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Executives

Ellen Chiu -- IR Director

Alan Tan -- Chairman and CEO

Richard Wei -- CFO

Xiangdong Zhang -- COO and Chief Producer

Analysts

Timothy Chan -- Morgan Stanley

Dick Wei -- JPMorgan

Catherine Leung -- Goldman Sachs

Eddie Leung -- Merrill Lynch

Jialong Shi -- CLSA

Ming Zhao -- UBS

Thomas Cheng -- RBS

Mark Marostica -- Piper Jaffray

Alex Yao -- Deutsche Bank

Shanda Games, Ltd. (GAME) Q4 2011 Earnings Call February 21, 2012 8:00 PM ET

Operator

Welcome to Shanda Games Limited’s fourth quarter and full-year 2011 results conference call. The conference call will be recorded and available for replay in its entirety. A copy of Shanda Games’ fourth quarter and full-year 2011 results announcement can be found and downloaded from the Investor Relations website at ir.shandagames.com.

At this time all lines have been placed on listen-only mode and the floor will be open for questions following the presentation.

I would now like to introduce your host, IR Director, Ellen Chiu. Thank you. Please go ahead.

Ellen Chiu

Thank you. Good morning and good evening everyone. On behalf of Shanda Games, I would like to welcome everyone to our 2011 fourth quarter and full year financial 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’d also like to remind you that management comments during the call will include forward-looking statements that are based on our current estimates and are intended to qualify for the Safe Harbor for such statements [expressed] in the US Private Securities Litigation Reform Act of 1995. All statements that are not 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 take a minute to read the Safe Harbor statement in Shanda Games’ 2011 fourth quarter and full year earnings release.

In addition, (inaudible) for discussion purposes, all numbers will translate into US dollars based on the exchange rate of RMB6.3009 per US dollar.

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

Alan Tan

Thank you, Ellen, and thank you all for joining us today.

Over 10 years ago, Shanda Games began to become one of the largest online game companies in China. Over time our strategic vision developed as we leveraged our strategies and developed a platform along with content to support it. Eventually we emerged as [the power] in the industry that we are today. During this time, we have become (inaudible) from our strong portfolio of games and franchises as we continue to grow our pipeline to expand into new markets.

The year 2011 was not exception. We had a solid fourth quarter to finish up another good year as Shanda Games sustained its success continually in a rapidly changing market environment in China.

Our industry-leading capabilities to develop, license and distribute appealing, innovative content allowed us to generate our new historic high for first quarter revenues which increased 17.7% year over year and 0.2% quarter over quarter. Full-year net revenues increased 17.3% year over year to $838 million, which was also a new net high for us.

Our strong results give us the confidence and determination to continue to push our boundaries. We have emerged a stronger, more adaptive company as we continue to focus on opportunities that will deliver good financial returns as we diversify our revenue stream and enrich our content offering.

The consistency and success that we have [elicited] during the past year can be seen by the consecutive quarters of revenue growth which has (inaudible) after successful execution from our AAA strategy, which I will now review briefly and provide an update on.

As a reminder, the three areas stand for the three critical elements, All-Star, All-Platform and All-Region. Let me start with an update on the All-Star component of our strategy.

Our All-Star strategy has continued to allow us to provide our games with high-quality and innovative content. It has enabled us to focus our efforts and resources on developing the creative talent and (inaudible) needed to diversify our business away from just (inaudible) a new generation of franchisees.

Last quarter we successfully launched Mir III which has already begun to meaningfully contribute to our revenue despite having been released midway through the quarter. We were able to not only recognize our regional (inaudible) players into returning to the game but also attract new ones. We hope to replicate our success with Mir III as we release and develop new content to strengthen and diversify our ever-expanding portfolio of games.

Aside from the positive feedback from (inaudible) players, the performance of Dragon Nest in the first quarter also validate this strategy as we continue to capture a larger share of our revenue, demonstrating our incredible reach and audience engagement. For the fourth quarter Mir II, Woool and Dragon Nest contributed 38% (inaudible) 17% and 17% of total revenue (inaudible).

Our All-Star strategy allows us to keep a laser-like focus on securing the best catalog through licensing agreements, in-house development and the investments. This quarter we strengthened our content offering by cooperating with content providers both inside and outside channels.

Next month we will launch a partnership with Snail Game leading online game developer and operator in China. Leveraging each other’s expertise in online game operations, Shanda Games and Snail Game will jointly operate Age of Wushu, one of the most anticipated 3D MMORPGs in China in 2012. The game has already received positive (inaudible) during its closed beta testing in fourth quarter of 2011.

Following that announcement, we entered into agreement with Trion Worlds, a leading US-based game publisher and a developer, to bring its highly successful MMORPG RIFT to China. RIFT is a 3D fantasy (inaudible) MMORPG provide highly [polished] game play and deeply immersive experience to gamers. Winning many awards from prestigious game websites and other organizations. (inaudible) also attracted a devoted fan base worldwide. From what we have seen to date, gamers have high expectations for this game. Entering into agreements (inaudible) demonstrates the attractiveness of our platform, expertise, resources in game operation, and a proven track record of mobilization content. We are excited about the upcoming launch of (inaudible) as we introduce our audience to some of the best content in the industry and attract new users to our platform. Moving forward, we expect our new titles to positively impact our results in future quarters as the user interest continues to grow around it.

In addition to the above-mentioned titles, we have highly-anticipated titles in the pipeline. This summer will be introducing War II a major expansion pack to our War franchise, that will include a new engine and in-game system (inaudible) for in-game characters.

We expect to see increasing benefits from our strong portfolio of online games. Following the awards we received the last quarter for innovative online gaming content, our pipeline was further (inaudible) China game industry (inaudible) where we received (inaudible) awards including two of the top ten most anticipated online games and two of the top 10 most popular online games. The awards reaffirmed the popularity and the quality of games in our portfolio, which we believe will continue to yield strong results.

In summary, the All-Star component of our strategy serves as a cornerstone of our continued sustainable growth. This is how we approach (inaudible) our game, to guarantee that they will be the best they can be. We’re committed to providing a content (inaudible) of the new and high-quality content to ensure they appeal to our gamers.

Moving on, I will now give you an update on our All-Platform strategy. Our (inaudible) and mobile version of our existing MMORPGs provide the flexibility needed as gamers increasingly split time among different products and devices. The success of our (inaudible) technology can be seen by the positive feedback we have received (inaudible). We’re now expanding the technology and developing a dedicated (inaudible) version to work (inaudible) and are applying or expanding the (inaudible) development for many of our other existing games.

This new technology increases the speed with which users can play our games by removing the burden of having to download a full software version of our games, which we believe will provide a tremendous value to our users.

On the mobile front, our mobile game division continues to (inaudible) taking place in online social interaction and gaming. We will launch online mobile games focusing on (inaudible) based model which will provide higher quality games as well as game (inaudible) as well as the increased monetization of (inaudible). Our expertise and strong development teams allow us to bring highly interactive and sophisticated game experiences to mobile platforms to our users.

The mobile game platform we are building is soon set to release mobile versions of our current titles (inaudible) as well as some of our other (inaudible) mobile games. In addition (inaudible) invested in a number of teams dedicated to developing mobile games. One of the games (inaudible) is already one of the most popular iOS games in the Chinese market. Investment opportunities to acquire more mobile game titles are abundant and we are committed to obtain the best titles available in the mobile games market.

We will continue to expand our presence in mobile games with more launches this year. These developments represent the next steps in social connectivity and mobility for online games. As the mobile game market around us continue to grow, we are paying close attention to other opportunities that will provide us with additional avenues of growth.

Finally, I would like to provide an update on our All-Region strategy. Aside from our China operations, we continue to see our overseas operations as one of the fastest-growing segments in terms of online gaming (inaudible) our unique portfolio into new region. Building our All-Star strategy, we have continued to leverage our strong portfolio of games to expand into various regions across the globe. Our overseas revenue grew by 30% year over year -- quarter over quarter and 89% year over year in the fourth quarter due to strong contribution from the operation of Dragon Nest in Singapore, as well as licensing revenue from Dragon Nest in the US, and (inaudible) in Taiwan.

Following the successful launch of Dragon Nest in Singapore, we’re planning about bring Dragon Nest to new regions including Thailand, Indonesia, Russia and Germany. In particular we plan to operate the game in Germany through our Europe global service platform or GSP.

In terms of licensing, last quarter (inaudible) was launched by our licensee in Thailand where it has become one of the most popular games there. This quarter Legend of Immortals was launched by our licensee in Taiwan, which has also received positive initial feedback. This year we will push further abroad with launches of (inaudible) in Russia and Germany and Legend of Immortals in Vietnam and Korea.

Growth in overseas revenue is expected to accelerate as we continue to develop new opportunities to licensing, publishing and offering games in new countries and regions. Leveraging our investments in intellectual properties abroad has (inaudible) strong returns as our four GSPs continue to serve as a strong foundation for our business internationally.

We have high expectations as we truly believe that a big component of our long-term health and our critical competitive advantage with (inaudible) abroad (inaudible) by our All-Region strategy.

In closing, 2011 shaped up to be one of the busiest and most exciting years in Shanda Games’ history. We are pleased with where we are today as we look at our prospects for 2012 and beyond. Our All-Star strategy leverages our key strengths as we expanded into new segments and regions. Our (inaudible) portfolio which has never been as strong and (inaudible) where we’ve expanded geographically large mobile games and a new diversified -- and new technologies that we are providing will affect total games through (inaudible).

As the online game market continue to grow with new regions, moving into games increasing numbers and numerous devices, we will continue to leverage our strong game portfolio. (inaudible) expertise and talent critical to create (inaudible) gaming experience for players around the world.

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

Richard Wei

Thank you, Alan. As always, our full earnings release with financial statements is available on our website as well as most major financial quarters. I will now briefly review the highlights of our fourth quarter and full-year 2011 results and provide an outlook for the first quarter 2012. We’ll take questions afterwards.

In line with our previous guidance, our fourth quarter 2011 net revenues were essentially flat, increasing 0.2% sequentially and 17.7% year over year to RMB1,356 million, equivalent to $215 million. Net revenues from online games generated in China were RMB1,262 million, equivalent to $200 million, a decrease of 1.5% quarter over quarter and an increase of 14.4% year over year. The quarter-over-quarter decrease was primarily due to weaker seasonality with zero holidays and decline in revenue from Mir II which reached peaked performance during the third quarter when we launched a number of expansion packs for the game’s 11th anniversary. This was partially offset by an increase in revenue from Dragon Nest and (inaudible) revenue contribution from Mir III which we released on October 30.

Average monthly active users for MAUs for all games operating in China were 20.4 million in Q4 compared with 21.0 million in Q3. Average monthly paying users or MPUs operated in China were 4.5 million in Q4 compared with 4.6 million in Q3. The sequential decrease in MAUs and MPUs were primarily due to weaker seasonality as more gamers tend to be active during the (inaudible) promotions and some holidays which happened in the third quarter.

Monthly ARPU for all games operated in China were RMB92.8 in the fourth quarter compared with RMB91.9 in the third quarter of 2011.

Other revenues, which primarily include overseas revenues from game licensing, game operations and advertising were RMB94 million, equivalent to $15 million, up 30% quarter over quarter and 89% year over year. The sequential increase was primarily due to the first full quarter of contribution from Dragon Nest overseas operating revenues in Singapore, Malaysia, and overseas game licensing revenue from Dragon Nest in the US and Hades Realm II in Taiwan.

Gross profit increased 0.5% quarter over quarter and 19% year over year to RMB834 million, equivalent to $132 million. Gross margin was 61.5%, up from 61.3% in third quarter of 2011 and 60.8% in the fourth quarter of 2010.

Operating income increased 11% quarter over quarter and 22% year over year to RMB401 million, equivalent to $62.6 million. Operating margin was up to 29.6% in Q4 compared to 26.7% in the preceding quarter and 28.2% in the year-ago period. Long-term operating margin was 32.7%, essentially flat compared with 32.0% in Q3 and 33.9% in the year-ago period. Our non-GAAP operation excludes the impact of share-based compensation expense for amortization of acquisition-related intangible assets and (inaudible) income tax effects.

Income tax expenses were RMB226 million, equivalent to $36 million, compared with RMB94 million in the preceding quarter and RMB87 million in the year-ago period. The sequential increase was primarily due to a RMB134 million accrued withholding tax associated with dividend distribution from the company’s subsidiaries to their holding companies overseas. Excluding the accrued withholding tax impact, effective tax rate would have been 16.9% compared with 21.2% in Q3 and 18.9% in Q4 of 2010.

The quarter-over-quarter decrease in effective tax rate was mainly because of large amounts of government subsidies in Q4 were granted to a subsidiary that enjoyed lower tax rates, and one of our Korean subsidiaries did a revaluation of [statutory tax rate] in Q4, resulting in reduction in tax expenses for the quarter. The company expects effective tax rate for Q1 2012 to be similar to Q3 2011.

Net income attributable to ordinary shareholders was RMB304 million, down 11% quarter over quarter and 17% year over year. The decrease was mainly due to the accrual (inaudible) mentioned about earnings per diluted ADS were RMB1.08, equivalent to $0.17 compared with RMB1.30 in the third quarter of 2011 and RMB1.30 in the fourth quarter 2010.

Non-GAAP net income attributable to ordinary shareholders totaled RMB236 million, down 17% quarter over quarter and 21% year over year. Non-GAAP earnings per ADS, per diluted ADS, were RMB1.30, equivalent to $0.19, compared with RMB1.42 in the third quarter and RMB1.50 in the year-ago period.

Turning to balance sheet, the company’s cash and cash equivalents total investments, restricted cash and time deposits net of loans and dividend payable decreased from RMB2.7 billion as of the end of Q3 to RMB2.2 billion, equivalent to $343 million, as of the end of Q4. The decrease was mainly due to the recognition of RMB1.8 billion dividends payable in the fourth quarter and partially offset by cash flow generated from operations in Q4 total of RMB413 million, equivalent to $66 million.

Now we’ll quickly provide the financials for our full-year 2011 results. Revenue for the full-year 2011 totaled RMB5.5 billion, equivalent to $838 million, representing an increase of 17.3% from RMB4.5 billion in 2010. Gross profit for the full year increased 21% year over year to RMB3.2 billion. Gross margin was 61.1% compared with 59.2% in 2010.

Operating income for the full-year 2011 increased 11% year over year to RMB1.5 billion. Operating margin was 27.9% compared with 29.6% in 2010. Non-GAAP operating income for the full year increased 11% year over year to RMB1.7 billion, equivalent to $274 million. Non-GAAP operating margin was 32.7% compared with 34.5% in 2010.

Net income for the full year decreased 2% to RMB1.3 billion, equivalent to $201 million. Earnings per diluted ADS were RMB4.46, equivalent to $0.70, compared with RMB4.52 in 2010. Non-GAAP net income for the full year was RMB1.5 billion, equivalent to $234.3 million, essentially flat from 2010. Non-GAAP earnings per diluted ADS were RMB5.20, equivalent to $0.82, compared with RMB5.18 in 2010.

I will now turn to guidance for the first quarter of 2012. We expect our revenues in Q1 to grow at 2% to 4% sequentially, equivalent to 13% growth year over year, and expect our non-GAAP operating, which includes the impact of (inaudible) of acquisition-related intangible assets and (inaudible) income tax effects to be flat compared with Q4’s non-GAAP operating margin. Share-based compensation expense in Q1 is projected to be approximately RMB18 million (inaudible) approximately RMB8 million in government subsidies in Q1.

That concludes my discussion. I would now turn it back to -- I’ll turn the call back to Ellen.

Ellen Chiu

Thank you, Richard. We will now take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Ladies and gentlemen, welcome to the question-and-answer session. (Operator Instructions).

Your first question comes from the line of Timothy Chan from Morgan Stanley. Go ahead, please.

Timothy Chan – Morgan Stanley

Hi, Alan, Richard and Ellen. Good morning and thanks for taking my question. My first question is that given that you have a very strong game pipeline, could you share with us some of the launch schedule of (inaudible) for example, Final Fantasy as well as Dragon Ball Online? And what is management’s expectation on the games? Are they likely to turn into new growth driver for the company? And I will have a follow-up question after that. Thank you.

Alan Tan

(Chinese language spoken)

Ellen Chiu

Indeed we have a very rich pipeline in 2012, including RIFT, [Age of Wushu], (inaudible) and Final Fantasy 14, of course as well as (inaudible) and other license or in-house developed games. And we will (inaudible) the internal (inaudible) data performance, the game performance to launch the game.

Alan Tan

(Chinese language spoken)

Ellen Chiu

For the above-mentioned titles, we should launch that within this year.

Timothy Chan – Morgan Stanley

Thank you. My second question would be, could you talk about the latest management change at Shanda Games? And how should we think of the impact if any to your company? Thank you.

Alan Tan

(Chinese language spoken)

Ellen Chiu

We currently have announced that our President and (inaudible) COO has been transferred to (inaudible) under Shanda Group. And other than that, we don’t have additional management changes.

Alan Tan

(Chinese language spoken)

Ellen Chiu

The management changes doesn’t have any material impact to our management structure or business operation.

Operator

Right, thank you. Our next question comes from the line of Dick Wei from JPMorgan. Go ahead, please.

Dick Wei – JPMorgan

Hi, morning. Thanks for taking my questions. My first question is, can you recap the revenue ranking and the revenue contribution for your top games please? Thanks.

Richard Wei

(Chinese language spoken)

Ellen Chiu

For the top games, the top three we have already mentioned in the call now, they are Mir II, Woool, Dragon Nest, and Mir III is our newly-launched game and is performing quite well. And in terms of the revenue contribution, it’s already close to Legend of Immortals.

Dick Wei – JPMorgan

So, do you mean the half-quarter revenue is equal to or maybe the full quarter will be similar to the Legend of Immortals?

Alan Tan

(Chinese language spoken)

Ellen Chiu

It’s based on the daily revenue run rate.

Dick Wei – JPMorgan

Okay, got it. And secondly, I wonder if Xiangdong can discuss about the competitive landscape in terms of web game, in both development of web game and also the web game operating platforms, if you can help us to understand a bit more about the landscape. Thank you.

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

Indeed we believe that web game market is very important, and we look forward to providing high-quality and high-end web games to our gamers. And our strategy to enter this market is to provide, starting with the [micro-client face change].

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

We believe that the web game gamers also have higher demand going forward, so we plan to provide high-quality games to gamers.

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

We also are trying to develop the web-based web games based on (inaudible).

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

As for mobile games, we believe that with the popularity of smartphones as well as the payment platform popularity, the mobile game market should become more mature.

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

We believe the online and action-based mobile game will become mainstream in the market going forward.

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

Therefore we plan to provide high-quality, high-end mobile games to the market.

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

We will continue our strategy in our sourcing in PC-based game, but the multi-sourcing strategy to get a good title, good mobile games as well, including in-house developments, licensing investments.

Xiangdong Zhang

(Chinese language spoken)

Ellen Chiu

So we will also create, unify social and service platforms to better serve our mobile gamers.

Dick Wei – JPMorgan

Thank you. Thank you, Xiangdong; thank you, Alan and Richard.

Operator

Thank you. Your next question comes from the line of Catherine Leung from Goldman Sachs. Go ahead, please.

Catherine Leung – Goldman Sachs

Hi, good morning. I have two questions. My first is whether you can comment on your expectations of the long-term more normalized ARPU achievable by Mir III in comparison with Mir II.

And my second question is also on web games and also on the monetization potential. For the same-quality games, we believe there is an ARPU differential between a web game and the client-based equivalent. Thank you.

Alan Tan

(Chinese language spoken)

Ellen Chiu

For your first question, for Mir III and Mir II ARPU, basically our (inaudible) data that we’re seeing, those two (inaudible) are pretty different. And based on our experience, different users will lead to different level of ARPU. So, basically we will -- based on the game characteristics to continue to produce (inaudible) ARPU (inaudible).

Alan Tan

(Chinese language spoken)

Catherine Leung – Goldman Sachs

(Chinese language spoken)

Alan Tan

(Chinese language spoken)

Catherine Leung – Goldman Sachs

(Chinese language spoken)

Alan Tan

(Chinese language spoken)

Ellen Chiu

For the different type of -- for different type of games, basically the user (inaudible) for different ARPU level. For example, for the more combat type of game, you will have higher ARPU, the more social type of game ARPU level be lower, but the user base is (inaudible). So we believe that different type of games will have their (inaudible) ARPU level.

Catherine Leung – Goldman Sachs

Okay. Thank you.

Operator

Thank you. Next question comes from the line of Eddie Leung from Merrill Lynch. Go ahead please.

Eddie Leung – Merrill Lynch

Hey. Good morning guys. Thank you for taking my questions. My questions are more about your margin outlook. It seems like the cost control has been pretty good in the past quarter or so. Could you give us some guidance on how we should see about your margin in 2012, especially given (inaudible) new games waiting to be launched in the year?

And then follow-up questions on that front as well, could you also talk about the headcount plan for this year and the [CRE] increase? Thanks.

Richard Wei

I think if you look at our Q4 numbers, you’ll see that margins relative to Q3 improved slightly both on the gross side as well as on the operating side. I think we’re looking for Q1 to be kind of flattish margin-wise compared to Q4. And for the rest of the year, I don’t have any precise numbers to give you right now, but I think it’s safe to say that we’re really focused on cost control this year, and my mandate is to improve margins in the subsequent quarters. So I think we should expect margin improvements on a sequential basis going forward.

Eddie Leung – Merrill Lynch

Richard, could you also talk a little bit about the number of headcounts you have right now and what’s the plan for the year? Thank you.

Richard Wei

Headcount, current headcount is approximately 2,700. And for the year, I think we’re looking at about flattish headcount.

Eddie Leung – Merrill Lynch

Got that. Thank you very much.

Operator

Thank you. Your next question comes from the line of (inaudible) from Nomura. Go ahead please.

Unidentified Participant

Hi. This is [Xiayen] sitting in for Jin Yoon. Just one quick question on your R&D expenses. I see that it has been increasing as a percent of revenues in the past two quarters. Can you provide some color or breakdown around that? Is it mostly from you investments in your mobile games, casual or traditional pipeline?

Richard Wei

Well, it’s a combination of all these. But I'm glad to give you a breakdown of the specific (inaudible). But Q4 numbers included investments that we normally count as expenses in R&D.

Unidentified Participant

Okay. So do you expect this trend to continue into the first quarter next year or do you expect it to reverse?

Richard Wei

I think the expenses -- sorry, our expenses overall should be coming down as a percent of revenue after Q1. But I think dollar-wise it probably will continue to increase a bit.

Unidentified Participant

Okay. Thanks.

Operator

Your next question comes from the line of Jialong Shi from CLSA. Go ahead, please.

Jialong Shi – CLSA

Hi, good morning. Thanks for taking my questions. I have a couple of questions. The first question is on the risk. Could you give us some guidance when you're going to commercially launch the game? And what will be its model? Is it an item-based game or time-based game?

Alan Tan

(Chinese language spoken)

Ellen Chiu

We have started the close cooperation with (inaudible) for localization and as well as to get the approval from the government. And we will launch the game as soon as possible.

Alan Tan

(Chinese language spoken)

Ellen Chiu

Within this year is the -- it’s our (inaudible) we will provide larger scale of testing within this year.

Alan Tan

(Chinese language spoken)

Ellen Chiu

About the business model, we are still discussing with Trion Worlds and we will expect their development expertise as well as their operation experience in the US to finally design the business model.

Jialong Shi – CLSA

My second question is about your partnership with Snail Games to cooperate the game Age of Wushu. And just wondering what’s your main responsibility in the partnership. And what’s the revenue split between you guys? And will you consolidate the contribution from Age of Wushu or you will record it separately on your [10-L]? Thank you.

Alan Tan

(Chinese language spoken)

Ellen Chiu

To our cooperation with Snail Games, Age of Wushu, in principle we cooperate this game.

Alan Tan

(Chinese language spoken)

Ellen Chiu

But for the details of the (inaudible) we would rather not disclose it.

Alan Tan

(Chinese language spoken)

Ellen Chiu

We will -- based on the (inaudible) as well as resources, we will leverage each other’s advantages in operating a game. And Snail Game will be able to leverage our platform in -- while focused on the user demand to improve and better design the game.

Jialong Shi – CLSA

Thank you. My last question is for Richard. Could you provide some guidance for the tax rate and the coming subsidy in 2012?

Richard Wei

I think right now Q1 we’re guiding the effective tax rate to be similar to Q3 last year. I think for the rest of the year I don’t have a number right now, but I think it’s probably similar to what we’ll see in Q1. In terms of the coming subsidy, I think in total probably similar to the total number for last year.

Jialong Shi – CLSA

Great. Thank you.

Richard Wei

But the distribution into each quarter is kind of uncertain.

Jialong Shi – CLSA

Understood. Thank you.

Operator

Thank you. Next question comes from the line of Ming Zhao from UBS. Go ahead please.

Ming Zhao – UBS

Thank you for taking my questions. So, I saw the revenue from games is sequentially down. Is that merely because of the weakness of MMO or casual games? Thank you.

Alan Tan

(Chinese language spoken)

Ellen Chiu

Q4 is traditional low season for the online games. For our casual game, basically it’s a little bit quite similar to MMORPG now already. So, basically we now classify game based on different age group. And as we are seeing younger age group gamers have more -- will be more impacted by the low season.

Ming Zhao – UBS

Thank you very much. And I also saw the share-based compensation dropped a lot from 30 million to about 0.8 million in Q4. Can you provide a reason? And any guidance for 2012 share-based compensation?

Richard Wei

Sure. In Q4 we had a number of departures, primarily the two senior executives that were discussed earlier in the call. When they resigned from the company, certain SBC accruals could be reversed, and that was the primary reason for the decline in stock-based compensation. For Q1, I think we (inaudible) for SBC accruals to be [18 million]. I don’t have numbers for the rest of the year yet.

Ming Zhao – UBS

Okay, thank you. I’ll go back to the queue.

Operator

Thank you. Your next question comes from the line of Thomas Cheng from RBS. Go ahead. Thank you.

Thomas Cheng – RBS

Hi, good morning everyone. I just have a couple of questions. My first question is related to the first quarter guidance. Can you talk about the performance for different games in the first quarter, in particular Mir II? Should we expect the game is still on a declining trend on quarter to quarter basis? Thanks.

Alan Tan

(Chinese language spoken)

Ellen Chiu

For Q1, major games including Mir II, Woool being more stable. But the main growth driver will be coming from the fourth quarter contribution of Mir III as well as lighter type of game including [Aryan] as well as MapleStory and Legend of Immortals.

Alan Tan

(Chinese language spoken)

Ellen Chiu

For Mir II, this kind of traditional MMORPG is basically driven by big expansion pack promotions. And Mir II sees some additional growth in (inaudible) last year, helped by the promotions we launched around the 11th year anniversary. And for 2012, we also have a couple of expansion packs in the pipeline that we’ll try to launch.

Thomas Cheng – RBS

Thanks. I have a second question related to Sudden Attack and Point Blank. How’s the performance of these two games right now? Or should we expect any revenue contribution in 2012? Thank you.

Alan Tan

(Chinese language spoken)

Ellen Chiu

For Sudden Attack, we launched small-scale open beta testing in China, but from the numbers that we’re seeing, we think this game needs more content to be added into, and as such, we are cooperating with the developer for further adjustments of the game titles.

As for Point Blank, we plan to launch closed beta testing in the first quarter or second quarter this year. This game has not been largely tested in China before, and we will, based on those (inaudible) results to decide the large-scale testing going forward.

Thomas Cheng – RBS

Thank you.

Operator

Ladies and gentlemen, due to time constrictions, we only have time for two more questions. Your next question comes from the line of Mark Marostica from Piper Jaffray. Go ahead please.

Mark Marostica – Piper Jaffray

Yes. Thank you for taking my question. My first question relates to Dragon Nest which had a nice performance in the fourth quarter. I'm curious if that performance carried over so far into the first quarter. And then, any updates on timings around expansion pack releases for Dragon Nest would be helpful.

Alan Tan

(Chinese language spoken)

Ellen Chiu

For Dragon Nest, it grew -- it had decent growth in the fourth quarter last year, thanks to the new expansion pack launch. And in Q1 this year, we also have a couple of updates we’re going to launch. So we expect Dragon Nest to continue to grow in the first quarter this year.

Alan Tan

(Chinese language spoken)

Ellen Chiu

Dragon Nest still belongs to the new (inaudible) in the market, and so we think it still got some potential out there. For this year, we will have a couple of marketing promotions campaign combined with new expansion pack launch this year.

Alan Tan

(Chinese language spoken)

Ellen Chiu

Dragon Nest has been quite well-perceived in overseas markets outside China as well. And this year we have launched in other for new regions which is mentioned, and we expect that the Dragon Nest to have good performance in overseas market as well.

Mark Marostica – Piper Jaffray

Great. Thank you. Then one last question, Richard, you mentioned that you have a mandate this year to improve margins. And one item that you did talk about was holding headcount flat. I'm curious, are there other initiatives that you're marching forward with that you could talk about that are focused on improving margins this year? Thank you.

Richard Wei

Well, every item is subject to review, but basically if you look at our cost structure, there probably won’t be that much changes in the cost of revenue because that’s really kind of somewhat tied to revenue. On the operating expenses, it’s really headcount driven and those marketing expenses, half of it comes from the market promotion fees that we use to promote new games, and then G&A has been kind of (inaudible) where we need to improve at.

So I don’t have any single number that will make that happen, but every line item will be examined carefully and we’ll try to (inaudible) where possible.

Mark Marostica – Piper Jaffray

Great. Thanks for the color. I’ll turn it over.

Operator

Your final question comes from the line of Alex Yao from Deutsche Bank. Go ahead please.

Alex Yao – Deutsche Bank

Hi. Good morning everyone. Thank you for taking my questions. I have two questions. Firstly is the dividend strategy. Can you guys talk about your dividend strategy going forward? And secondly is, will the privatization of your current (inaudible) has anything to do with your future strategy? Thank you very much.

Richard Wei

We paid a special one-time dividend in Q1. I think in our meetings with shareholders, many shareholders expressed a desire to see return to shareholders in some form, and the Board has been discussing this topic for sometime now, and I think we don’t have a decision yet, but I think it’s a topic that’s still very active among the Board members in terms of whether there should be a regular dividend.

The question is whether the privatization has any impact on our business, I think the privatization basically is a change in one of our shareholders. But as far as our (inaudible) is concerned, we’re still very much focused on games, and I think the privatization doesn’t change that.

Alex Yao – Deutsche Bank

Got it. Thank you very much.

Ellen Chiu

Thank you again for joining us today. And as usual, please feel free to contact us if you have further questions. Have a nice day.

Alan Tan

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may all now disconnect.

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