Is Everything Perfect About Perfect World?

The Chinese online game developer and operator Perfect World (NAS: PWRD) saw its third-quarter revenue and profits drop significantly, while many of its peers zoomed ahead with much higher revenues and profits. Let's take a closer, Foolish look at Perfect World's scores.

Not too perfect
The company's total revenue declined from the previous quarter by 9% to $111.2 million. This was chiefly caused by a deceleration in promotional activities for some of its games, while it shifted focus on enhancing its gaming content portfolio further. Management said content enhancement was necessary for long-term growth. The continuous cycle of enhancing gaming content to in-game promotions are normal and help increase the life cycle of the company's games. Nevertheless, one should not really mope about it, as revenue was up by 22% from the same quarter last year.

Perfect World's online gaming revenue stood at $100.9 million up from the previous year's quarter. However, as mentioned before, there was a sequential decline on account of a reduction in in-game promotions. Licensing revenue stood at $8.7 million, up 14.8% from the previous year's quarter. However, even that was down sequentially as a result of lower demand in foreign markets coupled with a reduction in initial license fees as the company failed to make many new launches in the second quarter.

All this contributed to a decline in the company's net income by 31.9% to $22.5 million from the previous year's quarter. This was also caused by a rise in operating expenses including higher spends on advertising along with significantly higher taxes and net interest payments. Inflated operating expenses were also, in part, a result of the company's recent acquisition of Cryptic Studios, an American online gaming development business.

Peer (NAS: NTES) also saw profits rise sharply by 41% to $129.5 million owing to the strong revenue it generated from Activision Blizzard's (NAS: ATVI) popular online multiplayer game World of Warcraft.

A perfect alliance
Perfect World recently announced a strategic partnership with Nexon Korea -- which specializes in online entertainment and massively multiplayer gaming -- to jointly establish a company that would help expand its user base in Korea. Both parties stand to benefit from the deal, as it would combine Nexon's in-depth experience of publishing online games in Korea, along with Perfect World's research and development capabilities and rich gaming content.

Back in August, the company also expanded its overseas licensing agreements to Brazil and certain Latin American countries. This was done by signing an agreement with Level Up Interactive for licensing the game Forsaken World. In September, the company also launched the online game Rusty Hearts in North American and European markets.

The Foolish bottom line
The online gaming company's world has not been perfect of late, but that doesn't necessarily mean that things won't get better in the months to come. At the same time, one should also note that the company's industry is also fraught with competition, and that could pose an obstacle. For this reason, I remain cautiously optimistic about the company in the long run. What do you think about Perfect World's imperfections? Let us know by giving your response in the box below. Also, don't forget stay up to speed with the latest news and analysis on Perfect World by adding it to your watchlist.

At the time thisarticle was published Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Fool owns shares of and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Activision Blizzard and, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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