Credit Suisse Downgrades Changyou.com Amid 'Sluggish Near-Term Outlook'

• Having declined steadily for a month, Changyou.Com Ltd (ADR) CYOU shares have lost 29 percent since January 5.
• Credit Suisse’s Dick Wei downgraded the rating for the company to Neutral, while reducing the price target from $25 to $17.
• Wei expressed concern regarding revenues cut on account of uncertainties in the game business outlook.

Changyou reported its 4Q revenue at $162mn, down 25 percent y/y and 14 percent q/q. Despite the decline, it was better than expected. Non-GAAP net income stood at $46mn, ahead of the Credit Suisse estimate of US$34mn.

The company guided to weak revenues for the next quarter at $120-$130mn, representing a 20-26 percent y/y decline and below the Credit Suisse estimate of $150mn due to “lack of traction in its new game titles and launches of expansion packages,” analyst Dick Wei mentioned.

PC game revenue declined 18 percent y/y in 4Q. the company had earlier decided to not launch any new PC games, and thus PC game revenue is unlikely to recover in the future, Wei said. Changyou added 1,300k monthly active accounts and 300k active paying accounts with new mobile game titles. However, ARPU of paying accounts was down by more than 50 percent q/q due to “the lighter nature of the two games.”

The analyst wrote, “We expect mobile gaming revenue to continue declining by 23% QoQ or 60% YoY in 1Q16, and will only see meaningful recovery in 4Q16 after the launch of new TLBB.”

The company now has a strategy of "Big IP, Top Games, and Mass Marketing" for 2016. Changyou intends to prioritize game quality and focus on making the next hit game. “As a result, we expect a lighter mobile game pipeline,” the Credit Suisse report noted.

The company also plans to continue to explore popular IPs, especially related to TV and movie. “We remain conservative as the track record of converting media IPs to mobile game is weak across the board,” Wei commented.