Changyou.com Limited (CYOU)

[eastunder]

Changyou Reports Second Quarter 2012 Unaudited Financial Results

Monday , August 06, 2012 01:00ET

http://www.knobias.com/story.htm?eid=3.1.9e074b8827822bf91fd67907c63517fee22e2dfee0d35d217247c25a8ee42be1

BEIJING, Aug. 6, 2012 /PRNewswire-Asia/ -- Changyou.com Limited ("Changyou" or the "Company") (NASDAQ: CYOU), a leading online game developer and operator in China, today announced its unaudited financial results for the second quarter ended June 30, 2012.



Second quarter 2012 Highlights

-- Total revenues reached a record US$147.3 million, an increase of 8%
quarter-over-quarter and an increase of 30% year-over-year, exceeding
the high end of the Company's guidance by US$3.8 million.
-- Online game revenues reached a record US$137.2 million, an increase of
8% quarter-over-quarter and 35% year-over-year, exceeding the high end
of the Company's guidance by US$4.2 million.
-- Net income attributable to Changyou.com Limited was US$69.1 million, or
US$1.29 per fully diluted ADS[1]. Net income attributable to
Changyou.com Limited increased 6% quarter-over-quarter and 14%
year-over-year.
-- Non-GAAP[2] net income attributable to Changyou.com Limited reached a
record US$72.3 million, or US$1.35 per fully diluted ADS. Non-GAAP net
income attributable to Changyou.com Limited increased 9%
quarter-over-quarter and 16% year-over-year, exceeding the high end of
the Company's guidance by US$12.3 million.

Mr. Tao Wang, Changyou's chief executive officer, commented, "The second quarter has underscored once again the staying power of Tian Long Ba Bu and the early strong reception of our new web game, Wartune (also known as Shen Qu). Our strong financial performance demonstrates the resilience of the online games business to business cycles and the current economic slowdown. Looking ahead, the outlook for online games is strong, particularly as gamers globally increasingly demand quick access to games online and as new game formats, like web games, gain popularity. With the launch of several MMO and web games in the second half of the year, we look to acquire more users and capture market share to further strengthen our position as a leading game developer and operator in China."

Mr. Dewen Chen, president and chief operating officer, continued, "We have been working behind the scenes to turn our online games portal, 17173.com, into an even more important resource for the online games industry. In addition to MMO games, we will be covering the fast-evolving web game and mobile game markets. It takes time to build up the resources, including star quality journalists, to do this, but we are making solid progress. Meanwhile, we continue to see strong demand for advertising on 17173.com. As we work on enhancing the website and expanding news coverage, we look to further enhance the leading position of 17173.com within the game portals and online game communities in China."

Mr. Alex Ho, Changyou's chief financial officer, added, "We set new records for both top-line and bottom-line performance during the quarter. Our ongoing MMO games business and acquired web game and online advertising business generated higher returns and rich cash flows, while we implemented cost control measures that led to cost savings. With a strong cash position and a proven cash generative business, we have capacity to continue investing in the development and marketing of games and in emerging growth opportunities that can further increase shareholder value."

Second Quarter 2012 Operational Results

The Company's operational results for the second quarter of 2012, which exclude those of 7Road's games, were as follows:

-- Aggregate registered accounts for the Company's games[3] increased 6%
quarter-over-quarter and 51% year-over-year to 199.5 million.
-- Aggregate PCU for the Company's games were flat quarter-over-quarter and
increased 11% year-over-year to 1.08 million.
-- Aggregate APA for the Company's games decreased 16% quarter-over-quarter
and decreased 10% year-over-year to 2.61 million. The decreases
reflected a decline in the number of low-spending active paying accounts
that did not make a purchase in the second quarter of 2012 as a result
of less in-game promotions and the give-away of virtual items in TLBB to
celebrate the game's fifth year anniversary.
-- ARPU for the Company's games increased 23% quarter-over-quarter and 31%
year-over-year to RMB277. The increase was mainly due to the decline in
low-spending active paying accounts in the second quarter of 2012.

7Road's operational results for the second quarter of 2012 were as follows:

-- Aggregate active accounts[4] for 7Road's games[5] were 54.3 million, an
increase of 15% quarter-over-quarter. The increase in active accounts
was mainly due to new gamers on third-party web platforms playing
Wartune (also known as Shen Qu) in the second quarter of 2012.
-- Aggregate active charging accounts[6] for 7Road's games was 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.
-- Average revenue recognized per active charging account[7] ("ARCA") for
7Road's games were RMB62, an increase of 24% quarter-over-quarter. The
increase was mainly because of more paying players in Wartune, which
tends to have a higher ARCA than DDTank .

Second Quarter 2012 Unaudited Financial Results

Revenues

Total revenues for the second quarter of 2012 increased 8% quarter-over-quarter and 30% year-over-year to US$147.3 million.

Online game revenues, which include revenues from Changyou's game operations and overseas licensing revenues and revenues from 7Road, increased 8% quarter-over-quarter and 35% year-over-year to US$137.2 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 a 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 generated from the 17173 business, increased 11% quarter-over-quarter and 10% year-over-year to US$9.1 million. The quarter-over-quarter increase was mainly due to the seasonal pickup typical for advertising in China. The year-over-year increase was mainly due to higher advertising prices in the second quarter of 2012 than in the second quarter last year.

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

Gross profit

Gross profit and non-GAAP gross profit increased 7% quarter-over-quarter and 26% year-over-year to US$123.8 million. Both gross margin and non-GAAP gross margin were 84%, compared with 84% in the first quarter of 2012 and 87% in the second quarter of 2011.

Gross profit and non-GAAP gross profit of the online games business increased 7% quarter-over-quarter and 30% year-over-year to US$118.9 million. Both gross margin and non-GAAP gross margin of the online games business were 87%, compared with 87% in the first quarter of 2012, and 90% in the second quarter of 2011. The year-over-year decline in gross margin and non-GAAP gross margin for the online games business was mainly due to an increase in headcount and related salaries and benefits expenses and higher bandwidth and server costs as Changyou operated a larger portfolio of online games in the second quarter of 2012.

Gross profit and non-GAAP gross profit of the online advertising business increased 14% quarter-over-quarter and 5% year-over-year to US$7.7 million. Both gross margin and non-GAAP gross margin of the online advertising business was 85%, compared with 83% in the first quarter of 2012 and 89% in the second quarter of 2011. The quarter-over-quarter increases in gross margin and non-GAAP gross margin for the online advertising business were mainly due to an increase in online advertising revenues in the second quarter of 2012. The year-over-year decreases in gross margin and non-GAAP gross margin for the online advertising business were mainly due to higher bandwidth and server costs in the second quarter of 2012.

Gross loss and non-GAAP gross loss of other business were US$2.8 million compared with US$2.4 million in the first quarter of 2012 and US$650,000 in the second quarter of 2011.

Operating expenses

Total operating expenses increased 18% quarter-over-quarter and 41% year-over-year to US$42.0 million.

Product development expenses were US$16.8 million, a decrease of 3% quarter-over-quarter and an increase 35% year-over-year. The quarter-over-quarter decrease was mainly due to decreased expenses related to royalties for licensed games, which was partially offset by an increase in salaries and benefits in the second quarter of 2012. The year-over-year increase was mainly due to an increase in salaries and benefits after Changyou hired more game engineers in the second quarter of 2012.

Sales and marketing expenses were US$14.5 million, an increase of 48% quarter-over-quarter and 30% year-over-year. The quarter-over-quarter and year-over-year increases were mainly due to higher advertising spending for the promotion of new game launches and expansion packs in the second quarter of 2012.

General and administrative expenses were US$7.8 million, a decrease of 8% quarter-over-quarter and an increase of 26% 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 salaries and benefits expenses in the second quarter of 2012.

Operating profit

Operating profit increased 2% quarter-over-quarter and 19% year-over-year to US$81.8 million. Operating margin was 56%, compared with 58% in the first quarter of 2012 and 60% in the second quarter of 2011.

Non-GAAP operating profit increased 6% quarter-over-quarter and 22% year-over-year to US$85.7 million. Non-GAAP operating margin was 58%, compared with 59% in the first quarter of 2012 and 62% in the second quarter of 2011.

Net income

Net income increased 6% quarter-over-quarter and 15% year-over-year to US$70.2 million. Net margin was 48%, compared with 49% in the first quarter of 2012 and 54% in the second quarter of 2011.

Non-GAAP net income increased 9% quarter-over-quarter and increased 17% year-over-year to US$73.4 million. Non-GAAP net margin was 50%, compared with 49% in the first quarter of 2012 and 55% in the second quarter of 2011.

Net income attributable to Changyou.com Limited

Net income attributable to Changyou.com Limited increased 6% quarter-over-quarter and 14% year-over-year to US$69.1 million. Fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.29, up from US$1.22 in the first quarter of 2012 and US$1.14 in the second quarter of 2011. Net margin attributable to Changyou.com Limited was 47%, compared with 48% in the first quarter of 2012 and 54% in the second quarter of 2011.

Non-GAAP net income attributable to Changyou.com Limited increased 9% quarter-over-quarter and 16% year-over-year to US$72.3 million. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.35, up from US$1.24 in the first quarter of 2012 and US$1.16 in the second quarter of 2011. Non-GAAP net margin attributable to Changyou.com Limited was 49%, compared with 49% in the first quarter of 2012 and 55% in the second quarter of 2011.

Liquidity

As of June 30, 2012, Changyou had cash and cash equivalents and short-term investments of US$464.9 million, which increased from US$396.8 million as of March 31, 2012. Operating cash flow for the second quarter of 2012 was a net inflow of US$82.5 million.


Business Outlook


For the third quarter of 2012, Changyou expects:

-- Total revenues to be between US$153 million and US$157 million,
including online game revenues of US$141 million to US$144 million and
online advertising revenues of US$11 million to US$12 million.
-- Non-GAAP net income attributable to Changyou.com Limited to be between
US$70 million and US$72 million.
-- Non-GAAP fully diluted earnings per ADS attributable to Changyou.com
Limited to be between US$1.31 and US$1.35.
-- Assuming no new grants of share-based awards, share-based compensation
expense to be between US$1.0 million and US$1.5 million, reducing fully
diluted earnings per ADS attributable to Changyou.com Limited by US$0.02
to US$0.03.