Chinese online gaming publisher, Changyou.com Limited announced its unaudited financial results for the second quarter ended June 30, 2010.

    Second Quarter 2010 Highlights

    -- Total revenues were US$77.7 million, an increase of 8%
       quarter-over-quarter and 17% year-over-year, exceeding the Company’s
       guidance.
    -- Net income reached a record US$42.1 million, or US$0.79 per fully
       diluted ADS(1). Net income increased by 6% quarter-over-quarter and 22%
       year-over-year.
    -- Non-GAAP(2) net income (i.e. excluding share-based compensation
       expenses) reached a record US$44.1 million, or US$0.82 per fully
       diluted ADS, exceeding the Company’s guidance. Non-GAAP net income
       increased by 3% quarter-over-quarter and 10% year-over-year.
    -- Aggregate registered accounts for the Company’s games(3) grew 12%
       quarter-over-quarter and 42% year-over-year to 98.2 million.
    -- Aggregate peak concurrent users ("PCU") for the Company’s games grew
       23% quarter-over-quarter and 35% year-over-year to approximately 1.28
       million. Aggregate PCU for the Company’s games determined under a
       method newly-adopted by the Company, described further below, rose 25%
       quarter-over-quarter and 21% year-over-year to approximately 1.14
       million.
    -- Aggregate active paying accounts ("APA") for the Company’s games grew
       17% quarter-over-quarter and 17% year-over-year to approximately 2.79
       million.

    (1) Each American depositary share ("ADS") represents two Class A ordinary
        shares.
    (2) 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 "Reconciliation to Unaudited
        Condensed Consolidated Statements of Operations."
    (3) Comprising Tian Long Ba Bu, Blade Online, Blade Hero 2, Da Hua Shui Hu,
        and Zhong Hua Ying Xiong.
 

"The double-digit sequential increases in the user base of our games and the record financial results achieved in the second quarter reaffirms our confidence in the future of the online games industry in China and of our company," said Mr. Tao Wang, Changyou’s chief executive officer. "With the large number of new users drawn to TLBB after the release of our major "TLBB2" expansion pack in April, we are confident that we are well-positioned to grow further in the quarters ahead with the regular release of new content based on user feedback. We also look to deliver growth over the long term with ongoing investments in creative game projects, like Duke of Mount Deer, that are aimed at attracting a demographic of users that is different from the games we currently operate. We believe our current and past successes with expansion packs and our ongoing pursuit of creativity and quality in new game developments will help enhance our brand equity and deliver greater shareholder value over the long term."

Mr. Dewen Chen, president and chief operating officer, continued, "Our growing team of game engineers and marketing professionals is driving our expansion into new market segments with the successful launch of new games, like the action-packed 3D game, Zhong Hua Ying Xiong, in the second quarter and the upcoming release of a 2D mythical game, Immortal Faith, in September. As the community nature of online games continues to draw new Internet users to online gaming, we will continue to work on opening new markets of Internet users with the selective licensing of games in categories outside of our leading 2.5D space."

Mr. Alex Ho, Changyou’s chief financial officer, added, "We set quarterly record in revenues and net income in the second quarter as our games continue to capture new audiences. We expect that our highly profitable model, healthy balance sheet, and rich cash flows will allow us to further boost the popularity of our existing games while we invest in our pipeline and position ourselves for the many opportunities in our industry."

Second Quarter 2010 Operational Results

Aggregate registered accounts for the Company’s games as of June 30, 2010 increased 12% quarter-over-quarter and 42% year-over-year to 98.2 million.

The Company has adopted a new method for reporting aggregate PCU for the Company’s games. Aggregate PCU for the Company’s games determined under the previous method rose 23% quarter-over-quarter and 35% year-over-year to approximately 1.28 million. Aggregate PCU for the Company’s games determined under the new method rose 25% quarter-over-quarter and 21% year-over-year to approximately 1.14 million. Under the previous method, aggregate PCU for a quarter was determined by adding up the separate PCUs for each of the Company’s games for the quarter. Under the new method, the aggregate PCU reported by the Company for its games will be the highest aggregate PCU of the games for a day that occurs during the quarter. The Company believes that the new method will provide investors, and the Company’s management, with a better foundation for understanding the Company’s performance on a comparative quarter-over-quarter and year-over-year basis. In this release, the Company is providing quarter-on-quarter and year-on-year comparisons using both methods in order to facilitate investors’ understanding as the Company transitions from the previous method to the new method. Going forward, the Company plans to only report aggregate PCU for the Company’s games determined under the new method.

Aggregate APA for the Company’s games grew 17% quarter-over-quarter and 17% year-over-year to approximately 2.79 million.

Average revenues per active paying account ("ARPU") for the Company’s games was RMB184 for the quarter, a decline of 8% quarter-over-quarter and 1% year-over-year, which is consistent with the Company’s intention to have ARPU within a range that keeps the Company’s games affordable for the majority of Chinese game players.

Second Quarter 2010 Unaudited Financial Results

Revenues

Total revenues for the second quarter of 2010 increased 8% quarter-over- quarter and 17% year-over-year to US$77.7 million.

Revenues from game operations for the second quarter of 2010 increased 8% quarter-over-quarter and 16% year-over-year to US$75.6 million. The increases were mainly due to the ongoing popularity of TLBB, the Company’s flagship game.

Overseas licensing revenues for the second quarter of 2010 increased 15% quarter-over-quarter and 29% year-over-year to US$2.1 million. The increases were largely the result of increased momentum of TLBB in Vietnam and Malaysia.

Gross Profit

Gross profit for the second quarter of 2010 increased 6% quarter-over- quarter and 13% year-over-year to US$70.7 million. Gross margin in the second quarter of 2010 was 91%, compared to 93% in the first quarter of 2010 and 94% in the second quarter of 2009. Non-GAAP gross profit for the second quarter of 2010 increased 6% quarter-over-quarter and 13% year-over-year to US$70.8 million. Non-GAAP gross margin in the second quarter of 2010 was 91%, compared to 93% in the first quarter of 2010 and 94% in the second quarter of 2009.

Operating Expenses

For the second quarter of 2010, total operating expenses were US$24.0 million, up 12% quarter-over-quarter and 3% year-over-year. Non-GAAP operating expenses were US$22.1 million, up 19% quarter-over-quarter and 25% year-over-year.

GAAP product development expenses increased 12% quarter-over-quarter and 3% year-over-year to US$7.8 million. Non-GAAP product development expenses increased 24% quarter-over-quarter and 49% year-over-year to US$6.7 million. The increases were mainly the result of an increase in salaries and benefits due to hiring of more game engineers and the depreciation of office building and facilities costs due to relocation of our R&D team to a new office building in the middle of the first quarter of 2010.

GAAP sales and marketing expenses increased 21% quarter-over-quarter and 13% year-over-year to US$11.7 million. Non-GAAP sales and marketing expenses increased 21% quarter-over-quarter and 14% year-over-year to US$11.7 million. The sequential increases were primarily due to increased marketing and promotional activities for the launch of a new game, Zhong Hua Ying Xiong, and the major expansion pack for TLBB in the second quarter of 2010. The year- over-year increases were primarily a result of increased marketing and promotional activities for the launch of new games during the year.

GAAP general and administrative expenses decreased 5% quarter-over-quarter and 15% year-over-year to US$4.5 million. The quarter-over-quarter decrease in GAAP general and administrative expenses was mainly due to a decrease in share-based compensation expense in the second quarter of 2010. The year-over- year decrease in GAAP general and administrative expenses was primarily due to the recognition of a one-time share based compensation expense in the second quarter of 2009 due to the completion of the Company’s initial public offering. Non-GAAP general and administrative expenses increased 5% quarter-over-quarter and 29% year-over-year to US$3.7 million. The quarter-over-quarter increase in non-GAAP general and administrative expenses was primarily due to increased salaries and benefits expense in the second quarter of 2010. The year-over-year increase in non-GAAP general and administrative expenses was primarily a result of an increase in headcount and an increase in professional fees for protecting our intellectual property.

Operating Profit

Operating profit for the second quarter of 2010 increased 3% quarter-over-quarter and 18% year-over-year to US$46.7 million. Operating margin in the second quarter of 2010 was 60%, compared to 63% in the first quarter of 2010 and up from 59% in the second quarter of 2009. Non-GAAP operating profit for the second quarter of 2010 increased 1% quarter-over-quarter and 8% year-over-year to US$48.7 million. Non-GAAP operating margin in the second quarter of 2010 was 63%, compared to 67% in the first quarter of 2010 and 68% in the second quarter of 2009.

Net Income

For the second quarter of 2010, net income increased 6% quarter-over-quarter and 22% year-over-year to US$42.1 million. Non-GAAP net income increased 3% quarter-over-quarter and 10% year-over-year to US$44.1 million. Fully diluted earnings per ADS were US$0.79, up from US$0.75 in the first quarter of 2010 and US$0.66 in the second quarter of 2009. Non-GAAP fully diluted earnings per ADS were US$0.82, up from US$0.80 in the first quarter of 2010 and US$0.75 in the second quarter of 2009. Net margin for the second quarter of 2010 was 54%, compared to 55% in the first quarter of 2010 and up from 52% in the second quarter of 2009. Non-GAAP net margin for the second quarter was 57%, compared to 59% in the previous quarter and 60% in the second quarter of 2009.

Cash Balances

As of June 30, 2010, Changyou had a net cash balance of US$294.5 million, up from US$265.4 million as of March 31, 2010. Operating cash flow for the quarter was a net inflow of US$49.2 million.

Other Business Developments

Open Beta Testing of Zhong Hua Ying Xiong

On May 20, 2010, Changyou began open beta testing of Zhong Hua Ying Xiong, the Company’s first 3D martial arts-themed massively multi-player online role-playing game ("MMORPG"). This licensed game is based on a popular Hong Kong comic book of the same name. The game features advanced 3D graphics, cinematic cutscenes, and dynamic real-time fighting movements that are designed to attract 3D online game enthusiasts.

Acquisition of I.C.E. Entertainment

In May 2010, the Company completed the acquisition of I.C.E Entertainment Limited, a Shanghai-based online game developer and operator. The acquisition adds over 140 game engineers and game operation professionals to the Company’s platform.

    Business Outlook

    For the third quarter of 2010, Changyou estimates:

    -- Total revenues to be between US$80.0 million and US$83.0 million.
    -- Non-GAAP net income to be between US$44.5 million and US$46.0 million.
    -- Non-GAAP fully diluted earnings per ADS to be between US$0.83 and
       US$0.86.
    -- Assuming no new grants of share-based awards, share-based compensation
       expense to be between US$1.5 million and US$2.0 million, reducing fully
       diluted earnings per ADS by US$0.03 to US$0.04.