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Changyou.com Limited (CYOU) Q1 2019 Earnings Call Transcript

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Changyou.com Limited  (NASDAQ: CYOU)
Q1 2019 Earnings Call
April 29, 2019, 6:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and good evening. Welcome to Changyou's First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen only mode. After the management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded, if you have any objections, you may disconnect at this time.

I would now like to turn the conference over to your host for today's conference call, Changyou's IR Head, Mr. Yujia Zhao. Please go ahead, Yujia.

Yujia Zhao -- Investor Relations

Thank you, operator, and thanks everyone for joining us. On the call today are Mr. Dewen Chen, CEO; Mr. Xiaojian Hong, COO; Mr. Yaobin Wang, CFO; and Mr. Wei Qing, Chief Games Development Officer. For today's agenda, management will discuss highlights for the first quarter 2019. This will be followed by a question-and-answer session.

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 a forward looking statements. These statements are based on our current plans, estimates and projections and therefore, you should not place undue reliance on them.

Forward-looking statements involving inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. For more information about the potential risks and uncertainties, please refer to the Company's filings with the SEC, including its most recent Annual Report on Form 20-F.

I will now turn the call over to our CEO, Mr. Dewen Chen.

Dewen Chen -- Chief Executive Officer

(Foreign Language). I'm pleased to announce that we got off to a good start in 2019, thanks to the solid performance of our online games. For the fourth quarter of 2019, our total revenue was $123 million and out of this, online game revenue was $99 million. Both numbers came in ahead of our expectations. Non-GAAP net income for the quarter was $37 million, exceeding the top end of our guidance by $9 million.

(Foreign Language). For PC Games, revenue for the first quarter rose significantly on a sequential basis, mainly due to the better than expected performance of TLBB PC. During the quarter, we launched a new expansion pack for the Spring Festival as well as a variety of online and offline events for the holidays. In addition, we also launched our eagerly anticipated promotion that ranks and rewards our highest paying users. The event served to effectively increase payments which demonstrates that players are generally quite happy with the current in-game environment and the long-term outlook for TLBB PC.

(Foreign Language). In the second quarter of 2019, we will launch an expansion pack for TLBB's 12-year anniversary in addition to giving away more benefits to players during the celebration period. We will apply new technology to upgrade the graphics for the Game's characters and in particular, we are going to add a number of elements from traditional Chinese culture that are derived from the original novel, which should give the game even more of a cultural association. Given that we plan to hold fewer in-game promotions during the second quarter, we expect TLBB PC revenue to decline about 10% on a sequential basis. Going forward, our key strategy remains unchanged, that is we want to ensure that we maintain player engagement and maximize the longevity of our legacy PC Games such as TLBB.

(Foreign Language). For mobile games, revenues from Legacy TLBB mobile declined slightly in the first quarter on a sequential basis and player engagement and willingness to pay remained stable, which were actually better than we expected, mostly thanks to the holiday event that we launched during the Spring Festival as well as continuity improvements that we made within the game. Mr. Wei Qing, our Chief Games Development officer will give you an update later on how this has progressed within the -- through this game.

(Foreign Language). Looking out at 2019, we will continue to execute our call strategy of top games by further improving our capabilities and the efficiency in game development. MMORPG mobile games will continue to be our strategic focus though we are also developing some card (ph) games and strategy games. With our strict standards for launching games and our tireless efforts to improve game quality, we believe we are well positioned to roll out exciting new games in the future.

(Foreign Language). In order to reward our shareholders for their patience and support during this development period, as we work our next key title, we announced today that we will be issuing a special cash dividend of about $503 million. Given our ongoing profitability and strong operating cash flow, we do not believe that this dividend will have a material impact on our business. After the dividend distribution, we will continue to invest in our various businesses as euro -- as we look to enhance our leading position in the industry.

(Foreign Language). With that, let me turn the call over to Mr. Wei Qing, our Chief Games Development Officer, to give you an update on the latest progress of Legacy TLBB Mobile.

Qing Wei -- Chief Games Development Officer

(Foreign Language). During the quarter, we were happy to see that Legacy TLBB Mobile's revenue was relatively stable despite the impact of the Spring Festival. This was mainly due to the various in-game holiday events and promotions that we launched during the quarter. Also for this special holiday, we decided to reduce the number of daily quests, so that players did not have to commit as much time to repetitive tasks within the game. We think this move was well received as both feedback and player engagement were positive.

(Foreign Language). For the second quarter of 2019, we will launch an expansion pack for Legacy TLBB mobiles second year anniversary with a new plan and various celebratory events to promote player engagement. Going forward, we will continue to focus on long-term oriented operational strategies, develop a more diversified character development system and continuously update and improve our in-game content according to player feedback in order to maximize the longevity of the game.

(Foreign Language). Now, let me turn the call over to our CFO, Mr. Yaobin Wang, to discuss the financial highlights.

Yaobin Wang -- Chief Financial Officer

(Foreign Language). Thank you, Wei Qing.

(Foreign Language). Now, let me walk you through our financial highlights for the first quarter.

(Foreign Language). Total revenue was $123 million, a decrease of 10% year-over-year and an increase of 5% quarter-over-quarter, exceeding our guidance.

(Foreign Language). Online game revenue was $99 million, a decrease of 6% a year-over-year and an increase of 5% quarter-over-quarter, exceeding our guidance. The year-over-year decrease was mainly due to the natural decline in revenue from our older games, including our Legacy TLBB mobile. The quarter-over-quarter increase was largely due to the better than expected performance of TLBB PC as a result of the in-game promotional events that were launched around the Chinese Spring Festival in the fourth quarter of 2019.

(Foreign Language). Online advertising revenue was $3 million, a decrease of 33% year-over-year and 19% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly due to fewer games being marketed on the 17173 website.

(Foreign Language). Cinema advertising revenue was $20 million, a decrease of 19% year-over-year and an increase of 12% quarter-over-quarter. The year-over-year decrease reflected the impact of a strategy adjustment in the second quarter last year related to the acquisition and the sale of advertising resources. The quarter-over-quarter increase reflected a recovery in revenue following the strategy adjustment as well as the release of several more popular movies in the first quarter of 2019.

(Foreign Language). Now, let me provide some more details about our other financials. From now on, most of the figures discussed will be on a non-GAAP basis. As a reminder, you can find a reconciliation of these non-GAAP measures in our published earnings release.

(Foreign Language). Gross margin was 71% compared with 69% in the first quarter of 2018 and 66% in the fourth quarter of 2018.

(Foreign Language). Gross margin of the online game business was 86% compared with 84% in the first quarter of 2018 and 85% in the fourth quarter of 2018.

(Foreign Language). Operating profit was $41 million compared with an operating profit of $35 million in the first quarter of 2018 and an operating profit of $9 million in the fourth quarter of 2018.

(Foreign Language). Net income attributable to Changyou.com Limited was $37 million compared with net loss of $16 million in the first quarter of 2018 and net income of $11 million in the fourth quarter of 2018.

(Foreign Language). Fully diluted net income attributable to Changyou.com Limited per ADS was $0.69 compared with net loss of $0.30 in the first quarter of 2018 and net income of $0.21 in the fourth quarter of 2018.

(Foreign Language). Next, moving on to the balance sheet and cash flow statement.

(Foreign Language). As of March 31st, 2019, we had net cash of $676 million compared with $673 million as of December 31st, 2018.

(Foreign Language). For the first quarter, we had net operating cash inflow of $31 million.

(Foreign Language). Finally, for the second quarter 2019 guidance, we expect...

(Foreign Language). -- total revenue to be between $110 million and $120 million. This implies a sequential decrease of 11% to 3%.

(Foreign Language). Within total revenue, online game revenue to be between $90 million and $100 million. This implies a sequential decrease of 9% to a sequential increase of 1%.

(Foreign Language). Non-GAAP net income attributable to Changyou.com Limited to be between $22 million and $27 million.

(Foreign Language). Non-GAAP fully diluted net income attributable to Changyou.com Limited per ADS to be between $0.41 and $0.50.

(Foreign Language). Gain on share-based compensation to be around $1 million, assuming no new grants of share-based awards and considering the impact of the payment of special cash dividend.

(Foreign Language). In our guidance, we have adopted a presumed exchange rate of RMB6.80 to $1 as compared with the actual exchange rate of about RMB6.74 to $1 for the first quarter of 2019.

(Foreign Language). Like that last quarter, we won't take questions regarding the going private proposal in the Q&A session of this call.

(Foreign Language). This concludes our prepared remarks. Thank you. Operator please, we would now like to open the call for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). We have our first question from the line of Alex Xie from Credit Suisse. Please go ahead.

Alex Xie -- Credit Suisse -- Analyst

Hi, management. Thank you for taking my questions. So my first question is a housekeeping question. So how much of this quarter's online games revenue is from mobile and how much is from PC?

And my second question is about our new game pipeline. So, can management provide some updates on our new game pipeline. What kind of games to be launched and expected timing and -- ask these two questions first. (Foreign Language).

Qing Wei -- Chief Games Development Officer

(Foreign Language). We'd like to answer the questions in terms of growth building. PC Games gross billing accounts for 45% of our game gross billing and the mobile game accounted for 55%.

(Foreign Language). For your second question, our main focus will be seen MMORPG game.

(Foreign Language). We will try to launch a DMD (ph) IP game -- mobile game in second quarter.

(Foreign Language). On the other hand, we will also launch two games in overseas market, one is in Inuyasha from Giant Network, to, Hong Kong, Macau, Taiwan markets, and the other one is (inaudible) to Korea market.

(Foreign Language). We also have some -- several major titles -- major MMO titles to be launched next year. Also we have some SLG game, car game, but the schedule will be on to the next year. Thank you, Alex.

Alex Xie -- Credit Suisse -- Analyst

Okay, then. So I'd like to -- sorry, there are some other few questions. So I'd like to ask about our headcount because I noticed that our cost decreased year-over-year significantly. So what about our headcounts in R&D, sales and marketing, and G&A?

And secondly, so as management mentioned, our old games such as TLBB PC I think exceeded our expectations (inaudible) again in the past year. And so, I think I would like to ask management about what are the key do you think to -- for this kind of outperforming performance? And what can we do to further extend it and what's the view of its lifespan to remain largely stable?

Yaobin Wang -- Chief Financial Officer

Okay, two questions right? Now for the first question, the year-over-year change on the cost, right?

Alex Xie -- Credit Suisse -- Analyst

Yes.

Yaobin Wang -- Chief Financial Officer

(Foreign Language). For the first question, actually now our employees in total is 2,000 and last year we had 2,200 and so, the 10% decrease was mainly due to the natural turnover and also some internal adjustments. And for our R&D team, we have been maintaining a team of 1,200 people. No major change on that.

(Foreign Language). First reason could be the shift from PC game to mobile internet -- mobile game has come to an end.

(Foreign Language). Another one is that we really paid a lot of effort to reduce those repetitive burden of players and also reduce the non-sense payment for the users.

(Foreign Language). So, we've shifted our focus from a revenue side to maintaining the current users' engagement.

(Foreign Language). So our effort just paid out and going forward, as long as we can maintain the current existing players and their active players -- number of active players, we can maintain the -- a quite stable revenue from TLBB PC. Thank you.

Alex Xie -- Credit Suisse -- Analyst

(Foreign Language) Thank you management, very helpful.

Operator

Next question comes from the line of Nelson Cheung from Citigroup. Please go ahead.

Nelson Cheung -- Citigroup -- Analyst

Thank you, management. Thank you for taking my question. I actually have two questions regarding the industry's landscape right now. First, we noticed that the gap from the last approval of Banhao (ph) has been widening since early April. So how would management interpret this trend? And should we expect it as a near-term impact or it will actually become a longer term overhang, just like what's happened last year?

And following on this question, we also know that the government officials have already uploaded the latest application forms -- for Banhao application. So should we expect there will be a material change in terms of sequence of approval, content requirement and any other additional documentation in the approval process in future? Thank you. (Foreign Language).

Dewen Chen -- Chief Executive Officer

(Foreign Language). Can I confirm your first question was -- is it related to the number of the license approval, because you mentioned it's -- the number -- to the number -- it's decreased or something?

Nelson Cheung -- Citigroup -- Analyst

My first question is actually about the timing of Banhao application. As you know, we noticed that there's a rectangular approval after December 2018 -- last year. And we -- it seems like that starting from early April, there's no more approval until now. So, how do management interpret this trend? And how should we foresee this trend as a near-term impact or maybe a longer term trend, just like last year? Thank you. (Foreign Language).

Dewen Chen -- Chief Executive Officer

(Foreign Language). The answer is, we believe it's a temporary thing and we are submitting materials for our game to apply for a new license approval. So, we don't think there will be any major impact to us or the industry. The second question was about the sequence, like the government giving approval and also the types of games, right.

Nelson Cheung -- Citigroup -- Analyst

Yeah, I guess we noticed that there is a new application form uploaded on the official website of the -- from the government, so we just want to check weather there would -- would there be any material change in terms of any additional requirement required for a submission in future? (Foreign Language).

Dewen Chen -- Chief Executive Officer

(Foreign Language). As we are the -- one of the leading gaming companies in the industry, we have well done, are self-regulated from our development stage. We don't want to touch any red line in terms of regulation. And also in addition, this year we don't have -- we won't have too many games to be launched. So, we believe we'll have -- we can have enough license approval for all of our games to be launched this year.

Nelson Cheung -- Citigroup -- Analyst

Okay, thank you very much.

Operator

(Operator Instructions). As there are no further questions, we will now begin closing comments. Please go ahead, Yujia.

Yujia Zhao -- Investor Relations

Thank you for the -- operator. And once again, I would like to thank you for joining today's call. If you have further questions, please don't hesitate to contact us. Thank you.

Operator

Ladies and gentlemen, thank you for standing by. Thank you. That does conclude your conference for today.

Duration: 36 minutes

Call participants:

Yujia Zhao -- Investor Relations

Dewen Chen -- Chief Executive Officer

Qing Wei -- Chief Games Development Officer

Yaobin Wang -- Chief Financial Officer

Alex Xie -- Credit Suisse -- Analyst

Nelson Cheung -- Citigroup -- Analyst

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