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Q2 2012 Earnings Call

August 06, 2012 7:00 am ET


Angie Chang

Alex Ho - Chief Financial Officer and Principal Accounting Officer

Wang Tao - Chief Executive Officer and Director


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



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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 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 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 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 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.

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