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Edited Transcript of CYOU earnings conference call or presentation 5-Aug-19 10:30am GMT

Q2 2019 Changyou.Com Ltd Earnings Call

Shijingshan District, Beijing Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Changyou.Com Ltd earnings conference call or presentation Monday, August 5, 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

* Eddie Leung

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

* Fuk Lung Cheung

Citigroup Inc, Research Division - Associate

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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 Second 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 conference 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 second quarter of 2019. This will be followed by a question-and-answer session.

Before we continue, please allow me to read you Changyou's safe harbor statement. Statements that are not historical facts, including statements about the company's beliefs and expectations are 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 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. 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 second quarter of 2019, our total revenue was $119 million, which was in line with our expectations. Online game revenue was $102 million, which slightly exceeded the high end of our guidance. Excluding a one-off item, which was an impairment charge that we determined was needed for our cinema advertising business, our non-GAAP net income was $31 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, revenue for the second quarter rose slightly quarter-over-quarter and as a result of the solid performance of several legacy PC games, which helped to offset a decrease in revenue from TLBB PC due to its natural declining life cycle.

During the quarter, we launched an expansion pack for TLBB PC's 12-year anniversary that introduced new content, invoked some of the classic cultural themes of the original novel. Overall, the new material helped to stabilize user engagement. However, due to fewer promotions during the quarter, TLBB PC revenue decreased by about 7% on a sequential basis, which was in line with our expectations.

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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 third quarter of 2019, we will launch a new expansion plan and introduce more in-game content to sustain user interest. We will also roll out this year's second promotional event that ranks and rewards our highest-paying users. We expect TLBB PC revenue for the third quarter to decline about 10% on a sequential basis. Going forward, our key strategy remains unchanged. This is to 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, revenue from Legacy TLBB Mobile was flat in the second quarter on a sequential basis, which was actually better than we expected, mostly thanks to new content that we introduced during the anniversary event as well as continued improvements that we made to the game. 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] Going forward, we will continue to execute our cost strategy of top games by further improving our capabilities and efficiency in game development. 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. 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 [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] With that, let me turn the call over to Mr. Wei Qing, our Chief Games Development Officer, to give you an update on TLBB Mobile.

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Qing Wei, Changyou.com Limited - Chief Games Development Officer [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] During the quarter, the expansion pack we launched for Legacy TLBB Mobile's second year anniversary introduced great new gameplay for players. And some new virtual items that we specifically designed for the anniversary and other seasonal events also drove higher user satisfaction. Therefore, both the user engagement and payments remained very stable during the quarter.

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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] In the third quarter of 2019, for our upcoming expansion pack, we plan to introduce a new underwater world map and corresponding plots and quests as well as a new clan that is more popular with female players. 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 to players.

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

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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] Total revenue was $119 million, an increase of 5% year-over-year and a decrease of 4% quarter-over-quarter, in line with our guidance.

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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] Online game revenue was $102 million, an increase of 8% year-over-year and 3% quarter-over-quarter, exceeding our guidance. The year-over-year increase was due to the improved performance of some of our older games.

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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 advertising revenue was $4 million, a decrease of 28% year-over-year and an increase of 19% quarter-over-quarter. The year-over-year decrease was mainly due to fewer games being marketed on the 17173.com website. The quarter-over-quarter increase was mainly due to more web and PC games being marketed on the 17173.com website.

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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] Cinema advertising revenue was $13 million, an increase of 8% year-over-year and a decrease of 38% quarter-over-quarter. The year-over-year increase was a result of a recovery in revenue following a strategy adjustment in the same quarter last year related to the acquisition and sale of advertising resources. The quarter-over-quarter decrease was primarily due to a seasonal trend in cinema advertising typical of the second quarter as well as the commencement of a winding-down of the company's cinema advertising business.

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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 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 [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 68% compared with 66% in the second quarter of 2018 and 71% 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] Gross margin of the online game business was 82% compared with 85% in the second quarter of 2018 and 86% in the first 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 $11 million compared with an operating profit of $21 million in the second quarter of 2018 and an operating profit of $41 million in the first 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 attributable to Changyou.com Limited was $14 million compared with net income of $28 million in the second quarter of 2018 and net income of $37 million in the first 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 attributable to Changyou.com Limited per ADS was $0.27 compared with net income of $0.52 in the second quarter of 2018 and net income of $0.69 in the first 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] Now I'd like to give a bit more color on the one-off item that we decided to book this quarter. Over the past 2 fiscal years, our cinema advertising business has been generating significant net losses. Efforts to restore the business to profitability or identify a suitable buyer for the business have been unsuccessful to date.

Our indirect wholly owned subsidiary, Shanghai Jingmao, filed a voluntary petition in court for relief under the country's bankruptcy laws on July 23, 2019. Based on the current value of the asset and the future expected return of the cinema advertising business, we decided to recognize an impairment charge of $17 million to the relative current value of the business.

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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] Excluding the impairment charge, our non-GAAP net income for the second quarter was $31 million, which exceeded the high end of our guidance.

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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 June 30, 2019, we had net cash of $217 million compared with $673 million as of December 31, 2018. The decrease was mainly due to the distribution of a special cash dividend of approximately $503 million in the second quarter of 2019.

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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 second quarter, we had net operating cash inflow of $66 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 third 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 $90 million and $100 million. This implies a sequential decrease of 24% to 16%.

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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] Moving to the revenue. Online game revenue will be between $80 million and $90 million. This implies a sequential decrease of 22% to 12%.

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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] Share-based compensation expense to be around $0.01 million, assuming no new grants of share-based awards.

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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 CNY 6.9 to USD 1 as compared with the actual exchange rate of about CNY 6.81 to USD 1 for the second quarter 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 with the last quarter, we won't take questions regarding the going-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, 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) Our first question comes from the line of Eddie Leung of Bank of America Merrill Lynch.

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

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Just 2 questions. The first one is about Jingmao. Could you share more color on the potential benefits of cutting back from the business, for example, how many headcounts you can save? And then secondly, could you also talk a little bit about the upcoming new game launch event?

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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] Now Jingmao has about [190] employees. And along with the progress, I think later on, these employees will be dissolved.

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Dewen Chen, Changyou.com Limited - CEO & Director [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 the near-term new game launch pipeline, we will launch a TLBB HTML5 version game recently. And then we will test another -- more animal game called (inaudible), [TMT] in fourth quarter -- in around fourth quarter.

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Operator [8]

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Our next question is from the line of [Elmer Chang] of Jefferies.

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Unidentified Analyst, [9]

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I would like to ask about how we should think about the Legacy TLBB in coming quarters and how we should think about our outlook in 2020?

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

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You mean the Legacy TLBB Mobile, right?

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Unidentified Analyst, [11]

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Yes.

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

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Okay. Thank you. (foreign language)

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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] We see that actually from the end of 2017, we switched our focus from revenue to user engagement and we believe it works. So you can see that the whole 2018 and also the first half 2019, you can see a very stable user metric.

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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] So if you see from the active users' numbers, we believe in the future, it can still generate stable revenue for us.

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Operator [17]

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(Operator Instructions) Our next question is from Alex Xie of Credit Suisse.

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Alex Xie, Crédit Suisse AG, Research Division - Analyst [18]

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My first question is in terms of breakdown between PC game and mobile games in this quarter, what is the breakdown in terms of gross revenue and gross billings? And secondly, I would like to ask in terms of bottom line benefits from Jingmao cuts, how much do we expect it to help our bottom line in Q3 or Q4? And these are my questions.

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Yujia Zhao, Changyou.com Limited - Head of IR [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] Yes. Of our online game revenue, actually PC game accounts for 2/3 of the total gaming revenue and mobile game accounts for 33%. And in terms of gross billings or cash receipts, it's half and half.

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Yaobin Wang, Changyou.com Limited - CFO [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] Legacy TLBB Mobile was licensed by Tencent. (foreign language)

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Yaobin Wang, Changyou.com Limited - CFO [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] It will help. But it depends on the legal progress because in the future, we won't consolidate Jingmao's financials. But in the third quarter, I'm sure that we have to consolidate part of its financials. And we expect to have no impact in the fourth quarter if everything goes well.

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Operator [26]

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Our next question is from the line of Nelson Cheung of Citi.

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Fuk Lung Cheung, Citigroup Inc, Research Division - Associate [27]

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I have a question regarding your recently launched game, the Legend of Heroes, which was launched in July and distributed by Bilibili. Just wonder if management can provide some metrics of feedback during the first month of launch? And what the revenue share which was distributed through Bilibili? And from a longer-term view, are there any change in company's strategies on its self-developed and licensed mobile games?

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

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Let me clarify. The first game is about The Legend of Heroes, right, the game we licensed out to Bilibili, right? And what's your second question?

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Fuk Lung Cheung, Citigroup Inc, Research Division - Associate [29]

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The second question is can management share some metrics of feedback for this game? And what's the long-term company strategies regarding the self-developed and licensed mobile games?

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

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Okay. Thank you. (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] For Legend of Heroes (inaudible), we haven't got enough metrics to share with the market right now. (foreign language)

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Dewen Chen, Changyou.com Limited - CEO & Director [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] For our longer-term strategy, actually in terms of self-development, in this year, we reduced the total number of our projects under development. We like to allocate more resources to each of our important or key projects. And in the meantime, we will also license or develop some games together with other developers. So it's several -- we will take several measures on the new games.

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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] We will pay only attention to the real quality of the game, but not the quantity.

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Operator [37]

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We don't have any questions as of this time. (Operator Instructions) No questions as of this time. Please continue. As there are no further questions, we'll now begin closing comments. Please go ahead, Yujia.

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

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Thank you, operator. And 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. Thank you.

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Operator [39]

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Thank you. Ladies and gentlemen, that does conclude the conference for today, and thank you for participating. You may now all disconnect.

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