been modeling and seen a lot of great metrics and using them and received lots of good feedback from games. In terms of innovations, we will say that there is three things. First of all, the graphics, it’s much improved and it ranks pretty up there compared to other domestically developed 2D online games.

Number two is game play and the details within the game, it’s both easy to approach for new players and veteran players, still have lots of motivation and incentives when they play for a long time as well. And third would be the in-game economy. We are marketing this as or innovating this as the third-generation in-game economy in online games in China and it has lots of innovative features to motivate free non-paying players to get them involved also.

(Foreign Language – Chinese)

In second quarter, we’ll commence official closed beta testing. We will undoubtedly release even more new features and upgrade the game and especially enhance the game play and also the in-game economy. In terms of in-game economy we may potentially flush out the in-game trading platform within the games so that gamers can be incentive and be able to earn more incentive and money in the game.

Operator

Your next question is from the line of Lisa Yuan with Goldman Sachs. Please proceed.

Lisa Yuan – Goldman Sachs

Hi, good morning. Thanks for taking my questions. My first question is related to the latest game trend for ZT and ZT Green especially after launch of ZT Online 2? My second question is about your guidance for first quarter you guided sequential growth for first quarter and if I look at your deferred revenue in fourth quarter, deferred revenue was up 15% in first quarter do you think that will be a good indication for your revenue growth in first quarter? Thanks.

Unidentified Company Representative

(Foreign Language – Chinese) As we launched ZT2 into unlimited closed beat testing past three months or so we have seen limited impact to the original ZT Online and also ZT Online Classic edition as their in-game economies are both of the old type where we sell items directly to gamers. But there has been more impact to ZT Green because this in-game economy is more similar to ZT2 and as a matter of fact, Green economy was can look at is sort of a prelude leading up to the development ZT2’s in-game economy so those two games are more similar.

(Foreign Language – Chinese) But in terms of total users numbers or metrics the combination of Green addition and ZT2 combined far surpasses green alone from previous quarters. So, the method in which we launched ZT2 is definitely positive.

From a financial angel, I believe that combined ZT Green and ZT2 definitely create a much, much better financial performance, just looking at the ZT Green alone. So we think the cannibalization of the ZT Green is really – there is no impact or is a non-event for the whole financial picture, in fact it’s very – it’s a big addition to our revenue in the future.

In terms of our first quarter guidance I think, yes, we guided that the first quarter we will continue to grow on a top line basis, I think Lisa you mentioned a very good point that in the fourth quarter we did experienced a strong growth deferred revenue. I think those deferred revenue will some days be translated into the revenue in the course of 2011. That could – that is a very logical thinking. So I think our first quarter will continue to maintain a very stable growth from the fourth quarter basis.

Lisa Yuan – Goldman Sachs

Thank you.

Operator

Your next question is from the line of Jenny Wu with Morgan Stanley. Please proceed.

Jenny Wu – Morgan Stanley

Hi. Thank you for taking my question. First one, can you help us understand the performance for ZT Online 2 and if excluding the ZT Online 2’s contributions what would be the performance for your APA and ARPU and second question is going forward what will be the trend for this two metrics in the coming quarters you mean ZT Online 2 could have higher contributions in years to come. Thank you.

Eric He

(Foreign Language – Chinese) There in the fourth quarter when we lost ZT 2 unlimited closed beta testing, we were testing both the user numbers and regular monetization. And we’ve noticed that APA has contributed pretty positively to our results.

(Foreign Language – Chinese) ARPU, however, is lower than our original ZT Online towards historic level.

(Foreign Language – Chinese) So there in second quarter, we launched official closed beta testing and large scale marketing for ZT 2. Hopefully, we expect that the company wise APA will continue to trend up

(Foreign Language – Chinese) And ARPU should remain stable. So in summary, we think that players believe ZT 2 has been very positive and are very attracted by the third generation in game economy in this game.

Jenny Wu – Morgan Stanley

Okay. Just a follow-up on this, can you quantitatively help us understand what would be the personal changes for APA and ARPU, excluding ZT Online 2?

Richard Chiang

Jenny, I am sorry, we have never actually breakdown the numbers. So we will have difficulty to breakdown the number for you, if we don’t take the whole – every games into consideration. So I think we won’t be able to provide you the breakdown number for APA or ARPU without ZT 2.

Operator

Your next question is from Eddie Leung with Merrill Lynch. Please proceed.

Eddie Leung – Merrill Lynch

Good morning, everyone. Just a couple of questions. The first one is could you guys compare in contrast the user demography between ZT 2 and the existing versions of ZT?

Unidentified Company Representative

(Foreign Language – Chinese) Graphics for the users in the ZT 2 versus original ZT Online, so far we talked about testing in ZT 2 we have seen that users are both similar and also not similar compared to the original games users.

In terms of similarities, they are both slightly older than they are at gamers. They tend to be 20 years old and above. They offer tend to favor PK or Combat oriented games. The ways in which they are not similar is that the users who prefer ZT 2 usually prefer more casual game play and also more team based game play where you have to work with other gamers but those players prefer the original ZT Online; tend to prefer more solo game play, playing by themselves, PK and et cetera. So with both versions we think that we have different versions to satisfy a wider group of user base.

Eddie Leung – Merrill Lynch

Got it. Thank you. My second question is about the online game industry. Did you comment on the competition that you have seen in the past, couple of quarters and going forward? Do you feel that competition is actually going up or down, given perhaps some smaller online game companies leaving the industry? Thank you.

Unidentified Company Representative

(Foreign Language – Chinese)

Wei Liu

For 2011, overall we view that the industry is still healthy and growing, so it is very possible. And as for other big companies, our peers they all have potential of successful hit games lined up in the pipeline and including our ZT Online 2 which we believe is the first of this new wave of games to come out. Each of these games have their own merits and so they are all different various – some are more casual or acute, so not all of them are in direct competition to our games ZT 2, but that’s a good thing but the potentially negative thing is that competition is very intense and it will be very competitive in terms of overall game design and indeed some small players may have a hard time.

Operator

The next question is from the line of Mark Marostica with Piper Jaffray. Please proceed.

Mark Marostica – Piper Jaffray

Thank you. Nice job on the quarter. My first question is in regards to the R&D spend in the quarter and I do note in your press release, in your comments that it was little bit higher than normal because of the some of the activities that you undertook in the quarter, including bonuses and also some other activities there. But I am curious as you think about the level it’s at now, should we consider that to be the run rate going forward or how do you think about that in this fiscal year?

Eric He

Mark, your question is very good one. I think you would agree with us that R&D spending is a blood stream of online game company, because R&D spending really help us to broaden our product and help us to attract more talents to our R&D lineups. In terms of future R&D spending or current R&D spending, we think we will use a same approach as we apply to the sales and marketing expenses as well. We try to optimize this R&D spending as a percentage of the revenue. I think the current percentage, it’s pretty optimal. I even tend to believe that as we grow our revenue base this percentage can actually fluctuate a little bit sometimes lower little bit. But I think R&D expenses definitely sometimes will be affected on some of the seasonal factors such as bonus payments, such as yearend bonus and yearend activities. So I do believe that R&D expenses should be kept at the pretty stable level or even as a percentage of the revenue or the aggregate number, the absolute number should be pretty stable for the quarters to come.

Mark Marostica – Piper Jaffray

Okay. And then one follow-up question regarding the government incentives in the quarter were little bit below we thought, we had modeled. I am curious how you think about that line item as you enter this fiscal year?

Richard Chiang

Well, in terms of government incentives, as you know, that represents the rebates of our tax to the government. I think that is based on the previous year annual revenues. I think the current level of the whole year is around RMB58 million. We should be pretty much under norm for 2011 as well. So I don’t think we will see this level to change too much to 2011.

Operator

Your next question is from Wendy Huang with RBS. Please proceed.

Wendy Huang – RBS

Good morning. Just two housekeeping questions. Your Q4 APA and ACU show different trend, is that actually because of the paying ratio of the new game ZT 2 is higher than your existing games?

Eric He

Wendy you say different in mean APA and ACU are same trend.

Wendy Huang – RBS

It’s just from your chart that Active Paying Account is growing, but ACU fluctuates a little bit.

Eric He

I think both ACU and APA increased in the fourth quarter. So I believe that is a good thing, because ACU represents a popularity of the game, APA meaning help us to understand that more gamers try to pay the – paid us in games. So our APA number actually increased about 13%, our ACU numbers increased about 8.5%. I think in terms of those numbers, they are very consistent.

Wendy Huang – RBS

The APA increase is actually much higher than the ACU and if you look at from Q2 to Q4s, it’s actually slightly different trend?

Eric He

This is because as President Liu just mentioned in the fourth quarter we started on a very test basis for ZT 2 in-game economy. So you see that the influx, the gamers who is testing this in-game economy. So APA number tend to be a little bigger.

Richard Chiang

Wendy, just want to add one thing, in the third quarter our ACU decreased on a sequential basis because we deleted some robot accounts in the ZT Online Series mostly Green edition the previous quarter, third quarter. So that’s why if you take a look at second quarter to fourth quarter, ACU did fluctuate a little bit.

Wendy Huang – RBS

Thank you. And secondly, you just mentioned R&D where we stable in Q1, are you talking about versus Q4 level or is a full year 2010 level as a percentage of total revenue?

Richard Chiang

Well, Wendy, as you know that we are still in the midst of first quarter. It would be difficult to quantify the numbers. But as I said that in the fourth quarter we had some seasonal factors, seasonal numbers in R&D lineup. I believe that in the first quarter things will tend to be normalized.

Operator

The next question is from the line of Gary Ngan with UBS. Please proceed.

Gary Ngan – UBS

Good morning, everyone and thanks for taking my question. Just firstly on financials, I see that there is about 77 million of other income in this quarter. Could you comment on what exactly are those?

Richard Chiang

This 77 million of other income mainly was attributable from our JV with Huayi Brothers. So that is the one-time items.

Gary Ngan – UBS

Okay. So it’s – is that a cash item or is that not really?

Richard Chiang

No. No, it’s a non-cash items.

Gary Ngan – UBS

I see. I see. Thanks. And also the other question is on the ZT 2 from natural launch, I mean from the last quarter management mentioned that we’re likely to launch the games almost immediately after the Chinese New Year and now we are sort of, taking a more step-by-step approach and maybe launching in Q2. So I just want to get your sense of what are you thinking in terms of the launch schedule. Are you timing for a better time slot or are you waiting for more R&D -excuse me – to take place before the launch or waiting for margin? Just want to get your thoughts on – on your change in timing.

Richard Chiang

Sure. I will refer these questions to Mr. Ji.

Xuefeng Ji

(Foreign Language – Chinese) For ZT 2 we had originally planned to commence large scale marketing in March, but we realized that that scheduling actually conflicts with the large meeting or conference by the central government. So we actually wanted to wait until that finishes before we launch our game.

Gary Ngan – UBS

Thank you very much.

Operator

Your next question is from Atul Bagga with ThinkEquity. Please proceed.

Atul Bagga – ThinkEquity

Hey, guys, thank you for taking my question and congratulations on a great quarter.

Eric He

Thanks.

Atul Bagga – ThinkEquity

A couple of questions for you. Number one, can you talk about your strategy for mobile games? Maybe you can highlight how big this market could be at this time and how big do you think mobile could become in next couple of years and how you plan to attack that market?

Xuefeng Ji

Okay. (Foreign Language – Chinese) Atul, I think you are absolutely very keen on the industry trend. As you know that there are so many mobile users in China and mobile game market, it’s a future market. But as you know that throughout Win@Giant program we actually invested in a mobile game platform which this company is doing very well. And so we will leverage this mobile game company’s strength in the platform to extend our mobile game strategy. At this moment I think we will be doing some early stage products for example we will launch our ZT 2 mobile versions along with this invested company that is the first step initiative that we are doing right now. Secondly in terms of the size of the mobile game market if you look at the research data at this moment still it’s very, very nascent it’s very young. So you won’t be able to find significant numbers in China yet because most of the mobile game at this moment it’s not Online version it’s a single version. So you actually play along with your mobile devices. But online version MMO version of the mobile games it’s picking up but at this moment the base is still very, very small.

Atul Bagga – ThinkEquity

So still do you expect that the mobile version of ZT – that’s not an incremental expectation for you guys in 2011?

Xuefeng Ji

Not in the immediate future.

Atul Bagga – ThinkEquity

Got you. And between ZT 2 and ZT I know you’ve spend some time on that I was wondering if you can share some perspective the 200,000 PCU and the registered users who are coming on ZT 2 how many of these are from – how many of these are original ZT players and how many are coming – how many of these are new to the ZT platform altogether?

Unidentified Company Representative

(Foreign Language – Chinese) And ZT Online 2, initially we did see a portion of existing users coming from ZT Online but after a while they play the game and actually went back to the original ZT Online, just going back to some of the differences in terms of game play and game design, you mentioned couple of question ago. And so, most of the users in ZT Online 2 now are new users or formers users who left our games some time ago.

Operator

Your next question is from the line of Adam Krejcik with ROTH Capital Partners. Please proceed sir.

Adam Krejcik – ROTH Capital Partners

Yeah, hi, thanks. Two quick questions, first, could you just tell us whether the ARPU for ZT2 how that compares to ZT Green, is it higher or lower or pretty similar?

Eric He

(Foreign Language – Chinese) I think in terms of ARPU for ZT and ZT Green as explained a couple of questions ago because they are in-game systems, it’s very similar and in fact ZT Green is sort of a prelude of ZT 2. So there ARPU level is very similar. Now compared with old ZT, original ZT, those ARPU numbers are lower.

Adam Krejcik – ROTH Capital Partners

Okay. That’s helpful. And then my second question, I was just curious in terms of what the involvement of your Chairman and CEO, Mr. Shi is these days in terms of what his focus and was he heavily involved in ZT 2 like he was in the original ZT Online or is he doing different area of focus these days for the company, any information there would be helpful. Thank you.

Eric He

(Foreign Language – Chinese)

Wei Liu

(Foreign Language – Chinese) For the development of ZT Online 2, the project was led by our younger development team led by Mr. Ji here himself. Mr. Ji was involve in terms of testing the game and trying the game out and sort of representing another type of user demographic for testing results. So he was involved in that regard and we believe that the initial positive performance of ZT 2 currently signifies that the potential or success of our younger development team. As for the involvement of Mr. Ji in the rest of the company he is still very actively testing and trying games and involved in the strategic developments of the company.

Operator

Your next question is from the line of Jin Yoon with Nomura. Please proceed.

George – Nomura

Hi, hi good morning. This is George [ph] calling on behalf of Jin. And my first question is I guess the slight decrease of ARPU this quarter was due to the dilution of new games and new pain gamers, is that correct? So how about the ARPU of the original ZT series, I mean I know you cannot disclose the numbers, but what about the trend of the original ZT games here?

Eric He

Regarding this ARPU numbers, I think George, you’re absolutely right. It’s been somewhat diluted due to the test basis of our ZT 2 in the fourth quarter. So APA number actually grew a little faster than our revenue caused it to slight decrease on our ARPU. I think moving forward as we mentioned that we expect that ARPU will remain stable, which translated into the ARPU level for the original ZT 2 maintain very stable as well.

George – Nomura

Okay. And just what about the revenue of contribution from ZT 2 at this stage, I mean consented wise, is it significant or what about the percentage?

Richard Chiang

The percentage of ZT 2’s revenue in the fourth quarter is insignificant as we mentioned that we actually are testing our in game economy for ZT 2. Moving forward in 2011, we will believe that ZT 2 were gradually picking up on the stream. By the end of 2011, we believe that ZT 2 should represent a significant of our revenue base.

George – Nomura

Okay. Got it. And a final question King of Kings III, as the sale of King of Kings III, is there any impact on your top line? Yeah.

Eric He

This King of Kings III joint venture with Huayi Brothers is one time even. And it’s a non-cash transaction. So to us the impact is very, very minimal. As to the top line impact, I think, it very minimal.

Operator

And that was the final question in queue. I’d now like to turn the call to Richard Chiang, for closing remarks.

Richard Chiang

Thank you for joining us today and we look forward to updating you on our progress in the near future.

Eric He

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. The presentation has ended. You may now disconnect. Have a good day.

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Source: Giant Interactive Group Management Discusses Q4 2010 Results - Earnings Call Transcript
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