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Shanda Interactive Entertainment Ltd. (NASDAQ:SNDA)

Q1 2007 Earnings Call

May 22, 2007 9:00 pm ET

Executives

Frank Liang - Director of Corporate Financing and Investor Relations

Jun Tang - President, Director

Daniel Zhang - Chief Financial Officer, Vice President, Director

Tianqiao Chen - Chairman of the Board, Chief Executive Officer

Analysts

Tony Gikas - Piper Jaffray

Dick Wei - JP Morgan

Evan Wilson - Pacific Crest

Tian X. Hou - C.E. Unterberg, Towbin

Richard Ji - Morgan Stanley

C. Ming Zhao - Susquehanna Financial Group

James Mitchell - Goldman Sachs

Qiu Chang - Shaw Capital Management

Wallace Cheung - Credit Suisse

Paul Keung - CIBC World Markets

Presentation

Operator

Welcome to today’s Shanda Interactive Entertainment’s first quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Frank Liang, Shanda's Director of Investor Relations. Sir, you may begin.

Frank Liang

Thank you, Operator, and welcome everyone to Shanda's first quarter 2007 conference call. I would also like to give a special thanks to our friends in the U.S. who joined this call at a later hour. As always, we appreciate your participation.

With us today on the call are Tianqiao Chen, our CEO; Jun Tang, our President; and Daniel Zhang, our CFO.

After the close of the U.S. market today, Shanda issued its first quarter earnings release. Copies of the release have been sent to you for your information and reference during this call. A copy of the release is also available on Shanda's corporate website at www.snda.com.

The purpose of this call is to provide investors with some further details regarding our financial results and to provide a general update on the company. Following our formal remarks, we will be happy to take any questions you might have.

Starting from this quarter, management will provide their remarks in a new order, with President Jun Tang providing business updates first, CFO Daniel Zhang commenting on financial performance second, and CEO Tianqiao Chen closing with the company strategy.

Before we begin, I would also like to remind you that during today’s call we will make certain forward-looking statements that are intended to qualify for the Safe Harbor from liability for such statements established in the U.S. Private Securities Litigation Reform Act of 1995. All statements during the conference call other than statements of historical facts are forward-looking statements. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will be correct. Risks and uncertainties could cause our actual results to be materially different from our expectations, including the risks set forth in our filings with the U.S. Securities and Exchange Commission.

Now with that, I would like to turn the call over to our President, Jun Tang.

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Jun Tang

Thank you, Frank and thank you, everyone, for joining the conference call today. In my presentation, I am going to talk about Q1 performance and future growth.

In the first quarter of 2007, we achieved continued success. Total revenues grew 13.1% quarter over quarter and 55.9% year over year. Operating margin reached 42.2% compared with the 33% in the previous quarter, and the net income grew 86.8% quarter over quarter to $58 million.

Online game revenue increased 12.2% quarter over quarter and 63.1% year over year to a record high of $65.3 million. This strong performance was driven by the growth both in MMORPGs and casual games, which benefited from the release of the game expansion packs as well as in-game promotion relating to the Chinese New Year holiday period.

Revenues from our MMORPG games rose 9.5% sequentially to $53.5 million, driven by the quarter over quarter growth from most of our MMORPG titles, with Mir II, Woool, Magical Land and ArchLord as the biggest contributors. The overall all-around growth in our MMORPG business was primarily due to the continued release of expansion packs and the various in-game promotions held during the Chinese New Year period.

In the first quarter, we released a large scale expansion pack for all our existing MMORPGs as scheduled. These expansion packs improved the game performance and were favorably received by our users.

At the same time, we held an in-game promotion during the Chinese New Year period. We successfully increased existing user participation of our value-added service by offering users the opportunity to win a [gate pass] and lucky money. As a result, ARPU for MMORPGs increased 7.1% quarter over quarter to RMB59, and the active paying accounts increased 2.3% quarter over quarter to $2.34 million.

Turning to casual games, revenues for the first quarter increased 26.3% quarter over quarter to $11.8 million. The increase in revenues of casual games was primarily due to the expansion packs, winter holidays and an in-game promotion related to the Chinese New Year. Similar to the performance of our MMORPGs, we saw a strong growth for most of our casual games, among which Maple Story, BNB, GetAmped and Crazy Kart contributed the largest gain.

Active paying accounts for casual games increased 21.5% quarter over quarter to $2.38 million and ARPU for casual games increased 4% quarter over quarter to RMB12.7.

In summary of the Q1 performance, we had a great quarter.

Now I am going to talk about the future growth, including expansion packs and new titles. Future growth driven by the increase of existing games and we believe our existing titles will continue to grow as we keep on launching large-scale expansion packs and introducing new services.

In Q2, we are releasing expansion packs for major titles, including Fear Herald for Mir II, Confinement for Woool, Frontier Man for ArchLord, [Bach] for BNB, Vacation for Maple Story and the National Auto for Crazy Kart. We have already started preparing the new expansion packs for 2008.

Looking at our new titles, in addition to the expansion packs, we look forward to releasing a series of high quality titles in the coming quarters, including Changchun, Majesta, Kung Fu Master, and [Sorel], with commercial launches of cartoon MMO game LaTale in early April and the results so far have been very encouraging. We believe the game will make considerable contributions to our revenue in Q2.

Today, we also announced our licensing of the Korean casual game Tales Runner, which we plan to launch in China in Q3 this year. The game has gained a solid reputation in Korea, Japan, Taiwan, Hong Kong and Thailand, and recently recorded over 80,000 peak concurrent users in Korea.

We also have great confidence in Tales Runner’s performance in China, especially with the upcoming 2008 Beijing Olympic Games. We believe that the Olympics event will launch a greater interest in sports games nationwide and we plan to introduce additional sports games in the future.

In summary, our online gaming portfolio showed a very solid quarter of growth and continued to perform well. We look forward to an active period of new game launches throughout the remainder of 2007. We have started to build up our pipeline in preparation of 2008 and 2009, and we will continue adding titles in our platform. We believe all these factors will help us maintain the portfolio of high quality content and will further drive our game business and success in the coming years.

With that, I will turn the call to Daniel.

Daniel Zhang

Thank you, Jun and welcome, everyone. First quarter total net revenues were $68.8 million, up 13.1% quarter over quarter and up 55.9% year over year. Gross margin was 65.2% in this quarter, compared with 62.9% in Q406 and 56.8% in Q106. The improvement in gross margin was mainly due to more efficient absorption of fixed cost of services as a result of continuous revenue growth.

Income from operations was $29 million in this quarter, up 44.7% quarter over quarter. Operating margins increased from 33% in Q406 to 42.2% in Q107. The improvement in operating margin was due to more efficient absorption of fixed cost of service and expenses as a result of continuous revenue growth, as well as our continuous efforts to cost control that resulted in lower product development and sales and marketing expenses.

As a percentage of revenues, general and administrative expenses also declined. Other income showed a sequential decline of 71.2% to $1 million, primarily due to a decrease in a foreign exchange gain partially offset by the increase of government financial incentives. Given plans [inaudible] including an active plan to explore overseas markets in Q107, Shanda Interactive Entertainment Limited, our listing company, incorporated in the Cayman Islands, changed its functional currency from RMB into U.S. dollars. As a result, the exchange gain of approximately $1.9 million from the valuation of the monetary assets and liabilities denominated in U.S. dollars in Shanda Interactive, mainly including U.S. dollars deposit and our $275 million, of $17 million of convertible bonds was not recorded in the statement of operations. Instead, it was treated as a tabulated translation adjustment under shareholders equity in the consolidated balance sheet. This resulted in an exchange loss of $0.6 million shown in the consolidated statement of operations for the first quarter of 2007, which represented the exchange loss incurred by the U.S. deposits in the entities other than Shanda Interactive.

Equity and loss in affiliates increased 162.7% quarter over quarter to $2.1 million in Q107, mainly because of loss recognized from Actoz’s sale of its 40% share holding in Wemade, amounting to approximately $0.8 million. A loss was recognized because the accounting value of Wemade in our financial statements was higher than the sales price for our proportionate interest in Wemade through Actoz.

Net income in Q1 was $58 million compared to net income of $30.8 million in Q4 and net income of $1.5 million in Q106.

Diluted earnings per ADS was $0.80 in Q1 compared to diluted earnings per ADS of $0.42 in Q4 and diluted earnings per ADS of $0.02 in Q106.

Non-GAAP net revenue in Q1, which excludes net gains from disposal of SINA stake, was $26.4 million, compared to non-GAAP net income of $22.2 million in Q4 and income of $1.5 million in Q106.

Non-GAAP diluted earnings per ADS was $0.36 compared to non-GAAP diluted earnings per ADS of $0.30 in Q4 and $0.02 in Q106.

The adjusted effective tax rate, after excluding from profit before taxation the net gain from disposal of SINA stake, which is free of income tax as the company was incorporated in the Cayman Islands, was 9.8% in Q1 2007 compared to 5.2% in Q406. The increase of effective tax rate was mainly because of the expiration of tax holiday for some of our operating subsidiaries. For the whole year 2007, we expect our effective tax rate to be approximately 10%.

Turning to our balance sheet, prepayment cards and other current assets increased to $24.6 million in Q1 from $6.6 million in Q406, mainly due to guaranteed deposit we paid for licensing Changchun Online. In April, the guaranteed deposits were returned to us.

Long-term assets increased to $20 million in Q1 compared with none in Q4, due to the payment of up-front licensing fee for Changchun.

Investment in equity securities increased 5.3% quarter over quarter to $45.6 million in Q1, mainly because we additionally acquired the stake of Actoz in the open market. As of March 31, 2007, our stake in Actoz increased to 45.6%.

Deferred revenue increased 48% quarter over quarter to $38.6 million as of March 31, 2007, as distributors bought more prepaid cards and our intensive promotions during the Chinese New Year holiday.

As of March 31, 2007, Shanda's cash and cash equivalents, short-term investments and marketable securities totaled $462.5 million.

Now, I would like to give our business outlook for the next quarter. The actual Q1 results exceeded our guidance mainly due to the better-than-expected effect from in-game promotions and the strong season. Generally speaking, Q2 is a weak season for online games. However, we still maintain our confidence in achieving a quarterly growth. We currently anticipate total net revenue target for the second quarter of 2007 to be in the range of $70.9 million and $72.9 million, representing an increase of 3% to 6% from the first quarter of 2007.

Given more marketing activities related to new games and new expansion packs in Q2, we expect operating margin in the second quarter of 2007 to reduce but be no less than 35%.

In giving our financial targets above, we caution that we cannot predict the future exchange rate of RMB against the U.S. dollar, and therefore cannot accurately and with any degree of certainty estimate the effects of any change in the exchange rates in our financial results. Accordingly, in giving our financial targets above, we assume no change in exchange rate in the second quarter of 2007 and have adopted a foreign exchange rate as of March 31, 2007, which is $1 equal to RMB7.7342. Our actual results could differ, however, from the financial targets above as a result of fluctuations in exchange rates.

With that, I will turn the call to Tianqiao.

Tianqiao Chen

Thank you, Daniel. In the first quarter of 2007, we achieved solid success with growth in all key statistics. We have seen strong financial growth in total revenue, operating income and net income. We have also seen significant sequential improvement in MMORPGs and casual games, as well as in active paying accounts and ARPU figures.

We have achieved continued growth during the last five quarters since we initiated the transition in late 2005. This quarter, we are glad to see that our online games inventory reached an historical peak and generated the industry’s highest quarterly revenues. Continuous and steady growth not only demonstrates the successful transition of our core business but also the sustainability of the CSP model. It further indicates that China’s online game market is growing at a fast pace and as an industry leader, Shanda is positioned to enjoy a heavy share of the market growth.

Here, I would like to extend my special thanks to all of our investors and analysts for their support during our transition period.

Going forward, we will focus our major business on the following three strategies.

Firstly, we will continue enhancing our content. As mentioned before, Shanda implemented a parallel approach of developing in-house games as well as licensing content from third party producers. This balanced approach allows us to partner with world leading game developers and steadily improve our in-house developing capability. Here, I would like to highlight three points.

First of all, under the CSP model, the release of expansion packs for existing titles is as important as the introduction of new games. Due to the existing large user base, updated existing titles are even more capable of attracting new users and generating revenues than successful new titles.

Second, Actoz, the South Korean company in which we have a controlling stake, has been our important game content provider in South Korea. After three years of development, the company has prepared a total of six online games in the pipeline. One of the titles, LaTale, has achieved great success since its initial launch, as Jun mentioned previously.

While Actoz will continue to play an important role as a content provider, we will also pay more attention to the domestic market and plan to invest in high quality domestic games going forward.

Furthermore, in order to prepare for the upcoming 2008 Beijing Olympic Games, we have licensed Tales Runner and we will license more sports games in the near future. We also have several sports titles under development. We believe that in the near future, Shanda will present the industry a rich library of sports games.

Third, our operating infrastructure and platform have improved a lot during the transition, thus enabling us to better allocate our abundant cash to license more good titles based on our own standards. Here, I am happy to tell you that we expect to enter into a license agreement for another high quality 3D game in July this year.

In addition to content enhancements and we will continue strengthening our platform, four of the 20 games that have been in operation on our platform have been successful and our sales and marketing expenses have grown less than those of our competitors, which explains the reason for the continuous improvement to our operating margin.

Going forward, we will strengthen our platform. We will focus more on enhancing online gaming and the online game community. Following our transition to the CSP model, our online titles will turn from individual products to ongoing communities, and we will further build up a unified Shanda online community. This explains why we have been able to prolong the lifecycle of our online games into users’ visits and increased ARPU. In the future, we will also closely monitor and learn from the new trends and technological developments related to virtual communities in other international markets in an effort to improve and grow our own platform.

Thirdly, we will continue to see some new growth drivers focused on our users. First of all, we will make better use of our existing users. As you know, we have currently 80 million active users per quarter, but paying accounts only account for about 6% of our active accounts.

On the one hand we have a lot of room to improve our APA and ARPU figures. On the other hand, we enjoy a distinct advantage in building in-game advertisement business compared to our peers.

Secondly, we will work hard to attract new users, which is also an important goal for our soft console strategy and home strategy. Here, I would like to note that both our IGA strategy and the home strategy embraced the opportunity brought forward by the 2008 Olympic Games and we believe that these strategies will become new drivers of Shanda's long run growth.

Finally, I would like to reiterate that content, community and commerce is the strategy we have outlined for Shanda's development in the next five years. We will use our entertainment content to attract users, use our game communities to retain them, and generate profit through our innovative business models. We are very confident that China’s online gaming market has great potential in the future and that Shanda will continue to lead the market and create lasting value for our shareholders.

That concludes my formal comments. Thank you, everyone, for joining us today. I would now like to turn the call back to Frank.

Frank Liang

Thank you, Tianqiao. Operator, we are ready for questions. We can begin the Q&A session now.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Tony Gikas with Piper Jaffray. Please go ahead.

Tony Gikas - Piper Jaffray

Good morning, gentlemen and congratulations on a terrific quarter. A couple of questions; recently, one of your competitors partnered with one of the large U.S. publishers for some sports properties. In your opinion, what’s your opinion of this type of a relationship? Do you expect to see a large number of these licensing opportunities with established players in the U.S.?

Jun Tang

You probably saw the news, as you mentioned. It shows the huge potential of the Chinese online game market is once again approved by the large companies, like EA. Actually, w are pleased that more and more industry players have recognized the value of the market, especially in the Chinese market. EA’s participation will make the competition of the Chinese online game market more organized and healthy. From that perspective, we absolutely welcome EA’s presence.

As the leader in the Chinese online game market, Shanda is never afraid of any competition with the global companies. It has been shown that local companies will have more advantage over the foreign competitors in the online game market and certainly Shanda is always very open to cooperate with global industry players.

Tony Gikas - Piper Jaffray

Just a follow-up, could you provide us with an update on the licensing opportunities? Are there a large number of good intellectual properties available in the market and are they affordable? Is pricing remaining stable or is pricing increasing?

Jun Tang

Actually, we are in talks with many players in Korea, Japan and the U.S. and some of them are in pretty good condition now.

In terms of the pricing, in this highly competitive market, the pricing for the license fee is getting higher and higher, but we at Shanda, we always try to balance the investments and return. From our past experience, I think we are doing very good in that sense and I think we will get a better return, no matter how much we pay for the license fees.

Tony Gikas - Piper Jaffray

Thank you. Great job.

Operator

Your next question comes from the line of Dick Wei from JP Morgan. Please go ahead.

Dick Wei - JP Morgan

Thanks for taking my questions and congrats on a very strong quarter. I have two questions. The first question is if you can give us an update in the in-game advertising in the first quarter. That would be great.

My second question is regarding the server leasing and the bandwidth costs. It seems like it continues to come down in the absolute terms. Is there any indication I can see from the average concurrent user for Shanda, or was it more because of the server costs coming down or more server consolidation is happening? Thanks.

Jun Tang

I’ll take the first one and Daniel will answer the second question. In terms of the IG business, we have been working on this IGA technical solutions for more than one year. By now, we have solved all technical problems and we are in our internal testing period. So far, the results for all the games are very, very positive and encouraging. We plan to launch our business in this year probably earlier than we have expected. Again, I want to emphasize that -- the IGA business will make a contribution to our revenue in 2008 in terms of the revenue but mostly on the bottom line.

Daniel Zhang

I will answer the second question. In terms of server leasing costs, actually Shanda has followed our procedures and control points to periodically review our servers and periodically combine the servers, if necessary. So when you look at our Q1 results and you can see that our server leading costs continues to slightly reduce compared to the previous quarter, but now -- my view is that actually we are trying, we are always trying to maintain the server cost at a reasonable level. I think current, as in our achievement and show this better results. Going forward, we will continue to work on this. Thank you.

Operator

Your next question comes from Evan Wilson from Pacific Crest. Please go ahead.

Evan Wilson - Pacific Crest

Congratulations on the good results and good morning. I was curious if you could give us a little detail on when you mentioned the sports business, if you plan to pursue licenses from a particular pro sports organizations. Secondly, if you could talk specifically to the ARPU and the massive multiplayer business and where you think it can go from here, how much growth you could see over the remainder of the year? Thanks.

Jun Tang

We just made an announcement that we are licensing the Tales Runner, which is a Korean game, a sports game. It has proven very successful in Korea, which recorded 80,000 concurrent users in Korea, just for your information. A game like that successful in Korea will definitely make a great success in China. That’s why we entered this business.

I think with the coming year of the Beijing Olympics, we are very confident that that kind of sports will have room in China. That’s why we are internally developing some sports games and also we are actively talking to other players we can license from. That’s the one thing.

In terms of the ARPU for the last quarter, or continues in the coming quarters, we have two ways to improve the ARPU. One is to make an expansion pack and also doing a lot of in-game events. For the first quarter, I think the ARPU contributed mainly from the in-game events. We are targeting the Chinese New Year and a lot of people get lucky money or pack, which made a great contribution to ARPU.

We think ARPU will continue to grow. If you look at our competitors in China which have adopted and follow Shanda's CSP model, their ARPU is probably reaching to RMB100. Today’s ARPU is RMB59 and I think we still have a lot of room to grow. However, we like to grow the active paying accounts faster than the ARPU. We try to work more in-game events and try to balance the growth both of the ARPU and the APA.

Evan Wilson - Pacific Crest

Thank you.

Operator

Your next question comes from Tian Hou with Unterberg, Towbin. Please go ahead.

Tian X. Hou - C.E. Unterberg, Towbin

Congratulations on a good quarter. I have several, or a couple of questions. The first one is regarding the expansion pack. I heard you mention five expansion packs for existing titles. Am I right?

Tianqiao Chen

Yes, you are right.

Tian X. Hou - C.E. Unterberg, Towbin

Okay, and also for the new titles, you have Changchun you are going to launch and LaTale. What is another one? There were three new titles you are going to launch in the second quarter, am I right?

Jun Tang

Yes, in the second quarter we have LaTale, and one I did not mention is Kung Fu Master.

Tian X. Hou - C.E. Unterberg, Towbin

Okay, so --

Jun Tang

And to emphasize the expansion packs, the expansion packs become a major contributor for our business and games. If you look at our growth over the last five quarters, it is all organic growth and the driver for this organic growth is all coming from the expansion packs. We have made an expansion for the next two or three quarters and we are working on the expansion packs for 2008.

Tian X. Hou - C.E. Unterberg, Towbin

Okay, and I also understand you just made two new announcements. One is the Tales Runner, one is Tianqiao, another new 3D game is going to be licensed in July. Am I right?

Jun Tang

Yes, we just made an announcement and as you mentioned, the Tales Runner and also Tianqiao mentioned that we are going to have a new 3D game as well.

Tian X. Hou - C.E. Unterberg, Towbin

Okay, and also we heard you guys licensing your own in-house developed game to Southeast Asian countries. Can you make some comments on that?

Jun Tang

Again, we are still trying to focus our business, our core business in China because we still believe the Chinese market has huge and great potential over the next few years. So I think we will continue to focus our core business in China but if there are opportunities out there in China, we certainly are open to that kind of business. But again, our core business is still in China and we will continue focusing on the Chinese market.

Tian X. Hou - C.E. Unterberg, Towbin

Thanks a lot.

Operator

Your next question comes from Richard Ji from Morgan Stanley. Please go ahead.

Richard Ji - Morgan Stanley

Great quarter. I have two questions. Number one, you obviously have adopted a very balanced game development strategy from both the licensing end and the self-development end. Just talking about in-house development, other than LaTale from Actoz and some of the expansion packs you mentioned, any other hits that are under development that you may have great expectations?

Jun Tang

Yes, as we mentioned, we have two parallel pipelines. One is for in-house and one is for licensed. In terms of in-house, we have two sources. One is the company called Actoz, which we have a contributing stake. They continue to generate titles for us.

Secondly, Shanda's in-house development and we are working on several titles, including both the MMORPG and also casual games. In terms of MMORPGs, we are working on the series two of the Woool II, which is in pretty good shape today.

Richard Ji - Morgan Stanley

The second question is regarding your cost-saving efforts. You clearly have done a great job in scaling back your costs over the past one year and we have seen sales and marketing costs, R&D costs consistently declining as a percentage of revenue and also -- can you provide us with some clarity about your long-term target for cost savings and how sustainable that is?

Tianqiao Chen

Okay. As you can see, we have made a great effort to control our costs and expenses during the past few quarters. I think the current operating margin shows a very good result. Going forward, I think we will actually -- to me, my view is that cost control is an ongoing exercise and we will try to maintain this operating margin in the future.

I think in the future the margin will be more balanced. I think we will show better results in the future.

Operator

Your next question comes from Ming Zhao from SIG. Please go ahead.

C. Ming Zhao - Susquehanna Financial Group

Thank you for taking my questions and congratulations. First question is actually about your game licensing strategy. If we look at the games you licensed and again operating in the past few quarters, it seems to me that the growth contributed by these new games are pretty much gradual or moderate. Maybe below 5% for each game. My question is if you look at other competitors, it seems like they are betting on one single game to contribute a big increase in revenue. So my question for you is that in your pipeline, do you see one game, whether it’s Changchun or LaTale, certainly contributing an increase of revenue in the range of 10% or do you see a similar pattern, that it will grow more gradually and you will have a lot of pipeline to see the growth?

Jun Tang

In our strategy, we try to grow our portfolio as we mentioned. There are two areas. One is we focused more on the organic growth which has contributed in the last six quarters and continues to make growth over the next year or so. That’s the beauty of our CSP model. As long as you have a great community and you leverage this community and adding on expansions packs, which in some sense this is called new. If you look at today’s game of Mir II or Woool and compare it to two years ago, it is a totally new game. That’s the one thing. We try to maintain our organic growth without adding new games.

In terms of new titles and starting this year, we are adding more and more new titles. If you look at LaTale, which probably is the first one in 2007 and will have some considerable contribution in the second quarter. That’s one thing. The second is we are going to have more and more titles coming in our pipeline. If you ask which titles you think will have the most contribution to our revenue, personally different people have different views. Personally, I think Changchun will make a great contribution in 2008. we have high expectations.

We have greater additions to our revenue pipeline. Even without this kind of new titles, we will continue to have organic growth and also for new titles, we will have greater contribution for that. Certainly we would prefer a diversified contribution from different titles. That’s why you see if you look at our competitors, probably they have only one or two or three titles, but our portfolio if you look at our titles, we’re more than 20 titles and we have more diversified and more balance.

C. Ming Zhao - Susquehanna Financial Group

Okay, just very quickly on the other revenue in the first quarter, what exactly contributed that growth and what should we expect for the future quarters this year? Thanks.

Daniel Zhang

In other revenues, mainly including two factors. One is the government financial incentives. Actually, as you know we recorded the incentives on a cash basis. That means once we receive the cash, we record the government financial incentives. The other thing is the exchange gain or loss and it is heavily dependent on the fluctuations and trends of the exchange rate going forward.

So going forward, I think the other income will still mainly include these two factors. Thank you.

C. Ming Zhao - Susquehanna Financial Group

I think I’m asking about the top line, the other revenue, not the other income.

Daniel Zhang

Okay, the other income, in other income we mainly include our advertisements, sales and other sales of products and all our revenue generated from our online [inaudible] sector. Going forward, we think that our other revenue will steadily increase as a result of our business development. Thank you.

Operator

Your next question comes from James Mitchell of Goldman Sachs. Please go ahead.

James Mitchell - Goldman Sachs

Thank you for taking my question. Could you talk qualitatively about your casual game business and whether the revenue casual game business is still driven by BNB and Maple Story or whether your self-developed casual games are contributing materially to your revenue yet? Thank you.

Jun Tang

Casual games are also our focus. If you look at our overall portfolio, casual games contributed probably more than 10% or 15% of total revenue, primarily contributed by BNB, Maple Story and other casual games in-house developed. Going forward, we are focusing quite a lot in the casual games area, as I mentioned with Tales Runner, which we just licensed. Also, we are making -- our in-house developing casual games for the next few quarters and you will see some of that kind of result contributing to our revenue.

James Mitchell - Goldman Sachs

Okay but for the first quarter specifically, should I assume that the growth was driven by a rebound in BNB and Maple Story, or whether also substantial contributions from other casual games?

Jun Tang

Primarily coming from the top casual games; BNB, Maple Story and Crazy Kart, those kinds of casual games, yes. We did not add a new causal game to our portfolio in the last quarter but we are going to add more titles in.

James Mitchell - Goldman Sachs

So within your casual games business, the Crazy Kart game would be your most successful self-developed game?

Jun Tang

Yes.

James Mitchell - Goldman Sachs

Great. Thank you.

Operator

Your next question comes from Qiu Chang from Shaw Capital Management. Please go ahead.

Qiu Chang - Shaw Capital Management

Thank you very much for taking my questions. First, congratulations. My question for you is just about the new games. I am wondering if the new games will cannibalize the older games. In other words, the people will shift from the older games to the new games. Do you see that problem?

Jun Tang

No. If you look at our past experience, even internal/external, even with other competitors launching new games, we did not see the cannibalizations among companies or among games, not even mentioning the internal games as well. So in the last five years experience, there was virtually no cannibalization, though you may attract some of the users but it is not meaningful.

The reason behind that is number one, the Chinese online gaming market is huge. Secondly, once you stick with one game, you basically cannot or you do not want to leave the game with the investment you have made -- your time, your money, your friends, the community inside the game. That’s why we didn’t see and we are not going to see the cannibalization among the games.

Qiu Chang - Shaw Capital Management

Okay, for your game pipeline, do you think -- we know NetEase has problems, they reported yesterday, about their gaming pipeline. With so many games in your pipeline, do you see any problem in the future? You may have a similar problem like the game couldn’t launch as you expected?

Jun Tang

When we are selecting our titles, we are very, very careful and we do a lot of the evaluation of games. So far, we haven’t seen that kind of problem. The good thing about our company that is different from others is that we have a great platform. That was our core competence, the operation, the channel, the marketing engine, that kind of thing. It will make a company capable for running different titles, different games and different types of games, and most often are successful.

Qiu Chang - Shaw Capital Management

I see. In terms of the R&D expense, I am wondering, I saw the R&D expense going down. Is this going to decrease the development of new games?

Daniel Zhang

No, actually in our schedule, we still strictly follow our pipeline to do the in-house development. In terms of the reduction in R&D expenses, I would say one reason is that we more efficiently control the outsourcing exercise, which made a great contribution to the reduction. Also, we will more efficiently and we have more efficiently reorganized our R&D teams to cut the labor costs. Thank you.

Qiu Chang - Shaw Capital Management

In the beginning of this year, there’s a -- you talk about new games like Woool II and Dungeons and Dragons Online, things like that. Is this the game you mentioned today, or --

Tianqiao Chen

Yes, as I mentioned, our in-house developed MMORPG is the Woool II and we are still in the middle of the development and we should be able to make a launch sometime later this year or so.

Qiu Chang - Shaw Capital Management

How about the Dungeons and Dragons?

Tianqiao Chen

Yes, and still we are -- everything we have announced it and it is still in the process of the development cycle, and again in very good shape.

Qiu Chang - Shaw Capital Management

Thank you very much.

Operator

Your next question comes from Wallace Cheung from CSFB. Please go ahead.

Wallace Cheung - Credit Suisse

Good morning. Thanks for taking my questions. Congratulations. Great quarter. Two questions; firstly, can you explain why you have to increase the investment in the Actoz? How do you see the synergy between Shanda and Actoz?

My second question is on the CB refinancing, because after selling all the stakes, I think Shanda has a lot of cash. Do you have any plans now to refinance or pay back on the convertible bonds and what kind of approach are you going to do? Thank you.

Daniel Zhang

I’m glad to answer these questions. Question number one; actually, as we reported, we additionally acquired a state of Actoz in the open market in Q1. The main reason is that now Actoz became a very good source of the in-house game developer and they already contribute a good title, LaTale. Going forward, I think they will continue this contribution. I think this will, the additional acquisition will make a further commitment for both of us. We will benefit in our future operations.

Question number two, actually as you can see that we now have our cash and cash equivalent plus short-term investment as well as a marketable security totaled $462 million. We have plenty of cash to repay the CB when it is due this October. Thank you.

Wallace Cheung - Credit Suisse

Can I ask one follow-up question, again on the Actoz side? Do you have interest even just simply taking over the whole company, or at least increase the stake more than 50%?

Daniel Zhang

We will gradually -- now we still look around the market and we will determine the next action based on the market conditions.

Wallace Cheung - Credit Suisse

But then do you have any management control of Actoz right now, like board seats or maybe extending any CFO or any kind of management over there?

Daniel Zhang

Yes, we now control the board seats. We are already the largest shareholder of Actoz.

Wallace Cheung - Credit Suisse

Okay, thank you.

Frank Liang

We will take another one, last question.

Operator

Our question comes from Paul Keung from CIBC. Please go ahead.

Paul Keung - CIBC World Markets

Thanks for taking my questions. Could you give us some update on your partnership with Disney Internet Group? How is your progress on the co-development of the Disney characters games? Is there any other potential for this kind of relationship? Thanks.

Jun Tang

As we have made an announcement earlier, we are partnering with the Disney Group and we are working the Disney Group on several projects. So far our team is working very hard to try to get the projects done and the overall process is in good shape and we are very happy about the partnership with Disney.

Frank Liang

Thank you, everyone, for joining us on today’s call. If you have any further questions, feel free to contact us. Thank you again.

Operator

Thank you, everyone. This concludes today’s conference call. You may disconnect your lines at this time and please have a wonderful day.

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