Driven By Launch Of New Games, Perfect World Posts A Strong Quarter

Perfect World (NASDAQ:PWRD), a Chinese online gaming company, posted strong top line and bottom line growth in Q3 2013. As per our previous expectations, its revenue increased by 18% sequentially and 20% annually to $136.2 million, which was more than the high-end of its previous forecast. This growth was fueled by the success of recently launched games such as Swordsman Online and Saint Seiya Online. Following its solid performance, Perfect World forecast revenue growth in Q4 2013 at 2% to 7% in sequential terms. We believe the company will continue to see strong top line growth over the coming quarters, owing to increasing popularity of recently launched games. Further, the recent investments in online gaming portals such as TGBus.com and PTBus.com, will strengthen the company’s position in the gaming market.

In a promising sign, the profitability trend also improved during the third quarter. Gross margin rose to 76.7% as compared to 75.5% in the previous quarter. However, it declined from the 81.5% level seen in Q3 2012, due to a rise in data center costs, royalty expenses and sales-related taxes. The operating margin rose to 13.3% from 9.5% in the previous quarter. On an annual basis, the operating margin fell by 250 basis points as R&D and sales & marketing expenses grew by 20% and 21% annually, respectively. We believe that these expenses will continue to increase on a y-o-y basis in Q4, on account of growth in staff expenses and increased promotional activities associated with the recently launched games.

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Launch of New Games and Expansion Packs

A number of new games such as Saint Seiya Online, Neverwinter, Swordsman Online and Holy King have been released in 2013, which have accelerated the top line growth for the company. New web games such as Touch and mobile games including Return of the Condor Heroes have also received traction with customers.

A number of expansion packs were also launched during the quarter to enhance the lifecycle of existing games. These include Night Patrol (for Legend of Martial Arts), Storm Army Attacks (for Forsaken World), Divine Archers (for Battle of the Immortals), Galaxy Arena (for Saint Seiya Online), The Glorious Rebirth (for Perfect World 2), Glory of Ice and Fire (for Forsaken World) Night Patrol (for Legend of Martial Arts), Storm Army Attacks (for Forsaken World), Divine Archers (for Battle of the Immortals), Galaxy Arena (for Saint Seiya Online), The Glorious Rebirth (for Perfect World 2) and Glory of Ice and Fire (for Forsaken World). ^[1]

The overall average concurrent users (ACU) for games operated in China rose to 778,000 in Q3 2013, as compared to 742,000 in Q2 2013 and 601,000 in Q3 2012. We expect a continuing increase in this metric, with increasing popularity of newly launched games.

Upcoming Games Pipeline And International Expansion To Drive Future Growth

Perfect World has a strong portfolio of upcoming games which adds to its future outlook. MMORPGs (massively multiplayer online role playing games) such as Dota 2 and Legend of the Condor Heroes are under development. Dota 2 is currently undergoing closed beta testing and is forecast to be released in China soon. Neverwinter, which was earlier launched in North America and Europe, is being modified for its expected launch in China in 2014.

Moreover, the company is also preparing a portfolio of web and mobile games in view of changing dynamics in the global gaming industry. A number of such games, including Heaven Sword and Dragon Saber are forecast to be released in the coming quarters. ^[1]

International diversification through a network of more than 100 countries globally, is another growth strategy for the company. During the third quarter, Saint Seiya Online was launched in Taiwan and Empire of the Immortals was released in Indonesia respectively. Recently, Battle of Immortals was released in Turkey and Azerbaijan and Swordsman Online was licensed for launch in Vietnam. Comprising for more than 25% of overall revenue currently, we expect the proportion of international revenue to rise in the long run. ^[1]

We are in the process of revising our $17.14 price estimate for Perfect World’s stock.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Perfect World’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 26, 2013 [↩] [↩] [↩]