- Perfect World's revenue declined by 13% annually and 8%
sequentially to $100.6 million in Q1 2013.
- The operating margin saw sequential improvement in Q1 2013,
on account of lower sales and marketing as well as R&D
expenses. A lack of new major game launches and the
capitalization of R&D expenses contributed to this
improvement in operating margin.
- Perfect World forecasts revenue to rise by 5%-10% in
sequential terms in Q2 2013. This revenue outlook is
encouraging considering the company has seen its revenue
decline during the last few quarters.
- In line with the recent turnaround in outlook, Perfect
World's stock has appreciated by more than 20%.
- We expect profitability to be under pressure in Q2 2013,
due to higher sales and marketing expenses associated with
launch of new games.
Perfect World (
), a Chinese online gaming company, posted revenue of $100.6
million in Q1 2013, which represented 8% sequential and 13%
annual decline respectively. A slowdown of in-gaming monetization
activities and lack of new major game launches contributed to the
decline in revenues during the quarter. However, the revenue came
in ahead of the initial guidance provided by the company.
Gross margin was recorded at 76.5% in Q1 2013, as compared to
76.9% in Q4 2012 and 82.3% in Q1 2012. The operating margin saw
sequential improvement from 1.8% in Q4 2012 to 21.3% in Q1
2013. However, on an annual basis it declined as the operating
margin was 32.7% in Q1 2012. The sequential rise in operating
profit was contributed by decrease in sales and marketing expenses,
R&D expenses, goodwill impairment and general and
administrative expenses. R&D expenses decreased as the company
capitalized expenses associated with certain new games and due
to decline in bonuses. Sales and marketing expenses fell as the
company did not launch any new major games in Q1 2013.
While Perfect World has seen its revenue decline in the past few
quarters, the revenue growth is expected to accelerate in the
future, driven by launch of new games such as
Saint Seiya Online
. A number of new games such as
are also forecast to be released in the near future. In line with
this turnaround in outlook, Perfect World's stock price has
appreciated by more than 20% since the latest quarterly results
Though the revenue outlook is encouraging, we think
profitability could remain a concern in the future. The margins are
expected to weaken in Q2 on account of significant rise in sales
and marketing expenses, due to launch of new games. We believe the
R&D expenses could also rise as the company is actively
investing in mobile gaming.
Check out our complete analysis of Perfect
Recent Launch Of New Games And Expansion Packs
Perfect World recently released a number of new MMORPG
(massively multiplayer online role playing) games, as well as
mobile and web games. In addition, it also introduced expansion
packs for its existing games to strengthen their life cycle.
- On May 16, open beta testing for
Saint Seiya Online
(a 3D MMORGP game) was launched.
- At the end of April,
(a MMORGP game developed by Perfect World's subsidiary Cryptic
Studios) was launched for open beta testing in the U.S. and
- Web games such as
Adventure in a Free Kingdom, Touch, Legend of Chu and
Han and Gourmet Adventure
were launched in Q1 and Q2 2013.
- Mobile games including
Legend of Chu and Han
Return of the Condor Heroes
were recently released.
- Expansion packs such as
Return of the Crouching Dragon
(for Chi Bi),
(for Return of the Condor Heroes) and
(for Zhu Xian) were also launched recently.
Highly anticipated games such as
Saint Seiya Online
have received good initial traction with customers. We expect these
new game launches to contribute in acceleration of revenue growth
in Q2 and beyond.
Future Growth Drivers
Strong Pipeline Of Upcoming Games
Perfect World aims to deliver a spate of new games in the near
- Swordsman Online, a MMORPG game, is in its final stage of
development and is expected to be released very soon.
- Dota 2, a world-famous title with a unique mix of action, RTS
and RPG gameplay, is in closed beta testing currently and will be
launched in China in the near future.
- A new MMORPG game
is also in the pipeline.
- Mobile games and web games are a key strategic area for the
company and a number of such games are also under
The new games will further boost Perfect World's revenue growth
Perfect World continues to focus on international expansion by
leveraging its overseas operating network and global R&D
capabilities. A number of games were recently released in
international markets including -
Battle of the Immortals, Blacklight
Retribution, Forsaken World
In line with these efforts, we expect Perfect World's
international revenues to grow over forecast horizon.
Guidance For Q2 2013
- Revenue is projected in the range of RMB 656 - 687 million
($105.9 - 110.9 million), representing an increase of 5%-10% on a
We are in the process of revising our price estimate for
Perfect World's stock.
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