Changyou Reports First Quarter 2017 Unaudited Financial Results
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 first quarter 2017.
First Quarter 2017 Highlights
- Total revenue was US$120 million1, representing a decrease of 8% both year-over-year and quarter-over-quarter, meeting the top end of the Company’s guidance.
- Online game revenue was US$85 million, representing a decrease of 17% year-over-year and 11% quarter-over-quarter, in line with the Company’s guidance.
- GAAP net income attributable to Changyou.com Limited was US$30 million, in line with the Company’s guidance. This compares with US$32 million in the first quarter of 2016 and US$41 million in the fourth quarter of 2016.
- Non-GAAP2 net income attributable to Changyou.com Limited was US$35 million, meeting the top end of the Company’s guidance. This compares with US$31 million in the first quarter of 2016 and US$40 million in the fourth quarter of 2016.
Mr. Dewen Chen, CEO, commented, “We got off to a good start in 2017 as we recorded total revenue of US$120 million and non-GAAP net income of US$35 million for the first quarter, both meeting the top end of our guidance. Revenue from TLBB PC and TLBB 3D for the first quarter both exceeded our previous expectations. We will continue to launch new expansion packs in order to maintain user stability and extend the life spans of both games. In terms of new games, we are more determined than ever to develop popular games that resonate with users by producing content with innovative game play, premium graphics, cutting-edge technology, and other high quality features.”
Mr. Qing Wei, Chief Games Development Officer added, “We conducted a second round of tests on Legacy TLBB mobile game in March. The results were in line with our expectations and improved greatly over the first round of tests in many aspects. Our team will continue to modify the game and make incremental improvements based on the latest test results as we get ready for the open beta test in mid-May. We hope to give this game the greatest possible chance of becoming a hit.”
Ms. Jasmine Zhou, CFO of Changyou added, “Before we officially launch Legacy TLBB mobile game, our revenue projections for the game remain uncertain. Given the significance of this game to Changyou and the uncertainty inherent at this time, we believe that it is best to take a conservative approach and not include any projections for the game in our second quarter guidance. In the mid to long term, with new game launches such as Legacy TLBB mobile game in 2017, we expect our revenue to pick up in the second half of the year.”
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[1] For the first quarter of 2017, on a yearly basis, the depreciation of the RMB against the U.S. dollar impacted our reported financial results. On a constant currency (non-GAAP) basis, if the exchange rate in the first quarter of 2017 had been the same as it was in the first quarter of 2016, or RMB6.53=US$1.00, total revenue in the first quarter of 2017 would have been US$126 million, or US$6 million higher than GAAP total revenue, and down 3% year-over-year, rather than down 8% year-over-year. |
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[2] Non-GAAP results exclude share-based compensation expense. 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 “Reconciliations of Non-GAAP Results of Operations Measures to the Nearest Comparable GAAP Measures.” |
First Quarter 2017 Operational Results
- Total average monthly active accounts3 of the Company’s PC games were 2.4 million, representing a decrease of 20% year-over-year and 4% quarter-over-quarter.
- Total average monthly active accounts of the Company’s mobile games were 1.1 million, representing a decrease of 66% year-over-year and 31% quarter-over-quarter.
- Total quarterly aggregate active paying accounts4 of the Company’s PC games were 0.9 million, representing a decrease of 18% year-over-year and 10% quarter-over-quarter.
- Total quarterly aggregate active paying accounts of the Company’s mobile games were 0.3 million, representing a decrease of 63% year-over-year and 25% quarter-over-quarter.
The year-over-year and quarter-over-quarter decreases reflected the natural declining life cycles of the Company’s older games.
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[3] Average Monthly Active Accounts for a given period refers to the number of registered accounts that were logged in to these games at least once during the period. |
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[4] Quarterly Aggregate Active Paying Accounts for a given period refers to the number of accounts from which game points are utilized at least once during the quarter. |
First Quarter 2017 Unaudited Financial Results
Revenue
Total revenue was US$120 million, representing a decrease of 8% both year-over-year and quarter-over-quarter.
Online game revenue was US$85 million, representing a decrease of 17% year-over-year and 11% quarter-over-quarter. The year-over-year decrease was mainly due to the natural decline in revenue of the Company’s older games. The quarter-over-quarter decrease was mainly due to a seasonal downturn of revenue from TLBB around the Chinese New Year holidays in the first quarter of 2017, as well as the natural decline in revenue of the Company’s older games.
Online advertising revenue was US$6 million, representing a decrease of 26% year-over-year and 30% quarter-over-quarter. The year-over-year decrease was mainly due to fewer games being marketed on the 17173 website. The quarter-over-quarter decrease was mainly due to a seasonal trend in advertising typical of the first quarter.
Cinema advertising revenue was US$25 million, representing an increase of 81% year-over-year and 21% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were a result of an active approach the Company took in acquiring more advertising resources.
Internet value-added services (“IVAS”) revenue was US$4 million, representing a decrease of 30% year-over-year and 36% quarter-over-quarter. The year-over-year decrease was a result of lower revenue from mobile internet products in the first quarter of 2017. The quarter-over-quarter decrease was a result of lower revenue from PC internet products in the first quarter of 2017.
Gross profit
GAAP and non-GAAP gross profit were both US$81 million, representing a decrease of 8% year-over-year and 10% quarter-over-quarter. GAAP and non-GAAP gross margin were both 67%, compared with 68% for both in the first quarter of 2016, and 69% for both in the fourth quarter of 2016.
GAAP and non-GAAP gross profit of the online games business were both US$69 million, representing a decrease of 10% year-over-year and 8% quarter-over-quarter. GAAP and non-GAAP gross margin of the online games business were both 81%, compared with 75% in the first quarter of 2016 and 78% in the fourth quarter of 2016. The year-over-year and quarter-over-quarter increases in gross margin were due to a smaller percentage revenue contribution from mobile games, which typically require additional revenue-sharing payments.
GAAP and non-GAAP gross profit of the online advertising business were both US$4 million, representing a decrease of 26% year-over-year and 23% quarter-over-quarter. GAAP and non-GAAP gross margin of the online advertising business were both 72%, compared with 72% in the first quarter of 2016 and 66% in the fourth quarter of 2016. The quarter-over-quarter increase in gross margin was mainly due to a decrease in salary and benefit expense as a result of a reduction in workforce.
GAAP and non-GAAP gross profit of the cinema advertising business were both US$6 million, compared with US$4 million in the first quarter of 2016 and US$7 million in the fourth quarter of 2016. GAAP and non-GAAP gross margin of the cinema advertising business were both 26%, compared with 29% in the first quarter of 2016 and 34% in the fourth quarter of 2016. The quarter-over-quarter decrease in gross margin was mainly due to an increase in cinema advertising costs as the Company partnered with a greater number of cinemas in the first quarter of 2017.
GAAP and non-GAAP gross profit of the IVAS business were both US$1 million, compared with a gross profit of US$2 million in the first quarter of 2016 and a gross profit of US$3 million in the fourth quarter of 2016.
Operating expense
Total operating expense was US$49 million, representing a decrease of 8% year-over-year and 5% quarter-over-quarter.
Product development expense was US$26 million, representing a decrease of 12% year-over-year and 13% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly due to a decrease in salary and benefit expense as a result of a reduction in bonus expense. The decreases were partially offset by an increase in share-based compensation expense5 compared with the first and fourth quarters of 2016.
Sales and marketing expense was US$11 million, representing a decrease of 12% year-over-year and 9% quarter-over-quarter. The year-over-year decrease was mainly due to a decline in marketing spending for the online advertising business in the first quarter of 2017. The quarter-over-quarter decrease was mainly due to a decrease in salary and benefit expense as a result of a reduction in bonus expense.
General and administrative expense was US$12 million, representing an increase of 8% year-over-year and 29% quarter-over-quarter. The year-over-year increase was mainly due to an increase in share-based compensation expense5 compared with the first quarter of 2016, and was partially offset by a decrease in salary and benefit expense as a result of a reduction in bonus expense. The quarter-over-quarter increase was mainly due to an increase in share-based compensation expense5 compared with the fourth quarter of 2016.
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[5] The increase in share-based compensation expense resulted from an increase in the market price for the Company’s ADSs in the first quarter of 2017 compared to the first and the fourth quarter of 2016. |
Operating profit
Operating profit was US$32 million, compared with US$34 million in the first quarter of 2016 and US$38 million in the fourth quarter of 2016.
Non-GAAP operating profit was US$37 million, compared with US$33 million in the first quarter of 2016 and US$37 million in the fourth quarter of 2016.
Other Income, net
Other income was US$2 million, compared with US$4 million in the first quarter of 2016 and US$5 million in the fourth quarter of 2016.
Income tax expense
Income tax expense was US$8 million, compared with US$8 million in the first quarter of 2016 and US$9 million in the fourth quarter of 2016.
Net income
Net income was US$30 million, compared with US$33 million in the first quarter of 2016 and US$42 million in the fourth quarter of 2016.
Non-GAAP net income was US$35 million, compared with US$32 million in the first quarter of 2016 and US$41 million in the fourth quarter of 2016.
Net income attributable to non-controlling interests
GAAP and non-GAAP net income attributable to non-controlling interests was US$0.1 million. This compares with GAAP and non-GAAP net income of US$0.5 million in the first quarter of 2016, and GAAP and non-GAAP net income of US$0.9 million in the fourth quarter of 2016. Non-controlling interests include the non-controlling interests in RaidCall, which provides online music and entertainment services primarily in Taiwan, and in MoboTap, the developer of the Dolphin Browser.
Net income attributable to Changyou.com Limited
Net income attributable to Changyou.com Limited was US$30 million, compared with US$32 million in the first quarter of 2016 and US$41 million in the fourth quarter of 2016. Fully-diluted net income attributable to Changyou.com Limited per ADS6 was US$0.56, compared with US$0.61 in the first quarter of 2016 and US$0.77 in the fourth quarter of 2016.
Non-GAAP net income attributable to Changyou.com Limited was US$35 million, compared with US$31 million in the first quarter of 2016 and US$40 million in the fourth quarter of 2016. Non-GAAP fully-diluted net income attributable to Changyou.com Limited per ADS was US$0.66, compared with US$0.58 in the first quarter of 2016 and US$0.75 in the fourth quarter of 2016.
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[6] Each ADS represents two Class A ordinary shares. |
Liquidity
As of March 31, 2017, Changyou had cash and cash equivalents and short-term investments of US$836 million compared with US$831 million as of December 31, 2016.
Operating cash flow for the first quarter of 2017 was a net inflow of US$14 million.
Business Outlook
For the second quarter of 2017, Changyou expects:
- Total revenue to be between US$110 million and US$120 million, including online game revenue of US$75 million to US$85 million;
- Non-GAAP net income attributable to Chanyou.com Limited to be between US$25 million and US$30 million, and non-GAAP income per fully-diluted share to be between US$0.46 and US$0.56. Assuming no new grants of share-based awards and that the market price of our shares is unchanged; we estimate that compensation expense relating to share-based awards will be around US$2 million. Taking into account the elimination of the impact of these share-based awards, GAAP net income attributable to Changyou.com to be between US$23 million and US$28 million, and GAAP income per fully-diluted share to be between US$0.43 and US$0.52.
Guidance excludes the impact of Legacy TLBB mobile game, which is scheduled to launch in May. Given that the game is not yet launched, revenue projections for the game remain uncertain. Therefore the Company believes that it is best to take a conservative approach with its second quarter guidance.
For the second quarter 2017 guidance, the Company has adopted a presumed exchange rate of RMB7.00 = US$1.00, as compared with the actual exchange rate of approximately RMB6.53 = US$1.00 for the second quarter 2016, and RMB6.88=US$ 1.00 for the first quarter 2017.
