Changyou.Com Ltd (ADR) (NASDAQ:CYOU) released Q1 FY2015 results which included total revenue of 209 million USD (exceeding the top-range management guidance by about 9 million USD) and net income of 47 million USD. First quarter results exceeded consensus expectations, delivering EPADS of 0.91 USD vs. estimates of 0.63. Along with strong growth on the top line, the company was able to realize margin improvements at the gross line due to stronger performance from its core online games segment, but cost controls also helped boost the operating results.’s Q1 operating profit margin grew to 25%, a nearly two-year high, and reversed the painful string of operating losses in FY2014.

Management’s outlook for Q2 seemed conservative, with YoY revenue growth slowing to a +6% pace, driven by a slowdown in online gaming revenues (+4% YoY, -14% QoQ). Although it may seem like there is a degree of expectations management,’s management did justify its weak Q2 outlook. The company expects multiple factors coming into play during the quarter, which include the deconsolidation of a subsidiary revenue due to be sold, a seasonal slowdown in its TLBB game, as well as gap in mobile game monetization while old titles mature and new games ramp up.

Recent Quarterly Performance FY2014
(000) USD Q1 Q2 Q3 Q4 Q1
Revenue 180,753 177,781 180,819 215,913 208,697
Gross profit 141,498 134,245 130,483 147,178 143,086
Operating profit -29,997 -7,012 -2,562 -2,178 52,545
Net income -19,869 1,507 1,473 -4,270 46,990
Earnings per share (GAAP) -0.37 0.04 0.06 0.21 0.91
Comparison YoY
Revenue 2% -3% -1% 11% 15%
Gross profit -4% -11% -15% -8% 1%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. -98% -98% n.a. n.a.
Earnings per share n.a. -97% -95% -75% n.a.
Comparison QoQ
Revenue -7% -2% 2% 19% -3%
Gross profit -11% -5% -3% 13% -3%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. n.a. -2% n.a. n.a.
Earnings per share n.a. n.a. 75% 229% 342%
Margin analysis
GPM 78% 76% 72% 68% 69%
OPM -17% -4% -1% -1% 25%
NPM -11% 1% 1% -2% 23%

For the Changyou faithful worried that positive results over the past two quarters were a flash in the pan, there is some degree of reassurance in the form of a robust game pipeline both for PC and mobile games. The timing of the PC game launches will require patience, however, with launch dates mostly in the second half of 2015, assuming no slippage in the development schedule. There was a solid mix of internally developed and third-party licensed mobile games in various stages of development, according to the company, which could also provide a tailwind to the 2H. generated about 15 million USD of operating cash flow in Q1, down from about 17 million USD in Q4 FY2014.

The company held about 450 million USD of highly liquid cash on its balance sheet at the end of the quarter.


Management’s Q2 FY2015 outlook included the following:

  • Revenue: 180-190 million USD (+6% YoY, -10% QoQ), with online game revenue of about 160 million USD (+4% YoY, -14% QoQ).
  • Non-GAAP EPS: 0.56-0.65 USD per ADS (vs. 0.04 USD in Q2 FY2014 and 0.97 USD last quarter)

When discussing the revenue outlook on the Q1 conference call, management explained that the relatively soft outlook was due to an expected decline in TLBB’s performance on PC due to relaxed marketing and promotion efforts.

In terms of profit margins, it sounded like there would be some reduction on promotional spending for new game launches, however product development expenses may persist due to new initiatives in mobile (more engineering headcount). Working back from management’s non-GAAP net income estimate and anticipated share-based compensation expense, GAAP net margins could be in the 12-17% range.

Although such a set of results would be notably softer than the 23% net margin achieved in Q1, seeing a healthy double-digit result would definitely be a welcome sign. Investors have had to deal with significant management turnover due to a strategic blunder, and seeing a return to profitability would likely be a relief for Changyou’s shareholders.

Operating Metrics

Note: recently overhauled its operating metric disclosure, in line with changes to the business focus (moving away from a platform offering to concentrating on game development and operation). Data below is incomplete as a result of the change. Data points prior to Q1 FY2015 were calculated based on company disclosures. Operating Metrics by Game Type FY2014 FY2015
(Millions) Q1 Q2 Q3 Q4 Q1
AMA of MMO Games 6.5 6.9 4.9
YoY n.a. -25%
QoQ n.a. -29%
AMA of Mobile Games 2.6 7.0 4.4
YoY n.a. 69%
QoQ n.a. -37%
APA of MMO Games 1.5 1.3 1.1
YoY n.a. -27%
QoQ n.a. -15%
APA of Mobile Games 0.1 1.5 0.9
YoY n.a. 800%
QoQ n.a. -40%

The sequential decline in the number of Average Monthly Accounts (AMA) for the company’s games was a result of the company’s efforts to remove ‘inauthentic’ player accounts, as well as attrition related to some older games.

According to the company, the change in Active Paying Accounts (APA) was a result of attrition related to some older MMO games, as well as the decline in popularity of its new TLBB 3D mobile title (a typical phenomenon after the initial surge, as the number of active players approaches stabilization).

Key Business Developments during Q1 FY2015

Exiting the web game platform business – another step to refocusing. shut down its website during Q1, which did impact financials (pressuring revenue), however represented management’s efforts to re-hone the business from a wider scope (games, platform, etc.) to a more singular focus – creating games that resonate with players. As part of the company’s effort to realign its business, it is divesting from a number of businesses, including 7Road and overseas assets, which it expects to sell for about 200 million USD in the coming months.

Expansion of the mobile game portfolio. Management noted on the Q1 call that it had a wide variety of games in the pipeline, including MMO, ARPG, SLG, and car games, with game content drawing on both internally-generated IP as well as licensed content. The mix of self-developed and licensed titles should have an impact on both the success prospects of the games (established franchise titles are usually less risky), but profit-sharing with licensed games can mean lower margins.

Overall, the company’s refined focus seems to be taking shape, and the first steps of removing non-core assets seems well underway. The key next steps for investors are to see if Changyou can replicate the early success it has achieved with its TLBB 3D mobile game with its development pipeline. The company recently launched a new title (Dashfire, in the ARPG genre), which could provide hints to future prospects to bring titles with new gameplay and IP to the market.

Financial Performance Income Statement FY2015
(000) USD Q1 Q2 Q3 Q4 Q1
Online game 163,388 153,877 150,338 184,405 184,994
Online advertising 9,246 14,732 16,718 18,267 9,636
IVAS 3,611 4,833 7,357 6,556 5,919
Others 4,508 4,339 6,406 6,685 8,148
Total revenue 180,753 177,781 180,819 215,913 208,697
YoY 2% -3% -1% 11% 15%
Cost of revenues
Online game -26,586 -30,262 -33,949 -51,752 -49,486
Online advertising -3,626 -3,617 -4,289 -3,306 -3,446
IVAS -3,766 -5,184 -6,668 -7,367 -6,125
Others -5,277 -4,473 -5,430 -6,310 -6,554
Gross profit 141,498 134,245 130,483 147,178 143,086
YoY -4% -11% -15% -8% 1%
Gross profit margin 78% 76% 72% 68% 69%
Product development -69,604 -49,041 -52,993 -22,475 -45,255
Sales and marketing -80,527 -69,400 -52,943 -38,437 -21,889
General and administrative -21,364 -22,816 -27,109 -36,162 -23,397
Impairment of goodwill, intangible assets 0 0 0 -52,282 0
Operating profit -29,997 -7,012 -2,562 -2,178 52,545
YoY n.a. n.a. n.a. n.a. n.a.
Operating profit margin -17% -4% -1% -1% 25%
Interest income 6,091 5,742 4,642 3,164 3,636
Foreign currency exchange gain/loss 737 151 -599 -957 -184
Other income/expense, net 617 434 283 2,778 3,438
Pretax income -22,552 -685 1,764 2,807 59,435
Tax expense 2,683 2,192 -291 -7,077 -12,445
Net income -19,869 1,507 1,473 -4,270 46,990
YoY n.a. -98% -98% n.a. n.a.
Net margin -11% 1% 1% -2% 23%
Net income due non-controlling interests 372 387 1,850 15,169 1,296
Net income due Changyou shareholders -19,497 1,894 3,323 10,899 48,286