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Edited Transcript of CYOU earnings conference call or presentation 27-Oct-17 11:00am GMT

Thomson Reuters StreetEvents

Q3 2017 Changyou.Com Ltd Earnings Call

Shijingshan District, Beijing Oct 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Changyou.Com Ltd earnings conference call or presentation Friday, October 27, 2017 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dewen Chen

Changyou.com Limited - CEO and Director

* Margaret Shi

* Qing Wei

Changyou.com Limited - Chief Games Development Officer

* Yaobin Wang

Changyou.com Limited - CFO

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Conference Call Participants

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* Eddie Leung

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

* Han Joon Kim

Deutsche Bank AG, Research Division - VP and Research Analyst

* Shawn Yang

Blue Lotus Research Institute - VP

* Wayne Wang

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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. Thank you for joining the Changyou's Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the manager's prepared remarks, there will be a Q&A 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, Margaret Shi. Please go ahead, Margaret.

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Margaret Shi, [2]

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Thank you, operator. 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 third quarter 2017, which 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 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 Securities and Exchange Commission, including its most recent annual report on Form 20-F.

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

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

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(foreign language)

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Margaret Shi, [4]

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I am pleased to report that total revenue for the third quarter was USD 166 million, an increase of 22% year-over-year. Online game revenues were USD 132 million, an increase of 34% year-over-year. Non-GAAP net loss is USD 5 million, as we recognized impairment charges on goodwill and intangible assets in the third quarter. Excluding these impairment charges, non-GAAP net income for the third quarter was about USD 56 million, which is in line with our guidance.

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

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(foreign language)

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Margaret Shi, [6]

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For PC games, we continue to focus on maintaining user stability within our existing games, and we remain prudent with new game launches. Revenue from TLBB PC game was stable quarter-over-quarter and was in line with our expectations. The launch of Legacy TLBB Mobile games has had very limited impact so far on the performance of our TLBB PC game. We will keep making improvements to the content and functionality of the game to sustain user interest and engagement. We expect revenues from TLBB PC for the fourth quarter to be stable on a quarter-over-quarter basis.

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

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(foreign language)

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Margaret Shi, [8]

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In the fourth quarter, we are trying to launch a new PC game called Man Huang Sou Shen Ji. The launch of this game will make up for the decline of some of our older PC games and keep our overall PC game revenue stable in the fourth quarter, on a sequential basis.

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

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(foreign language)

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Margaret Shi, [10]

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For mobile games, we continue to keep our strategic focus locked on MMORPG games, (inaudible) games, and SLG games, and we are working hard to produce new games that will be popular and will resonate with the users. For MMORPG, leveraging our expertise in PC game development, we will keep exploring ways to enhance social functionality, optimize in-game environments, and increase user engagement. For the (inaudible) games, we are encouraging our producers to be innovative, and we are also making sure that we keep the gameplay simple, so that the young gamers we are targeting can quickly jump into those games and have fun while playing.

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

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(foreign language)

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Margaret Shi, [12]

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With the launch of Legacy TLBB Mobile in May, we have issued two new extension packs. We will continue to improve the (inaudible) interactive system within the came and to create new gameplay to maximize the longevity of the game. Wei Qing, our Chief Games Development Officer, will give you an update later on our latest (inaudible) game.

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

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(foreign language)

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Margaret Shi, [14]

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In terms of our older games, TLBB 3D has been in operation for three years, and we have been impacted by the launch of the Legacy TLBB Mobile. Despite the game's 25% decline quarter-over-quarter, its revenue still outperforms non-mobile games on the market. TLBB 3D is among the longest-operating mobile games in China, which gave our R&D team ample time and space to test and experiment creative new ideas. As a result, we have accumulated invaluable experience, which will surely help set a stage for our next blockbuster.

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

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(foreign language)

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Margaret Shi, [16]

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As for our pipeline, we are trying to launch a new mobile game 'Dao Jian Dou Shen Zhuan in December as a new MMORPG game, such as (inaudible), as well as (inaudible) games, such as Runaway are also on the way. These games are currently going through various adjustments and modifications, and are expected to launch early next year.

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

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(foreign language)

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Margaret Shi, [18]

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We remain focused on producing top-quality games. The quality of our games is governed by our product [appraisal] committee for games that do not meet our testing standards to either them back for modification or terminate the projects immediately, to ensure that our resources are most efficiently allocated. For games with strong test results, we then match our (inaudible) and the marketing resources to them to maximize their chance for success, which means our focus and commitment to produce top-quality games will lead us to the next blockbuster.

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

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(foreign language)

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Margaret Shi, [20]

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

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

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(foreign language)

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Margaret Shi, [22]

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I (inaudible) Legacy TLBB Mobile, the game set a new record for MMORPG games in terms of monthly gross billings. However, like most MMORPG games, the longer you play it, the gross billings experience a natural decline in the following months, which was in line with our expectation. During the third quarter, we introduced new characters and updated the social function, which helped to stabilize user numbers and revenue. On the whole, however, we still expect the revenue of the Legacy TLBB Mobile to decrease on a quarter-over-quarter basis. Our top priority, as always, is to (inaudible) of our core users. We aim to launch bimonthly extension packs to keep our users entertained, which builds continuous upgrades of content and social functions, which we believe is vital for building long-lasting and sustainable games.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [23]

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(foreign language)

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Margaret Shi, [24]

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So now, 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 [25]

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(foreign language)

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Margaret Shi, [26]

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

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

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(foreign language)

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Margaret Shi, [28]

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Total revenues were USD [150] million, up 22% year-over-year and 10% quarter-over-quarter, which was in line with our guidance.

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

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(foreign language)

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Margaret Shi, [30]

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Online game revenue exceeded our guidance at USD 160 million, up 34% year-over-year and 8% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to the [revenue] contribution of the Legacy TLBB Mobile, which was launched in May 2017.

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

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(foreign language)

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Margaret Shi, [32]

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Online advertising revenue was USD 6 million, down 48% year-over-year and 14% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly because fewer PC games are being launched in China, and our new mobile initiative for 17173 are still at an early stage.

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

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(foreign language)

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Margaret Shi, [34]

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Cinema advertising revenue was USD 24 million, an increase of 14% year-over-year and 38% quarter-over-quarter. The year-over-year was because we took an active approach in acquiring more advertising resources. The quarter-over-quarter increase was the result of a seasonal trend in cinema advertising, typical of the third quarter.

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

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(foreign language)

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Margaret Shi, [36]

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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.

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

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(foreign language)

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Margaret Shi, [38]

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Gross margins is 73%, which compares with 70% in the third quarter of 2016 and 77% in the second quarter 2017.

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

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(foreign language)

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Margaret Shi, [40]

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Gross margins of online games business was 87%, compared with 76% in the third quarter of 2016 and 19% in the second quarter of 2017. The year-over-year increase in gross margin is due to Legacy TLBB Mobile, which was launched in second quarter of 2017, and has a high gross margin, as revenue is recognized on a net basis after revenue sharing with (inaudible).

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

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(foreign language)

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Margaret Shi, [42]

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Operating loss was USD 28 million, compared with operating profit of USD 37 million in the third quarter of 2016, and operating profit of USD [53] million in the second quarter of 2017.

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

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(foreign language)

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Margaret Shi, [44]

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Net loss attributable to Changyou.com Limited was USD 5 million, compared with the net income USD 36 million in third quarter of 2016, and a net income of USD [51] million in the second quarter of 2017.

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

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(foreign language)

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Margaret Shi, [46]

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Fully diluted net loss attributable to Changyou.com Limited per ADS was USD 0.09, which compares with a fully diluted net income attributable to Changyou.com Limited per ADS of USD 0.85 in the third quarter of 2016, and USD 1.14 in the second quarter of 2017.

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

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(foreign language)

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Margaret Shi, [48]

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During this (inaudible) quarter (inaudible) goodwill impairment and the impairment of intangible assets was USD 87 million. The impairments were mainly related to the MoboTap business, which was acquired in [2014]. In the third quarter of 2015, we recognized the impairment charge related to the MoboTap business, due to a change in the company's strategic direction. Since then, MoboTap focused on the development and operation of card and board games, which have been MoboTap's main source of revenue. Due to reinforced restrictions that the Chinese regulatory authorities imposed on card and board games, some of MoboTap's key distribution partners informed us that they had decided to stop distribution and the promotion of card and board games in the third quarter of 2017. As a result, it is determined that it is unlikely for MoboTap to gain users and grow its revenue in China. For this reason, we have recognized the impairment charge of USD 87 million to reflect the fair value of MoboTap (inaudible). Impairment charges recognized in net income attributable to Changyou.com Limited was USD 60 million. Impairment charges recognized in net income attributable to non-controlling interest was USD (inaudible).

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

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(foreign language)

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Margaret Shi, [50]

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Excluding impairment charges, net income attributable to Changyou.com Limited would have been USD 56 million, which was in line with our guidance.

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

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(foreign language)

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Margaret Shi, [52]

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

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

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(foreign language)

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Margaret Shi, [54]

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As of September 30, 2017, we've had cash and cash equivalents and short-term investments totaling USD 881 million, compared with USD 831 million as of December 31, 2016.

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

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(foreign language)

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Margaret Shi, [56]

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For the third quarter 2017, we've had net operating cash flow of USD 75 million.

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

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(foreign language)

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Margaret Shi, [58]

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Finally, for the fourth quarter 2017 guidance, we expect --

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

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(foreign language)

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Margaret Shi, [60]

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-- total revenue to be between USD 145 million and USD 155 million, which implies a sequential decrease of 7% to 13%.

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

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(foreign language)

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Margaret Shi, [62]

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Within total revenue, online game revenue to be between USD 110 million and USD 120 million, which implies a sequential decrease of 8% versus 10%.

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

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(foreign language)

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Margaret Shi, [64]

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Non-GAAP net income attributable Changyou.com Limited should be between USD 35 million and USD 40 million.

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

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(foreign language)

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Margaret Shi, [66]

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Non-GAAP, fully diluted net income attributable to Changyou.com Limited per ADS should be between USD 0.66 and USD 0.76.

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

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(foreign language)

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Margaret Shi, [68]

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The share-based compensation expense to be around USD 2 million, assuming no new grants of share-based awards and that the market price of our shares remains unchanged.

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

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(foreign language)

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Margaret Shi, [70]

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In our guidance, we have adopted a presumed exchange rate of RMB 6.6 to USD 1, as compared with actual exchange rate of approximately RMB 6.67 to USD 1 for the third quarter of 2017.

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Yaobin Wang, Changyou.com Limited - CFO [71]

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(foreign language)

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Margaret Shi, [72]

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This concludes our prepared remarks. Thank you for joining the call today. Operator, 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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Thank you. (Operator Instructions) We will now take our first question comes from Eddie Leung from Merrill Lynch. Please go ahead.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [2]

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Good evening; thank you for taking my question. I (inaudible) just a question on (inaudible) mobile game industry. So just wondering if you guys can still expect the overall mobile game user base in China can continue to grow, let's say in 2018, because it seems like from our checking of some of the mobile app ranking applications (inaudible) the existing games are not growing that much recently. For example, you also mentioned that TLBB Mobile could see some revenue decline, so just want to get your sense on the industry trend, especially on the user side. Thank you.

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Margaret Shi, [3]

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Well Eddie, your first question was on the (inaudible) mobile games was industry-wide.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [4]

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Yes, especially on the user side. Thanks.

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Margaret Shi, [5]

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Can you (inaudible)? I can't hear you so clearly.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [6]

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Yes, especially the overall mobile game user growth, how is your view on it in 2018?

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Margaret Shi, [7]

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(foreign language)

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Unidentified Company Representative, [8]

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(foreign language)

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Margaret Shi, [9]

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From our observations, the overall mobile game market had slowed down.

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Unidentified Company Representative, [10]

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(foreign language)

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Margaret Shi, [11]

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But the revenue growth for mobile games will exceed the user [base load].

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Unidentified Company Representative, [12]

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(foreign language)

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Margaret Shi, [13]

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It's because of the increasing users' willingness to pay, and also because the economic -- the (inaudible) economic (inaudible) consumption and behavior within the games.

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Unidentified Company Representative, [14]

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(foreign language)

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Margaret Shi, [15]

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Okay, we think the growth in user number will be fairly slow going forward, probably around single digit growth. Thank you.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [16]

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Thank you very much. (foreign language)

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Margaret Shi, [17]

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Did you have another question, Eddie?

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [18]

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Actually, that's the same question. Thanks.

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Margaret Shi, [19]

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Okay, thanks.

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Operator [20]

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We will now take our next question from (inaudible) from (inaudible). Please go ahead.

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Unidentified Analyst, [21]

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Thank you, management. Thank you for taking my question. I have a question regarding the games in our pipeline. Could management share more on the publishing strategy for some of the mobile games in our pipeline, including (inaudible), and also (inaudible) and also others. Are we looking to publish these titles on our own, or some of the third party, including (inaudible)? And then I have another question. Thank you.

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Margaret Shi, [22]

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(foreign language)

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Unidentified Company Representative, [23]

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(foreign language)

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Margaret Shi, [24]

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Okay. So when we started the project for Dao Jian Dou Shen Zhuan, the user -- total user base is very hardcore MMORPG users.

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Unidentified Company Representative, [25]

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(foreign language)

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Margaret Shi, [26]

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From the recent testing results, we find that the game appealed to our core user base.

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Unidentified Company Representative, [27]

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(foreign language)

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Margaret Shi, [28]

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Okay. The overlap between our hardcore MMORPG (inaudible) and the traditional PC-played game is not particularly large, so we're don't expect the user base to be very large.

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Unidentified Company Representative, [29]

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(foreign language)

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Margaret Shi, [30]

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For Dou Shen Zhuan, when we started the project, we wanted the target user base to be the general public, or we wanted it to be available for everyone, so the game design is very [usable] and it's (inaudible).

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Unidentified Company Representative, [31]

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(foreign language)

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Margaret Shi, [32]

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From our recent testing feedback where we've been testing with new players, and then the testing results have been satisfactory so far. So going forward, we'll be modifying our gameplay (inaudible) players further, and then hopefully adding more gameplay for the mid- to long-term.

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Unidentified Company Representative, [33]

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(foreign language)

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Margaret Shi, [34]

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Thank you.

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Unidentified Analyst, [35]

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And another question will be regarding (inaudible). So these titles have (inaudible) development for some years, so why are we launching it at this point? Are we seeing positive feedback during (inaudible), and how should we think about the marketing dollars and publishing [charge] for this one? Thank you.

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Margaret Shi, [36]

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(foreign language)

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Unidentified Company Representative, [37]

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(foreign language)

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Margaret Shi, [38]

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We've spent a very long time developing this game, and then the testing results, which we received -- the (inaudible) testing results (inaudible) satisfactory, and we think we're ready for launch.

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Unidentified Company Representative, [39]

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(foreign language)

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Margaret Shi, [40]

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We also have [leveraging] endorsements from (inaudible), one of the public celebrities in China. And then, (inaudible) more concrete (inaudible) publishing and distribution will be ready when there are more concrete results [after launch]. Thank you.

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Unidentified Analyst, [41]

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Thank you very much. Look forward to the game launches.

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Margaret Shi, [42]

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Thank you.

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Operator [43]

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We will now take our next question from Han Joon Kim from Deutsche Bank. Please go ahead.

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Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [44]

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Great, thanks for the opportunity to ask questions. My first one is just on our fourth-quarter guidance and the net margin that it implies. It looks like you're somewhere between 24% to 26%, which would be a bit lower than your historical trajectory, so I just kind of wanted to see what's creating a little bit of a margin pressure than before.

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Margaret Shi, [45]

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(foreign language)

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Unidentified Company Representative, [46]

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(foreign language)

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Margaret Shi, [47]

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The reason for the short-term margin pressures is because of three reasons. The first (inaudible) was (inaudible) decline in revenue from Legacy TLBB. And the second is (inaudible) will be incurring some additional (inaudible) marketing costs (inaudible) in the fourth quarter. And thirdly, we are acquiring additional (inaudible) resources for our (inaudible) business.

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Unidentified Company Representative, [48]

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(foreign language)

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Margaret Shi, [49]

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He also wants to add that (inaudible) TLBB revenue translate directly to the net margin, and as a result, a drop in its revenue will lead to a direct drop in net profit. Thank you.

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Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [50]

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Got it; that makes sense. Yes, so that actually leads to my second question. I think so far, TLBB has been holding up better than expected. We're expecting some level of decay, but on a relative basis, it seems pretty good. So as you think about the longevity of this Legacy TLBB into 2018, do you feel like it will start to stabilize at some point, or we should be expecting kind of quarter-over-quarter continued decline for the next few quarters?

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Margaret Shi, [51]

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(foreign language)

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Unidentified Company Representative, [52]

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(foreign language)

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Margaret Shi, [53]

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Okay, if there is (inaudible), based on our current observations, we think our Legacy TLBB revenue will start to stabilize after the fourth quarter, so we think probably around third quarter of 2018, we'll probably be stable from the level in the fourth quarter this year.

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Unidentified Company Representative, [54]

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(foreign language)

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Margaret Shi, [55]

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In other words, I would think after fourth quarter that the TLBB (inaudible) TLBB Mobile game will stabilize.

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Unidentified Company Representative, [56]

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(foreign language)

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Margaret Shi, [57]

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Thank you.

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Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [58]

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Thank you. Thank you.

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Operator [59]

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We will now take our next question from Wayne Wang from HSBC. Please go ahead.

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Wayne Wang, [60]

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Thank you, management, for taking my question. So I have a question regarding TLBB, or I suggest to management that you expect the TLBB Mobile to enter a stable stage. So, may I ask, so is this stable stage in terms of revenue or maybe in terms of (inaudible) revenue, like (inaudible) and the number of users? And also, I have another question regarding to the cinema advertising business. It seems (inaudible) growth continued to slow down in the [path of due course], so could management add more color on that, and maybe a little bit on competition landscape? Thank you very much.

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Margaret Shi, [61]

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(foreign language)

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Unidentified Company Representative, [62]

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(foreign language)

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Margaret Shi, [63]

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Okay, from (inaudible) we want our Legacy TLBB Mobile to operate in a very healthy manner. We want it to have a very long lifespan. In order to do that, the priority for us is to stabilize [its user] number. Generally, we want to see stabilization of both user numbers and revenue.

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Margaret Shi, [64]

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(foreign language)

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Unidentified Company Representative, [65]

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(foreign language)

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Margaret Shi, [66]

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Okay. The main reason why we've seen this slowdown in revenue growth is because the large advertisers for cinema advertising has a smaller budget.

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Margaret Shi, [67]

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(foreign language)

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Unidentified Company Representative, [68]

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(foreign language)

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Margaret Shi, [69]

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In terms of competition landscape, (inaudible) three to four major players in the market, and that's because the cinema resources are very much [accepted] around the country, and in order to (inaudible) the market, (inaudible) very (inaudible) and take a very long time.

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Unidentified Company Representative, [70]

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(foreign language)

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Margaret Shi, [71]

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For the (inaudible) in the market, the market share for each one of them is pretty stable, so we think the (inaudible) landscape will not change very much in the [recent] period.

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Unidentified Company Representative, [72]

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(foreign language)

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Margaret Shi, [73]

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Thank you.

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Wayne Wang, [74]

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(foreign language)

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Operator [75]

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(Operator Instructions) We'll now take our next question from [Jin Yoon] from (inaudible). Please go ahead.

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Unidentified Analyst, [76]

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Hey, good evening, guys, just a couple of questions. First of all, the expansion packs that you guys mentioned that's going to come out, I think you said every month, is there a more grand expansion pack that we should expect, perhaps like a bigger one that perhaps the gamers are kind of looking forward to? And second of all, I think it's been about five or six months since the chairman has announced potentially going private offering. Is there any update to that, or how should we see that going forward? Thanks, guys.

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Margaret Shi, [77]

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(foreign language)

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Unidentified Company Representative, [78]

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(foreign language)

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Margaret Shi, [79]

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The (inaudible) on a very frequent basis for mobile games, so that will -- it's difficult. It's not like a PC game where you have small expansion packs and bigger expansion packs.

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Unidentified Company Representative, [80]

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(foreign language)

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Margaret Shi, [81]

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So in our most recent expansion pack, the goal is to -- the target users are the returning users, and also, to increase the experience for low-paying users or nonpaying users.

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Unidentified Company Representative, [82]

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(foreign language)

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Margaret Shi, [83]

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And then we are also going to launch a brand new character or a [clan] for the game.

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Unidentified Company Representative, [84]

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(foreign language)

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Margaret Shi, [85]

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Thank you.

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Margaret Shi, [86]

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(foreign language) And then, (inaudible) just want to say, in terms of your second question (inaudible), we won't be discussing any information in this conference call.

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Unidentified Analyst, [87]

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Great. Thanks, guys.

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Margaret Shi, [88]

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Thank you.

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Operator [89]

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We will now take our next question from Shawn Yang from [Blue Lotus]. Please go ahead.

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Shawn Yang, Blue Lotus Research Institute - VP [90]

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Hello, management, and thank you for taking my questioning. I just want to know that we notice that the company continues to promote new PC game. What's management's view to what the general PC game (inaudible) in China? So, I mean, looking at next year, do we expect that the PC market is still (inaudible) flat compared with this year, or we are going to see a more decline year? And my second question is about I would like to ask the management's view to what the MMORPG game in China, since you are very experienced in developing and publish MMORPG games. So we noticed some of the MMORPG game have very long lifecycle, and some have very short lifecycle. How can we evaluate (inaudible) MMORPG game more successful? Thank you.

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Margaret Shi, [91]

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(foreign language)

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Unidentified Company Representative, [92]

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(foreign language)

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Margaret Shi, [93]

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I think [overall] the PC game market is flat, but the user number has declined, and I think the reason is because there's upgrades in consumption behavior for users, and also because the gaming company has upgraded the economics systems within the games.

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Unidentified Company Representative, [94]

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(foreign language)

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Margaret Shi, [95]

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I think overall, it might [not] decline going forward, but then it's still a very substantial market for us. It's still a RMB 500 million, RMB 600 million market. Thank you.

And your second question is on (foreign language).

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Unidentified Company Representative, [96]

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(foreign language)

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Margaret Shi, [97]

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We think computer game is like computer TV series, and some TV series run a longer time, while some TV series run up to one or two episodes. So the most important thing is that we design our games that appeal to the user [here] and user (inaudible).

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Unidentified Company Representative, [98]

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(foreign language)

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Margaret Shi, [99]

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I think in terms of TV series, we have a different (inaudible) the romantic TV series and the [horror] TV series, and each category of them appeal to a certain category of users. Similarly, for game users, there are those who are interested in collectibles; there are ones who are interested in PVPs, and those who are interested in social elements. At the moment, if we appeal to one particular group of users, we'll be able to create games with a long lifespan.

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Operator [100]

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There appear to be no further questions in the queue at this time. I'd like to turn the conference back to yourselves for any additional or closing remarks.

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Margaret Shi, [101]

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Once again, I would like to thank you for joining today's call. If you have any follow-up questions, please don't hesitate to contact us. Thank you.

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Operator [102]

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This concludes today's call. Thank you for your participation. You may now disconnect.