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Edited Transcript of CYOU earnings conference call or presentation 29-Apr-19 10:30am GMT

Q1 2019 Changyou.Com Ltd Earnings Call

Shijingshan District, Beijing May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Changyou.Com Ltd earnings conference call or presentation Monday, April 29, 2019 at 10:30:00am 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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* Alex Xie

Crédit Suisse AG, Research Division - Analyst

* Nelson Cheung

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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 First 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 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.

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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. Dewen Chen, CEO; Mr. Xiaojian Hong, COO; Mr. Yujia 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 companies beliefs and expectations are 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 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 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.

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

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(foreign language) Thanks, Yujia.

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

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[Interpreted] 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 first quarter of 2019, our total revenue was $123 million, and out of this, online game revenue was $99 million. Both numbers came ahead of our expectations. Non-GAAP net income for the quarter was $37 million, exceeding the top end of our guidance by $9 million.

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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, 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 off-line events for the holiday. In addition, we also launched our equally anticipated promotions 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.

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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] 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 characters. And in particular, we are going to add a number of elements from traditional Chinese culture that are direct 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.

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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, revenues from Legacy TLBB Mobile declined slightly in the first quarter on a sequential basis. End player engagement and the 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 continuing improvements that remain within the game. Mr. Wei Qing, our Chief Games Development Officer, will give you an update later on how this is progressed within -- through 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] Looking out at 2019, we will continue to execute our core strategy of Top Games by further improving our capabilities and efficiency in game development. MMORPG mobile games will continue to be our strategic focus, though we are also developing some tarot 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.

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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] In order to reward our shareholders for their patience and support during this development period, as we work on 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 we look to enhance our leading position in the industry.

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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 were happy to see the Legacy TLBB Mobile's revenue was relatively stable despite the impact of the Spring Festival. This was mainly due to the rising game holiday event and promotions that we launched during the quarter. Also, for the 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.

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

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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] Let me turn the call over to our CFO, Mr. Yaobin Wang, 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] Thank you, Wei Qing.

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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] Now let me walk you through our financial highlights for the first quarter.

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

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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] Online game revenue was $99 million, a decrease of 6% 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 first quarter of 2019.

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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] Our 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.

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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] 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 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.

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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] 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 (technical difficulty)

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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] Gross margin was 71% compared with 90 -- 69% in the first quarter of 2018 and 66% in the fourth quarter of 2018.

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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] 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.

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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] 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.

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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] 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.

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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] 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.

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

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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] As of March 31, 2019, we have net cash of $676 million compared with $673 million as of December 31, 2018.

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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] For the first quarter, we have net operating cash inflow of $31 million.

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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] Finally, for the second quarter 2019 guidance, we expect...

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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] Total revenue to be between $110 million and $120 million. This implies a sequential decrease of 11% to 3%.

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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] 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%.

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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] Non-GAAP net income attributable to Changyou.com Limited to be between $22 million and $27 million.

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

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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] [Getting] our share-based [composition] to be around $1 million, assuming no new grants of share-based awards and considering the impact of the payment of special cash dividend.

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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] In our guidance, we have adopted a presumed exchange rate of RMB 6.8 (sic) [RMB 6.38] to $1 as compared with the actual exchange rate of about RMB 6.74 to $1 for the first quarter of 2019.

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Yaobin Wang, Changyou.com Limited - CFO [67]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [68]

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

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Yaobin Wang, Changyou.com Limited - CFO [69]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [70]

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[Interpreted] This concludes our prepared remarks. Thank you. Operator, please, we would now like to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from the line of Alex Xie from Credit Suisse.

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Alex Xie, Crédit Suisse AG, Research Division - Analyst [2]

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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 I'll ask these 2 questions first.

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Yujia Zhao, Changyou.com Limited - Head of IR [3]

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(foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [4]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [5]

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[Interpreted] We'd like to answer the questions in terms of gross billing. PC games gross billing accounts for 45% of our game gross billing. And the mobile game accounts for 55%.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [6]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [7]

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[Interpreted] For your second question, our main focus will be still on MMORPG game.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [8]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [9]

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[Interpreted] We will try to launch a DMD IP game -- mobile game in second quarter.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [10]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [11]

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(foreign language) On the other hand, we will also launch 2 games in overseas market. One is [Inuyasha] from Giant Network to Hong Kong, Macau and Taiwan market. The other one is [Nati's Asian Nocturne] to Korea market.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [12]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [13]

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[Interpreted] We also have several major titles -- major MMO titles we'll launch next year. Also, we have some SLG game, card game, but the schedule will be all to the next year.

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Alex Xie, Crédit Suisse AG, Research Division - Analyst [14]

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Okay. So I would like to add some other few questions. So I would like ask about our headcounts, 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 mentioned, our old games such as TLBB PC, I think, exceeded our expectations just second again in the past year. And so I think I would like to ask -- mention about what are the key, do you think, to -- for this kind of outperforming performance? And what can we do to further extend this? And what's our view of its lifespan to remain largely stable?

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Yujia Zhao, Changyou.com Limited - Head of IR [15]

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Okay. 2 questions, right? For the first question, it's the year-over-year change of the cost, [right, trend?]

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Alex Xie, Crédit Suisse AG, Research Division - Analyst [16]

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Yes.

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Yujia Zhao, Changyou.com Limited - Head of IR [17]

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(foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [18]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [19]

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[Interpreted] For the first question, actually, now our employees in total is 2,000. And last year, we had 2,200. 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)

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Dewen Chen, Changyou.com Limited - CEO & Director [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] First reason could be the shift from PC games to mobile Internet. Mobile games has come to an end.

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Dewen Chen, Changyou.com Limited - CEO & Director [22]

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(foreign language)

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Yujia Zhao, Changyou.com Limited - Head of IR [23]

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[Interpreted] Another one is that we really paid a lot of effort to reduce those repetitive burden of players and also reduce the nonsense payment for the users.

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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] So we shifted our focus from revenue side to maintaining the current user's engagement.

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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 our efforts 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.

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Operator [28]

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Next question comes from the line of Nelson Cheung from Citigroup.

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Nelson Cheung, [29]

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I actually have 2 questions regarding the industry landscape right now. First, we noticed that the gap from the last approval of banhao has been widening since early April, so how management interpret this trend? And should we expect it as a near-term impact? Or it will actually become a longer term overhead just like what's happened last year?

And following on this question, we also note that the government offices 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 the future?

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

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(foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [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] Can I confirm your first question? Was -- is it related to the number of the license approval? Because you mentioned it's the number -- total number has decreased or something.

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Nelson Cheung, [33]

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My first question is actually about the timing of banhao application. As we noticed that there's a regular approval after December 2018 last year, and 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?

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

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(foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [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] The answer is, we believe it's a temporary thing. And we are submitting our materials for our games to apply for 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, right, the government getting approval and also the type games -- types of games, right?

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Nelson Cheung, [37]

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Yes. Yes. I guess we noticed that there's a new application form uploaded on the official website of the -- from the government. So we just want to check whether there -- will there be any material change in terms of -- any additional requirement required for submission in the future.

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

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(foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [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] Yes. As we are one of the leading gaming companies in the industry, we have [well done our] 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 we'll launch. So we believe we will have -- we can have enough license approval for all of our games to be launched this year.

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Operator [41]

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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 [42]

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Okay. Thank you for that, 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.

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Operator [43]

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

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