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

Q1 2011 Earnings Call

May 23, 2011 9:00 pm ET

Executives

Vivien Wang - VP of IR and Corporate Communications

Michael Chi - Chairman and CEO

Kelvin Lau - CFO

Analysts

Timothy Chan - Morgan Stanley

Jin Yoon - Nomura

Wendy Huang - Royal Bank of Scotland

Yvonne Yang - BNP Paribas

Lisa Yuan - Goldman Sachs

Mark Marostica - Piper Jaffray

Paul Wuh - Samsung

Andy Yeung - Oppenheimer

Jeffrey Tsang - Standard Chartered

Atul Bagga - ThinkEquity

Nick Ning - Roth Capital

Hui Dong - HSBC

Operator

Ladies and gentlemen, welcome to the Perfect World's first quarter 2011 earnings call. (Operator Instructions) I'd now like to hand the conference over to your first speaker today, Mr. Vivien Wang, VP of Investor Relations and Corporate Communications.

Vivien Wang

Thank you everyone for joining us today for Perfect World's first quarter 2011 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, we 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 first quarter 2011. 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 provisions 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 statement as a result of new information, future events or otherwise, except as required under applicable law.

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

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

Michael Chi

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

We were pleased with the quarter's results. The sequential growth in our revenues surpassed the high end of our expectations and drove our margin up.

Last year, we underwent a strategic transition, which catered on lengthening the development cycle of our games and focusing on larger and long-term projects. As a result, we saw some short-term pressure on our financial performance, but we believed these actions would be necessary for our sustainable growth in the long term. Our solid results in the first quarter show that we're on the right path.

We recorded a strong performance in our core portfolio of games, including our flagship titles, Perfect World II and Zhu Xian. Our more recent releases, Empire of the Immortals and the Forsaken World, also began to contribute meaningfully to our results.

At the same time, we had a few launches during the first quarter as compared to the previous quarter. We led to a reduction in our sales and marketing expenses. Together, these factors contributed to a strong bottomline growth in the first quarter.

For the second quarter, as part of our normal product cycle, there is no grand promotional holiday similar to the Chinese New Year. Additionally, we intend to ramp up our marketing activities in the run-up to our upcoming MMORPG, the highly anticipated, Heaven Sword and Dragon Saber, as well as a release of some new expansion packs.

This has led to cause some fluctuations in our results for the second quarter, but we are optimistic that our performance will accelerate again in the following quarters. Such quarterly fluctuations will also be a part of our business, and it's simply a natural extension of our product cycle.

We believe investors will clearly see the write-off of our business model by taking a long-term view of our ongoing performance. A long-term view is key to understanding our business. Our outlook for this year and beyond is very positive, given our diversified portfolio of existing games and the strong pipeline.

We continued to execute on our core strategies, including the globalization of our brand and the signature gaming titles. To date, our games have grown in popularity both in China and abroad and we remain China's leading exporter of online games.

During the quarter, successful overseas licensing activities continued in Asia, Latin America and the Russia. Overseas subsidiaries in North America and Europe also made good progress. In Japan, our business was affected somewhat by the March earthquake; however, we expect the impact will be temporary. And overall overseas operating platform continues to strengthen. Going forward, we'll continue to deliver exciting and innovative games for players worldwide.

Looking ahead, we are confident our growth will continue to be fueled by our core portfolio of the existing titles and rich and diverse pipeline of new games, including Heaven Sword and Dragon Saber, Swordsman Online and a number of additional new titles under development.

Our specialized production studios and proprietary gaming engines allow us to develop new franchisees across the spectrum of 2D, 2.5D and 3D segments. Our diverse collection of games continue to be one of the strongest assets, and we plan to further bolster our collection with other new titles that cater to specific sub-segments of the online gaming market in order to further diversify our revenue streams.

We believe we are thoroughly prepared to meet the new demands and opportunities that lie ahead in the global online gaming industry. The strengths in R&D and innovation will support our efforts to continue our delivery of the high-quality gaming experiences to our players, while driving sustainable growth for our business over the long term.

With that, I'd like to pass the call to Kelvin.

Kelvin Lau

Thank you, Michael. As Michael mentioned, in the first quarter, we lengthened our product cycle, which allowed us to realize meaningful growth during the quarter.

We saw a strong performance in the domestic market from a number of our titles such as Perfect World II, Zhu Xian, Forsaken World and Empire of the Immortals. We also continue to bring new content to our existing games through releases of new expansion packs.

Shortly after the quarter end, we launched an expansion pack Fantasy Zhu Xian 2.0 for our turn-based 2D MMORPG Fantasy Zhu Xian. We are also going to release another expansion pack Road to Glory for our 3D MMORPG, Zhu Xian.

In the overseas market, we have a series of great developments during the quarter. We signed an agreement to license Perfect World II to the Spanish-speaking countries in Latin America, Forsaken World to Singapore, Malaysia, Thailand, Philippines, Hong Kong and Macao and Dragon Excalibur to Vietnam.

Through various overseas panels, we launched the Forsaken World in Singapore, Malaysia and Taiwan, and Legend of Martial Arts in the Philippines through our own overseas subsidiaries. We also successfully launched Forsaken World in North America and Europe.

In addition, we obtained a licensing agreement to operate RaiderZ and Rusty Heart in North America. Both games are action MMORPGs developed by Korean developers.

Shortly after the quarter, we signed an agreement to license Legend of Martial Arts to Russia and Empire of the Immortals to Taiwan. We also successfully launched Hot Dance Party in the Philippines through our own overseas panel.

Now I would like to take you through our first quarter 2011 financial highlights.

Our total revenues were RMB721 million in 1Q '11 as compared to RMB593 million in 4Q '10 and RMB625 million in 1Q '10. Our online game operation revenues were RMB646.2 million in 1Q '11 as compared to RMB526.2 million in 4Q '10 and RMB569.7 million in 1Q '10.

The sequential growth in online game operation revenue from 4Q '10 was primarily attributable to the continued strength of some of our existing games such as Perfect World II and Zhu Xian as well as the strong performance of newly launched games including Forsaken World and Empire of the Immortals.

ACU for games under operation in Mainland China was approximately 905,000 in 1Q '11 as compared to 999,000 in 4Q '10 and 993,000 in 1Q '10. The decrease in ACU from 4Q '10 was mainly due to adverse seasonality factors on a traffic side in 1Q '11.

Our overseas licensing revenues were RMB63.6 million in 1Q '11 as compared to RMB57.8 million in 4Q '10 and RMB53.4 million in 1Q '10. The increase from 4Q '10 was mainly attributed to the continuous growth in the usage-based royalty fees, partially offset by a decrease in initial license fee as we commercially launched fewer new games in the overseas market in 1Q '11.

Our film, television and other revenues were RMB11.2 million in 1Q '11 as compared to RMB9 million in 4Q '10 and RMB2 million in 1Q '10. There was no major release of any movie or TV series in 1Q '11.

Our gross revenue was RMB612.9 million in 1Q '11 as compared to RMB482.3 million in 4Q '10 and RMB537.9 million in 1Q '10. Gross margin was 85% in 1Q '11 as compared to 81.3% in 4Q '10 and 86.1% in 1Q '10.

Our operating expenses were RMB326.1 million in 1Q '11 as compared to RMB 359.5 million in 4Q '10 and RMB214.8 million in 1Q '10. The decrease in operating expenses from 4Q '10 was mainly attributed to lower sales and marketing expenses, partially offset by higher G&A expenses and R&D expenses.

Our R&D expenses were RMB146.3 million in 1Q '11 as compared to RMB136.8 million in 4Q '10 and RMB77.8 million in 1Q '10. The increase from 4Q '10 was primarily attributed to increased depreciation expenses and office expenses as a result of the relocation to our own new office building.

Our Sales and marketing expenses were RMB105.2 million in 1Q '11 as compared to RMB155.2 million in 4Q '10 and RMB82.2 million in 1Q '10. This was largely due to lower advertising and promotional expenses in 1Q '11 as we did not have as many new launches as in 4Q '10.

General and administrative expenses were RMB74.7 million in 1Q '11 as compared to RMB67.5 million in 4Q '10 and RMB54.8 million in 1Q '10. The increase from 4Q '10 was mainly due to higher depreciation expenses and office expenses as a result of the relocation to our own new office building as well as an increase in staff cost.

Our operating profit was RMB286.8 million in 1Q '11 as compared to RMB122.8 million in 4Q '10 and RMB323.2 million in 1Q '10. Non-GAAP operating profit was RMB312.5 million in 1Q '11 as compared to RMB147.3 million in 4Q '10 and RMB344.9 million in 1Q '10.

Our income tax expense was RMB33.6 million in 1Q '11 as compared to RMB12.1 million in 4Q '10 and RMB28.7 million in 1Q '10. The increase from 4Q '10 was in light with the growth in operating profit in 1Q '11.

Net income attributable to the company's shareholders was RMB263.7 million in 1Q '11 as compared to RMB125.2 million in 4Q '10 and RMB305.2 million in 1Q '10. Non-GAAP net income attributable to the company's shareholders was RMB289.5 million in 1Q '11 as compared to RMB149.7 million in 4Q '10 and RMB327 million in 1Q '10.

Basic and diluted earnings per ADS were RMB5.25 and RMB4.99 respectively in 1Q '11 as compared to RMB2.50 and RMB2.36 respectively in 4Q '10 and RMB6.12 and RMB5.75 respectively in 1Q '10.

In terms of financial guidance, as part of the normal product cycle, during the second quarter, there is no grand promotional holiday similar to the Chinese New Year. As such, based on our current operations, total revenues for the second quarter of 2011 are expected to be between RMB685 million and RMB721 million, representing a flat-to-mild decline on a sequential basis, but still an increase of 15% to 21% on a year-over-year basis.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Timothy Chan from Morgan Stanley.

Timothy Chan - Morgan Stanley

I am very interested to learn more about your new games, Heaven Sword and Dragon Saber as well as Swordsman Online. What are the feedbacks you've received so far on these games and what are the key features of these games that distinguish themselves from many potential features among the competitors, and how should we think about its launch schedule?

Michael Chi

Regarding the feedback of these two games, Heaven Sword and Dragon Saber, we just started several rounds of closed beta testing. So far the feedback from the gamers is positive. The gamers liked the game.

Regarding the SAJH, because this is still in progress of development, we still haven't started any closed beta testing. So we still haven't gotten so much feedback from the gamers. But in general, they loved the game.

Regarding features, as all you know, SAJH and Heaven Sword and Dragon Saber two games are based on Louis Cha's very famous and popular novels. So it's similar, not to add. I think the gamers will love the features. We are definitely willing to do some new and innovative features in the games to attracts more gamers to play the games. But I think right now, we cannot disclose quite a lot on what type of new and innovative features are in the games for competitive reasons.

Regarding the launch date for the Heaven Sword and Dragon Saber, we are still waiting for the publishing number to be issued by GAPP. Once we have obtained the publishing number, we can confirm the exact launch date for Heaven Sword and Dragon Saber.

SAJH, as we probably mentioned before, we still target to launch the game in Q4 this year. Going back to Heaven Sword and Dragon Saber, I think based on current status, so we expect Heaven Sword and Dragon Saber will be launched in December.

Timothy Chan - Morgan Stanley

And I have a follow-up question regarding your second quarter guidance. Does that include any movie revenues? And how much of impact from the Japan earthquake was factor in the Q2 guidance? If we look at it without the earthquake impact, what would the guidance look like?

Kelvin Lau

In my guidance for Q2, there is no movie or TV drama revenue expected to be generated in Q2. I don't think the earthquake will have some impact on our operation in Japan. But right now, the contribution in terms of revenue or in terms of profit contributed by our Japan operations compared to the whole group is still not that big.

So there will be some impact on the Japan operation, but compared to the overall group impact, it's very minimal. So in my guidance, I've already taken into consideration the impact from the earthquake event in Japan.

Operator

(Operator Instructions) Your next question comes from Jin Yoon from Nomura.

Jin Yoon - Nomura

Just on your cost line on R&D and sales and marketing, I know that you mentioned that you have a couple of games coming on the pipeline. While the margins came kind of handsomely in the quarter, can you talk about R&D spending? Should we expect that to be flat on an absolute dollar basis for Q2? And with R&D, should we expect more of a Q3 last year type of number or Q4 with some of these gains coming out? Could we expect that operating margins could be in the high 30s and low 40s throughout the rest of the year?

Kelvin Lau

Regarding the R&D expenses, I think for Q2, we expected R&D expenses will go up a little bit, because we are going to hire some more R&D people to prepare for the development of our new games for 2012 and 2013. But I think this type of increase in R&D will not be very high. I think we will increase a little bit of R&D expenses in Q2.

Regarding the margins, according to our internal policies, I think we are not going to give any guidance on the operating margin or net margin. So we only give the guidance on the revenue side.

Jin Yoon - Nomura

Sure, Kelvin. But can you talk about if how much of incremental spending for sales and marketing you plan to do in the quarter? I mean is it going to be type of numbers like Q4 numbers last year where you go close to RMB24 million or is it going to be just slightly north of what saw in Q1? Can you just describe what the present quarter looks like in terms of sales and marketing?

Kelvin Lau

As I mentioned before, it all depends on how many expansion packs and how many new games we are going to launch in that quarter. That would affect sales and marketing expenses.

And also, we mentioned we'll have several expansion packs to be launched in this quarter. So sales and marketing expenses will definitely go up in Q2. And also in Q1, there is a Chinese New Year. So we cannot do so many promotional advertising activities in Q1. So Q2 compared to Q1, definitely the sales and marketing expenses will go up. And it also depends on the launching of our new games.

So normally for expansion packs, we incur several million RMB on the expansion pack promotion. And for the new game launches, normally we incur about RMB7 million to RMB10 million for the launch as part of our promotional expenses.

Operator

Your next question comes from Wendy Huang from Royal Bank of Scotland.

Wendy Huang - Royal Bank of Scotland

I just wonder if you can give some color on the ARPU trend and APC trend in Q1. I know that you no longer discuss these metrics. But If I just look at your ACU data, it shows decline sequentially. But you picked up quite strongly in the quarter. So it seems as you kind of decouple with the topline, can you give some color on the APC and ARPU?

Kelvin Lau

Yes, in Q1, our ACU number dropped to about 903,000. I think the main reason for such a decline this year is mainly because of the Chinese New Year. I think the major reason was, I mentioned many times before, because during Chinese New Year, many gamers will engaged in some of the social activities. And I think this put them away from computers for a while. So the average user number declined. It's normal. It's natural. So we are not worried about this.

In terms of APC and ARPU, starting with this quarter, we prefer not to disclosing these two data. I'll say in Q1, the major driver for our revenue growth is coming from the monetization activities. We have done that in our core game, Zhu Xian.

So based on this, yes, the monetization activity increased and the gamers' spending will be higher than Q1.

Operator

Your next question comes from Yvonne Yang from BNP Paribas.

Yvonne Yang - BNP Paribas

First, I have a quick follow-up on the R&D expense. Could you please share the number of the R&D staff by now? And if possible, could you please share the expected R&D staff by the next quarter or by the end of this year? How many are we expecting to add?

Secondly, could you also comment on the overseas business? Should we continue to expect overseas business to outpace the domestic business? And if yes, which market do you think will be the major driver?

Michael Chi

In terms of our R&D headcount, right now we have about 2,200 R&D people. Our current trend, we'll try to hire another 700 R&D people. As well as I mentioned, we got to prepare for our new game development for 2012 and 2013 and even 2014. So in a mixed sense, we'll add a little bit of the R&D people.

If you compare the overseas and the domestic market, in terms of the increase in sales, we really hope to see both domestic operations and overseas operations increase at the same time.

I would say domestic market is still the leader and is larger than the overseas market in the short run. Why? Because in the domestic market, we are going to launch more new games and also we are more actively adding our games to more overseas countries. Even in U.S., you'll see we just launched our Forsaken World in U.S. as well, and the performance of Forsaken World in U.S is very good.

So I would say domestic market is still a major market for us.

Yvonne Yang - BNP Paribas

The 700 and more R&D staff, it's the number that we are looking to hire next quarter or the rest of the year?

Vivien Wang

Throughout the year, several hundred.

Operator

Your next question comes from Lisa Yuan from Goldman Sachs.

Lisa Yuan - Goldman Sachs

Could you talk a little about the trend of Forsaken World and Empire of the Immortals?

Michael Chi

Forsaken World, we launched beginning Q4 last year. So right now, Forsaken World is quite stable. In fact, Forsaken World is very third largest revenue contributor to our revenue in Q1 already. So we're very happy. And also in terms of issue number for Forsaken World is quite stable. We also going to have an expansion pack to be launched for Forsaken World this year.

Empire of the Immortals, we are happy with performance of Empire of the Immortals. It's also stable right now. But because of our policies, we're not going to disclose the issue number for innovative games. So we're happy.

Lisa Yuan - Goldman Sachs

So the flat-to-declining revenue guidance for second quarter is mainly because of the reduced monetization for existing games, is it safe for me to assume this?

Michael Chi

Yes.

Operator

Your next question comes from Mark Marostica from Piper Jaffray.

Mark Marostica - Piper Jaffray

Why don't you give us an insight on the co-development activities with Sega on Saint Seiya Online? When do you expect to launch the game in China? Are you are going to operate the game overseas? And do you expect that game to be a big contributor?

Michael Chi

We acquired some IPs in Japan. So we're prepared on our desk to cooperate with some of our Japanese partners on development of games. But I think right now it's not appropriate for us to disclose so much on what kind of games or exact launch dates of these types of Japanese titles. So definitely we will actively cooperate with our Japanese partners.

Mark Marostica - Piper Jaffray

Just a follow-up regarding your pipeline. Obviously, there are two big games that you are talking about, Heaven Sword and SAJH. But you also alluded to a building pipeline I think in your introductory remarks. Can you give us a sense as to just generally what 2012 looks like versus 2011 in terms of pipeline? I am just trying to get some level of color on a relative basis.

Michael Chi

Yes, we have many R&D people that are working on a number of new titles in our pipeline. But for competitive reasons, we'd prefer not to disclose too much detail. We will only announce when we're very close to the launching date.

Actually if you remember, two years ago, we've kind of modified our strategy a little bit. We wanted to strengthen of R&D efforts to each our games and we wanted to work on larger and longer-term products that can help us sustain the long-term growth.

Actually we have a number of titles we're working on and they are targeting different sub-segments, for example, 2D, 2.5D, 3D. So we are very confident of the long-term sustainable growth of our company.

Mark Marostica - Piper Jaffray

On the tax rate, how should we be thinking about your tax rate going forward?

Kelvin Lau

My estimation is about 10% to 12%. Looking at Q1, my effective tax rate is about 11%. So I think 10% to 12% is a fair estimation for the whole year.

Operator

Your next question comes from Paul Wuh from Samsung.

Paul Wuh - Samsung

You had mentioned that there will be no film and TV serial revenues in the second quarter. What about in the second half of this year? Do you anticipate there to be any revenues from this source and what do you think about for 2012 for this category?

Kelvin Lau

For film and TV drama, it all depends on the development progress of each project. So as I mentioned before; once we confirm the exact launch date for a movie or TV drama, we will keep the market informed either in the earnings call or through our press release announcement.

Paul Wuh - Samsung

In your estimation, do you expect any revenues from these titles in the second half at this point?

Kelvin Lau

First of all, we didn't give any guidance or estimation for our second half in terms of revenue or profit. What I mentioned is that there would be no TV or TV dramas in Q2 in my revenue guidance.

Paul Wuh - Samsung

What is the RMB11 million that you have in the revenues in the first quarter from the other revenues?

Vivien Wang

It was just some of the tail revenue from Fighting for My Marriage.

Operator

Your next question comes from Andy Yeung from Oppenheimer.

Andy Yeung - Oppenheimer

I think you mentioned earlier that your monetization activity did help you boost your first quarter revenues, particularly regarding to Zhu Xian. Can you help us understand a little bit on the dynamic between the players' traffic and your monetization strategy over the next couple of quarters?

Michael Chi

We did quite a lot of monetization for Perfect World II and Zhu Xian. If you follow Perfect World closely, you would know that we do monetization here and there, and then we take a break. And then we reactivate the monetization in the first quarter. So that's the main reason of why the guidance for Q2 is flat-to-mild declining, because we decided not to do so many monetization activities for our games in Q2.

In Q3, yes, we most probably will accelerate our monetization activity for our games, because Q3 is a good season because it's summer vacation to do monetization for the games.

Operator

Your next question comes from Jeffrey Tsang from Standard Chartered.

Jeffrey Tsang - Standard Chartered

It's a follow-up question on the ACU trend actually. After the low season in Chinese New Year, I was wondering what you guys were seeing going into April and May? Are they improving?

Kelvin Lau

Chinese New Year is a low season for our games in terms of ACU, but after Chinese New Year, we see the ACU number going back to the normal level.

Jeffrey Tsang - Standard Chartered

So more like Q4 level already?

Kelvin Lau

Right now, I don't have the exact number on hand, because we got to calculate it by the end of each month. Right now, the ACU number, if you compare with the Chinese New Year, is better.

Operator

Your next question comes from the line of Atul Bagga from ThinkEquity.

Atul Bagga - ThinkEquity

Kelvin, I was wondering if you can help us understand a little bit on the monetization. What did you guys do different in the first quarter? if I just take the same kind of corresponding figures for AP, it seems like monetization could have been significantly higher in 1Q.

So I trying to see if you can help us understand what are you guys doing different and where do you see monetization? Is it mostly coming from higher conversion rates from free user to paying user, or is it mostly ARPU which is going up?

Kelvin Lau

There is not so much difference techniques in monetization. I think what we did is overall some more virtual items in Perfect World II and Zhu Xian. I think these two games are already three to four years old and they have a large group of loyal gamers. So whenever we do some monetization, some more virtual items, I think our loyal gamers will spend more money on the game.

That's why the monetization drove up the revenue in Q1. So from what I understand, we've a special or unique monetization technique.

Vivien Wang

And also bear in mind that the Q1's growth also came from newly announced games such as Forsaken World and Empire of the Immortals. So not solely from monetization of older games.

Atul Bagga - ThinkEquity

Just a follow-up on that, Kelvin. So I know U.S. and Europe are still very small part of your business. But can you help us understand sequentially from fourth quarter to first quarter what is the kind of growth you're seeing in U.S. and Europe?

Kelvin Lau

In fact, our operation in U.S. and Europe in Q1 dropped a little bit. Why? Because as I mentioned, I think the situation in Europe and U.S. is quite different from that in China. In U.S. and Europe, I think Q4, especially during the Christmas period is a very good season to do the monetization. So in U.S. and Europe, we achieved a pretty nice revenue growth in Q4.

And then going to Q1, because we cannot do the monetization, in Q1 U.S. and Europe revenue dropped a little bit. But I think the good new is we launched the Forsaken World in Europe and also in U.S. in March. So I will expect my U.S. and Europe operations performance will go up in Q2, because Forsaken World is well accepted U.S. and European gamers.

Operator

You next question comes from Nick Ning from Roth Capital.

Nick Ning - Roth Capital

So for the new games to be launched in 2012 and beyond, which will target the difference segment of the market, just wonder are they all MMORPG targeting hardcore gamers or there will be different types of games?

Michael Chi

Most of our new games will be MMORPG. We do have some of our new games in the pipeline for 2012 and beyond that are new. But for competitive reasons, we'll prefer not to disclose the details at this point. We will keep the market informed when the time is right.

Operator

Your next question comes from Hui Dong from HSBC.

Hui Dong - HSBC

My question is regarding the game development. Actually we see that company will introduce a new expansion pack for Empire of the Immortals this week maybe. How the company sees the gamers consuming the game content more well than previously and which may give more pressure on the game development, maybe introduce new expansion pack more frequently? Could you share your view on this?

Michael Chi

We are keeping a good pace in terms of updating our content. For example, typically we do monthly update. On a quarterly basis, we will also do a mid-sized update for each of our game. On annual basis, each year we typically do one or two big-sized expansion pack. We've been keeping this pace for most of our games in order to keep the gamers engaged.

Operator

Your next question comes from Wendy Huang from Royal Bank of Scotland.

Wendy Huang - Royal Bank of Scotland

Could you give me some update on the share repurchase program you announced in March and how many shares or what amount of shares you have repurchased so far?

Kelvin Lau

As Vivien mentioned on our last earnings call, the Board approved the share buyback trend within the amount of $100 million for the period of March last year to March this year. So up to now, we still haven't executed the repurchase trend. I think the repurchase will be made from time to time at the market price being negotiated transaction of the market (inaudible).

The timing extent of any share repurchase is at the discretion of management. And also, it depends on the market condition that affect us. Net-net, we'll make the best use of the cash, including the share buyback,

Wendy Huang - Royal Bank of Scotland

Kelvin, you said you have not repurchased any shares so far, is it?

Kelvin Lau

Up to now, yes, you are right.

Operator

Your next question comes from Paul Wuh from Samsung.

Paul Wuh - Samsung

I was wondering, in general would you say that the environment for MMOs this year is better than last year? I am just trying to get a sense of what you feel the overall market is, because it seems that obviously U.S. has new games and others. But what do you feel about competition and just the overall sense of the MMORPG market in China this year versus last year at this time?

Michael Chi

There are a lot of our peers that are also launching many more new big games to the market. As far as you noticed, ever since three years ago, we've seen changing our strategy a little bit where we've seen lengthening product cycle in order to give every single of our game a bigger trend for success upon the launch.

We are working hard to deliver. We are also noticing social networking types of games are also taking off in the market. We are doing some kind of test as well in these new markets.

Paul Wuh - Samsung

So are you guys saying that you are actually developing social networking game as well potentially for a launch next year?

Michael Chi

Yes.

Vivien Wang

Yes, we are developing some small games at this point. But for competitive reasons, we'll prefer not to disclose too much detail at this point.

Operator

The next question comes from Nick Ning from Roth Capital.

Nick Ning - Roth Capital

Just now you mentioned that the fourth quarter is usually the strongest of three seasons for your overseas game operations. So which quarter is the second best and which is number three if we exclude the new game launch impact?

Michael Chi

Q4 is the best, yes, because of the Chinese New Year. And I would say the second best should be Q3, the summer vacation.

Operator

The next question comes from Wendy Huang from Royal Bank of Scotland.

Wendy Huang - RBS

I think some of market players recently commented a trend about game industry. They are saying that due to the fragmented usage time from the game players, the game logon time actually reduced for the game overall. So that's why we are seeing the ACU kind of decline for the whole industry or for most of games, but it doesn't really affect to the monetization of the game.

So I just wonder if you were observing this similar trend on your games, will you design any game session or game features to accommodate these kind of new changes in the industry? And also how can you make sure that your monetization or value didn't decline despite of the game usage time decline?

Michael Chi

Thanks very much for your information, Wendy. As far as ourselves, we are very confident to further increase our market share given that we've been accumulating a lot of the R&D efforts and we have been lengthening or demo cycle for each of our game to give them the best chance for success. So we are working on a lot of the blockbuster potential titles in our pipeline.

As far as the fragmentation of the gamers' time, we are also working on some other new types of games that should help us attract some of the different segments of the gamers.

Also, something that sets us apart from our peers is the globalization. As you can see clearly from our results, we are doing a great progress in terms of globalization. We are doing great in a lot of our overseas markets. So in terms of the global online gaming market, we do see a lot of potential for online games to further grow.

We also want to further penetrate into different markets to further grow our online gaming that can help us further diversify our portfolio and also diversify our revenue stream.

Operator

There are no further questions at this time. Please continue.

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 Investor Relation section. If you have any additional questions, please feel free to call us. Thank you.

Michael Chi

Thank you.

Operator

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

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Source: Perfect World CEO Discusses Q1 2011 Results - Earnings Call Transcript
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