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Executives

Vivien Wang – VP of Investor Relations and Corporate Communications

Michael Chi – Chairman and CEO

Kelvin Lau – CFO

Analysts

Wendy Huang – RBS

Timothy Chan – Morgan Stanley

Eddie Leung – Merrill Lynch

[Heidi Lee] – Piper Jaffray

Yvonne Yang – BNP Paribas

Andrey Glukhov – Brean Murray

Alicia Yap – Citigroup

Paul Wuh – Samsung Securities

Lisa Yuan – Goldman Sachs

James Lee – CLSA

[Noah Harris] – Oppenheimer

Mike Hickey – Janco Partners

Hui Dong – HSBC

Atul Bagga – ThinkEquity

Wallace Cheung – Credit Suisse

Nan Lee – SIG

Tian Hou – TH Capital

Nick Ning – Roth Capital

Perfect World Co., Ltd. (PWRD) Q4 2010 and Full Year Earnings Conference Call March 7, 2011 8:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Perfect World Limited Fourth Quarter 2010 and Full Year Earnings Call.

At this time all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session, at which time, if you would like to ask a question, you'll need to press star 1 on your telephone.

I would like to advise that this conference is being recorded today, Tuesday, the 8th of March, 2011.

I would now like to hand the conference over to your first speaker today, Vivien Wang, Vice President of Investor Relations and Corporate Communications at Perfect World. Thank you. Ma'am, please go ahead.

Vivien Wang

Thank you, operator, and thank you everyone for joining us today for Perfect World's fourth quarter and full year 2010 earnings release conference.

We distributed our earnings release earlier today. You may find a copy of the press release on our official website or through the news wires.

Today you will hear from Mr. Michael Chi, our Chairman and CEO, who will give us a brief introduction and overview; Mr. Kelvin Lau, our CFO, will then discuss some of our latest business and operational developments and take us through our financial performance in the fourth quarter and fiscal year 2010. Following the prepared remarks, Mr. Chi, Mr. Lau and I 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 provision of the U.S. 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 statements as a result of new information, future events or otherwise, except as required under applicable law.

Our earnings release and the call include discussion 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 Michael.

Michael Chi

Thank you, Vivien, and thanks everyone for joining us today.

The past year was a transitional year for us due a number of actions taken to support the long-term sustainable growth of our company. The short-term pressure on results continued into the fourth quarter. As we have mentioned before, we choose to lengthen the development cycle of our games in order to give them a better chance of success. This slowdown in our new releases along with sizable investments in R&D and expansion through acquisitions during the year placed pressure on our margins and cause a temporary fluctuation in our results. Still it's important to note that we believe that the most quarter and the past year marked the [inaudible] in our financial performance. We are confident that the mismatch between our internal investments and the output of our new content will start to realign in 2011.

In the fourth quarter, our hard work during the year began to take shape as we launched three new games as well as a number of expansion packs for our existing games. These new titles including Forsaken World and Empire of the Immortals have already generated excitement among gamers and built a strong user base. We are expecting to see much stronger revenue growth in the fourth quarter of 2011 as these new contents are to take effect on the revenue side.

In terms of our pipeline, we have an exciting roster of titles set for release in 2011 and beyond. Anticipation is already growing for two of our upcoming releases, Heaven Sword and Dragon Saber and Swordsman Online, both of which are based on novels that are household names in China, adding to our highly successful portfolio of these existing games. These new titles [inaudible] and a number of recently launched games to provide multiple growth drivers for us in both 2011 and the years to come.

Our overseas performance continues to be robust. We remain the leader in the Chinese online game export market in terms of revenues and geographic coverage. During the year we continued to sign multiple new licensing agreements and launched a number of popular titles in new markets through our overseas partners around the world.

In addition, our operating subsidiaries in the U.S. and the Europe and C&C Media, our acquired subsidiary in Japan all continue to serve as growing sources of revenue. Our strategic position of a majority stake in the Seattle-based studio Runic Games has also enhanced our global R&D capabilities and provided us a strong pipeline of global titles.

While 2010 has clearly been challenging, we believe our decisions were necessary for the healthy growth of our company in the long run. We continue to be one of the leading online game developers and our operators in China. Our pipeline is deep and diverse, and we've enhanced R&D capabilities resulting from the past year's investments. The future is looking bright.

Our shareholders have much to look forward to and value proposition remains unchanged. Having confidence in our outlook, our board has also authorized us to repurchase up to US$100 million of the company's own ADS between March 2011 and March 2012.

Now with 2010 behind us and our key growth drivers firmly in place, we're optimistic that we will deliver solid growth in both the top and the bottom line in 2011 and the years to come. We will expect our margin to greatly improve throughout the year starting from Q1. Our strength in innovation combined with enhanced R&D capabilities and the trends in the operating platform from our continued investments will position us well in the near term and ensure the long-term sustainable growth of our business.

With that, I would like to pass the call to Kelvin.

Kelvin Lau

Thank you, Michael. As Michael mentioned, the past quarter has been pretty [inaudible] for us in the domestic market. We launched three new titles including open beta testing for Forsaken World and Dragon Excalibur and unlimited closed beta testing for Empire of the Immortals. We also released a number of expansion packs including Breach of Heavens for Zhu Xian, Perfect World II 2012 for Perfect World II, Tiger Mercenary for Chi Bi, and the rise of the Demon King for Pocketpet Journey West, while the new titles like Forsaken World and Empire of the Immortals and a number of expansion packs we launched in Q4 have been generating excitement among gamers. We have been deliberately slowed on our side to monetize them in the early stage, in order to draw players in and ramp up traffic.

I would like to reiterate our strategy for the release of new [games] as we feel it is important to help understand the quarter's result. As we have demonstrated with our signature titles in the past, to repeat the cycle of [driving traffic] with new content and fresh marketing activities followed by increased monetization in subsequent periods allows us to create higher-performing and sustainable franchise over the long term. The fourth quarter marked the first half of this cycle and we rammed up profit for both our core existing games through the release of web-based expansion packs and the newly-launched games. We are expecting to see much stronger revenue growth in Q1 as we push web-based monetization activities in the year.

We are also progressing well in the overseas market. During the quarter we signed agreements to license Zhu Xian, Battle of the Immortals and Forsaken World to Indonesia, Dragon Excalibur to Korea, and Zhu Xian to Russia, and the Legend of Martial Arts Chi Bi and Hot Dance Party to the Philippines. Through various overseas partners, we launched the Battle of the Immortals in the Philippines, Singapore, Malaysia, Thailand and Korea. We also launched the Battle of the Immortals and Hot Dance Party in Russia. In addition, through our own operating subsidiaries, we launched the Legend of Martial Arts in North America and the French and German versions of Zhu Xian in Europe.

Shortly after the quarter end, we signed an agreement to license Dragon Excalibur [inaudible] and Forsaken World to Hong Kong, Macau, Singapore, Malaysia, Thailand and the Philippines in January. In the same month we launched the Forsaken World in Taiwan through our local partner there. Our overseas subsidiaries, also our U.S. subsidiaries also signed a licensing agreement with WindySoft to operate Rusty Hearts in North America. Rusty Hearts is a visual action MMORPG developed by Stairway Games and WindowSoft holds the global provisioning rights.

Now I would like to take you through our fourth quarter 2010 financial highlights. Total revenues were RMB593 million in 4Q10 as compared to RMB658.2 million in 3Q10 and RMB607.9 million in 4Q09. The decrease in total revenues from 3Q10 was primarily because there was no major movie or TV series release in 4Q10, whereas the popular TV series Fighting for My Marriage contributed to the results in 3Q10.

Our online game operation revenues were RMB526.2 million in 4Q10 as compared to RMB527.1 million in 3Q10 and RMB541.8 million in 4Q09. Despite launches of new games and large expansion packs of core existing games during the quarter, online game operation revenue in 4Q10 was relatively flat compared with 3Q10. This was primarily due to the deliberate decision to slow monetization activities to foster user interest and further nurture these games at the initial stage following the releases of new content.

ACU for games under operation in mainland China was approximately 999,000 in 4Q10 as compared to 733,000 in 3Q10 and 1,157,000 in 4Q09. APC for games operated in mainland China under the item-based revenue model was approximately 1,402,000 in 4Q10 as compared to 1,274,000 in 3Q10 and 2,188,000 in 4Q09.

ARPU for games operated in mainland China under the item-based revenue model was RMB275 in 4Q10 as compared to RMB323 in 3Q10 and RMB223 in 4Q09. The increase in traffic from 3Q10 was mainly due to the strong performance of several of our newly-launched games as well as the continued popularity of a number of our existing games. The decrease in ARPU from 3Q10 was mainly due to the dilution effect arising from the

launches of the new games during 4Q10.

Our overseas licensing revenues were RMB57.8 million in 4Q10 as compared to RMB48.6 million in 3Q10 and RMB61.7 million in 4Q09. The increase from 3Q10 was primarily attributable to an increase in initial license fees arising from a number of new commercial launches overseas as well as a sequential growth in usage-based royalties.

Our film, television and other revenues were RMB9.0 million in 4Q10 as compared to RMB82.5 million in 3Q10 and RMB4.5 million in 4Q09. Most of the film, television and other revenues recognized in 3Q10 were related to the release of the TV series Fighting for My Marriage, whereas there was no similar major release during 4Q10.

Our gross profit was RMB482.3 million in 4Q10 as compared to RMB508.9 million in 3Q10 and RMB526.4 million in 4Q09. Our gross margin was 81.3% in 4Q10 as compared to 77.3% in 3Q10 and 86.6% in 4Q09. The decrease in gross profit from 3Q10

was primarily due to the absence of a major movie or TV release in 4Q10, whereas the popular TV series Fighting for My Marriage contributed to the results in 3Q10.

Our operating expenses were RMB359.5 million in 4Q10 as compared to RMB297.0 million in 3Q10 and RMB249.8 million in 4Q09. The increase in operating expenses from 3Q10 was mainly attributed to higher sales and marketing expenses, R&D

expenses and general and administrative expenses.

Our R&D expenses were RMB136.8 million in 4Q10 as compared to RMB113.8 million in 3Q10 and RMB76.9 million in 4Q09. The increase from 3Q10 was primarily due to an increase in staff cost, including a special yearend bonus as well as lower capitalization of development cost. During 4Q10, we ceased capitalization of development cost for Forsaken World and Dragon Excalibur following their official launches.

Our sales and marketing expenses were RMB155.2 million in 4Q10 as compared to

RMB123.8 million in 3Q10 and RMB124.7 million in 4Q09. The increase from 3Q10 was largely due to an increase in advertising and promotional expenses associated with the launches of the new games Forsaken World, Dragon Excalibur and Empire of the

Immortals, as well as the releases of some large-scale expansion packs such as Breach of

Heaven for Zhu Xian and Perfect World II 2012 for Perfect World II during 4Q10. In addition, we also incurred a special yearend bonus in 4Q10.

Our G&A expenses were RMB67.5 million in 4Q10 as compared to RMB59.4 million in 3Q10 and RMB48.3 million in 4Q09. The increase from 3Q10 was mainly due to a provision of receivables related to our film and television business. Our film and television business continues to expand. As the credit term, collection cycle as well as characteristic of receivables of the film and television business are significantly different from those of the online gaming business, we adopted a conservative and prudent approach and provided certain allowance for the accounts receivables related to our film and television business in 4Q10.

Our operating profit was RMB122.8 million in 4Q10 as compared to RMB211.9 million in 3Q10 and RMB276.5 million in 4Q09. Non-GAAP operating profit was RMB147.3 million in 4Q10 as compared to RMB237.4 million in 3Q10 and RMB298.5 million in 4Q09. The decrease from 3Q10 was mainly due to an increase in staff cost, including a special yearend bonus as well as a ramp-up in advertising and marketing spending to support the launches of a number of our new games and large expansion packs. As we adopted prudent monetization strategies with the new content at the initial stages of release during 4Q10, higher sales and marketing expenses prior to the releases of new content and greater R&D spending outgrew revenues temporarily in 4Q10.

Our income tax expense was RMB12.1 million in 4Q10 as compared to RMB17.1 million in 3Q10 and RMB17.5 million in 4Q09. Net income attributable to the company’s shareholders was RMB125.2 million in 4Q10 as compared to RMB213.7 million in 3Q10 and RMB270.8 million in 4Q09. Basic and diluted earnings per ADS were RMB2.50 and RMB2.36 respectively in 4Q10 as compared to RMB4.27 and RMB4.05 respectively in 3Q10 and RMB5.44 and RMB5.09 respectively in 4Q09.

Our total revenues were RMB2,470.4 million in 2010 as compared to RMB2,144.4 million in fiscal year 2009. Our online game operation revenues were RMB2,156.3 million 2010 as compared to RMB1,879.9 million in fiscal year 2009. The year-over-year increase was primarily attributable to the successful expansion of its overseas operations in North America and Japan as well as the continued popularity of some of our core existing games.

Our overseas licensing revenues were RMB215.0 million 2010 as compared to RMB214.6 million in fiscal year 2009. We actually continued to grow our overseas licensing revenue in various markets during the year. The previous was mainly due to the full acquisition of our Japanese partners C&C Media which had generated considerable licensing revenues for us in the previous year. In 2Q10, we began classifying C&C Media's revenue as online game operation revenue because of the full acquisition, making overseas licensing revenue appear relatively flat compared with 2009.

Our film, television and other revenues were RMB99.2 million in 2010 as compared to RMB49.8 million in 2009. Most of the film, television and other revenues recognized in 2010 were related to the popular TV series Fighting for My Marriage which was released in 3Q10.

Our cost of revenues were RMB444.7 million in 2010 as compared to RMB299.8 million in 2009. The year-over-year increase was primarily due to increases in staff cost, sales-related taxes and server depreciation expenses associated with overseas acquisition and expansion of our domestic game operations, as well as an increase in film, television and other costs associated with the release of the successful TV series Fighting for My Marriage.

Our gross profit was RMB2,025.7 million in 2010 as compared to RMB1,844.6 million in 2009. Gross margin was 82% in fiscal year 2010 as compared to 86% in 2009.

Our operating expenses were RMB1,146.4 million in 2010 as compared to RMB760.4 million in fiscal year 2009. The year-over-year increase mainly resulted from the expansion of our overall business operation and talent pool as well as our overseas acquisitions.

Our operating profit was RMB879.3 million in 2010 as compared to RMB1,084.2 million in 2009. In order to deliver higher-quality products in the longer run in response to the demands of the fast-changing industry, we have been lengthening the development cycle of our games and devoting more resources to long-term projects while at the same time investing heavily in R&D and expanding our talent pool. As a result, we did not launch any new games until the last quarter of the year which impacted the revenue growth in fiscal year 2010, yet still incurred higher sales and marketing expenses prior to the launches of these new games as well as greater R&D spending for future titles in the pipeline. As such, expenses temporarily outgrew revenues during this transitional year.

Net income attributable to the company’s shareholders was RMB840.7 million in 2010 as compared to RMB1,037.2 million in 2009. Basic and diluted earnings per ADS were RMB16.80 and RMB15.87 respectively in 2010, as compared to RMB20.57 and RMB19.28 respectively in 2009.

In terms of financial guidance, based on our current operations, total revenue for the first quarter of 2011 are expected to be between RMB640 million and RMB664 million, representing an increase of 8% to 12% on a sequential basis. This reflects expected growth from our existing games and the anticipated contribution from the recent launches of Forsaken World, Dragon Excalibur and Empire of the Immortals.

With that, I would like to turn the call back to Vivien for a quick announcement. Then we can start Q&A.

Vivien Wang

Thank you, Kelvin.

Before we start Q&A, we would like to announce that this is the last quarter that we will be disclosing APC and ARPU numbers. However, we will continue to provide the ACU number. APC is the aggregate number of accounts for games operated in China under the item-based revenue model that has been deposited with money at least once during a given quarter. However, there is generally a lag from the time when a player deposits cash to the time when such player purchases and further consumes the e-game item. The fact that a player has deposited a certain amount into his/her account does not mean the amount still deposited will be recognized as revenues immediately or even within the same quarter.

Furthermore, the different deposit frequencies and spending pattern of gamers are different types of promotional activities as well as various timing of our e-game promotions among other factors can cause significant fluctuations in APC from period to period. While these fluctuations appear normal to our management team given the underlying reasons, unfortunately we have come to believe that it causes more confusion than help in the markets.

ARPU is actually a [POG] number derived by dividing item-based online game revenues from domestic operations by APC rather than an independent revenue driver. Since neither measure can be monitored on a real-time basis or as either was considered as key performance indicator by our management, we do not plan to release these numbers in the future.

On the other, our management team can and does monitor ACU data in real time. Although various factors such as the timing and the magnitude of our [inaudible] can also cause ACU to fluctuate from period to period, we do believe that ACU is a more meaningful indicator than APC or ARPU. Therefore, to further facilitate our investors' understanding of the operational performance of our games operating in China, we will continue to disclose ACU in the future.

With that, this concludes the prepared remarks for today. We're happy to take your questions now. Operator, we're ready for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone keypad now and please wait for your name to be announced. Again that's star followed by 1 and please wait for your name to be announced. We do ask that just in the interest of time, if you would kindly ask one question per participant. However, we are happy to have you re-queue and ask a second question later. Just again if you could kindly just ask one question initially; we're happy to have you re-queue later.

First question from the telephones will come from Wendy Huang of RBS. Please go ahead, Wendy.

Wendy Huang – RBS

Good morning. Thanks for taking my questions. Just wondering if you can give more color on your Q1 guidance. You guided 50 million to 70 million incremental revenue versus Q4, so, how much of it was driven by the old games continuing growth such as from Perfect World and Zhu Xian, and how much of it was contributed by the new games that you've launched. Thank you.

Vivien Wang

[Chinese Language].

Kelvin Lau

Thank you, Wendy. Regarding the guidance we'd given to the market, we already considered all the factors I think of the revenue growth [add-in] for Q1. The revenue growth mainly come from all the games including our existing games and also including our newly-launched games in 4Q last year. That's why I mentioned, we are entering another half-cycle of the cycle. So we did quite a lot of monetization for, for example, Perfect World II Zhu Xian during Chinese New Year, and also you see Forsaken World and Dragon Excalibur we just launched I think late October, and also Empire of the Immortals we launched I think by the end of Q4. So I would expect these three newly-launched games will have full quarter revenue contribution, so that's another I think major revenue driver for our Q1 results. That's why we gave 8% to 12% revenue growth in this quarter.

Operator

Next question will come from Timothy Chan of Morgan Stanley. Please go ahead, Timothy.

Timothy Chan – Morgan Stanley

Hi, good morning, Mr. Chi, Kelvin and Vivien. Thanks for taking my questions. I actually would like to get more color on your operating margin. Given the top line growth in first quarter and a normalized marketing spending, what would be a more reasonable assumption of the operating margin in this quarter?

Kelvin Lau

Tim, thanks for your question. I think our policy, is I think we are not going to give any guidance on the margin. But as what we mentioned, I think we are confident and expect to see our margin can be improved I think gradually over quarters in this year. Why? Because, as you can see, Q1 we have a really strong revenue growth, and then with some more games we are going to launch this year, and also you can see Forsaken World, Dragon Excalibur and also Empire of the Immortals will have a full year contribution of revenue this year. So we are quite optimistic and confident that we can improve our margin quarter-over-quarter this year.

Operator

Thank you. Next question will come from Eddie Leung of Merrill Lynch. Please go ahead, Eddie.

Eddie Leung – Merrill Lynch

Hey, good morning, guys. Kelvin, I know that you won't talk too much about the margin trend. But could I follow up on previous questions? Given that you have launched a couple of new games in the fourth quarter and some major expansion packs, how should we look at the sales and marketing expenses going in the near term?

Kelvin Lau

Of course sales and marketing expenses are I think the key items we got to impose more control I think going forward, but [inaudible] especially in Q1 because of the Chinese New Year. Normally the sales and marketing will go down a little bit in Q1. Plus in Q4, as what we mentioned, we have three new games launched in Q4, so we incurred quite a lot in the pre-launch, advertising and promotion expenses in Q4. But still there's no new game launch in Q1, so I guess I expect the sales and marketing expenses will go down a little bit in Q1.

Eddie Leung – Merrill Lynch

That's very helpful. Thank you.

Operator

The next question will come from Mark Marostica of Piper Jaffray. Please go ahead, Mark.

[Heidi Lee] – Piper Jaffray

This is [Heidi Lee] calling in behalf of Mark Marostica. I would like to know, like you licensed the game in Rusty Hearts from a Korean developer and going to release in North America. This game is sort of [new rather] compared to other Perfect World games. It's more action-based, right? Are you going to release this game in Mainland China?

Vivien Wang

[Chinese Language]

Michael Chi

This is Michael. [Chinese Language]

Vivien Wang

So, our U.S. operation team has very strong capabilities. Some of our self-developed games are suited for the U.S. market and they actually already launched a number of them. But because of the strong operating platform they have, they can and they do want to license or offer more games, that will diversify their portfolio, especially given that Rusty Hearts is in a different genre, as you just said. And in the longer term, our U.S. team, the goal of our U.S. team is to become number one in the item-based online game segments in the U.S.

And as far as the license of Rusty Hearts in China, so far we have not discussed this with WindySoft. Thanks.

Operator

Next question will come from Yvonne Yang from BNP Paribas. Please go ahead, Yvonne.

Yvonne Yang – BNP Paribas

Hi, good morning, Michael, Kelvin and Vivien. Thanks for taking my questions. My question is the strategic outlook for this year. After a year of transition, how should we look at the competitive landscape in this year as each of the major game companies boast at least one highly-anticipated pipeline for the year? And is there any further R&D expansion plan or any other new initiative plan that you could share with us for this year? Thank you.

Vivien Wang

[Chinese Language]

Michael Chi

[Chinese Language]

Vivien Wang

Overall, during the past two years and our strategy has been to develop and to deliver blockbuster titles. Actually last year has been a transition year. We have only launched three years in the end of 2010. But this year we target to launch another two new games. And we actually have a lot of products that are under development, and some of them have been under development for one, two years or even one and two years. Looking forward, we target to continue to launch those blockbuster potential titles and drive our growth in the long run.

Looking at the competitive landscape, we do think that those top companies with the strongest capability of R&D and operating platform can win in the longer term, and we're confident to deliver sustainable growth in the long run. Thanks.

Operator

Next question will come from Andrey Glukhov from Brean Murray. Please go ahead, Andrey.

Andrey Glukhov – Brean Murray

Yes. Thank you for taking the question. I want to actually ask you about the international operations. You guys have a very strong performance this quarter from your U.S., European subsidiary. Can you talk about what really drove that? How do expect that revenue to trend going forward, and to the extent that now over a third of your revenue seems to be coming outside of China, would you consider starting to disclose the ACU on that revenue as well?

Kelvin Lau

Yes, Andrey. Yes, I think the performance of our overseas operation in Q4 is not bad, is good. I think, especially in U.S. and also in Japan.

I think the major reason for such good performance in U.S. and Japan is the Christmas. Normally I think Christmas, I think our teams in Japan and the U.S., we do a lot of promotions and also organize a lot of events during the Christmas so as to drive up revenue in Q4. This is the key reason; this is key reason number one. Another reason is we just launched our Battle of Immortals in several overseas countries which we can recognize quite a lot of the initial license fee in Q4. This is another key reason why the overseas operation in terms of revenue I think were real good in Q4.

Going forward, whether we can disclose the ACU number for our overseas operations, I think it all depends, I think we have to consider because right now the overseas operations still are I think individual [reasons] like Japan or U.S. or other, like Malaysia, Singapore, I think individual data [varies more]. And also you have a lot of numbers, a lot of differing [inaudible] numbers in the ACU number. So we will consider going forward if U.S. can grow bigger and bigger, and [inaudible] then we will consider to disclose the ACU number, but not now, Andrey.

Operator

Next question will come from Alicia Yap of Citigroup. Please go ahead, Alicia.

Alicia Yap – Citigroup

Hi. Good morning, Michael, Kelvin and Vivien. Thanks for taking my questions. My question is regarding also on your first Q guidance. Does that actually include any film or TV revenues? And if not, can you give us any update when you expect your next movie or TV series to be launched in 2011?

Kelvin Lau

Thank you, Alicia. Our guidance for Q1, we expect that there will be no movie or TV revenue coming in Q1. There will be no.

Regarding when will be the next TV or movie revenue will come in, it all depends on the schedule. In fact our subsidiary, our TV and movie subsidiaries right now are working on some projects right now, but I think it all depends on I think the progress. So we'll keep the market informed in each earnings call, whether we have any TV or movie revenue come in. In each earnings call we will keep you informed. But there will be no TV or movie revenue in Q1.

Alicia Yap – Citigroup

Okay, thank you. Can I follow up on the total number of R&D people as of end of 2010?

Michael Chi

Approximately 2,000 including all those R&D people in Beijing, Shanghai and [Xiangdu].

Operator

Thank you. Next question will come from Paul Wuh of Samsung Securities. Please go ahead. Please go ahead, Paul.

Paul Wuh – Samsung Securities

Hi, thanks so much. Following up with Alicia's question, how many do you think you'll add R&D people this year? And what do you think the trends for R&D in the first quarter will be?

Vivien Wang

[Chinese Language]

Kelvin Lau

Thank you, Paul. According to our budget, I think our R&D people, right now we are quite confident that, in terms of number of R&D people, we are sufficient enough to support our new game launched in the coming one to two years. So I think on and off, if we come across some good talents. I think we are not ruling out to not hire all those good people. So I will expect our R&D people headcount will increase a little bit but not to an extent like the increase in this year. So it will move a little bit but not that much I think this year.

R&D expenses for Q1, I would expect our R&D expenses will increase a little bit in Q1. Why? Because in terms of headcount in Q1, there's no increase in R&D headcount, but the situation is that we move to a new office building in January of this year. So all those allocated overhead expenses like rental, like office expenses, will push up a little bit on our R&D expenses in Q1.

Michael Chi

[Chinese Language]

Vivien Wang

I think your comments, Michael just pointed out that we're working on -- we already have a lot of people, R&D people, to work on a number of projects that we plan to release in the next couple of years. So we don't expect our R&D headcount to increase too significantly. Yes.

Operator

Next question will come from Lisa Yuan from Goldman Sachs. Please go ahead, Lisa.

Lisa Yuan – Goldman Sachs

Thanks for taking my questions. Could you give us an update on the timeline of your latest pipeline?

Kelvin Lau

We expect to launch two new games this year. The first one, I think you heard about the news, Heaven Sword and Dragon Saber. [Chinese Language]

So the game I think for [Chinese Language] we already started our internal testing to it already. So we expect to launch it I think Q2 or this summer. I think for competitive reason, we cannot announce exactly the launch date of this [Chinese Language].

Another big title we are going to launch this year is [XAGH] [Chinese Language] [XAGH]. So I think last week we just came up with a model which I think internally we can play with and test the games. But I think we are fine-tuning, we are further modifying the games right now –

[No Audio/Technical Difficulty].

Operator

Ladies and gentlemen, your speakers are just having some technical difficulties with their line. Your lines will be placed on a music hold until the conference can resume. We do appreciate your patience.

Just again, ladies and gentlemen, your lines will placed on a music hold until the conference can resume. We do appreciate your patience.

Ladies and gentlemen, speakers have rejoined us. we'd like to begin.

We move on to the next question at the moment, will come from James --

Vivien Wang

Sorry, operator, this is Vivien Wang from Perfect World. So sorry, we were just cut off for some unknown reason, and we'd like to repeat the last question and answer.

The question came from Lisa Yuan from Goldman Sachs, and she was asking about a timeline for the pipeline.

Kelvin Lau

Yes. Okay, let me repeat the response to Lisa's question. We are going to launch two big titles this year. The first one is Heaven Sword and Dragon Saber [Chinese Language]. So we're scheduled to launch these [Chinese Language] in Q2 or this summer. So I think for competitive reasons, we still haven't fixed the exact launch date.

Another big title for us [XAGH]. [XAGH] I think, as far as date, we already have come up with model which can give our internal players to try and test the game. So we are working on this. I think the progress is on track. So our schedule is trying to launch the game either in Q3 or Q4 this year. It all depends on the final stage development program and the market situation. Yes. Thank you.

Operator

Next question will come from James Lee of CLSA. Please go ahead.

James Lee – CLSA

Thanks for taking my question. And Kelvin, can you help us maybe understand sales and marketing expenses a little bit more? It seems like as a percentage of revenue, you spent a little bit higher than your peers. Maybe can you help us maybe compare/contrast how you spend it differently than your competitors? And how should we think about that? Are you spending maybe different channel, more channels than your competitors? Or is the intensity of the spending on the same channel just being heavier than your peers? Thank you.

Kelvin Lau

James, thanks for your question. I think, first of all, I think in terms of how to spend the sales and marketing expenses, I think through different channels, I think we are similar to our peers. In fact we don't have any innovative or special channel or ways to do the marketing and promotion.

I think two parts I want to raise is, one, is why my sales and marketing expenses [inaudible] by peers in terms of percentage to revenues higher? Number one is I have a consultation with my subsidiaries in U.S. and Japan. Especially in Japan, I think we got to incur sales and marketing expenses to promote game, and also U.S., we got to incur sales and marketing expenses to promote our game. So in terms of absolute amount of these, we are bigger than our peers.

So one more reason is consolidation, consolidation of C&C and U.S. Another reason is I think it all depends on how many games were launched each quarter. As we mentioned, in Q4, yes, my sales and marketing expenses grew up by a lot, because I had three new games launched together in one quarter. So that's the key reason why my sales and marketing expenses grew up quite a lot in Q4.

And also I mentioned in the Q&A session, is that in Q1 I expect sales and marketing expenses to go down because I don’t have new game launch. So you can see the sales and marketing expenses will be tempered quarter over quarter. It all depends on how many games, how many new games we are going to launch in that quarter.

Operator

Next question will come from [Noah Harris] of Oppenheimer. Please go ahead, [Noah].

[Noah Harris] – Oppenheimer

Hi, everyone. Thanks for taking my call. Most of my questions have been answered. Just on, in general and administrative expenses, there's a provision for the film and television business. Is that going to be a one-time thing or is that a continuing expense?

Kelvin Lau

That expense is a one-time thing. Of course I don’t want to see this provision will happen frequently. This is a one-time provision on some investments we made in some movies and TV. So it's one-time.

[Noah Harris] – Oppenheimer

Thank you.

Operator

Next question will come from Mike Hickey of Janco Partners. Please go ahead, Mike.

Mike Hickey – Janco Partners

Hey, guys, thanks for taking my questions. For Forsaken World and Dragon Excalibur, could you update us on player traffic trends through your Q1 period? And can you provide us any perspective on [churns] on new games?

Vivien Wang

[Chinese Language]

Kelvin Lau

Forsaken World, I think we launched it by the end of October. Right now, in fact Forsaken World we are very satisfied with the performance of Forsaken World so far. But our policy, we stay away from disclosing ACU number for each game. So what I could tell you is this, Forsaken World is pretty. In fact, Forsaken World right now is already number three revenue contributor to the whole group of Perfect World already. So, ACU number is quite stable; we are going to have a big expansion pack for Forsaken World shortly. So we are very satisfied with the Forsake World performance. And also we can see the Forsaken World performance in Taiwan is also very good. So it's very well accepted by all those gamers in overseas countries.

Dragon Excalibur, to be honest, I think it turned out to be a smaller game; it's not as good as Forsaken World. But the good news is for Dragon Excalibur, right now the ACU number is very stable and also is making profit for Dragon Excalibur. It's a 2D game. So we are still happy with the performance of Dragon Excalibur.

For the other, our core games like Perfect World II and Zhu Xian, the ACU number is pretty stable, I can say, is pretty stable. I mean these two games are still our top and second revenue contributor for the whole portfolio. So they are stable, even though they are already three to four years old. So we're still very happy with our Perfect World II and Zhu Xian.

Surprisingly, also Legend of Martial Arts, even though this game is already four and a half years old, the ACU number is pretty stable, pretty stable, and also the revenue stream is also very stable quarter-over-quarter. Yes. Thank you.

Operator

Next question will come from Hui Dong from HSBC. Please go ahead.

Hui Dong – HSBC

Thanks for taking my question. Would you give us some color of how the new game Empire of the Immortals is going since the first two-month testing this year? And can you provide some comparison with the old game Battle of the Immortals? And what's the key features to [inaudible] gamers? Thanks.

Vivien Wang

[Chinese Language]

Michael Chi

[Chinese Language]

Vivien Wang

Hey, Hui. Just want to clarify, you were asking different between BOI and EOI, right? Or between EOI and Forsaken World?

Operator

Next question will come from Atul Bagga from ThinkEquity. Please go ahead.

Atul Bagga – ThinkEquity

Hey, guys. Thank you for taking my question. A quick question, in the third quarter your ARPU was up significantly and fourth quarter it was down. I think you guys talked about part of this is the new games. I'm trying to understand, how much of the decline in the fourth quarter ARPU was from the new game versus the existing game? Maybe can you talk also -- can you talk about the ARPU [churn] on the existing games, old games, in Q4 and Q1.

And just a couple of quick housekeeping questions, can you talk about, at current level, is the U.S., Europe and subsidiaries making profit or what kind of burn rate do you have? And lastly, quick housekeeping, can you talk about what was the one-time expense from the bonuses, yearend bonuses, and marketing launch expenses in the fourth quarter operating expense? Thank you.

Kelvin Lau

Thank you, Atul. You've got a lot of questions, okay, I'll try to answer one by one, okay?

Okay, our policy is not to disclose the individual game's revenue number, but I can tell you this, the three new games we launched in Q4, Forsaken World, Dragon Excalibur and Empire of the Immortals, they contribute new revenue too the whole. So we cannot say there's [inaudible] revenue for all those new games. So that means in Q4, yes, Perfect World II and Zhu Xian, I think the revenue declined a little bit. That's what we mentioned in the remarks. So it is a cycle, right? We launched expansion pack for Perfect World II and Zhu Xian. The immediate purpose is trying to draw the players in and ramp up the profit in Q4, and then we'll do the monetization in Q1 during the Chinese New Year. That's why our revenue will have -- is expected to have a pretty nice growth in Q1. That's response to your question number one.

Regarding the bonus, are they one-off bonus? I think for competitive reasons, I think it is not appropriate for me to disclose how much bonus we paid to our staff by the end of last year.

Okay, one more, including the overseas performance of our U.S. or Japan, all these things, I think our policy is not going to disclose I think individually, each entity's revenue or profit number. But I can tell you this, for sure, U.S. and Japan, they are making profit right now. So, yeah, thank you, Atul.

Operator

Next question will come from Wallace Cheung of Credit Suisse. Please go ahead, Wallace.

Wallace Cheung – Credit Suisse

Hi, Michael, Kelvin and Vivien. I'm surprised you still can take my questions. Basically, can you explain so far the synergies between the games and the movie business and how the sort of a movie and TV sort of launch scheduled this year? Thank you.

Vivien Wang

[Chinese Language]

Michael Chi

[Chinese Language]

Vivien Wang

We are pretty prudent in terms of investing in our movie and TV projects. In the short term we actually don't plan to release a lot of TV or movie projects. We are still very focused on our online gaming business. Of course in the long run, in the longer run, we do want to generate more synergies between the two segments of our business through content or co-promotions. Thanks.

Operator

Next question will come from Nan Lee of SIG. Please go ahead, Nan.

Nan Lee – SIG

Good morning, everyone. Thank you for taking my questions. Actually most of my questions were answered. But just one quick follow-up, I see ACU went up a lot in the fourth quarter. Just wondering what's your expectation in the first quarter.

Kelvin Lau

Thanks for your question. Yes, I think the ACU number are I think comparable to Q3; they went up quite a lot. The major reason for such increase in ACU numbers is mainly because we launched three new games including Forsaken World, Dragon Excalibur and Empire of the Immortals. So I think expectation of ACU in Q1, to be honest, right now because we still aren't close to the end of this quarter, I don’t know the number. But I think based on my real-time checking record, in Q1 it's a little bit down in ACU number because of the Chinese New Year. Normally Chinese New Year, I think the average time spending of gamers I think the two weeks of Chinese New Year holiday I think will be lesser than like in Q4. So I would expect the ACU number may be a little bit of fluctuation in Q1, but I think it will not affect a lot -- or it will not affect our revenue a lot I think in Q1.

Thank you.

Operator

Next question will come from Tian Hou of TH Capital. Please go ahead, Tian.

Tian Hou – TH Capital

Thank you for taking the question. And I think this question is really for Michael. At the beginning of the game business, we believed game business is a social network, is that people go there to meet a friend. But in China and also worldwide, mostly in China, you have so many social networks right now, we have [Chinese Language] tons of it, I think that diverted a lot of traffic from game platform. So what's the company game development strategy to incorporate those major factors into the game development?

Vivien Wang

[Chinese Language]

Michael Chi

[Chinese Language]

Vivien Wang

Regarding to your question, there are a couple of points. First of all, we are actually also developing more social networking games. We expect to release them in the future and we also expect them to be profitable for us. Secondly, we believe that the overlap between large-scale MMORPG and social networking in terms of the user base is actually pretty different. The overlap is not too much. So we believe that social networking type of games is primarily attracting new gamers coming into the sector. We don't believe a significant negative impact from the sector to the large-scale MMORPG segment. And shortly we are also actively adding a lot of the social networking, mini-blog type of features, type of functions into our MMORPG as well. Any theory, any new form of social networking type of functions can be added in a larger-scale MMORPG as well. So overall we don't expect any significant negative impact from the social networking type of games or social networking type of platforms. Yes, thanks.

Operator

The next question will come from the line of Mark Marostica from Piper Jaffray again. Please go ahead.

[Heidi Lee] – Piper Jaffray

This is [Heidi] again. I have a quick follow-up question regarding your, like, we know that Runic Games is going to roll out their sequel to their first franchise game, like Torchlight II this summer, in July. So this game will be a network-compatible game. So I'm wondering if you are going to bring this game to Mainland China. Thanks.

Vivien Wang

[Chinese Language]

Michael Chi

[Chinese Language]

Vivien Wang

We're actually very happy with Runic Games' performance. The single version of Torchlight, although it was not officially released in China, but has been -- there are a lot of user interest that were generated with the game already. They are currently working on Torchlight II as well as Torchlight Online. We look forward to launch Torchlight Online in China in the future. Yes.

Operator

Next question will come from Nick Ning of Roth Capital. Please go ahead, Nick.

Nick Ning – Roth Capital

Hi. Thanks for taking my questions. So I just want to get a sense about for the rest of the year or next year, if you [can make a computation], which part of your game business will grow faster, overseas game operation or Chinese Mainland online game operation? Thank you.

Kelvin Lau

Thank you, Nick. Thanks for the question. Once again, we are not going to give any guidance in terms of our revenue performance in Q2, Q3 or Q4 this year. But I can tell you this, we expect our revenue in domestic market and also overseas market will grow this year. Why? Because, as what I mentioned, we just launched three new games. We, I think these three new games, we will have a full year revenue contribution this year, and also we have our two more games that are going to launch this year. And also I expect like Perfect World II and Zhu Xian, they will not -- I think we can maintain a very stable level I think this year. So I will expect my domestic revenue will grow this year. And also overseas, like Forsaken World is going to launch in the U.S. and also Forsaken World is going to I think export to other overseas countries. So I also expect my overseas operation revenue will grow as well. And also we just started our operation in Europe. We just launched I think a few games already. So, Forsaken World will also launch in Europe. So that's the reason I said I expected domestic and also overseas revenue growth this year.

Thank you.

Operator

Just in the interest of time, ladies and gentlemen, we will need to close the question-and-answer session there. At this point, I would like to hand back to Vivien for any closing remarks.

Vivien Wang

Thank you. This is the end of the conference call. The webcast replay will be available at Perfect World's official website, www.pwrd.com, under IR section. If you have any additional questions, please feel free to contact us. Thanks.

Michael Chi

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference call. We do appreciate your participation, and you may now disconnect.

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