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 Changyou Reports Fourth Quarter 2016 and Fiscal Year 2016 Unaudited Financial Results
   Tuesday, February 21, 2017 12:27:00 AM ET

Changyou.com Limited ("Changyou" or the "Company") (CYOU ), a leading online game developer and operator in China, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2016.

http://photos.prnewswire.com/prnvar/20090402/CNTH020

Fourth Quarter 2016 Highlights

-- Total revenues were US$131 million[1], representing a decrease of 19% year-over-year and 4% quarter-over-quarter, exceeding guidance by $1 million.

-- Online game revenues were US$95 million, representing a decrease of 25% year-over-year and 3% quarter-over-quarter, in line with the Company’s guidance.

-- GAAP net income attributable to Changyou.com Limited was US$41 million, or US$0.77 per fully-diluted ADS[2]. This compares with US$38 million, or $0.73 per fully-diluted ADS in the fourth quarter of 2015 and US$39 million, or $0.73 in the third quarter of 2016.

-- Non-GAAP[3] net income attributable to Changyou.com Limited was US$40 million, exceeding the Company’s guidance by US$5 million. This compares with US$46 million in the fourth quarter of 2015 and US$46 million in the third quarter of 2016.

-- Non-GAAP net income attributable to Changyou.com Limited per fully-diluted ADS was US$0.75. This compares with US$0.85 in the fourth quarter of 2015 and US$0.85 in the third quarter of 2016.

[1] For the fourth quarter of 2016, on a yearly basis, the depreciation of the RMB against the U.S. dollar impacted our reported financial results. Should the exchange rate be at RMB6.39=US$1.00 as the same of the fourth quarter of 2015, total revenues in the fourth quarter of 2016 would have been US$140 million, or US$9 million higher than the GAAP total revenue, or down 14% year-over-year.
[2] Each ADS represents two Class A ordinary shares.
[3] Non-GAAP results exclude share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions.  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."

Fiscal Year 2016 Highlights

-- Total revenues were US$525 million, compared with US$762 million in 2015.

-- Online game revenues were US$396 million, compared with US$637 million in 2015.

-- GAAP net income attributable to Changyou.com Limited was US$145 million, or US$2.72 per fully-diluted ADS. This compares with US$213 million, or US$4.02 per fully-diluted ADS in 2015.

-- Non-GAAP net income attributable to Changyou.com Limited was US$153 million, compared with US$228 million in 2015.

-- Non-GAAP net income attributable to Changyou.com Limited per fully-diluted ADS was US$2.85, compared with US$4.20 in 2015.

Mr. Dewen Chen, CEO, commented, "2016 was a year of building on our strengths and committing to developing high grossing games. At the beginning of 2016, we announced our ’Top games, Big IP and Mass marketing’ strategy, and strictly executed it. After a year of hard work, we have now prepared a solid pipeline with a focus on MMORPG games, and supplemented by a number of advanced casual games. We are confident that our efforts will start to pay off in 2017 with many new exciting products in the pipeline. We will continue to focus on producing high quality games that will resonate with players. "

Mr. Qing Wei, Chief Games Development Officer added, "Our development of Legacy TLBB mobile is more or less complete. The testing results so far meet our standards for high quality games. As our team has higher expectations for the game, we will continue to make incremental improvements on the game. We plan to conduct a large-scale beta test in the first quarter and if the results meet our expectation, the game will be officially launched in the second quarter."

Ms. Jasmine Zhou, CFO of Changyou added, "We are pleased that we exceeded both our revenue guidance and non-GAAP net income guidance, and our online game revenues remained stable. We started to focus on producing high quality games at the beginning of 2016. This approach and higher testing standards have set the bar high for new games in pipeline, which had an impact on 2016 revenue. Nevertheless, we believe that focusing on the best is the only way to make a high quality and high grossing games possible."

Fourth Quarter 2016 Operational Results

-- Total average monthly active accounts[4] of the Company’s PC games were 2.5 million, representing a decrease of 31% year-over-year and 7% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases reflected the natural declining life cycles of the Company’s older PC games.

-- Total average monthly active accounts of the Company’s mobile games were 1.6 million, representing a decrease of 57% year-over-year and 43% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases reflected the natural declining life cycles of the Company’s older mobile games.

-- Total quarterly aggregate active paying accounts[5] of the Company’s PC games were 1.0 million, representing a decrease of 17% year-over-year and flat quarter-over-quarter. The year-over-year decrease reflected the natural declining life cycles of the Company’s older PC games.

-- Total quarterly aggregate active paying accounts of the Company’s mobile games were 0.4 million, representing a decrease of 56% year-over-year and 43% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases reflected the natural declining life cycles of the Company’s older mobile games.

[4] 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.
[5] 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.

Fourth Quarter 2016 Unaudited Financial Results

Revenues

Total revenues were US$131 million, representing a decrease of 19% year-over-year and 4% quarter-over-quarter.

Online game revenues were US$95 million, representing a decrease of 25% year-over-year and 3% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly due to the natural decline in revenues of the Company’s older games.

Online advertising revenues were US$8 million, representing a decrease of 44% year-over-year and 28% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly due to fewer games being marketed on the 17173 Website.

Cinema advertising revenues[6] were US$20 million, representing an increase of 53% year-over-year and a decrease of 3% quarter-over-quarter. The year-over-year increase reflected the strong growth of China’s movie and cinema industry in general and was also a result of an active approach we took in acquiring more advertising resources.

Internet value-added services ("IVAS") revenues were US$6 million, representing a decrease of 6% year-over-year and an increase of 40% quarter-over-quarter. The year-over-year decrease was a result of lower revenues from mobile internet products in the fourth quarter of 2016. The quarter-over-quarter increase was a result of higher revenues from PC internet products.

[6] The Company’s Cinema advertising business revenue was previously presented as Other revenues as it was not significant enough to be presented as a separate line item under revenue.  During the year of 2016, the cinema advertising business has experienced strong growth and become a more significant part of Changyou’s overall business. In order to provide investors with a better foundation for understanding of Changyou’s performance of the cinema advertising business, revenues generated from cinema advertising business are presented separately going forward.

Gross profit

GAAP and non-GAAP gross profit were both US$90 million, representing a decrease of 25% year-over-year and 6% quarter-over-quarter. GAAP and non-GAAP gross margins were both 69%, compared with 74% for both in the fourth quarter of 2015, and 70% for both in the third quarter of 2016.

GAAP and non-GAAP gross profit of the online games business were both US$74 million, representing a decrease of 25% year-over-year and flat quarter-over-quarter. GAAP and non-GAAP gross margin of the online games business were both 78%, compared with 78% in the fourth quarter of 2015 and 76% in the third quarter of 2016.

GAAP and non-GAAP gross profit of the online advertising business were both US$6 million, representing a decrease of 56% year-over-year and 38% quarter-over-quarter. GAAP and non-GAAP gross margin of the online advertising business were both 66%, compared with 84% in the fourth quarter of 2015 and 76% in the third quarter of 2016. The year-over-year and quarter-over-quarter decreases in gross margin were due to a decrease in online advertising revenues, while costs remained relatively flat.

GAAP and non-GAAP gross profit of the cinema advertising business were both US$7 million, compared with US$5 million in the fourth quarter of 2015 and US$9 million in the third quarter of 2016.GAAP and non-GAAP gross margin of the cinema advertising business were both 34%, compared with 38% in the fourth quarter of 2015 and 43% in the third quarter of 2016. The quarter-over-quarter decrease in gross margin was mainly due to an increase in cinema advertising costs as we partnered with more cinemas in the fourth quarter of 2016.

GAAP and non-GAAP gross profit of the IVAS business were both US$3 million, compared with a gross profit of US$3 million in the fourth quarter of 2015 and a gross profit of US$2 million in the third quarter of 2016.

Operating expenses

Total operating expenses were US$52 million, representing a decrease of 35% year-over-year and 21% quarter-over-quarter.

Product development expenses were US$31 million, representing a decrease of 30% year-over-year and an increase of 2% quarter-over-quarter. The year-over-year decrease was due to a decrease in salary and benefit expenses as a result of a reduction in bonus expenses and workforce.

Sales and marketing expenses were US$12 million, representing a decrease of 22% year-over-year and 36% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly due to a decrease in marketing spending to promote new games and expansion packs.

General and administrative expenses were US$9 million, representing a decrease of 53% year-over-year and 45% quarter-over-quarter. The year-over-year decrease was mainly due to a decrease in salary and benefit expenses as a result of a reduction in bonus expenses, as well as a decrease in share-based compensation expense[7] compared with the fourth quarter of 2015. The quarter-over-quarter decrease was mainly due to a decrease in share-based compensation expense[8] compared with the third quarter of 2016.

[7] The decrease in share-based compensation expense was triggered by a decrease in the market price for the Company’s ADSs in the fourth quarter of 2016 compared to the fourth quarter of 2015.
[8] The decrease in share-based compensation expense was triggered by a decrease in the market price for the Company’s ADSs in the fourth quarter of 2016 compared to the third quarter of 2016.

Operating profit

Operating profit was US$38 million, compared with US$40 million in the fourth quarter of 2015 and US$29 million in the third quarter of 2016.

Non-GAAP operating profit was US$37 million, compared with US$48 million in the fourth quarter of 2015 and US$37 million in the third quarter of 2016.

Other Income

Other income was US$5 million, compared with US$1 million in the fourth quarter of 2015 and US$3 million in the third quarter of 2016.

Income tax (expense) / benefit

Income tax expense was US$9 million, compared with an income tax expense of US$8 million in the fourth quarter of 2015 and an income tax benefit[9] of US$1 million in the third quarter of 2016, respectively.

[9] The income tax benefit in the third quarter of 2016 was mainly due to recognition of a tax benefit for the preferential tax rate of one of the Company’s subsidiaries as a "2015 Key National Software Enterprise" in the third quarter of 2016.

Net income

Net income was US$42 million, which compares with US$38 million in the fourth quarter of 2015 and US$39 million in the third quarter of 2016.

Non-GAAP net income was US$41 million, which compares with US$46 million in the fourth quarter of 2015 and US$46 million in the third quarter of 2016.

Net income/ (loss) attributable to non-controlling interests

Both GAAP and non-GAAP net income attributable to non-controlling interests was US$0.9 million. This compares with a GAAP net loss of US$ 0.2 million and non-GAAP net loss of US$0.3 million in the fourth quarter of 2015, and a GAAP and a non-GAAP net income of US$0.3 million in the third 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$41 million, compared with US$38 million in the fourth quarter of 2015 and US$39 million in the third quarter of 2016. Fully-diluted net income attributable to Changyou.com Limited per ADS was US$0.77. This compares with US$0.73 in the fourth quarter of 2015 and US$0.73 in the third quarter of 2016.

Non-GAAP net income attributable to Changyou.com Limited was US$40 million. This compares with US$46 million in the fourth quarter of 2015 and US$46 million in the third quarter of 2016. Non-GAAP fully-diluted net income attributable to Changyou.com Limited per ADS was US$0.75. This compares with US$0.85 in the fourth quarter of 2015 and US$0.85 in the third quarter of 2016.

Liquidity

As of December 31, 2016, Changyou had net cash[10] of US$831 million, compared with US$755 million as of December 31, 2015.

Operating cash flow for the fourth quarter of 2016 was a net inflow of US$62 million.

[10] Net cash is calculated as the sum of cash and cash equivalents, short-term investments, current and non-current restricted time deposits, minus short-term bank loans.

Fiscal Year 2016 Unaudited Financial Results

Revenues

Total revenues in 2016 were US$525 million, compared with US$762 million in 2015.

Online game revenues were US$396 million, down 38% from US$637 million in 2015. The year-over-year decrease was mainly due to the natural decline in revenues of older games, and a decrease in Web game revenues upon the completion of the sale of the 7Road business in 2015.

Online advertising revenues were US$39 million, compared with US$58 million in 2015. The year-over-year decrease was mainly due to fewer games being marketed on the 17173 Website.

Cinema advertising revenues increased 61% year-over-year to US$69 million. The year-over-year increase reflected the strong growth of China’s movie and cinema industry in general, and improvements made to the Company’s advertising sales function, as well as an active approach we took in acquiring more advertising resources.

IVAS revenues decreased 11% year-over-year to US$22 million. The decrease was a result of lower revenues from mobile internet products.

Gross profit

GAAP and non-GAAP gross profit were US$360 million, down 34% from US$545 million in 2015. GAAP and non-GAAP gross margin were 68%, compared with 72% in 2015.

GAAP and non-GAAP gross profit of the online games business were US$300 million, down 38% from 2015. GAAP and non-GAAP gross margin of the online games business were 76%, compared with 75% in 2015.

GAAP and non-GAAP gross profit of the online advertising business decreased to US$29 million, down 37% from 2015. GAAP and non-GAAP gross margin of the online advertising business were 74%, compared with 80% in 2015. The year-over-year decrease in gross margins was due to a reduction in revenues of online advertising business, while costs remained relatively flat.

GAAP and non-GAAP gross profit of the cinema advertising business were US$23 million, compared with US$13 million in 2015. GAAP and non-GAAP gross margin of the cinema advertising business were 33%, compared with 31% in 2015.

GAAP and non-GAAP gross profit of IVAS were US$8 million, compared with a gross profit of US$5 million in 2015.

Operating expenses

Total operating expenses were US$229 million, down 40% from 2015.

Product development expenses were US$122 million, down 29% from 2015. The decrease was due to a decrease in salary and benefit expenses in 2016 as a result of a reduction in the workforce as well as a reduction in bonus expenses.

Sales and marketing expenses were US$57 million, down 39% from 2015. The decrease was due to a reduction in marketing and promotional spending for new games in 2016.

General and administrative expenses were US$51 million, down 37% from 2015. The decrease was due to a decrease in salary and benefit expenses in 2016 as a result of a reduction in the workforce and bonus expenses.

Operating profit

Operating profit was US$131 million, compared with an operating profit of US$161 million in 2015.

Non-GAAP operating profit was US$139 million, compared with an operating profit of US$176 million in 2015.

Other Income

Other income was US$16 million, compared with US$65 million in 2015. The year-over-year decrease was due to a reduction in a gain that was recognized upon the divestment of 7Road and certain overseas assets in 2015.

Income tax expense

Income tax expense was US$22 million in 2016, compared with US$54 million in 2015.

Net income

Net income was US$147 million, compared with a net income of US$191 million in 2015.

Non-GAAP income was US$155 million, compared with a non-GAAP net income of US$206 million in 2015.

Net income/ (loss) attributable to non-controlling interests

Both GAAP and non-GAAP net income attributable to non-controlling interests were US$2 million, compared with a net loss of US$22 million in 2015. 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$145 million, compared with a net income of US$213 million in 2015. Fully-diluted net income attributable to Changyou.com Limited per ADS was US$2.72 compared with a fully-diluted net income per ADS of US$4.02 in 2015.

Non-GAAP net income attributable to Changyou.com Limited was US$153 million, compared with US$228 million in 2015. Non-GAAP fully-diluted net income attributable to Changyou.com Limited per ADS was US$2.85, compared with US$4.20 in 2015.

Business Outlook

For the first quarter of 2017, Changyou expects:

-- Total revenues to be between US$110 million and US$120 million, including online game revenues of US$80 million to US$90 million;

-- Non-GAAP net income attributable to Chanyou.com Inc. to be between US$30 million and US$35 million, and non-GAAP income per fully-diluted share to be between US$0.56 and US$0.65. 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 between US$1 million and US$2 million. Considering eliminating the impact of these share-based awards, GAAP net income attributable to Changyou.com to be between US$28 million and US$34 million, and GAAP income per fully-diluted share to be between US$0.52 and US$0.64.

For the first 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$1.00 for the first quarter 2016, and RMB6.83=US$ 1.00 for the fourth quarter 2016.

Non-GAAP Disclosure

To supplement the unaudited consolidated financial information prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), Changyou’s management uses non-GAAP measures of gross profit, operating profit, net income, net income attributable to Changyou.com Limited and diluted net income attributable to Changyou.com Limited per ADS, which are adjusted from results based on GAAP to exclude the compensation cost of share-based awards granted, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Changyou’s management believes that excluding share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions from its non-GAAP financial measures is useful for itself and investors. Further, the amount of share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions cannot be anticipated by management, and these expenses are not built into the Company’s annual budgets and quarterly forecasts, which generally will be the basis for information Changyou provides to analysts and investors as guidance for future operating performance. As share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions does not involve subsequent cash outflow, Changyou does not factor this in when evaluating and approving expenditures or when determining the allocation of its resources to its business operations. As a result, in general, the monthly financial results for internal reporting and any performance measure for commissions and bonuses are based on non-GAAP financial measures that exclude share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions.

The non-GAAP financial measures are provided to enhance investors’ overall understanding of Changyou’s current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, operating profit, net income, net income attributable to Changyou.com Limited and diluted net income attributable to Changyou.com Limited per ADS, excluding share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions, is that the share-based compensation charge has been and will continue to be a significant recurring expense in the Company’s business for the foreseeable future, non-cash tax benefits from excess tax deductions related to share-based awards and income/expense from the adjustment of contingent consideration previously recorded for acquisitions may recur in the future. In order to mitigate these limitations the Company has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between GAAP financial measures that are most directly comparable to the non-GAAP financial measures the Company has presented.

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is derived from Changyou’s unaudited financial statements prepared in accordance with GAAP.

Safe Harbor Statement

It is currently expected that the Business Outlook will not be updated until the release of Changyou’s next quarterly earnings announcement; however, Changyou reserves the right to update its Business Outlook at any time for any reason.

This announcement contains forward-looking statements. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. The Company cautions that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, continuing volatility in global financial and credit markets and its potential impact on the Chinese economy; exchange rate fluctuations in general and possible continued valuation of the RMB in particular, including their potential impact on the Chinese economy and on the Company’s reported U.S. dollar results; slowing growth in the Chinese economy; the uncertain regulatory landscape in the People’s Republic of China; fluctuations in Changyou’s quarterly operating results; the possibility that Changyou will be unable to develop a series of successful games for mobile platforms or successfully monetize mobile games it develops or acquires; the possibility that the Company’s margins will decline as a result of the need for revenue-sharing with mobile game platform operators; and the Company’s reliance on TLBB as its major revenue source. Further information regarding these and other risks is included in Changyou’s Annual Report on Form 20-F filed on February 26, 2016, and other filings with the Securities and Exchange Commission.

Conference Call Information

Changyou’s management team will host an earnings conference call today at 7 a.m. U.S. Eastern Time, February 21, 2017 (8 p.m. Beijing/Hong Kong, February 21, 2017).

The dial-in details for the live conference call are:

US:             +1-855-298-3404
Hong Kong:      +852-5808-3202
China Mainland: +86-400-1200-539
International:  +1-631-514-2526
Passcode:       CYOU

Please dial in 10 minutes before the call is scheduled to begin and provide the passcode to join the call.

A telephone replay of the call will be available after the conclusion of the conference call at 10: 00 a.m. Eastern Time on February 21, 2017 through February 28, 2017. The dial-in details for the telephone replay are:

International: +1- 866-846-0868
Passcode:      7470977

The live Webcast and archive of the conference call will be available on the Investor Relations section of Changyou’s Website at http://ir.changyou.com /">http://ir.changyou.com / .

About Changyou

Changyou.com Limited (CYOU ) is a leading developer and operator of online games in China with a diverse portfolio of popular online games , such as Tian Long Ba Bu ("TLBB"), one of the most popular PC games in China, as well as a number of mobile games. Changyou also owns and operates the 17173.com Website, a leading game information portal in China. Changyou began operations as a business unit within Sohu.com Inc. (SOHU ) in 2003, and was carved out as a separate, stand-alone company in December 2007. It completed an initial public offering on April 7, 2009. Changyou has an advanced technology platform that includes advanced 2.5D and 3D graphics engines, a uniform game development platform, effective anti-cheating and anti-hacking technologies, proprietary cross-networking technology and advanced data protection technology. For more information, please visit http://ir.changyou.com .

For investor and media inquiries, please contact:

In China:

Ms. Margaret Shi Investor Relations Tel: +86 (10) 6192-0800 E-mail: ir@cyou-inc.com

In the United States:

Ms. Linda Bergkamp Christensen Phone: +1-480-614-3004 Email: lbergkamp@ChristensenIR.com

CHANGYOU.COM LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER ADS AMOUNTS)
                                                                   Three Months Ended                                       Twelve Months Ended
                                                                   Dec. 31, 2016      Sep. 30, 2016      Dec. 31, 2015      Dec. 31, 2016   Dec. 31, 2015
Revenues:
Online game                                                   $    95,400        $    98,553        $    127,001       $    395,708       $ 636,846
Online advertising                                                 8,332              11,651             14,798             39,409          57,832
Cinema advertising                                                 20,371             21,058             13,315             68,542          42,573
IVAS                                                               6,420              4,600              6,796              21,726          24,385
Total revenues                                                     130,523            135,862            161,910            525,385         761,636
Cost of revenues:
Online game(includes share-based compensation expense              20,936             23,719             28,266             96,171          156,318
of $(5), $26, $47, $31 and $37 respectively)
Online advertising                                                 2,799              2,761              2,315              10,104          11,565
Cinema advertising                                                 13,452             11,906             8,203              45,959          29,231
IVAS(includes share-based compensation expense of $0, $0,          3,792              2,711              3,963              13,576          19,647
$(2), $0 and $(2) respectively)
Total cost of revenues                                             40,979             41,097             42,747             165,810         216,761
Gross profit                                                       89,544             94,765             119,163            359,575         544,875
Operating expenses:
Product development (includes share-based                          30,516             29,934             43,841             121,619         170,605
compensation expense of $(437), $2,524,
$2,867, $2,881 and $5,475, respectively)
Sales and marketing (includes share-based                          11,989             18,748             15,456             56,543          92,355
compensation expense of $(61), $437,
$487, $572 and $1,017 respectively)
General and administrative (includes share-based                   9,222              16,647             19,791             50,560          80,269
compensation expense of $(435), $4,215,
$4,095, $4,918 and $8,497 respectively)
Goodwill impairment and impairment of                              -                  -                  -                  -               40,324
intangibles via acquisitions of businesses
Total operating expenses                                           51,727             65,329             79,088             228,722         383,553
Operating profit                                                   37,817             29,436             40,075             130,853         161,322
Interest income                                                    5,217              5,879              4,432              17,169          15,444
Foreign currency exchange gain                                     2,747              518                963                5,108           2,954
Other income                                                       5,463              2,691              1,064              15,523          64,962
Income before income tax expense                                   51,244             38,524             46,534             168,653         244,682
Income tax (expense)/ benefit                                      (9,356)            519                (8,317)            (21,583)        (54,055)
Net income                                                         41,888             39,043             38,217             147,070         190,627
Less: Net income/(loss) attributable to non-controlling            869                339                (248)              2,123           (22,157)
interests
Net income attributable to Changyou.com Limited               $    41,019        $    38,704        $    38,465        $    144,947       $ 212,784
Basic net income attributable to Changyou.com Limited per ADS $    0.78          $    0.74          $    0.74          $    2.78          $ 4.06
ADSs used in computing basic net income attributable to            52,331             52,292             52,164             52,280          52,462
Changyou.com Limited per ADS
Diluted net income attributable to Changyou.com Limited per   $    0.77          $    0.73          $    0.73          $    2.72          $ 4.02
ADS
ADSs used in computing diluted net income attributable to          53,346             53,219             52,846             53,139          52,881
Changyou.com Limited per ADS
CHANGYOU.COM LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
                                             As of Dec. 31, 2016   As of Dec. 31, 2015
ASSETS
Current assets:
Cash and cash equivalents                  $ 597,188             $ 569,917
Accounts receivable, net                     47,150                67,959
Short-term investments                       233,491               174,515
Restricted time deposits11                   -                     227,285
Prepaid and other current assets             484,995               227,719
Assets held for sale12                       103,079               -
Total current assets                         1,465,903             1,267,395
Non-current assets:
Fixed assets, net                            189,770               214,306
Goodwill12                                   26,502                111,082
Intangible assets, net                       12,335                25,139
Restricted time deposits11                   -                     127,454
Deferred tax assets13                        7,952                 17,402
Other assets, net                            5,575                 16,728
Total non-current assets                     242,134               512,111
TOTAL ASSETS                               $ 1,708,037           $ 1,779,506
LIABILITIES
Current liabilities:
Receipts in advance and deferred revenue   $ 43,541              $ 42,166
Accounts payable and accrued liabilities     460,674               275,926
Short-term bank loans11                      -                     344,500
Tax payables                                 8,381                 27,423
Liabilities held for sale12                  3,902                 -
Total current Liabilities                    516,498               690,015
Long-term liabilities:
Long-term deferred tax liabilities13         29,336                28,500
Long-term accounts payable                   -                     1,004
Long-term tax payable                        13,295                -
Other long-term liabilities                  744                   738
Total long-term liabilities                  43,375                30,242
Total liabilities                            559,873               720,257
SHAREHOLDERS’ EQUITY
Changyou.com Limited shareholders’ equity    1,117,767             1,029,479
Non-controlling interests                    30,397                29,770
Total shareholders’ equity                   1,148,164             1,059,249
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,708,037           $ 1,779,506
11 Changyou repaid all of the remaining bank loans of $345 million, and restricted time deposits of $355 million that secured these loans were released during the first quarter of 2016.
12 Changyou management had an intention to divest the Company’s interest in MoboTap in the third quarter of 2016. Therefore, the assets and liabilities of MoboTap were recognized as "Assets held for sale" and "Liabilities held for sale," respectively, since the third quarter of 2016.
13 The Company early adopted the Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, retrospectively from the fourth quarter of 2016. The guidance requires current deferred income tax assets and liabilities to be classified as non-current assets and liabilities in balance sheet. As a result of the adoption of this guidance, $4.7 million of current deferred tax assets recorded in prepaid and other current assets, and $24.9 million of deferred tax liabilities were reclassified to non-current as of December 31, 2015.
CHANGYOU.COM LIMITED
RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES
(UNAUDITED, IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
                                                                  Three Months Ended Dec. 31, 2016
                                                                                                      Non-GAAP adjustments
                                                                  GAAP                                Share-based                         Non-GAAP
                                                                                                      compensation expense (a)
Online game gross profit                                        $ 74,464                              (5)                                 74,459
Online advertising gross profit                                   5,533                               0                                   5,533
Cinema advertising gross profit                                   6,919                               0                                   6,919
IVAS gross profit                                                 2,628                               0                                   2,628
Gross profit                                                    $ 89,544                              (5)                                 89,539
Gross margin                                                      69%                                                                     69%
Operating  expenses                                               51,727                              933                                 52,660
Operating profit                                                $ 37,817                              (938)                               36,879
Operating margin                                                  29%                                                                     28%
Income tax expense                                                (9,356)                             0                                   (9,356)
Net income                                                      $ 41,888                              (938)                               40,950
Less: Net income attributable to non-controlling interests        869                                 8                                   877
Net income attributable to Changyou.com Limited                 $ 41,019                              (946)                               40,073
Net margin attributable to Changyou.com Limited                   31%                                                                     31%
Diluted net income attributable to Changyou.com Limited per ADS $ 0.77                                                                    0.75
ADSs used in computing diluted net income attributable to         53,346                                                                  53,785
Changyou.com Limited per ADS
Note:
(a) To eliminate share-based compensation expense measured using the fair value method. The downward adjustment of share-based compensation expense in the current period was a result of fluctuation in the market price for the Company’s ADS.
CHANGYOU.COM LIMITED
RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES
(UNAUDITED, IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
                                                                  Three Months Ended Sep. 30, 2016
                                                                                  Non-GAAP adjustments
                                                                  GAAP            Share-based               Non-GAAP
                                                                                  compensation expense (a)
Online game gross profit                                        $ 74,834          26                        74,860
Online advertising gross profit                                   8,890           0                         8,890
Cinema advertising gross profit                                   9,152           0                         9,152
IVAS gross profit                                                 1,889           0                         1,889
Gross profit                                                    $ 94,765          26                        94,791
Gross margin                                                      70%                                       70%
Operating expenses                                                65,329          (7,176)                   58,153
Operating profit                                                $ 29,436          7,202                     36,638
Operating margin                                                  22%                                       27%
Income tax benefit                                                519             0                         519
Net income                                                      $ 39,043          7,202                     46,245
Less: Net income attributable to non-controlling interests        339             8                         347
Net income attributable to Changyou.com Limited                 $ 38,704          7,194                     45,898
Net margin attributable to Changyou.com Limited                   28%                                       34%
Diluted net income attributable to Changyou.com Limited per ADS $ 0.73                                      0.85
ADSs used in computing diluted net income attributable to         53,219                                    53,796
Changyou.com Limited per ADS
Note:
(a) To eliminate share-based compensation expense measured using the fair value method.
CHANGYOU.COM LIMITED
RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES
(UNAUDITED, IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
                                                                  Three Months Ended Dec. 31, 2015
                                                                                  Non-GAAP adjustments
                                                                  GAAP            Share-based               Non-GAAP
                                                                                  compensation expense (a)
Online game gross profit                                        $ 98,735          47                        98,782
Online advertising gross profit                                   12,483          0                         12,483
Cinema advertising gross profit                                   5,112           0                         5,112
IVAS gross profit                                                 2,833           (2)                       2,831
Gross profit                                                    $ 119,163         45                        119,208
Gross margin                                                      74%                                       74%
Operating expenses                                                79,088          (7,449)                   71,639
Operating profit                                                $ 40,075          7,494                     47,569
Operating margin                                                  25%                                       29%
Income tax expense                                                (8,317)         0                         (8,317)
Net income                                                      $ 38,217          7,494                     45,711
Less: Net loss attributable to non-controlling interests          (248)           (43)                      (291)
Net income attributable to Changyou.com Limited                 $ 38,465          7,537                     46,002
Net margin attributable to Changyou.com Limited                   24%                                       28%
Diluted net income attributable to Changyou.com Limited per ADS $ 0.73                                      0.85
ADSs used in computing diluted net income attributable to         52,846                                    53,928
Changyou.com Limited per ADS
Note:
(a) To eliminate share-based compensation expense measured using the fair value method.
CHANGYOU.COM LIMITED
RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES
(UNAUDITED, IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
                                                                    Twelve Months Ended Dec. 31, 2016
                                                                                    Non-GAAP adjustments
                                                                    GAAP            Share-based               Non-GAAP
                                                                                    compensation expense (a)
Online game gross profit                                          $ 299,537         31                        299,568
Online advertising gross profit                                     29,305          0                         29,305
Cinema advertising gross profit                                     22,583          0                         22,583
IVAS gross profit                                                   8,150           0                         8,150
Gross profit                                                      $ 359,575         31                        359,606
Gross margin                                                        68%                                       68%
Operating expenses                                                  228,722         (8,371)                   220,351
Operating profit                                                  $ 130,853         8,402                     139,255
Operating margin                                                    25%                                       27%
Income tax expense                                                  (21,583)        0                         (21,583)
Net income                                                        $ 147,070         8,402                     155,472
Less: Net income attributable to non-controlling interests          2,123           33                        2,156
Net income attributable to Changyou.com Limited                   $ 144,947         8,369                     153,316
Net margin attributable to Changyou.com Limited                     28%                                       29%
Diluted net income per ADS attributable to Changyou.com Limited   $ 2.72                                      2.85
ADSs used in computing diluted net income per ADS attributable to   53,139                                    53,803
Changyou.com Limited
Note:
(a) To eliminate share-based compensation expense measured using the fair value method.
CHANGYOU.COM LIMITED
RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES
(UNAUDITED, IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
                                                                    Twelve Months Ended Dec. 31, 2015
                                                                                    Non-GAAP adjustments
                                                                    GAAP            Share-based               Non-GAAP
                                                                                    compensation expense (a)
Online game gross profit                                          $ 480,528         37                        480,565
Online advertising gross profit                                     46,267          0                         46,267
IVAS gross profit                                                   4,738           (2)                       4,736
Other gross profit                                                  13,342          0                         13,342
Gross profit                                                      $ 544,875         35                        544,910
Gross margin                                                        72%                                       72%
Operating expenses                                                  383,553         (14,989)                  368,564
Operating profit                                                  $ 161,322         15,024                    176,346
Operating margin                                                    21%                                       23%
Income tax expense                                                  (54,055)        0                         (54,055)
Net income                                                        $ 190,627         15,024                    205,651
Less: Net loss attributable to non-controlling interests            (22,157)        14                        (22,143)
Net income attributable to Changyou.com Limited                   $ 212,784         15,010                    227,794
Net margin attributable to Changyou.com Limited                     28%                                       30%
Diluted net income per ADS attributable to Changyou.com Limited   $ 4.02                                      4.20
ADSs used in computing diluted net income per ADS attributable to   52,881                                    54,280
Changyou.com Limited
Note:
(a) To eliminate share-based compensation expense measured using the fair value method.

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SOURCE Changyou.com Limited

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