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Giant Interactive Group Inc (NYSE:GA)

Q2 2011 Earnings Call

August 8, 2011 9:00 PM ET

Executives

Richard Chiang – IR Manager

Eric He – CFO

Jazy Zhang – CFO

Analysts

Thomas Cheng – RBS

Timothy Chan – Morgan Stanley

Gary Ngan – UBS

Mark Marostica – Piper Jaffray

Vincent Sun – Mirae Asset

Chao Wang – Bank of American Merrill Lynch

Andy Yeung – Oppenheimer

Adam Krejcik – Roth Capital

Operator

Good morning and good evening, ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group Second Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background nose. 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’d like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Manager of Giant Interactive.

Richard Chiang

Good morning, ladies and gentlemen. Welcome to the second quarter 2011 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, President; Mr. Eric He, Chief Financial Officer, and Mr. Xuefeng Xi, 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. Xi 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 historically in nature constitute forward-looking statement 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, intend, plans, believes, estimates, and other 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 states 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 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 17, 2011.

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, our Chief Financial Officer.

Eric He

Thank you, Rich. Good morning and good evening, everyone. Thank you for joining us today. We delivered another quarter of sequential growth both operationally and financially, supported by our segmentation strategy and continued development of our pipeline. Our results continue to benefit from strong performance of ZT Online 2, which commence official closed beta testing in April 2011 and deliver a PCU of more than 300,000 for the second quarter.

We launched some marketing initiative in support of ZT Online 2 in the second quarter and are very pleased with the response from gamers thus far. We remain confident in continued growth potential of ZT Online 2, as we enter the second half of the year.

In addition to ZT Online 2, we continue to attract both new and returning experienced gamers through the rather ZT Online family of games, including ZT Online, ZT Online Classic Edition, ZT Online Green Edition. Through constant update and additions of new features, we are successfully keeping gamers engaged, which in term has helped support our steady improving operational metrics. We also continued to make progress on our new game pipeline including both self-developed and license games, and expect certain gains to reach key development milestone in the second half of the year.

As a result of our improving operating and financial performance we are happy to announce a significant special cash dividend of $3 per share in light of current capital market environment facing all U.S. listed Chinese companies we believe this special dividend provides a clear demonstration of our confidence in underlying strains of our business and allowed us to provide a significant return of capital to our loyal shareholders. Even after payment of this special dividend we will continue to maintain a strong debt free balance sheet with approximately $238 million or approximately $1 per share in cash and cash equivalents. Free cash flow also continued to remain strong leaving us well positioned to fund future growth opportunities.

With that, I will move on to our key operational metrics on slide six. Total active paying accounts or APA grew 12.1% sequentially and grew 39% year-over-year to 1.984 million. Average revenue per user or ARPU was RMB212, down 2% over last quarter and down 5% over second quarter 2010. Average concurrent user or ATU was 654,000 or 11.6 sequential increase and 2.4% decrease year-over-year. Peak concurrent user or PCU was up 10.8% sequentially or up 28.1% year-over-year to 2.112 million.

The sequential increase in the most of our key operating metrics again highlights the success of our segmentation strategy and as mentioned the growing popularity of ZT Online 2 and continued health of our ZT Online franchise in general. The growth in APA shows that we are succeeding in attracting a broader base of paying users through our games. By expanding our paying user base, we are tracking players with various spending habits. While result in a sequential and year-over-year – year-on-year decrease in ARPU, we believe it is indicative of more diverse user base and healthier growth profile. We believe these trends are sustainable, as we continue to update our existing games and ramp up our new gains, including ZT Online 2.

Our solid operating metrics have again allowed us to deliver healthy financial results, as seen on slide seven. Net revenue for the quarter was $67.5 million, presenting 8.2% increase from the first quarter 2011 and 35.6% increase from the second quarter last year. Our core online games revenue grew at 10.4% sequentially.

For the second quarter, other revenue was $1.9 million compared to approximately $2.2 million in the first quarter 2011, $307,000 in the second quarter 2010. Year-over-year increase in other revenue was attributable through the first-person shooter demo we developed as a result of government grant. As we have received a large portion of payments for the project in the first and second quarters, other revenue is expected to decrease in the third quarter.

Gross profit for the second quarter 2011 was $57.7 million, representing a 9.5% sequential increase and a 35.7% year-over-year rise. Gross margin of 85.5% was up from 84.4% in the previous quarter and flat compared to 85.4% in the second quarter of 2010.

The total operating expenses for the first quarter 2011 were $18.1 million, an increase of 28% sequentially and increase of 24% – 24.1% year-over-year. The sequential increase was mainly due to the increase in marketing campaigns for ZT Online 2.

R&D expenses increased 12.8% sequentially, 79.4% year-over-year to $9.2 million in the second quarter. The sequential increase was due to bonuses accrued to ZT Online series and ZT Online 2 developers, while the year-over-year increase was due to an increase in headcounts and the staff compensation.

Sales and marketing expenses were up 60.1% sequentially and down 11.7% year-over-year in the second quarter to $6.2 million. Sales and marketing expenses increased sequentially as we launch marketing campaigns for ZT Online 2 during the quarter, while the year-over-year decline was due to more efficient control of our sales and marketing costs.

General and administrative expenses increased 15.9% from last quarter and 6.7% from second quarter 2010 to $4.2 million. The sequential and year-over-year increase in G&A expenses were mainly caused by the relocation of new office building and related maintenance expenses.

Net income attributable to the company’s shareholders in the second quarter decreased 96.1% sequentially and 94.5% year-over-year to $1.6 million representing a margin of 2.3%. The decrease in net income resulted from the significant increase in income tax expenses in the second quarter due to a one-time withholding tax associated with repatriation of cash for the special cash dividend. Excluding non-cash share-based compensation and one-time withholding tax on the special cash dividend, non-GAAP net income attributable to the company’s shareholders was $42.5 million, a 2% increase sequentially and 42.2% increase year-over-year.

Non-GAAP net margin was 62.9% for the second quarter 2011 compared to 66.8% in preceding quarters and 60% in the second quarter 2010. Basic and diluted earnings per ADS for the second quarter 2011 were each $0.01, but $0.18 on a non-GAAP basis which exceeds Street Consensus estimates.

Moving to our balance sheet, as seen on slide nine, as of June 30, 2011 cash, cash equivalents and short-term investments totaled $807.4 million, a decrease from March 31, 2011 mainly attributable to the payment of our annual cash dividend and a commitment in April 2011 to invest $148.3 million in a privately held insurance. Due to regulatory and other considerations we have transferred this investment commitment to a company owned by our Chairman and CEO, Mr. Shi for a purchase price equal to the full amount of prepaid investment commitment plus accrued interest during the commitment period.

Wrapping up our financial analysis we believe that we are making steady progress on all fronts. Despite an increasingly competitive environment we remain confident in our ability to maintain our positive momentum in the second half of (inaudible). Our positive outlook is due in part to continued progress we had made on our growing portfolio of innovative and engaging games including the success today of ZT Online 2 with further value driving opportunity expected in the second half. We remain confident in the long-term prospect of our pipeline.

Looking at the recent progress, we continue to make a number of enhancement and upgrades to ZT Online Series of games during the second quarter to keep player engaged including the long term new features in ZT Online to commemorate the games fit in anniversaries.

In addition, we launched new expansion pack for ZT Online Classic edition introduced new game play functions, similar enhancements were introduced to ZT Online Green edition and we plan on launching new expansion packs for both ZT Online and ZT Online Green edition in the third quarter.

As noted, we launched of official close beta type test while new flagship game ZT Online 2 on April the 8th 2011 with positive game player feedbacks it’s PCU reach more that 300,000 during the official close beta test, a result which is especially not worthy given the competition from other new games in its marketplaces. We continue to add new game play features and our fine tuning previously introduced functions, we planned to initiative open Beta test in September.

Moving to Giant Online we release a new space thing expansion pack which incorporated a number of new game play features and also introduced a series of Chinese (inaudible) activities during the quarters. As far as the Giant years, we’ll continue to develop new functions and activities to keep gamers engaged in the game. We also added additional features to XT Online in a effort to improve all over game play experience trying to begin open beta testing in the third quarter, localization is also currently underway for MMO version of XT Online.

Also in the second quarter, we introduced new game plays elements for the Golden Land, which remain a popular web game in Taiwan and Japan. The Tai version was launched in June 2011, and Korean, U.S., European versions are expected to enter big open beta testing in August. Localization is underway for Spanish, Turkish and Russian versions. With closed beta testing for those regions expected to commence in the third quarter 2011, the widespread licensing of Golden Land is a testament to our effort to expand it internationally through partnership and licensing agreement, and we look forward through the continued development of this game.

We also continue to make progress on the Spirits of Warriors, our newly self-developed 3D MMORPG. Based on the Three Kingdom period in ancient Chinese history, we initialized engineering testing in May 2011 and expect to begin a new round of engineering testing in the third quarter of 2011. Both our licensed game will reach new milestone in the upcoming quarters. With our store enter into a new round of engineering testing during the third quarter, Allods Online expected to enter into preliminary engineering testing in the third quarter of 2011, following extensive translation and localization for the Chinese market.

The continued improvement in our operating and financial performance together with strong performance to-date of the ZT Online 2, underpin our policy outlook for the third quarter. Although we expect other revenue to decrease in the third quarter, given the growing popularity of the ZT Online 2, we expect to deliver continued top line growth in the third quarter.

That concludes the prepared remarks. Before moving to Q&A I would like to comment on the announcement issued this morning on my departure from Giant and the appointment of Jazy Zhang as the CFO. It is a certainly a bittersweet day for me as it has truly been a pleasure working together with the rest of Giant team. These past 4.5 years, to solidify Giant’s position as the leading online game company in China.

While we have faced challenges along the way our recent performance demonstrates underlying strength of fundamental business model and strategy. I know that I’m leaving Giant in a period of growing momentum. I am pleased to handing my responsibility over to Jazy Zhang who brings Giant a wealth of experience in various senior level management finance and accounting roles having most recently served as a people of a pre-IPO online gaming company. I had a pleasure working with Jazy recently during a handover process. I know she wills serve the company and investment community well. Jazy?

Jazy Zhang

(Inaudible) for the final words. I am honored to take over your duties during this exciting period of time for Giant. I look forward to helping the company to maintain its recent positive momentum and continue to grow in the long-term.

Eric He

Thank you, Jazy. Once again thank you for joining us today. We are now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Thomas Cheng with RBS. Please proceed.

Thomas Cheng – RBS

Hi, good morning, everyone. Congratulations on a strong quarter. I have a couple of questions. The first one is; can you guys talk about the open beta testing for ZT2 in September next month, and also the market expense which are likely to incur in the third quarter? That’s all, and I have follow-yup. Thanks?

Jazy Zhang

(Foreign Language)

Eric He

(Foreign Language)

Jazy Zhang

For ZT Online 2, we commenced official open beta testing in April, and over the past couple of months we have received a lot of good feedback from players and judging by the performance user numbers and other metrics, that evidence as one of the best new games in the marketplace so far this year. And our team has been working very hard to enhance the features of the game and the constant of the game based on player feedback in order to prepare for the open beta in September. And for the marketing expenses, as you can see in the second quarter when we launched official closed-beta testing, we controlled marketing expenses with an appropriate range compared to the whole company’s financial and I think we’ll be able to do the same for the third quarter as well.

Eric He

(Foreign Language)

Richard Chiang

Also commenting on the sales and marketing expenses and sales and marketing strategies, we have been trying or testing new ways to market our content, our games such as using avenue such as Way-Bwah, which is microblog service in China, social networking websites, or online video sites. We have achieved a lot of good results using these avenues. So, for the open beta test in September we’ll continue using these and exploring a new ways to market the game.

Thomas Cheng – RBS

Thanks. I have a second question. It is about the SPS game that you have mentioned in the prepared remarks, could you give us some color about FPS game and the timeline that it would be launched is it going to be this year or next year? Thanks.

Jazy Zhang

(Foreign Language)

Eric He

The current project is first-person shooter game that was commissioned by the Chinese Military for their own use. But our development team is currently working on a consumer gamer online version and it’s scheduled to come out probably the end of next year.

Thomas Cheng – RBS

I see thanks. I’ll get back to the queue.

Operator

And your next question comes from the line of Timothy Chan with Morgan Stanley. Please proceed.

Timothy Chan – Morgan Stanley

Good morning. I’ll start with new Mr. Xi and Rich and thanks very much for taking my question. And first of all let me congratulate on a very strong on second quarter results. My first question is related to ZT Online 2, may I again understanding of the in-game game and trading activity on ZT Online 2? Are we seeing more gamers trade that virtual item because they are now multimillion with the in-game trading module? And are relating to that will there be any up sight to the commission rate that ZT Online 2 is charging for the commission and how should we think about the ARPU trend? And I have a follow up question.

Thomas Cheng – RBS

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

For ZT Online 2, as you can see its been one of the best new games in the marketplace over the past two years demonstrating that it’s been a very successful game especially in terms of the new in-game economy which we call it the third generation in-game economy. So as you said, like you said, the trading is a very common phenomenon in the game. On a daily basis, when we have excess amount of number of concurrent user we have huge amount of trading activities in the game as well.

Timothy Chan – Morgan Stanley

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

(Inaudible) is still under official closed beta testing, so our internal goals are still to try to ramp up or build the user numbers, not to try to raise monetization too aggressively but there would be room for monetization to grow in the future.

Timothy Chan – Morgan Stanley

Thank you. My second question is related to the payment of special dividend, I just want to get a sense that after the payment is the policy on the regular dividends do in place?

Jazy Zhang

Can you repeat your question, you mean the insurance company – can you repeat your question Thomas please.

Timothy Chan – Morgan Stanley

My question is that related to the special dividend after the special dividend I mean the policy of regular dividend will be in place again?

Thomas Cheng – RBS

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

Currently, our Board of Directors has no plans to change our annual dividend policy.

Timothy Chan – Morgan Stanley

Thank you.

Operator

And your question comes from the line of Gary Ngan with UBS. Please proceed.

Gary Ngan – UBS

Thank you very much for taking my question. Just quickly on your thoughts about the overall gaming market, so I guess right now there is a lot of social, new social game development and also there is a lot of new social game players in the market probably growth is exceeding that of the MMORPG players. So does Giant have any specific plans to develop more social networking games or maybe acquiring some of these R&D teams out there, just want to get your overall sense of this part of the market and how do you think it is a declining part or do you think it is relatively too small for the company to enter into any thoughts would be appreciated thanks.

Timothy Chan – Morgan Stanley

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

For the overall online game industry, we obviously have a very positive outlook on the industry as a whole. Currently the MMO is still the biggest and most profitable type of game, but social and mobile games are growing faster. So both are very good directions for us to move into. Starting from 2009, we’ve began developing and investing in web games, and so far we’ve had some very positive business such as the launch of Golden Land, our first web game. We currently have two or three other projects in development for social games or web games and we’ve also been investing in social networking websites and so – or platforms, so we’re going to keep monitoring the progress and development on these fronts.

Gary Ngan – UBS

If I may I want to ask one more question on ZT2, it’s related to the demographics of the player base, so I guess this could be a bit complicated. But from your observation, what are these players that who actually play? And are they typically heavy spend in traditional item-based games or are they relatively low to payers? And where do you think the most of the overlaps of these players are coming from? Are they coming typical to the item-based games or are they coming from time based games? So I just want to get a sense of who are these new incremental playing players in ZT 2? Thanks.

Jazy Zhang

(Foreign Language)

Eric He

(Foreign Language)

Jazy Zhang

For ZT Online 2, the paying players are indeed a little bit different in terms of demographics than our other games, but they are still considered hardcore gamers. Even though and maybe a little bit broader selection of them compared to our other games, for example, in ZT2 we have also a lot of medium-level spenders or middle-class spenders in the game.

Eric He

(Foreign Language)

Jazy Zhang

For the demographics in – we have indeed seen some more I guess personal or solo players or female players as well, so we do suspect that they are coming – or they are maybe brand new gamers who some have ever played games before actually.

Operator

And your next question comes from the line of Mark Marostica with Piper Jaffray. Please proceed.

Mark Marostica – Piper Jaffray

Thank you and congratulations on the strong quarter. My first question relates to operating margins in the third quarter. Clearly there is a lot of activity taking place in Q3 with ZT2 open beta and with the ZT Online series. I believe you got the expansion pack for ZT Online hitting Q3 as well as ZT Green’s expansion pack, so I’m just curious how we should think about operating margins in Q3 relative to Q2?

Gary Ngan – UBS

(Foreign language)

Jazy Zhang

(Foreign language)

Eric He

As you can see, our operating margin it’s been kept at a very steady range over some time now. Even though in the third quarter despite some new marketing campaign for expansion packs and open beta for ZT 2 that you’ve mentioned before, our sales marketing expenses will be controlled within very – within very consistent range compared to the company’s financials. So we don’t foresee any major impact to the operating margin in the third quarter.

Mark Marostica – Piper Jaffray

Okay, thank you. And then as a follow up I wanted to get some additional color with regards to ARPU on games outside of ZT 2. I mean understand the focus with ZT 2 is on growing the user base, however with ZT original and other core ZT games, how should we think about ARPU trends across those specific games?

Mark Marostica – Piper Jaffray

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

As ZT2, our other games such as the ZT Series, ZT Green, ZT Classic as all been very stable, including the ARPU figures for those games.

Mark Marostica – Piper Jaffray

Great. Thank you.

Operator

And your next question comes from the line of (inaudible) with CLFA. Please proceed.

Unidentified Company Representative

Hi, good morning. Thanks for taking my question. I remember – I have a question on ZT Online 2. I remember management said on previous conference call and you will expect ZT Online 2 to contribute 40% of total game revenue by the end of the year. And given game already had a solid – in the past three months, just wondering if you are agreeing to rise your expectation for the game? And what is your current forecast for that game’s revenue contribution by the end of the year? Thanks.

Jazy Zhang

(Foreign Language)

Eric He

(Foreign Language)

Jazy Zhang

The ZT Online 2, of course, we initialize official open beta testing in April and saw very positive results and we are very confident and development of progress of its planned open beta testing in September. So, naturally, the contribution from ZT Online 2 will gradually get – will gradually increase more and more, but we can’t disclose exactly how much it should contribute by the end of this year.

Operator

And your next question comes from the line of Vincent Sun with Mirae Asset. Please proceed

Vincent Sun – Mirae Asset

Hi, thanks for taking my questions. Congrats on the strong quarter. So my question is on the ZT2 also. So I noticed that ARPU for the second quarter was flattish quarter-on-quarter basis, so how should we look at this? Does this mean that ARPU (inaudible) at relatively similar level as ZT Online? And also, what what’s the trend of PCU of ZT Online in the second quarter compared to the first quarter?

Vincent Sun – Mirae Asset

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

For ZT Online 2, the ARPU has been very stable over the past couple of months, so currently it’s still lower than the ZT Online. And the PCU for ZT Online Original in the second quarter has been steadily growing a little bit compared to the previous quarter, as you can see from average or total PCU figures in our earnings release.

Operator

And your next question comes from the line of Chao Wang with Bank of American Merrill Lynch. Please proceed.

Chao Wang – Bank of American Merrill Lynch

Hi. Thanks for taking my question. My question is regarding your investment in the insurance company. Could you share with us a more color on that? And is it purely financial investment or would there be any strategic cooperation (inaudible) for leveraging your sales team to sale some insurance policy? Thanks.

Thomas Cheng – RBS

(Foreign Language)

Eric He

(Foreign Language)

Richard Chiang

Regarding the proposed investment commitment in the privately held insurance originally our Board of Directors approved this as a proposed investment due to the fact that we obviously have a very large cash balance and we wanted to invest that into something that was very low risk and very high – very profitable so we did not foresee any cooperation opportunities by investing in this insurance company. When the Board of Directors approved this investment commitment we disclosed the possibility in our 20-F annual report. However since then we’ve received a lot of feedback from our shareholders and investors saying that they wish that we did not invest in things that were outside of our core business, outside of our industry. So therefore our Board of Directors has approved the transfer or the cancellation or unwinding of this insurance commitment.

Eric He

I just want to add or emphasize the company has never or will not participate into any insurance related business or operation.

Chao Wang – Bank of American Merrill Lynch

Okay. Thanks very much.

Operator

And your next question comes from the line of Andy Yeung with Oppenheimer. Please proceed.

Andy Yeung – Oppenheimer

Hi, good morning. Thank for taking my questions. My question is about your longer term strategy, obviously with the last year with payments of more than $700 million then may be some change in your philosophy regarding in-house and M&A strategy, so maybe you can give us some color your view regarding in house development versus M&A...

Thomas Cheng – RBS

(Foreign Language)

Eric He

(Foreign Language)

Jazy Zhang

Regarding our long-term strategy, it still remains the same to self-developed and to focus on developing good games, good game content. For now, we are still focusing on doing a self-developing MMO, massively multiplayer online games, but in the future we’ll diversify into more and more genres that are up and coming such as the social games, web games and the mobile games. So, the feature to online game industry here is still very bright and still has a lot of opportunities.

And regarding the payout that the large special dividend, even though we’re paying out a significant special cash dividend, we’re still going to have a large enough cash balance on hand afterwards. So we’ll have roughly US$238 million and cash flow from operations is still remained very strong. So we’ll have enough cash left over for many investments and M&A opportunities yet to come.

Richard Chiang

I just want to add. On a per-quarter basis, the company generated more than $200 million on the free cash flow in the future quarters. So we think that with the strong cash flow, the management team should have ample capability to execute all M&A or investment strategy in the future.

Andy Yeung – Oppenheimer

Got it. Thanks. And just one follow-up question regarding ZT Online 2. We have open beta coming up in September, how should we model the ramp-up in PCU as well as ramp-up in monetization in the coming quarters?

Jazy Zhang

(Foreign Language)

Eric He

(Foreign Language)

Jazy Zhang

For ZT Online 2, for the planned open-beta testing in September, as we mentioned last time, we want to try build the user base up one step at a time, over time. So currently the user – the PCs is over 200,000 concurrent users. When open beta testing begins we hope to reach more than 400,000 PCU and once open beta testing begins we expect ARPU to increase.

Andy Yeung – Oppenheimer

Great. Thank you

Operator

And your next question comes from the line of Adam Krejcik with Roth Capital. Please proceed.

Adam Krejcik – Roth Capital

Yeah, thanks for taking the call. Two questions, first one just going back to special dividend, I guess is there anymore color you can provide in terms of – is this something you’ve been considering for some time now and just any sense in terms of the market timing doing it here any thought that went into that? And then why you chose a special dividend I guess versus other options such as this (inaudible) just that growth just increasing your annual dividend or making a quarterly just want to get a little more input on that and then have a follow-up question? Thanks

Eric He

(Foreign Language)

Richard Chiang

(Foreign Language)

Eric He

Regarding the rationale behind the special dividend payments. There are couple – there are number of different reasons that we decided to do this special dividend. First of all our cash balance has been growing over time and it’s been piling up surpassing the company’s needs and also becoming a very large shrunk compared to the company as a whole. So we obviously do not require this much cash for our future investment and operations. Another reason is buyback versus dividends where some of the feedback or requests that we’ve gotten from investors over time. In the past we’ve already brought back roughly $300 million worth of our own shares and this would a buyback program does has some pros and cons, it does increase your EPS or profitability per share but it’s going to decrease or limit the liquidity in our trading volume. So there are some pros and cons.

Another reason is currently in the marketplace there is lot of nervousness regarding Chinese companies, Chinese listed companies, so we would like to do this to try to increase transparency for Chinese companies. Last of all the rationale included the proposed investment commitment in a privately held insurance company. We’ve gathered a lot of investors feedback we got in this commitment and we decided give out this special dividend because investors feel that if we wanted to invest in things outside of our industry, investors should have the freedom to do that on their own.

Richard Chiang

I want to add one more point is regarding our original cash balance because our large cash balance in relation to our market cap, the company is likely to be classified as pit fit . In fact, by that standard we’ve already being counted as pit fit. If we continue to be so, our investors in the U.S. will actually be exercised in a different tax rates. And we don’t want that to happen, so we think the prudent and the rational way to avoid that is to send our or give out special cash dividend to our investor to reward them – to thank them for their long-term loyalty.

Adam Krejcik – Roth Capital

Thanks, that’s really helpful. And I guess just lastly, Eric; is there anything more you can comment on your personal decision to live at a time when it seems like things are certainly heading in the right direction, and just to clarify, there was no disagreements between you and the company in terms of deciding to leave now?

Eric He

Yeah. I think I have been working with Giant for 4.5 years. My time here is it’s very rewarding and I have working with the management team all together to build a very strong online game company. In fact the company is very profitable and moving into the right directions. My departure is really very personal. I am trying to pursue my own interest. I have no disagreement with the company. I think in fact it’s a big dilemma for me. So today I’m just glad to see Giant is on the right path, it’s in the right hands with the management. So I think this is the time for me to move on to pursue my own interest.

Adam Krejcik – Roth Capital

Okay. Thanks and best of luck with everything in the future.

Eric He

Thank you.

Operator

And your next question comes from the line of Gary Ngan with UBS. Please proceed.

Gary Ngan – UBS

Hi. Thanks for taking my question again. I guess I just want to follow up with the ARPU question from one other fellow analyst, I guess the question is related to that if most of the growth in revenues has been driven by ZT 2 in these quarters and ARPU level for ZT 2 is lower than the rest of the portfolio then why did the decline ARPU is flattish instead of going down? Can you help us to understand that a little bit more?

Eric He

(Foreign Language)

Jazy Zhang

(Foreign Language)

Eric He

Regarding your question about total ARPU, now that ZT2 is ramping up over the past two quarters. We have actually also seen that the original ZT Online has been steadily growing as well and very stable. So ZT2 it’s still smaller in scale compared to the original game. ZT Online original still has a much larger contributor in terms of APA, active paying accounts, which is why ARPU when you put altogether has remained fairly stable, decreasing just a little bit over the past two quarters. But in the future, ZT2 continues to ramp up as its paying players continues to increase, it may affect the ARPU levels further.

Gary Ngan – UBS

Thanks. And also just wondering get a bit more clarification, if I try to do a calculation of revenue divided by ACU, the number has actually been increasing since Q1 2010 whereas the reported ARPU is actually kind of flattish or trending down. How should we reconcile this difference?

Jazy Zhang

Gary, yes I can answer the question for you, because ACU actually includes both players, one paying accounts and also non-paying accounts because average concurring use we don’t distinguish between user who is paying or who is not but you know when we calculate ARPU the denominator is acted paying user, so the only focus on the one who pays, that’s why if you divide the revenue by ACU or you divide revenue by active paying accounts, you will get different results.

Gary Ngan – UBS

So that means there is a structural change in the paying percentage in your portfolio, is it basically because ZT2 has increased your paying ratio pretty substantially?

Jazy Zhang

We can say that. The broad-based of user adopt to pay for the game. So in the past the hard core MMO has been being as a very small portion of the user who can pay, but because of introduce of ZT2, the new monetization system we’ll be able to expand our paying user base. So that is very positive for us.

Gary Ngan – UBS

Okay. Thank you very much.

Operator

And that concludes our Q&A session. And now I would like to hand the call back to Rich Chiang for closing remarks.

Richard Chiang

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

Operator

Ladies and gentlemen that concludes today’s conference. You may now disconnect have a wonderful day.

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