Perfect World's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Perfect World (PWRD)

Perfect World Co., Ltd. (NASDAQ:PWRD)

Q1 2013 Earnings Conference Call

May 28, 2013 9:00 p.m. ET

Executives

Joanne Deng – IR Manager

Robert Xiao – CEO

Vivien Wang – VP, IR and Corporate Communications

Kelvin Lau – CFO

Analysts

Timothy Chan – Morgan Stanley

Mark Marostica – Piper Jaffray

Jialong Shi – CLSA

[Benny Wong] – Bank of America

George Meng – Macquarie

Thomas Chong – BOCI

Andy Yeung – Oppenheimer

William Huang – Barclays Capital

Muzhi Li – Citigroup

Nick Ning – 86Research

Operator

Hello, ladies and gentlemen. This is [Ben]. I’ll be the operator for this conference call.

I would like to welcome everyone to Perfect World Co., Limited's First Quarter 2013 Earnings Conference Call.

All lines have been placed on mute to prevent background noise. 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. In fairness to other callers, please keep your questions limited to one and then you are free to rejoin the queue.

Now I would like to turn the call over to Ms. Joanne Deng, Investor Relations Manager at Perfect World. Ms. Deng, please proceed.

Joanne Deng

Thank you, operator, and thank you all for joining us today for Perfect World’s first quarter 2013 earnings release conference call. We distributed our unaudited earnings release earlier today. You may find a copy of the press release on our official website or through the newswire.

Today you will hear from Mr. Robert Xiao, our CEO, who will give us a brief overview of the quarter and a brief update on our business. After that, Ms. Vivien Wang, our Vice President of Investor Relations and Corporate Communications, will take us through some of our latest operational developments. And then she will pass the call to Mr. Kelvin Lau, our CFO, who will take you through our financial performance in the first quarter 2013. Following the prepared remarks, Mr. Chi, Mr. Xiao, Mr. Lau and Ms. Wang will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but not limited to those outlined in our public filings with the SEC, including our annual report on Form 20-F.

For more information about these risks and uncertainties, please refer to our filings with the SEC. Perfect World does not undertake any obligations to update any forward-looking statement as a result of new information, future events, or otherwise except as required under applicable law.

Our earnings release and this call include discussions of certain non-GAAP financial measures. Our earnings release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on our website at www.pwrd.com under the Investor Relations section.

I would now like to turn the call over to Robert.

Robert Xiao

Thank you, Joanne. Thank you all for joining us today.

Our first quarter top line results came in line with our expectations. We continued to focus on developing new content for portfolio and pipeline and slowdown in promotional activities during the quarter. As we expected, the overall performance of our existing games were softer in the first quarter, but we are very pleased with the recent progress in our pipeline development. We look forward to bringing many of the exciting titles in the future pipeline for players including the highly anticipated Swordsman Online and DOTA 2, our recently-announced 3D MMORPG Holy King, and a number of web and mobile games.

We are very pleased with the recent progress made by our R&D team in China. In mid-May we launched our open beta testing for Saint Seiya Online, a 3D MMORPG adapted from the famous comic series Saint Seiya. Recently we also launched several web games and mobile games. We are actively investing in this area and we plan to bring more web games and mobile games to players throughout the year.

Swordsman Online, our self-developed 3D MMORPG is now in the final stages of development as we fine-tune details of the game. DOTA 2, a world-famous title, with a unique mix of action, RTS and RPG game play is also part of the diverse lineup of titles we expected to bring to players in China.

In addition to those exciting titles in China, our overseas studios also achieved great progress in pipeline development. At the end of April we launched open beta testing for English, French and Germany versions of Neverwinter in the US and Europe. This MMORPG developed by Cryptic Studios which is our subsidiary in the US has met with warm reception by our players. Our specialized studios in China and abroad are not only essential to produce highly quality entertainment for our gamers worldwide but also critical to our global strategy.

Again our global strategy is one of our key competitive advantages and we have established a leading position in the overseas market through our extensive overseas network which covers over 100 countries and regions and generate over one-fourth of our total revenues. Recently we continued to strengthen our global presence by launching more games throughout all overseas subsidiaries and our overseas partners. Additionally, we further expanded out our overseas operation through our subsidiaries in Korea and Southeast Asia.

Through the continued development of global operating network, we look forward to providing more high-quality games and services to players all over the world in the future. We believe that our continued effort to develop our pipeline, solid global R&D capabilities and extensive global operating network will translate into new and exciting entertainment for game players worldwide, a new growth driver for our business for the remainder of 2013 and beyond.

I will now pass the call to Vivien who will take us through some of our latest operational developments. Vivien?

Vivien Wang

Thank you, Robert.

In addition to bringing our new game Saint Seiya Online to our gamers in China, we recently, as Robert mentioned, we're also working on a number of expansion packs for our existing to lengthen their lifecycles and ensure the long-term sustainability of our business. During the quarter we released Return of the Crouching Dragon for Chi Bi. More recently we released the [CDF] for Forsaken World, Mountain Might for Return of the Condor Heroes and World Conquest for Zhu Xian.

We also expanded on our portfolio of web games. We launched the 2D turn-based cartoon-style web game Adventure in a Free Kingdom and the 3D dancing web game Touch during the quarter. Shortly after the quarter we launched the 3D strategy war epic web game Legend of Chu and Han and 2D turn-based cartoon-style web game Gourmet Adventure.

In addition, we recently [launched] some of our mobile game [two-players] including the card game Legend of Chu and Han, the SLG game and the 2D turn-based RPG game Return of the Condor Heroes.

Meanwhile, we continue to make progress in our overseas business. During the quarter we began to offer Battle of the Immortals in Korea through our Korean subsidiary and launched the Turkish version of Blacklight Retribution through our European subsidiary.

After the end of the first quarter, besides the strong review of Neverwinter in the US and Europe as Robert mentioned, we also released the simplified Chinese, traditional Chinese and Japanese versions of Torchlight 2 through our subsidiaries and partners in Asia, and launched the Turkish version of Forsaken World through our European subsidiary. In addition, we launched the Forsaken World in Vietnam through our overseas partner.

Moving forward we will continue our dedication to delivering innovative, high-quality entertainment to gamers in China and across the world.

I will now pass the call over to Kelvin for a review of our financials.

Kelvin Lau

Thank you, Vivien. Now for the first quarter 2013 financials.

Total revenues were RMB624.5 million in 1Q13 compared with RMB679.9 million in 4Q12 and RMB718.5 million in 1Q12. Online game operation revenues, which include domestic and overseas online game operations, were RMB556.2 million in 1Q13 compared with RMB599.7 million in 4Q12 and RMB665.1 million in 1Q12.

In the first quarter, we Company continued to slow down in-game promotional activities and primarily focused on content development of our portfolio and pipeline.

ACU for games under operation in Mainland China was approximately 554,000 in 1Q13 compared with 620,000 in 4Q12 and 804,000 in 1Q12. The decrease from 4Q12 was mainly due to adverse seasonality factors affecting user traffic in 1Q13.

Licensing revenues were RMB30.1 million in 1Q13 compared with RMB36.5 million in 4Q12 and RMB49.2 million in 1Q12. The decrease from 4Q12 was mainly due to a decrease in usage-based royalty fees in overseas markets in 1Q13.

Other revenues were RMB38.2 million in 1Q13 compared with RMB43.7 million in 4Q12 and RMB4.2 million in 1Q12. Most of the other revenues were associated with Torchlight 2, a popular pay-per-install game developed by Runic Games, our majority-owned subsidiary based in the US.

Cost of revenues was RMB146.6 million in 1Q13 compared with RMB157.3 million in 4Q12 and RMB127.1 million in 1Q12. An impairment associated with certain of our smaller games was charged off in 4Q12, whereas there was no similar cost in 1Q13.

Gross profit was RMB477.9 million in 1Q13 compared with RMB522.6 million in 4Q12 and RMB591.4 million in 1Q12. Gross margin was 76.5% in 1Q13 compared with 76.9% in 4Q12 and 82.3% in 1Q12.

Operating expenses were RMB344.9 million in 1Q13 compared with RMB510.2 million in 4Q12 and RMB356.6 million in 1Q12. The decrease in operating expenses from 4Q12 was mainly due to decreases in sales and marketing expenses, R&D expenses, goodwill impairment, and general and administrative expenses in 1Q13.

R&D expenses were RMB181 million in 1Q13 compared with RMB230.9 million in 4Q12 and RMB179.4 million in 1Q12. The decrease from 4Q12 was primarily due to a decrease in staff cost.

Sales and marketing expenses were RMB96.6 million in 1Q13 compared with RMB159.7 million in 4Q12 and RMB101.4 million in 1Q12. The decrease from 4Q12 was mainly due to a decrease in advertising and promotional expenses in 1Q13. We did not launch any major new game or release any major expansion pack in 1Q13.

G&A expenses were RMB67.3 million in 1Q13 compared with RMB78.8 million in 4Q12 and RMB75.8 million in 1Q12. The decrease from 4Q12 was mainly due to a decrease in staff cost.

Goodwill impairment was nil in 1Q13 compared with RMB40.8 million in 4Q12 and nil in 1Q12. A goodwill impairment associated with our Japanese subsidiary was charged off in 4Q12, whereas there was no such charge in 1Q13.

Operating profit was RMB133.1 million in 1Q13 compared with RMB12.4 million in 4Q12 and RMB234.8 million in 1Q12. Excluding the share-based compensation charge and the goodwill impairment, non-GAAP operating profit was RMB149.8 million in 1Q13 compared with RMB67.1 million in 4Q12 and RMB256.6 million in 1Q12.

Total other income was RMB34.2 million in 1Q13 compared with RMB75.6 million in 4Q12 and RMB21 million in 1Q12. In 1Q13, we did not recognize as much government grant subsidy income as in 4Q12.

Income tax expense was RMB33.5 million in 1Q13 compared with RMB1.1 million in 4Q12 and RMB47.8 million in 1Q12. The increase from 4Q12 was mainly because an R&D super deduction was recognized during the annual tax filing for some of our PRC entities in 4Q12. The increase from 4Q12 is also a result of the increase in the operating profit in 1Q13.

Net income attributable to the company’s shareholders was RMB131 million in 1Q13 compared with RMB86.4 million in 4Q12 and RMB209.8 million in 1Q12. Excluding the share-based compensation charge and the goodwill impairment, non-GAAP net income attributable to the company’s shareholders was RMB147.6 million in 1Q13 compared with RMB141.1 million in 4Q12 and RMB231.6 million in 1Q12.

Basic and diluted earnings per ADS were RMB2.70 and RMB2.69, respectively, in 1Q13 compared with RMB1.79 and RMB1.78, respectively, in 4Q12, and RMB4.52 and RMB4.38, respectively, in 1Q12. Excluding the share-based compensation charge and the goodwill impairment, non-GAAP basic and diluted earnings per ADS were RMB3.05 and RMB3.03, respectively, in 1Q13 compared with RMB2.92 and RMB2.9, respectively, in 4Q12, and RMB4.99 and RMB4.83, respectively, in 1Q12.

In terms of financial guidance, based on our current operations, total revenues for the second quarter of 2013 are expected to be between RMB356 million and RMB687 million, representing an increase of 5% to 10% on a sequential basis. This takes into consideration the anticipated additional revenue contribution from the recent launches of Saint Seiya Online in China and Neverwinter in the US and Europe.

This concludes our prepared remarks for today. We're happy to take your questions now.

Operator, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And the first question comes from the line of Timothy Chan. Please ask your question.

Timothy Chan – Morgan Stanley

Good morning. Thanks very much for taking my question. My question is related to Saint Seiya Online. I believe this is one of the best new games launched in China so far this year. Could you maybe talk more about the performance so far? And how does that compare to your expectations? And would you expect this title to become a new -- a major revenue driver in the second half?

And finally also on your mobile games as well, I understand that you have already launched quite a few mobile games so far, and we would love to hear more about the performance, and what do you see the mobile games that are more preferred by gamers in China? Is it social games, [touch] games or [inaudible] games? Thank you very much.

Robert Xiao

Thanks, Tim, for the question. Our policy is not to disclose and discuss any performance of individual games. But what I can tell you is Saint Seiya is up to our expectations, basically is performing well. We have a few big titles to launch and Saint Seiya obviously is the first one to launch this year, and so far so good.

For the mobile game, I think we believe that the mobile space is a big space. And we've been deferred for a while, but starting from this quarter we started to, you know, launch some web -- mobile games ourselves. We basically look at the market itself. We think we have to invest a little bit more and we have to really get into the mobile space, start to develop our own things. And we're going to continue to do that and this is, you know, a pretty serious commitment to the mobile space so far.

Operator

The next question comes from the line of Mark Marostica calling from Piper Jaffray. Please ask your question.

Mark Marostica – Piper Jaffray

Yes, thank you. Could you give us a sense of your timing for launches of your key games and your pipeline, mainly Swordsman Online and DOTA 2?

Robert Xiao

Swordsman Online actually is very close. It's, you know, in the final stage of polishing. We expect to launch it very soon.

And DOTA 2 actually was on the Chinese server closed beta testing starting end of April. And then we think -- we're fine-tuning. We're not expecting anything within, you know, pretty soon, but we're fine-tuning. We probably, whenever we feel this is the right time and we tune it toward the Chinese market, because you understand that, you know, overseas players and Chinese players are having sometimes completely different behavior and, you know, likelihood. So we're still tuning, getting feedback. There are people playing in the closed beta testing now. We expect that the testing will last for a while.

Also for the, you know, the next two quarters, maybe three, we're going to have another, you know, Holy King, it's a 3D MMORPG, will be launched. And also the Legend of the Condor Heroes will be launched as well. So we anticipate in the next two or three quarters we will have several things lining up for the market to see.

Operator

And your next question comes from the line of Jialong Shi calling from CLSA. Please ask your question.

Jialong Shi – CLSA

Hi. Just to follow on that previous question, I remember in previous conference call you guys mentioned in public would launch Swordsman Online in June. I just want to clarify if you stick with that date. And also have a follow-up question.

Robert Xiao

I think we -- we believe we announced that it's going to be mid-2013, right? So, you know, we are expecting mid-2013. Excuse me, I -- because, you know, there's policies and guidelines, so we're not at the time to announce, you know, the [open date] at this point of time yet.

Jialong Shi – CLSA

I see. And also regarding your mobile and web game, just wondering how many mobile and web game, respectively, you guys have launched so far into the year. And also can you give us a rough idea like how much monthly gross revenue for your individual web and mobile game? Thank you.

Robert Xiao

Okay. For the browser web game space, so far we launched four different games. Starting earlier this year we gradually launched something we developed for a while. We're still looking for the key in how to tune into hot game in the web space, in the browser game space.

At the same time, you know, we already launched three different mobile games so far and been launched, you know, not too far ago. So we're still monitoring the performance. Most of them are still on their testing. We're expecting in the next quarter I can come back to give you more clearer picture on how this thing will do.

So far we believe that these are two very important certain application areas we're looking at other than the traditional client-based space. We are definitely getting into more of the mobile game space. Browser-based we, you know, we started a little longer ago and we believe we are ready to launch something more significant toward the end of this year.

Operator

[Operator Instructions]. And the next question comes from line of [Benny Wong] calling from Bank of America. Please ask your question.

[Benny Wong] – Bank of America

Hi. Thank you for taking my question. My first question comes from the ARPU trend. Can management share with us some color on the ARPU trend this quarter and going forward? And also can you give us any color on the C&C operations during the last quarter? Thank you.

Kelvin Lau

Thank you. Regarding the ARPU trend, I would say the ARPU trend in Q1 this year is quite stable as compared with Q4. As what we mentioned, I think we remember in our last earning call we slowed down monetization activity for our games in Q4 last year and also we did the same thing in Q1 this year; we slowed the monetization activity for existing game because we [did not have] new game launch. So the ARPU trend compare I think the past two quarters I think should be quite stable.

Regarding the C&C performance, I think C&C right now the operation in Japan is quite stable. We are still operating some of our MMORPG and also licensed some Korean games in Japan. So far so good. I think right now the performance improvement is I think pretty much with our budget we did at the beginning of this year. Yeah. Thank you.

Operator

And the next question comes from the line of George Meng calling from Macquarie. Please ask your question.

George Meng – Macquarie

Hi, good morning everyone. Thank you very much for taking my question. My question is related to mobile. So just on, first, on a high level, you know, now we already see like mobile games that had their growth revenue of over 50 million or 60 million a month in China. So we just want to hear like your strategies regarding mobile, especially are you going to focus more on self-development or more investment in maybe smaller studios?

Just philosophically, what do you think, as an MMO incumbent, what's your advantage and disadvantages over the smaller, you know, mobile -- dedicated mobile studios? And do, you know, Perfect World will focus more maybe, you know, mobile, focus more on like bigger games and maybe spend longer on R&D but also aiming at longer lifecycle? And I have a follow-up. Thanks.

Robert Xiao

Well, that's a great question actually. A lot of people are asking questions about the mobile. We believe mobile definitely is the future in the game space. And for us, we're doing our own development as well as looking for smaller studios to invest. I think mobile games is a little bit different from traditional client-based or even broader-based game because mobile game can, you know, the spectrum of different types of games can go pretty wide, can be very, very small and, you know, single-payer, very simple thing, or it can be very complicated.

You know, to answer your question about our own advantages, obviously we are a company with a long history of developing high-quality graphics, more complicated based kind of games. And we believe that advantage can definitely move to mobile space. And that's why we have to utilize whatever we do the best, you know, to get into the mobile space.

But at the same time we realize that the market space is much bigger, so we're not stopping any investment in that area and we've been, we have been, you know, assessing, searching for different studios and eventually we have made some investment as well.

Thank you.

Operator

As a reminder, in fairness to other callers, please keep your questions limited to one and rejoin the queue by pressing star 1.

And we'll now move to the next question in queue from the line of Thomas Chong calling from BOCI. Please ask your question.

Thomas Chong – BOCI

Hi, good morning everyone. I have a couple of questions. The first question is regarding your investments in mobile. I just want to see the number of R&D staff in the first quarter and how should we expect the number to go up at the end of this year. And should we expect the additional R&D staff basically doing mobile games? And then I have a follow-up. Thank you.

Robert Xiao

I think we have been putting, you know, more and more staff into the mobile space. Basically we expect the number of people involved in mobile development will increase. But again, you know, developing mobile games is different from developing client-based games because mobile games turn out to be smaller, the lifecycle is shorter, and then the frequency of changes in the design is much more than client-based.

So it's more like very flexible smaller groups or, you know, developing small projects, and then some of the project can turn into really big project and take a little bit longer. So it's very hard to estimate, you know, for individual projects how many staff will move into. But overall, you know, for the trend, it's very clear, because we are stepping into the mobile space; we definitely will see the increase of the number of staffs in the mobile space in terms of development.

Operator

And the next question comes from the line of Andy Yeung calling from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Good morning. Thank you for taking my question. My question is about your expense level, particularly to R&D spending and sales and marketing expenses. I guess, you know, it seems like R&D spending have come down a little bit in the first quarter. Was there a staff reduction? And also given your R&D investments in mobile and web games, how should we think about R&D spending and also your sales and marketing spending given your game launch schedule?

Kelvin Lau

Thank you, Andy. The decrease in R&D expenses in Q was mainly because we capitalized I think some of the R&D expenses in relation to Saint Seiya, Neverwinter and Swordsman Online. As I mentioned before, under US GAAP we are allowed to capitalize some of the R&D expenses here. These R&D expenses are we needed to all those games which already started closed beta testing like Saint Seiya, Neverwinter and Swordsman Online in Q1. So the major reason for the decrease is mainly because of the capitalization of R&D expenses.

Vivien Wang

And also another reason for the R&D, you know, decrease in the R&D staff cost is because we paid a special yearend bonus in Q4 which didn't happen in Q1.

Kelvin Lau

Thank you.

Operator

And our next question comes from the line of William Huang calling from Barclays Capital. Please ask your question.

William Huang – Barclays Capital

Hi, good morning. Thank you for taking my call. My question is about your other revenue. Can you comment the current performance for Torchlight 2 since the game is one-time subscription based model released in 4Q last year. Well, the Q1's performance seems to be okay, so how should we expect the performance going forward? Thank you.

Kelvin Lau

Thank you for the question. Okay. In the other revenue, this includes several sources of income including Torchlight 2 and some other revenue. Let me explain to you a little bit.

Torchlight 2 was officially launched in the US in Q3 last year, so you can see other revenue increased quite a lot in Q3 last year. You're right, Torchlight 2 is pay-per-install, I think more like one-time fee in nature [piece of game]. So in [inaudible] Q3 the revenues gradually go down -- went down Q over Q. In fact Torchlight 2 revenue in Q1 compared with Q4 last year decreased because it's already I think two quarters I think past the official launch.

But you can see the other revenue in Q1 compared to Q4 increased. It's mainly because we have another small studio in US called Unknown Studio which launched small another pay-per-install games called Natural Selection 2 in Q4 last year. So they generated revenue and according to the contract we have the right to increase our shareholdings from minority shareholder to majority shareholder in Q1. So we exercised this right and became the majority shareholder of Unknown Studio and started to consolidate the Unknown Studio financial statement.

So the revenue generated from this Natural Selection 2 game revenue was reflected in other revenue. So this is the major reason for the increase in other revenue in Q1.

Operator

The next question comes from the line of Muzhi Li calling from Citigroup. Please ask your question.

Muzhi Li – Citigroup

Hi, good morning. Thanks for taking my questions. Would you please give some guidance for the margin trend in both gross margin and operating margin for the rest of the year? Thank you very much.

Kelvin Lau

Our policy is we are not going to give any guidance on our margin. We just give guidance on the revenue.

I think I can give you this, I mentioned before that this quarter, Q2 this year, there will be some pressure on margin. The major reason is we have some big title launches in this quarter with Saint Seiya, Neverwinter, maybe Swordsman Online. So we will incur -- in fact we already incurred quite a lot of sales and marketing expenses to promote these big titles. So some pressure will be on the margin, I mean operating margin, in this quarter. Thank you.

Operator

The next question comes from the line of [Benny Wong] calling from Bank of America. Please ask your question.

The line of [Benny Wong] calling from Bank of America. Your line is now open.

[Benny Wong] – Bank of America

Sorry. Thanks for taking my question. Sorry. Just a quick follow-up on the ARPU trend. Earlier management mentioned that we have slowed down the monetization of some of the games, but then this quarter we noticed that revenue dropped 8% quarter over quarter and ACU dropped about 10%. So I was thinking that, is it that you mean does the ARPU remain stable, but do you mean that the decline is smaller or is it that it's just flat? Just want to get some color on in terms of whether you mean a slight sequential decline or do you mean just flattish on that. Thank you.

Kelvin Lau

What I mean is the ARPU I think comparable is stable. I think there's no significant fluctuation in the ARPU. So whether it's down by 8% or it is down by 10%, I think it's quite reasonable. Thank you.

Operator

And the next question comes from the line of George Meng calling from Macquarie. Please ask your question.

George Meng – Macquarie

Hey. Thank you very much for taking my question again. I just want to follow up on my previous mobile game question. So we noted that you are actually publishing a new mobile game called This is War or [Chinese Language Spoken] which is, you know, a Clash of Clans type game. And just want to understand like what's the timeline here and in terms of competition. There are so many, you know, mobile games of this type being developed at this moment. And also as a publisher, I just want to understand like how do you book the gross revenue or net revenue or -- and also, finally, just want to understand your revenue expectation of mobile and web game by the end of this year in terms of contribution. Thanks.

Robert Xiao

Well, I think that is, you know, that game actually was a first try for us to license some other developer's game. This is definitely one of our, you know, series of actions of getting into the mobile space. We launched our own developed games, at the same time, you know, we searched for games we think is good, having potential. So we published both so that we can accumulate more experiences and understand the market a little bit more. So I wouldn't, you know, detail on any expectation on any of these games, but eventually our true expectation throughout all these initial try is to, you know, really put us in the space first.

Of course we try to find the best games we can find to publish and to really test the water. But eventually, you know, we're going to continue to do more. We're going to continue to invest and develop our own games. At the same time, we're going to continue to look for good mature games out in the market and try to license them and publish. So this is the right time, I hope it's not too late, but this is the right to start to do this kind of activity. And we believe throughout the year you will see the level of, you know, this kind of self-development, also licensing and publishing activity will increase. That's basically our commitment to get into the mobile space.

Thank you for the question.

Operator

And the next question comes from the line of Nick Ning calling from 86Research. Please ask your question.

Nick Ning – 86Research

Hi. Thanks for taking my questions. So I just would like to get management's view on how to sustain the user activity for our games and reduce the attrition rate after commercial operation. I mean is there any difference between our previous ways of game operations in terms of monetization strategy and investing approach or is there a change in KPI to evaluate our game operation team or development staff [inaudible]? Thanks.

Kelvin Lau

I think we are -- continue to adjust the KPIs and the measurement toward the performance of a game. For mature game, I mean for games been there for relatively long time, obviously our focus would be, you know, try to improve the lifecycle, where we want those games to last a little bit longer. So one of the things is to reduce the monetization ratio but at the same time to offer more content to the, you know, the players, you know, playing those games for a longer time. So that strategy actually is, you know, for every game it's been there. But for detail kind of KPI for the team, there are always some, you know, tune-up adjustment along the way. So I wouldn't say there is a major change in that space.

I think since we have more titles to publish and, you know, for newer games we're going to, you know, basically put more effort in making it available and improve the services and improve the quality of the game to attract more users, so we can afford to let our games to slow down a little bit. Thank you.

Operator

The next question comes from the line of Muzhi Li calling from Citigroup. Please ask your question.

Muzhi Li – Citigroup

Thanks for taking my follow-up. I want to ask about the R&D expenses. In the formal release it says the decrease from 4Q was due to the staff costs. Is that because of the less bonus paid or because of the people in the company?

Kelvin Lau

Yeah, I answered this question I think already. The decrease in our revenue expenses in Q1 is not because of the decrease in our R&D headcount. Two reasons. One is the accrued, as I said, the amount of bonus by the end of last year Q4. So this type of special bonus did not accrue by the end of Q1 this year, so decrease in the salary or bonus is reason number one.

Reason number two is we started to capitalize some of the R&D expenses in relation to all those games we already started the closed beta testing like Saint Seiya, Neverwinter and Swordsman Online in Q1. So reason number two is the capitalization of the R&D expenses in Q1. Thank you, Muzhi.

Operator

The next question comes from the line of William Huang calling from Barclays. Please ask your question.

William Huang – Barclays Capital

My question is about guidance. Just want to clarify that your sequential 5% to 10% 2Q growth is almost driven by two new games, Saint Seiya Online and Neverwinter, or do you see any kind of rebound from any existing titles or meaningful monetization from mobile or web games? Thank you.

Kelvin Lau

In the guidance we already considered all the factors including all the new game launches, including MMORPG, web games, mobile games and also our current performance of our existing games. But I think bear in mind that our new game launch like Neverwinter just launched by the end of April just in North America and Europe, not in China, and also our second big title Saint Seiya just officially launched on 28th of May -- 26th of May.

Robert Xiao

16th.

Kelvin Lau

16th of May. So the revenue contribution from Saint Seiya is only about one-and-a-half month. And also at the initial stage of all those new games, normally I think the revenue conversion will be lower -- the revenue contribution will be lower. So I think all these factors are already considered when we give the guidance to the market. And also I would say existing game like Zhu Xian, Perfect World II, Forsaken World, they're stable right now in terms of ACU and also the revenue contribution. So I think we already considered all those factors already.

Robert Xiao

I think one of the things I want to add on to whatever Kelvin just said, I don’t want to give everybody the impression that our old games are gone. It's actually every year our old games are actually adding more, you know, expansion packs every year. So whenever there's expansion pack, there is more content, and there will be more people coming back. And those are important factors for our, you know, revenue rebound and whatever we calculate into our formula.

Kelvin Lau

Thank you.

Operator

And the next question comes from the line of Thomas Chong calling from BOCI. Please ask your question.

Thomas Chong – BOCI

Hi. I have a follow-up question regarding the overall industry trend for web games and mobile games. I think in the medium term, should we expect the launch of web games and mobile games are incremental to your revenue? How should we look at the longer-term trend? Should we expect there will be cannibalization between mobile games and web games? And on top of that, given Perfect World is very strong in overseas operations, should we expect your mobile games and web games will be launched in overseas market after the success in China? Thanks.

Robert Xiao

The last question first. The answer is sure. It's a big yes. We are a global company and all products is ready for the global market. So whenever we have good product, we, you know, no matter where, we develop it.

And then the follow-up answer would be we are not only developing mobile and browser games in China. We are developing, you know, started to develop everywhere whenever there's a possibility, whenever we have a studio who has some capability or time to start to get into that space.

I think for the general longer-term trend, I will put it this way. You know, our strategy is very simple. We're looking at the mobile and browser game market, but at the same time the traditional client-based MMORPG is still very important and long-lasting areas we're focusing on. So whatever we want to do is actually to build a portfolio. The product portfolio is covering, you know, starting from very high end, high-quality, sophisticated, you know, PC-based client MMORPG down to probably more casual-looking, smaller-sized and, you know, flexible, you know, widely distributed mobile games.

So that is a rather wide spectrum. What we want to do is to utilize our existing development capability and see in which of the areas we can get in. And we found that traditionally client-based MMORPG, yes, we definitely have an edge. We're going to stay there. We're going to focus on this area. At the same time, we do have capabilities we can leverage to develop better browser games. At the same time, we look at the mobile space, it's the same thing.

So we are, you know, doing things across the spectrum, much wider than before, but it doesn’t mean we're stating any part become the, you know, future dominant. If you really want my view, in the longer term, my view is all three areas of these games would, you know, be very important part of our overall product portfolio.

And then during our developing that, again we're not only developing in China. We're developing everywhere, like our traditional client-based MMORPG. And I think we want to continue that success and we really believe that's the future for us. Thank you.

Operator

Next question comes from the line of Nick Ning calling from 86Research. Please ask your question.

Nick Ning – 86Research

Hi. Thanks for taking my follow-up question. So we already heard from this call basically how we do in this mobile game, like licensing, self-development and strategic games [inaudible] type of studio you're getting. But to conclude, how should we look at what would be the biggest advantage for Perfect World in mobile game space comparing to advertising market as we see this market is getting very crowded? I remember seeing somewhere that some media quoted Robert as saying that gamer data accumulated over the years could be our advantage, but how that could pay out. Thanks.

Robert Xiao

All right. You read my new script. Thank you very much for the question.

I think, yes, I agree the mobile space is getting very crowded these days. But if you really look at the teams on the market, majority of them are, you know, five, ten very young inexperienced guys developing very simple applications. They're hoping they can develop some killer application and getting rich overnight. That will happen to some people, but that will happen, you know, one out of 10,000 probably.

So for us, we're not getting that kind of activity or that level of development activity. We are getting into, you know, some of the applications, game applications that have certain, you know, barriers, not easy to get in, because we have very experienced people who understand consumer, who understand game players, who understand how to create, you know, story lines, how to create beautiful -- most beautiful graphics. And that is not a few fresh graduate can understand.

And we have technology. I think if you see that so many games are pouring into this market, but if you look at that, more sophisticated games are collecting more attention and collecting more money because, you know, after all people are looking for quality stuff, okay, people who will pay for quality.

So if you're really looking at sophistication, not only on the storyline but also on the graphics, on the technology, on the game play itself, on the, you know, beautiful design, those are the areas we have advantages. That's definitely true. So that's why we believe in this space we definitely have a chance and, you know, many of our past experiences have been applied at this point of time, even though we're testing -- I have to say we're applying testing and adjusting and see how we can do it better. But that's why we're also looking for studios out there, because there are, you know, one out of 10,000 people or, you know, lucky or smart enough to be able to create something which is very good. So we want to do that as well.

So this doing both I think basically can give us better kind of a balanced approach to get into the space. And again, you know, we are very confident that this will be one of future, you know, our future [inaudible] and we'll get some very good result in the future. Thank you for the question.

Operator

[Operator Instructions]. And the next question comes from the line of Jialong Shi calling from CLSA. Please ask your question.

Jialong Shi – CLSA

Hi. Thanks for taking my follow-up question. I have a question about DOTA 2. You started closed beta testing recently. Just wondering if you can give us some colors on its performance during testing.

And also a big picture question, for this kind of online battle arena game market, your competitor's game [inaudible] seems very dominant in this category. Just wondering what sort of strategy you will use to penetrate this potential also very competitive game segment. Will you try to partner with a domestic battle game platforms like [Ho Fung] to operate or at least to promote DOTA 2? Thank you.

Robert Xiao

Well, our promotional activity has been, you know, going on the way and I think our focus at this point of time is not to, you know, compare with any competitors. But I think whatever we're focusing on is to really fine-tune the game itself, the game play, the -- not the quality, but the appeal, and in-game kind of, you know, sort of the customized thing for fit into the Chinese players. Because one of the things we believe to make a game like this to be successful in a sustainable way is to provide, number one, highly customized feel and appeal to our Chinese players.

Number two, providing the, you know, the best kind of services people can expect. So that require a lot of, you know, feedback collection and analysis and really working with some individual players and some groups in the space because, you know, there is professional teams and professional players, and we're working with many of them to try to fine-tune the quality of the game. So we're not in a hurry to really, you know, do the open beta, but we want to make sure that this thing when we, you know, really openly release it, open it for everybody, it's going to be a hit.

And that's the only strategy to win in the market space, you know, considering any competitor wouldn't help much. But we're focusing on the game itself and focusing on ourselves to make sure we serve those potential consumers. So that's our strategy. And, you know, like I said, we just launched it on a closed beta on the Chinese server.

Technical issues is another thing we're trying to resolve because all this testing are on the way. But since end of April we launched that, it's, you know, players are generally pretty happy, even though there, here and there, there's something we have to change, and we are changing them. So, so far so good, and we're moving, you know, forward to make sure that whenever we start to launch it, it's going to be a huge success. Thank you for the question.

Operator

There are no further questions at this time. Now I'd like to turn the call back over to Ms. Joanne Deng for closing remarks.

Joanne Deng

Thank you. This is the end of the conference call. The webcast replay will be available at Perfect World's official website at www.pwrd.com, under IR section.

If you have any additional questions, please feel free to contact us.

Robert Xiao

Thank you.

Kelvin Lau

Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may all disconnect.

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