Perfect World Q3 Earnings: Mobile Games Deliver Revenue Growth

PWRD: Perfect World logo
Perfect World

In our earnings preview, we wrote that Perfect World’s (NASDAQ: PWRD) Q3 results could be dampened by a lack of new game releases (See Perfect World Q3 Earnings Preview). However, its only new release in the quarter and some existing games delivered strong revenue growth to deliver a decent set of numbers in line with its guidance. [1] In this earnings report, we review the company’s Q3 results. Since the company reports its financials in Chinese Yuan (CNY or RMB), we use a USD-CNY conversion rate of 6.14 to convert the figures into dollar equivalents.

The company’s management has given a Q4 revenue guidance of RMB 1023-1072 million ($166-175 million). The analysts consensus estimate compiled by Bloomberg Businessweek is $171 million. [2]

Relevant Articles
  1. Why We Are Revising Our Price Estimate For Perfect World
  2. Perfect World Q4 2014 Earnings Preview: Environment Has Improved, But Challenges Remain
  3. Why We Expect Perfect World’s Paying User Base To Shrink
  4. Perfect World’s 2014: The Quest For Sustained Gamer Interest
  5. Perfect World Earnings Preview: Lack Of New Game Releases The Only Concern
  6. Weekly Chinese Internet Notes: Perfect World, Sina and Baidu

See our complete analysis of Perfect World here

Revenue Growth Led By Game Performance

The company’s revenue increased 5% quarter-on-quarter from RMB 928 million ($151 million) in Q2 to RMB 974 million ($159 million) in Q3. This represented a year-on-year increase of nearly 19%. A big contributor to this growth was the online games business, especially mobile games. The revenue from online games increased 7% sequentially and over 20% year-on-year to RMB 919 million ($150 million). [1]

Last quarter, Perfect World released a 2D cartoon mobile game called Crossgate Mobile which has gained good traction among consumers and aided revenue growth. Also on the mobile front, one of their existing games Forsaken World contributed to the growth in gaming revenues. Yet another good performer was the PC-based DOTA2, which is distributed in China by Perfect World under a license from U.S.-based developer Valve. A lift of the 14 year ban on gaming consoles by the Chinese Government has enabled Perfect World to earn revenue from distributing its games through this format. [3] The breakup among revenues between these various formats and games has not been released by the company. [1]

Expansion packs for existing games can be a revenue lifeline for gaming companies when new game releases are delayed. This was the case with Perfect World in Q3 as they have released quite a few such expansion packs to prolong the life-cycles of their best selling titles. Another revenue enhancing strategy for the company has been releasing games in international markets through their subsidiaries. For instance, Swordsman Online was released by the company in Thailand, Korea, North America and Europe during the third quarter. [1]

Investment Gains Overshadow Rising Costs To Avert Loss

Despite the improvements in revenue, rising variable costs and overhead expenses turned the operating profits of the previous quarter and last year into an operating loss. The shift to mobile has led to greater revenue sharing with distributors, which increased the cost of revenues. Cost of revenues came in at RMB 302 million ($49 million), 21% higher than the previous quarter and 65% higher year on year. [1]

Several major items among the operating expenses also showed increases, both sequentially and year-on-year terms. Research and development expenses increased due to an increase in staff costs, while advertising and promotional expenses related to new games led to an increase in sales and marketing expenses. Altogether, the company’s operating expenses came in at RMB 696 million ($113 million), an increase of 26% quarter-on-quarter and over 30% year-on-year.  ((ref: 1))

The rising costs led to an operating loss of RMB 23 million ($4 million), compared to an operating profit of RMB 128 milion in Q2 2014 and RMB 115 million in Q3 2013. Net income declined by 63% from the previous quarter and was roughly half the profit made last year in the third quarter. Investment gains were the primary reason that the company didn’t report a net loss. Perfect World made a profit of nearly RMB 29 million ($5 million) by selling its stake in Shanda Games. The remaining part of this other income was largely foreign exchange gains. [1]

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid CapMore Trefis Research

  1. Perfect World Q3 2014 Earnings Call Transcript [] [] [] [] [] []
  2. Perfect World Earnings Page At []
  3. Microsoft Just Launched China’s First Console In 14 Years []