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Shanda Games Ltd. (NASDAQ:GAME)

Q1 2011 Earnings Call

May 31, 2011 9:00 pm ET

Executives

Ellen Chiu - IR Director

Alan Tan - Chairman and CEO

Richard Wei - CFO

Analysts

Jin Yoon - Nomura

Timothy Chan - Morgan Stanley

Eddie Leung - Merrill Lynch

Lisa Yuan - Goldman Sachs

Wendy Huang - Royal Bank of Scotland

Dick Wei - JPMorgan

Paul Wuh - Samsung Securities

Operator

Welcome to Shanda Games Limited 2011 first quarter results conference call. This conference call will be recorded and available for reply in its entirety. A copy of Shanda Games' 2011 first quarter results announcement can be found and downloaded from its Investor Relations website, http://ir.shandagames.com. (Operator Instructions)

I would now like to turn the call over to Ellen Chiu, Shanda Games' Investor Relations Director.

Ellen Chiu

Thank you. Good morning and good evening everyone. On behalf of Shanda Games, I would like to welcome everyone to our 2011 first quarter results conference call. With me today are Mr. Alan Tan, our Chairman and Chief Executive Officer; and Mr. Richard Wei, our Chief Financial Officer.

Before we begin, I would also like to remind you that management comments during the call will include forward-looking statements that are based on our current expectations and are intended to qualify for the Safe Harbor from liability for such statements established in the U.S. Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts during the conference call are forward-looking statements which are subject to significant risks and uncertainties. Actual results may differ materially from those contained in the forward-looking statements. So please do take a minute to read the Safe Harbour Statement in Shanda Games' first quarter 2011 earnings release.

In addition, please note for discussion purpose, all numbers were translated into US dollars based on the exchange rate of RMB6.5564 per US dollar.

Now I would like to turn the call over to our Chairman and Chief Executive Officer, Ms. Tan.

Alan Tan

Thank you, Ellen, and welcome everyone. Playing games is increasingly becoming a common occurrence in the global internet market, whether be it through PC, tablet, mobile phone or other devices. Online gaming has clearly become a critical application for almost all social networks and all the platforms.

As an early pioneer, we have always been at the forefront of Chinese online gaming. With over 10 years of history in publishing and developing online games, we have evolved into an online gaming powerhouse with our own distinctive platform in markets from Asia to North America. It is our ability to leverage Shanda Games' unique operational experience and the structure that positions us especially well in China's ever evolving internet industry.

Now we at Shanda Games are preparing for the next shift. We have begun implementing a strategy that we are calling Triple-A. The Triple-A stands for the three critical elements: All-Star, All-Platform and All-Region. We are confident that this strategy will help us not only maintain our position as one of the most innovative and forward-thinking companies in the global online gaming industry, but also attract both near and long-term sustainable growth for the company.

Let me start with All-Star. Our All-Star strategy is the result of over 10 years of operational experience and expertise in online gaming. We have developed a mechanism that combines our multi-sourcing strategy, data mining and modularized and analyzed system and the whole operations platform.

Due to this mechanism, we seek to diversify the game portfolio, supported by the data mining and modularized and analyzed system to improve their quality and further leverage our operating platform to get a broad relation with gamers. The All-Star strategy will not only allow us to better organize our resources, secure best titles, but also to successfully roll out the multiple games consecutively.

This not only further solidifies our game portfolio, but also provides sustainable growth with games that focus on greater audience engagement. Our stable performance this quarter were a demonstration of our All-Star strategy, mainly driven by the continued popularity of a number of our important games, namely Dragon Nest, Mir II, Woool, Maple Story and Aion, along with our recent launch of Hades Realm 2.

Of significant notes, our recently started beta-testing of Legend of Immortals demonstrates the strength of our pipeline and our ability to release hit games well into the future.

The breadth and the depth of Mir II series, Woool series and our more recent Dragon Nest continues to be massive with enriched content and better interaction. The revenue from our robust game portfolio continues to diversify with Mir II, Dragon Nest and Woool contributing 37%, 18% and 16% of total revenue in the first quarter respectively.

To sustain our leadership, we'll continue to implement a four-pronged approach for sorting the game we believe are of the highest quality. This includes licensing state-of-art foreign-developed games, leveraging our outstanding R&D capabilities for in-house games production, investing and acquiring platforms and game development studios which also boost our R&D capability and our unique platform approach.

This four-pronged approach has allowed us to build an enviable game development pipeline for the coming years as well as sustained and continual adding to leverage online communities. Supported by our experienced talent pool and analyzing capabilities, we're continuing to optimize our pipeline for future releases.

We expect that in few years that only a handful of successful games launched in China will be able to generate the vast majority of the industry profits. And with our exciting pipeline, supported by our unique platform, we are confident in the popularity of our future games.

On May 16, we began open beta-testing of Legend of Immortals, a highly-anticipated MMORPG developed by our own in-house studio. The widespread of the novel Xing Chen Bian, this game already is building name recognition.

Sudden Attack and Point Blank are two highly anticipated first person shooters we have licensed for our operations in China and are slated to begin beta-testing later this year.

Furthermore, we have secured the right to operate FINAL FANTASY XIV and Dragonball Online, which are currently undergoing customization and are expected to launch early next year.

We also have several in-house developed MMOs in the pipeline, which we'll start closed beta-testing of World Zero beginning of next year. There is also another action MMORPG based on our Unreal 3 Engine and the development now.

As you can see, we're confident that our rich pipeline of games will continue to attract players as they gravitate towards the very best in entertainment experience.

Our All-Star is at the core and will expand to other emerging platforms and regions of the world in the near future.

Moving on to All-Platform, based on our All-Star strategy, we have begun providing our users with new social functions that's been across the entire Shanda Game portfolio. We have opened a new chapter by turning online games into open social networking platforms. In addition to building the China's first social community to fully integrate with MMO games, we are linking our platform to surpass the social network service.

This near feature we will allow gamers to share their status and in-game achievements with friends in real time by connecting them to social communities and to third-party websites such as Sina Weibo and Renren. No longer will gamers be socially isolated in a game or in the platform they are using. Instead, they will be instantly connected to each other. Regardless of what game or SNS site are logged into, players will be able to communicate in real time.

Furthermore, the building of social communities or what we call the communitization of game will increase the social aspects of our games by engaging gamers with social network games or SNGs and other applications developed by third parties.

To go a step further, the experience points or items gained from playing certain games or from interaction in the communities can be used in the MMO games, making the connection between communities and the games even closer. This has already proven to be an extremely popular feature with over $3.5 million registered accounts of SNS of Legend of Immortals by the end of the first open testing.

Although we have started with Legend of Immortals, we plan to build communities for other MMO games and eventually build a single cross-game community which will be fully opened to third-party platforms and applications.

Meanwhile, we are looking forward to establishing a social game community based on mobile platform. I think what we have created for the PC, we will eventually unify this (inaudible) the community bring people from all over the world. (inaudible) alongside this communitization of our games, we have begun developing social games. We believe that over time, gamers who began playing social games will begin demanding higher quality and increasingly interactive games.

With our expertise in the MMO field, this will play to our advantage. We are focused on developing advanced social games which provide enhanced graphics and in-depth content. On the other hand, we see great potential beyond the PC platform especially to mobile or tablet platform. We believe that mobile gaming market will outgrow the PC market in the next couple of years, leaving room for rapid growth. The mobility of tablets and the cell phones creates an even greater significance with games becoming accessible anywhere, anytime.

Our experience in creating MMO games, by the same token, provides us with a competitive advantage as we believe people who play mobile games now will eventually demand games with higher quality and increased interaction.

The current model for publishing mobile games is pay-to-download. We believe this model will become less important over time and transform to a free-to-play and item-based model which can provide a higher quality game for the users and a greater revenue of potential for us.

Our first in-house developed social game is set to be launched early in the third quarter of this year. We plan to launch a total of more than 10 social games and mobile games this year. Moreover, we hope to leverage most immediate to grow user base of over 150 million monthly unique players to expand our user base with the enormous potential in the booming mobile and social game categories.

As you can see, scale is vital with this initiative, and all different types of small, large, casual and MMO games contribute to our (inaudible) under our All-Platform strategy.

Finally, I'd like to cover our region. We intend to capitalize on our success in China by expanding our All-Platform strategy abroad to all regions. We currently export to over 49 countries and regions globally and are committed to further exploring opportunities abroad as wee see the potential to increase the revenues exponentially overseas.

As of the first quarter, overseas revenue increased 35% quarter-over-quarter and 46% year-over-year to $10.2 million.

We expect Dragon Nest, Hades Realm 2, Luvinia and Fengyun Online to be launched overseas during the second half of 2011. Following up, Legend of Immortals has been licensed to Korea, Taiwan and Vietnam and is expected to launch in the near future.

Aside from licensing games to market outside China, we're establishing global service platform, which will cater to Greater China, America, Europe and Southeast Asia. It will not only allow us to begin operation games and servicing global markets, but will also serve as an important basis to develop our business globally.

In addition to licensing or operating in-house game abroad, we are also looking for opportunities to publish other high-quality licensed games abroad in order to expand our global business.

Along with our All-Star and All-Platform strategies, we are planning on launching our diverse portfolio of games, including MMO, social games, mobile games and web games abroad to capture global market.

To conclude, our Triple-A strategy, which will take our All-Star games and allow us to seamlessly expand to various platforms and regions, has continued to pave the way for our sustainable growth.

As our revenue sources diversify with our strong 2011 games pipeline, we are confident that our unique experience in platform operations and game development expertise will allow us to continuously adapt to the growing global online gaming market.

Thanks to our own growth of social networks and continuous online growth of social network and mobile platforms, the number of global online gamers is growing quickly. We're ready to leverage the experience and the talent we have accumulated from operating and designing MMO games over the past 10 years to enter this rapidly developing market and to create a remarkable gaming experience for gamers across the world.

With that, I would like to conclude my remarks and turn the call to Richard.

Richard Wei

Thank you, Alan. Our full earnings release with financial statements is available on our website as well as most major financial portals. I would now briefly review the highlights of our Q1 results and provide an outlook for the second quarter of 2011. We will take questions afterwards.

In Q1, our net revenues increased 8.7% quarter-over-quarter and 9.6% year-over year to RMB1.253 billion, equivalent to $191 million. You see in the company's previous guidance of a 5% to 7% sequential growth. The strength was mainly due to the growing popularity of Dragon Nest, the stable performance of Mir II and Woool and the strength of other important games such as Aion and Maple Story in Q1.

Net revenues from MMORPGs operated in China were RMB1.093 billion, equivalent to $167 million, representing an increase of 5% quarter-over-quarter and 8.8% year-over-year. Active paying accounts for MMORPGs increased 4% sequentially to 9.85 million and ARPU for MMORPGs increased 1% to RMB37.

Net revenues from advanced casual games operated in China were RMB93 million, approximately $14 million, up 49% quarter-over-quarter and flat year-over-year. The strong quarter-over-quarter increase was primarily due to both stronger seasonality for advanced casual games in Q1 and the launch of a large expansion pack for one of our major advanced casual games, Maple Story, in Q1. As a result, APA for advanced casual games increased 22% quarter-over-quarter to 0.91 million and ARPU increased 23% quarter-over-quarter to RMB33.9.

Other revenues, which primarily includes overseas revenues from game operations, game licensing and advertising were RMB67 million, approximately $10 million, up 35% quarter-over-quarter and 46% year-over-year.

Gross margin in Q1 was 60.8%, same as Q4 of last year and up from 59.0% in Q1 of 2010. Non-GAAP gross margin was 62.1% in Q1 compared with 63.4% in Q4 and 60.5% in Q1 of last year. The non-GAAP calculation excludes the impact of share-based compensation, amortization of acquisition-related intangible assets and the related income tax effects.

Operating income increased 7.8% quarter-over-quarter and decreased 7.4% year-over-year to RMB350 million, equivalent to $53 million. Operating margin was 27.9% in Q1 this year compared to 28.2% in the preceding quarter and 32.1% in the same period last year.

Non-GAAP operating income was up 6.5% quarter-over-quarter and 0.5% year-over-year at RMB416 million, equivalent to $63 million. Non-GAAP operating margin was 33.2% in Q1 compared with 32.9% in Q4 and 36.2% in Q1 of last year.

Net income was RMB313 million, equivalent to $48 million, down 15% quarter-over-quarter and 5% year-over-year. The quarter-over-quarter decrease was primarily due to a decline in government financial incentives which totaled RMB33 million in Q1 this year compared to RMB125 million in Q4 last year and RMB36 million in Q1 of last year. Obviously, the government subsidy is subject to time lag and inconsistent government administrative practices relating to timing of payments. The company expects to continue to receive government subsidies in the second quarter of this year.

Earnings per diluted ADS were RMB1.1, equivalent to $0.17, compared with RMB1.3 in Q4 last year and RMB1.14 in Q1 of last year. Non-GAAP net income totaled RMB369 million, equivalent to $56 million, down 13% quarter-over-quarter and up 2% year-over-year. Non-GAAP earnings per share diluted ADS were RMB1.3, equivalent to $0.20, compared with RMB1.14 in Q4 last year and RMB1.24 in Q1 last year.

Turning to the balance sheet, the company's cash and cash equivalents, short-term investments, restricted cash and time deposits, net of loans were RMB3.188 billion, equivalent to $486 million, at end of Q1 this year compared with RMB2.979 billion at the end of last year.

I'll now turn to guidance for Q2. As Q2 is normally a weaker season with fewer holidays, we expect our revenues in Q2 to grow approximately 45% sequentially. We expect our non-GAAP operating margin, excluding the impact of share-based compensation, amortization of acquisition-related intangible assets and related income tax effects, to be approximately flat from the Q1 level.

Share-based compensation expense in Q2 is projected to be approximately RMB33 million to RMB40 million. We expect to book approximately RMB10 million to RMB20 million in government subsidies in Q2.

That concludes my discussion. I would now turn the call back to Ellen.

Ellen Chiu

Thank you, Richard. We will now take your questions.

Question-and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jin Yoon with Nomura.

Jin Yoon - Nomura

A couple of questions on your guidance. First of all, the 4% to 5% guidance that you gave, how much of that is incremental to the new game launch like Legend of Immortals? And did Legend of Immortals contribute to any incremental growth to the Q1 number?

Alan Tan

Well, the Legend of Immortals is for launch in Q2. So it didn't generate any revenue for Q1. And for Q2, it's a rich season for casual games. And for MMOs, that have a younger age of the player. So the revenue increases have a lot of contribution from Legend of Immortals. However, Legend of Immortals is only at an early stage of commercialization. So I believe that we'll have more increase both in actual users and revenue.

Jin Yoon - Nomura

In terms of some of the key metrics surrounding Legend of Immortals, can you give us some kind of range in terms of APAs associated just with Legend of Immortals or ACUs or PCUs, just so we can kind of put a handle on or put our arms around how big this game is right now?

Alan Tan

We have a policy that we would not disclose single game's PCU or APA. But based on the performance of the game, I can say that for the region-based operation, the revenue of Legend of Immortals is already at top five in all the operational and commercial games.

Jin Yoon - Nomura

Regarding your pipeline of games, can you give us kind of better timeline or timeframe in terms of some of the newer releases such as Sudden Attack or Point Blank in terms of how those games are progressing in terms of getting the government approval or finishing out the closed beta-testing, or can you give us some timeline in terms of how we should forecast some of these upcoming launches?

Alan Tan

With our schedule, we will launch Sudden Attack in the third quarter. Also, we will launch the testing of Bubble Fighter at the end of Q3. We have these three very important titles we'll launch in Q3 for open testing.

And we also have Point Blank I believe we will before the end of this year and other games we'll have very important sales packs. For Aion, we'll have 2.5 in Q3. And also, Mir II and Woool, we'll have very important expansion packs in the second half of this year.

Operator

Our next question comes from the line of Timothy Chan with Morgan Stanley.

Timothy Chan - Morgan Stanley

In the opening remarks, you mentioned about the social mobile games to be launched in the second half of this year. Could you please give us more color on the social elements in those games, and what are the key differences between the social element as well as the more traditional MMORPG that you have? And then how should we think about the potential monetization on those sorts of elements?

Alan Tan

We can separate this question into two parts. One is communitization for our existing and future MMORPGs. That's what we do for open social network for each MMO. But eventually, there will be a collective and unified community for them. And this community has very common social network features, and also it's open to connect to other popular social networks like Weibo, Renren, Facebook and Twitter. And based on these open net, we can ask third-party developers to develop social games and applications for the same community and also for games.

In that sense, we can open the games to third parties and allow other developers to develop tools or mini games for the MMO in order to expand the game site.

So for the revenue side, I believe that as long as we provide better experience for users, we'll provide more games inside of the MMO games and we'll provide better tools to heavy user to have a better gameplay experience, I believe we'll have more revenues generated from the community and from the third-party content.

To open that for the community to connect to either social networks will help us to attract more new users from the social networks and to help our players to have better connection to their friends even if they do not play this game, but they may like to share their ideas, their happiness of the game to their friends. And I believe that will help us to potentially have a bigger audience and have a better business for the players. That's first part, communitization.

And the second part that we'll develop new social games and new mobile games. Now, we believe that as the time goes by, the social networks will have a lot of social games players, and they will not only assess it whether it's simple graphics and very simple gameplay, they will be willing to play more in-depth games and have a better graphics and interaction.

Most of these are focused on advanced social games that have a bigger borderline, have a bigger community inside of games and have an in-depth game content. Also, we'll have much better graphics. So our social games will be released one by one later this year.

And then we have our first social game launched in Renren.com in region-based for beta-testing. And that's just a further trial of our social games, and we'll have more in the future.

And for mobile games, we will have a similar situation. There is a lot of very good games in the mobile gaming market. And with this model, we'll shift to first-to-play and item-based model. And the social features will include the community behind the game. And also, users can exchange the items, exchange their weapons in the communities and they will have a bigger economy system inside of game. So that's much like an MMORPG. However, we will focus on the easy-to-play feature in the mobile phone. But the fragment of the gameplay time, that will change the gameplay.

Based on the change, we will adopt many systems to develop from MMORPG and we will release social mobile games in the second half. As you are aware, we have launched the first one. The IP has come from our popular (inaudible). We will launch Latale, Fengyun in Q3 for the beta-testing. We will also have other mobile games that are based on our popular IP release in the second half of 2011. That's our plan.

Operator

Our next question comes from the line of Eddie Leung with Merrill Lynch.

Eddie Leung - Merrill Lynch

I have a couple of questions. The first one is on the marketing expenses. Given the timing of some launches in the upcoming a few quarters, could you guys share with us how should we see the fluctuations of marketing expenses in the upcoming few quarters? Should we expect any spike in any of the quarter?

And then my second question is on your licensing. Have we sent any overseas licensing in the second quarter? And then finally, I'm sorry I missed the contributions of our Dragon Nest in the first quarter. If you guys don't mind, could you repeat that?

Richard Wei

Dragon Nest was approximately 18% of revenue in Q1. Regarding the marketing expenses in later quarters, I think our goal is to maintain the marketing fees at about approximately 5% of revenue. But when you have new game launches, sometimes you may exceed that by a little bit if it's necessary. But in general, I think that's kind of the range we should be looking for.

But that's only one component of the total sales and marketing expenses. In that line item, you also have expenses incurred by Shengfutong which distributes the prepaid cards for us and sales and marketing staff salary expenses and all that.

Eddie Leung - Merrill Lynch

Richard, just about the licensing in the same quarter, have we done any licensing for some of your games in the second quarter?

Richard Wei

Do you mean licensing out?

Eddie Leung - Merrill Lynch

Out, yes.

Richard Wei

I think we licensed Legend of Immortals to Korea, Taiwan and Vietnam.

Eddie Leung - Merrill Lynch

Is that in the first quarter or the second quarter of the prepayment?

Richard Wei

Well, normally I do not recognize the license fee as revenue until the game goes into operation at the license level.

Operator

Our next question comes from the line of Lisa Yuan with Goldman Sachs.

Lisa Yuan - Goldman Sachs

I have a follow-up on Legend of Immortals. I understand you have a very strong opening on this game. Could you talk a little it about the latest trend of the game? And does the management feel the pressure to sustain the game given it's in a highly competitive segment? Secondly, could you talk about the latest trend of your last three games?

Alan Tan

Legend of Immortals has exceeded our expectations in our launch period, and we have a continued marketing plan to attract more players. Especially, we have launched in July and have another very important marketing event. So we see the trend that the actual user is in the increasing trend. And also, with our social network for Legend of Immortals, we have showed the power that the users are more active in the community. And the turn rate is going down based on our communities. And also, Legend of Immortals is a 2D game, and it's very popular especially for second and third-tier cities.

So as you can see, our first launch is mainly point to the first year series, but we have other plans to expand our user base to more deeper second and third-tier cities. So we are seeing the trend that there are more users into the game and also a bigger community in the game.

Lisa Yuan - Goldman Sachs

My second question is related to the latest trend on your last three games, Mir franchise mainly.

Alan Tan

Mir II and Woool are stable in Q1. And I believe they've had this trend this year. We believe that the new expansion packs and the new summer groups will attract more new users for the game.

So for longer term, I believe the game will attract more active users.

Operator

Our next question comes from the line of Wendy Huang with Royal Bank of Scotland.

Wendy Huang - Royal Bank of Scotland

First, can you clarify that revenue contribution from your World of Legend in Q1 in aggregate was just 36%?

Richard Wei

37% is Mir II and its direct titles. 16% is World of Legend series.

Wendy Huang - Royal Bank of Scotland

And secondly, I noticed that your deferred revenue increased very strongly by 36% sequentially. So I just wonder if your 4% to 5% sequential growth guidance for the revenue was too conservative and what has caused that deferred revenues at the quarter end?

Richard Wei

We have some promotions towards the end of the quarter, and I think some of the money that was into the accounts was not fully spent. And so that's why you have deferred revenue going up.

Wendy Huang - Royal Bank of Scotland

But that deferred revenue was mainly related to which games pre-booked revenue?

Richard Wei

It's not in one single game. It's in multiple games.

Wendy Huang - Royal Bank of Scotland

My final question is more at a strategic level. You just mentioned that you have All-Star strategies, including the All-Platform and also All-Regions. I just wonder if you will consider to add All-Age to your strategy and also to expand into the shooting game segment, because we have seen some players in the industry who are operating some great games like the (inaudible). So will you consider to broaden your gamers' target age and develop more such type of games?

And also, you mentioned that you are looking to expand to some emerging regions and also U.S. and Europe. So what's your overseas revenue target in the three years' time?

Alan Tan

First, you mentioned our age. Actually, we always balance with our business. We think our pipeline will cater 7 to 70 age people. And now we have games for different segment of the user. We have very mature audience, games like Mir II. We also have games fit for younger players like Dragon Nest and the Maple Story.

We are developing new series of casual MMOs that cater to more casual and may have some education functions within our games that fit to younger users. We acquired flash casual game that will have a lot of users that are mainly young students. This game is very healthy and very sharp.

In terms of will we expand to all platforms, we believe social games and mobile games will help us to attract more casual players.

Wendy Huang - Royal Bank of Scotland

I guess most of the existing games are targeting gamers' pockets directly. Those games I just mentioned like (Rakuten Gun) or the (inaudible), they are actually targeting the parents' pockets. So do you have any plan to develop games targeting the parents' pockets?

Alan Tan

We are developing a project that I believe has a similar approach. But it's not same to (inaudible). You have a better community inside. You have a better game play and also has more content beyond the games and have more educational functions inside.

Wendy Huang - Royal Bank of Scotland

Your overseas revenue target in three years' time?

Alan Tan

We have licensed our game to 49 countries and regions. And a big portion of the revenue is coming form Asia, especially Taiwan, Korea and Japan. So based on our MMORPGs series, our revenue will grow mainly in Southeast Asia and East Asia. And based on our new JSP plan we have set up before, are going to work, especially in Singapore, Southeast Asia and America, Europe and Greater China.

So for the new games, we will launch especially for the social games. I believe we'll have a better market share form America and Europe.

So we imagine in three year, I believe that's mainly the revenue we will generate form Asia. But starting from America and Europe, the revenue share will increase rapidly.

Wendy Huang - Royal Bank of Scotland

So is it reasonable to accept overseas revenue, including (inaudible) revenue to exceed 20% of your total revenue in three years' time given you are doing so many things right now?

Alan Tan

I think that would possible. In Q1, we were about 5.4%. So I think by end of the year, we should be somewhere in the high single digit range. I think if you talk about three years, that's already pretty long. And I think getting over 20% should be possible.

Based on the numbers were we could get, where the highest overseas revenue will come from China online game market.

Operator

Our next question comes from line of Dick Wei with JPMorgan.

Dick Wei - JPMorgan

My first question is on the social games. I guess you earlier mentioned that it will be one of the initiatives. And I wonder in general of how much efforts do you plan to spend on social games, meaning how much headcount will be allocated in the area? And also, how should I look at the R&D efforts per game? For example, how many people and how long time will be dedicated to one particular game on average?

Alan Tan

Well, social game is very important to our strategy. I believe we mentioned we will (inaudible) into social games, including MMOs and casual games. All we can say in our games, we have special features and both inside a game plan and outside of game to the community. So we'll no longer develop the game without a social function.

So we'll talk about the investment in the social game field. We are separate that into different parts. That's modify the existing game and develop new game in-house. And also, we will apply (inaudible) company that it can provide the R&D capability or publishing channel and the platform. So I believe that's where our major investment in the near future will be.

Dick Wei - JPMorgan

So if I look at a single social game, how much effort will you be putting into some of this pure social games, new social games?

Alan Tan

Actually, a social game contains a wider range for different games. Also, we will develop more complex social game that may have 20 or more people in the R&D team and take a longer time, because the game has better graphics and gameplay and the game itself can be a standalone game, but also it can be integrated into social networks.

So for the bigger phase, you can say it's similar to our MMORPG. That's quite an advanced game. But we will continue to have this combination of both simple, but very interesting social games and more complex, more bigger and more advanced games.

Dick Wei - JPMorgan

My second question is basically on the ARPU trend for Legend of Immortals, if you can give some sense? How is it relative to other and how will it trend?

Alan Tan

Well, Legend of Immortals is just launched couple of days before. So it's far from stable now. And for ARPU, it's in the early range. It's not very high. Our main focus is on expanding the user base and expanding the virtual economy system within a game. So the upper level is not high now. And we believe that along with our expansion of the user base and more content we'll develop for the users, will stay at the proper level. That's where we believe we still have a very big room for us to grow.

Operator

Our next question comes from the line of Paul Wuh with Samsung Securities.

Paul Wuh - Samsung Securities

I also have a question on your social networking games. You mentioned that you'd be on these other platforms such as Renren, QQ and others. I guess you would be operating as a third-party developer on these sites, is that correct? Would you be on your own site? When you say that you'll be on Renren or QQ or Weibo, you would be like a third-party developer on those sites?

Alan Tan

Yes, on their sites, we are third-party developers and operators.

Paul Wuh - Samsung Securities

Could you give us an idea about what type of revenue share agreements you have with like QQ, Weibo? Is it different from site-to-site, or is it like a 70-30 type of a split, or what type of revenue-sharing you have with these different sites or is it different by site?

Richard Wei

It varies from site-to-site.

Paul Wuh - Samsung Securities

For example, like QQ's site, what kind of a revenue share do you get?

Richard Wei

I can't give you the specifics, but I think it's not 70-30.

Paul Wuh - Samsung Securities

There was a question about overseas revenues. For this particular type of either social or mobile gaming, what percentage of the revenues do you expect that to bring in the next year or so?

Alan Tan

Well, we have an internal target for social games and mobile games. We expect social games and mobile games have a meaningful contribution to our total revenue. That may be around 5% at the end of next year. That's our internal plan, but we hope that's based on our developed R&D and also maybe acquiring. That's the way we hope to exceed that target.

Ellen Chiu

Thank you everyone for joining us today. If you have any further questions, please feel free to contact us. Have a nice day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.

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