Changyou Reports Second Quarter 2016 Unaudited Financial Results

BEIJING, Aug. 1, 2016

Second Quarter 2016 Highlights

• Total revenues were US$129 million^[1], representing a decrease of 36% year-over-year and 1% quarter-over-quarter, in line with the Company's guidance.
• Online game revenues were US$99 million, representing a decrease of 42% year-over-year and 3% quarter-over-quarter, in line with the Company's guidance.
• Non-GAAP^[2] net income attributable to Changyou.com Limited was US$36 million, exceeding the Company's guidance by US$1 million. This compares with US$52 million in the second quarter of 2015 and US$31 million in the first quarter of 2016.
• Non-GAAP net income attributable to Changyou.com Limited per fully-diluted ADS^[3] was US$0.68. This compares with US$0.95 in the second quarter of 2015 and US$0.58 in the first quarter of 2016.

Mr. Dewen Chen, CEO, commented, "Since we set forth our strategy of 'Top Games, Big IP and Mass Marketing' at the beginning of the year, we have worked hard to fortify a strong mobile game pipeline. Starting in the third quarter, we will be releasing more high quality titles to the market. To adapt to the emerging market trends, we are now moving towards a more diversified strategy with a focus on MMORPG, e-sports and card combat games. TLBB PC game and TLBB 3D mobile game are both stable and we will continue to launch new expansion packs to extend the longevity of these games."

Mr. Qing Wei, Chief Games Development Officer added, "The development of our new Legacy TLBB mobile game is on track. The feedback that we have received is that the game has recreated TLBB's PC experience on mobile and meets the expectation of game players. We will continue to make improvements to the game based on testing results and user feedback."

Ms. Jasmine Zhou, CFO of Changyou added, "We are pleased that we arrived at the top end of our revenue guidance and exceeded our non-GAAP net income guidance. Online game revenues remained stable at around $100 million compared to the first quarter. Excluding the impact of foreign exchange, online game revenues are expected to be sequentially stable in the third quarter. With more games coming to the market in the next two to three quarters, we expect online game revenues to gradually recover."

[1] For the second quarter of 2016, on a yearly basis, the depreciation of the RMB against the U.S. dollar impacted our reported financial results. On a constant exchange rate basis, total revenues in the second quarter of 2016 would have been US$9 million higher, down 32% instead of 36% year-over-year.

[2] 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." ARIVA.DE Börsen-Geflüster Kurse Changyou.com ADR -   0,00%

[3] Each ADS represents two Class A ordinary shares.

Second Quarter 2016 Operational Results

• Total average monthly active accounts^[4] of the Company's PC games were 2.9 million, representing a decrease of 34% year-over-year and 3% 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 2.4 million, representing a decrease of 58% year-over-year and 25% 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 9% both year-over-year and 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 quarterly aggregate active paying accounts of the Company's mobile games were 0.6 million, representing a decrease of 57% year-over-year and 25% quarter-over-quarter. The year-over-year and the quarter-over-quarter decreases reflected the natural declining life cycles of the Company's older mobile games.

Second Quarter 2016 Unaudited Financial Results

Revenues

Total revenues were US$129 million, representing a decrease of 36% year-over-year and 1% quarter-over-quarter.

Online game revenues were US$99 million, representing a decrease of 42% year-over-year and 3% quarter-over-quarter. The year-over-year decrease was mainly due to the natural decline in revenues of older games, such as TLBB and TLBB 3D, and a decrease in Web game revenues upon the completion of the sale of the 7Road business during the third quarter of 2015.

Online advertising revenues were US$12 million, representing a decrease of 24% year-over-year and an increase of 46% quarter-over-quarter. The year-over-year decrease was mainly due to fewer PC games being marketed on the 17173 Website. The quarter-over-quarter increase was mainly due to a seasonal pickup typical for advertising in the second quarter of 2016.

Internet value-added services ("IVAS") revenues were US$5 million, representing a decrease of 23% year-over-year and 17% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were a result of lower revenues from mobile internet products in the second quarter of 2016.  

Other revenues, which consist of cinema advertising revenues, were US$14 million, representing an increase of 61% year-over-year and flat quarter-over-quarter. The year-over-year increase reflected the strong growth of China's movie and cinema industry in general.

Gross profit

GAAP and non-GAAP gross profit were both US$87 million, representing a decrease of 39% year-over-year and 1% quarter-over-quarter. GAAP and non-GAAP gross margins were both 68%, compared with GAAP and non-GAAP gross margins of 70% and 71%, respectively, in the second quarter of 2015, and 68% for both in the first quarter of 2016.

GAAP and non-GAAP gross profit of the online games business were both US$74 million, representing a decrease of 42% and 43% year-over-year, respectively, and a decrease of 3% for both quarter-over-quarter. GAAP and non-GAAP gross margin of the online games business were both 74%, compared with 75% in the second quarter of 2015 and 75% in the first quarter of 2016.

GAAP and non-GAAP gross profit of the online advertising business were both US$9 million, representing a decrease of 23% year-over-year and an increase of 61% quarter-over-quarter. GAAP and non-GAAP gross margin of the online advertising business were both 79%, compared with 79% in the second quarter of 2015 and 72% in the first quarter of 2016. The quarter-over-quarter increase in gross margins was due to an increase in online advertising revenues which reflected a seasonal pickup typical for advertising in the second quarter of 2016.

GAAP and non-GAAP gross profit for the IVAS business were both US$2 million, compared with a gross profit of US$1 million in the second quarter of 2015 and a gross profit of US$2 million in the first quarter of 2016.

GAAP and non-GAAP gross profit of the other business were both US$3 million, compared with US$1 million in the second quarter of 2015 and US$4 million in the first quarter of 2016.

Operating expenses

Total operating expenses were US$58 million, representing a decrease of 40% year-over-year and an increase of 9% quarter-over-quarter.

Product development expenses were US$31 million, representing a decrease of 26% year-over-year and an increase of 4% quarter-over-quarter. The year-over-year decrease was due to a reduction in salary and benefits expenses, which reflected a reduction in headcount during the past year and a reduction in severance payments. The quarter-over-quarter increase was due to an increase in share-based compensation expense^[6] compared with the first quarter of 2016.

Sales and marketing expenses were US$13 million, representing a decrease of 60% year-over-year and an increase of 7% quarter-over-quarter. The year-over-year decrease was mainly because of a change in marketing strategy from large-scale offline campaigns in the second quarter of 2015 to a more targeted online marketing approach for promoting new mobile games. The quarter-over-quarter increase was mainly due to an increase in marketing spending to promote new games.

General and administrative expenses were US$14 million, representing a decrease of 39% year-over-year and an increase of 24% quarter-over-quarter. The year-over-year decrease was mainly due to a decrease in share-based compensation expense^[7], as well as a reduction in salary and benefits expenses, which reflected a reduction in headcount during the past year. The quarter-over-quarter increase was mainly due to an increase in share-based compensation expense^[6] compared with the first quarter of 2016.

Operating profit

Operating profit was US$29 million, compared with US$45 million in the second quarter of 2015 and US$34 million in the first quarter of 2016.   

Non-GAAP operating profit was US$33 million, compared with US$52 million in the second quarter of 2015 and US$33 million in the first quarter of 2016.

Other Income

Other income was US$4 million, compared with US$2 million in the second quarter of 2015 and US$4 million in the first quarter of 2016.

Income tax expense

The Company's main operating entity in China is a "High and New Technology Enterprise" and as a result, the entity is entitled to a preferential corporate income tax rate of 15% for the 2015 and 2016 tax years.

Income tax expense was US$5 million, compared with US$8 million in the second quarter of 2015 and US$8 million in the first quarter of 2016.

Net income

Net income was US$33 million, which compares with US$43 million in the second quarter of 2015 and US$33 million in the first quarter of 2016.

Non-GAAP net income was US$37 million, which compares with US$50 million in the second quarter of 2015 and US$32 million in the first quarter of 2016.

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

GAAP and non-GAAP net income attributable to non-controlling interests were both US$0.4 million. This compares with both a GAAP and non-GAAP net loss of US$2 million and US$1 million, respectively, in the second quarter of 2015, and a GAAP and non-GAAP net income of US$0.5 million in the first 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 Inc., the developer of the Dolphin Browser.  

Net income attributable to Changyou.com Limited

Net income attributable to Changyou.com Limited was US$33 million, compared with US$45 million in the second quarter of 2015 and US$32 million in the first quarter of 2016. Fully-diluted net income attributable to Changyou.com Limited per ADS was US$0.62. This compares with US$0.84 in the second quarter of 2015 and US$0.61 in the first quarter of 2016.

Non-GAAP net income attributable to Changyou.com Limited was US$36 million. This compares with US$52 million in the second quarter of 2015 and US$31 million in the first quarter of 2016. Non-GAAP fully-diluted net income attributable to Changyou.com Limited per ADS was US$0.68. This compares with US$0.95 in the second quarter of 2015 and US$0.58 in the first quarter of 2016.

Liquidity

As of June 30, 2016, Changyou had net cash^[8] of US$822 million, compared with US$755 million as of December 31, 2015. 

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

Business Outlook

For the third quarter of 2016, Changyou expects:

• Total revenues to be between US$125 million and US$135 million, including online game revenues of US$90 million to US$100 million;
• Non-GAAP net income attributable to Changyou.com Limited to be between US$25 million and US$30 million;
• Non-GAAP fully diluted net income attributable to Changyou.com Limited per ADS to be between US$0.47 and US$0.56;
• A tax expense adjustment to be made in the third quarter, which may lead to increases in Non-GAAP net income attributable to Changyou.com and Non-GAAP fully diluted net income per ADS attributable to Changyou.com from our current projections;
• Assuming no new grants of share-based awards and at constant share price, share-based compensation expense to be between US$2.0 million and US$2.4 million.

For the third quarter 2016 guidance, the Company has adopted a presumed exchange rate of RMB6.7 = US$1.00, as compared with the actual exchange rate of approximately RMB6.26 = US$1.00 for the third quarter 2015, and RMB6.53=US$ 1.00 for the second 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, August 1, 2016 (7 p.m. Beijing/Hong Kong, August 1, 2016).

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

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 August 1, 2016 through August 8, 2016. The dial-in details for the telephone replay are:

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/.

About Changyou

Changyou.com Limited (NASDAQ: 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. (NASDAQ: 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
		Jun. 30, 2016		Mar. 31, 2016		Jun. 30, 2015
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