Shanda Games' CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  About: Shanda Games Ltd (GAME)
by: SA Transcripts

Shanda Games Limited (NASDAQ:GAME)

Q2 2011 Earnings Call

August 23, 2011 9:00 AM ET

Executives

Ellen Chiu – Director, IR

Alan Tan – Chairman and CEO

Richard Wei – CFO

Analysts

Timothy Chiang – Morgan Stanley

Dick Wei – J.P. Morgan

Thomas Cheung – UBS

Ming Zhao – SIG

Mark Marostica – Piper Jaffray

Alex Yao – Deutsche Bank

Operator

Welcome to Shanda Games Limited’s 2011 Second Quarter Results Conference Call. The conference call will be recorded and available for replay in its entirety. A copy of the Shanda Games 2011 second quarter results announcement can be found and downloaded from its Investor Relations website, ir.shandagames.com. At this time all lines have been placed in a listen-only mode, and the floor will be open for questions following today’s presentation.

I would now like to turn the call over to Ellen Chiu, Shanda Games’ Investor Relations Director. Please proceed, ma’am.

Ellen Chiu

Thank you. Good morning and good evening, everyone. On behalf of Shanda Games, I would like to welcome everyone to our 2011 second 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 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 are 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 Harbor statement in Shanda Games’ second quarter 2011 earnings release.

In addition, please note for discussion purposes, all numbers were translated into U.S. dollar based on the exchange rate of RMB6.4716 per U.S. dollar.

Now, I’d like to turn the call over to our Chairman and Chief Executive Officer, Mr. Alan Tan.

Alan Tan

Thank you, Ellen, and welcome everyone. Shanda Games delivered another quarter of solid financial and operational results. The delay came in head of our expectations for potential revenue growth. In the second quarter of 2011, our total net revenues increased 5.4% quarter-on-quarter and 18.7% year-over-year.

Our long term sustainable growth has been served by our continued ability to leverage Shanda Games unique operational experience, innovative technology and a strong pipeline and we believe we are now especially well positioned in the heavy volume online gaming industry.

During the second quarter we continue to implement our Triple-A strategy which has been contributing to our farther than expanding growth over the past few quarters. As a remainder, the three As stand for the three critical elements, All-Stock, All-Platform, and All-Region.

Let me start with our All-Star updates. Consistently delivering new groundbreaking and innovative content helps insure that our games grow into long-term franchises that cater to our users’ different tastes. The All-Star strategy not only allow us to better organize our resources to secure the best titles from aboard but also successfully roll out multiple in-house developed

Our performance this quarter was a continued demonstration of our All-Star strategy. Our revenues continues to be driven by our diverse portfolio of multiple games including Dragon Nest, Realm II, Woool, Mir II, and Legend of Immortals. Players were drawn to these games as we enhance the in-game content with multiple expert impacts and facilitated better social interaction.

In particular major remodels which recently went live are starting to contribute meaningfully as well. For the quarter, Mir II, Woool, and the Dragon Nest contributed 39%, 18% and 17% of total revenue in the second quarter respectively.

We are happy to see this numbers because it shows that we are continuing to diversify our portfolio. In September, an expansion pack with the enhanced features and game play mood will be released for major remodels. The expansion pack will continue to improve the game by adding new words, store reliance, and keep our gamers and engaged.

This game has – this game has already gained traction among every gamer that has started to contribute, continue to lead as a way to energize and innovate the way in which our users communicate in games with one and another. I will touch more on this later.

In addition to the innovation we are bringing to the major remodels model, we have built amiable game development pipeline for the coming second half of the year that we are perhaps proved to be the most exciting interactive and socially collected internet entertainment we have ever offered.

Our product sales for the remainder of the year are consistent with the 12-prong approach for sourcing and developing games that we articulated last quarter.

Sudden Attack is a highly anticipated first person shooter that we licensed for operation in China that have begun open beta testing last week. Bubble Fighter, another shooting base title game expense will be for beginning open beta testing this week. In addition we are preparing to re-launch Mir III in China in the first quarter and expect the game to revitalize the Mir II series by galvanizing original Mir III players.

During last multi China Joy exhibition in Shanghai we had our All-Star event where we showcased our highly anticipated game pipeline for the upcoming 12 months. The games present include 3D games Sudden Attack, the Ring of Dragons, Dragon Ball online, and the Final Fantasy for teen. Due to the popularity of major remodels, the Ring of the Dragons is adapted from another novel written by the same author and it started to have similar market impact.

2D games including – social games, Hello Takes, Legend of Heroes and other developed by our Social Game Studio in UK. Mobile games, mobile versions of Mir II and the Woool and other developed by our Mobile Game Studio came alive. As you can see, we have one of the – and most diversified portfolio of online games in China and we are confident that in the thickness and quality of our pipeline as we enter the second half of 2011 – ensures that we are focused on making each of our games the best that it can possibly be and as far as the guiding principle as we are looking into the future.

Moving on, I will now give you an update on our all platform strategy. As I mentioned earlier, we have opened a new chapter with Legend of Immortals by turning online games into open social networking platforms. We believe we have created China’s first online social community that is fully integrated with MMO games. Our gaming community has especially opened our MMO games to third party platforms and application developers. While these functions are first been looked on through measuring models, we have plans communities for our other games that we are eventually create a single cross game community.

In long-term, we plan on converting this community to a mobile platform where we can make advantage of this freedom to move as we fully integrate our PC and the mobile platform. We will build communities for our mobile games and eventually turn that in with communities on traditional PCs platform making only cross games and also a cross-platform community.

With Legend of Immortals, we have been leading the industry by combating all gamers with third-party SSIs such as SNS are able to directly in to a legendry model using their counts on these social platforms. This will facilitate the introduction of our continent to a larger number of new users who will be exposed to the advertising for our new expansion packs and the games for the third party (inaudible).

Professional gamer’s attention, we have introduced new features and tools that will allow them to share their data and in game achievements with friends in U.S home by connecting them to social communities under third party social facts. Our platform strategy is similarly merging interactive entertainment between PCs, and mobile platforms. We will continuously apply the national (inaudible) to perfect release process follow a new social automobile games. As we move forward, we are in turn introduction of new and existing products to a new platform and are providing our gamers with engaging and interactive experience that will be addressable to all and change with the shifting internet technology MSK.

Finally, I would like to go over our origin updates. As we continued to apply capital resources to our long term business costs, we are actively looking to capitalize our decade of success in China by bringing more players into the community through our region strategy. We currently export to our 49 countries and regions globally and are seeing a significant increase in revenue and new account creations abroad. As over the second quarter, overseas revenue increased 8.5 quarter over quarter and 76% year-over-year to US$11 billion

We are moving forward with our overseas expansion plans through our global service platform or GSP. This GSP is quicker to our overseas aspirations as they export Shanda Games to foreign markets and allow us to launch games abroad. August 17 Dragon Nest was the first game to be launched by our south East Asia GSP in Singapore and Malaysia where we began operating the game in the two greater frontiers.

In addition to launching in-house developed games abroad, we have taken an advantage of opportunities to license our games to foreign operators. On July 26, our licensees, Nascent America also launched Dragon Nest in the United States where the game has gained in popularity. Hades Realm II will be launched in South East Asia and Russia in the near future. It was already launched in Taiwan in July where it is currently ranked as one of the top five games. Aside from Heades Realm II, our launches of Dragon Nest and Luvinia have also been extremely successful in Taiwan. As a consequent of the success we have in Taiwan, process we surely have an edge in the market.

As we continue to launch new games in the third quarter, we expand overseas revenue to growth substantially. I want to – for entrance into the global market that will only highlight our superior R&D capabilities but also our successful strategies for investment and other stations abroad. Along with our platform strategies, we plan on launching our diverse portfolio of games including MMO, social games, mobile games and web games abroad to capture global market share and increase Shanda Games branded revolution.

In conclusion, we will continue to (inaudible) strategy where we have launched multiple this quarter. We will have the capital resources and the industry in that should allow us to leverage our AAA strategy and as we (inaudible) before. Our (inaudible) product pipeline and determination to expand into diverse geographic regions under modified mobile platform should allow us to continue our industry needing revolution for many years to come. As we move forward, we anticipate martial arts, Shanda Games footprint in the global online game industry. With that I will like to conclude my remarks and return the call to Richard.

Richard Wei

Thank you, Ellen. Our full earnings release with financial statements available on our website as was most major financial portals. I will now briefly redo the highlights of our Q2 results and provide an outlook for the third quarter of this year. We will take questions afterwards.

In Q2, our revenues increased 5.4% quarter-over-quarter and 18.7% year-over-year to RMB1,322 billion equivalent to US$204 million exceeding the company’s previous guidance of a 4% to 5% sequential growth. Net revenues from MMORPGs were RMB1,166 billion equivalent to US$180 million, an increase of 6.7% quarter-over-quarter and 16.5% year-over-year.

Quarterly active paying accounts for MMORPGs decreased 4% sequentially to $9.46 million. Net revenues for advanced casual games were RMB82 million equivalent to US$12.6 million which represents a decrease of 11.8% quarter-over-quarter due to a weaker seasonality in Q2 but an increase of 16.4% year-over-year. Quarterly active paying accounts for advanced casual games decreased 29.6% quarter-over-quarter to 0.64 million.

Starting with this reporting period, Shanda Games will begin providing investors with monthly active users or MAUs, monthly paying users or MPUs and monthly ARPU as the company believes that these operating metrics provide a more meaningful understanding of the underlying performance and the quarter-to-quarter trends of the business.

The MAU and MPU numbers represent the averages of a given period. The Company will phase-out quarterly APA and ARPU figures starting in the third quarter this year. Historical data of MAU and MPU and monthly ARPU starting from Q1 of last year can be found from the earnings slide on our website under the financial reports tab.

During the second quarter of this year, MAUs for all games operated in China were 24.0 million compared with 20.3 million in Q1 this year. The sequential increase in MAUs was mainly attributed to the past quarter contribution of Legend of Immortals which was introduced in mid May. MPUs for all games operated in China were 4.4 million compared with 4.6 million in Q1 this year. The sequential decrease was mainly due to seasonal weakness for advanced casual games given that the first quarter of each year includes the winter holidays and Chinese New Year

In addition, during the first quarter of this year the company launched major expansion packs for Maple Story and Fengyun Online but did not launch expansion packs for (inaudible) during the second quarter. Monthly ARPU for all games operated in China were RMB94.6 in Q2 compared with RMB85.2 in Q1. Other revenues which primarily include overseas revenues from game operations, game licensing and advertising were RMB73 million equivalent to US$11 million, up 8.6% quarter-over-quarter and 75.7% year-over-year. Gross margin in Q2 was 60.6% compared to 60.8% in Q1 this year and 58.0% in Q2 last year.

Operating income increased 2.3% quarter-over-quarter and 11.7% year-over-year to RMB262 million equivalent to US$56 million. Operating margin was 27.4% in Q2 compared to 27.9% in the preceding quarter and 29.1% in the same quarter last year.

In line with our earlier guidance non-GAAP operating margin was 32.2% in Q2 compared with 32.1% in Q1 this year and 35.1% in Q2 last year. Our non-GAAP calculation excludes the impact of share-base compensation, amortization of acquisition-related intangible assets, and the related income tax effect. Net income was RMB205 million equivalent to US$47 million, down 2.5% quarter-over-quarter and up 0.2% year-over-year. The quarter-over-quarter decrease was primarily due to a decline in government financial incentives which totaled RMB10 million in Q2 compared with RMB33 million in Q1 this year.

Earnings per diluted ADS were RMB1.08 equivalent to US$0.17 compared with RMB1.6 in Q2 last year and RMB1.10 in Q1 this year. Non-GAAP net income totaled RMB217 million equivalent to US$57 million, up 0.5% quarter-over-quarter and up 1.4% year-over-year. Non-GAAP earnings per diluted ADS were RMB1.30 equivalent to US$0.20 compared with RMB1.28 in Q2 last year and RMB1.30 in Q1 this year.

Turning to balance sheet, the company’s cash and cash equivalents, short-term investments, restricted cash and time deposits net of loans increased from RMB3,188,000 as of March 31 this year to RMB 3,521, 000 equivalent to $544 million as of June 30. Sorry, the numbers should RMB2517 million instead of RMB3,521.

I will now turn to guidance for Q3 of this year. We expect our revenues in Q3 to grow 2% to 4% sequentially which reflect our non-GAAP operating margin especially the impact of share-based compensation, amortization of acquisition related intangible assets and the related income tax effects to be approximately 32% to 33% due to enhanced marketing activities during the third quarter to promote upcoming new games. Share-based compensation expense in Q3 is projected to be approximately flat from Q2.

We also expect to book approximately RMB20 to RMB30 million in government subsidies in Q3.

That concludes my remarks. I will now turn the call back to Ellen.

Ellen Chiu

Thank you, Richard. We will now take the – operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Timothy Chiang of Morgan Stanley. Please proceed.

Timothy Chiang – Morgan Stanley

Hi, Richard and Ellen. Good morning and thanks for taking my questions. Congratulations on a solid quarter. My first question is on Legend of Immortals, could you please give us some more color on the performance firstly on monetization and what is the sales contribution in the second quarter and what you are seeing in third quarter? And I have a follow-up question after that. Thank you.

Unidentified Company Representative

(Foreign Language – Chinese)

Alan Tan

To answer your question, Legend of Immortals indeed is a very important game of ours which we launched in second quarter. However, because it’s only been launched in mid May so it only got around 1.5 month of contribution. But in terms of bidding revenue it has already been of us and in second quarter we continue to improve the game and also adding to new contents and solid line into the game.

Especially in September, we will launch a major inspection pack which will add in two new characters and functions into the game. And also we will launch the official commercial launch of the game in September. Going forward, we will cooperate with the third-party SNS sites including to do the joint promotion and by doing this the users can use their current accounts on those third party SNS sites to log into a game and to play the game. So we believe that this will further improve the monetization of the Legend of Immortals.

Richard Wei

Firstly – the commercial launch will be due date around the September and October and second is that the users they log onto the (inaudible) model using their third-party accounts and their passwords will enjoy some special content and as always from this platform. So also we will share their game achievement and total collections in the game to all the third-party sites, so that the user feel is not only play under the game but also is extension for the existing social networks and friends.

Timothy Chiang – Morgan Stanley

Thank you very much. My second question is related to your active paying accounts, it is coming down in second quarter. Is the revenue growth mainly coming from the increasing monetization of the existing games or is it because your new games have higher ARPU? Thank you.

Richard Wei

Okay. (Foreign Language – Chinese)

Timothy Chiang – Morgan Stanley

Thank you. It’s very helpful.

Richard Wei

The APA decrease in 2Q is not only attributed to the decline of that casual game APA decline and that’s mainly due to the seasonality and also we have been doing adjustments for two of our major games in which we adjust the payment system which we think will further perfect the user and get economy going forward. Also on top of that, Legend of Immortals only launched in mid of this quarter and so only got half quarter of contribution, that’s the main reason for the APA decline.

Timothy Chiang – Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Dick Wei with J.P. Morgan. Please proceed.

Dick Wei – J.P. Morgan

Hi thank you for taking my question. I am Maria I am asking questions on behalf of Dick Wei. My first question is about your newly reported operating metrics. We have – mentioned that you have changed to the new operating metrics and to the average MOUs and average MPUs. And our question is about how can we get clarity on the performance on MMO versus advanced casual and social games in the future from this new operating metrics?

Richard Wei

I think our – first of all, you should go to our website and download the slides that are associated with this earnings release. It has the numbers for the past six quarters in terms of MAUs, MPUs and monthly ARPU but to answer your question I think the – if you look at our MMOs as far as the advanced casual games, I think they’re actually not all that different. The ARPU numbers have basically converged and even though we call the advanced casual games to be a separate segment but they really are very much like MMOs and they are still MMOs in some sense and so I feel that there is really no need to disclose separate MAUs and MPUs for the two separate segments.

Dick Wei – J.P. Morgan

Okay. Thank you. And then – our next question is about would you please give us some guidance for the MAU and MPU in the next quarter?

Richard Wei

I think that’s hard to predict but I would guess that because of the summer season that was potential new game launches taking place in Q3 the MAU numbers should be – should be stable to maybe up and I think the MPU number probably should be stable.

Dick Wei – J.P. Morgan

Okay. That’s all – all our questions. Thank you. It’s helpful.

Operator

Your next question comes from the line of Thomas Cheung with UBS please proceed.

Thomas Cheung – UBS

Hi good morning. Thanks for taking my questions. I have couple of questions. The first one is talking about you are allowing users to log into the accounts using the SNS accounts, I just wonder if you would apply this to your other legacy titles such as Mir 2 and Woool in the future? Thanks.

Richard Wei

Well, the Legend of Immortal is the first game to apply what we call All-Platform strategy that allowed third-party accounts to log on. And we will see the testing results and while we’re improving the order technical infrastructures and promotion and other management systems we may apply that this feature to more games in the future.

Thomas Cheung – UBS

I see. The next question is regarding your other revenues, you said in the prepared remarks that the order revenues will grow significantly in the third quarter. I just wonder, if you can give us some more color with regard to the growth rate, how significant the growth quarter-on-quarter and the reasons behind? Thanks.

Richard Wei

I think, if you look at what’s happening with our business in Q3, we have started renting the game in Singapore, Dragon Nest in Singapore in Q3 and has been well received by the gamers in Singapore, Malaysia and in some places from other countries. We are partnered in the U.S. Nexon also launched the Dragon Nest game in Q3 and it’s also been well received. So, I think that should add to the international component of the business. And so, I think the Q3 growth from overseas should be higher than the corporate number of all.

Thomas Cheung – UBS

I see. And I have a final question with regard to the balance sheet, can you give us some more color about the short-term rolling what is it about?

Richard Wei

Sure. We had a loan from the peer companies that we wanted to repay in Q2. And so if you look at our balance sheet, there is a – due to really partly decline of similar magnitude right, and so basically what happened was we needed to repay a U.S. dollar loan to the parent and we realized that our RMB was appreciating and so what we decided to do was to borrow U.S. dollars from a commercial bank and provide to our RMB as collateral to kind of enjoy the additional appreciation in RMB and that’s why there is a short term borrowing on the balance sheet.

Thomas Cheung – UBS

Okay. So this amount will be paid this by the end of this year, am I correct?

Richard Wei

It should be repaid within 12 months.

Thomas Cheung – UBS

Within 12 months. Okay, thanks. I will get back to the queue.

Richard Wei

Okay.

Operator

Your next question comes from the line of Ming Zhao with SIG. Please proceed.

Ming Zhao – SIG

Thank you very much for taking my questions. I have two questions, first question is, could you comment on deferred revenue number on the balance sheet which is a little bit soft compared with the quarter before? That’s my first question. My second question is you mentioned you have this partnership with the social media platforms, social networking sites Sina, Renren, et cetera. My question is what’s the economics in that to partnership, do you incur – do you share revenue with them or do you pay them on a number of customers acquired? Thank you.

Richard Wei

According to deferred revenue figure I feel that fluctuation is now really meaningful because it’s really cutoff date that happens at the end of the quarter and you plan to have the fluctuations in what’s been prepaid into the games and what’s been recognized as revenue but I think we did promotional activities during the quarter which I think also took down the different number.

Alan Tan

(Interpreted) We are still being trying to cooperate for (inaudible) cooperation with third party platforms and because we – for the details of content, we are not. It’s not convenient for us to disclose it and that we based on the principle of our sharing the resources with our third party partners and as for the revenue share each platform is actually quite different.

Ming Zhao – SIG

Thank you very much.

Alan Tan

(Interpreted) Also to reach out to new users, we also have been putting a lot of money in terms of advertisements and so this partnership while we actually cannot find more efficient way to reach out to new users.

Operator

Your next question comes from the line of (inaudible) with NRS Investments. Please proceed.

Unidentified Analyst

Hi, good morning. Thank you for taking my questions. I have three questions. One is the third-quarter guidance of 2% to 4% quarter-on-quarter just want to know what are the games that will drive these growth and the second question is on can you comment a bit more on the share buybacks, is the company going to – can you give us the update on the program of the share buyback and certainly what are the drivers for the ARPU increases quarter?

Alan Tan

(Interpreted) To answer the first question, the sub quarter growth is mainly driven by the gross from the entire gaming portfolio especially from the new game Legend of Immortals, the game will give us the full quarter contribution in third quarter and also we have couple of expansion packs that we will put out for our existing titles that will also contribute to the third quarter growth.

Richard Wei

Yeah, regarding the share buyback I think the company has – sorry the Board has authorized $150 million in share repurchase that was done last year and we intend to continue with the program. And I think we’re going through our internal discussions to see when to fund the next tranche and now that we’ve done our earnings release, I think that should make it easier for us to repurchase.

Unidentified Analyst

(Foreign Language – Chinese)

Richard Wei

Sorry can you repeat the –

Unidentified Analyst

The ARPU.

Richard Wei

For Q2 or Q3?

Unidentified Analyst

For Q2.

Richard Wei

Q2, okay. Right, the monthly ARPU increase from I think from 84 to 190 – RMB93.5, I think the increase was – the ARPU is the mathematical number and still really was caused by a slight drop in the MPU and that was really caused by two games the Maple Story, as well as Fengyun Online. They had some lower end users and one that did not repeat in Q2, as well as a seasonal slowdown in Q2 for that category of games.

Unidentified Analyst

Thank you.

Richard Wei

Okay.

Operator

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

Mark Marostica – Piper Jaffray

Yes, thank you. My first question is in regards to the adjustment to the payment system that you commented on in a few of your games. Could you give us more specifics there and give us a sense for what that portends for ARPU behavior in Q3?

Richard Wei

(Foreign Language – Chinese) For the adjustment of the payment systems, we – both our developer and us think that those virtual items although they can burden the user base but will cause the imbalance of Indian economy. So we think it’s better to kind of adjust them. And although we cancel some of the items, but in terms of revenue we still see stable revenue for those two game titles. So we think it didn’t affect our game that much.

Alan Tan

(Foreign Language – Chinese).

Richard Wei

And indeed we have been adjusting the virtual items all the time by replacing the old virtual items with new ones to more fit into the trend and also for the user demand. So the fluctuation of the user number we think is quite reasonable and also related to this kind of adjustments.

Alan Tan

(Interpreted) And also as Richard just mentioned, we think our MPUs will be stable in Q3 and the MNU number will be stable to slightly up in Q3.

Mark Marostica – Piper Jaffray

And then ARPU for Q3?

Alan Tan

Should be stable.

Mark Marostica – Piper Jaffray

Okay and just as a quick follow up, with Legend of Immortals expansion it will be official launch targeted for Q3, can you give us a sense if we should see a spike in marketing spend in the quarter or how marketing – selling and marketing expansion should behave relative to Q2? Thank you.

Richard Wei

Well, I think in our guidance for Q3, the average margin on a non-GAAP basis is expected to be 30% to 33% which reflects a small decline from Q2. Q2 was 33 point something and so that includes both additional R&D spending

Mark Marostica – Piper Jaffray

Great. Thank you.

Richard Wei

Thank you.

Operator

Your next question comes from the line of Alex Yao with Deutsche Bank. Please proceed.

Alex Yao – Deutsche Bank

Hi, good morning everyone and thank you very much for taking my question. My first question is regarding the Legend of Immortal, this is the first game that’s coming under the new MMO socialization strategy. Can you talk about some of the core operating metric and how would those metrics compared to other games. I just want to get a gauge of how the new MMO socialization strategy is affecting the operating metrics? And my second question is regarding the R&D expense, can you talk about how many new R&D staff you hired in this quarter and how should we think about with inflation in this year? Thank you.

Alan Tan

(Foreign Language – Chinese).

Richard Wei

Indeed Legend of Immortals is our first part of our socialization and it actually has a problem yielding users on the community, we built inside Legend of Immortals right now. And we think that is a solid base for the game itself. And it also stands for a technology innovation, which provides the mutual benefit of the game and all sort of social company – the social community.

Alan Tan

(Interpreted) We also been building the similar community inside Dragon Nest as well as Bubble Fighters.

Richard Wei

(Interpreted) We still at the very initial stage for the social community and we will continue to add new content and function into the social community as well as we are putting the mobile social community later this year.

Alan Tan

Second question regarding the R&D headcounts I think there should be modest increases in Q3?

Alex Yao – Deutsche Bank

Okay, got it. Thank you very much.

Operator

Your final question comes from the line of (inaudible) with UBS. Please proceed.

Unidentified Analyst

Hi just want a follow up with the ARPU, do you think in the Q3 the ARPU will be very stable and do you think the new games will actually provide some increase in ARPU? Thank you.

Alan Tan

(Interpreted) We think the ARPU in the quarter will remain stable, although they are new game coming into our portfolio but the new games are still at the earlier stage where the ARPU is not especially high compared with older games. Also we are launching couple expansion packs for our old games. I think the old game and new games the ARPU will be fluctuating within certain range, so as a whole we see the ARPU to remain stable in the quarter.

Unidentified Analyst

And another question, when do you think the mobile platform and collaboration with social networks will have some impact on our MPU, MAUs?

Richard Wei

You mean what mobile platform or mobile game, third-party or our own product?

Unidentified Analyst

I think for both. To talk about your launches in mobile, so did – there is a mobile platform for the games and you talk about collaboration with like KaiXin and Renren, how do you think that will have a impact? When do you think that will have impact on your user base?

Alan Tan

(Foreign Language – Chinese)

Unidentified Analyst

That’s very helpful. Thank you very much.

Richard Wei

First of all the PC – in terms of the contribution from social – third-party social networks side, indeed it will increase our MMO users by introducing the third-party users, but we are still doing a lot of testing and also the modification in this technology and we spot those users to greatly contribute to our user base in the first quarter. As for mobile side, we are also launching a couple of mobile games, mobile platform and others. And we will – we also expect to see the contribution to kick-in in the fourth quarter, but as for those contributions, I think the user base increase will be more significant than the revenue increase and we think – will still take some time to become meaningful.

Unidentified Analyst

Thank you.

Operator

I would now like to turn the call back over to management for closing remarks.

Richard Wei

Thank you for taking the time to participate in our conference call and look forward to talking to you soon. Bye.

Operator

This concludes the presentation. You may now disconnect. Have a great day.

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