Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q1 2012 Earnings Call

May 29, 2012 9:00 p.m. EDT

Executives

Joanne Deng – IR Manager

Michael Chi – Chairman and CEO

Kelvin Lau – CFO

Vivien Wang – VP of IR

Analysts

Mark Marostica – Piper Jaffray

Steve Zhang – Macquarie

Timothy Chen – Morgan Stanley

Wendy Huang – Royal Bank of Scotland

Huizi Zhang – Nomura Securities

Adam Krejcik – Roth Capital Partners

Martin Bao – CICC

Eric Wen – Mirae Asset

Andy Young – Oppenheimer

Atul Bagga – Lazard Capital

William Huang – Barclays Capital

Jialong Shi – CLSA

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Perfect World Co. Limited First Quarter Earnings Conference 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 wish to ask a question, you’ll need to press star 1 on your telephone. In fairness to other callers, please keep your questions limited to one, and then you're free to return to the queue. I must advise you that this conference is being recorded today, Wednesday, the 30th of May, 2012.

I would now like to hand the conference over to your first speaker today, Mr. [Chip Fleming]. Thank you, sir, please go ahead.

Joanne Deng

Thank you, operator, and thank you everyone for joining us today for Perfect World’s first quarter 2012 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. Michael Chi, our Chairman and CEO, who will give us a brief update on our business. Mr. Kelvin Lau, our CFO, will then provide an overview of the quarter. Ms. Vivien Wang, our Vice President of Investor Relations and Corporate Communications, will then take us through some of our latest operational developments. And then she will pass the call back to Mr. Lau to go through our financial performance in the first quarter 2012. Following the prepared remarks, Mr. Chi, Mr. Lau and Ms. Wang would be available to answer your questions.

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

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

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

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

Michael Chi

Thank you, Joanne. Thank you all for joining our call today.

Our first quarter results came within our expectations, although we slowed some of our promotional activities during the quarter. And we are pleased to see some of existing games, including our popular titles, Perfect World II and Forsaken World, continued to deliver solid performance.

Our diverse game portfolio and pipeline are one of the major strengths of our company. During the first quarter we continued to work on our rich pipeline which includes several new MMORPGs like the highly-anticipated titles, Swordsman Online and Saint Seiya Online, as well as a number of different type of games such as web games.

This year we are gearing up for the launch of two martial arts MMORPGs, Heaven Sword and Dragon Saber, and the Return of the Condor Heroes. Both of these games are adapted from widely-popular martial arts novels by Louis Cha, one of China’s most celebrated writers. We expect to launch both titles in the second half of this year, and believe they will bring a new level of fighting fun to both martial arts fans and gamers. At the same time, we are actively managing the healthy lifecycle and the sustainable growth of our portfolios by working on content enhancement of our existing games.

Another core component of our business continues to be our effective globalization strategy. We maintain our global presence of subsidiaries and specialized production studios in both China and abroad. That’s so to further enhance our strong R&D capabilities worldwide. Our newly-acquired US-based Cryptic Studios is currently developing the highly-anticipated game Neverwinter and other projects, adding additional world-class titles to our portfolio.

We also continue to enhance our global operating capabilities through [extensing of reach in] network of subsidiaries and partners. With diverse portfolios and pipeline, strong and innovative R&D teams worldwide, and extensive global outreach in network, we will continue to grow our business to meeting the increasing high standards of today’s online gamer and create long-term value for our shareholders.

Thank you. Now I will pass the call to Kelvin.

Kelvin Lau

Thank you, Michael.

Our first quarter revenues fell within our expectation, although [inaudible] compared to the previous quarter. In the first quarter we are more focused on preparation for our upcoming game launches and content enhancement for the healthy lifecycles of our existing games. Furthermore, we slowed down promotional activities as many players were away from their computers for the Chinese New Year and we did not have any major new launches during the quarter, which resulted in a reduction in sales and marketing expenses for the quarter.

In some of our overseas markets, it was a slower season for our in-game monetization activities during the first quarter. However, our successful globalization strategy continues to help us to maintain our leading positions overseas among China online gaming companies. Our games reached over 100 countries and regions worldwide and over one-fourth of our total revenues were from overseas operations and licensing activities. Our overseas subsidiaries and our overseas licensing activities continues to progress during the quarter.

We remain committed to the sustained and healthy growth of our business and to our shareholders. Given our commitment in both our current business and outlook and [capability] from our healthy partnership, we distributed a cash dividend of approximate USD98 million for our shareholders in April 2012. As we look ahead, we’re looking forward to continue to build for our future while creating long-term value for our shareholders.

Before I go over the financials, I will pass the call to Vivien, who will take you through some of our operational developments.

Vivien Wang:

Thank you, Kelvin.

[Enhancing] the lifecycles of our existing games and ensure long-term sustainability, we continue to work on company enhancements of our portfolio. Recently we released a series of expansion packs, including Tournament of Warrior Couples for Dragon Excalibur, Dance of Lucky Stars for Hot Dance Party, Fantasy Zhu Xian 2.0 for Fantasy Zhu Xian, and Scroll of Time Travel for our flagship title Zhu Xian.

Our overseas subsidiaries also continued to make progress. Recently we launched the free-to-play first-person shooter game Blacklight Retribution developed by Zombie Studios in North America, and its French and German versions in Europe. We also launched French and German versions of our sci-fi MMORPG Star Trek Online in Europe. Star Trek Online was developed by Cryptic Studios, our renowned R&D team in the US.

We also remained active in our overseas licensing business. Through various overseas partners, during the quarter, we licensed our Battle of the Immortals in Brazil and launched Forsaken World and Chi Bi in Indonesia. After the end of the quarter, we also launched Forsaken World in Brazil. Backed by our world-renowned R&D team and global operating network, we’re confident that we will continue to grow our presence overseas, and we believe these markets will continue to be a key driver of our growth over the long run.

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

Kelvin Lau

Thank you, Vivien. Now, for the first quarter 2012 financials.

Total revenues were RMB718.5 million in 1Q12, compared with RMB776.4 million in 4Q11 and RMB718.5 million in 1Q11.

Online game operation revenues, which include both domestic and overseas online game operations, were RMB665.1 million in 1Q12, compared with RMB706.9 million in 4Q11 and RMB646.2 million in 1Q11.

For overseas operations, the first quarter was a slower season for in-game monetization activities. For our domestic operations, there were no major new launches during the quarter and we mainly focused on preparing for our upcoming new game launches and further enhancing contents of our portfolio in order to lengthen the life cycle of existing games.

ACU for games under operation in mainland China was approximately 804,000 in 1Q12, compared with 873,000 in 4Q11 and 905,000 in 1Q11. The decrease from 4Q11 was mainly due to adverse seasonality factors affecting user traffic in 1Q12.

Licensing revenues were RMB49.2 million in 1Q12, compared with RMB65.6 million in 4Q11 and RMB63.6 million in 1Q11. The decrease from 4Q11 was mainly because we did not have as many new launches in overseas markets as in 4Q11.

Other revenues were RMB4.2 million in 1Q12, compared with RMB3.9 million in 4Q11 and RMB8.7 million in 1Q11.

Cost of revenues was RMB127.1 million in 1Q12, compared with RMB137.1 million in 4Q11 and RMB107.9 million in 1Q11. The decrease from 4Q11 was mainly a result of decreases in server depreciation expenses and staff cost.

Gross profit was RMB591.4 million in 1Q12, compared with RMB639.3 million in 4Q11 and RMB610.6 million in 1Q11. Gross margin was 82.3% in 1Q12, compared with 82.3% in 4Q11 and 85.0% in 1Q11.

Operating expenses were RMB356.6 million in 1Q12, compared with RMB419.1 million in 4Q11 and RMB321.7 million in 1Q11. The decrease in operating expenses from 4Q11 was due to decreases in R&D expenses, sales and marketing expenses and G&A expenses in 1Q12.

R&D expenses were RMB179.4 million in 1Q12, compared with RMB186.5 million in 4Q11 and RMB146.3 million in 1Q11. The decrease from 4Q11 was primarily due to a decrease in staff cost.

Sales and marketing expenses were RMB101.4 million in 1Q12, compared with RMB142 million in 4Q11 and RMB103.7 million in 1Q11. The decrease from 4Q11 was largely attributable to a decrease in advertising and promotional expenses. We slowed down promotional activities as there were no major new launches during the quarter, and we primarily focused on preparing for upcoming launches of new games and further content enhancements for some existing games.

G&A expenses were RMB75.8 million in 1Q12, compared with RMB90.6 million in 4Q11 and RMB71.7 million in 1Q11. The decrease from 4Q11 was mainly due to a decrease in staff cost as a special yearend bonus was recorded in G&A expenses in 4Q11.

Operating profit was RMB234.8 million in 1Q12, compared with RMB220.2 million in 4Q11 and RMB288.9 million in 1Q11. Non-GAAP operating profit was RMB256.6 million in 1Q12, compared with RMB244 million in 4Q11 and RMB314.6 million in 1Q11.

Income tax expense was RMB47.8 million in 1Q12, compared with RMB10.7 million in 4Q11 and RMB33.7 million in 1Q11. Some of the company's controlled entities are qualified as software enterprises and had been entitled to a tax exemption in prior years. In 2012, these entities started to enjoy a 50% reduction of the applicable corporate income tax rate in China in 2012.

Net income attributable to the company's shareholders was RMB209.8 million in 1Q12, compared with RMB260 million in 4Q11 and RMB263.7 million in 1Q11. Non-GAAP net income attributable to the company's shareholders was RMB231.6 million in 1Q12, compared with RMB283.9 million in 4Q11 and RMB289.5 million in 1Q11.

Basic and diluted earnings per ADS were RMB4.52 and RMB4.38, respectively. This compares with RMB5.65 and RMB5.45, respectively, in 4Q11, and RMB5.25 and RMB4.99, respectively, in 1Q11. Non-GAAP basic and diluted earnings per ADS were RMB4.99 and RMB4.83, respectively, in 1Q12, compared with RMB6.17 and RMB5.94, respectively, in 4Q11, and RMB5.76 and RMB5.48, respectively, in 1Q11.

In terms of financial guidance, based on our current operations, total revenues for the second quarter of 2012 are expected to be between RMB647 million and RMB683 million, representing a slight decline from the revenues in the first quarter of 2012 -- 2012, yes. In the second quarter, as part of the normal product cycle, we plan to continue to focus on preparing for upcoming new game launches and further enhancing the content of our portfolio in order to lengthen the life cycle of existing games and maintain long-term sustainable growth.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions).

First question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.

Mark Marostica – Piper Jaffray

Yes. Thank you for taking my question. My first question is, in regards to your licensing revenue slowdown in the quarter, and I'm curious whether there were any particular games that came in weaker than expected there. And then, does your Q2 guidance imply sequential growth in overseas licensing revenue? Thank you.

Kelvin Lau

Thank you, Mark. I think that the overseas licensing revenues slowed down in Q1 is absolutely normal because in overseas market, especially in US or in Europe, and Japan, or even in Korea, in Q4, during the Christmas is the peak season to do the monetization for all those games in Q4. So, after the peak season, the monetization typically will be slowed down a little bit in Q1. So you can see, look back to my Q1 last year, this overseas licensing revenue also slowed down. So I think Q1 overseas market performance slowed down is absolutely normal. Okay?

Vivien Wang:

Yeah. And also the decrease from 4Q was also because there was no -- not many -- as many new game launches as what happened in 4Q.

Mark Marostica – Piper Jaffray

Understand. And then, would you expect Q2, based on your guidance, top line guidance, to show sequential growth in overseas licensing?

Kelvin Lau

I expect in Q2 my overseas licensing revenue will remain flattish, because I don’t expect any major new game launches would happen in Q2 in the overseas market.

Mark Marostica – Piper Jaffray

Okay. Thank you. I’ll jump back in the queue.

Operator

Thank you for your questions. Your next question comes from the line of Steve Zhang from Macquarie. Please ask your question.

Steve Zhang – Macquarie

Hi. Thanks for taking my question. Can you give one more color on Q2, why the sequential decline? Because Q1 I assume would be a fairly light season for online gamers already, if you already did some promotional activities in Q1 that you would not be continuing to Q2? Thanks.

Kelvin Lau

Thank you, [Nick]. As what we had mentioned in the remark, in Q2 we are more focused on our new launches, more resource on the preparation of new game, and also for the preparation of the new expansion pack for our media games like Perfect World II and Zhu Xian. So we continue to slow down a little bit on the monetization for these media games in Q2. So, this is the major reason why we expect it to have a decline in revenue in Q2.

Operator

Thank you. Your next question comes from the line of Timothy Chen from Morgan Stanley. Please ask your question now.

Timothy Chen – Morgan Stanley

Hello, Michael, Kelvin, Vivien. Good morning, and thanks for taking my question. My question would be a follow-up on the second quarter expense guidance. You mentioned that the -- for the decline in the second quarter, it’s mainly due to the decreased promotion and monetization. But I believe in the last call you mentioned that there would be a more sustained rate of monetization as you now shift to a more permanent virtual items as compared to a more consumable virtual items as before. Thank you.

Kelvin Lau

Yes, Tim, you are right. If you look on our balance sheet and see there’s an increase in [inaudible] so this can refer to what I mentioned in the last earnings call. Yes, in Q1 we did some monetization and encouraged gamers to [inaudible] into the game, and we collected cash, but we didn’t convert the cash into revenue [inaudible].

Going to Q2, yes, the cash is still in our books, but we didn’t do so many activities, promotional activities to convert or to encourage gamers to consume so many items in the games. We want to do more monetization in the second half of this year together with our new game launches in the second half, so we expected to see a better growth in the second half of this year in terms of revenue.

Operator

Thank you. Next question comes from the line of Wendy Huang from RBS. Please ask your question now.

Wendy Huang – Royal Bank of Scotland

Hi. Also I have a follow-up on your Q2 revenue guidance. You quoted the Q1 weakness as temporary, but the Q2 guidance is still weak. And also if I compare your Q2 guidance to your Q4 ’11 revenue, actually is about RMB100 million less. So, can you help me to understand where are those RMB100 million decline coming from? Thank you.

Kelvin Lau

Thank you, Wendy. Yes, we did a very good job last year Q4 because we launched a big expansion pack for Zhu Xian in Q3 last year, and the results was very good for Zhu Xian, then we did a monetization for Zhu Xian in Q4, that’s pushed up quite a lot on our revenue in Q4. So this is the major reason why we are very good in Q4.

As what I said, in Q2 this year, we are more focused on content enhancement, like expansion pack launches, all these things, for -- to prepare for the second half of this year. So we [trended] to slow down -- further slow down a little bit on the monetization for our media games like Perfect World II and Zhu Xian.

Operator

Thank you for your questions. The next question is from the line of Jin Yoon from Nomura Securities. Please ask your question now.

Huizi Zhang – Nomura Securities

Hi. Thank you very much for taking my question. This is Huizi Zhang today for Jin Yoon. Just a quick question on your visibility for sales and marketing for the second half of the year. You mentioned that basically you're delaying a lot of your sales and marketing activities till the end of the year to correspond with your new launches. Where can we expect your sales and marketing expenses to fall as a percent of your revenues in the second half? Do we expect more such expenses to compensate for the lower spending in earlier half of the year?

Kelvin Lau

Yes. In Q2, as what I said, we don’t have any major new game launches in Q2, and also I also mentioned that in Q1 the sales and marketing expenses I think will -- was in a low level, is at a good level, because of the Chinese New Year, nobody will do the promotion advertisement in Q1. So, in Q2, I explained myself, the marketing expenses will go up as compared with Q1 this year, but will not be as high as that of in Q4 last year.

Huizi Zhang – Nomura Securities

Right. Thank you.

Operator

Thank you for your questions. Next question comes from the line of Adam Krejcik from Roth Partners. Please ask your question.

Adam Krejcik – Roth Capital Partners

Yeah, hi there. First, on your balance sheet, your short-term bank loan doubled this quarter, so, just wondering why you feel the need to increase your amount of debt when you have a pretty significant amount of cash. And then also, related to that, is your buyback still effective, the RMB100 million buyback, is that still in place? Are you buying any shares? And hence, the Board consider paying an annual dividend as well as a special dividend [that was just had]? Thank you.

Kelvin Lau

Thank you, Adam. In policy, the short-term investment representing I think the short-term fixed deposit, we put that cash in the bank. So I think in Q1 we put some of our cash in the safe deposit. So, this is the major reason for the increase in the short-term investment. The short-term investment merely represents for the fixed deposits, number one.

Number two is regarding the share buyback, we don’t have any share buyback plan approved by the Board, but I think we will see -- I think consider the share buyback program going forward.

Regarding the dividend, I think I mentioned in the last earnings call that we paid out a special dividend in April 2012 this year. We adopt a dividend policy in that going forward we will have a regular annual dividend paying to our shareholders. However, when to pay and how much to pay is still subject to the Board approval on an annual basis.

Operator

Thank you for your questions. Your next question comes from the line of Martin Bao from CICC. Please ask your question.

Martin Bao – CICC

Thank you for taking my question. I would like to know the latest status and an update with the two major [inaudible] Swordsman Online and Saint Seiya Online. Thank you.

Kelvin Lau

I'm sorry, it’s Swordsman Online and what?

Martin Bao – CICC

Saint Seiya Online.

Kelvin Lau

Saint Seiya Online. Swordsman Online and Saint Seiya Online, I think according to our current plans right now, we are going to launch these two games in the first half of next year.

Martin Bao – CICC

Okay. Thank you.

Operator

Thank you for your question. Next question comes from the line of Eric Wen from Mirae Asset. Please ask your question.

Eric Wen – Mirae Asset

Hi, good morning, Kelvin and Vivien. Just a quick question, how many developers do you have at this point?

Kelvin Lau

In terms of developer, right now we have about 2,000 [inaudible] plus, a little bit, yeah, 2,000.

Eric Wen – Mirae Asset

Okay. Thanks.

Operator

Thank you. Next question comes from the line of Andy Young from Oppenheimer. Please ask your question.

Andy Young – Oppenheimer

Hi. Thank you for taking my question. My question is about your update in game as well. I didn’t hear your previous calls regarding your two games for next year. But can you -- you mentioned -- but you mentioned I think four games that is in your pipeline right now. Can you give us some color on your launch schedule, particularly for Heaven Sword and Dragon Saber, as well as -- what’s the other one? Sorry, the other one. But those two games -- or Excalibur, Return of the Condor Heroes. Can you give us some idea what’s the progress on those games? I think Heaven Sword and Dragon Saber have been beta-testing since last August. What’s the progress on that, and how well it’s being received by gamers? Thanks.

Kelvin Lau

Yeah. As what we mentioned in the remark today, is Heaven Sword and Dragon Saber and also the Return of Condor Heroes will be launched in the second half of this year. These two games, are based on the Louis Cha [inaudible]. And then, going into 2012-’13, okay, 2013, is we have Swordsman Online, Saint Seiya Online, and also we have another new game, right now is under development by Cryptic which is called Neverwinter, will be launched in US as well.

For the games that are in progress, under development [inaudible] yeah.

Andy Young – Oppenheimer

Thanks.

Operator

Thank you. (Operator Instructions).

Next question comes from the line of Atul Bagga from Lazard Capital. Please ask your question now.

Atul Bagga – Lazard Capital

Hey, guys. Thanks for taking my call. Kelvin, can you talk a little bit about your web game strategy, how many web games you might have in the pipeline this year and next year? And what percentage of revenue you expect to come from web game in 2012 and 2013?

And also looking into your pipeline for fiscal ’12 or calendar ’12, what are the games that you're really excited about? And maybe if you can rank in all of those games. Thank you.

Kelvin Lau

Yes. I think we started to more diversify our game portfolio I think starting from last year, not only in MMORPG, we also started to develop some web game, social game, started on last year. In that we already launched one social game and one web game already in the market. So, one of our team is right now we’re focused on the web game projects and social game projects. We expect to have several web games which will be launched this year and also in the coming years.

So, in terms of expectation, I think right now it’s too early to commit to -- give comment on how much I expect in terms of revenue will be contributed to the whole group from the web game or social games. However, definitely I will give update to you guys when we have any big launches on the web game and social games. Yeah.

Operator

Thank you for your question. Next question comes from the line of William Huang from Barclays Capital. Please ask your question.

William Huang – Barclays Capital

Hi, good morning. Thank you for taking my call. My question is also a follow-up about your web game strategy. In terms of web game on the pipeline, can you please give a bit more color on that? What kind of web game you guys have under development? And also, does Perfect World have any plan to build up in-house web game platform? Thank you.

Kelvin Lau

I think we have given, as what I say, several web games are under development right now and also several web games have different styles. Some martial arts and some between different styles. So I think for competitive reasons, I think it’s not prudent for me to disclose more the content, I think, of web games. I think definitely some web games are under development now. And this [week] we are going to launch some more web games.

Going forward, whether we’ll create our own web game platform is definitely we will consider this. But I think at this moment we will try to get use of adding other partners to promote our web game at this stage. Whenever we come to a certain scale in terms of web game launches and development, we will seriously consider to build our own web game platform, yeah.

Operator

Thank you. You have a follow-up question from the line of Wendy Huang from RBS. Please ask your question now.

Wendy Huang – Royal Bank of Scotland

Hi. Based on your Q1 results and also Q2 revenue guidance, it seems to me that it would be very difficult for you guys to achieve even single-digit revenue this year unless you have a big jump in second half revenue. So, how confident are you in the two new games you scheduled for the second half?

And also, can you give me some update for the launch timing for the highly-anticipated title Swordsman Online? Thank you.

Kelvin Lau

Mainly you're right, okay? In order to achieve growth in terms of [inaudible] we have to work harder in the second half of this year. I think the two main items to drive up the revenue in the second half, I think one is our existing game, Perfect World II and Zhu Xian. We’re adding every year, so this year we’ll have a big expansion pack to drive up some of our revenue in second half of this year, is number one. Number two, we got to see the performance of two big games, Heaven Sword and Dragon Saber and also the Return of Condor Heroes, hope that they can perform good and contribute significant revenue growth for actually in the second half of this year.

Swordsman Online, we are right now adding -- developed so many resources on developing the Swordsman Online. According to the current schedule we still think we can launch the game in the first half of this year.

Wendy Huang – Royal Bank of Scotland

Okay.

Operator

Thank you. (Operator Instructions).

Your next question comes from the line of Atul Bagga from Lazard Capital. Please ask your question.

Mr. Bagga, your line is open, please ask your question.

Atul Bagga – Lazard Capital

Thanks for taking my follow-up question. Kevin, can you help us understand, in terms of when you look at these upcoming two games in the second half of this year, what’s your internal expectations in terms of the scale of these games? Thank you.

Or in other words, what -- sorry, go ahead.

Kelvin Lau

Of course, we have an expectation for -- of course, we have a high expectation for upcoming games, because these two titles are [inaudible] to our titles written by Louis Cha, so I think, let’s see, okay? We are [working the] internal closed beta testing for these two games. We hope these two games can be successful and contribute a lot of revenue for us in the second half.

Operator

Thank you. You do have a follow-up question from Wendy Huang from RBS. Please ask your question now.

Wendy Huang – Royal Bank of Scotland

Hi. This follow-up question is about your operating margin. So, for the second quarter, you expect lower revenue but higher sales and marketing expenditures. So, in terms of operating margin, should we expect it to go back to second half 2011 level, i.e. 27%, 28% level?

Kelvin Lau

Wendy, our policy is not to give any guidance on the margin. What I can tell you is sales and marketing expenses will grow a little bit, but we are trying to control the other costs like G&A expenses and also the R&D expenses, trying to maintain the margin or not to allow the margin to drop more. So, it’s what I can tell you about the margin, yeah.

Wendy Huang – Royal Bank of Scotland

Okay, sure. And regarding the tax rate, this quarter the effective tax rate was about 19%. So, what kind of level should we expect for the full year?

Kelvin Lau

Good question, Wendy. This is exactly what I want, to give you guidance, some updates on the effective tax rate for this year. As what I mentioned in the remark, okay, two of our entities this year, their tax exemption holiday has been expired and will go into the 50% reduction tax rate. And also, one of our major entity, [Beguine Network] having the 50% [induction] tax holiday also expired. And I think the tax rate for [Beguine Network] will go to 15%.

So, right now, the [wise] effective tax rate guidance should be about 19% to 21% for this year, for 2012, 19% to 21%.

Wendy Huang – Royal Bank of Scotland

Okay, got it. I also -- sure. I have one last question for Michael. So, how long will this product cycle last, and when should we expect you guys to resume the growth again?

Joanne Deng

[Chinese Language Spoken]

Michael Chi

[Chinese Language Spoken]

Joanne Deng

I think good products will have -- typically have a long lifecycle, but this -- the last cycle has to be supported with a steady stream of continuous content update, which is what we continue to do for our existing games. We think the key for success is launching quality products into the increasingly competitive markets. Therefore, we think when our -- the products we continue to develop and fine-tune, going to be launched to the market, then when those games -- when those well-developed games are launched into the market, then we expect to see a growth for us.

Another factor is that in the current market, nowadays markets, still many new types of games are entering into the market, like some cross-platform products entering to the market. This is what we are trying to develop in the future.

Also, another strength for us is our global expansion. We believe our overseas business will create a big growth for us with our continued stable overseas development. And we believe with our global strategies, we will also see a growing number of our players in both China and worldwide. And our strategy is to evolve into a leading global company. And we are also trying to further enhance or develop our R&D capabilities with more innovative ideas for our games.

In the long term, we are very confident in our sustainable growth. And we will appreciate our shareholders’ and players’ patience with us.

Michael Chi

Thank you.

Operator

Thank you. You have a follow-up question from Mark Marostica from Piper Jaffray. Please ask your question now.

Mark Marostica – Piper Jaffray

Yes, thanks for taking my question. I just want to follow up on the timing of the expansion pack launches for Zhu Xian and Perfect World II, is that a Q3 event or a Q4 event?

Vivien Wang:

For Zhu Xian, we’ll be launching a big expansion pack in Q2. And for Perfect World II, we plan to launch a big expansion pack in second half of the year. We also plan to launch a number of other expansion packs including Forsaken World and [inaudible] in the latter half of this year. Thank you.

Mark Marostica – Piper Jaffray

Okay. Thank you.

Operator

Thank you. You also have a new question from the line of Jialong Shi from CLSA. Please ask your question now.

Jialong Shi – CLSA

Hi. Thanks for taking my question. I have a quick question on Heaven Sword and Dragon Saber. I remember the game did not deliver as-expected performance last year in its closed beta testing. Then I heard you guys have been fine-tuning the game. Could you give us some comments on what sort of improvement you have done on the game so that its success rate might be higher than one year ago?

Kelvin Lau

Jialong, okay, yes, in fact we launched Heaven Sword and Dragon Saber in Q3 last year, yes, you're right, the performance and the feedback on the game has -- not as good as what we expect. I think the major issue or question for this game is this game is a 2D game. As you know [inaudible] last year, all those 2D MMORPG encountered quite a lot of challenges from that game. We are confident that Heaven Sword and Dragon Saber is a good game, include a lot of new features. But I think right now the game is looking for convenience instead of having -- we ask them to download kinds of update, have been difficult to persuade and to download 2D kind based of a game.

So what we are doing for the Heaven Sword and Dragon Saber, we’re trying to change some character in this game, to change it from 2D to 2.5D or 3D. Maybe [inaudible] 2D, but I think it needs to [occur] 3D so as to attract gamers to come back to the game. So [inaudible] is an innovation of the Heaven Sword and Dragon Saber. Thank you.

Operator

Thank you for your question.

Since we have no further questions from the phone line, ladies gentlemen, I would now like to hand the conference back to Joanne of Perfect World for closing remarks.

Joanne Deng

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

Vivien Wang:

Thank you.

Michael Chi

Thank you.

Kelvin Lau

Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Perfect World Co.'s CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts