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Edited Transcript of CYOU earnings conference call or presentation 4-Nov-19 11:30am GMT

Q3 2019 Changyou.Com Ltd Earnings Call

Shijingshan District, Beijing Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Changyou.Com Ltd earnings conference call or presentation Monday, November 4, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dewen Chen

Changyou.com Limited - CEO & Director

* Qing Wei

Changyou.com Limited - Chief Games Development Officer

* Yaobin Wang

Changyou.com Limited - CFO

* Yujia Zhao

Changyou.com Limited - Head of IR

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Conference Call Participants

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* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Fuk Lung Cheung

Citigroup Inc, Research Division - Associate

* Shuopeng Gu

Crédit Suisse AG, Research Division - Analyst

* Thomas Chong

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and good evening. Welcome to Changyou's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the conference over to your host for today's call, Changyou's IR head, Mr. Zhao Yujia. Please go ahead, Yujia.

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Yujia Zhao, Changyou.com Limited - Head of IR [2]

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Thank you, operator, and thanks, everyone, for joining us. On the call today are Mr. Chen Dewen, CEO; Mr. Hong Xiaojian, COO; Mr. Wang Yaobin, CFO; and Mr. Wei Qing, Chief Games Development Officer. For today's agenda, management will discuss highlights for the third 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 statements. 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 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 statements. 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. Chen Dewen.

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Dewen Chen, Changyou.com Limited - CEO & Director [3]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [4]

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[Interpreted] For the third quarter of 2019, our total revenue was $111 million. Online games performed well, with revenue reaching $108 million. Our non-GAAP net income were $34 million, which exceeded the high end of our guidance.

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Dewen Chen, Changyou.com Limited - CEO & Director [5]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [6]

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[Interpreted] For PC games, we launched a new expansion pack for TLBB PC during the quarter to sustain user interest. In addition, we rolled out this year's second promotional event, which ranked and rewarded our highest paying users. We were happy to see that it not only helped to sustain player engagement, but it also effectively stabilized the in-game spending of players. Overall, TLBB PC revenue in the third quarter was flat on a sequential basis.

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Dewen Chen, Changyou.com Limited - CEO & Director [7]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [8]

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[Interpreted] For the fourth quarter of 2019, we will launch another expansion pack for TLBB PC that features the addition of a new clan. We will also further improve our payment system and launch new holiday events that are specifically designed to promote engagements among mid-tier-paying players. Given the uncertainty due to the national day holidays and a fewer promotions during the fourth quarter, we expect TLBB PC revenue to decrease by about 7% on a sequential basis. We will continue to focus on our core strategy to maintain user engagement and maximize the longevity of our Legacy TLBB -- our Legacy PC games such as TLBB.

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Dewen Chen, Changyou.com Limited - CEO & Director [9]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [10]

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[Interpreted] For mobile games, revenue from Legacy TLBB mobile increased slightly in the third quarter on a sequential basis, which was actually better than we expected, mainly thanks to new content that we introduced during the quarter. Mr. Wei Qing, our Chief Games Development Officer, will give you an update later on our latest progress with this game.

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Dewen Chen, Changyou.com Limited - CEO & Director [11]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [12]

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[Interpreted] During the quarter, we launched a new MMORPG mobile game, TLBB Honor, which adopts the core gameplay of other classes gained from our TLBB franchise and features an innovative portrait screen mode. Leveraging the influences of the TLBB franchise among highly active mobile game players, the game has performed quite well since its launch. However, since the game content is not particularly expensive, it's revenue contribution and the profitability are not comparable with Legacy TLBB mobile.

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Dewen Chen, Changyou.com Limited - CEO & Director [13]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [14]

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[Interpreted] Going forward, MMORPG mobile games will continue to be our strategic focus, and we will continue to work on improving the quality of the key games that we are developing so that we can give them the best possible chance to become hits. In the meantime, we are also developing some casual and strategy games to make sure that we maintain a diversified product portfolio.

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Dewen Chen, Changyou.com Limited - CEO & Director [15]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [16]

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[Interpreted] 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.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [17]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [18]

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[Interpreted] During the quarter, we launched our expansion pack, with an underwater world map and new challenging dungeons, all of which helped to drive higher player involvement. In addition, we were pleased to see that the newly introduced clan has been well received by players. So overall, we have been able to maintain stable user engagement during the quarter and achieve solid player spending.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [19]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [20]

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[Interpreted] During the fourth quarter of 2019, we will launch more expanded content that includes casual gameplay featuring some additional elements of day-to-day life. In addition, we will do a preliminary review of the skill system of all clans in order to be prepared to further enhance the PVP experience in the future.

For Legacy TLBB mobile, we will continue to focus on long-term-oriented operational strategies and introduce new content in order to provide a better experience for players.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [21]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [22]

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[Interpreted] Now I will turn the call over to our CFO, Mr. Wang Yaobin, to discuss the financial highlights.

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Yaobin Wang, Changyou.com Limited - CFO [23]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [24]

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[Interpreted] Before I walk you through our financial highlights for the third quarter, I would like to remind you that the company's wholly-owned subsidiary, Shanghai Jingmao Culture Communication Co., Ltd, or Shanghai Jingmao in short, which operated the company's cinema advertising business, ceased operations and wound down the business during the third quarter of 2019 as a result of a Chinese court having granted a petition by Shanghai Jingmao for bankruptcy release. Accordingly, the results of operations for the company's cinema advertising business have been excluded from the company's results from continuing operations in the condensed consolidated statements of operations for the third quarter and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis for comparison. Unless indicated otherwise, results presented in this release are related to continuing operations only and exclude results from the cinema advertising business.

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Yaobin Wang, Changyou.com Limited - CFO [25]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [26]

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[Interpreted] Total revenue was $111 million, an increase of 9% year-over-year and 4% quarter-over-quarter, exceeding our guidance.

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Yaobin Wang, Changyou.com Limited - CFO [27]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [28]

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[Interpreted] Online game revenue was $108 million, an increase of 13% year-over-year and 6% quarter-over-quarter, exceeding our guidance. The year-over-year increase was due to the revenue contribution from new games launched during the quarter.

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Yaobin Wang, Changyou.com Limited - CFO [29]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [30]

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[Interpreted] Our advertising revenue was $3 million, a decrease of 42% year-over-year and 30% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly due to fewer games being marketed on the 17173.com website.

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Yaobin Wang, Changyou.com Limited - CFO [31]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [32]

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[Interpreted] Now let me provide some more details about our unaudited 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.

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Yaobin Wang, Changyou.com Limited - CFO [33]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [34]

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[Interpreted] Gross margin was 78% compared with 83% in the third quarter of 2018 and 82% in the second quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [35]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [36]

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[Interpreted] Gross margin of the online games business was 78% compared with 84% in the third quarter of 2018 and 82% in the second quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [37]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [38]

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[Interpreted] Operating profit was $35 million compared with an operating profit of $40 million in the third quarter of 2018 and an operating profit of $38 million in the second quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [39]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [40]

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[Interpreted] Net income from continuing operations as attributable to Changyou.com Limited were $34 million compared with net income of $67 million in the third quarter of 2018 and net income of $41 million in the second quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [41]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [42]

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[Interpreted] Fully diluted net income from continuing operations attributable to Changyou.com Limited per ADS was $0.64 compared with net income of $1.25 in the third quarter of 2018 and net income of $0.77 in the second quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [43]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [44]

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[Interpreted] Next, moving on to the balance sheet and cash flow statement.

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Yaobin Wang, Changyou.com Limited - CFO [45]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [46]

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[Interpreted] As of September 30, 2019, we had net cash of $250 million compared with $671 million as of December 31, 2018. The decrease was mainly due to the distribution of a special cash dividend of about $503 million in the second quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [47]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [48]

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[Interpreted] For the third quarter, we had net operating cash inflow of $56 million.

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Yaobin Wang, Changyou.com Limited - CFO [49]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [50]

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[Interpreted] Finally, for the fourth quarter 2019 guidance, we expect...

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Yaobin Wang, Changyou.com Limited - CFO [51]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [52]

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[Interpreted] Total revenue to be between $100 million and $110 million. This implies a sequential decrease of 10% to 1%.

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Yaobin Wang, Changyou.com Limited - CFO [53]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [54]

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[Interpreted] Given total revenue -- online game revenue to be between $95 million and $105 million. This implies a sequential decrease of 5% to 3%.

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Yaobin Wang, Changyou.com Limited - CFO [55]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [56]

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[Interpreted] Non-GAAP net income attributable to Changyou.com Limited to be between $27 million and $32 million.

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Yaobin Wang, Changyou.com Limited - CFO [57]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [58]

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[Interpreted] Non-GAAP fully diluted net income attributable to Changyou.com Limited per ADS to be between $0.50 and $0.60.

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Yaobin Wang, Changyou.com Limited - CFO [59]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [60]

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[Interpreted] Share-based compensation expense to be around $3 million, reflecting grants to certain key employees of share-based awards approved by the company's Board of Directors and our newly adopted share incentive plan as well as remaining share-based awards under 2014 Share Incentive Plan and assuming no other grants of share-based awards in the fourth quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [61]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [62]

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[Interpreted] In our guidance, we have adopted a presumed exchange rate of RMB 7.1 to $1 as compared with the actual exchange rate of about RMB 6.99 to $1 for the third quarter 2019.

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Yaobin Wang, Changyou.com Limited - CFO [63]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [64]

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[Interpreted] As last quarter, we won't take any questions regarding the going private proposal in the Q&A session of this call.

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Yaobin Wang, Changyou.com Limited - CFO [65]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [66]

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[Interpreted] This concludes our prepared remarks. Thank you.

Operator, we would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ribery Gu from Crédit Suisse.

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Shuopeng Gu, Crédit Suisse AG, Research Division - Analyst [2]

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(foreign language) I will translate myself. We have noticed that the -- a trial company has already received several new monetization approvals for online games. Could the management kindly comment on the potential pipeline and the potential contribution from the new games that are going to be launched.

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Dewen Chen, Changyou.com Limited - CEO & Director [3]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [4]

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[Interpreted] From fourth quarter this year to -- up to the end of next year, we will launch some new games. And the most recent could be DMD, Duke of Mount Deer. We may launch it in the fourth quarter or first quarter next year.

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Dewen Chen, Changyou.com Limited - CEO & Director [5]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [6]

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[Interpreted] It's hard to predict the revenue performance of those new games, so we need further support from testing results.

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Operator [7]

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Your next question comes from the line of Eddie Leung from BoA ML.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [8]

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(foreign language) [Interpreted] So I have 3 questions. The first question is about the potential impact of cloud games to the online gaming industry. And are we preparing for the new changes in the industry when we prepared our new games?

And then secondly, just wondering why there was a sequential decline in the deferred revenue in the third quarter given some new games?

And finally, how many engineers we have right now?

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Dewen Chen, Changyou.com Limited - CEO & Director [9]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [10]

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[Interpreted] We are studying the cloud-based games, actually, if in the future, the user scale will be large enough. But for the provider side, there will be still content provider and operator, [two sides].

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Dewen Chen, Changyou.com Limited - CEO & Director [11]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [12]

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[Interpreted] For us, like a game developer, no matter it's cloud-based era or current market, it won't be a large difference between games.

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Dewen Chen, Changyou.com Limited - CEO & Director [13]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [14]

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[Interpreted] So from our perspective as a content provider or game developer, it won't impact us in the future.

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Dewen Chen, Changyou.com Limited - CEO & Director [15]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [16]

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[Interpreted] From the limit from bandwidth and the very high cost of the Internet connection speed, we believe the current revenue mode is not high enough to cover those kind of costs.

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Dewen Chen, Changyou.com Limited - CEO & Director [17]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [18]

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[Interpreted] So not only those are several very big players are trying the -- in this very new market and to establish new platform and to operate cloud-based games.

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Dewen Chen, Changyou.com Limited - CEO & Director [19]

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(foreign language)

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Yaobin Wang, Changyou.com Limited - CFO [20]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [21]

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[Interpreted] Yoabin will answer the second and third question. Now we have been maintaining 1,100 R&D workforce scale. And as we have been reviewing our game projects under development periodically, so we will close or shut down some older projects without enough creative ideas. So we will have some loss in our R&D workforce. But in the meantime, we will also have new recruitments from new projects established. So we will -- overall speaking, we will maintain the similar scale of R&D workforce.

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Operator [22]

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Your next question comes from the line of Nelson Cheung from Citi.

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Fuk Lung Cheung, Citigroup Inc, Research Division - Associate [23]

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(foreign language) I will translate the questions myself. My first question is on the marketing dollars. Can you guys just share what would be your marketing strategies going in the next quarter? Should we expect more aggressive spending in order to lengthen the life cycle of the new games?

And then second question is on the revenue mix between PC and mobile games. And can management share the current revenue mix between PC and mobile in terms of reported numbers in closing?

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Dewen Chen, Changyou.com Limited - CEO & Director [24]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [25]

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[Interpreted] The increase of marketing fees in the third quarter was mainly due to our new game launch in the market, TLBB Honor, because we had a different publishing mode this time. In the past, we took distributing channels plus advertising. But this time, we used the method of, in Chinese, (foreign language) and we value their traffic.

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Dewen Chen, Changyou.com Limited - CEO & Director [26]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [27]

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[Interpreted] So in terms of buying user traffic, you need to consider the cost of buying traffic and the lifetime value from the buying traffic method.

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Dewen Chen, Changyou.com Limited - CEO & Director [28]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [29]

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[Interpreted] So the future cost and the marketing fees will be depend on the return -- rate of return.

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Dewen Chen, Changyou.com Limited - CEO & Director [30]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [31]

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[Interpreted] Now for next quarter, we expect a lower investment on buying traffic.

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Dewen Chen, Changyou.com Limited - CEO & Director [32]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [33]

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[Interpreted] For our cash received or gross billing, the PC games account for 38% and mobile games account for 62%.

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Dewen Chen, Changyou.com Limited - CEO & Director [34]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [35]

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[Interpreted] In terms of revenue, PC games account for 60% and the mobile game, 40%. Thank you, Nelson.

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Operator [36]

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(Operator Instructions) Your next question comes from the line of Thomas Chong from Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [37]

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I have 2 quick questions. The first one is about Duke of Mount Deer, the DMD mobile that's -- we are going to be launched. Can you share how we should think about the PC version that we launched many, many years ago. Is there any lessons that we learned from 10 years ago about the challenge that faced by DMD at that time?

And my second question is about the 2020 outlook. In particular, can we get some color about the TLBB PC version and the Legacy TLBB in terms of the growth momentum? Or should we expect stabilization versus 2019? (foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [38]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [39]

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[Interpreted] In terms of the game content, actually DMD mobile will be very differentiated from DMD PC 10 years ago.

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Dewen Chen, Changyou.com Limited - CEO & Director [40]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [41]

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[Interpreted] We had a very different R&D team. So our game content gameplay and the stories loss will be totally different.

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Dewen Chen, Changyou.com Limited - CEO & Director [42]

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(foreign language)

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [43]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [44]

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[Interpreted] Because they are both older games from the company, so from our expectations, they will decrease for the next year. What we can do is to further extend their lifespan. And we will also have some more promotional event in the future, but the core strategy will be maintaining user engagement in the first place. So we -- it's hard to say how much it will be decreased for the next, like, 1-year period.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [45]

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(foreign language)

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [46]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [47]

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[Interpreted] Roughly speaking, it will be the end of this year or early next year. And -- but specific timing will be depend on further testing results.

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Operator [48]

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

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Yujia Zhao, Changyou.com Limited - Head of IR [49]

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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.

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Operator [50]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]