Perfect World’s Fourth Quarter Results Disappoint

by Trefis Team
-14.02%
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Trefis
PWRD
Perfect World
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    Quick Take 

  • Perfect World posted revenue of $109 million in Q4 2012, marking a 2% sequential and a 12% annual decline
  • Its operating margin dropped to 1.8% in Q4 2012, as compared to 15.7% in Q3 2012, on account of goodwill impairment charges and higher R&D expenses
  • Perfect World is expected to release various games such as ’Swordsman Online’, ’Saint Seiya Online’, ‘Neverwinter’ and ‘Dota-2′ in 2013 to drive revenues
  • Expansion in international operations is a key growth strategy for Perfect World as it continues to launch various games in the international markets through overseas subsidiaries and licensing partners

Perfect World (NASDAQ:PWRD), a Chinese online gaming company, posted weak financial results in Q4 2012. Its revenue was recorded at $109 million in Q4 2012, marking a 2% sequential and a 12% annual decline. The company’s profitability dropped even further as the operating margin lowered to 1.8% in Q4 2012, as compared to 15.7% in Q3 2012 on account of goodwill impairment charges associated with Japanese subsidiary and higher R&D expenses.

Going forward, Perfect World is expected to launch a diverse pipeline of games in 2013, including ‘Swordsman Online’, ’Saint Seiya Online’ and ‘Neverwinter’ to drive its growth. It will also launch web games and mobile games to stem the decline in its user base. In addition, the company is expanding its international operations to further bolster its growth. Revenues for Q1 2013 are projected in the range of Remnibi (RMB) 592-619 million ($95-99 million).

Check out our complete analysis of Perfect World

Profitability Decline In Q4 2012

Perfect World’s gross margin slipped to 76.9% in Q4 2012, as compared to 81.5% in Q3 2012 and 82.3% in Q4 2011. The gross margin decreased on account of impairment related to certain smaller games.

The operating margin saw an even greater decline to 1.8% in Q4 2012, as compared to 15.7% in Q3 2012 and 28.4% in Q4 2011. Operating expenses witnessed a sharp increase mainly on account of goodwill impairment charges associated with Perfect World’s Japanese subsidiary and higher R&D expenses. We feel lowering profitability is a major worrying factor for the company as its top line has also seen a declining trend during the recent past, on account of increased competition in the Chinese gaming market.

Upcoming Pipeline of Games Is Expected To Fuel Growth in 2013

Perfect World is expected to launch a diverse pipeline of games in 2013. Massively multiplayer online role-playing games (MMORGP) such as ‘Swordsman Online’ and ‘Saint Seiya Online’ are in the final stage of development and are expected to be launched later this year. Moreover, the company has gained exclusive rights to operate ‘Dota -2′, a world-famous title with a unique mix of action, RTS and RPG gameplay in China. Along with its subsidiary Cryptic Studios, Perfect World is working towards the development of a highly anticipated game ‘Neverwinter’, which will be released in North America soon.

In addition to MMORGPs, Perfect World is also developing lighter games, including web games and mobile games to diversify its portfolio. The aggregate average concurrent users (ACU) for games operated in China was around 620,000 in Q4 2012, as compared to 601,000 in Q3 2012 and 873,000 in Q4 2011. Going forward, we expect the upcoming portfolio of games to curb the decline in user numbers.

Expansion In International Operations Will Drive Growth In The Future

Perfect World is focused on enhancing its global presence in a bid to grow its revenues. It is expanding its overseas network of subsidiaries and licensing partners as part of this strategy. Recently, Perfect World released MMORPG games such as ‘Zhu Xian’ and ‘Chi Bi’ in Southeast Asia and ‘Battle of the Immortals’ in Korea through its overseas subsidiaries. In November 2012, it launched the Polish and Russian versions of ‘Torchlight 2′. [1]

In the latest earnings call, Perfect World announced certain organizational changes that will further strengthen the company’s focus on international markets. Mr. Qi Zhu and Mr. Alan Chen were appointed as Chief Publishing Officer (Asia) and Chief Publishing Officer (U.S. & Europe) respectively, to look after the operations in those markets.

Going forward, we think Perfect World’s international revenues will continue to increase through our forecast period.

Outlook for Q1 2013

- Revenues are expected to be in the range of RMB 592-619 million ($95-99 million)

- Perfect World is not expected to launch any new major game in Q1 2013

We are in the process of estimating the new price estimate for Perfect World’s stock.

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Notes:
  1. Perfect World Announces Recent Business Developments, PRNewswire, March 11, 2013 []
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