Chinese game developer Perfect World (NASDAQ: PWRD) is slated to release its Q3 2014 earnings on November 25, after market close. Perfect World has gone from having a rich pipeline of games to having no new releases other than expansion packs. The third quarter did see some corporate action, with a major investment and a restructuring of its R&D division. In this pre-earnings report we take a look at Perfect World’s moves in recent months, and our expectations for how these will impact its earnings.
We have a price estimate of about $18 for Perfect World, compared to a market price of approximately $19. Management’s guidance for Q3 revenues is roughly RMB 1 billion. At a USD-CNY exchange rate of 6.14, this translates to revenue of about $163 million.
- Why We Are Revising Our Price Estimate For Perfect World
- Perfect World Q4 2014 Earnings Preview: Environment Has Improved, But Challenges Remain
- Why We Expect Perfect World’s Paying User Base To Shrink
- Perfect World’s 2014: The Quest For Sustained Gamer Interest
- Perfect World Q3 Earnings: Mobile Games Deliver Revenue Growth
- Weekly Chinese Internet Notes: Perfect World, Sina and Baidu
Perfect World’s Thinning Game Pipeline
In the second half of 2014, the only new game released by Perfect World was a 2D turn-based cartoon-style RPG mobile game CrossGate Mobile. On the PC game front, Perfect World has been unable to release any new games this year. Instead, it has been releasing expansion packs for its existing games to try to prolong their life-cycles. Perfect World has historically maintained a market share of between 6 and 7% of the Chinese online gaming market.  The intent behind releasing expansion packs for its existing games has been to try to preserve its market share in the absence of new game releases. 
In July, Perfect World released the Shaolin Kongfu expansion pack for Return of the Condor Heroes, and in August released the Call of Jianghu expansion pack for Legend of Martial Arts.  We have written earlier on the release of an expansion pack for its MMORPG (Massively Multi-player Online Role Playing Game) Neverwinter, titled Rise Of Tiamat. Neverwinter has been a very successful title for Perfect World. Within a month of its launch, over two million people had registered to play the game. It has also been credited with helping Perfect World’s international subsidiaries register 15% y-o-y revenue growth last year (see Weekly Chinese Internet Notes).
Deal In Q4 Hints At Lackluster Q3
In its increasing need for new games, Perfect World bought 3% stake in Canadian game-developer Digital Extremes in October. Digital Extremes is the owner of one of the world’s most popular online games, Warframes. In August, Warframes’ user base was 10 million, double the February figure.  This is a big jump from February, when it had gained only about 5 million users since its launch in March 2013. .
Warframes is a free to play game that earns revenues through in game purchases, which is how Perfect World’s games earn most of their revenues as well. Therefore, it could prove to be an easy fit within Perfect World’s portfolio. It is believed that Perfect World’s participation in the deal was aimed at having exclusive distribution rights to this game in China, which will help it bolster market share in the absence of new game releases.
Warframes has definitely had a beneficial impact on Digital Extremes’ earnings. The company earned revenue of $27 million in the six month period ended April 30, giving it a pre-tax profit of $8.7 million. In the 12 months leading up to this period, the company had revenues of only $24.6 million and pre-tax profit of $5.5 million. 
R&D Revamped To Resuscitate Game Development
Management had previously promised action in regard to motivating game developers to speed up the new game development process.  It has kept its word and made a drastic change to the R&D structure of the company. The R&D department has been spun off into five separate subsidiaries in which developers have ownership. This is aimed at attracting and retaining top talent to improve its game development process. ((Perfect World Announces R&D Restructuring))Notes: