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.
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.