Perfect World (PWRD) Beats Solidly on Earnings, Offers Soft Guidance

Chinese video game maker Perfect World (PWRD) reported a typical quarter; beating estimates in the current quarter and offering lowball estimates for the following quarter.  Stock is volatile in premarket, but as long as $42 is held we should be ok.

Full report here.  A quick glance at some of the metrics; analysts had been looking for $82M in revenue and 75 cents on the quarter.  Revenue came in up 13.2% sequentially, and 54.5% year over year; expenses up a tad faster so gross profit "only" gained 8.9% sequentially and 48.0% year over year - gross margin dropped about 3%.  Some of this is due to a non video game blip that I'll come back to at the end of this entry.  Net income up 9.1% quarter over quarter, and 45.4% year over year... impressive numbers but quickly forgotten as stock market lemmings already move onto the next thing to worry about.

• Total revenues were RMB590.0 million (USD86.4 million) in 3Q09, an increase of 13.2%, or RMB68.7 million, from RMB521.3 million in 2Q09 and an increase of 54.5%, or RMB208.2 million, from RMB381.8 million in 3Q08.  
• The sequential growth in online game operation revenues was primarily attributable to the successful release of expansion packs for some of the Company's existing games and a series of successful marketing activities.
• Gross profit was RMB495.0 million (USD72.5 million) in 3Q09, an increase of 8.9%, or RMB40.4 million, from RMB454.5 million in 2Q09, and an increase of 48.0%, or RMB160.4 million, from RMB334.5 million in 3Q08. Gross margin was 83.9% in 3Q09, as compared to 87.2% in 2Q09 and 87.6% in 3Q08.
• Non-GAAP net income attributable to the Company's shareholders was RMB308.5 million (USD45.2 million) in 3Q09, an increase of 9.1%, or RMB25.7 million, from RMB282.9 million in 2Q09, and an increase of 45.4%, or RMB96.4 million, from RMB212.2 million in 3Q08.
• Non-GAAP basic and diluted earnings per ADS were RMB6.24 (USD0.91) and RMB5.88 (USD0.86), respectively, in 3Q09, as compared to RMB5.61 and RMB5.32, respectively, in 2Q09, and RMB3.77 and RMB3.56, respectively, in 3Q08.

So effectively PWRD printed a .86 v .75 expectation or 11 cents over.

Guidance below; analysts had been looking for $87M and 79 cents.

• Based on the Company's current operations, total revenues for the fourth quarter of 2009 are expected to be between RMB578 million and RMB602 million, representing a decline of 2% to an increase of 2% on a sequential basis and an increase of 38% to 44% on a year-over-year basis. 
• This reflects the expected growth from the Company's existing games and the anticipated contribution from the newly launched "Fantasy Zhu Xian." It also takes into consideration that the Company does not expect to release any movie in 4Q09.

One caveat and something investors seem to be glossing over is Perfect World had a non core business revenue bump in the last quarter due to a movie.  So to some effect that overstated the current quarter's results, and makes the comparables in the future quarter look weaker than they are.  If you exclude the movie, revenue in the current quarter would of missed slightly - EPS would of been lower but most likely still a solid beat, and the "growth" between this quarter and the next would look far better than the -2 to +2% cited.  Again, management is very conservative and almost always comes in better than what they offer in guidance.

• Film and television revenues were RMB45.3 million (USD6.6 million) in 3Q09, as compared to Nil in 2Q09 and Nil in 3Q08. All the film and television revenues recognized in 3Q09 were related to the movie "Sophie's Revenge" that was released in August 2009.
• The film and television cost was RMB27.0 million (USD4.0 million) in 3Q09, as compared to Nil in 2Q09 and Nil in 3Q08. All the film and television cost recognized in 3Q09 was related to the movie "Sophie's Revenge."

[Aug 11, 2009: Perfect World Continues to Impress in Execution]
[Jun 19, 2009: Perfect World Raises Guidance]
[Nov 10, 2008: Earnings for Perfect World Solid]
[Oct 15, 2008: Perfect World Announces Share Buyback Program]
[Aug 18, 2008: Perfect World Earnings Mostly Inline]
[May 20, 2008: Motley Fool on Chinese Gaming]

Long Perfect World in fund; no personal position