Giant Interactive - Nice Suprise
The company reported much better than expected results this week and saw a jump in its stock price, versus the general market which was absolutely dismal.
The stock had suffered recently due to changes that the company had made in the monetization structure of its ZT Online game. They made these changes to emphasize purchasing items for daily consumption rather than relying on promotions, allowing smoother and more predictable revenues over time and potentially lengthening the monetization lifespan of the game. As this shift was being made in the last quarter, there was a rather large hit to earnings and the market became skittish over the idea that perhaps these changes may have backfired. The key question was whether these changes would hinder future growth prospects.
I admit that I was getting somewhat concerned about this investment, which I wrote about back in September. The financial hit in Q3 was much larger than I had expected. Despite an overflowing cash horde, strong game metrics, and a CEO with majority ownership, it was not clear to me whether the company could regain its momentum. Coupled with the deteriorating economy and a competitive marketplace, I felt that my investment thesis was being tested. After the Q4 results, I think most of my doubts were put to rest.
Here's the key information:
My takeaways:
Taken together, it looks like GA is in pretty good shape. They have the cash to weather a downturn, and it looks like consumers haven't stopped turning to gaming companies as a cheap source of entertainment. There's still a lot of uncertainty in the market, but I definitely feel better about hanging on to my shares for now.
The stock had suffered recently due to changes that the company had made in the monetization structure of its ZT Online game. They made these changes to emphasize purchasing items for daily consumption rather than relying on promotions, allowing smoother and more predictable revenues over time and potentially lengthening the monetization lifespan of the game. As this shift was being made in the last quarter, there was a rather large hit to earnings and the market became skittish over the idea that perhaps these changes may have backfired. The key question was whether these changes would hinder future growth prospects.
I admit that I was getting somewhat concerned about this investment, which I wrote about back in September. The financial hit in Q3 was much larger than I had expected. Despite an overflowing cash horde, strong game metrics, and a CEO with majority ownership, it was not clear to me whether the company could regain its momentum. Coupled with the deteriorating economy and a competitive marketplace, I felt that my investment thesis was being tested. After the Q4 results, I think most of my doubts were put to rest.
Here's the key information:
My takeaways:
- Revenue growth and margin expansion. Slide 7 of the presentation lays it out pretty nicely. There had been an eye-popping decline in revenue from Q2 to Q3 of almost 47%, but that recoved nicely in Q4.
- Gross and net income margins recovered to the low 80%, where they've been historically. Note that if you back out the sales tax refund of about $4.3M USD, it still translates to net margins of about 70%.
- The company is under a tax holiday and will have a tax rate of 10% in 2009, 11% in 2010, and then the normal 25% in the years after.
- Management stated that they expect the lifespan of the ZT Online to be 5 years. I'm not sure if that means they expect it to continue to grow for another 5 years or that the game will last another 5 years.
- The company repurchased 14.9M shares for total consideration of $97.7M, or about $6.56 per share. They now have outstanding shares of 226M. I found this pretty amazing, since they've already burned through almost 2/3 of their $150M share repurchase authority. At this rate, they'll soon have to increase the size of their plan. Keep in mind that the company just went public in November 2007 for $15.50, where they sold about 60M shares. They basically bought back almost of a quarter of the shares they sold in the IPO just a year ago at more than 50% off, using money they raised from the IPO. That's simply brilliant. It's reminiscent of how Brad Pitt and Edward Norton in Fight Club bragged about "selling rich women their own fat asses back to them" by making premium soap out of liposuction waste.
- Initiated dividend. I suppose this makes sense. They have $740M in cash on their balance sheet, and they run a business that isn't exactly capital intensive. A dividend will only cost them about $40M.
- 3 new game launches in 2009. This is the gravy.
Taken together, it looks like GA is in pretty good shape. They have the cash to weather a downturn, and it looks like consumers haven't stopped turning to gaming companies as a cheap source of entertainment. There's still a lot of uncertainty in the market, but I definitely feel better about hanging on to my shares for now.
posted by Henry at
3:32 PM
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