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Changyou.com Limited (CYOU) Q2 2019 Earnings Call Transcript

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Changyou.com Limited (NASDAQ: CYOU)
Q2 2019 Earnings Call
Aug 5, 2019, 6:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and good evening. Welcome to Changyou's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

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.

Yujia Zhao -- Investor Relations

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 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 involved 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.

Dewen Chen -- Chief Executive Officer

[Foreign Speech] 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.

[Foreign Speech] For PC games, revenue for the second quarter rose slightly quarter-over-quarter mainly 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 lifecycle. 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.

[Foreign Speech] In the third quarter of 2019, we will launch a new expansion pack 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.

[Foreign Speech] 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 events as well as continue the 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.

[Foreign Speech] Going forward, we will continue to execute our core strategy of Top Games by further improving our capabilities and efficiency in game development. MMORPG mobile games will continue to be our strategic focus and we will continue to work on improving the quality of the key games that we are developing. In the meantime, we're also developing some casual and strategy games to make sure that we maintain a diversified product portfolio.

[Foreign Speech] 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.

[Foreign Speech] 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 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.

[Foreign Speech] 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.

[Foreign Speech] Now let me turn the call over to our CFO, Mr. Wang Yaobin to discuss the financial highlights.

Yaobin Wang -- Chief Financial Officer

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

[Foreign Speech] 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.

[Foreign Speech] 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.

[Foreign Speech] Our advertising revenue was $4 million, a decrease of 28% year-over-year and a 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.

[Foreign Speech] 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 second 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.

[Foreign Speech] 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 business. As a reminder, you can find a reconciliation of these non-GAAP measures in our published earnings release.

[Foreign Speech] Gross margin was 68% compared with 66% in the second quarter of 2018 and 71% in the first quarter of 2019.

[Foreign Speech] 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.

[Foreign Speech] 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.

[Foreign Speech] 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.

[Foreign Speech] 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.

[Foreign Speech] 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 two fiscal years, our cinema advertising business have been generating significant 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 reflect the current value of the business.

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

[Foreign Speech] Next moving on to the balance sheet and cash flow statement.

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

[Foreign Speech] For the second quarter we had net operating cash inflow of $66 million.

[Foreign Speech] Finally, for the third quarter 2019 guidance. We expect --

[Foreign Speech] Total revenue to be between $90 million and $100 million. This implies a sequential decrease of 24% to 16%.

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

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

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

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

[Foreign Speech] In our guidance, we have adopted a presume exchange rate of RMB6.9 to $1 as compared with the actual exchange rate of about RMB6.81 to $1 for the second quarter 2019.

[Foreign Speech] Like with the last quarter, we won't take questions regarding the going private proposal in the Q&A session of this call.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Good evening. Just two questions. The first one is about Jingmao. Could you share more color on the potential benefits of coming 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? Thank you.

Dewen Chen -- Chief Executive Officer

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

[Foreign Speech] For the near term new game launch pipeline, we will launch a TLBB HTML5 version games recently. And then we will test another more MMO game called Duke of Mount Deer, DMD, in fourth quarter -- in and around fourth quarter.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

[Foreign Speech] Thank you.

Operator

Thank you. Our next question is from the line of Thomas Chong of Jefferies. Please go ahead

Thomas Chong -- Jefferies -- Analyst

Hi. Thanks management for taking my questions. 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? Thank you.

Yujia Zhao -- Investor Relations

You mean the Legacy TLBB Mobile, right, Thomas?

Thomas Chong -- Jefferies -- Analyst

Yes.

Yujia Zhao -- Investor Relations

Okay. Thank you.

Dewen Chen -- Chief Executive Officer

[Foreign Speech] Currently 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 from the whole 2018 and also the first half of 2019, you can see a very stable user metric.

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

[Foreign Speech] Thank you, Thomas.

Thomas Chong -- Jefferies -- Analyst

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Alex Xie of Credit Suisse. Please go ahead.

Alex Xie -- Credit Suisse -- Analyst

Hi, management. Thank you for taking my questions. 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 cut. How much do we expect it to help our bottom line in Q3 or Q4. And these are my questions. Thank you.

Dewen Chen -- Chief Executive Officer

[Foreign Speech] Our online game revenue actually PC game accounts for two-thirds of the total gaming revenue and mobile game accounts for like 33%. And for -- in terms of gross billings or cash receipts it's half and half.

[Foreign Speech] Yeah, still we have TLBB -- Legacy TLBB Mobile was licensed by Tencent.

[Foreign Speech] 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.

Alex Xie -- Credit Suisse -- Analyst

Thank you.

Yujia Zhao -- Investor Relations

Thank you.

Operator

Thank you. Our next question is from the line of Nelson Cheung of Citi. Please go ahead.

Nelson Cheung -- Citi -- Analyst

Hi, management. Thank you for taking my question. 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 or feedback during the first month of launch? And what the revenue share ratio was distributed by Bilibili? And from a longer-term view any change in company's strategies on self-developed and licensed mobile games? Thank you.

Yujia Zhao -- Investor Relations

Let me clarify. The first game is about The Legend of Heroes, right. The Trails of the Star, the game we licensed out to Bilibili, right the performance.

Nelson Cheung -- Citi -- Analyst

Yeah.

Yujia Zhao -- Investor Relations

What's your second question?

Nelson Cheung -- Citi -- Analyst

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

Yujia Zhao -- Investor Relations

Okay, thank you.

Operator

Thank you.

Dewen Chen -- Chief Executive Officer

[Foreign Speech] For the Legend of Heroes. Trails of the Star, we haven't got enough metrics to share with the market right now.

[Foreign Speech] 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 method on the new games.

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

[Foreign Speech] Thank you.

Nelson Cheung -- Citi -- Analyst

Thank you very much.

Operator

Thank you. 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.

Yujia Zhao -- Investor Relations

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 us. Thank you.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Yujia Zhao -- Investor Relations

Dewen Chen -- Chief Executive Officer

Yaobin Wang -- Chief Financial Officer

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Thomas Chong -- Jefferies -- Analyst

Alex Xie -- Credit Suisse -- Analyst

Nelson Cheung -- Citi -- Analyst

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