China Stock Research

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Several years experience as an analyst in the hedge fund world. Investment knowledge includes long/short equities, credit, macro, arbitrage, distressed debt, and special situations. Previous research publication experience includes Japanese small cap research distributed to institutional investors. Education credentials include BS in Computer Science, MBA in Finance, and CFA Charter. Follow on Twitter @ChinaStockRsrch Follow on StockTwits @ChinaStockResearch

Changyou Q4 FY2014 Results (NASDAQ:CYOU) reported Q4 FY2014 results that included revenue of about 216 million USD, which exceeded management’s earlier guidance by over 10%, and also beat consensus estimates of about 211 million USD. Although the company reported solid progress on the top line, with growth of approximately +11% YoY, one-time impairment charges related to earlier investments in Raidcall meant that operating results slipped into the negative.

Operating metrics the company disclosed suggested that top line performance was due to the positive reception to new mobile game launches, which contributed the bulk of the increase in average monthly active accounts for its MMO and mobile games.

Management’s outlook for Q1 FY2015, a seasonally slow quarter, was for slowing revenue growth of about 9%+ YoY vs. 11%+ YoY in Q4. A silver lining, however, was continued strength in Changyou’s core online games segment, which appears to have rebounded in Q4 after slowing during Q1-Q3 FY2014.

Recent Quarterly PerformanceFY2014
(000) USDQ4Q1Q2Q3Q4
Gross profit159,582141,498134,245130,483147,178
Operating profit29,139-29,997-7,012-2,562-2,178
Net income42,999-19,8691,5071,473-4,270
Earnings per share0.81-0.370.040.060.21
Comparison YoY
Gross profit10%-4%-11%-15%-8%
Operating profit-69%n.a.n.a.n.a.n.a.
Net income-46%n.a.-98%-98%n.a.
Earnings per share-42%n.a.-97%-95%-75%
Comparison QoQ
Gross profit4%-11%-5%-3%13%
Operating profit-64%n.a.n.a.n.a.n.a.
Net income-41%n.a.n.a.-2%n.a.
Earnings per share-41%n.a.n.a.75%229%
Margin analysis
NPM22%-11%1%1%-2% generated about 17 million USD of operating cash flow during the quarter, versus about 46 million USD in Q3 and a net inflow of about 83 million USD in Q4 FY2013. One of the factors impacting operating cash flow in Q4 was an increase in working capital needs (current assets in excess of current liabilities), which rose approximately 30 million USD during Q4.

The fourth-quarter balance sheet included approximately 412 million USD of highly liquid assets (cash and cash equivalents, short-term investments), an increase of about 25 million USD vs. last quarter.


The company’s Q1 FY2015 outlook included the following:

  • Revenue: Between 195 to 200 million USD (+9% YoY, -9% QoQ), comprising mainly online game revenues of between 175 to 180 million USD (+9% YoY, -4% QoQ) and online advertising revenues of between 9 to 10 million USD (+3% YoY, -48% QoQ)
  • Non-GAAP EPS: Between 0.64 and 0.68 USD per ADS

Management’s outlook for its online game business suggests solid progress in turning around the segment through new game launches, something which has been dragging on financial results for most of FY2014. For investors, this is the key focus – reigniting the growth engine that has historically been the main driver of results. Online game revenues were sequentially lower during Q1-Q3 FY2014, before turning positive in Q4, and seeing continued strength in this segment bodes well for future results.

The first quarter of the year is typically slow in China, something which is reflected in the implied QoQ slowdown in online advertising revenues in the Q1 FY2015 forecast.

Operating Metrics

The company changed the way it discloses operating metrics, shifting from a total platform focus to report metrics exclusively focused on its games (MMO, mobile). Based on provided disclosures, the number of average monthly active accounts for Changyou’s MMO and mobile games grew to 13.9 million (+81% YoY, +14% QoQ). The number of quarterly aggregate active paying accounts for Changyou’s MMO and mobile games grew to 2.7 million (+59% YoY, +69% QoQ).

According to management, the increase in both metrics (monthly active accounts, aggregate active paying accounts) was due to the positive effects of new mobile game launches (notably, TLBB 3D).

Key Business Developments During Q4 FY2014

Management changes – The company announced the appointment of a new CFO, Ms. Jasmine Zhou, as well as the resignation of Mr. Tao Wang (the previous CEO) from the board. Mr. Wang was replaced by Ms. Carol Yu (Changyou co-CEO, president and CFO of parent company Sohu).

Share repurchase program – The company purchased an additional 164,300 ADS during Q4, bringing the aggregate amount spent on buybacks to about 21 million USD since announcing the two-year, 100 million USD repurchase program in July 2013.

Financial Performance Income StatementFY2014
(000) USDQ4Q1Q2Q3Q4
Online game171,958163,388153,877150,338184,405
Online advertising16,8639,24614,73216,71818,267
Total revenue194,851180,753177,781180,819215,913
Cost of revenues
Online game-25,926-26,586-30,262-33,949-51,752
Online advertising-4,912-3,626-3,617-4,289-3,306
Gross profit159,582141,498134,245130,483147,178
Gross profit margin82%78%76%72%68%
Product development-43,158-69,604-49,041-52,993-22,475
Sales and marketing-69,226-80,527-69,400-52,943-38,437
General and administrative-18,059-21,364-22,816-27,109-36,162
Impairment of goodwill, intangible assets0000-52,282
Operating profit29,139-29,997-7,012-2,562-2,178
Operating profit margin15%-17%-4%-1%-1%
Interest income5,9386,0915,7424,6423,164
Foreign currency exchange gain/loss-1,218737151-599-957
Other income/expense, net1,4166174342832,778
Pretax income35,275-22,552-6851,7642,807
Pretax margin18%-12%0%1%1%
Tax expense7,7242,6832,192-291-7,077
Net income42,999-19,8691,5071,473-4,270
Net margin22%-11%1%1%-2%
Net loss/income due non-controlling interests03723871,85015,169
Net income due Changyou shareholders42,999-19,4971,8943,32310,899