omniture

Changyou Reports Second Quarter 2009 Results

2009-07-27 14:49 1123

Total Revenues Reach a Record US$66.6 million, Exceeding High End of Company Guidance by US$1.6 million, Up 8% Quarter-over-Quarter;

Non-GAAP Net Income Reaches a Record US$40.2 million, Exceeding High End of Company Guidance by US$2.2 million, Up 17% Quarter-over-Quarter

BEIJING, July 27 /PRNewswire-Asia/ -- Changyou.com Limited ("Changyou" or the "Company") (Nasdaq: CYOU), a leading online game developer and operator in China, today announced its unaudited financial results for the second quarter ended June 30, 2009.

(Logo: http://www.prnasia.com/sa/2009/04/02/200904021356.jpg )

Second Quarter 2009 Highlights

-- Total revenues reached a record US$66.6 million, an increase of 8%

quarter-over-quarter and 39% year-over-year, exceeding high end of

company guidance by US$1.6 million.

-- Non-GAAP(1) net income (i.e. excluding share-based compensation

expenses) reached a record US$40.2 million, or US$0.75 per fully

diluted ADS(2), exceeding high end of company guidance by US$0.04.

Non-GAAP net income increased by 17% quarter-over-quarter and 24%

year-over-year.

-- GAAP net income reached a record US$34.5 million, or US$0.66 per fully

diluted ADS. GAAP net income increased by 3% quarter-over-quarter and

9% year-over-year.

-- Non-GAAP operating margin was 68%, an expansion of 5% from the first

quarter of 2009 and 8% from the second quarter of 2008.

-- Aggregate active paying accounts ("APA") for the Company's two

MMORPGs(3) grew by 5% quarter-over-quarter and 32% year-over-year to

2.39 million.

-- Average revenue per user ("ARPU") for the Company's two MMORPGs

increased 4% quarter-over-quarter and 6% year-over-year to RMB186.

(1) Explanation of the Company's non-GAAP financial measures and related

reconciliations to GAAP financial measures are included in the

accompanying "Non-GAAP Disclosure" and "Reconciliation to Unaudited

Condensed Consolidated Statements of Operations."

(2) Each American depositary share ("ADS") represents two Class A

ordinary shares.

(3) Tian Long Ba Bu ("TLBB") and Blade Online

"Our relentless focus on building our business for the long-term by actively seeking out and implementing feedback from game players to improve the user experience continues to pay off," said Mr. Tao Wang, Changyou's chief executive officer. "This, combined with the ongoing strength of the online gaming industry in China and its status as a defensive play in difficult economic times, has helped us deliver another quarter of record results. Our user-centric strategy, strong R&D capabilities and regular release of expansion packs has allowed us to maintain the upward momentum of our games, and we expect this to continue going forward. With our growing user base and expanding online and offline marketing capabilities, I am confident in our ability to deliver sustainable growth."

Mr. Alex Ho, Changyou's chief financial officer, added, "During the second quarter, our key operating and financial metrics continued on a healthy and upward trend, demonstrating our ability to execute our well-defined strategies. Boosted by the continued popularity of our games, particularly Tian Long Ba Bu, total revenues and net income once again exceeded guidance. With our debt-free balance sheet, rich cash flows and high profitability, we are poised to capitalize on opportunities as they arise. "

Second Quarter 2009 Operational Results

Aggregate registered accounts for the Company's two MMORPGs as of June 30, 2009 increased 9% quarter-over-quarter and 53% year-over-year to 69.1 million.

Aggregate APA for the Company's two MMORPGs increased 5% quarter-over-quarter and 32% year-over-year to 2.39 million.

Aggregate ARPU for the Company's two MMORPGs increased 4% quarter-over-quarter and 6% year-over-year to RMB186, which the Company believes is within a range that is relatively affordable for the majority of Chinese game players.

Aggregate peak concurrent users ("PCU") for the Company's two MMORPGs was approximately 950,000, a decrease of 2% quarter-over-quarter and an increase of 23% year-over-year.

Second Quarter 2009 Unaudited Financial Results

Revenues

Total revenues for the second quarter of 2009 increased 8% quarter-over-quarter and 39% year-over-year to US$66.6 million.

Revenues from game operations for the second quarter of 2009 increased 9% quarter-over-quarter and 42% year-over-year to US$64.9 million. The increases were mainly due to user base expansion and higher APA, which reflect the growing popularity of the Company's online games.

Overseas licensing revenues for the second quarter of 2009 decreased 27% quarter-over-quarter and 23% year-over-year to US$1.7 million. The decreases were largely the result of greater competition in mature overseas markets.

Gross Profit

Gross profit for the second quarter of 2009 increased 8% quarter-over-quarter and 41% year-over-year to US$62.7 million. Gross margin in the second quarter of 2009 was 94%, unchanged from the first quarter of 2009 and up from 93% in the second quarter of 2008. Non-GAAP gross profit for the second quarter of 2009 increased 8% quarter-over-quarter and 41% year-over-year to US$62.7 million. Non-GAAP gross margin in the second quarter of 2009 was also 94%, unchanged from the first quarter of 2009 and up from 93% in the second quarter of 2008.

Operating Expenses

For the second quarter of 2009, total operating expenses increased 14% quarter-over-quarter and 40% year-over-year to US$23.2 million. Non-GAAP operating expenses totaled US$17.6 million, down 9% quarter-over-quarter and up 13% year-over-year. The sequential decrease of non-GAAP operating expenses for the second quarter of 2009 of US$1.8 million was primarily the result of a change in the Company's bonus program for management and key engineers, for whom the Company lessened cash bonuses after share-based awards previously granted increased in value after the Company's IPO, and the saving of marketing and promotion spending on the Company's existing games. The year-over-year increase of non-GAAP operating expenses of US$2.0 million was primarily the result of increased headcount and increased marketing and promotion activities over the year to deepen the penetration of the Company's games within new and existing markets in China.

Operating Profit

Operating profit for the second quarter of 2009 increased 4% quarter-over-quarter and 42% year-over-year to US$39.5 million. Operating margin in the second quarter of 2009 was 59%, compared to 61% in the first quarter of 2009 and 58% in the second quarter of 2008. Non-GAAP operating profit for the second quarter of 2009 increased 17% quarter-over-quarter and 57% year-over-year to US$45.1 million. Non-GAAP operating margin in the second quarter of 2009 was 68%, up from 63% in the first quarter of 2009 and 60% in the second quarter of 2008.

Net Income

For the second quarter of 2009, net income increased 3% quarter-over-quarter and 9% year-over-year to US$34.5 million. Non-GAAP net income increased 17% quarter-over-quarter and 24% year-over-year to US$40.2 million. Fully diluted earnings per ADS were US$0.66, compared to US$0.71 in the first quarter of 2009 and US$0.67 in the second quarter of 2008. Non-GAAP fully diluted earnings per ADS were US$0.75, up from US$0.72 in the first quarter of 2009 and US$0.68 in the second quarter of 2008. Net margin for the second quarter of 2009 was 52%, compared to 54% in the first quarter of 2009 and 66% in the second quarter of 2008. Non-GAAP net margin for the second quarter was 60%, up from 56% in the previous quarter and down from 68% in the second quarter of 2008.

Cash Balances

Changyou had a strong cash position of US$275.9 million as of June 30, 2009, up from US$195.0 million as of March 31, 2009. Operating cash flow for the quarter was a net inflow of US$33.7 million.

As described in the Company's IPO prospectus, Changyou declared on April 1, 2009, prior to the Company's IPO, a US$96.8 million cash dividend payable to Sohu.com (Game) Limited ("Sohu Game"), an indirect, wholly-owned subsidiary of Sohu. Changyou expects to pay this dividend after receiving required PRC approvals, which it expects will occur in the third quarter of 2009.

Other Business Developments

In July 2009, the Company entered into a preliminary purchase agreement to acquire an office building in Beijing with approximately 15,000 square meters of space to accommodate its expanding workforce. Total estimated cost for building acquisition and renovation is expected to be approximately US$43 million.

Business Outlook

Changyou estimates total revenues for the third quarter of 2009 to be between US$67 million and US$69 million.

Changyou estimates non-GAAP net income for the third quarter of 2009 to be between US$40 million and US$41 million.

Changyou estimates non-GAAP fully diluted earnings per ADS for the third quarter of 2009 to be between US$0.75 and US$0.77.

Assuming no new grants of share-based awards, Changyou estimates share-based compensation expense for the third quarter of 2009 to be between US$3.5 million and US$4.0 million, reducing fully diluted earnings per ADS by US$0.07 to US$0.08.

Non-GAAP Disclosure

To supplement the unaudited consolidated financial statements presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"), Changyou's management uses non-GAAP measures of cost of revenues, operating expenses, net income and net income per ADS, which are adjusted from results based on GAAP to exclude the compensation cost of share-based awards granted to employees under Statement of Financial Accounting Standard 123R. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Changyou's management believes that excluding the share-based compensation expense from its non-GAAP financial measure is useful for itself and investors. Further, the amount of share-based compensation expense cannot be anticipated by management, and these expenses are not built into the Company's annual budgets and quarterly forecasts, which generally will be the basis for information Changyou provides to analysts and investors as guidance for future operating performance. As share-based compensation expense does not involve any upfront or subsequent cash outflow, Changyou does not factor this in when evaluating and approving expenditures or when determining the allocation of its resources to its business operations. As a result, the monthly financial results for internal reporting and any performance measure for commissions and bonuses are based on non-GAAP financial measures that exclude share-based compensation expense.

The non-GAAP financial measures are provided to enhance the investors' overall understanding of Changyou's current financial performance and prospects for the future. A limitation of using non-GAAP cost of revenues, operating expenses, net income and net income per ADS, excluding share-based compensation expense, is that the share-based compensation charge has been and will continue to be a significant recurring expense in the Company's business for the foreseeable future. In order to mitigate these limitations the Company has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between GAAP financial measures that are most directly comparable to the non-GAAP financial measures the Company has presented.

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is extracted from Changyou's unaudited interim financial statements prepared in accordance with GAAP.

Safe Harbor Statement

This announcement contains forward-looking statements. It is currently expected that the Business Outlook will not be updated until release of Changyou's next quarterly earnings announcement; however, Changyou reserves right to update its Business Outlook at any time for any reason.

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. The Company cautions that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, the current global financial and credit markets crisis and its potential impact on the Chinese economy, the slower growth the Chinese economy experienced during the latter half of 2008 and the first half of 2009, which could continue through the remainder of 2009, the uncertain regulatory landscape in the People's Republic of China, fluctuations in Changyou's quarterly operating results, Changyou's historical and possible future losses and limited operating history, and the Company's reliance on TLBB as its major revenue source. Further information regarding these and other risks is included in Changyou's Registration Statement on Form F-1 originally filed on March 17, 2009 as amended through March 31, 2009, and other filings with the Securities and Exchange Commission.

Conference Call Information

Changyou's management team will host an earnings conference call today at 7 a.m. U.S. Eastern Daylight Time, July 27, 2009 (or 7 p.m. Beijing/Hong Kong time, July 27, 2009). To listen to the conference call, please use the dial in numbers below:

US: +1-866-202-3048

Hong Kong: +852-3002-1672

International: +1-617-213-8843

Please dial in 10 minutes before the call is scheduled to begin and provide the passcode to join the call. The passcode is "CYOU."

A replay of the conference call may be accessed by phone at the following number until August 3, 2009:

International: +1-617-801-6888

Passcode: 24453720

The conference call will be available on webcast live and available for replay at: http://www.changyou.com/ir/ .

About Changyou

Changyou.com Limited's ("Changyou") (NASDAQ: CYOU) massively multi-player online games ("MMORPG") business began operations as a business unit within Sohu in 2003. Changyou was carved out as a separate, stand-alone company in December 2007 and is now a leading developer and operator of online games in China and completed an initial public offering on April 7, 2009. Changyou currently operates two MMORPGs, including the in-house developed Tian Long Ba Bu, one of the most popular online games in China, and the licensed Blade Online. Changyou has four pipeline games scheduled to begin open beta testing in 2009 and 2010, including the licensed Blade Hero II, which is the sequel to Blade Online, the licensed Immortal Faith and Legend of the Ancient World, and the in-house developed Duke of Mount Deer, which received an award as one of China's most anticipated online games. Changyou's leading technology platform includes an advanced 2.5D graphics engine, a uniform game development platform, effective anti-cheating and anti-hacking technologies, proprietary cross-networking technology and advanced data protection technology. For more information about Changyou, please visit http://www.changyou.com/en/ .

CHANGYOU.COM LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED, IN THOUSANDS EXCEPT PER ADS AMOUNTS)

Three Months Ended

Jun. 30, Mar. 31, Jun. 30,

2009 2009 2008

Revenues:

Game operation revenues $64,936 $59,346 $45,730

Overseas licensing revenues 1,660 2,261 2,166

Total revenues 66,596 61,607 47,896

Cost of revenues

(includes share-based

compensation expense under

SFAS 123(R) of $90, $8, $5,

$98 and $10, respectively) 3,943 3,441 3,519

Gross profit 62,653 58,166 44,377

Operating expenses:

Product development

(includes share-based

compensation expense under

SFAS 123(R) of $2,989,

$767, $791, $3,756 and

$2,589, respectively) 7,510 6,167 4,920

Sales and marketing

(includes share-based

compensation expense under

SFAS 123(R) of $112, $4,

$4, $116 and $8,

respectively) 10,381 10,836 9,553

General and administrative

(includes share-based

compensation expense under

SFAS 123(R) of $2,481,

$67, $82, $2,548 and $271,

respectively) 5,309 3,280 2,042

Total operating expenses 23,200 20,283 16,515

Operating profit 39,453 37,883 27,862

Interest expense -- (104) (59)

Interest income and foreign

currency exchange gain/loss 871 780 223

Other expense -- (1) (288)

Income before income tax expense 40,324 38,558 27,738

Income tax (expense) benefit (5,796) (5,054) 3,885

Net income $34,528 $33,504 $31,623

Basic net income per ADS $0.67 $0.71 $0.67

ADSs used in computing basic

net income per ADS 51,209 47,500 47,500

Diluted net income per ADS $0.66 $0.71 $0.67

ADSs used in computing diluted

net income per ADS 52,590 47,500 47,500

Six Months Ended

Jun. 30, Jun. 30,

2009 2008

Revenues:

Game operation revenues $124,282 $86,304

Overseas licensing revenues 3,921 2,547

Total revenues 128,203 88,851

Cost of revenues

(includes share-based compensation

expense under SFAS 123(R) of $90,

$8, $5, $98 and $10, respectively) 7,384 6,748

Gross profit 120,819 82,103

Operating expenses:

Product development

(includes share-based compensation

expense under SFAS 123(R) of

$2,989, $767, $791,

$3,756 and $2,589, respectively) 13,677 10,553

Sales and marketing

(includes share-based

compensation expense

under SFAS 123(R) of

$112, $4, $4, $116

and $8, respectively) 21,217 18,111

General and administrative

(includes share-based

compensation expense

under SFAS 123(R) of

$2,481, $67, $82,

$2,548 and $271,

respectively) 8,589 4,376

Total operating expenses 43,483 33,040

Operating profit 77,336 49,063

Interest expense (104) (118)

Interest income and foreign currency

exchange gain/loss 1,651 260

Other expense (1) (291)

Income before income tax expense 78,882 48,914

Income tax (expense) benefit (10,850) (2,084)

Net income $68,032 $46,830

Basic net income per ADS $1.38 $0.99

ADSs used in computing

basic net income per ADS 49,354 47,500

Diluted net income per ADS $1.36 $0.99

ADSs used in computing

diluted net income per ADS 50,045 47,500

CHANGYOU.COM LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED, IN THOUSANDS)

As of As of

Jun. 30, 2009 Dec. 31, 2008

ASSETS

Current assets:

Cash and bank deposits $275,856 $134,439

Accounts receivable, net 1,405 1,019

Prepaid and other current assets 4,633 22,187

Due from Sohu 2,262 8,535

Total current assets 284,156 166,180

Non-current assets:

Fixed assets, net 9,101 9,260

Intangible assets, net 95 57

Other assets, net 1,655 1,159

TOTAL ASSETS $295,007 $176,656

LIABILITIES AND SHAREHOLDERS' EQUITY

Receipts in advance and deferred revenue $22,617 $20,703

Accrued liabilities 23,860 22,834

Tax payables 8,850 9,163

Short-term loan from Sohu -- 8,450

Dividend payable 96,800 --

Due to Sohu 5,646 10,812

Total liabilities 157,773 71,962

Total shareholders' equity 137,234 104,694

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $295,007 $176,656

CHANGYOU.COM LIMITED

RECONCILIATIONS TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT PER ADS AMOUNTS)

Three Months Ended Three Months Ended

Jun. 30, 2009 Mar. 31, 2009

Non-GAAP Non- Non-GAAP Non-

GAAP Adjustments GAAP GAAP Adjustments GAAP

Total revenues $66,596 $-- $66,596 $61,607 $-- $61,607

Less: Cost of revenues 3,943 (90)(a) 3,853 3,441 (8)(a) 3,433

Gross profit $62,653 $90 $62,743 $58,166 $8 $58,174

Gross margin 94% 94% 94% 94%

Operating expenses $23,200$(5,582)(a)$17,618 $20,283$(838)(a)$19,445

Operating profit $39,453 $5,672 $45,125 $37,883 $846 $38,729

Operating margin 59% 68% 61% 63%

Net income $34,528 $5,672 $40,200 $33,504 $846 $34,350

Net margin 52% 60% 54% 56%

Diluted net income per

ADS $0.66 $0.75 $0.71 $0.72

ADSs used in computing

diluted net income

per ADS 52,590 53,251 47,500 47,500

Three Months Ended

Jun. 30, 2008

Non-GAAP

GAAP Adjustments Non-GAAP

Total revenues $47,896 $-- $47,896

Less: Cost of revenues 3,519 (5)(a) 3,514

Gross profit $44,377 $5 $44,382

Gross margin 93% 93%

Operating expenses $16,515 $(877)(a) $15,638

Operating profit $27,862 $882 $28,744

Operating margin 58% 60%

Net income $31,623 $882 $32,505

Net margin 66% 68%

Diluted net income per ADS $0.67 $0.68

ADSs used in computing

diluted net income per ADS 47,500 47,500

CHANGYOU.COM LIMITED

RECONCILIATIONS TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

IN THOUSANDS EXCEPT PER ADS AMOUNTS)

Six Months Ended Jun. 30, 2009 Six Months Ended Jun. 30, 2008

Non-GAAP Non- Non-GAAP Non-

GAAP Adjustments GAAP GAAP Adjustments GAAP

Total revenues $128,203 $-- $128,203 $88,851 $-- $88,851

Less: Cost of

revenues 7,384 (98)(a) 7,286 6,748 (10)(a) 6,738

Gross profit $120,819 $98 $120,917 $82,103 $10 $82,113

Gross margin 94% 94% 92% 92%

Operating expenses $43,483 $(6,420) $37,063 $33,040 $(2,868)(a)$30,172

Operating profit $77,336 $6,518 $83,854 $49,063 $2,878 $51,941

Operating margin 60% 65% 55% 58%

Net income $68,032 $6,518 $74,550 $46,830 $2,878 $49,708

Net margin 53% 58% 53% 56%

Diluted net income

per ADS $1.36 $1.48 $0.99 $1.05

ADSs used in

computing diluted

net income per

ADS 50,045 50,375 47,500 47,500

Note:

(a) To eliminate share-based compensation expense as measured

using the fair value method under SFAS 123(R).

For investor and media inquiries, please contact:

In China:

Ms. Angie Chang

Investors Relations Manager

Changyou.com Limited

Tel: +86-10-5956-3358

Email: ir@cyou.com

Ms. Cathy Li

Ogilvy Financial, Beijing

Tel: +86-10-8520-6104

Email: cathy.li@ogilvy.com

In the United States:

Ms. Jessica Barist Cohen

Ogilvy Financial, New York

Tel: +1-646-460-9989

Email: jessica.cohen@ogilvypr.com

Source: Changyou.com Limited
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