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Giant Interactive Group, Inc. (NYSE:GA)

Q1 2013 Earnings Conference Call

May 7, 2013 9:00 p.m. ET

Executives

Richard Chiang – IR Director

Jazy Zhang – CFO

Xuefeng Ji – President

Wei Liu – CEO

Analysts

Timothy Chan – Morgan Stanley

Eddie Leung – Merrill Lynch

Jiong Shao – Macquarie

Gloria Yu – Oppenheimer

William Huang – Barclays

Martin Bao – CICC

Mark Marostica – Piper Jaffray

Jialong Shi – CLSA

Thomas Chong – BOCI

Operator

Good morning and good evening, ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group’s First Quarter 2013 Earnings Conference Call.

Please note that all participants are currently in listen-only mode. After the presentation there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question.

Now I would like to transfer the call to the moderator, Mr. Rich Chiang, Giant Interactive's Investor Relations Director.

Richard Chiang

Good morning, ladies and gentlemen. Welcome to the first quarter 2013 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, Chief Executive Officer; Ms. Jazy Zhang, Chief Financial Officer; and Mr. Xuefeng Ji, President.

As we proceed through our prepared remarks, we will refer to our results presentation which can be downloaded from our website at www.ga-me.com. Following the remarks, Ms. Liu, Ms. Zhang and Mr. Ji will be happy to take your questions.

Before we continue, I would like to remind you that statements on this call that are not strictly historical in nature constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates and similar statements and among others, include statements regarding the company’s expectations for sequential growth in the fourth quarter 2012, the ability of the company to release one big title each year, the ability of the talent of game developers and chief game designers to deliver a steady stream of innovative and fun games going forward, the ability of the company to implement its key strategic initiatives with respect to strengthening the company's game development capability and diversifying the company's game portfolio, the ability of the company to become a leader in new game segments such as web game and mobile game segments, the ability of the company to release at least one mobile game later this year, the ability of our game initiatives to carry top-line momentum throughout 2013, the ability of the company to continue to deliver results as designated, the ability of the company to deliver -- to continue to pay dividends based on future cash flows, and the timetable for testing and release of new games and expansion packs in the company's game pipeline.

These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which by their nature are inherently uncertain and outside of our control. Our actual results and financial condition and other circumstances may differ possibly materially from the anticipated results and financial condition indicated in these forward-looking statements.

Among the factors that could cause the company's actual results to differ from what we currently anticipate may include a deterioration in the performance of ZT Online 1 series, and ZT Online 2, unexpected delays in developing expansion packs or in the timetable for testing and launching our games, our dependence on ZT Online franchise which currently account for the majority of our historical net revenues, failure of our web games, MMO pipeline games or other diversification or distribution efforts to grow as successful as expected, uncertainties with respect to the PRC legal and regulatory environments and the volatility of the markets in which the company operates.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results of Giant to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These factors include but are not limited to risks discussed in filings with the Securities and Exchange Commission including our Annual Report on Form 20-F for the fiscal year 2012 as filed with the Securities and Exchange Commission on April 18, 2013, which is available on the Securities and Exchange Commission's website at www.sec.gov. All forward-looking statements are qualified by this cautionary statement and Giant undertakes no obligation to revise or update this information to reflect events or circumstances after today.

In addition, please note that references in the presentation to dollars refer to US dollars.

Now I would like to turn the call over to our CFO, Jazy Zhang. Jazy?

Jazy Zhang

Thank you, Rich.

Good morning and good evening everyone. I will begin by reading the opening remarks from our CEO, Ms. Liu.

We have made a good solid start in the first quarter of 2013. Despite no new game launches and a weaker seasonality associated with the Chinese New Year holiday, we were able to deliver solid top-line figures driven by the strong performance of ZT Online 2 and its micro-client version. Similarly, our impressive bottom line also demonstrated our ability and commitment to constantly improve efficiency.

2013 is shaping up to be a promising year for Giant as we will also be seeing a good deal of transformation within the company. We will continue our implementation of key strategy initiatives to fortify our already formidable game development capability and further diversify our game portfolio. In anticipation, we have made key strategic moves over the past quarter to strengthen our R&D capability.

Firstly, the recent appointment of Mr. Xuefeng Ji as President has reflected our company's product-driven strategy. Secondly, our R&D structure which is the heart of all our games now beats stronger than ever. We possess one of the most capable game development teams in China with a talented pool of developers specializing in MMO game, web game and mobile game development, and a growing team of chief game designers to lead projects, allowing us to deliver a steady stream of fun and innovative pipeline games going forward.

These impressive development and product teams were built with the goal to fully execute our focus strategy on elite games and to release one big title every year. This strategy will begin to pave the future path of Giant in which we will rely less and less on individual titles and diversify our revenue over a variety of potential hit games. We would like to take the opportunity reiterate that MMO games remain a fundamental and viable component of our business. Giant has been an innovator in this segment for a number of years, especially in monetization and game play. As market consolidation continues, many of our peers have increasingly turned their focus on web games or mobile games which require less financial resources and shorter development cycles.

According to recent findings from the game industry regulators in China, despite the recent emergence of mobile games, game operators in China are still more likely to benefit from MMO game monetization than mobile games. Based on data from the GAPP, there are approximately 70 million to 80 million MMO game players in which up to 15% or 10.5 million to 12 million are active paying accounts. This holds up well against mobile games in which they can boast 200 million players but only a low single digit in terms of percentage as active paying accounts. Mobile games are indeed growing rapidly, but it is still a viable strategy for us to continue putting out great MMO titles given the higher revenue potential and decreasing competition.

While MMO games remain our core business, we will replicate our proven strategy of focusing on elite titles for our web games and mobile game development. We believe that our proven approach will also gradually set us apart as a leader in these new market segments.

In terms of our business operations highlights, we are glad to report that World of Xianxia, our latest MMO game offering, has begun official closed beta testing on April 19 and has gone off to a great start, surpassing our own expectations. The launch is accompanied by our first round of major marketing campaign. This closed beta testing version improved the overall game play compared to the previous small-scale beta testing version. We expect a steady pickup in terms of registered users and revenue contribution in the coming quarters. And we are confident that this game will become our largest catalyst this year.

In addition, our first web game, The Sky, is gradually being rolled out and has received positive feedback. This game is an ARPG, incorporating certain core game plays from the ZT Online series. The Sky is available now on Qihoo360's web game platform and we plan to distribute this game on other platforms in the coming quarters. We're expecting the launch of our second web game, Genesis of the Empire, in the third quarter 2013.

On the mobile game front, we are planning to release at least on mobile game later this year. We expect these initiatives will carry our top-line momentum throughout 2013.

We have also added new contents for ZT Online 2. We launched a new expansion pack for both the full client and micro-client versions in March with new maps and game play. Since the launch of ZT Online 2, we have been listening to gamers and taking their feedback into consideration. And our next expansion pack, which is scheduled to be released in the second half this year, will include new functions based on gamers' feedback.

In terms of overseas expansion, we plan to further expand our international horizon on two fronts. First, we will continue to work with foreign game publishers for our existing and pipeline games on PC, web and mobile platforms, whichever is most suitable to the local market. Secondly, we will actively seek licensing opportunities to publish major foreign titles in China, forming co-development partnerships and investing in foreign game studios.

Given the strong performance of our existing games and implementation of our key strategic initiatives, together with our unique studio incentive structure and other operational systems in place, we are confident that we will continue to deliver results and give value back to our shareholders such as our regular semi-annual dividends.

Last but not least, I would like to thank Mr. Shi for his vision and tremendous contribution. Giant's solid foundation was built under his leadership and we will strive to take the company to new heights.

This concludes the opening remarks from our CEO, Ms. Liu.

And now I will walk you through our operational metrics and financials for the first quarter 2013.

Please refer to slide eight of our presentation. Overall we are pleased to see a solid start to 2013.

In terms of our key operational metrics in the first quarter, active paying accounts or APA were down 1.8% sequentially and up 3.3% year over year to 2.26 million. Average revenue per user or ARPU was RMB238, similar to the previous quarter and up 4.2% year over year. Average concurrent users or ACU were 690,000, down 1.7% sequentially and up 1.2% year over year. Lastly, our peak concurrent users or PCU were down 3.8% sequentially and down 0.3% year over year to 2.28 million.

The year-over-year improvements in APA and ACU were mainly driven by contributions from new games while ARPU increased year over year as users became more eager to spend as they progressed through ZT Online 2. The sequential decreases in APA, ACU and PCU were all due to the weak seasonality during the Chinese New Year holiday.

The healthy performance of our core game portfolio contributed to our positive financial performance for the quarter which is illustrated on slide nine and 10 of our presentation. Net revenue for the quarter was $92.2 million, up 0.2% sequentially and up 12.6% year over year. Our core business online game revenue grew 0.3% sequentially and 13.8% year over year to $89.7 million. Online game revenue was only up slightly on a sequential basis as many gamers traveled during the Chinese New Year holiday and there were no new game launches during the first quarter. The year-over-year increase in online game net revenue was primarily due to the continued growth of ZT Online 2 and the contribution from its micro-client version.

Gross profit for the quarter was $79 million, down 0.5% sequentially and up 11.2% year over year. Gross margin was 85.6% in the first quarter 2013 which remained approximately the same compared with the fourth quarter 2012 and the same quarter a year ago.

Total operating expenses for the quarter was down 18.6% sequentially and up 4.3% year over year to $20.9 million. As a percentage of revenue, total operating expenses were 22.6% for the first quarter 2013 compared to 27.8% in the fourth quarter 2012 and 24.4% in the first quarter 2012. The sequential decrease in operating expenses was mainly due to the decrease in R&D, sales and marketing and G&A expenses, while the year-over-year increase in operating expenses was mainly attributable to the increase in R&D and sales and marketing expenses in the first quarter 2013, offset by a decrease in G&A expenses.

R&D expenses for the quarter were down 19.6% sequentially and up 5.4% year over year to $12.5 million. As a percentage of revenue, R&D expenses were 13.5% in the first quarter 2013 compared to 16.9% in the fourth quarter 2012 and 14.5% in the first quarter 2012. The sequential decrease in R&D expenses is mainly attributable to the decrease in share-based compensation expenses or SBC in the first quarter 2013 and higher yearend bonus accrued for our R&D staff in the fourth quarter 2012 as compared to the first quarter 2013.

Share-based compensation expenses are mainly associated with the restricted shares granted at the end of November 2011 and the company adopted -- as the company adopted the accelerated accounting method to amortize such expenses, SBC generally decreased from period to period. The year-over-year increase was primarily due to the increased personnel costs as a result of the additional hiring of developers to work on our new products and an increase in software amortization, partially offset by a decreased SBC for the reason I just mentioned.

Sales and marketing expenses for the quarter were down 21.9% sequentially and up 34.7% year over year to $4.9 million. As a percentage of revenue, sales and marketing expenses were 5.3% this quarter compared to 6.8% in the previous quarter and 4.4% in the first quarter 2012. The sequential decrease in sales and marketing expenses is mainly due to the lack of major marketing campaigns as there were no new game launches in the first quarter 2013. And the year-over-year increase was mainly due to the higher marketing expenses incurred in the first quarter 2013 to promote the new expansion packs for ZT Online 2 and ZT Online Green Edition.

G&A expenses for the quarter were down 7.5% sequentially and down 16.8% year over year to $5.1 million. As a percentage of revenue, G&A expenses were 5.5% this quarter compared to 6% last quarter and 7.5% in the same quarter a year ago. The sequential decrease in G&A was mainly due to the higher yearend bonus accrued in the fourth quarter 2012 as compared to the first quarter 2013 and decrease in SBC as a result of the accelerated accounting method adopted to amortize such expenses, while the year-over-year decrease in G&A expenses was mainly due to the decrease in SBC and depreciation expense related to our rights to use a parcel of land in Zhuhai, Guangdong Province which we acquired in 2009 and sold in 2012.

Moving on to our bottom line, net income attributable to the company's shareholders during the quarter was up 294.3% sequentially and up 11.6% year over year to $52.5 million. The net margin for the quarter was 56.9% compared to 14.5% in the previous quarter and 57.4% in the first quarter 2012. The sequential increase in net income attributable to the company's shareholders was mainly due to the company recording an investment loss of RMB240.7 million related to a 2008 investment in 51.com, while there was no such loss in the first quarter 2013.

Excluding such investment loss, net income attributable to the company's shareholders for the fourth quarter 2012 was RMB323.4 million and the sequential increase in net income attributable to the company's shareholders in the first quarter 2013 was 1%. The sequential and year-over-year increase in net income attributable to the company's shareholders excluding investment loss were primarily due to the company's general business growth.

Non-GAAP net income attributable to the company's shareholders during the quarter was down 2.1% sequentially and up 6.3% year over year to $65.2 million. This number excludes non-cash share-based compensation expenses and impairment loss of our 51.com investment. Non-GAAP net margin was 59.8% compared to 61.2% in the previous quarter and 63.4% in the first quarter 2012. Basic and diluted earnings per ADS for the quarter were $0.22 and $0.21 respectively on a GAAP basis and $0.23 and $0.22 respectively on a non-GAAP basis.

Moving on to our balance sheet on slide 11, as of March 31, 2013, our cash and cash equivalents and short-term investments totaled $483.9 million compared to $430.6 million as of December 31, 2012. The sequential increase was primarily due to the growth of the company's game operations.

In February 2013 we announced a cash dividend of $0.42 per ADS or ordinary share. The ordinary cash dividend is payable to shareholders of record at the closing of trading on May 20, 2013 US Eastern Time. The total cash payment will be approximately $100.5 million. After this dividend payment, our new semiannual cash dividend will start in 2013. The payment announced and dates are subject for approval by our Board of Directors and compliance with applicable laws.

We are pleased with our performance this quarter and we expect revenue for the second quarter of 2013 to moderately increase as compared to the first quarter of 2013 as revenue from World of Xianxia ramps up gradually.

That concludes our prepared remarks. Once again thank you for joining us today. We will now open the lines for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions].

Your first question comes from Timothy Chan from Morgan Stanley. Please ask your question.

Timothy Chan – Morgan Stanley

Good morning. First of all, congratulations on the promotions of Ms. Liu and Mr. Ji. And I have two questions if I may.

According to some reports, World of Xianxia had a pretty strong start with 100,000 gamers on the first day of launch. Maybe could you share with us the progress of the game now, where are we, and how does that compare to ZT Online 2 at the similar stage? And I have a second question. Thank you.

Jazy Zhang

Great. Thank you, Tim, for your question.

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. For World of Xianxia and actually for all our games, unfortunately we don't disclose individual metrics for each game. But for World of Xianxia, it definitely surpassed our own internal expectations during the past two, three weeks. It has already become the best new game launch in China this year. So we're very proud of that.

Now comparing with ZT 2, ZT 2 had the luxury of leveraging a famous IP whereas World of Xianxia is a brand-new IP on its own. So while the game is very important from our strategic standpoint and is our new flagship game, it's hard to compare them on an apples to apples basis.

Timothy Chan – Morgan Stanley

Great. Thanks. My second question will be on The Sky. Since you have launched that on Qihoo's platform, how would that compare to the micro-client version of ZT Online which is [Xianjin Online], since the two games are operating on the same platform? Thank you.

Jazy Zhang

Great. [Chinese language spoken]

Xuefeng Ji

[Interpreted]. Comparing The Sky with the ZT 2 micro-client version both on Qihoo's platform, The Sky has just recently entered a small-scale test on Qihoo's platform. And so far we can see that the games themselves, the very big difference between the micro-client version of ZT 2 and The Sky, which is a pure web game. The micro-client version of ZT 2, although it's very user-friendly in the beginning for the web game players, once they dive deeper into the game, it resembles more of a hard-core MMO game just like the full ZT 2. So it offers a much deeper game play and more substantial content.

So far The Sky has done pretty well, and we will continue to improve the game based on feedback we gather from our partner Qihoo360 and plan to launch it on other platforms at around June or end of second quarter.

Operator

Your next question comes from Eddie Leung from Merrill Lynch. Please ask your question.

Eddie Leung – Merrill Lynch

Hey. Good morning guys. Thank you for taking my question. I have only one question, more about your mobile game strategy, because you just mentioned that in the upcoming couple of quarters towards the end of this year there will be one mobile game. So, wondering going forward in terms of the development process in terms of the R&D staff, so on and so forth, could you share some metrics with us and the strategy to launch mobile games?

Jazy Zhang

Great. Thank you, Eddie, for your question.

[Chinese language spoken]

Wei Liu

[Interpreted]. For our mobile strategy, this is going to be a very important focus for us this year, and this year with the goal of forming our internal R&D teams for mobile development. We're looking to form two or three mobile teams and release one or two games this year. And in terms of strategy, you know, we are going to continue to do our focus strategy on elite games and not just push out a large quantity of mediocre games.

We're going to, by the end of this year, I think we're going to have around 100 developers on mobile internally. And starting from last year we also began investing in external teams as well. We invested in two smaller teams last year and their games are underway to be launch soon afterwards as well.

Eddie Leung – Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from Jiong Shao from Macquarie. Please ask your question.

Jiong Shao – Macquarie

Good morning. Thank you very much for taking my questions. Sticking to the program, I have two questions as well. The first question is on the -- sort of on the high level. You talked about the paying ratio for the PC games and paying ratio for the mobile games. Could you talk about the paying ratio for the web games as well and as well as the ARPUs for these three types of games. And in three, five years' timeframe, do you think relatively speaking, how big is each segment within the overall gaming industry? And strategically, you think web games is just transitioning or do you think it's a huge market with a long-term potential? That's the first long question.

Second question is quick, is on the financial, given that you launched a number of games in the rest of the year in web games and in mobile games, do you also talk about the marketing earlier in your prepared remarks? I was wondering, margin-wise, how should we think about that for the rest of the year? Thank you very much.

Jazy Zhang

Great. Thank you, Jiong, for your questions.

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. For MMO versus web games and mobile games, first of all, the paying ratio among the different formats and genres, it really depends on each individual game. Now MMOs are already very well-established. So the metrics are very transparent, but -- and clearly easily understood. But for mobile, this segment is just starting off and it's very early on this stage and its development including payment methods. So the paying ratio and payment method should become more mature and should increase as we go forward.

Speaking on the ARPU on these different formats and genres, generally speaking, especially on the client games, it depends on how hard-core or how casual the game is. Now on web games, sometimes it's more about how convenient it is, the game appeals to gamers and how convenient it is for them to take, which also leads to shorter lifecycles for some of these web games. But that's just the trend there.

But in about three or -- in three years or over the long term, we feel that the MMO or client-based games, even though their growth rates are slower now than in previous years, the market size is still growing. Lots of our peers are focusing more and more on web and mobile games, which provides even more opportunity for us in the MMO segment as there's less competition for us, as we continue to keep delivering good MMO games.

The web games will still have a market -- also have a place in the market as long as PC still exists. Even with the emergence of mobile games, it's definitely going to see high growth rates, but mobile is not going to replace MMOs and web games at least over the next couple of years. So.

Jazy Zhang

Okay. So I, Jiong, I will answer your second question which is regarding the margins for the remaining of this year.

Even though the margins in terms of gross margin, operating margin and net margin will fluctuate a little quarter over quarter, but for 2013 on average we expect gross margin to be around 86% and operating margin to be somewhere between 60% and 65% and net margin 50% to 55%.

Operator

Your next question comes from Andy Yeung from Oppenheimer. Please ask your questions.

Gloria Yu – Oppenheimer

Good morning. This is Gloria Yu asking question on behalf of Andy Yeung. We have one question.

In the first quarter we have noticed that APA and ACU both declined. Given that a newly-launched World of Xianxia and also Sky gradually ramped up, should we expect the declining trend to reverse in the coming quarter? Thanks.

Jazy Zhang

Great. Thank you, Gloria.

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. Yes. As you mentioned, during the first quarter our user metrics were down due to weaker seasonality during the Chinese New Year holiday. Especially in our ZT games, most of the gamers are older, so they were busier during the national holidays as they traveled and spent time with their families. But yes, now that we're launching World of Xianxia, this should help our user metrics growth this year. But a word on The Sky, because we cooperate The Sky, it's a web game, because we cooperate this with web game platforms, we may not be able to consolidate their user metrics with our results.

Gloria Yu – Oppenheimer

Thank you.

Operator

Your next question comes from William Huang from Barclays. Please ask your question.

William Huang – Barclays

Good morning. Thank you for picking my call and congratulations to Ms. Liu and Mr. Ji. I have two questions. My first question is about your guidance. You guide a moderate increase on top line. Can you please elaborate a bit more details like how much percentage of revenue should we expect from World of Xianxia and also what do you expect for the performance of existing games like ZT Online 2 the micro-client version? I have a follow-up question.

Jazy Zhang

[Chinese language spoken]

Wei Liu

[Interpreted]. Yes. For the second quarter revenue guidance, our ZT games are performing very stably. And World of Xianxia, it was launched to official closed beta on April 19. So in the second quarter it will not have a full quarter worth of contribution. And because we're just starting out, the goal is to gather users into the game right now and not monetize too aggressively in the beginning. As Mr. Ji mentioned earlier in his big hard-core MMOs, usually users will, you know, spend more gradually as time goes on and they become more comfortable with the game and progress through the game further. So as we roll out the World of Xianxia, this contribution will increase for us gradually.

And another key is that, to take into account, is that in the second quarter our online game revenue, our core business, is -- will see very healthy growth. But we are going to see some decrease in licensing revenue which leads to our a little bit more conservative moderate growth guidance.

William Huang – Barclays

Okay. I just want to follow up on World of Xianxia. According to a couple of local press interview with your game chief developer, it seems like your game wants to create balance in game system and target those very traditional and very hard-core MMO players. But given that those -- the market has been very competitive and those gamers usually have been [inaudible] to at least one or two big MMO titles right now, so what is Giant's strategy to acquire those gamers in the next few quarters? Thank you.

Jazy Zhang

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. For World of Xianxia, based on our initial testing results and user feedback, you know, gamers have unanimously said that this game is most balanced traditional item based MMO in the marketplace these days. So we're very confident that this game can do very well.

In terms of the features of the game, the graphics, the interaction, the social features, the game play, we're very confident in the design of the game. Now how to ultimately get users from other games, well, we just have to design the best game that we can and let gamers see, you know, the positive aspects of the game and make their own judgment for them to come into the game.

Now World of Xianxia is our new 3D flagship game, so it is indeed a very important focus for us this year. And we're very confident that we can get users from some of our rivals in the game marketplace these days.

Operator

Your next question comes from Martin Bao from CICC. Please ask your question.

Martin Bao – CICC

Thank you for taking my question. I have a question regarding the ongoing new client game strategy. As we know that client game market, especially the user base, is not a fast-growth track. So for our new games in the next few years, will we focus more on the demand from our existing client base digging deep into the demand of the existing client base or we would like to expand our client base? Which of these two strategies will be the main growth driver? Thank you.

Jazy Zhang

Great. Thank you, Martin.

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. For MMO markets, actually, you know, we can see that the MMO users is still growing these years. Now obviously not as fast as before, but it's still growing nonetheless.

In terms of the supply of MMO games, there's a major difference these days as well. During its heyday a couple of years ago, you would see three new MMOs being released everyday. But nowadays you might see only 30 to 40 MMOs releasing per month. So the MMO users aren't going away but there's definitely less competition, less supply of new MMO games. So we are presented with a great opportunity to keep growing our share of the MMO segment of the market.

Now we're definitely going to, you know, treat MMOs as our core business. It's our core competence, where we have the most experience for. As you remember, ZT offers the best large-scale PK or battle of any game in the market. And, you know, the gamers who love this type of play, there is no substitute for them in the marketplace. So we have to drive that to try to keep these players happy. But at the same time, go after new players and release games that target our rival games as well, and try to growing our market share. So what we understand, that is, you know, the taste and evolving taste and preferences of gamers, and we are very confident that we can continue to grow in the segment.

Operator

Your next question comes from Mark Marostica from Piper Jaffray. Please ask your question

Mark Marostica – Piper Jaffray

Yes, thanks for taking my question. Nice job in the quarter. My question is related to World of Xianxia, and the strategy around adding servers. It seems that compared to ZT 2's launch for official closed beta, it seems that you're taking a different tack in terms of server additions for World of Xianxia in so far as adding more servers each week than was the case with ZT 2. I'm just trying to understand why that has been the strategy. And it seems to have resulted in a significant increase in free servers over the last week. So perhaps you can just shed some light on the server rollout strategy for World of Xianxia. Thanks.

Jazy Zhang

Thank you, Mark, for such in-depth question. Thank you for the opportunity for us to clarify some misconceptions.

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. So as we just commenced official closed beta testing for World of Xianxia, because World of Xianxia is a 3D game, so the capacity of users in each server [shard] is much lower than the 2D ZT 2 when we launched in similar timeframe. For world of Xianxia, each server [shard] holds about a 7,500 gamers whereas ZT 2 holds over 40,000 concurrent users.

So during the launch of World of Xianxia, we're definitely opening more [shards] and servers compared to when we launched ZT 2 back in the day. And for World of Xianxia, we're opening servers once there is more demand. So you're going to see an influx of more and more servers.

Mark Marostica – Piper Jaffray

Great. Thanks for that question. It's helpful.

And then just one last follow-up regarding Glorious Mission, I think you mentioned that you're planning to target engineering testing in Q2. Do you have a sense at this point when that game will be launched? Will it be a 2013 launch or should we be looking at the 2014 for the official launch of Glorious Mission? Thank you.

Jazy Zhang

[Chinese language spoken]

Wei Liu

[Interpreted]. Glorious is targeting end of second quarter for engineering testing. And based on how the results of that engineering testing goes, we will determine when will be the best time to launch that game. But we hope we can achieve that soon later this year.

Operator

Your next question comes from Jialong Shi from CLSA. Please ask your question.

Jialong Shi – CLSA

Hi, good morning. Thanks for taking my call. I have one question. I noticed on the balance for your intangible assets actually surged 72% in the past quarter. So just wonder if this kind of increase was caused by any acquisitions you guys have done in the past quarter or if it is due to any down-payment for game license.

And also the advance from distributors dropped in terms of the amount in previous quarter. So could you give some color on there as well? Thank you.

Jazy Zhang

Great. Thank you, Jialong. I will answer your questions.

With respect to the increase in intangible assets, this is because previously we recorded the upfront license fee payment for our license games under other assets. And in Q1 we reclassified this amount to intangible assets because the upfront license fee payment was related to exclusive rights to distribute foreign gains in China and we were required to do such a reclass on our balance sheet.

With regard to your second question, advances from distributors declined by almost 50% in Q1 compared to Q4. This is because at the end of last year we informed our distributor that we were going to raise price at the beginning of this year, so our distributors [stocked up] at yearend.

Operator

Your next question comes from Thomas Chong from BOCI. Please ask your question.

Thomas Chong – BOCI

Hi, good morning. Thanks for taking my question. I have one question. Given the success for the micro-client version for ZT 2 in Qihoo's platform, are you guys planning to launch the micro-client of World of Xianxia in Qihoo's platform as well? Thanks.

Jazy Zhang

Great. Thank you, Thomas.

[Chinese language spoken]

Xuefeng Ji

[Interpreted]. For World of Xianxia, we plan to release a micro-client version after open beta tests later this year, after more established version of the game is released. And as for platforms, we are open to all good platforms out there in the marketplace even though Qihoo is definitely a established good partner for us so far.

Thomas Chong – BOCI

I see. Thanks. I will get back to the queue.

Operator

As there are no further questions at this time, I would like to hand the conference call back to Mr. Rich Chiang. Please continue.

Richard Chiang

Thank you again for joining us today and we look forward to talking to you about our progress in the near future. Thanks. Have a nice day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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