Changyou.com's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 5.12 | About: Changyou.com Limited (CYOU)

Changyou.com Limited (NASDAQ:CYOU)

Q3 2012 Earnings Call

November 5, 2012 07:00 AM ET

Executives

Angie Chang – IR Manager

Alex Ho – CFO

Tao Wang – CEO

Analysts

Dick Wei – JPMorgan

Eddie Leung – BofA Merrill Lynch

Timothy Chan – Morgan Stanley

Alicia Yap – Barclays

Atul Bagga – Lazard Capital

Muzhi Li – Citi Group

Alex Yao – Deutsche Bank

Mark Marostica – Piper Jaffray

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3, 2012 Changyou.com Limited earnings conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by question and answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Monday, 5th of November 2012. I'll now like to hand the conference over to your first speaker today, Ms. Angie Chang, Investor Relations Manager. Thank you. Please go ahead.

Angie Chang

Thank you for joining Changyou.com to discuss our third 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 uncertainties. The company cautions that a number of important factors could cause actual results to differ materially from those are 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. Despite the slowing of game economy in China, we continued to deliver record breaking financial results as both our online game business and our online advertising business performed well above our expectation in the third quarter of 2012. Both our topline and bottom line results broke records and exceeded our guidance by a wide margin. These once again demonstrated that the resilient nature of our business.

Total revenues for the quarter reached a record $165.8 million, an increase of 13% quarter over quarter and 29% year-over-year exceeding the high end of our guidance by $8.8 million. Online game revenues for the third quarter increased 10% quarter over quarter and 30% year-over-year to 151.1 million exceeding the high end of our guidance by $7.1 million.

Online advertising revenue which consists of revenues generated from the (inaudible) business, increased 40% quarter-over-quarter and 32% year-over-year to $12.8 million exceeding the high end of our guidance by $12.8 million. Non-GAAP net income attributable to Changyou.com Limited reached a record $75.9 million, an increase of 5% quarter-over-quarter and 20% year-over-year, exceeding the high end of our guidance by $3.9 million.

The strong financial this quarter was supported by several of our key proprietary games starting with our long standing blockbuster MMO games Tian Long Ba Bu or TLBB and our web games DDTank and Wartune as well as the seasonal growth of our online advertising business. I will now give the cash flow performance of each game, our transport new expansion pack and game launches and then web up with an overview of our online advertising business.

First, last year at our MMO games, our flagship game Tian Long Ba Bu or TLBB, continues as a leading MMO games in China. Over the year, TLBB has created a loyal community of gamers and increased the number of core gamers who come back regularly to play the game with their friends. We believe that TLBB’s longstanding success is the result of our culture of praising use first when looking decision at the company.

In the third quarter, we continue to promote healthy gameplay and improve user experience in TLBB. We extended last quarter’s series of offering giveaway items to players and coming back on in-game promotion. In addition on July 12th, we launched a new task and reward system that allow players to complete tasks to earn premium virtual item for free. These initiatives were decided to reward players for their time and loyalty to the game. As a result, we saw a rise in player engagement levels and a number of concurring players and a reduction in the number of low spending players during the quarter.

On October 25th, we believe that TLBB’s annual major expansion pack called the (inaudible) with new features mainly targeted at advanced level players. Many features of the expansion pack includes premium item for strengthening a weapon’s power, a new cross server gameplay and the introduction of the game’s first underwater battleground aimed for players of higher levels.

Following the release of this major expansion pack, we saw a pickup in the activities and spending of advanced level players. In 2013, we expect to continue releasing expansion pack every three to four months including an annual major expansion pack.

In our web games, driven by popularity of DDTank, and the growth momentum of Wartune in China, we saw strong growth in the third quarter. In the third quarter web games accounted for over 15% of our online games revenue compared with 10% of our online game revenue just a year ago. DDTank continues to hold a leading position among web games in China and we continue to attract players to the games with the release of the new version BBTank 2, an upgrade of the games every few months.

For our newer games Wartune, we continue to see good momentum in the third quarter. We launched the game on more website and game portals in China bringing the total number of website and game portals that Wartune is operating on to 93. We also launched Wartune in more countries and regions overseas including South Korea and North America. Currently, we are working on more game updates for Wartune which we plan to roll out over the next few quarters.

Now turning to our pipeline. Based on results of the game’s closed beta testing in August Da Hua Shui Hu 2 (inaudible), a licensed MMO game originally scheduled for launch this year will need to undergo further development work. Judging from the game’s major through testing we are now working with the game developers on more features and enhancement for players in this turn based game. As for the rest of this year, we plan to launch a MMO first person shooting game Battlefield Online in November. Battlefield Online is licensed from Electronic Arts and will Changyou’s first FPS game. The game’s key feature includes the use of army tanks in battles in large skill team based combat.

In December, we plan to launch a new web game, (inaudible) which is a 2D navigation adventure web based games developed by 7Road. In 2013, we expect to have the full pipeline with at least four MMO games to bring to the market and server web games. This will include both in-house developed and licensed games.

Now turning to our online advertising business. The resources we have put behind our online advertising revenue 17173, payoff in record growth during the third quarter. Third quarter online advertising revenue outperformed our expectations. Being the portal of choice, for online game advertisers, we saw strong demand over the summer seasons for advertising space on 17173.com. On July 1st, we reached twice for advertisement on the homepage and other popular webpage that helped to drive some of the strong demand we saw to lower webpage of the website. In addition, in the third quarter, we began to offer enhanced self service to our top advertisers with both dedicated sales team for each advertisers to (inaudible) ad campaign for the games. This led to a jump in ad utilization weight on the lower webpage of the website.

Longer term, we add two new news channel, one for web game and another for mobile games. Each supported by an independent team to further expand or news coverage. Currently, we are working to add another news channel to deliver news for international gamers. We are also working on mobile application that will bring gaming news, game review and waiting to gamers. Our goal is to grow our market share further by delivering news that is tiny and relevant to gamers for a while.

We see this quarter as continuation of our transition from a dominant player in the MMO business to a broad spectrum gaming company responding to new technology and media effort. Our 17173 business is beginning to play a strategic role. We are not only starting to monetize the websites by bringing increase to advertising revenues, but we are also raising the visibility of our games. High quality content and FS2 customers are a winning combination in online gaming business. Among the major player in the online gaming industry in China, Changyou is one of the few companies that has a demonstrated ability to develop high quality MMO games and web games that are popular in the market while only an operating and leading game information portal 17173.com that served as gateway to gamers. With such results, we believe that we are well positioned to further grow our business and take advantage of many growth opportunities available in China than globally. We will continue to strengthen our team and our product in order to gain more uses, capture additional market share and sustain our growth trajectory over the long term. This complete Tao’s prepared remarks. Let me now offer you the operational and financial highlights for the quarter.

Our operational results for online games in the third quarter reflect the growth momentum of TLBB and Wartune in China. The operational results of our MMO games in China were as follows. One, applicant registered user for the third quarter were 223.5 million, up 12% quarter over quarter and 41% year-over-year. Two, aggregate peak concurrent user or PCU for the quarter were 1.09 million up 1% quarter over quarter and decreased 5% year over year. Three, aggregate active paying accounts or APA for the quarter were 2.41 million down 8% quarter over quarter and 20% year-over-year. The decreases reflect a decline in the number of low spending active paying accounts, certainly not make purchased in the third quarter of 2012 as the company continued last quarter’s strategy of keeping away virtual items and reducing in game promotion in TLBB. Four, average revenue per active paying account or ARPU for the quarter was RMB319, an increase of 15% quarter-over-quarter and 46% year-over-year. The increase was mainly due to the decline in TLBB’s low spending active paying account and (inaudible) just now. And TLBB’s core players increased their spending in the third quarter of 2012.

Next, I would like to discuss the operational results of 7Road’s web game which includes BBTank and Wartune. One, aggregate active account were at 66.8 million, an increase of 23% quarter-over-quarter and 42% year-over-year. The increases in active accounts were mainly due to new gamers on the third party web platform playing Wartune in the third quarter of 2012. Two, aggregate active charging account or ACA were at 1.66 million, an decrease of 5% quarter-over-quarter and 3% year-over-year. The decreases in active charging accounts resulted primarily from certain players of BBTank having ceased game coins because in the new version of BBTank, BBTank 2 they were prevented from purchasing virtual items at discounted price from other players. The decreases in active charging account also reflect the fact that BBTank which has been in operation since 2008 has entered into a relatively mature phase. This resulting decrease in active charging account for BBTank was offset in part by an increase in the number of active charging account for Wartune in the third quarter of 2012. Three, average revenue per active charging account or ARCA was RMB100, an increase of 61% quarter-over-quarter and 163% year-over-year. The increase resulted primarily from Wartune tending to have a higher ARCA than BBTank. And from ARCA for BBTank having received it as some relatively lower spending players seized purchasing game coin as I explained just now.

Financial results. Moving on to discuss our financial results. Total revenue for the third quarter of 2012 increased 13% quarter-over-quarter and 29% year-over-year, exceeding the high end of our guidance by $8.8 million. Online game revenue, which includes revenue from our game operations in China, overseas licensing revenues and the revenue from 7Road, increased 10% quarter-over-quarter and 30% year-over-year to $151.1 million, exceeding the high end of our guidance by $7.1 million. The quarter-over-quarter and year-over-year increases were mainly due to the growth momentum of TLBB and Wartune in China.

Online advertising revenues, which consist of revenues from the 17173 business, increased 40% quarter-over-quarter and 32% year-over-year to $12.8 million, exceeding the high end of company guidance by $2.8 million. The quarter-over-quarter increase was mainly due to the seasonal pickup typical for advertising in China and higher utilization rates of our advertising resources in the third quarter of 2012. The year-over-year increase was mainly due to higher advertising price and high utilization rates of our advertising resources in the third quarter of 2012 taking the third quarter last year.

Other revenues, which consists of cinema advertising revenues, were $1.9 million, up 80% quarter-over-quarter and down 40% year-over-year. The quarter over quarter increase was mainly due to seasonal pickup typical for advertising in China in the third quarter of 2012. The year-over-year decrease was mainly due to streamline of the cinema advertising business in 2012.

The majority of the remaining metrics, I will be discussing with the non-GAAP numbers. Under U.S. GAAP, share-based compensation expenses are charged to the quarter's cost of revenues and operating expenses. Goodwill impairment of intangible via acquisition of business and the related tax impact, non-cash tax benefits from tax deduction related to share based (inaudible) an income of expenses from the adjustment of contingent consideration previously recorded for acquisition are charged with quarter’s operating expense and income tax expenses.

Total share-based compensation expenses for the third quarter were $2.8 million. In the third quarter, we also recognized an expenses as a result of an increase in the fair value of the contingent and out payments for the 7Road acquisition, up $2.2 million. As we expect, 7Road will exceed specify the performing target in 2012 as set on in the acquisition agreement. We believe excluding share based compensation expenses, goodwill impairment, impairment of intangible via acquisition of business and the related tax impact, non-cash tax benefits from excess cash deduction related to the share based award, an income of expenses from the adjustment of contingent consideration previously recorded for the acquisitions from a non-GAAP financial calculation of net income makes a more meaningful comparison of our operational results and give a (inaudible) more insights into our performance, so we use non-GAAP measures in deferring discussion to explain costs, expense item and margins.

Non-GAAP gross profit increased at 9% quarter-over-quarter and 23% year-over-year to $134.9 million. Non-GAAP gross margin was 81%, which compares with 84% last quarter and 85% in the same quarter last year. Non-GAAP gross profit for the online games business increased 9% quarter-over-quarter and 29% year-over-year to $130.1 million. Non-GAAP gross margin for the online games business was 86% for the quarter, which compares with 87% in the last quarter and 87% in the same quarter last year. The quarter-over-quarter and 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 in the third quarter of 2012.

Non-GAAP gross profit for the online advertising business increased 43% quarter-over-quarter and 27% year-over-year to $11.1 million. Non-GAAP gross margin for the online advertising business was 87%, which compares with 85% last quarter and 90% in the same quarter last year. The quarter-over-quarter increase in gross margins and non-GAAP gross margin for online advertising business was mainly due to an increase in online advertising revenues in the third quarter of 2012. The year-over-year decrease in gross margin and non-GAAP gross margin for the online advertising business was mainly due to higher bandwidth costs and increase the salary and benefit expenses due to the hiring of more editors in the third quarter of 2012.

Non-GAAP gross loss of other business was $6.3million for the quarter compared with $2.8 million last quarter and $246,000 in the same quarter last year. The quick fill non-GAAP gross loss of other business was mainly due to the impairment provision for the advertising resources at cinema circuits in China of $4 million in the third quarter of 2012. Non-GAAP operating expenses were $41.7 million, up 9% quarter-over-quarter and 14% year-over-year.

Non-GAAP product development expenses were $17.7 million, up 9% quarter-over-quarter and 46% year-over-year. The quarter-over-quarter and year-over-year increase were mainly due to an increase in salary and benefits after we hired more game engineer in the third of 2012.

Non-GAAP sales and marketing expenses were $16.4 million, up 13% quarter-over-quarter and down 6% year-over-year. The quarter-over-quarter increase was mainly due to higher advertising spending for the promotion of expansion packs in the third quarter of 2012. The year-over-year decrease was mainly due to lower advertising spending as we carry out nationwide (inaudible) campaign to promote a large of a new game to (inaudible) in the third quarter of 2011.

Non-GAAP general and administrative expenses were $7.6 million, up 1% quarter-over-quarter and up 7% year-over-year. The quarter-over-quarter and year-over-year increases was mainly due to an increasing head count and the related salary and benefit expense in the third quarter of 2012. Non-GAAP operating profit increased 9% quarter-over-quarter and 28% year-over-year to $93.2 million. Non-GAAP operating margin was 56% compared with 58% last year and 57% in the same quarter last year. Income tax expenses was $17.4 million, representing an effective tax rate of approximately 18% on a non-GAAP basis, which is similar to last quarter's effective tax rate. Non-GAAP net income before non-controlling interest increased to 10% quarter-over-quarter and 25% year-over-year to $80.4 million.

Net income attributable to mezzanine classified non-controlling interest increased at 3115 quarter-over-quarter and 312% year-over-year to $4.5 million. In the third quarter of 2012, the increase in net income attributable to mezzanine classified non-interesting interest of $3.4 million was mainly because China increased their estimated redemption value of the mezzanine classified non-controlling interest in (inaudible). China increased the estimated redemption value because net income’s 7Road performance in the first three quarter of 2012. Changyou estimated that 7Road will likely exceed these original estimated performance for the year 2012 and 2013 which is the basis to determine the exercise price of the put option that gives the non-controlling shareholders the right to put their shares to Changyou at a pre-determined price. If 7Road achieves specific performance milestone and certain circumstances occur. The increase in the redemption value was recognized perceptively over the period from the day of the change in estimate to the earliest exercise state of the put right as an increase in net income attributable to mezzanine classified non-controlling interest. For more details, please refer to the Changyou financial information sections in our earning release. Now our income attributable to Changyou.com Limited increased 5% quarter-over-quarter and 20% year-over-year to $75.9 million exceeded the front end of our guidance by $3.9 million.

Non-GAAP net margins attributable to Changyou.com Limited for the quarter was 46% compared with 49% last quarter and 49% the same quarter last year. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were $1.42 this quarter up from $1.35 last quarter and $1.18 in the same quarter last year.

Shifting to our balance sheet and cash flow position. As of September 30, 2004 our cash and cash equivalent and short term investments were 340.6 million down from $463.9 million as of June 30, 2012.

Operating cash flow for the quarter was a net inflow of $1.2 million. The decline in the combined balance of cash and cash equivalent and short term investments was mainly due to the payment of a special dividend of $201 million to our shareholder in the first quarter.

In order to expedite the payment of the special cash dividend to our shareholder. We appointed offshore bridge loan from banks in the third quarter that was secured with an equipment amount of running the denominated offshore bank deposit of our subsidiary in China. The offshore bridge loans and onshore bank deposits have seen separate latest concepts on our balance sheet as of September 30, 2012 and the short term and long term bad loans in current and non-current restricted term deposits respectively.

We expect to pay off the offshore bridge loans by 2014. We see in advance and differed revenue where $49.8 million as of September 30, 2012 up from $47.8 million as of June 30, 2012.

Finally in terms of business outlook for the fourth quarter of 2012 we expect, one, total revenues to be between $166 million and $170 million of which unmet gained revenues are expected to be between $152 million and $155 million.

Online game revenues are expected to be between $12 million and $13 million, two, non-GAAP net income attributable to Changyou.com Limited between $69 million and $71 million. The decrease from the third quarter is because of three main factors, one higher marketing expenses, four, promoting new games that will be online and TLBB’s major expansion pack.

Two, higher salary and benefit expenses due to hiring of more game engineers and three lower interest income earned after we paid the special cash dividends to shareholders. Three, non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited between $1.26 and $1.33.

Four, assuming on new games (inaudible) we estimate share based compensation expenses between $2.5 million and $1 million. We will say our fully diluted earnings per ADS attributable to Changyou.com Limited under U.S. GAAP by one to two U.S. GAAP.

In conclusion, we once again exceeded our financial expectation in the fourth quarter by achieving record top line and bottom-line results both online games have online emphasis a highly profitable and which record revenues with the strong and stable cash flow that we have generate from this core business this quarter. We expected to continue to invest in human capital and product development so as to ship our competitive edge and build new capabilities.

We look forward to increasing shareholders value further with these investments we make. This concludes our prepared remarks for today. Operator we will now open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from the line of Dick Wei from JPMorgan. Please ask your question.

Dick Wei – JPMorgan

Just two quick questions first one I mean we can further just guess about the trends for DDTank and DDTank II during the quarter and then how should we looking at the paying accounts I’m going into the fourth quarter basically quite interested in how will you speak between this DDTank as well as the Wartune’s and secondly if we can also discuss about the gross margin trends will expect that to be gradually ask the web game increases in terms of the revenue contribution when do we can discuss that as well. Thank you.

[Foreign Language – Chinese]

Tao Wang

For DDTank because of the summer season for the metric in terms of numbers of active accounts they are spending, there is an increases in those metrics. Going forward we expect in Q4 that it will stable or slightly declining.

For DDTank it currently it has already entered a relatively mature stage so going forward we are going to increase the rates of the lease of new versions or game updates as well as through innovations and gameplay to continue the title. Thank you.

Alex Ho

As for the question related to the gross margin, currently the web game business and MMO business are enjoying quite a similar gross margin level. So we don’t expect it that there will be a much impact to the gross margin line. Thank you.

Operator

Next question comes from the line of Eddie Leung from BofA Merrill Lynch. Please ask your question now.

Eddie Leung – BofA Merrill Lynch

I have two questions; the first one is about TLBB. I know that the annual expansion that has been launched just last week so could you guys share more colors whether it's on the user engagement fund as far as on the Apple front. You mentioned that you have seen some positive signs, I’m wondering could you, you basically share more color on that front and then secondly I’m curious on the new channels that you will be launching for 171 in 2013 mainly the mobile game channel as far as the web game channel. What could be the thesis model say you know in a couple of years, would that be more driven by performance in respect to advertising or mainly brand advertising. Thanks.

[Foreign Language – Chinese]

Tao Wang

First of all after we launched the TLBB annual major expansion pack. This expansion pack is targeted a vast level of players. So what we see in that the user engagement levels and the spending levels of the vast game players has increased. But from the overall the corporate philosophy when comes to developing games we are very much more on focused on the and expanding the life span of our game.

As for the two new channel the mobile games and the web game news channel that we launched for (inaudible), right now we’re still in the stage of accumulating users and growing the viewership phase. So we have not done too much planning on the business model for these two channels. Thank you.

Operator

Next question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question now.

Timothy Chan – Morgan Stanley

I have two questions, the first would be more about your rich game pipeline, feedback so far during the closed beta testing which of the games you would have high hopes and would become the next blockbuster for Changyou. I would like to hear your thoughts on that. And my second question would be more about the competitive landscape in the web game market and how would you for speeding record sharing between 7 Road and these are platforms going forward. Would there be any change? Thank you very much.

[Foreign Language – Chinese]

Tao Wang

For the success of the game after its launch, it's affected my factors and for Changyou we do not have do speculative guesses on the performance of our gains. And about the revenue sharing between web game developers and the platforms, it's going to differ between companies based on kind of the strategy and approach that they are taking as well as their position within the market but from what we have seen so far we do not expect that there will be much change in the revenue sharing percentage at the moment. Thank you.

Operator

Next question comes from the line of Alicia Yap from Barclays. Please ask your question now.

Alicia Yap – Barclays

My question is regarding the performance of Wartune essentially. So far the tractions and the growth has been very impressive and given the web game has not proven to have a long lasting lifecycle. Can management share your view, your upcoming strategies on web game and what is your expectation for Changyou gross outlook into the next year and longer term? Thank you.

[Foreign Language – Chinese]

Tao Wang

Actually even for most client based MMO games the life span of those games are for most of them are short and so the life span of games really depends very much on the developer how they operate the game as well as their strategy.

And as for on this front both Changyou and 7 Road, we share the same philosophy and our strategy is on launching the more game content and launching more expansion packs in order to expand the life span of these games. For Wartune we expect the future growth will be mainly from overseas and the launching of the game on more platforms. Thank you.

Operator

Next question comes from the line of Atul Bagga from Lazard Capital. Please ask your questions.

Atul Bagga – Lazard Capital

I wanted to understand a little bit better the dynamics between the registered user account and the PCU. So it seems like this quarter you had about 24 million new registered account but the PCU was up roughly flat rather and your average paying account was going down. So is this a reflection of the timings (ph) between PCU and registered user, is this a reflection, is there any changes in the attrition rate, day one, day seven, day 30. Thank you.

[Foreign Language – Chinese]

Tao Wang

Because we launched the major expansion pack in this quarter, we believe that a lot of the registered users are made up of the hardcore game unions and with using computer programs to register in the games. Thank you.

Operator

Next question comes from the line of Muzhi Li of Citi Group. Please ask your question.

Muzhi Li – Citi Group

Would you please share how often do you see the web gamers charge their account and do you have any ideas about, do you have any numbers to share with us about average account amount that they keep in their players account? Thank you very much.

[Foreign Language – Chinese]

Tao Wang

These are non-metrics that we actually look at and for a larger the information about the charging amount and players those are data is kept by the operators. We are more interested in understanding the number, in the frequency in which gamers make purchases in the game.

If there was a need we can provide that information later. Thank you.

Operator

Next question comes from the line of Alex Yao from Deutsche Bank. Please ask your question now.

Alex Yao – Deutsche Bank

I have a two question, number is one if I look at the operating metric for the quarter it says that you guys are decreasing the monetization of low end users and increasing the monetization of high end users. Is there a strategic reason to do so or it's a one more thing what should we think about the future trends. And second question is if I look at delaying revenue growth the net addition in the part of several three quarters seem to be a lot stronger than the guidance for fourth quarter so part of the gaming business is slowing down. Can you share with us which game title or what kind of game is slowing down? Thank you.

[Foreign Language – Chinese]

Tao Wang

First of all the needs of the advance players and the low end players their needs are different. Therefore when we are developing our games we will target and come up with gameplay that satisfy these two different groups of users.

For the low spending players they are people that hope that this game is very fun to play but they are not as willing to pay. Before the advance players, they also are interested in whether the game is fun to play and they updating frequency and updating the games content but they are not as affected in terms of the spending levels in the game.

And especially for advance players they are more interested in the interaction with other players and particularly individual players battling against each other.

So if follow the needs of these customers and launch a gameplay targeted for them we will see their spending levels increase but this is a natural increase. Our game philosophy in operating these games is still the same and our objective is to meet the needs of our gamers and show that they enjoy playing our games.

Alex Ho

I will ask you second question. If you can from our guidance that we are expecting Q4 revenue online game revenue to reach $152 million to $155 million which are essentially implied 1% to 3% quarter-over-quarter increases and also if you take the mid-point that will imply like that will be implying close to 24% year-over-year growth. So I don’t see any major slowdown in terms of the revenue growth on that front and we do expect that the Q4 revenue will be continued to be driven mainly by the continued growth of TLBB and Wartune in China. Thank you.

Operator

Next question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question now.

Mark Marostica – Piper Jaffray

Two questions and my first one relates to the prior question and TLBB in particular. Are you still anticipating Q4 will have stepped up levels of reductions and the promotions and virtual item giveaways, that’s impacting the active charge incomes or active pulling accounts metrics? And then my second question relates to your pipeline for 2013. You talked about four MMO releases and a number of web games, can you give us a sense of the timing of those game launches throughout the year. Thank you.

[Foreign Language – Chinese]

Tao Wang

In the fourth quarter we will continue with the strategy of give away free virtual items and also decreasing the in-game promotions in the game. And next year for the four MMO games that we launched we hope that we will launch a one MMO game per quarter. Well actual launch date will eventually depend on the development progress of these games as well as the results from the initial technical testing. Thank you.

Operator

Thank you ladies and gentlemen. Unfortunately we have run out of time for any further questions. I would now like to hand the conference back to Angie Chang.

Angie Chang

Once again I will 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.

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