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Executives

Richard Chiang – Director, IR

Wei Liu – President

Jazy Zhang – CEO

Analysts

Timothy Chan – Morgan Stanley

Mark Marostica – Piper Jaffray

Tjeng – Macquarie

Gary Ngan – UBS

Thomas Chong – RBS

Jin Yoon – Nomura

Jialong Shi – CLSA

Jenny Wu – Citi

Adam Krejcik – Roth Capital Partners

Atul Bagga – Lazard Capital

Andy Yeung – Oppenheimer

Dick Wei – JP Morgan

Giant Interactive Group Inc. (GA) Q3 2011 Earnings Call November 1, 2011 9:00 PM ET

Operator

Good morning and good evening ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group Third Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent background nose. After the presentation, there will be a question and answer session. (Operator Instructions)

Now, I’d like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Director of Giant Interactive.

Richard Chiang

Good morning, ladies and gentlemen. Welcome to the third quarter 2011 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, President; Ms. Jazy Zhang , 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, Ms. Zhang 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 statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intend, plans, beliefs, estimates and other statements, and include among others, statements regarding our ‘s expectation of sequential top line growth in the fourth quarter of 2011 future prospects of the company and the Chinese online game industry, future financial position of the company, the ability for the company’s new web game projects to diversify its user base. The investment strategy of the company and the timetable of – for engineering testing, close beta testing, open beta testing, introduction and commercial launch of the various (inaudible) game pipeline.

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

These factors include, but are not limited to, the deterioration in the performance of the ZT Online 1 Series, failure of ZT Online 2 to grow as expected, unexpected delays in developing expansion packs or in the timetable for testing, introduction and launching of games, the company’s dependence on the ZT Online 1 Series games, which currently account for the majority of the company’s historical net revenues.

The company’s limited operating history and unproven long-term potential of its online game business model. The uncertainties with respect to the PRC legal and regulatory environments and the volatility of the markets in which the company operates. 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 by 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.

I’ll like to begin the call by reading an introductory remark on behalf of our President Miss. Wei Liu.

Wei Liu

Good morning ladies and gentlemen. Thank you for everyone for joining us today. As you may have seen from our earnings release, we delivered a solid quarter with both sequential and year-over-year growth continuing our steady trend of financial and operational commitment throughout 2011. Our results were supported by continued growth and the online game industry in China despite increase in competition among industry players and the launch of numerous new game titles in recent months.

We believe our ability to deliver steady growth despite strong competition extends from the success of our game segmentation and focused strategy as well as the fundamental strength of our internal development capabilities. The success to date of our flagship games ZT Online 2 demonstrates these capabilities and indicates our strategy is fundamentally found. ZT Online 2 launch into open beta testing in September and reached a new high of over 435,000 PCU a significant achievement of which we are proud.

We are also continuing to attract a broad and diverse base of playing players across our ZT Online family of games resulting in a sequential and year-over-year increase in active paying accounts and average concurrent users. The improvements in these key financial, key performance metrics demonstrate that we are succeeding in our efforts to broaden and deepen our player. (Inaudible) supported by the continuous updates in additions of new game play features to keep players engage.

While we are pleased with our performance to-date we remained focused on the continued development of our existing games and game pipeline. We are managing our expenses to maximize profitability. We have number of games in the pipeline that are nearing key development milestones and we have been actively seeking gamers as fee back from the various phases of testing and incorporating them into these games to improve game play and functionality.

Our primary focus remains on the hardcore MMORPG segment of the online gaming industry, which is still the most profitable genre of games. However, during the fourth quarter, we plan to introduce our first action casual game, Elsword, which was licensed from South Korea. We have also initiated additional web game projects and our first person shooter game is also under development. As we seek to capitalize on the fast expanding range of entertainment and game options available to consumers in China.

Because we are a company that focuses on self development, R&D is the backbone of our company. We have done an excellent job containing most of our key employees since the inception of the company. In order to continue to attract and retain the best R&D talents, our Board of Directors has approved the issuance of additional restricted shares and the re-pricing of existing options in light of the recent decline in our stock price due to our recent special cash dividend.

As we enter the fourth quarter and look ahead to 2012, our outlook remains positive, we continue opportunities to deliver incremental growth. After the payout of our special cash dividend in September, balance sheet remains strong with approximately $300 million in cash on hand as of the end of the third quarter. Benefiting from the strong cash flow nature of our business, we maintain a high level of flexibility to pursue additional investment opportunities in the online game industry that complement our existing products and services such as the developers of web, social and mobile games, as well as opportunities in overseas game markets. Our objective is to expand our game platform to achieve long-term sustainable growth and return value to our shareholders.

With that, I now pass call to Jazy Zhang, our CFO, to walk you through our financial and operational results for the quarter. Jazy?

Jazy Zhang

Thank you, President, Wei Liu and thank you, Rich. Let me now turn to our key operational metrics for the third quarter on slide six. Total active paying accounts or APA grew at 4.7% sequentially and 39.4% year-over-year to 2,087,000. Average revenue per user or ARPU was RMB202, up 2.5% over last quarter and down 3.3% over the third quarter 2010. Average concurrent user or ACU was 661,000 or 1.1% sequential increase and a 22.9% increase year-over-year. Peak Concurrent User or PCU was up 8.2% sequentially and up 56.7% year-over-year to 2,297,000.

As President Liu mentioned our games segmentation strategy is succeeding in attracting in attracting a broad base of players who have been spending in our games, which has been reflected in the fluctuations in our OPs level. In terms of ACU, PCU and APA increases on a sequential basis were supported by the growing popularity of ZT Online 2, while year-over-year increases are attributable to both ZT Online 2 and ZT Online 1 series.

As such we believe we are cultivating a sustainable and diverse player base which we expect to drive continued growth in our operating metrics in the coming quarters. Our operating performance once again allowed us to deliver solid financial results as seen on slide seven. Net revenue for the quarter was $71.8 million, a 5% increase from the second quarter of 2011. And 35.2% increase from the third quarter last year, our core business, online game revenue grew at 7.4% sequentially.

Other revenue for the third quarter was $171,000 compared to approximately $1.9 million in the second quarter 2011 and $12,400 in the third quarter of 2010. The decrease in other revenue was anticipated as we have already received and recorded the payments for the military first-person shooter demo project in prior quarters.

Gross profit for the third quarter 2011 was $61.9 million, representing 5.8% sequential increase and a 36.8% year-over-year rise. Gross margins of 86.2%, was up from 85.5% in the previous quarter and 85.2% in the third quarter 2010.

Total operating expenses for the third quarter 2011 were $17.8 million, 2.8% sequential decrease and an increase of 20.6% year-over-year. The year-over-year increase was mainly due to the rise in marketing expenses for ZT Online 2 and – XT online.

R&D expenses decreased 17.7% sequentially and 7% year-over-year to $7.7 million in the third quarter. The sequential and year-over-year decreases were due to higher bonuses accrued for developers in the previous periods.

Sales and marketing expenses were up 23.9% sequentially and 32.6% year-over-year in the third quarter to $7.8 million. Sales and marketing expenses...

Sales and marketing expenses increased sequentially and year-over-year as we launched marketing campaign for the open beta testing of to ZT Online 2 and XT Online during the quarter. General and administrative expenses decreased 8.4% from last quarter and 25.3% from the third quarter 2010 to $3.9 million. The sequential decrease was mainly due to office relocation expenses incurred in the preceding quarters, while the year-over-year decrease was mainly caused by higher compensation expenses recorded in the third quarter 2010 in connection with the re-pricing of certain incentive-based share options and the grant of restricted shares to certain select employees and management members.

Net income attributable to the company’s shareholders in the third quarter increased 3,452% sequentially and 73.1% year-over-year to $56.6 million. The large sequential and year-over-year increases in net income were the result of several factors: First, online game revenue has increased both sequentially and year-over-year. Secondly, due to our affective cost control measures operating expenses have decreased sequentially and increased at a slower rate than the increase of net revenue on a year-over-year basis.

Third, we had an increase in other income about $4 million mainly due to the foreign exchange gain from the repatriation of cash for a special cash dividend. And finally, we had a significant decrease in income tax expense, which was due to a one-time reporting tax accrued in the second quarter for the repatriation of cash for our special cash dividend. And the recognition of $9.9 million in deferred tax assets on the balance sheet, which caused our corresponding income tax benefits on income statement in the third quarter.

Net margin for the third quarter was 78.9% compared to 2.3% in the preceding quarter and 61.6% in the third quarter of 2010. Excluding non-cash share based compensation recognition of additional deferred tax assets and foreign exchange gains for the payment of a special cash dividend non-GAAP net income attributable to the company’s shareholders was $44.7 million, a 3.8% increase sequentially and a 28.9% increase year-over-year.

Non-GAAP net margin was 62.2% for third quarter 2011 compared to 62.9% in the preceding quarter and 65.2% in the third quarter 2010. Basic and diluted earnings per ADS for the third quarter 2011 were $0.24 per share on a GAAP basis and $0.19 per share on a non-GAAP basis.

Moving on to our balance sheet on slide nine, as of September 30, 2011 cash, cash equivalents and short-term investments totaled $300.2 million, this decrease from the balance as of June 30, 2011, is mainly due to the payments of a significant special cash dividend of $707.9 million in September 2011. In summary, we are pleased with our financial performance during the quarter and we expect to maintain our positive momentum as we look ahead to Q4. We will continue to investment in our game development and our marketing efforts to further grow ZT Online 2. However, we remain committed to achieving a healthy balance between our growth strategy and our focus on profitability.

Now, let me give you an update on our game development efforts. As mentioned earlier, we continue to invest in our games through ongoing upgrades and added features. For the ZT Online 1 series of game in the third quarter we introduced a new ZT Online expansion pack with innovative game play and in-game activities such as unique PK and banking server. Additional games play features were also added to ZT Online Classic Edition and we plan to launch a new expansion path for Classic Edition in the fourth quarter.

Additionally, ZT Online Green Edition celebrated its second anniversary with new functionalities in the new expansion pack launched in the third quarter. We believe these modifications have helped to keep players engaged and entertained, and we will continuously refine our games to enhance gamer experience. We have been very pleased with the response to the open beta testing of ZT Online 2 and the new PCU record achieved at the end of the third quarter.

We enhanced the game based on player feedback and added new features or improvements on existing features such as large scale PK battles, in-game voice chat, casual mini games, and the in-game micro-blog system. We will continue to support the developments of ZT Online 2, as we seek to further expand the player base. We also released new features for Giant Online in the third quarter, which will intend to help to increase interaction among players and keep them more engaged. We expect to release a new expansion pack in the fourth quarter. As we informed you the last quarter, we began open beta testing for XT online in September. The response so far from gamers has been very positive. We plan to release the first expansion pack in December following open beta testing.

Moving on to The Golden Land, which has become our most broadly licensed international game. We continue incorporate new game playing features during the third quarter while optimizing existing game features and functionalities. A Korean version of the game launched into open beta testing in September has been well received by Korean gamers. U.S. and European versions are expected to enter open beta testing in October.

While localization is underway for the Spanish and Russian markets with closed beta testing expected to launch in those regions in the fourth quarter. Additionally Golden Land remains popular among gamers in Taiwan and Japan. We continue to make progress on Spirits of The Warriors, our new self developed 3-D MMORPG game based on three kingdoms period in ancient Chinese history.

We conducted the second round of engineering testing in the third quarter, focusing on testing of game play features and modifications based on players feedback. We will continue to fine tune the game and expect a commercial launch in 2012.

Turning to our two licensed games, we conducted the final round of engineering testing for Elsword in the third quarter and we plan to commence closed beta testing in November, with respect to – Online we conducted a two-week long engineering test with limited number of test accounts during Q3 and received positive feedback from gamers and the media. We continue to optimize this licensed game and plan another round of engineering testing in Q4.

In conclusion, we are making steady progress on all fronts and the continued solid performance of our core games allows us to maintain an optimistic outlook for the fourth quarter. We expect ZT Online 2 to continue to grow following its open beta testing at the end of the Q3, end of the third quarter. As a result the company expects continued top line growth in the fourth quarter.

That concludes our prepared remarks. Once again, I like to thank you for joining us today and we are now happy to take your questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions) Your first question comes from the line of Timothy Chan of Morgan Stanley. Please ask your question.

Timothy Chan – Morgan Stanley

Good morning, President Liu and Jazy, and Mr. Xi and Rich. Thanks for taking my questions and congratulations on a very solid third quarter. And regarding ZT Online 2, could you please give us some color for the performance since its open beta testing? Is the growth sustainable and what will be the next catalyst to take the game to a higher level? And what is the revenue contribution as well as –combined to ZT Online 2? Thank you.

Unidentified Company Representative

Thank you Chan. Let me first translate your question. (Foreign Language)

Jazy Zhang

Yes for ZT Online 2, we launched open-beta testing on September 16th and then PCU, ACU concurrent use and revenue has been very solid and been very positive. We reached over 435,000 PCU after the open-beta testing. So, our next target would the next month and then it would be 500,000 PCU and we’re very confident that we can reach this mark. Our team is currently working very hard to improve the game to reach this new target. Right now ZT Online 2 after the open-beta testing and we considered more of a stable operating stage right now. Revenue showed continues steadily improve or grow in the near future. After open-beta testing, we’ll continue to market the game in fourth quarter. We have been trying out a lot of new media such as the TV and subway advertisements, which has been working very well and after a quarter or two, we plan to launch probably a new version of the game or add an expansion pack to the game to continue to enhance the game for our gamers.

Timothy Chan – Morgan Stanley

Thank you, very much.

Wei Liu

Thank you, Tim.

Operator

Your next question comes from the line of Mark Marostica of Piper Jaffray. Please ask your question.

Mark Marostica – Piper Jaffray

Yes, thank you, nice job on the quarter. Just following up on the prior questioners question on ZT2, I like to get an idea regarding the extent to which you are monetizing the ZT2 at present and your plans going forward?

Unidentified Company Representative

Okay, thanks Mark. Let me translate your question

(Foreign Language)

Jazy Zhang

(Interpreted) For ZT Online 2, we implemented our third generation in game economy into this game which is a more balanced, more fair economic and paying system and that cause – because of the more balanced system, users are more willing to pay to spend money in the game. We have the higher percentage of paying players in this game compared to our original ZT Online, because users believe it’s more fair, there is more transactions the game, the willingness from users to pay comes from the that there is less inflation and deflation of items as time goes on in the game. And because of this new positive developments in this in-game economy, we believe that APA and ARPU should creep up or continued to trend up in the future.

Mark Marostica – Piper Jaffray

Great. Thank you. And just as a quick follow up. You talked about the idea of rolling forward with some additional marketing activities with the game with ZT 2 and I am curious related to that statement. How we should think about the behavior of the marketing spend line in fourth quarter relative to third quarter.

Jazy Zhang

Mark, let me answer that question. We previously budgeted certain amount of marketing expenses for ZT Online 2. I can give you the specific number as we normally don’t give out that number for each game. So we have spent about half of that budget in Q3 and the remaining half will hit out P&L in Q4. The overall Q4 sales and marketing expenses will be about the same level as Q3.

Mark Marostica – Piper Jaffray

Thank you Jazy for the color and I will turn it over.

Unidentified Company Representative

Thanks, Mark.

Operator

Your next question comes from the line of Tjeng of Macquarie. Please ask your question.

Tjeng – Macquarie

Hi, can you talk a little more about the ARPU and user trend for ZT Online original and also perhaps the cannibalization between ZT 1 and ZT 2 and my follow up question is can you talk a little more about feedback from elsewhere at this point. Thank you.

Unidentified Company Representative

Okay, thanks. Let me first translate your question (Foreign Language).

Wei Liu

(Interpreted) As per the ARPU the original ZT Online versus ZT online 2, ARPU for the original game is very stable. Of course, there is always some seasonality or some promotions at certain timeframes, but these things are – have very minimal impact on the overall quarter or the overall numbers. For ZT Online 2 after the open beta was launched, ARPU has been creeping up a little bit, but it’s still lower than the original game.

(Foreign Language)

For cannibalization between the ZT games, in the third quarter it is now very minimal. During the second quarter actually, when we began close beta testing, we had some original ZT Online gamers come and try the new ZT2, but now that has been very stable.

Tjeng – Macquarie

(Foreign Language)

Jazy Zhang

(Interpreted) For Elsword, which is our upcoming game in the fourth quarter, this is a licensed action, causal, 3D game from South Korea. We plan to launch it into close beta testing on November 11. And so far this game has done very well in home market in Korea, and also in neighboring countries such as Japan and Taiwan. The unique features of this game include it’s sort of animate style, 3D graphics and animation, which look very, very pretty and good. And the game itself is very complementary game to entire – it will be a completely new genre for us. So we are very excited about the prospects of this game. Our team is gearing up and preparing to launch this game next month or this month actually.

Operator

Your next question comes from the line of Gary Ngan from UBS. Please ask your question.

Gary Ngan – UBS

Good morning everyone, thanks for taking my question. My first question is relating to the PCU and ACU trend for Q3. So just want to understand, firstly is when you cancel a PCU, do you add up all the individual games PCU for the quarter, or is the 2.3 million is the at one point in time the total concurrent users of all the games combined? So, the second part is, so the PCU increased 8.2% from Q2 while ACU is only 1.1%, why is that the – can you explain a little bit more the difference between the two metrics and why would PCU increase much higher, much more than ACU?

Unidentified Company Representative

Thanks Gary. Great question. Let me first translate your question. (Foreign Language)

Jazy Zhang

Hi Gary, for PCU the way we calculated it, that we take a snapshot in time, so for any given moment, any point in time, it is the highest for our total portfolio of games.

(Foreign Language)

As for the PCU versus ACU growth trends, PCU grew very well this quarter due to some improvements in the ZT Online 1 series, open beta marketing for ZT Online 2 and some improvements in the other games as well. So PCU grew very nicely, but ACU was a little bit more flattish due to a reason that we’ve been mentioning or spotted a couple of quarters ago in that there is other new form of online entertainment these days. So users are spending some more time on some of these things besides games. But in order to compensate for that we have adjusted some content in our games to make it less time consuming or tedious for our users. But, so that is why ACU is growing at a slower pace than PCU but I just want to add a point that even though users are spending less time, this is not mean that there aren’t spending less revenue overall or does not, we don’t see much impact to our overall business going forward.

Gary Ngan – UBS

Thanks. Just one on related financial question for Jazy-and the re-pricing of options how does that actually change the share based compensation going forward. Could you maybe give us some guidance on how should we think about that?

Jazy Zhang

Yeah. Sure. So we have estimated an extra amount of expense that will hit our Q4 income statement, about $400,000 to $500,000 that will be a onetime nonrecurring charge in Q4. This is different from the upcoming restricted share grant.

Gary Ngan – UBS

So on an ongoing basis do you mean that in the Q4 there will be found of 50,000 more and then for the rest of the next few quarters, it will still be around 1.5 million something like that or it will go back to what happened in this quarter which is roughly 1 million?

Jazy Zhang

So we announced that we are going to issue a new round of receipt of share grants to our select employees, that’s another layer of expenses.

Gary Ngan – UBS

Oh, I see, that’s right, okay thanks.

Jazy Zhang

Yeah, sure, thanks.

Operator

Your next question comes from the line of Thomas Chong of RBS. Please ask your question.

Thomas Chong – RBS

Hi good morning everyone, hi Jazy I have a couple of questions also relating to the operating expenses. The first one is if I look at R&D expenses that seems much less compared to second quarter and also the third quarter of last year. I just want to see how we should think about R&D expenses going forward. And my second question is related to shares turns. Given there will be another issuance of restricted shares, how should we think about lump of share counts in the fourth quarter as well as for 2012. Thank you.

Jazy Zhang

Sure, thanks Thomas. Yeah, the third quarter R&D expenses are lower than last quarter; that’s because we approved higher amount of our bonus in last quarter. So we do expect that the R&D expenses for Q4 to go up, that’s possibly normally pay yearend bonus to our employees. So we do expect an increase in our R&D expenses in Q4 and with respect to the restricted shares, we have estimated a total expense of about $49 million over a four-year period, this is our vesting period. Given that previously we have adopted the decelerated accounting method, so unfortunately unless we choose – method, we have to stick with the same method, which means that in the first year, I have to recognize about 46% of that $49 million, which gives us about $23 million in the first year. So, I calculated my Q4 impact would be roughly $2.8 million, about $3 million in Q4 relating to the restricted share brands.

Thomas Chong – RBS

Related to the share counts for the fourth quarter and in 2012, would there be any big difference?

Jazy Zhang

Yeah. We do expect the share-based compensation expense to be much bigger than prior year that’s because of, that we plan to issue a new round of restricted shares in the near future that has been approved by our board of directors. We will issue up to 40 million restricted shares to our top R&D talents and select employees.

Thomas Chong – RBS

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

Unidentified Company Representative

Okay.

Operator

Your next question comes from the line of Jin Yoon of Nomura. Please as you question.

Jin Yoon – Nomura

Hi and congratulations on the following quarter. I just have a quick question actually going back to the revenue part. I am looking at your, basically increasing PCU on your ZT 2 game, it seems like in the last quarter your PCU for the game increased by 135,000, and that your overall PCU – for all of your game group increased by 175,000 users there is.

Jin Yoon – Nomura

No, is it correct to assume that the overall growth of your other game portfolio is 40,000 users in PCU and that most of the revenue growth in the quarter has been from ARPU growth, and if you have an estimate for the ARPU increase excluding ZT2?

Jazy Zhang

Hi Jin. This is Jazy. Let me clarify your question. You’re asking for the ARPU excluding ZT 2?

Jin Yoon – Nomura

Yes, ARPU growth or trend excluding ZT 2, that’s the first question. And I’m curious about your user, kind of your PCU growth excluding ZT 2, because from my calculations I have it at about 40,000 and is that kind of in the ballpark there?

Unidentified Company Representative

Okay Thanks Jin. Let me translate your question.

(Foreign Language)

Jazy Zhang

(Interpreted) For the ARPU between ZT Online 2 and the other games and closed beta in the second quarter, since then to open beta at the end of the third quarter ARPU has been trending up a little bit, but for the other games mostly ARPU is very stable. Although during the summer vacation we did launch some new promotions and activities for the release of ZT Online 2 for example. So there may have some – been some differences, but overall it’s been very stable as well.

Jin Yoon – Nomura

That’s it. Thanks.

Operator

Your next question comes from the line of Jialong Shi of CLSA. Please ask your question.

Jialong Shi – CLSA

Hi good morning. Thanks for taking my question. I just have a okay question. (Inaudible) the Chinese media you established an overseas operations center in October. So just wondering if you could talk about your overseas expansion plans going forward? Thanks.

Unidentified Company Representative

Thanks Jialong.

(Foreign Language)

Jazy Zhang

(Interpreted) Hi, Jialong. As regarding the news as you may have seen, we are not sure how accurate that news is, but we can tell you now is that earlier this year internally we established overseas department in our company to evaluate licensing opportunities, and this includes both imports of foreign games and export of our own games to overseas markets. So, some of the works that this department is responsible for is, for example, the testing and launch of Elsword and (inaudible), both of our upcoming licensed games. And this is a big part of our strategy because currently we are very willing to explore lots of overseas opportunities besides continuing to grow our own internal MMO development.

Operator

Thanks. Your next question comes from the line of Jenny Wu of Citi. Please ask you question.

Jenny Wu – Citi

Okay. Thank you very much for taking my question. And then also would you please share with us observation of the industry girls, and any new change of the of the competitive men’s game? Thank you.

Jazy Zhang

Hi Jenny, this is Jazy, I am sorry. We missed your first part of the question about..?

Jenny Wu – Citi

Yeah, about the unlike any industry girls, is there any new change in the competitive men’s game?

Unidentified Company Representative

Okay, thanks Jenny.

(Foreign Language)

Jazy Zhang

(Interpreted) So in light of these trends, just to reiterate our company strategy we will still focus on the MMO market because this is our competitive advantage compared to other game companies, especially in regards to our ZT Online franchise or existing ZT games and future games in the franchise. We’re also placing more higher focus on web games, casual and social games due to the high growth nature of these genres. And so internally we have additional web game projects that we’ve been working on and our founder has decided to personally oversee these new web game projects. Another online development for us will be continue to seek opportunities in overseas markets in regards to licensing opportunities.

Unidentified Company Representative

Thank you very much Jenny.

(Foreign Language)

Jenny Wu – Citi

Okay. My final question is about – do you see any potential – to be if discussed now and have to be rolled out in any near-term so? Thank you very much.

(Foreign Language)

Jenny Wu – Citi

Okay. Thank you very much.

Operator

Your next question comes from the line of Adam Krejcik of Roth Capital Partners. Please ask your question.

Adam Krejcik – Roth Capital Partners

Yeah, hi. I just had one question. Could you disclose or give a rough estimate for what percentage of revenues ZT 2 online now accounts for? I think you’ve disclosed this in the past or perhaps you’ve told us (audio gap).

Unidentified Company Representative

Sorry, Adam. I think you broke up a little bit.

Adam Krejcik – Roth Capital Partners

Yes. Do you hear me now?

Jazy Zhang

Yeah. Hi, Adam.

Adam Krejcik – Roth Capital Partners

So my, hi. So, my question was I think in the past you’ve disclosed what percentage of revenue ZT 2 was or its size related to the original ZT. I was just wondering if you could provide us with – and your expectations for how big or how much of your revenues that can account for your going forward? Thanks.

Jazy Zhang

Hi, Adam. This is Jazy. Really as a common industry practice, we don’t really disclose the performance for each game. But we can share with you that our ZT 2 performance has been trending well and we are very pleased with its financial performance as well as operating performance.

Adam Krejcik – Roth Capital Partners

Okay, thanks.

Jazy Zhang

Thank you.

Operator

Your next question comes from the line of Atul Bagga from Lazard Capital. Please ask your question.

Atul Bagga – Lazard Capital

Hey, guys. Congrats on the quarter and thanks for taking my question. I have a question on, again on the industries. So you guys talked about faster growth happening in social online web and mobile. I wanted to understand, do you see this markets as new value creation opportunity for you or do you see over longer-term these are more really destruction opportunities since I would assume that the ARPU on these, monetization on these new platform is probably lower than that of MMO. And also as a follow up, I mean how do you see the opportunities with your ZT franchise as a multi platforming opportunity with Zeta Franchise. Are you guys internally thinking about taking the ZT games the same game on web or mobile? Thank you?

Unidentified Company Representative

(Interpreted) Thank you. Let me translate your question. (Foreign Language)

Jazy Zhang

Asset development of web, social and mobile games and opportunities for the industry, we believe that these genres that are bringing a lot of new opportunities for the industry as a whole.

Now, obviously monetization or ARPU is lower. These games tends to attract what we call a more causal gamers or new gamers to the industry who are not currently playing MMO games, because these games are simple in game playing nature. But for revenue or growth potential, we believe that the web games have probably more opportunities or have been growing their revenue more quickly. So we will tackle this type of genre first, and then look towards the other new genres. For ARPU, it is probably much lower for social games, but we’re starting to see some web game with good monetization and higher ARPU with good potential. But overall, our first objective would be to get new users into our games and then consider monetizing them later on.

Atul Bagga – Lazard Capital

(Foreign Language)

Jazy Zhang

(Interpreted) As for our ZT franchise and it’s a potential to be put on different web or mobile platforms, we have been testing some projects on those fronts. As you know, we have an investment in the mobile platforms, mobile embedded, Yang Xun and we have done a mobile ZT app in conjunction with their platform and we’ve also tested a web version of ZT game. But you are probably aware that the original ZT PC type game has a lot of content, especially a lot of large scale PK features, battle features, so in order to move ZT onto these other platforms we would have to go through a lot of different changes and adjustments.

Atul Bagga – Lazard Capital

Perfect. Thank you so much.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the line of Andy Yeung of Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi, good morning, thank you for taking my questions. I have a couple of questions today. My first question is about your investment in the Alibaba Group. Can you give us some insight into your thinking and intention regarding that investment? And also if there is any plan to dip in that relationship beyond just a financial investment?

Unidentified Company Representative

Thanks Andy. Let me translate your question.

(Foreign Language)

Wei Liu

(Interpreted) For investments into Alibaba Group we did invest $50 million in 2011, which was established solely for the purpose of investing in Alibaba. We believe that this investment is primarily a strategic investment because first of all they’re one of the most prominent internet companies in China and all over the world. And we believe that there is – will be ample opportunities for us to work with them in the future.

For example, in ZT Online 2 the third generation game economy consists of lot entirely of online transactions between gamers and this is something that we can improve or there could be a convergence with e-commerce model in the internet industry in the future. So, there will be lots of good opportunities in the future, but of course, we also considered the financial terms of the investments when we initiated this investment.

Andy Yeung – Oppenheimer

Okay, and thanks. My next question is a follow up question on your overseas operations and (inaudible) games, casual games and – games. You had mentioned some of the charge on those funds, do you think actually mark a change in terms what you’re thinking, regarding internal developments with this licensing?

Wei Liu

So, Andy, let me let me clarify your question, you asked about, is the change of strategy?

Andy Yeung – Oppenheimer

Right, because you mentioned you does have a overseas operational center to monitor overseas games and potentially get more licensing from overseas and export your games as well. And also, you mentioned some of the new games that you launched and it’s also in a lot of game areas, some of those games are licensed games from overseas. So, just traditionally your orientation is more internal game development, but with those new departments in your operations, in your strategy in web games, does that in – internal development versus going out in license market?

Unidentified Company Representative

Okay, I see. Good question. (Foreign Language).

Wei Liu

(Foreign Language)

Just to reiterate our company’s strategy, our priority is still focusing on our competitive advantage, which is self developing our MMO games, MMORPGs, but this MMO is still related to licensing opportunities as we import or export MMOs. And for secondly our web games strategy, in the past we did not focus that much on web games as of yet, but starting from now, yes, you’re correct, we are going to start placing higher emphasis on web games, because this is an area that’s growing very fast, the industry. And third, we will continue to look for other import and export licensing opportunities in the market.

(Foreign Language)

And then other point on our web game strategy, our focus will be to self develop our own web games because we can see that most of the web games in the marketplace now aren’t that great. And so in order to be successful we believe that you need a really good content, fun to play and innovative game. And this is something that we will do in the web game area in the future.

Andy Yeung – Oppenheimer

Great. That’s very helpful, thank you.

Operator

Your next question comes from the line of Dick Wei of JP Morgan. Please ask your question.

Dick Wei – JP Morgan

Hi good morning. Thanks for taking my question, my first question is that can you discuss the demographics of ZT Online 2, how does that differ when you compare to other ZT version?

Unidentified Company Representative

Thanks Dick, good question.

(Foreign Language)

Jazy Zhang

(Interpreted) Yes for demographics of ZT Online 2 internally when we said about designing ZT Online 2 we had some targets, differences in targets in mind already. For example of the n-game economy, the third generation n-game economy in ZT 2 is a more fair and balanced system compared to your traditional item based n-game economy. So the spending is more fair and balance, its more approachable for most gamers. And so this of course is going to attract more lower spending gamers than ZT original and we’ll let the higher end accounts be even more willing to stay in ZT original. There is also a lot of community based or social casual features that we’ve added into to ZT 2 to attract these more casual gamers, for example some casual mini games such as farming games, pet raising activities and things like that that have been successful in increasing the percentage of female players in ZT 2 compared to before.

Dick Wei – JP Morgan

Good if I guess (inaudible) in terms of age as well as in terms of geographic locations? Thanks.

Unidentified Company Representative

Okay. (Foreign Language)

Jazy Zhang

(Interpreted) For differences in terms of age and area, while the geographical demographics for ZT 2, for all our games it’s generally pretty much well covered throughout China. But maybe some higher concentration in places, such as Northeast China, Sichuan, Guangdong areas like that but for the age of players in ZT 2, the average is pretty much the same, may be just one or two years lower than ZT original, but very similar. And so in terms of demographics, most of the differences are coming from user habits and behavior.

Dick Wei – JP Morgan

Great, thank you very much…

Operator

I’d like to hand back now for closing comments.

Richard Chiang

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

Operator

That does conclude our conference for today. Thank you for participating. You may now all disconnect.

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