Shanda beats analyst estimates

PUBLISHED : Thursday, 17 August, 2006, 12:00am
UPDATED : Thursday, 17 August, 2006, 12:00am

Shares surge after firm reports less than expected 40pc drop in net profit as free-to-play move lifts interest

Shares in Shanda Interactive Entertainment, China's second-largest online games operator, surged as much as 9.4 per cent in the US after it announced second-quarter net profit dropped a less than expected 40 per cent following its decision to offer many of its games for free.

The Nasdaq-listed company yesterday reported that its net profit for the three months to June fell to US$16.7 million from US$26.9 million a year earlier, as sales declined 25 per cent to US$50.7 million.

The results beat the median estimate of US$11.9 million net profit on sales of US$43 million of seven analysts surveyed by Thomson Financial.

Revenue from the company's online games fell 20 per cent to US$46.8 million from a year earlier, accounting for about 92 per cent of the company's total sales.

At the end of last year, the Shanghai-based company began offering free its stable games, including its most popular titles The Legend of Mir II, The World of Legend and Magical Land free, banking on greater interest for value-added pay services such as special weapons and levels.

The company said as the strategy gained traction, the monthly average revenue per user (arpu) during the period jumped 50 per cent to US$5.68, improving net profit 10-fold compared with the first quarter, even as the number of active paying accounts for the company's online games declined 10 per cent to 2.23 million.

'Our free-to-play and pay-for value-added services revenue model continues to witness growing user adoption,' said Shanda's chairman and chief executive Chen Tianqiao, who during his company's halcyon days in 2004, was the mainland's richest man, according to many tallies, with a net worth of more than US$1 billion.

Morgan Stanley research analyst Richard Ji said he expected that the free-games strategy 'would continue its momentum into the third quarter'.

Shanda will not launch it new titles Archlord and Dungeons and Dragons until the fourth quarter.

Mr Ji said he did not expect much from the company's expansion into online music and movie sales.

Mr Chen, in February, said he wanted half of the company's sales to come from music and movies within five years. Revenue from music and movie downloads and online advertising fell 57 per cent to US$3.9 million from a year earlier, contributing just 7.8 per cent of total sales in the quarter.

The company's American depositary receipts rose 3.9 per cent to US$16.55 before the earnings report was released after the market closed and then jumped to US$18.10 in after-hours trading. Shanda's ADRs have risen 8.6 per cent this year, compared with a 23 per cent gain for it main rival NetEase.

NetEase, whose Westward Journey games have soared in popularity in the past months, on Tuesday reported that its second-quarter net profit soared 29 per cent from a year earlier to US$39 million.