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Changyou.com Limited (NASDAQ:CYOU)

Q2 2012 Earnings Call

August 06, 2012 7:00 am ET

Executives

Angie Chang

Alex Ho - Chief Financial Officer and Principal Accounting Officer

Wang Tao - Chief Executive Officer and Director

Analysts

Dick Wei - JP Morgan Chase & Co, Research Division

Eddie Leung - BofA Merrill Lynch, Research Division

Timothy Chan - Morgan Stanley, Research Division

Alicia Yap - Barclays Capital, Research Division

Atul Bagga - Lazard Capital Markets LLC, Research Division

Alex Yao - Deutsche Bank AG, Research Division

Operator

Good morning, good afternoon, and good evening. My name is Angela, and I will be your conference operator. At this time, I would like to welcome everyone to the Q2 2012 Changyou.com Ltd. Earnings Conference Call. [Operator Instructions]

I would like to turn the conference to Ms. Angie Chang. Please go ahead.

Angie Chang

Thank you for joining Changyou.com to discuss our second quarter 2012 results. You may find a copy of our earnings press release, which we issued earlier, on the IR section of our website at www.changyou.com/en or through the newswires.

On the call today are Mr. Tao Wang, CEO; Mr. Dewen Chen, President and COO; Mr. Alex Ho, CFO; and Mr. Xiaojian Hong, CTO. Mr. Ho will lead off by providing business highlights on behalf of Mr. Wang, and then he will discuss financial results for the quarter just ended. After the prepared remarks, he will be joined by the other officers to answer questions.

Before we continue, please allow me to read you Changyou's Safe Harbor statement. Statements that are not historical facts, including statements about the company's beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore, you should not place undue reliance on them.

Forward-looking statements involve inherent risk and uncertainty. The company cautions that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risk and uncertainties include, but are not limited to, the current global financial and credit market crisis and its potential impact on China's economy; the uncertain regulatory landscape in the People's Republic of China; fluctuations in Changyou's quarterly operating results; Changyou's historical and possible future losses and limited operating history; and the company's reliance on Tian Long Ba Bu as its major revenue source. Further information regarding these and other risks is included in Changyou's annual report on Form 20-F filed on February 28, 2012, and other filings with the Securities and Exchange Commission.

Now let me turn the call over to our CFO, Mr. Alex Ho. Alex?

Alex Ho

Thanks, Angie. Hello, everyone, and thank you for joining us today. We have continued to deliver strong financial results on the back of the performance of our core MMO games, web games and online advertising business during the quarter. Both of our top line and bottom line results have reached record high and exceeded our guidance by a wide margin.

Total revenues for the second quarter reached a record $147.3 million, an increase of 8% quarter-over-quarter and 30% year-over-year, exceeding the high end of our guidance by $3.8 million. Online games revenue for the second quarter increased to 8% quarter-over-quarter and 35% year-over-year to $137.2 million, exceeding the high end of our guidance by $4.2 million.

Online advertising revenue, which consists of revenue generated from the 17173 business, increased 11% quarter-over-quarter and 10% year-over-year to $9.1 million. Non-GAAP net income attributable to Changyou.com Limited reached a record $72.3 million, an increase of 9% quarter-over-quarter and 16% year-over-year, exceeding the high end of our guidance by $12.3 million.

Our strong performance reflect the resilience of the online games industry in China despite the weakening global macroeconomic environment and economic slowdown in China. Also, we flag the ongoing strength of our online games content and the successful expansion into other fast-growing segments of the industry.

I will now review briefly our online game business, starting with our MMO games, our web games and the pipelines we have for both segments and then wrap up with an overview of our online advertising business. Turning first to our MMO games.

Our flagship game, Tian Long Ba Bu or TLBB, continued a smooth momentum and maintained its leading position among MMO games in China. In order to further extend the game's lifespan and to thank players for their continued support of our game, we ran a series of promotions, offering rewards and giveaway items to players as part of the game's fifth-year anniversary celebration. As a result, we saw a slight increase in the number of concurrent player in the second quarter.

We also worked on promoting participation and reinforcing user loyalty by hosting competitions and releasing a new expansion pack. In the latter half of June, we organized a better challenging event, which received a great deal of player interest and will last through September. We launched an expansion pack on July 12 that introduced a new cast and reward systems that provide players with new activities to take part in.

We also released a new micro-client option for TLBB that has made the game more accessible and faster to download for new users. Based on our testing, the micro-client can be downloaded in less than 5 minutes on a 1-megabyte broadband connection. In the fourth quarter, we plan to release TLBB's annual major expansion pack, which we expect to further enhance user loyalty and enthusiasm as these advertisements have done.

In our web game segment, DDTank has evolved over 3 years, continues to enjoy popularity in China. We released a new version, DDTank 2, on June 19, which introduced exciting pet characters into the game, with functions for cultivating pets that are designed to make the game more engaging for players. Also the new web game, Shen Qu, also known as Wartune, gained traction on the SNS sites and other game portals it operates on. As of June 30, Wartune operates on a total of 39 websites in China.

The game had also been launched overseas in Malaysia, Hong Kong and Taiwan. Given the early strong receptions of Wartune in China, we plan to partner with additional domestic and overseas game operators to roll out the game to more countries in the third quarter. We are optimistic about the potential both for Wartune specifically and web games more broadly.

Gamers are breaking out of mindsets of dedicated gaming devices and are chasing their favorite content online, accessing it through different devices and platforms. China has a head start on this phenomenon. Now we see gamers around the world demanding similar flexibilities. Content is king in web games, as it is in every genre of online games.

Taking a look at our MMO pipeline, we plan to launch 2 MMO games in the second half of 2012. In September, we will begin open beta testing for Da Hua Shui Hu 2, a turn-based cartoon-style game that is a licensed 3D sequel to Da Hua Shui Hu. In addition to traditional turn-based feature, some new special features has been added.

In the fourth quarter of 2012, we plan to launch Battlefield Online, a licensed first-person shooting game. The game not only allow players to compete in a small team of group battles online, but also allows for participation in a large-scale combat of up to 100 players. And lastly, the in-house development of Zhong Hua Ying Xiong, a 2.5D fantasy role-playing game based on a popular Chinese online novel of the same name, is on track. After reviewing our pipeline of games and expansion pack, we have rescheduled the launch date for this game to 2013. In our pipeline for web games, we also have 2 in-house developed web games coming out in the second half of 2012.

Finally, in our online advertising business, second quarter revenue came in line with our expectations, as we continue to benefit from solid demand from advertisers for advertising slots on the 17173.com websites. 17173.com continues to be the portal of choice for online games advertising.

In the second quarter, online games company, both large and small, increased advertisement on the 17173.com website to promote their summer titles. We expect the increase in demand for advertising. On July 1st, we raised the price for advertisements on the homepage and other hot web page. We also brought on more people to our editorial team as we seek a way to enhance the quality of content and expand coverage, especially for news on rapidly growing web games and mobile games.

With the continuous growth and solid performance of our online games and demonstrated ability to generate solid cash flow from our operation each quarter, we have accumulated a sizable cash reserve since our IPO. In an effort to return value to our shareholder, we are pleased to declare today a special one-time cash dividend to our shareholders. The special cash dividend is $3.80 per American depositary share, ADS, and has been approved by our Board of Directors.

On behalf of the company, I would like to thank our shareholders for their continued support of Changyou. Online games have proven to be a resilient business and a highly cash-generative business. We have seen solid growth in our MMO games, web games and online advertising business in the second quarter, and we have games in our pipelines for the second half of the year that will further expand our product portfolio.

With this and other investment in new business initiatives, we are confident that we will be able to gain more new users, capture market share and sustain our growth trajectory over the long term. This completes Tao's prepared remarks.

Let me now walk you through the operational and financial highlights for the quarter.

Operational results. Our operational results for online games in the second quarter reflected the continued strength of TLBB and the growth of web game Wartune. The operational results of our MMO games in China were as follows: one, aggregate registered user for the second quarter were 199.5 million, up 6% quarter-over-quarter and 51% year-over-year; two, aggregate peak concurrent user or PCU for the quarter were 1.08 million, flat quarter-over-quarter and up 11% year-over-year; three, aggregate active paying accounts or APA for the quarter was 2.61 million, down 16% quarter-over-quarter and 10% year-over-year. The decreases reflect a decline in the number of low-spending active paying accounts as they did not make purchases in the second quarter as a result of less in-game promotions and the giveaway of virtual items in TLBB to celebrate the game's fifth-year anniversary; four, average revenue per active paying accounts or ARPU for the quarter was RMB 277, an increase of 23% quarter-over-quarter and 31% year-over-year from RMB 225. The increase was mainly due to the decline in the low-spending active paying accounts in the second quarter of 2012 as explained just now.

Now I would like to discuss the operational results of 7Road's web games, which includes DDTank and Wartune. One, aggregate active accounts were 54.3 million, an increase of 15% quarter-over-quarter. The increase in active accounts was mainly due to new gamers on the third-party web platforms playing Wartune in the second quarter of 2012. Two, aggregate active charging account or ACA were 1.74 million, an increase of 12% quarter-over-quarter. The increase in active charging accounts was mainly due to an increase in the number of active charging accounts for Wartune in the second quarter of 2012. Three, average revenue per active charging account or ARCA was RMB 62, an increase of 24% quarter-over-quarter. The increase was mainly because of more paying players in Wartunes, which tends to have a higher ARCA than DDTank.

Financial results. Moving on to discuss our financial results. Total revenues for the second quarter of 2012 increased 8% quarter-over-quarter and 30% year-over-year to $147.3 million, exceeding the high end of our guidance by $3.8 million. Online game revenues, which includes revenue from our game operations in China, overseas licensing revenues and revenue from 7Road, increased 8% quarter-over-quarter and 35% year-over-year to $137.2 million, exceeding the high end of our guidance by $4.2 million. The quarter-over-quarter increase was mainly due to the ongoing popularity of TLBB and the growth of Wartune in China. The year-over-year increase was mainly due to full quarter's revenue contribution from 7Road, the ongoing popularity of TLBB and the growth of Wartune in China.

Online advertising revenues, which consist of revenues from 17173 business, increased 11% quarter-over-quarter and 10% year-over-year to $9.1 million, which is in line with our guidance. The quarter-over-quarter increase was mainly due to seasonal pickup typical for advertising in China. The year-over-year increase was mainly due to higher advertising price in the second quarter of 2012 than in the second quarter last year.

Other revenues, which consists of cinema advertising revenues, were $1.1 million, down 7% quarter-over-quarter and 69% year-over-year. The decreases was mainly due to continuing -- continued streamlining of the cinema advertising business in the second quarter.

The majority of the remaining metrics, I will be discussing with non-GAAP numbers. Under U.S. GAAP, share-based compensation expenses are charged to the quarter's cost of revenues and operating expenses, and impairment of intangible via acquisition of business and the related tax impact are charged to the quarter's operating expenses and income tax expenses.

Total share-based compensation expenses for the second quarter were $1 million. Impairment of intangible via acquisition of business and the related tax impact for the second quarter were $2.9 million. We believe excluding share-based compensation expenses impairment of intangibles via acquisitions of business and the related tax impact, from a non-GAAP financial calculation of net income, makes a more meaningful comparison of our operational results and gives investors more insight into our performance. So we use non-GAAP measures in the following discussion to explain costs, expense item and margins.

Non-GAAP gross profit increased 7% quarter-over-quarter and 26% year-over-year to $123.8 million. Non-GAAP gross margin was 84%, which compared with 84% last quarter and 87% in the same quarter last year. Non-GAAP gross profit for the online games business increased 7% quarter-over-quarter and 30% year-over-year to $118.9 million. Non-GAAP gross margin for the online games business was 87% for the quarter, which compares with 87% in the last quarter and 90% in the same quarter last year. The year-over-year decline in non-GAAP gross margin for the online games business was mainly due to an increase in headcount and related salary and benefit expenses and higher bandwidth and server costs as Changyou operated a larger portfolio of online games in the second quarter of 2012.

Non-GAAP gross profit for the online advertising business increased 14% quarter-over-quarter and 5% year-over-year to $7.7 million. Non-GAAP gross margin for the online advertising business was 85%, which compares with 83% last quarter and 89% in the same quarter last year. The quarter-over-quarter increase in the non-GAAP gross margin for the online advertising business was mainly due to an increase in online advertising revenues in the second quarter of 2012. The year-over-year decrease was mainly due to higher bandwidth and server costs in the second quarter of 2012.

Non-GAAP gross loss of other business was $2.8 million for the quarter compared with $2.4 million last quarter and $650,000 in the same quarter last year. Non-GAAP operating expenses were $38.1 million, up 11% quarter-over-quarter and 35% year-over-year.

Non-GAAP product development expenses were $16.2 million, down 2% quarter-over-quarter and up 36% year-over-year. The quarter-over-quarter decrease was mainly due to lower expenses related to royalties for licensed games, which was partially offset by an increase in salary and benefits in the second quarter of 2012. The year-over-year increase was mainly due to an increase in salary and benefit after hiring more game engineers in the second quarter of 2012.

Non-GAAP sales and marketing expenses were $14.4 million, up 48% quarter-over-quarter and 33% year-over-year. The quarter-over-quarter and year-over-year increase was mainly due to higher advertising spending for the promotion of new game launches and expansion packs.

Non-GAAP general and administrative expenses were $7.5 million, down 6% quarter-over-quarter and up 35% year-over-year. The quarter-over-quarter decrease was mainly due to a reduction in bad debt expenses related to the cinema advertising business in the second quarter of 2012. The year-over-year increase was mainly due to an increase in headcount and related salary and benefits expenses in the second quarter of 2012.

Non-GAAP operating profit increased at 6% quarter-over-quarter and 22% year-over-year to $85.7 million. Non-GAAP operating margin was 58% compared with 59% last quarter and 62% in the same quarter last year. Income tax expenses was $16.1 million, representing an effective tax rate of approximately 19% on a non-GAAP basis, which is similar to last quarter's effective tax rate.

On July 31, 2012, Ministry of Finance and State Administration of Taxation jointly announced that starting from August 1, 2012, the pilot programs of change in tax regulation from liability business tax to value-added tax for certain industry will be expanded from Shanghai to 8 other regions, including Beijing and Shenzhen in China. Based on our initial assessment, we do not expect the adoption of the pilot program for Changyou would have a material impact on our consolidated financials.

Non-GAAP net income before noncontrolling interests increased at 9% quarter-over-quarter and 17% year-over-year to $73.4 million. Non-GAAP net income attributable to Changyou.com Limited increased 9% quarter-over-quarter and 16% year-over-year to $72.3 million and exceeding the high end of our guidance by $12.3 million. Non-GAAP net margin attributable to Changyou.com Limited for the quarter was 49% compared with 49% last quarter and 55% for the same quarter last year. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were $1.35 this quarter, up from $1.24 last quarter and $1.16 in the same quarter last year.

Shifting to our balance sheet and cash flow position. As of June 30, 2012, our cash and cash equivalents and short-term investments were $464.9 million, up from $396.8 million, as of March 31, 2012. Operating cash flow for the quarter was a net inflow of $82.5 million.

Receipts in advance and deferred revenues were $47.8 million as of June 30, 2012, down from $53.1 million, as of March 31, 2012. The decrease is mainly due to the selling of more prepaid game cards during a promotional sales event organized in March of last quarter.

Today, we declared a special one-time cash dividend to our shareholders of $1.90 per Class A or Class B ordinary share or $3.80 per American depositary share, ADS. The total amount of special cash dividends is approximately $201 million, which is expected -- which we expect to pay out to our ADS holder via bank of New York Mellon, our depositary bank, on or before September 30, 2012.

Since most of our cash are denominated in renminbi and held by our subsidiaries in China, in order to fund the dividend payment, we will have to repatriate the cash to offshore holding companies, which typically require procedural approvals from various government authority in China. Such procedural approval may take a period of time. In order to expedite the payment of the special cash dividends to our shareholders, we expect to finance the payment through offshore bridging bank loans, which would be secured by an equivalent amount of renminbi-denominated onshore bank deposit of our subsidiaries in China.

Finally, the business outlook for the third quarter of 2012. We expect: one, total revenues to be between $153 million and $157 million, of which online games revenues is expected to be between $141 million and $144 million. Online advertising revenue are expected to be between $11 million and $12 million; two, non-GAAP net income attributable to Changyou.com Limited to be between $70 million and $72 million; three, non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited to be between $1.31 and $1.35; four, assuming no new grants of share-based awards, we estimate share-based compensation expenses to be between $1 million and $1.5 million, reducing our fully diluted earnings per ADS attributable to Changyou.com Limited under the U.S. GAAP by USD 0.02 to USD 0.03.

In conclusion, our record-breaking financial results in the second quarter exceeded our expectations. The results reflect the strength of our ongoing game operations, the success of our prior investments and acquisitions and the effectiveness of implemented cost control measures. In the light of our solid financial performance and strong cash position and in order to return value to our shareholders, we have declared a special one-time cash dividend to our shareholders.

We are confident that with our demonstrated ability to consistently generate solid cash flow from our operation, we can sustain investments in our products, marketing and human capital to capture growth opportunities and further increase shareholder values. This concludes our prepared remarks for today.

Operator, we will now open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Dick Wei with JPMorgan.

Dick Wei - JP Morgan Chase & Co, Research Division

First question is on Tao Yuan. I wonder if you can give an update on Tao Yuan in terms of the reception and maybe the outlook for the game. Then I have a follow up.

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

Tao Yuan has achieved an -- its performance has achieved our expectations.

Wang Tao

[Chinese]

Angie Chang

Because the game was developed by our wholly-owned subsidiary, Ice Entertainment and this is the first -- not developed, this is the first game that they've launched since we've acquired them. Their game has created -- developed using the Unreal 3 commercial game engine. And because of this, they had -- they did run into -- there were some technical issues that they had to deal with. But in general, the game has achieved our expectations. Thank you.

Dick Wei - JP Morgan Chase & Co, Research Division

Great. Maybe if I can have a follow-up question on the advertising side. For the 17173 advertising, how much coming out from web game is MMO games? And what is the -- what do you think of the advertising game market if the web game space is going quicker than MMO? Any thoughts there will be great.

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

For the 17173 business, the majority of our revenues is still coming from the advertising of MMO games.

Wang Tao

[Chinese]

Angie Chang

And LineKong, the company has -- did some -- a little bit of advertisement on web games on 17173.

Wang Tao

[Chinese]

Angie Chang

And our goal is to develop 17173 into an even bigger website and platform. And therefore, our plan is, in the latter half of this year, we will launch a web game news channel, a new channel to promote web games on the site.

Operator

And your next question is from Eddie Leung with Merrill Lynch.

Eddie Leung - BofA Merrill Lynch, Research Division

I have a couple of questions. The first one is I'm wondering if you can have any tax rate guidance given the potential payout for withholding tax related to the dividends. And then secondly, also wondering whether we would see any impairment in the upcoming couple of quarters again.

Angie Chang

[Chinese]

Alex Ho

Thank you, Eddie. This is Alex. First, in relation to your question on the tax rate. Because for Changyou, we have been accruing the related withholding tax starting from January 1 this year in accordance to our cash repatriation plan, so there will not be a certain chance in terms of the income tax expenses in the third quarter. So in terms of the tax rate guidance, I believe that the -- for the remainder of this year, I think, Q2 effective tax rate should be a good proxy for the rest of this year. Second is on your question on the impairment. As of today, we do not expect to see other impairments. That is, we'd be vocal in the third quarter.

Operator

And your next question is from the line of Timothy Chan with Morgan Stanley.

Timothy Chan - Morgan Stanley, Research Division

I have 2 questions. The first is given the very strong and steady free cash flow, could you help us understand your views towards a more recurring kind of annual dividend and how would you balance the shareholder return as far as your investment mix going forward? And I have a follow-up question.

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

At the moment, we do not have -- we are not considering on giving out regular dividends. And we -- however, if the macro environment and the market conditions continues to be rather weak, we may consider that -- to do a regular dividend or other ways to return shareholder value in the future.

Timothy Chan - Morgan Stanley, Research Division

My second question is related to the operations in second quarter. Could you maybe talk about the reason why you want to decrease the average paying accounts but to increase the ARPU? Would that lead to a more concentrated paying gamer base?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

Because of TLBB's fifth anniversary, we celebrated the event with the giveaways, and giving out of rewards and virtual items to game players. Because of this, that has led to a decline in the number of low-spending APA accounts that did not spend during the quarter. And the lower APA has led to -- when we calculate ARPU, has led to ARPU being higher in the second quarter. However, when we look at TLBB, the main value driver of -- and the core user base continues to be stable and very healthy.

Wang Tao

[Chinese]

Angie Chang

And separately, because TLBB is a very community-driven game, we found that after implementing this, it has led to the user base being more healthy. And we will consider on continuing this strategy in the next quarter. So therefore, we do not expect to -- an increase in APA in the next quarter.

Operator

And your next question is from Alicia Yap with Barclays.

Alicia Yap - Barclays Capital, Research Division

My first question is, can you update us on the latest progress on Duke of Mount Deer? How has the game been performing? And I have another questions.

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

For DMD, we've got -- we have a team of developers working on launching expansion packs for the game. In terms of the size of development teams, it's comparable to that of TLBB and Blade Online.

Wang Tao

[Chinese]

Angie Chang

Going forward, we will launch -- plan to launch the game in more overseas markets.

Alicia Yap - Barclays Capital, Research Division

My second question is can management share your view regarding the overall web games market potential in China? And it does not seem that your TLBB was affected by the increased popularity of the web games. So just wonder where do you think the web games players come from. And are there new players? Or are they gamers that come from other MMO games?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

For TLBB, because it is a community-driven game, it has a relatively high user stickiness than other comparable MMO games. In TLBB, in growing the user base, a lot of the new users are coming from the recommendations by friends and through word-of-mouth.

Wang Tao

[Chinese]

Angie Chang

For the web game segment, it continues to be in a fast-growing cycle -- in its fast-growing cycle. The difference between web games and MMO games is mainly -- There's 2 differences. One is that for web games you do not need a game client -- or download a game client to play. And secondly, for web games, it's being offered on many, many different websites through a lot of different operators that has allowed the widespread -- to allow more players to play these games.

Wang Tao

[Chinese]

Angie Chang

We will continue to focus and strengthen our capabilities in the web-based game segment.

Operator

And your next question is from Atul Bagga with Lazard Capital.

Atul Bagga - Lazard Capital Markets LLC, Research Division

Two questions for you. In your pipeline, can you guys talk about what games you're most excited about in terms of your recognition level? And specifically on Battlefield Online, can you talk a little bit about how do you see competition from games -- established games like CrossFire, DF2 and then upcoming Call Of Duty? And then I have one more question.

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

For all the games that we've talked about on our script, those are the games that we feel have a good potential because we are very selective when we are making -- developing games and when we're licensing games.

Wang Tao

[Chinese]

Angie Chang

For the Battlefield Online game, it is a game that can allow up to 100 players to engage in battles against each other. And also, it will contain vehicles such as airplanes, tanks and other driving vehicles, so -- and also, it will have very, very large maps.

Wang Tao

[Chinese]

Angie Chang

Therefore, we think that this is a game that is differentiated and different from other FPS games currently in the market, like Crossfire and Counter-Strike.

Wang Tao

[Chinese]

Angie Chang

You can also say that Battlefield Online is a game that is more hardcore than these other games.

Atul Bagga - Lazard Capital Markets LLC, Research Division

Very helpful. And then, my second question was about 17173.com. Last year, you guys talked about your plan to transform this as an online gaming platform. Can you help us -- can you talk about where we are on that transformation? And just a clarification on Battlefield, do you guys already have that approval from the government, from GAPP and MOC, for Battlefield Online?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

Right now, for 17173, we are in the progress of increasing this media's influence. And as we mentioned, in the latter half of this year, we plan to launch new channels to cover web-based games. And we also plan to launch a new channel to cover overseas games.

Wang Tao

[Chinese]

Angie Chang

And in the second half of this year, we will also start entering into the mobile game side.

Wang Tao

[Chinese]

Angie Chang

All the site channels that we -- I just mentioned, these are channels that we plan to do and operate for the long term.

Wang Tao

[Chinese]

Angie Chang

In our -- we are very determined in our initiative to increase, yes, 17173's media influence and also, to gain users.

Wang Tao

[Chinese]

Angie Chang

Yes. We have already received all the relevant government approvals for the game.

Operator

And your next question is from Alex Yao with Deutsche Bank.

Alex Yao - Deutsche Bank AG, Research Division

I have 2 question. The first one is, I believe in China's current online gaming market, the market size of the client-based games remain the largest. Client-based growth rate is a lot slower than that of mobile game and web games. We understand that so far, the core -- your core games, which is the TLBB, hasn't been really affected by this growing trend. But how would you envision this growing trend will impact the new game launch in the near future?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

At the end of last year, we began to reorganize the company into -- to fit our strategy of 6 different business lines, and each of the business lines are responsible for expanding their respective businesses.

Wang Tao

[Chinese]

Angie Chang

For example, the web-based game units and the MMO games units, they will -- each of them will independently assess and look at the market situations facing them and decide on how to invest, plan and strategize to grow -- to expand their businesses. Therefore, it is not -- it is -- these 2 things are being operated differently -- separately.

Wang Tao

[Chinese]

Angie Chang

And in actual fact, we are more focused on looking at the actual quality of the content of a game rather than what type of game is it or whether it is an MMO web-based game or mobile game.

Wang Tao

[Chinese]

Angie Chang

We think that in this space, it is very normal to see a change in the market every 3 to 5 years. However, for the company, we are most focused on increasing values for our users.

Wang Tao

[Chinese]

Angie Chang

So most of our company's management is most focused on seeing how we could keep increasing user value through setting up of systems and platforms.

Alex Yao - Deutsche Bank AG, Research Division

That's very helpful. My second question is regarding the web game. In terms of capturing the growth opportunities in the web game market, based on what you guys have done so far, it seems to me that you guys prefer the M&A strategy over in-house development. Is there anything fundamentally different between client-based game and the web game that prevents you guys leveraged the internal resources?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

We've already set up a department to -- for developing web-based games. However, because of the -- our company's culture is focused on creating high-quality games, and so comparatively in game development, we have a longer development cycle.

Wang Tao

[Chinese]

Angie Chang

And we already have 1 to 2 web-based -- web games in our pipeline for the latter half of this year. However, over the long term, we do not expect that we would be developing web-based games at a very rapid pace.

Wang Tao

[Chinese]

Angie Chang

We would still want to focus on creating high-quality games in order to develop a web game that is of the same popularity and size as TLBB in the client-based space.

Wang Tao

[Chinese]

Angie Chang

We would also aim -- we also aim to create games that have a longer lifespan. And right now in the market, most of the games have a rather relatively short life -- for web-based games have a relatively short lifespan. And so this is something we will continue to work on.

Operator

And I do apologize, but we do not have time for further questions. I would now like to turn the call back to Ms. Angie Chang for closing remarks.

Angie Chang

Once again, I would like to thank all of you for joining us on today's call. If you have any follow-up questions, please do not hesitate to contact us. Thank you.

Operator

This does conclude today's Q2 2012 Changyou.com Ltd. Earnings Conference Call. You may now disconnect.

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