Changyou.com Ltd ADR Earnings Call Nuggets: Margin Trends, Mobile and Social Games

On Monday, Changyou.com Ltd ADR (NASDAQ:CYOU) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the executives shared with analysts and investors.

Margin Trends

Dick Wei – JPMorgan: My first question is on the margin trends going forward. I guess as I look at the net income for second quarter, it looks like guidance is going to be down around $6.5 million. So, I was wonder how much of these expenses maybe one-time, call it, one-time we did into kind of the marketing for some of the new upgrades and games, and how much of this ongoing basis related to the R&D expenses and some of the 17173 platform? How should we look at the margins in the second half of the year as well?

Alex Ho – CFO: Hi, Dick, thanks for your question. As I have point out in the script is that actually most of the Q2 – the increased marketing expenses as well as the headcounts in the Q2 are not one-time. So, I think the Q2 form a base for the remainder – for the outer quarters during the year. As I also said that, Q1 is a quarter that we do not have launched new games. So the lower marketing cost for the first quarter is something that is not recurring in nature, because in this year in the second quarter we are going to launch Tao Yuan and in the latter half of this quarter, we’re going to have three other new MMOs to be launched as well.

Mobile and Social Games

Eddie Leung – Bank of America Merrill Lynch: I have two questions. The first one is about your plans of mobile and social games. So could you elaborate more on your distribution plans of these two types of games, because in general it seems like most of your (developer) peers would use some of the third-party platforms to launch these games? Then secondly, could you also share more about the development on changing 17173 into more like a game community platform?

Unidentified Company Speaker: The mobile game side, so right now we have established a team of about 100 developers to develop mobile games. Our strategy on the mobile side is to develop online mobile games and not the downloaded types of online games. We are more focused on products similar to Smurf Village. Right now we are still in a testing phase in terms of this business. But we expect that we will be investing more next year into this segment. In terms of the distribution plan, it is we consider establishing our own mobile platform and the target would be on the overseas market. In terms of in the domestic market our distribution plan for mobile games will depend on the market circumstances in China as it is quite different for iPad and for the mobile phone games. We have also established a web-based games department and with it we have over 100 developers working on social games. Our focus for the social games is on the overseas market as well and the platforms are – targeted platforms are like Facebook and Google Plus But we are also searching for good platforms, that the smaller platforms to operate social games overseas. In the third quarter and the fourth quarter, we have some mobile games and social games that we expect to launch. However, because this is our first time in the segment its performance, well we’ll have to wait and see and how these games perform. For 17173, we’ve just recently acquired it and took over the management of the company for about three months and we’ve established a management team to look over the day-to-day operations of the business. We are making plans for the strategy of 17173 and this is something that we will continue to be doing over the course of the next couple of quarters. Thirdly, we are working on this structuring of the company where we will change; we’ll try to modify it from a sales-oriented culture to a more product-oriented culture. Lastly, we’ve setup a data base, so that we could collect and analyze user statistics in order to find appropriate market opportunities for us to enter into it and develop the business. We are also considering the overseas market for the 17173 Business; however, we are still looking into this and we do not have any specific plans in this regard. We are also actively looking for companies overseas in this area to acquire.

Unidentified Company Speaker: As a means to support the operation of mobile games or show games and the media of business overseas.