Changyou.com Limited (CYOU)

[eastunder]

Changyou Reports Third Quarter 2012 Unaudited Financial Results

Monday , November 05, 2012 00:35ET



BEIJING, Nov. 5, 2012 /PRNewswire/ -- 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 third quarter ended September 30, 2012.



Third quarter 2012 Highlights

-- Total revenues reached a record US$165.8 million, an increase of 13%
quarter-over-quarter and 29% year-over-year, exceeding the high end of
the Company's guidance by US$8.8 million.
-- Online game revenues reached a record US$151.1 million, an increase of
10% quarter-over-quarter and 30% year-over-year, exceeding the high end
of the Company's guidance by US$7.1 million.
-- Online advertising revenues reached a record US$12.8 million, an
increase of 40% quarter-over-quarter and 32% year-over-year, exceeding
the high end of the Company's guidance by US$0.8 million.
-- Net income attributable to Changyou.com Limited reached a record US$72.9
million, or US$1.37 per fully diluted ADS[1]. Net income attributable to
Changyou.com Limited increased 6% quarter-over-quarter and 18%
year-over-year.
-- Non-GAAP[2] net income attributable to Changyou.com Limited reached a
record US$75.9 million, or US$1.42 per fully diluted ADS. Non-GAAP net
income attributable to Changyou.com Limited increased 5%
quarter-over-quarter and 20% year-over-year, exceeding the high end of
the Company's guidance by US$3.9 million.
-- On August 6, 2012, the Company's board of directors declared a special
one-time cash dividend of US$1.9 per Class A or Class B ordinary share,
or US$3.8 per American Depositary Share ("ADS"). The total amount of
this dividend was approximately US$201 million. The dividend was paid to
shareholders on September 21, 2012.

Mr. Tao Wang, Changyou's chief executive officer, commented, "The third quarter is a testimony to our corporate philosophy of putting our customers first. Our key operational metrics and financial results demonstrate that we have a solid base of players who are engaged and willing to spend in our games as we continue to invest the resources to keep them fresh and exciting. In our flagship MMO game, Tian Long Ba Bu, or TLBB, we saw higher player engagement levels and spending from our core players after the release of the July 12(th) expansion pack and the October 25th major expansion pack. Meanwhile, our new web game Wartune continued to build momentum as it was launched on more platforms and in more countries during the quarter. Changyou is one of the few online game companies in China with a leading presence in all three key markets of the online games industry, MMO games, web games and online game media. With the talents, customer base and marketing networks accumulated in each of these three areas, we believe we can take our businesses further, both in China and globally, and build the company into an even greater success."

Mr. Dewen Chen, president and chief operating officer, continued, "Our online advertising business benefited from the traditionally strong summer season for online games advertising in the third quarter. 17173.com is the portal of choice for online game advertisers and we achieved higher utilization rates of our advertising resources due to strong demand. We are building 17173.com into an even better portal for game-related news. We launched two brand-new news channels in the third quarter, one dedicated to web games and the other to mobile games, and have plans to deliver news for international gamers as well."

Mr. Alex Ho, Changyou's chief financial officer, added, "In the third quarter, we once again topped past quarters' financial performance, in both GAAP and non-GAAP terms, on our top-line and bottom-line results. Both our online games business and online advertising business grew in terms of revenues and are highly profitable and cash-generative. With the strong and stable cash flows from our operations, we plan to keep investing in people and products to take advantage of the many growth opportunities we see in the market and create greater shareholder value over the long term."

Third Quarter 2012 Operational Results

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

-- Aggregate registered accounts for the Company's games[3] increased 12%
quarter-over-quarter and 41% year-over-year to 223.5 million.
-- Aggregate PCU for the Company's games increased 1% quarter-over-quarter
and decreased 5% year-over-year to 1.09 million.
-- Aggregate APA for the Company's games decreased 8% quarter-over-quarter
and 20% year-over-year to 2.41 million. The quarter-over-quarter and
year-over-year decreases reflected a decline in the number of
low-spending active paying accounts that did not make a purchase in the
third quarter of 2012 as the Company continued last quarter's strategy
of giving away virtual items and reducing in-game promotions in TLBB.
-- ARPU for the Company's games increased 15% quarter-over-quarter and 46%
year-over-year to RMB319. The quarter-over-quarter and year-over-year
increases were mainly due to the decline in TLBB's low-spending active
paying accounts and TLBB's core players increasing their spending in the
third quarter of 2012.

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

-- Aggregate active accounts[4] for 7Road's games[5] were 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
third-party web platforms playing Wartune (also known as Shen Qu) in the
third quarter of 2012.
-- Aggregate active charging accounts[6] for 7Road's games were 1.66
million, a decrease of 5% quarter-over-quarter and 3% year-over-year.
The decreases in active charging accounts resulted primarily from
certain players of DDTank having ceased purchasing game coins because in
the new version of DDTank, DDTank II, they were prevented from
purchasing virtual items at discounted prices from other players. The
decreases in active charging accounts also reflected the fact that
DDTank, which has been in operation since 2008, has entered into a
relatively mature phase. This resulting decrease in active charging
accounts for DDTank was offset in part by an increase in the number of
active charging accounts for Wartune (also known as Shen Qu) in the
third quarter of 2012.
-- Average revenue recognized per active charging account[7] ("ARCA") for
7Road's games was RMB100 an increase of 61% quarter-over-quarter and
163% year-over-year. The increases resulted primarily from Wartune
tending to have a higher ARCA than DDTank, and from ARCA for DDTank
having increased as relatively lower-spending players ceased purchasing
game coins after the discount market was closed when the new version of
DDTank, DDTank II, was released.

Third Quarter 2012 Unaudited Financial Results

Revenues

Total revenues for the third quarter of 2012 increased 13% quarter-over-quarter and 29% year-over-year to US$165.8 million.

Online game revenues, which include revenues from Changyou's game operations and overseas licensing revenues and revenues from 7Road, increased 10% quarter-over-quarter and 30% year-over-year to US$151.1 million. The quarter-over-quarter and year-over-year increases were mainly due to the growth momentum of TLBB and Wartune in China in the third quarter of 2012.

Online advertising revenues, which consist of revenues generated from the 17173 business, increased 40% quarter-over-quarter and 32% year-over-year to US$12.8 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 prices and higher utilization rates of our advertising resources in the third quarter of 2012 than in the third quarter last year.

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

Gross profit

Gross profit increased 9% quarter-over-quarter and 23% year-over-year to US$134.8 million. Non-GAAP gross profit increased 9% quarter-over-quarter and 23% year-over-year to US$134.9 million. Both gross margin and non-GAAP gross margin were 81%, compared with 84% in the second quarter of 2012 and 85% in the third quarter of 2011.

Gross profit of the online games business increased 9% quarter-over-quarter and 29% year-over-year to US$130.0 million. Non-GAAP gross profit of the online games business increased 9% quarter-over-quarter and 29% year-over-year to US$130.1 million. Both gross margin and non-GAAP gross margin of the online games business were 86%, compared with 87% in the second quarter of 2012 and 87% in the third quarter of 2011. The 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 in the third quarter of 2012.

Gross profit of the online advertising business increased 43% quarter-over-quarter and 28% year-over-year to US$11.0 million. Non-GAAP gross profit of the online advertising business increased 43% quarter-over-quarter and 27% year-over-year to US$11.1 million. Gross margin of the online advertising business was 87%, compared with 85% in the second quarter of 2012 and 89% in the third quarter of 2011. Non-GAAP gross margin of the online advertising business was 87%, compared with 85% in the second quarter of 2012 and 90% in the third 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 third quarter of 2012. The year-over-year decrease in gross margin and non-GAAP gross margin for the online advertising business were mainly due to higher bandwidth cost and increased salaries and benefits expenses due to the hiring of more editors in the third quarter of 2012.

Gross loss and non-GAAP gross loss of other business were US$6.3 million compared with US$2.8 million in the second quarter of 2012 and US$246,000 in the third quarter of 2011. The greater gross loss and non-GAAP gross loss of other business were mainly due to the impairment provision for the advertising resources at cinema circuits of $4.0 million in the third quarter of 2012.

Operating expenses

Total operating expenses were US$42.4 million, an increase of 1% quarter-over-quarter and 12% year-over-year.

Product development expenses were US$18.1 million, an increase of 8% quarter-over-quarter and 44% year-over-year. The quarter-over-quarter and year-over-year increases were mainly due to an increase in salaries and benefits after the Company hired more game engineers in the third quarter of 2012.

Sales and marketing expenses were US$16.4 million, an increase of 13% quarter-over-quarter and a decrease of 7% 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 carried out a nationwide marketing campaign to promote the launch of a new game, Duke of Mount Deer, in the third quarter of 2011.

General and administrative expenses were US$7.8 million, an increase of 1% quarter-over-quarter and 3% year-over-year. The quarter-over-quarter and year-over-year increases were mainly due to an increase in headcount and related salaries and benefits expenses in the third quarter of 2012.

Operating profit

Operating profit increased 13% quarter-over-quarter and 29% year-over-year to US$92.4 million. Operating margin was 56%, compared with 56% in the second quarter of 2012 and 56% in the third quarter of 2011.

Non-GAAP operating profit increased 9% quarter-over-quarter and 28% year-over-year to US$93.2 million. Non-GAAP operating margin was 56%, compared with 58% in the second quarter of 2012 and 57% in the third quarter of 2011.

Net income

Net income increased 10% quarter-over-quarter and 23% year-over-year to US$77.4 million. Net margin was 47%, compared with 48% in the second quarter of 2012 and 49% in the third quarter of 2011.

Non-GAAP net income increased 10% quarter-over-quarter and 25% year-over-year to US$80.4 million. Non-GAAP net margin was 49%, compared with 50% in the second quarter of 2012 and 50% in the third quarter of 2011.

Net income attributable to mezzanine classified non-controlling interests

Net income attributable to mezzanine classified non-controlling interests increased 311% quarter-over-quarter and 312% year-over-year to US$4.5 million. In the third quarter of 2012, the increase in net income attributable to mezzanine classified non-controlling interests of $3.4 million was mainly because Changyou increased the estimated redemption value of the mezzanine classified non-controlling interests in 7Road. Changyou increased the estimated redemption value because judging from 7Road's performance in the first three quarters of 2012, Changyou estimates that 7Road will likely exceed its originally estimated performance for year 2012 and 2013, which will be 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 specified performance milestones before the expiry of the put option and certain circumstances occur. Please refer to the section "Notes to Financial Information", for further details on the put option. The increase in the redemption value was recognized prospectively over the period from the date of the change in estimate to the earliest exercise date of the put right as an increase in net income attributable to mezzanine classified non-controlling interests.

Net income attributable to Changyou.com Limited

Net income attributable to Changyou.com Limited increased 6% quarter-over-quarter and 18% year-over-year to US$72.9 million. Fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.37, up from US$1.29 in the second quarter of 2012 and US$1.16 in the third quarter of 2011. Net margin attributable to Changyou.com Limited was 44%, compared with 47% in the second quarter of 2012 and 48% in the third quarter of 2011.

Non-GAAP net income attributable to Changyou.com Limited increased 5% quarter-over-quarter and 20% year-over-year to US$75.9 million. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.42, up from US$1.35 in the second quarter of 2012 and US$1.18 in the third quarter of 2011. Non-GAAP net margin attributable to Changyou.com Limited was 46%, compared with 49% in the second quarter of 2012 and 49% in the third quarter of 2011.

Liquidity

As of September 30, 2012, Changyou had a combined balance of cash and cash equivalents and short-term investments of US$340.6 million, which decreased from US$464.9 million as of June 30, 2012. Operating cash flow for the third quarter of 2012 was a net inflow of US$100.2 million.

The decrease in the Company's combined balance of cash and cash equivalents and short-term investments was due to the payment of a special cash dividend of US$201 million in the third quarter.

As of September 30, 2012, Changyou had short-term and long-term bank loans of US$222.4 million and current and non-current restricted time deposits of US$225.5 million. The bank loans and restricted time deposits were mainly related to offshore bridge loans from banks that the Company obtained in order to expedite the payment of the special cash dividend to the Company's shareholders. The offshore bridge loans were secured with an equivalent or higher amount of Renminbi-denominated onshore bank deposits by the Company's subsidiaries in China.


Other Business Developments in the Third Quarter of 2012

Changyou Declared and Paid Special Cash Dividend to Shareholders

On August 6, 2012, the Company's board of directors declared a special one-time cash dividend of US$1.9 per Class A or Class B ordinary share, or US$3.8 per ADS. The total amount of this dividend was approximately US$201 million. The dividend was paid to shareholders on September 21, 2012.

Business Outlook


For the fourth quarter of 2012, Changyou expects:

-- Total revenues to be between US$166.0 million and US$170.0 million,
including online game revenues of US$152.0 million to US$155.0 million
and online advertising revenues of US$12.0 million to US$13.0 million.
-- Non-GAAP net income attributable to Changyou.com Limited to be between
US$69.0 million and US$71.0 million.
-- Non-GAAP fully diluted earnings per ADS attributable to Changyou.com
Limited to be between US$1.29 and US$1.33.
-- Assuming no new grants of share-based awards, share-based compensation
expense to be between US$0.5 million and US$1.0 million, reducing fully
diluted earnings per ADS attributable to Changyou.com Limited by US$0.01
to US$0.02.


Continued at: http://www.knobias.com/story.htm?eid=3.1.40a337ec057905b41f7ee357552797b3d38652cc29b997bcde50f3be26b428ef