Perfect World Might be Down, but it’s Surely Not Out
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even the most promising of players might hit a rough patch. But that doesn’t mean that their flair has diminished. The same can be said about Chinese online game developer Perfect World (NASDAQ: PWRD). After an exhilarating report at the beginning of 2012, Perfect World has failed to replicate the same charm so far.
The company has failed to satisfy the Street and brought despair to investors after its magical performance earlier this year. The stock was decimated badly after a poor first quarter report and the trend continued in the recently-reported second quarter.
What went wrong?
Perfect World’s second quarter results were far from perfect as it scraped past analyst estimates on revenue but missed on the bottom line. Well, that’s what happens if you don’t release any new games. As a result, the company saw a decline in the number of subscribers, with a 17% year over year decline in average concurrent users (ACU). Another factor behind the drop in subscriber count was Perfect World’s effort to curb cheating in its games.
A glance at the call transcript will reveal that the management is harping more about the games under development. And going by Perfect World’s guidance, it becomes evident that those games are still sometime away. The company’s top line expectation for the current quarter is way behind what analysts are expecting as investors brace for another barren quarter.
Beyond the outlook
But if we look beyond the company’s outlook, things won’t appear as bad as they do now. Perfect World is set to launch a massively multiplayer online role-playing game (MMORPG) known as Return of the Condor Heroes towards the end of the current quarter or at the beginning of the next one. Apart from this, the company is working on games like Legend of the Condor Heroes, Swordsman Online and Saint Seiya Online.
Moreover, Perfect World is progressing on its plans of global expansion. Its Cryptic Studios in the U.S. is currently developing a MMOPRG called Neverwinter. It recently launched Star Trek Online in Europe and is slated to release Swordsman Online and Neverwinter in Japan going forward. The company aims to become a major player in the online gaming market and is working towards that goal through international expansion.
Also, Perfect World is focused on extending the life-cycle of its games so that they continue to contribute towards its top line for a long time. Hence, it recently released expansion packs for a number of games, such as the well-known Zhu Xian and the popular Legend of Martial Arts franchises. These moves are expected to help Perfect World bring back its glory days and provide some relief to investors.
Industry prospects bright but not without dark spots
And again, we shouldn’t discount the prospects of the Chinese online gaming industry where Perfect World is plying its trade. The market is set to expand more than 39% in the next two years and Perfect World should benefit from it. The market is led by the likes of Tencent, NetEase (NASDAQ: NTES) and Shanda Games (NASDAQ: GAME), with Perfect World fifth in the pecking order behind Changyou.
However, Perfect World is well-focused on improving its standing in the market, as evidenced by ballooning R&D expenses. A bad quarter shouldn’t lead you to discount the company’s prospects completely, as Perfect World isn’t alone in its suffering.
NetEase was recently clobbered amidst concerns about a slowdown in gaming growth in China. NetEase’s problems were compounded as its partner, Activision Blizzard (NASDAQ: ATVI), for whom it operates World of Warcraft in China, lost subscribers. Moreover, Activision’s decision of going with market leader Tencent for operating Call of Duty Online in China also weighed on NetEase’s results. Shanda Games, which released results along with Perfect World, also saw a decline in revenue, but it hopes to get better in the future with more games in the pipeline.
Thus, while the industry might seem gloomy on the whole at the moment, the primary reason behind the underperformance of these players is the lack of new game releases, and the same goes for Perfect World. The online gaming market is set to grow further, and Perfect World is aiming to capture it through better games, which might be one of the reasons behind the long game development time.
The company’s R&D efforts and the philosophy of expanding across Asia, Europe and North America in order to attain its goal of becoming a known player in the online gaming industry are quite noteworthy. Perfect World might hit a few roadblocks on the way but its long-term prospects shouldn’t be discounted after a couple of torrid quarters.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.