Back in November, I highlighted the third quarter earnings of Perfect World (PWRD). The company at the time saw revenue fall to $110.7 million ($112.8) after disappointing new releases. I recommended shares of the Chinese game operator at that time and am back today to recommend one more look at Perfect World.
Neverwinter, a MMORPG based on the popular Dungeons and Dragons game, continues to be the big catalyst for Perfect World. I highlighted this in the third quarter earnings article as it was the thing to look forward for the company. The game has been showcased at the 2011 E3 Conference and the 2012 Pax East, where it won Best of Show. Perfect World recently announced that the game will also be showcased at the Pax East in Boston (March 22nd through 24th).
On March 7th, the second Beta testing began for Neverwinter. The game can be played by people who sign up over the course of three days. Over 60 hours of gameplay is available to testers as are new characters and levels. To get access to the beta testing, Perfect World made people purchase the Founder's Pack, which gave easy future revenue to the company.
During its full year earnings call, company executives confirmed that Neverwinter will release in the second quarter of fiscal 2013. This would mean that the strong revenue from the game will likely hit the third and fourth quarters of 2013, which are still far enough away for investors to become bullish on the stock. Due to decrease revenue, shares were actually down sharply, representing a nice opportunity to go long before Neverwinter is released.
The game is a huge make it or break it for Perfect World and its subsidiary Cryptic Studios. Perfect World acquired Cryptic from Atari back in 2011 for around $50 million. The purchase gave Perfect World and American base with games like Champions Online and Star Trek Online. The online Star Trek game recently celebrated its third year and could be in for a strong 2013 with the movie sequel being released and interest in the brand rising.
The main reason for the purchase was to give Perfect World a presence in North America, but also was done due to the potential of Neverwinter, which Atari marketed to potential buyers. Neverwinter comes with a built in audience from the successful Dungeons and Dragons game. The MMORPG has gone through several delays and fans are starting to grow impatient. This has to be the year the game is released and Perfect World needs a strong showing from the game to make the Cryptic acquisition payoff and also keep its growing presence in North America.
In the fourth quarter, Perfect World reported revenue of $109.1 million. Earnings per share were reported at $0.29. Online gaming revenue made up the majority of the company's total at $96.3 million. Revenue from licensed games made up $5.9 million. The average number of users increased from the third quarter to 620,000, but was down significantly from the fourth quarter of 2011 (873,000).
With strong in-game purchases and subscription models for several hit games, Perfect World has phenomenal cash flow. The company will once again pay out a generous dividend ($0.45) to American Depository Shareholders in April.
For the full year, Perfect World reported $444.7 million in revenue. Earnings per share were reported at $1.81 for the full year. Revenue was hurt by a decrease in in-game promotional activity. The company is instead focusing on long term projects in its pipeline, like Neverwinter. For the full year, online revenue represented $401.2 million. Licensing revenue ($27.5) and other ($16.0) made up the other portions of full year revenue.
The year 2013 could finally be the one that Perfect World shareholders are looking for. The company will release three big games in Swordsman Online, Saint Seiya Online, and Neverwinter. Shares are currently trading at $10.52, representing a price to earnings of only 5.8.This company is always risky with its dependence on online games and its Chinese connections. I think the stock is worth buying at these prices for a strong return in 2014.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PWRD over the next 72 hours.