Novice Investing - Shanda Does Not Interact

Date: Monday 13th 2008f October 2008 10:43:37 AM

Shanda Does Not Interact - 05/18/2006

By: Novice Investing Staff

Shanda Interactive (SNDA) has been featured several times on our column. Shanda reported its first quarter earning late last night with net revenue decreasing 31% to $ 42.6 Million. Earning per share for the quarter was down to $ 0.02. Meanwhile, analysts were expecting revenue of $ 39.77 Million with earning per share of $ 0.07. The profit figure clearly miss expectation.

There are however, a few positives within the earning report. Revenues for across various segments does seem to stabilize on the first quarter of 2006. For example, revenue for MMORPG segment was RMB 225 Million compared with RMB 230.6 Million on the fourth quarter of 2005. While this quarter's revenue was down 31.3% from the same period last year, it was down only 5% sequentially. This is important because the 4Q-2005 is the first quarter Shanda changes it revenue model to avatar-based. A decrease of a mere 5% suggests that Shanda online users are willing to pay, despite the losing popularity of its MIR II games.

Further, Shanda has managed to increase its active paying account to 2.47 million while average monthly revenue per active paying account is $ 3.80 on the first quarter. For gamers, they would have to pay $ 15 monthly to play games such as World of Warcraft (WOW). So far, Shanda can 'extract' 25% of that revenue potential on its second quarter of using avatar-based revenue model. Shanda definitely holds a lot of potential here. If it can squeeze $ 7.50 monthly per active users (half of the cost of playing WOW), revenue would have doubled the current quarter. Profits would probably zoom out to $ 0.30 per share for the quarter or $ 1.20 for the year. But that is still a long way to go since Shanda's new revenue model is on its infancy. Only time will tell.

On the last earning report, we concluded that Shanda will be able to produce profits for the coming quarter. The company has managed to do that, although barely. This, despite the fact that the company increases its sales/marketing budget to $ 8.04 Million from $ 3.34 Million a year ago. Without it, Shanda would have earned $ 0.06 more, handily beating estimate.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Shanda Interactive (SNDA) or any other securities.

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