Despite drop, company's shares rise 7.4% to $17.77

Profits at Chinese online games outfit Shanda fell 40% to $16.7 million on sales down 25% to $50.7 million in the second quarter vs. a year earlier, following its decision to give many of its games away for free.

But shares of the Nasdaq-listed company were rewarded with a boost Wednesday, up 7.4% to $17.77 in after-hours trading from a close of $16.55, as the wider effect of its sales strategy began to show through.

At the end of last year, the Shanghai firm began giving away games including “The Legend of Mir II,” “The World of Legend” and “Magical Land” to create wider interest in value-added services such as add-on weapons and higher playing levels.

Shanda said that average revenue per user was up 50% in the second quarter and that net profits were up 10% on the first three months of 2006.

Company, which aims to raise half its revenues from music and movie downloads within five years, revealed that revs in this sector dropped to just $3.7 million in the period.

Follow @Variety on Twitter for breaking news, reviews and more