Perfect World’s Results Are Unlikely To Deliver Near-Term Catalysts

by Trefis Team
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Perfect World
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    Quick Take 

  • Perfect World will report its Q1 2013 financial results on May 28, 2013.
  • The company had projected revenue in Q1 2013, in the range of Remnibi (RMB) 592-619 million ($95-99 million).
  • The lack of new game launches and slow down of in-game monetization activities contributed to the weak revenue guidance during the quarter.
  • Profitability concerns could continue in Q1 due to increased competitive pressure and rise in R&D expenses.

Perfect World (NASDAQ:PWRD), a Chinese online gaming company, is scheduled to report its Q1 2013 results on May 28, 2013. We expect Q1 to be a weak quarter for the company as it has slowed down its in-gaming monetization activities and did not launch any major games during the quarter. While, Torchlight 2 (a pay per install game) contributed substantial revenues during Q3 and Q4 2012, its revenue contribution in Q1 2013 is expected to be insignificant.

We expect revenue growth to pick up in the later half of 2013, post the launch of new games such as Swordsman Online, Saint Seiya Online, Dota 2, and Neverwinter. However, profitability could continue to be weak during the year on account of higher R&D and sales and marketing expenses.

Check out our complete analysis of Perfect World

Recap Of Q4 2012 Results

In Q4 2012, Perfect World’s revenue declined by 12% annually and 2% sequentially to $109.1 million. Its profitability also declined further as its operating margin was witnessed at 1.8% in Q4 2012, as compared to 15.7% in Q3 2012 and 28.4% in Q4 2011. The sharp increase in operating expenses was caused by goodwill impairment charges related to Perfect World’s Japanese subsidiary, higher R&D expenses and impairment associated with certain smaller games.

Going forward, we expect profitability to remain a concern in the short term, as the company will continue to invest in R&D to enhance its gaming portfolio. Moreover, the launch of new games during 2013 will lead to an increase in sales and marketing expenses.

Upcoming Pipeline of Games Will Stem Revenue Decline Later During The Year

Perfect World’s revenue declined in 2012 as it slowed down the in-game monetization activities for its existing games (to maintain their healthy life cycle) and launched very few new games during the year.

Going forward, Perfect World intends to launch a diverse pipeline of games:

  • MMORGP’s (massively multiplayer online role playing games) such as Swordsman Online and Saint Seiya Online are in the final stage of development and are expected to be released in mid-2013. Beta testing of Saint Seiya Online has already begun.
  • Last year, the company had gained exclusive rights to operate Dota -2, a world-famous title with a unique mix of action, RTS and RPG gameplay in China. Recently, the company launched beta-testing for this game.
  • Neverwinter, a highly anticipated game, being developed by Cryptic Studio (Perfect World’s subsidiary) is expected to be launched in Q2 2013 in North America.

In addition to MMORGPs, Perfect World is also bolstering its portfolio with lighter games, such as web games and mobile games. We expect the company to launch various new web games and mobile games during 2013. On account of these efforts, we think Perfect World could see an acceleration in its revenue growth during the second half of 2013.

International Gaming Revenues Will Continue To Grow

Facing heightened competition in the Chinese market, Perfect World is expanding its international operations to grow its revenues. It is enhancing its overseas network of subsidiaries and licensing partners as part of this strategy. In the recent past, the company launched various games in Asia and Europe, and made organizational changes to strengthen its international operations.

We will be watching for more developments in this area during the earnings call. We expect Perfect World’s international gaming revenues to grow at a CAGR of 6% during our forecast horizon.

Our $15.50 price estimate for Perfect World represents near 27% upside to the current market price.

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  • commented 1 years ago
  • tags: ATVI EA PWRD
  • Way off base with this analysis. Expect Q1 to meet or exceed slightly and Q2 projections to be HUGE. PWRD's Q2 guidance will crush any and all estimates. Neverwinter launched on April 30 (not coming soon, It's launched) and it's huge. Saint Seiya launched earlier this week. Will contribute to Q2. They already launched one web game and it's also doing well. Solid execution all around since new CEO took over. Open beta in the industry means cash shop is open and the game is launched. Only in closed beta is a game actually in beta.

    Q2 forecast should be very good.