Changyou.com Limited Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 4.13 | About: Changyou.com Limited (CYOU)

Changyou.com Limited (NASDAQ:CYOU)

Q4 2012 Earnings Call

February 04, 2013 7:00 am ET

Executives

Angie Chang

Alex Ho - Chief Financial Officer and Principal Accounting Officer

Wang Tao - Chief Executive Officer and Director

Dewen Chen - President

Analysts

Dick Wei - JP Morgan Chase & Co, Research Division

Eddie Leung - BofA Merrill Lynch, Research Division

Wallace Cheung - Crédit Suisse AG, Research Division

Alicia Yap - Barclays Capital, Research Division

Timothy Chan - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2012 Changyou.com Limited Earnings Conference Call. [Operator Instructions] I must advise that this conference is being recorded today, Monday, 4th of February, 2013.

I'd now like to hand the conference over to your first speaker today, Ms. Angie Chang. Please go ahead.

Angie Chang

Thank you for joining Changyou.com to discuss our fourth quarter 2012 results. You may find a copy of our earnings press release, which we issued earlier, on the IR section of our website at www.ir.changyou.com or through the newswires.

On the call today are Mr. Tao Wang, CEO; Mr. Dewen Chen, President; Mr. Alex Ho, CFO; Mr. Xiaojian Hong, COO; and Ms. Wendy Pan, CIO. Mr. Ho will lead off by providing business highlights on behalf of Mr. Wang, and then he will discuss financial results for the quarter just ended. After the prepared remarks, he will be joined by the other officers to answer questions.

Before we continue, please allow me to read you Changyou's Safe Harbor statement. Statements that are not historical facts, including statements about the company's beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore, you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties. The company cautions that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Potential risks and uncertainties include, but are not limited to, the current global financial and credit market crisis and its potential impact on China's economy; the uncertain regulatory landscape in the People's Republic of China; fluctuation in Changyou's quarterly operating results; Changyou's historical and possible future losses and limited operating history; and the company's reliance on Tian Long Ba Bu as its major revenue source. Further information regarding these and other risks is included in Changyou's Annual Report on Form 20-F filed on February 28, 2012, and other filings with the Securities and Exchange Commission.

Now let me turn the call over to our CFO, Mr. Alex Ho. Alex?

Alex Ho

Thanks, Angie. Hello, everyone, and thank you for joining us today. After many years of continuous growth, the online game industry in China is now the largest market globally. In 2012, the industry was built by the strong growth of new segments, such as web games and mobile games, with stable and secular growth of MMO games.

According to the published data announced last month by the General Administration of Press and Publication, GAPP, along with International Data Corporation, IDC, an established information technology research firm, China's online games market grew 34% year-over-year to $9.5 billion in 2012. The report also estimated that the market for the client-based MMO games grew 23% year-over-year to $7.2 billion. The market for web games grew 46% year-over-year to $1.3 billion and the market for the mobile games was up 91% year-over-year to USD 0.5 billion in China.

Despite the slowing of the general economy in China, Changyou's business continued to demonstrate its resilient nature. For the quarter and for the full year, we once again topped our previous financial results. Total revenue for the fourth quarter reached a record $173.5 million, an increase of 5% quarter-over-quarter and 26% year-over-year, exceeding the high end of our guidance by $3.5 million. Online games revenue reached a record $158.9 million, an increase of 5% quarter-over-quarter and 29% year-over-year. Non-GAAP net income attributable to Changyou.com Limited was $75.8 million, which was flat quarter-over-quarter and an increase of 7% year-over-year, exceeding the high end of our guidance by $4.8 million. Total revenues for the full year reached a record $623.4 million, up 29% year-over-year. Online games revenues for the full year reached a record $574.7 million, an increase of 32% year-over-year. Full year non-GAAP net income attributable to Changyou.com Limited was a record $290.5 million, up 13% from last year.

The solid financial performance reflected the continued growth of our long-standing blockbuster MMO games, Tian Long Ba Bu or TLBB and our popular web games, Wartune. All these achievements point to a culture that is -- we entered a -- our gamers, and it is by consistently meeting and exceeding their needs in every game updates and expansion pack that we release that we are able to grow this company.

First, let's take a look at our MMO games. After the release of 24 expansion packs, including the latest one we released on October 25, our flagship game, TLBB, continued to deliver record revenues. The expansion pack released was TLBB's annual major expansion pack called Shen Bing Hai Yu. It introduced a feature targeted at advanced level players, including the game's first-ever underwater battleground, a new score server game play, and new premium items to strengthen the powers of gamers' weapons. Following the release of this major expansion pack, we saw a pick-up in the average playing time and spending level of advanced-level players.

Meanwhile, for more casual players, we continued our strategy from the last 2 quarters of offering giveaway items to players and cutting back on in-game promotions. We also gave players option to add premium items for free by completing certain tasks in the game. As a result, we continued to see higher engagement level from our more casual players and a reduction in the number of low-spending players during the quarter, that was in line with our expectations. We expect to carry out -- to continue to carry out this player segmentation strategy in 2013 to continue to reinforce player loyalty across all levels, so as to further extend the games' lifecycle. In 2013, we expect to release full expansion pack for TLBB, which includes 1 annual major expansion pack.

Next, let's take a look at our web games. In the fourth quarter, DDTank and Wartune continued to be 2 of the most popular web games in China as we continue to tweak the game based on players' feedback during the quarter. These 2 games now account for around 20% of our online games revenue, up from over 15% last quarter. To refresh game content and attract players' interest, we plan to keep releasing updates of these games on a regular basis. The next new updates of DDTank and Wartune will be released in the first quarter of 2013.

For Wartune, we saw a strong growth from overseas markets during the quarter. We are working to bring the game to more countries overseas in the next few quarters and plan to launch the game in Russia in the first quarter of 2013. In addition, we are currently working on a mobile version of Wartune that will allow the game to be played simultaneously on multiple devices. This effort, a part of our ongoing commitment to meet the needs of our gamers and enhance the game playing experience of our games.

For our pipeline in 2013, we plan to launch at least 3 new MMO games and a number of web games and mobile games. This game will include martial arts role-playing games that we have a great track record of making, as well as games in other genre created for new demographic of users. Games that we have recently launched or plan to launch in 2013 include: one, Hai Shen, a 2D web-based sea adventure RPG games developed by 7Road. The game introduced a fantasy realm set in a realistic medieval world and featured diverse game modes, including fleet combat and guild combat. We launched the game on January 24. The feedback on the game play design that we have received since the game's launch has been positive. Two, Dou Po Cang Qiong, DPCQ, an in-house developed 2.5D fantasy martial arts MMORPG that is adapted from a popular Chinese online literature work of the same name. We expect to launch this game in mid-2013.

Three, Grand Chase, a licensed side-scrolling MMO action games that was developed by a Korean game studio and featured Japanese anime style graphics . We expect to launch this game in mid-2013.

Title of other games in our pipeline will be launched at a later date closer to their launches.

Shifting to our 17173 business. We continued to work on expanding and enhancing our game-related new services through our 17173 business for the border gaming community in China. Fourth quarter online advertising revenue of the 17173 business met our expectations. 17173 continues to be the portal of choice for online game advertisers in China and enjoys unparalleled media inference within the gaming community, in light of the solid advertising demand by online game company in 2013.

In January 2013, we wasted [ph] the price of advertisement across all webpage on the 17173 sites. Also, as a part of our medium-term initiative to broaden and extend 17173's media reach even further, during the quarter, we added more game songs and ramped up news coverage in our 2 dedicated news channel for web games and mobile games. Our near-term priority is to attract and further grow the user traffic on this news channel and on 17173.com. Longer term, we aim to grow 17173 into a rising [ph] and active repository of gamers.

In conclusion, we made solid progress in 2012 in our core online games and online advertising business. Our progress reflects largely on a working culture that places the needs of our gamers, front and foremost, in what we do every day. This has led us to achieve a leading position in each of the markets we compete in, be it MMO games, web games or online games media. It has also led us to explore new market opportunity and begin this necessary investment in our human capital early on. With the achievement to date and new talent that we have acquired and trained over the past year, we believe Changyou is well positioned to take advantage of many growth opportunities present in the China online game industry going forward.

This completes Tao's prepared remarks. Let me now walk you through the operational and financial highlights for the quarter.

Operational results. Our operational results in the fourth quarter reflected the growth momentum of TLBB and Wartune. The operational results of our MMO games in China were as follows: one, aggregate registered users for the fourth quarter were 248.1 million, up 11% quarter-over-quarter and 41% year-over-year. Two, aggregate peak concurrent users or PCU for the quarter were 1.1 million, up 1% quarter-over-quarter and down 6% year-over-year. Three, aggregate active paying accounts or APA for the quarter were 2.2 million, down 9% quarter-over-quarter and 31% year-over-year. The decreases reflected a decline in the number of low-spending active paying accounts that did not make a purchase in the fourth quarter of 2012, as we continued the previous 2 quarters strategy of giving away virtual items and reducing in-game promotions in TLBB.

Four, average revenue per active paying account, or A-R-P-U, ARPU, for the quarter was RMB 353,000 (sic) [RMB 353], up 11% quarter-over-quarter and 60% year-over-year. The increases was mainly due to the decline in the TLBB's low-spending active paying accounts as I just mentioned, and TLBB's advanced-level player increasing their spending in the fourth quarter of 2012.

Next, I would like to discuss operational results of 7Road's web games, which includes DDTank and Wartune. One, aggregate active accounts were 55.3 million, down 70% quarter-over-quarter and up 32% year-over-year. The quarterly decline was mainly due to the fourth quarter being a seasonally weaker quarter for web games as web games tends to have a higher concentration of student players. The year-over-year increase in active accounts was mainly due to new gamers on the third-party web platforms playing Wartune in 2012.

Two, aggregate active charging accounts, or ACA, were 1.68 million, up 1% quarter-over-quarter and 2% year-over-year. The increases in active charging accounts resulted primarily from an increase in the number of active charging accounts for Wartune in the fourth quarter of 2012, which was offset in part by a decrease in active charging accounts for DDTank, which is a game that has entered into a relatively mature phase.

Three, average revenue per active charging account or ARCA, was RMB 120, an increase of 20% quarter-over-quarter and 216% year-over-year. The increases was primarily because Wartune generated a higher ARCA than DDTank and because DDTank's ARCA increased, following the release of new updates to the game in the fourth quarter of 2012 that added more virtual item and paying game features.

Financial results. Moving on to discuss our financial results. Total revenue for the fourth quarter of 2012 increased 5% quarter-over-quarter and 26% year-over-year to $173.5 million, exceeding the high end of our guidance by $3.5 million. Online game revenues, which include revenue from our games operations in China, overseas licensing revenue and revenue from 7Road, increased 5% quarter-over-quarter and 29% year-over-year to $158.9 million, exceeding the high end of our guidance by $3.9 million.

Revenue from 7Road were $32.3 million in the fourth quarter, an increase of 21% quarter-over-quarter and 222% year-over-year. The increases in online game revenue was -- were primarily due to the growth momentum of TLBB and Wartune.

Online advertising revenues, which consist of revenue from the 17173 business, were $12.5 million, down 2% quarter-over-quarter and up 1% year-over-year, which is in line with our guidance. The quarter-over-quarter decrease was mainly due to lower advertising spending in the fourth quarter of 2012 due to game companies pushing forward their game launches to the third quarter. The year-over-year increase was primarily -- was mainly due to higher advertising price in 2012, offset by lower advertising spending in the fourth quarter of 2012 due to game companies pushing forward their game launches to the third quarter.

Other revenues, which consist of cinema advertising revenues, were $2.1 million, up 8% quarter-over-quarter and 6% year-over-year. The increases was mainly due to higher utilization rates of cinema advertising resources in the fourth quarter of 2012.

Now, let me provide some more detail about our financials. From now on, most of the factors discussed will be non-GAAP. As a reminder, you can find a reconciliation of these non-GAAP measures in our official earnings release.

Non-GAAP gross profit increased 8% quarter-over-quarter and 24% year-over-year to $145 million. Non-GAAP gross margin was 84%, which compares with 81% last quarter and 85% in the same quarter last year.

Non-GAAP gross profit for the online games business increased 5% quarter-over-quarter and 28% year-over-year to $136.8 million. Non-GAAP gross margin for the online game business was 86% for the quarter, which is the same as last quarter and similar to 87% recorded in the same quarter last year.

Non-GAAP gross profit for the online advertising business decreased 5% quarter-over-quarter and 8% year-over-year to $10.5 million. Non-GAAP gross margin for the online advertising business was 84%, which compares with 87% last quarter and 92% in the same quarter last year.

The quarter-over-quarter decrease in non-GAAP gross margin for the online advertising business was mainly due to increased salary and benefit expenses due to the hiring of more editors in the fourth quarter of 2012. The year-over-year decrease in the non-GAAP gross margin for the online advertising business was mainly due to higher bandwidth cost and increased salary and benefit expenses due to the hiring of more editors in 2012.

Non-GAAP gross loss of other business was $2.3 million for the quarter compared with $6.3 million last quarter and $1.6 million in the same quarter last year. The smaller non-GAAP gross loss of other business compared with last quarter was mainly because there was an impairment provision for advertising resources at cinema circuits of $4 million last quarter. The greater non-GAAP gross loss of other business compared with same quarter last year was mainly due to an increase in the cost of cinema advertising resources in 2012.

Non-GAAP operating expenses were $50.4 million, up 21% quarter-over-quarter and 37% year-over-year. Non-GAAP product development expenses were $21.3 million, up 20% quarter-over-quarter and 39% year-over-year. The quarter-over-quarter increase was mainly due to higher expense on licensed games and an increase in salary and benefit expenses after we hired more game engineers in the fourth quarter of 2012.

The year-over-year increases in product development expenses was mainly due to an increase in salaries and benefits expenses after we hired more game engineers throughout the year of 2012. Non-GAAP sales and marketing expenses were $19.8 million, up 21% quarter-over-quarter and 62% year-over-year. The quarter-over-quarter increase was mainly due to higher advertising spending for the promotion of TLBB's major expansion pack and new games in the fourth quarter of 2012. The year-over-year increase was mainly due to higher advertising spending for the promotion of TLBB's major expansion pack and new games, plus an increase in headcount and related salary and benefit expenses in the fourth quarter of 2012.

Non-GAAP general and administrative expenses were $9.3 million, up 22% quarter-over-quarter and were flat year-over-year. The quarter-over-quarter increase was mainly due to an increase in headcount and related salary and benefit expenses in the fourth quarter of 2012.

Non-GAAP general and administrative expenses were flat year-over-year, mainly because bad debt expenses related to the cinema advertising business in the fourth quarter of 2011 were greater than the year-over-year increase in salary and benefit expenses in the fourth quarter of 2012.

Non-GAAP operating profit increased 2% quarter-over-quarter and 19% year-over-year to $94.6 million. Non-GAAP operating margin was 55% compared with 56% last quarter and 58% in the same quarter last year.

Income tax expenses was $17.7 million, representing an effective tax rate of approximately 18% on a non-GAAP basis, which is similar to last quarter's effective tax rate. Non-GAAP net income before non-controlling interest was flat quarter-over-quarter and increased 11% year-over-year to $80.3 million.

Net income attributable to mezzanine classified noncontrolling interests was flat quarter-over-quarter and increased 307% year-over-year to $4.5 million. The year-over-year increase of $3.4 million was mainly because in the third quarter of 2012, Changyou increased the estimated redemption value of the mezzanine classified non-controlling interest in 7Road, as we explained last quarter. For more detail, please refer to the Financial Information section in our earnings release.

Non-GAAP net income attributable to Changyou.com Limited was flat quarter-over-quarter and increased 7% year-over-year to $75.8 million and exceeded the high end of our guidance by $4.8 million. Non-GAAP net margin attributable to Changyou.com Limited for the quarter was 44% compared with 46% last quarter and 52% for the same quarter last year. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were USD 1.42 this quarter, which was the same as last quarter and up from USD 1.33 in the same quarter last year.

I would now briefly highlight our full year financial performance. For full year 2012, total revenues reached a record $623.4 million, up 29% from 2011. Online game revenue reached a record $574.7 million, up 32% from 2011.

Non-GAAP net income attributable to Changyou.com Limited for the year reached a record $290.5 million, up 13% from 2011. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were USD 5.43, up from USD 4.81 in 2011.

Non-GAAP net margin attributable to Changyou.com Limited was 47% in 2012 compared with 53% in 2011. Shifting to our balance sheet and cash flow positions. As of December 31, 2012, our cash and cash equivalents and short-term investments were $418.4 million, up from $340.6 million as of September 30, 2012.

Operating cash flow for the quarter was a net inflow of $100.9 million. Received in advance and deferred revenue were $43.7 million as of December 31, 2012, down from $49.8 million as of September 30, 2012. The decrease is mainly due to gamers having bought more game cards at the end of September last quarter in advance of the week-long October national holiday in China.

Finally, in terms of business outlook. For the first quarter of 2013, we expect: one, total revenues to be between $168 million and $174 million, of which online game revenues are expected to be between $160 million and $165 million. Online advertising revenues are expected to be between $6 million and $7 million. Two, non-GAAP net income attributable to Changyou.com Limited between $74 million and $77 million. Three, non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited between USD 1.38 and USD 1.44. Four, assuming no new grants of share-based awards, we estimate share-based compensation expenses between $2.5 million and $1 million, reducing our fully diluted earnings per ADS attributable to Changyou.com Limited under U.S. GAAP by USD 0.01 to USD 0.02.

In conclusion, we once again exceeded our financial expectation in the fourth quarter, supported by a well-timed and solid execution of our strategies. Our business continued to generate strong cash flow quarter-to-quarter and year-to-year. This gives us the ability to continue to invest in our future, which mainly involve hiring the best talent possible while simultaneously promoting our games. While this does continue to place mild pressure on our margins in 2013, we are keenly aware of the ongoing need to enhance our competitive position and build our brand in order to capture and benefit from many growth opportunities available in the industry. We look forward to this investment bearing fruit and further increasing shareholder value over time.

This concludes our prepared remarks for today. Operator, we will now open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Dick Wei from JPMorgan.

Dick Wei - JP Morgan Chase & Co, Research Division

My question is on the TLBB ARPU. With the amount of paying user, what is the ARPU concentration? And what would be the comfortable level for the ARPU going into the end of this year?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

Regarding the first answer to the first portion of your question, essentially, in terms of the concentration, the ARPU follows the 80-20 rule. So most of the ARPU is being contributed by the advanced-level players. And then our strategy is to continue to improve the game for the advanced-level players while decreasing or limiting the spending by the lower spending players in order to keep both population of the games to continue to stay with the game and be attracted to come back. And as such, our revenues for this quarter and the fourth quarter increased, while our lower spending players -- number of lower-spending players decreased. This is what led to the increase in the ARPU -- sequential increase in the ARPU quarter-over-quarter.

Wang Tao

[Chinese]

Angie Chang

And then also, we expect to -- or we're planning to launch another major annual expansion pack this year called -- the tentative name is called New TLBB. And for this new expansion pack, we expect that the features will attract a lot -- increase in the large number of the paying users, which would lead to a decline in the ARPU.

Wang Tao

[Chinese]

Angie Chang

Over the long term, our strategy is to increase the number of the -- our core users or the advanced-level players. As for the lower or more casual players, that would either increase or decrease with the launch of our regular expansion packs. Thank you.

Operator

The next question comes from the line of Eddie Leung from Merrill Lynch.

Eddie Leung - BofA Merrill Lynch, Research Division

Just I have a question on your new games for 2013. Could you share with us what are you -- what gave you the confidence that these couple of new games in the middle of the year would be popular among the game users?

Angie Chang

[Chinese]

Wang Tao

[Chinese]

Angie Chang

First of all, for one of the games that we mentioned, Dou Po Cang Qiong, or DPCQ, that game has one -- based on the literary work that is highly popular in China, it's probably one of the most popular. And at that time, the baidu index for that game exceeded 1 million.

Wang Tao

[Chinese]

Angie Chang

And also for this game, this is a martial arts game, which is a highly popular genre amongst Chinese players.

Wang Tao

[Chinese]

Angie Chang

And so for Dou Po Cang Qiong, it's based on a popular theme and also it will include a lot of features that is -- will be popular -- a martial arts features that's popular with players.

Wang Tao

[Chinese]

Angie Chang

And also for this game, it's a game that has been under development in-house for 4 years. And so it has gone through numerous testings and it should be a game that is relatively stable and well-tested game.

Wang Tao

[Chinese]

Angie Chang

And for Grand Chase, it is a game that has a lot of -- it's a Korean game that has a lot of features where players can enjoy, can get a lot of satisfaction from playing the many features within the game.

Wang Tao

[Chinese]

Angie Chang

And we believe, based on our understanding, in China, the demand for this type of game is growing and therefore, that's why we're -- we've licensed and are releasing this game.

Wang Tao

[Chinese]

Angie Chang

And then for Hai Shen, a game that we just launched on January 24, we already received positive feedback on this game. And the game's -- the game metrics is performing slightly above our expectations. We will spend the next 1 to 3 months to do a further modifications and updates to the game. And based on DDTank's -- our experience with DDTank and Shen Qu, we believe that this game will perform well. Thank you.

Operator

The next question comes from the line of Wallace Cheung from Credit Suisse.

Wallace Cheung - Crédit Suisse AG, Research Division

[Chinese] So my question is very simple. So as we've seen the smartphone users has been growing at around 80 million by 2011 to around 300 million by 2012, so what's exactly the impact for Changyou's existing client-based software as well as the web-based games business?

Wang Tao

[Chinese]

Angie Chang

In response to the question, first of all, we -- based on our understanding, the MMO game users and the web game users, there's a lot of overlap with mobile gamers. And so in terms of market share on the gamers' side, it should not be -- have a huge impact. But the mobile games industry is growing very rapidly, and so we have set up 2 independently run business units in charge of working on mobile games. And in terms of the strategic -- and in addition, we plan to seek, look for strategic partnerships in this area. Our target is that in 2013 and 2014, we'll be able to launch our own mobile game products into the market. And also overseas, we will also plan to do mobile games as well. Thank you. Oh, sorry.

Wang Tao

[Chinese]

Angie Chang

And also on the mobile games side, we will continue to expand and try to penetrate into the market. At the same time, on the existing games and blockbuster MMO games, we'll continue to put in the resources needed to maintain those titles and grow those titles.

Wang Tao

[Chinese]

Angie Chang

Because for MMO games, currently, they're not only being -- there is not only competition amongst -- between MMO games and other MMO games, but there is also competition coming in from web games and mobile games.

Wang Tao

[Chinese]

Angie Chang

So therefore, that's why we've implemented this strategy with TLBB where we continue to give out free items and also lower promotions so that our low-spending players will continue to stay with the game.

Wang Tao

[Chinese]

Angie Chang

So for our new businesses, we'll continue to seek for ways to expand. And for our existing games, we will look to reinforce their leading positions to the market. Thank you.

Wallace Cheung - Crédit Suisse AG, Research Division

[Chinese]

Wang Tao

[Chinese]

Wallace Cheung - Crédit Suisse AG, Research Division

[Chinese] So my question is, will 17173 have a special or separate strategy on the mobile Internet as well?

Wang Tao

Okay. [Chinese]

Angie Chang

Okay. First of all, and on 17173 business, we've achieved several things in the last year. First of all, our number of unique visitors have reached the highest point in the history of 17173.

Wang Tao

[Chinese]

Angie Chang

And also last year in September, we opened up 2 new channels: 1 for web games and 1 for mobile games.

Wang Tao

[Chinese]

Angie Chang

And also, we are fully aware of the emergence of the opportunities in the mobile side. And so for 17173, they've already started on several projects internally. And approximately, about 50% to 60% of these projects are related to mobile.

Wang Tao

[Chinese]

Angie Chang

And of these products, this is not just all focused on new services -- the launch of new services, but also it's focused on the traditional media side of the business as well. And so, including the game news and the release of game reviews and so on and so forth. And so these are all projects that we're doing for the mobile.

Wang Tao

[Chinese]

Angie Chang

In line with this strategy, for the headcount for 17173, we plan to increase that from 300 people at the end of this year to 800 people next year. Thank you.

Operator

The next question comes from the line of Alicia Yap from Barclays.

Alicia Yap - Barclays Capital, Research Division

I just have a quick question on the 17173 guidance. So I wanted to get a sense, is this mainly due to the seasonality factors or are we seeing -- losing some market shares to other game portals? And just a follow-up on that is that regarding the margins and expenses, given that you're going to increase a lot of people, so how are we going to look into some of these sales and marketing and R&D costs for the quarter?

Angie Chang

[Chinese]

Wang Tao

Okay. [Chinese]

Angie Chang

For this year, because Chinese New Year is on February 9, and typically, in China, online game companies would not -- will prefer not to launch their games before Chinese New Year because right after the holiday period, gamers may not be interested in going back to these new games or will lose interest in these games. And so that resulted in a lot of the online game companies either pushing forward their launches in the earlier part of first quarter 2013 or pushing it back to the rest of the year.

Wang Tao

[Chinese]

Angie Chang

Compared to last year, last year's Chinese New Year was started on January 22.

Wang Tao

[Chinese]

Angie Chang

And just as -- and as I mentioned just now, the number of unique visitors on 17173 has reached the highest point in its history.

Wang Tao

[Chinese]

Angie Chang

Therefore, at the beginning of this year, on January 1, we have increased the advertising prices of the web pages of 17173.

Dewen Chen

[Chinese]

Angie Chang

And in addition, we also have set a target for the number of unique visitors for 17173 and this target is double that of what we've achieved last year.

Wang Tao

[Chinese]

Angie Chang

But for this, to clarify, for the number of unique visitors that we target, it's not just based on the 17173 website, but it'll be based on all the website and also its related products. Thank you.

Alex Ho

Okay. Let me take the second part of the question then. In terms of the margin and marketing spending. As Tao and Dewen mentioned, and also we mentioned that in the script that we are going to continue to -- our investment into 2013 because we see the number of promising opportunities in the market. And in this -- in 2013, we will be investing in a number of areas such as mobile, mobile area, as well as our platform business. And that's why you will continue to see that our headcount will be increased throughout 2013. And that's one part. And the second part is, as we mentioned in the script, we will be launching quite a rich pipeline for 2013, not only MMO games but web games and mobile games and the like. So we will also need to increase our marketing spending in this area as well. But net-net, I think that overall speaking, in terms of the overall margin, it will put a mild pressure in our margins for 2013, starting from the second quarter of this year. But I think overall, the pressures will be swallowable because we continue to expand our core online game business, as well as online advertising business continue to grow consistently in 2013. Thank you.

Operator

The next question comes from the line of Timothy Chan from Morgan Stanley.

Timothy Chan - Morgan Stanley, Research Division

I just have a quick question on web games. So as the web game market has grown...

Alex Ho

Sorry, we can't hear you.

Timothy Chan - Morgan Stanley, Research Division

Okay. Let me repeat. I just have a quick question on web games. So web games market grew very fast in the past few years, but do you see this growth start to mature this year? And what are the areas within web games that are underpenetrated at the moment?

Angie Chang

I'll translate that question. So his question is about -- okay. [Chinese]

Wang Tao

[Chinese]

Angie Chang

Actually, for the web game market in China, it's still in a changing environment. And last year, we saw a number of other companies like Taobao and Xing Dong also going into this market.

Wang Tao

[Chinese]

Angie Chang

And currently, on the -- in terms of the types of web games, it's still quite concentrated in a number of genres. And so we believe that going forward, we will continue to see new types of web games of different genres entering into the market.

Wang Tao

[Chinese]

Angie Chang

And for the earliest batch of web game companies that have released their games and also their operators, those web game operators, they're -- because of the increase in the advertising cost, they're also under some pressure.

Wang Tao

[Chinese]

Angie Chang

Okay. And so to recap, basically, we've -- we're seeing a number of large companies entering into this market and at the same time, the diversity of the types of web games will continue to increase, as well as some pressure on the earliest entrants in the market. So what we believe that the industry will continue -- the industry dynamic will continue to change. But overall, we believe that the web game industry will continue to grow for a few years.

Wang Tao

[Chinese]

Angie Chang

But because Changyou, we are a game developer, and so as long as we continue to be able to launch good products into the market, we'll be able to maintain our competitive position. Thank you.

Operator

Thank you very much. Ladies and gentlemen, we are sorry that that's all the time we have for questions for today. This concludes the Q&A session. I will hand the conference back to Angie.

Angie Chang

Once again, I would like to thank all of you for joining us on today's call. If you have any follow-up questions, please do not hesitate to contact us. Thank you.

Operator

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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