Novice Investing - Shanda Entertains All Wanderers

Date: Monday 13th 2008f October 2008 10:47:08 AM

Shanda Entertains All Wanderers - 08/16/2006

By: Hari Wibowo

We have talked about Shanda Interactive (SNDA) on various occasion. Shanda reported second quarter earning on 15th August 2006 and while profit fell 40%, it still beat analysts' estimate. For the quarter, Shanda reported net earning of 24 cents per share versus 6 cents estimate. In absolute basis, that is equal to $ 17 Million. Again, while I feel that this is a fantastic result, analysts seem to write about The9 more than they do on Shanda.

Previously, I briefly talked about how lousy revenue was for The9 with $ 2.14 revenue per gamer per month. How about Shanda? As I've pointed out before it released its second quarter earning, Shanda can do better than $ 2.14. What about the actual result? Let's see. Revenue for the quarter clocks in at $ 50.7 Million, a decrease of 25% mainly due to the switch in revenue model. Sales from the MMOPRG ( online gaming division) fell to $ 38.1 Million while active paying accounts fell to 2.2 Million. Doing simple division shows that each gamer forks in $ 5.77 per month to Shanda, which is a better number than The9. Further, Shanda was doing this with an aging title of Mir II and Woool.

Thus, while its avatar-based revenue model makes year over year comparison looks bad, Shanda has actually turned the corner on the second quarter with 24 cents profit. We have pointed out several times that it is even wonderful that Shanda can incur a small loss during this transition period. The journey to profitability here was faster than our expectation. If Shanda can just stabilize its revenue and expense for the quarter, it would have reported $ 0.96 in annual profit. However, this first quarter, Shanda reported revenue of $ 42.6 Million and this second quarter, revenue rises to $ 50.7 Million ( or 19% increase quarter over quarter). The quarter before that, Shanda reported a 5% decrease in revenue quarter over quarter.

What does this means? This simply means that Shanda can sustain its avatar-based revenue model. Survivability will not come into question here. Now, what the company needs to prove is that it is the right revenue model for the company to be the dominant provider of online gaming community.

We believe that Shanda is employing the right strategy. By making the games free (Shanda makes money on the avatar that gamers use), Shanda still boosts significant number of players even for its aging game. The future may look unclear for Shanda in term of gaming pipeline but by employing an avatar-based revenue early, it is one step ahead of its competitor in the online gaming. Not a whole lot of company can sustain its profitability three quarters after giving out its revenue-generated stream for free to its users. This is like Apple Computer giving out iPod for free while making money with i-tunes. But, Shanda did it on the second quarter. There might be bumps for one or two quarters (if there ever is any bump), but longer term view, Shanda shares is a good bargain based on this latest development.

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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 Entertainment Ltd. (SNDA) or any other securities.

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