Wednesday, March 01, 2006

SNDA Q405 Update

SNDA did surprise the public again with a loss in Q405.

The stock writedown of Actoz is inevitable. In Nov 2004, they spent 91.7 million USD for 29% stake in South Korean game developer Actoz, maker of Mir II. They paid 100% premium over market price for that stake. Since then, this South Korean firm's stock has been going down. As of year end of 2005, the overall market value of this firm was only 107 million USD, which implies Shanda has lost about 60 million USD on this investment on mark-to-market basis. This writedown came together with the worst operating quarter, make it looks like a 'big bath' (it is already very bad, won't hurt too much to make it worse).

Back to the free-to-play model, I still believe this is a viable business model, as long as you can ramp up players and stick to your game. Shanda also emphasized that the revenue from games after taking this model does not have a significant decrease than before.In the end, I think it is the quality and popularity of games that really matter, not the paying for free model. There is no free lunch, gamers should be able to figure out it won't make much difference since they need to pay for their gaming experience one way or the other, it does not matter it is monthly cards, point cards, hour cards, or virtual items.

The EZ series don't look so good either. Based on what I read some news reports, some newspapers reported that Shanda actually has abandoned their EZ Station project completely. Instead of selling that DVD like box (in fact that is a modified pc in the shape of DVD players with a remote control), it was said they have teamed up with some hardware manufacturers, who has similar products, to provide contents for their platform. I am not sure how it goes with EZ Mini. As for EZ pod, it seems to be the only hope for the EZ strategy so far. But it is too early to draw any conclusion on its future earning power.

On the cost side, the picture is very ugly. They do not seem to have a sense to control expenses, if you compare SNDA's operating expense with that of NTES,SINA, or SOHU, then you will know how this firm is spending shareholders' money. The balance sheet is getting worse, cash is shrinking, it is funny that the CFO can not even answer the question how much the operating cash flow was in Q405, he said it was 'healthy'.

To conclude, I would sell all SNDA shares I have them. For many people, me included, they will be far better off without ever knowing this company. Unfortunately I did not foresee this disaster when I bought shares on the down turn. I will not touch it again unless there is a turn around is in sight.




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