Perfect World's (PWRD) CEO Robert Xiao on Q1 2014 Results - Earnings Call Transcript

Perfect World Co., Ltd. (PWRD) Q1 2014 Earnings Conference Call May 19, 2014 9:00 PM ET

Executives

Joanne Deng - Associate IR Director
Robert Xiao - CEO
Kelvin Lau - CFO

Analyst

George Meng - Macquarie
Eddie Leung - BofA Merrill Lynch
Natalie Wu - CICC
Nick Ning - 86Research
Jialong Shi - Credit Suisse
Alicia Yap - Barclays
Thomas Chong - BOCI
Philip Wan - Morgan Stanley
Wendy Huang - Standard Chartered

Operator

Hello ladies and gentlemen. This is Sean. I'll be the operator for this conference call. I would now like to welcome everyone to Perfect World Co. Limited first quarter 2014 earnings conference call. (Operator Instructions). I would like to turn the call over to Ms. Joanne Deng, Associate Investor Relations Director 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 2014 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 newswires.

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, Kelvin Lau, our CFO, will take us through some of our latest operational developments, and then our financial performance in the first quarter 4014 -- 2014. Following the prepared remarks, Mr. Xiao and Mr. Lau 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 are 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 obligation 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 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 our call today.

We're pleased to announce our first quarter result. Our total revenue came in line with the high end of our expectations, which was slightly softer than the strong fourth quarter of 2013.

During the quarter, we slowed down promotional activities for our client-based MMORPGs and continued to focus on content development for our portfolio and pipeline.

However, we are pleased to see our mobile games continue to grow and contribute meaningfully to our top-line results in the first quarter. The performance of our popular RPG mobile game, Return of the Condor Heroes, remained strong during the quarter. And as part of our continuous effort to expand our portfolio of our mobile games, we launched another hardcore game, our first 3D RPG mobile game, Fantasy of the Immortals, earlier this year.

In terms of our mobile games pipeline, we have a variety of exciting upcoming titles, such as Forsaken World, Touch, CrossGate Mobile and Swordsman Mobile, which we hope will bring an abundant stream of entertainment to players.

And we believe that the rich line-up of our mobile and web games, along with our diverse pipeline of our exciting client-based games bring us a key competitive advantage that positions us well in the highly competitive and rapidly evolving game market.

Among our various upcoming client-based games, DOTA2, a world-class title that is highly anticipated by players in China is currently at the early stage of commercialization and gradually ramping up its contribution. And we look forward to having a full-scale open beta testing in China soon.

We have also been developing our proprietary and highly anticipated Legend of the Condor Hero, a 3D MMORPG, based on one of the Louis Cha's classic martial art novel. Neverwinter, an attractive title developed by our Cryptic Studios in the US, is expected to be launched in China, later this year. Given the game's popularity among players in North America and Europe, we greatly look forward to introducing it to Chinese users.

In addition to our robust pipeline, our global strategy effectively helping us, maintaining our competitive edge, and is an important component of our business, as we look to strengthen our presence around the world. By launching more games, through both our own overseas subsidiaries and our overseas partners, we keep strengthening our extensive operating network beyond China.

With the geographic coverage of the regions and around one-fourth of our total revenue generated from various markets, we will continue to enhance our leading position in the Chinese online game export markets, through our extensive overseas network.

Riding on our extensive global operating experience and the strength of our specialized domestic and overseas R&D studios, we will continue to sharpen our capabilities, to provide more high-quality games and premium services to players, worldwide.

Looking forward, we will continue to work toward solidifying our competitive edge, by further developing our diversified portfolio, extensive global operating network, and solid global R&D capabilities, in order to achieve long-term and sustainable growth for our business.

I will now pass the call to Kelvin, for an update on some of our recent operational development and a review of our financials. Kelvin.

Kelvin Lau

Thank you, Robert.

In order to lengthen the lifecycle of our existing games and sustain the healthy growth of our business, we have been working on a number of expansion packs and content updates for our current base of games. Recently, we launched Desert Maze for Swordsman Online, and Covenant of the Wolf for Fantasy Zhu Xian.

As Robert mentioned, we also continued to expand our mobile games. In early January, we launched both the iOS and Android version of our mobile game, Fantasy of the Immortals.

We continued to make progress in our overseas business as well. During the quarter, we began to operate the Portuguese version of Neverwinter in Brazil, through our own subsidiaries. Through our overseas partners, we launched Swordsman Online in Vietnam during the quarter.

Moving forward, we will continue our effort to develop our portfolio and pipeline, global R&D capabilities, and global operational network, and remain dedicated to delivering innovative, high-quality contents for gamers worldwide.

Now, for the first quarter 2014 financials.

Total revenues were RMB891.1 million, compared with RMB914.3 million in the previous quarter and RMB618.1 million in the same quarter last year.

Online game operating revenues, which include both domestic and overseas online game operations, were RMB827.6 million, compared with RMB843.8 million, in the previous quarter and RMB556.2 million in the same quarter last year.

ACU for PC games under operation in mainland China was approximately 662,000, compared with 803,000 in the previous quarter and 554,000 in the same quarter last year.

Toward the late fourth quarter of 2013, we stepped up anti-cheating efforts for certain games, in order to maintain a healthy and fun game environment for players. The decrease from the previous quarter was mainly due to such stringent anti-cheating efforts, as well as adverse seasonality factors affecting user traffic during the first quarter.

Licensing revenues were RMB45.3 million, compared with RMB48.6 million in the previous quarter and RMB30.1 million in the same quarter last year. The slight decrease from the previous quarter was mainly due to lower initial license fees as we had fewer significant new game launches through our partners in overseas market in Q1 2014. This was partially offset by an increase in usage-based royalty fees in Q1 2014.

Other revenues were RMB18.1 million, compared with RMB21.9 million in the previous quarter and RMB31.8 million in the same quarter last year. The decrease from the previous quarter was primarily due to fewer installations of Torchlight 2 in Q1 2014. First released in September 2012, Torchlight 2 is a popular pay-per-install game developed by Runic Games, our majority-owned subsidiary, based in the US.

Cost of revenues was RMB235 million, compared with RMB227.5 million in the previous quarter and RMB137.1 million in the same quarter last year. The increase from the previous quarter was mainly due to an increase in revenue sharing, particularly with mobile game distribution channels as a result of the strong performance of our mobile games in Q1 2014. This was partially offset by a decrease in an impairment charge. We recognized an impairment for certain of our smaller games was charged off in Q4 2013, whereas there was no such charge in Q1 2014.

Gross profit was RMB656.1 million, compared with RMB686.8 million in the previous quarter and RMB481 million in the same quarter last year.

Gross margin was 73.6%, compared with 75.1% in the previous quarter and 77.8% in the same quarter last year.

Operating expenses were RMB478.7 million, compared with RMB677 million in the previous quarter and RMB340.5 million in the same quarter last year. The decrease in operating expenses from the previous quarter was mainly due to decreases in sales and marketing expenses, goodwill impairment, R&D expenses and general and administrative expenses in Q1 2014.

R&D expenses were RMB253.5 million, compared with RMB271.5 million in the previous quarter and RMB180.1 million in the same quarter last year. The decrease from the previous quarter was primarily due to a decrease in staff cost.

Sales and marketing expenses were RMB144 million, compared with RMB233.1 million in the previous quarter and RMB94.4 million in the same quarter last year. The decrease from the previous quarter was mainly due to a decrease in advertising and promotional expenses in Q1 2014. We did not launch any major new games and released fewer major expansion packs in Q1 2014

R&D -- G&A expenses were RMB81.3 million, compared with RMB95.2 million in the previous quarter and RMB66 million in the same quarter last year. The decrease from the previous quarter was mainly due to decreases in an impairment charge and staff cost.

In the final quarter of 2013, the impairment of the trademark recognized from the acquisition of our Japanese subsidiary in April 2010 was charged off in G&A expenses, while there was no such charge in Q1 2014.

Goodwill impairment was nil, compared with RMB77.3 million in the previous quarter and nil in the same quarter last year. The goodwill impairment recognized in 4Q 2013 was also associated with the same Japanese subsidiary that I just mentioned. As of December 31, 2013, all goodwill arising from the acquisition of our Japanese subsidiaries was fully impaired.

Operating profit was RMB177.3 million, compared with RMB9.8 million in the previous quarter and RMB140.5 million in the same quarter last year.

Excluding the share based compensation charge and the goodwill impairment, non-GAAP operating profit was RMB195.9 million, compared with RMB108.6 million in the previous quarter and RMB157.2 million in the same quarter last year.

Total other income was RMB43.8 million, compared with RMB59.6 million in the previous quarter and RMB34.2 million in the same quarter last year. The decrease from the previous quarter was mainly due to a decrease in the government grant subsidy income recognized in Q1 2014. This was partially offset by an equity investment gain recognized in Q1 2014, while losses was recognized in Q4 2013.

Income tax expense was RMB20.8 million, compared with RMB2.2 million in the previous quarter and RMB33.5 million in the same quarter last year. The increase from the previous quarter was primarily because an R&D super deduction was recognized during the annual tax filing for some of our PRC entities in Q4 2013.

Gain from disposal of discontinued operations, net of tax, was nil, compared with RMB166.3 million in the previous quarter and nil in the same quarter last year.

As of December 31, 2013, we completed a transaction to sell Beijing Huanxiang Zongheng Chinese Literature Website Company Limited, the entity that operated our Chinese online reading business, and recorded the related gain in Q4 2013 in the consolidated statement of operations, in according to the US GAAP.

Net income attributable to the Company's shareholders was RMB201.2 million, compared with RMB209.8 million in the previous quarter and RMB131 million in the same quarter last year.

Excluding the share-based compensation charge, the goodwill impairment, and the gain from disposal of discontinued operations, net of tax, non-GAAP net income attributable to the Company's shareholders was RMB219.8 million, compared with RMB163.8 million in the previous quarter and RMB147.6 in the same quarter last year.

Basic and diluted earnings per ADS were RMB4.07 and RMB3.98, respectively, compared with RMB4.25 and RMB4.18, respectively, in the previous quarter, and RMB2.70 and RMB2.69, respectively, in the same quarter last year.

Excluding the share-based compensation charge, the goodwill impairment and the gain from disposal of discontinued operations, non-GAAP basic and diluted earnings per ADS were RMB4.45 and RMB4.35, respectively, compared with RMB3.33 and RMB3.26, respectively, in the previous quarter, and RMB3.05 and RMB3.03, respectively, in the same quarter last year.

In terms of financial guidance, based on our current operations, total revenue for the second quarter of 2014 are expected to be between RMB891 million and RMB936 million, representing an increase of 0% to 5%, on a sequential basis. This takes into consideration the expected growth from some of the client-based games we operate in China and the continued strength of our mobile game.

This concludes our prepared remark for today. We are happy to take your questions now. Operator, we are ready for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from George Meng from Macquarie; please ask your question.

George Meng - Macquarie

Hi. Good morning, guys. Thank you very much for taking my question. First of all, congratulations on a very solid quarter. I have two questions.

The first one is regarding your mobile games. So the mobile game pipeline, you have CrossGate, which I believe was a very good IP 10 years ago.

But I just wonder what is your expectation of these -- the mobile version of this game or this is your mobile version of this game. And like if -- compared to other of your mobile games. And because this IP, although it's very good, it's already ten years old. And the second version of that PC game, the (Concerto) [ph], it didn't really perform that well. So I just want to ask your expectation.

And to extend that a little bit, what kind of IPs do you think is more valuable on mobile games, aside from the Louis Cha's IPs that you already have? Thanks.

Robert Xiao

That's a great question. I think we notice that this IP has been a pretty old IP. But eventually, if you look at Louis Cha's IPs, it's not young any more. But eventually, the best -- the beauty of the IP is that if it is famous, if it is attracting a lot of people in the market, it can last long.

So when we choose the CrossGate, this IP, we believe this is something still attractive to the younger generations in this market in China. And I can assure that this version is our version of the CrossGate. And of course we work with the original IP owner and basically do whatever they require, in terms of interpreting their IP. But eventually, this is our own product.

And to answer your second question, I think down the road, what we look for is something mature enough that -- well-known enough in China market. But at the same time, you know, it -- something -- we prefer to have something which can last.

George Meng - Macquarie

Okay, great. And my second question is particularly, on the console games. I know it's very early stage, but you guys are the early movers. So I just wondered is it possible to share your thoughts on console games, going forward? Is it more similar to the PC kind of games or more similar to the mobile games, in terms of both the game development and also operations? Any color would be very helpful. Thanks.

Robert Xiao

I think console game is even more sophisticated than the PC MMORPG because of the platform it's on and because of the technologies and the graphics that need to be engaged to really build that experience.

So what we are trying to do is to more of leverage our experiences in the PC MMORPG side, but expand it into a new hardware platform. I think it takes some time. And the investment is -- it's a long haul. It's not like just mobile game is to invest for a few months and you have a product. So we do have a plan to continue to invest in that side.

And then the differences from the traditional console side is that when you have the online element put into a console that you can have multi players from every corner of the world to play at the same time. That builds just absolutely a different experience than the old version of the console.

So we are trying to utilize that feature that the newer console machines are providing for the users. And again, that's our expertise to build the multi player type of games and we're working on that.

George Meng - Macquarie

Okay, great. And sorry, just one quick follow up.

Just on that, can I draw any similarity between the distribution of this console game to the distribution of the mobile games, because you will probably see more like smart TV or smart box players, going forward, in like -- yes, that's my question. Thanks.

Robert Xiao

It's pretty hard to say, at this point of time. But eventually, there is a major difference. It's that on either mobile or PC distribution, you are going for a website. But for TV oriented or set top box oriented, you're going for hardware. So the distribution actually, on the TV side, is somehow tied up with hardware sales and how the distribution channels of the hardware look like, at least at the initial stage.

So we're still working with different partners, to figure out the right model for the TV. And we believe, as long as we build good games and we build an extensive network with our partners, we'll be able to make this a good business for us.

George Meng - Macquarie

Okay. That's great, Robert. Thanks a lot. That's very helpful. And congratulations again. Thanks.

Robert Xiao

Thanks.

Operator

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

Eddie Leung - Merrill Lynch

Good morning, guys. I have two questions.

The first one is about your investment and M&A strategy. Recently we have seen that you guys are taking a stake in Shanda Games. So just wondering, going forward, what type of synergy you can see from these investments, or if it's more financially driven.

And related to that, what are the areas you would like to consider the further investment? So that's my first question.

And secondly, about your margin profile. Historically, there has been quite some volatility in the margins, given the timing of new games. So just wondering if there would be any change in this type of volatility profile, going into later part of 2014. Thanks.

Kelvin Lau

Eddie, thank you. Two questions.

Number one is regarding our investment. Yes, recently we announced that we participated in the Shanda Group private deal. So what I can tell you is that at this stage, we are acting as a financial investor in this deal. We signed a consortium agreement to become one of the partners, (one of the member) [ph] of the consortium. We just paid out $100 million to acquire about 5% of Shanda Games' shares. I think -- Eddie, I think right now this is what I can disclose at this level.

So going forward, I'm not going to disclose anything because we've got to have a long discussion with all the parties. I think my point is once we have confirmed with the other parties, with any more concrete or legally binding arrangement or agreement, definitely I think we will make announcement to let all the investor and shareholders know immediately, actually.

On the other areas of investment, I think we are more interested in all those -- as you know, we have the [indiscernible] project. We already invested quite a lot of projects in all those mobile or PC game development studios. So what we are looking for is I think high-quality good content games from other studios, so as to build our more diversified game portfolio, going forward. So I think this is one of the major directions for our investment, going forward.

Second question, margin. Yes, I think this is our pattern, I would say, Eddie. Whenever a new game launch, we've got -- before the game launch, we've got to incur quite a lot of sales and marketing expenses to promote the game. I think down the road, during the year, when we launch more mobile game or also our PC game, Legend of Condor Hero, I would say before we launch the game, we will incur quite a lot of (R&D) [ph] expenses. So there will be some fluctuation or volatility in the margin, going forward, on a -- quarter over quarter.

[Indiscernible]earnings call I will give some color or guidance to you guys, to inform you guys what games we are going to launch in the coming quarters. So I will probably guide you guys there. Thank you.

Operator

Thank you. Your next question comes from Natalie Wu from CICC. Please ask your question.

Natalie Wu - CICC

Hi, good morning, Robert and Kelvin. Congratulations on a strong quarter.

Quite impressed that you recorded such a strong growth in the first quarter with no expansion packs released in PC games. Can you give us some color on your mobile game contribution and can you update us your latest mobile game development like Forsaken World? I thought it already began its limited test, right?

Robert Xiao

Yes, you're absolutely right. Forsaken World is under, how do we call it, closed beta, or whatever, testing already. And then our first quarter, mobile has been contributing a lot in first quarter. Currently I can tell you that our contribution to the revenue from the mobile is over 15% now. We're really looking forward that that portion will increase quarter by quarter.

I think down in the pipeline we have strong titles. Forsaken World, you must have seen that, a very good game, hard core. And then CrossGate of course is on the line. And then we have a little more casual game, is Touch, the dancing thing, is on the more casual side on the mobile. And then of course later this year is the Swordsman Online.

And we announced these four currently for the pipeline, but eventually we do have teams developing more other different titles down the road. We believe that we're catching up with this wave of mobile development on the market. We don't want to be left behind, and so far it seems like we are getting there.

Natalie Wu - CICC

That's great, thanks. In that case, can we assume that the gross margin of mobile game is approximately 50% while PC game is 75%?

And also, can you share with us the effective tax rate trend in this year? Thanks.

Kelvin Lau

Regarding the gross margin, I think as what I mentioned before, we think the gross amount of the mobile games revenue and then the sharing by -- the revenue sharing by distribution channel will be recognized as cost of revenue. So the gross margin will be approximately 40% to 50% for mobile. PC I think it's about 75% to 80%, I think is reasonable. I think this is what I can tell on gross margin [indiscernible].

And the other question (was what) [ph]?

Natalie Wu - CICC

Thank you. About the effective tax rate.

Kelvin Lau

The effective tax rate, yes, yes. Sorry, yes.

The effective tax rate, as I mentioned, should be around 16% to 18% this year. I think I'm not going to change this number. I think I gave this number to the market I think the previous quarter. So it will be 16% to 18%, something like this percent, this year.

Operator

Thank you. Your next question comes from Nick Ning from 86Research. Please ask your questions.

Nick Ning - 86Research

Hi. Thanks for taking my question and congratulations on the solid results.

I was just wondering, as we see some of our PC gaming peers are now shifting more of their resources to mobile space and certain companies are even doing internal (Technical Difficulty) PC MMORPG department, according to some media reports.

So I'm just curious, what is the situation in Perfect World right now, for this year and beyond 2014. From a top level perspective, how much of our resources will be allocated between PC, mobile and our TV initiative and for investment in those strategically important new areas, maybe in terms of the cash use and human resources? Thank you.

Kelvin Lau

Yes, I think our situation in Perfect World is, of course the number one is we'll keep on looking for good talents on mobile game development. It's the number one. We are looking for new talents in the market to join Perfect World, is number one.

Number two, our practice in Perfect World is we are trying to use a team to develop both PC game and mobile game, like Swordsman Online. The whole team is working on PC plus mobile. So I think it's a mix of team model right?

Robert Xiao

Yes.

Kelvin Lau

Yes.

Nick Ning - 86Research

Okay. So it looks like Perfect World [Technical Difficulty] division has no (formal set up) [ph] like I think [Technical Difficulty]. This is different from most of our peers, so just curious why we (don't have) [ph] this structure and will there be any change on this front?

Robert Xiao

[Technical Difficulty] but eventually, I think I understand where you're coming from, is like how we organize ourselves and why we use this type of organization structure and position our talents, if I guess right.

I think different people would have different approaches in terms of developing mobile games and different genres of different games. What we believe is if a set of team want to develop, no matter what kind of game, what they really need is, number one, the designer. They have ideas. They have extensive experience and understanding of the customers or consumers behind a certain platform. And then there's the set of technologists, programmers, who can utilize all kinds of different programs as tools to help them. And then a graphic designer or a bunch of artists who can draw whatever the designer wants to show a beautiful graphics presentation.

So in terms of that, what you really want is a bunch of people who really have a vision on a certain platform. And it really doesn't matter if they're dedicated on PC, on mobile or TV.

So what we want to do is we're using, you know, we're focusing around designers and the supporting programmers and artists who really have a vision about a storyline and then who can extensively build their experiences across the different platform to form projects in that sense.

So, so far it's been working okay, and I believe, you know, different formats of organizing teams would have different advantages, disadvantages. But we're going down -- down the road, we're not saying we'll have to insist on a certain way of developing our internal games. As time goes by, as talents -- more and more talents join in, we're going to do whatever is necessary to change or to modify whatever so far we have.

Mobile, we believe mobile is a fast-evolving market. And so the overall concept in any organization who wants to capture this mobile wave is to be flexible, to be sensitive to the changes of the market and change themselves. So we are ready to make any kind of change for ourselves down the road.

Operator

Thank you. The next question comes from Jialong Shi from Credit Suisse. Please ask your questions.

Jialong Shi - Credit Suisse

Hi. Good morning, management. Thanks for taking my call. I have two questions.

My first question is about the TV games. Can management give some colors on the potential size of this market? And when do you think the TV game market may pick up in China?

And for Perfect World, how much you're planning to spend on TV game this year? This is my first question. Thank you.

Robert Xiao

I think, like I said, on the TV set, the games actually will follow the hardware. So if you're asking the console game in China, whenever Microsoft starts to ship their hardware, then that's the start of a console game in China. And then for TV set-top box, I mean professional set-top box, whenever different manufacturers have this game-oriented set-top box being shipped, then that's the kickoff of certain group of games.

I think our positioning is that number one, we are the content provider. We have expertise. We can develop more sophisticated games on different platforms, and TV as an extension of our capability.

Number two is we are investing on the fly, which means we invest some and we look at the market, and if we feel the market is growing faster, we're going to invest more. If the market is picking up a little slowly, we're going to keep our steady investment.

So this is not to say we're putting everything into the TV, but eventually we are investing some. We have a few -- several projects I would say going on at this point of time. And by the end of this year we'll definitely look at how the TV market is going on, and then we will decide what's the next additions of investment into the TV market.

Jialong Shi - Credit Suisse

Thank you. This is very helpful.

My second question is about mobile game. In your release, you guys listed a few new mobile games to launch in the rest of this year. I just wonder, in the management's view, which one of these new games may have the potential to maybe, to replicate the success of Return of Condor Heroes?

Robert Xiao

Well, I hope every one of them. That's obviously the case I guess. Each one would have a very strong point. Sometimes a very good-looking game needs some luck to be a super-game when it's launched. So we're hopeful, as many as possible out of these four can become as successful as the Return of the Condor Heroes.

Jialong Shi - Credit Suisse

Thank you.

Operator

Thank you. Your next question comes from Alicia Yap from Barclays. Please ask your question.

Alicia Yap - Barclays

So my question is regarding the overall margins trend. So why are some of these expenses line actually declining sequentially? I understand it could be some of this is seasonality driven and lack of the new games promotion. So just wanted to get a sense, I understand it could be some fluctuations. But if you can give us a little bit more color in terms of how should we look at the 1Q 19%? So would that be sustainable for the rest of the year?

Kelvin Lau

Yes, Alicia. Regarding the expenses fluctuation, I think I can explain to you one by one.

I think for some of the sales and marketing expenses, I think if you look at Q1 last year, I think, or every year Q1, our sales and marketing expense will be lower because I explained quite a lot of time that, during the Chinese New Year, normally we are not going to launch any new game or expansion pack. So we are not going to spend quite a lot of money to promote our game or our expansion pack. And so normally in Q1 our sales and marketing expenses will be at a very low level. So it's normal; it's absolutely normal.

R&D expenses I think compared with last quarter is lower because Return of Condor Heroes [indiscernible], we already started of course beta testing, so we started to capitalize part of the R&D expenses. So that's the reason why R&D expenses decreased a little bit in Q1 compared with Q4 last year.

G&A expenses, G&A expenses, I think the main reason is last year Q4 we have an impairment of the C&C trademark. So in this quarter we don't have any impairment on any trademark in this quarter. So that's the reason for the decrease in our G&A expenses this quarter. So this is I think the overall reason why our total operating expenses decreased this year -- this quarter, yes.

Alicia Yap - Barclays

And is there any kind of like, you know, more color in terms of the overall trend in terms of margins that could end up for this year or maybe the rest of the few quarters?

Kelvin Lau

Alicia, our policy is we're not going to give any guidance on the margin. We only give, I think, in the coming quarter the revenue guidance. Sorry, Alicia.

Alicia Yap - Barclays

Okay. That's okay.

And my second question, have we seen any change of the industry landscape or the competitive dynamic after the launch of the Tencent WeChat, especially with them introducing a lot more mid-core and potentially going to introduce more hard-core games? Are we anticipate any of these will be taking away from some of the user tractions with our upcoming launch of the mobile games? Thank you.

Robert Xiao

I think we don't want to comment on our competitors or other people. But what I can tell you is, in our view, China market in the mobile side distribution is actually very fragmented. Compared to other mature markets like North America or Europe, China is highly fragmented. A lot of different platforms are still having a lot of users from different channels.

So I think it's going to remain for a while. One or two different channels may be stronger, but eventually the fragmentation will stay long. In that case, our strategy is very simple. We are working with as many partners as possible to push our services or our games to as many users as possible through different channels.

So I don't see in the near future that this situation will change dramatically. I think there's still a lot of chance in China to be able to do -- to build quality channels or quality services for the Chinese users.

Operator

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

Thomas Chong - BOCI

Hi. Good morning everyone. Thanks for taking my questions. I have two questions.

The first question is about the second quarter guidance. Can management comment about the sequential growth for the PC client-based games, as well as your expectation for the mobile games contribution in the second quarter?

And my second question is about the ACU. Can management comment about, in terms of the absolute amount in terms of the decline in ACU, how is the performance for Zhu Xian, Perfect World 2, Swordsman Online and Saint Seiya? Thanks.

Kelvin Lau

Number one, second quarter revenue guidance is 0% to 5%. As I mentioned in my remarks, we have already taken into consideration of the growth in our PC-based game and also our continued strength of mobile game.

So I also mentioned in my remarks that in Q1 we implemented some of the anti-cheating activities for some of our games and that also slowed down some of the monetization for some of our games. So in fact in Q1, the PC-based game is slowed down -- was slowed down a little bit. So we are (beginning) [ph] some of the monetization activities in Q2 for our PC games. So I will say 0% to 5% is largely coming from our PC games.

So I expect that the Return of Condor Heroes will still maintain the same momentum as that of Q1. So in Q2 we don't have any major mobile game launch. I think most of the mobile game we will launch -- new mobile game we will launch in Q3 and Q4. So a little bit increase will be coming from mobile game; it's largely from the PC-based game. So this is the second quarter revenue guidance.

So regarding the ACU question, I also mentioned it in the remarks, okay. One of the reasons for the decrease in the ACU is the seasonality, the Chinese New Year. So, some of the gamers I think will be on travel, going back home to celebrate Chinese New Year or something like this, so the ACU number will be lower.

And also the anti-cheating activities we implemented in Swordsman Online, so actually the Swordsman Online ACU number dropped a little bit because of the anti-cheating activity we conducted I think in the games in Q1. So that's the major reason for the decrease in ACU for Q1 this year, yes. Thank you, Thomas.

Operator

Thank you. Your next question comes from Philip Wan from Morgan Stanley. Please ask your question.

Philip Wan - Morgan Stanley

My question is about seasonality. Could you comment on the seasonality difference between PC game and mobile game? Thanks.

Robert Xiao

That's a very good question. We are still learning the trend of mobile side because we don't have too many games at this point of time running on the mobile. But we believe on the mobile side the seasonality probably will play a smaller factor, smaller role than in the PC world, because when people travel, people travel with their mobile phones. So, like in Chinese New Year, people travel and people can travel with their computers, but still not too many people have the laptop with them. But for sure people travel with mobile, so they can play games everywhere.

So we assume that the seasonality factor for mobile is less important. But we're going to continue to watch our games performance throughout the year and to see if that's true.

Philip Wan - Morgan Stanley

Thank you. My second question is, could you comment based on your recent experience, comment on the economics between PC and mobile games? For example, in terms of development costs and then marketing expenses for game promotions.

Robert Xiao

Well, I think basically mobile games is cheaper to build up for sure, shorter time investment, and the lifecycle is supposedly to be shorter. That's obviously the case. And for PC game, the risk is higher. If you want to build a PC game now, you have to build a high-quality PC game, right? You have to invest a longer time, more manpower, more budget and more marketing expenses. But eventually if it is successful, then it can last longer, and that lifecycle is much longer.

And so I think what we believe the way of deciding where to go is really based on the corporate strategy. Like I said many times, our strategy is very simple. Analyzing five years down the road PC, mobile, TV would each cover about 30% of the market share, and we as a content builder and publisher, we want to cover all the markets we can see from now.

So that's why we are going to invest suitable amount of manpower and money and time in all three of these areas, like TV development, PC development and mobile development. So I can't tell you exact numbers or exact cuts, but we do have economics to calculate on each of the -- based on each of the project when we have a new project to launch.

Operator

Thank you. Your next question comes from Wendy Huang from Standard Chartered. Please ask your question.