I have summarized three reasons behind the weak performance:
Delay of new game Duke of Mount Deer (DMD). During the conference call, Changyou's management said that the launch of DMD will be delayed to 3Q10 from the original 4Q09.
Prior to yesterday's announcement, investors had expected DMD to start contributing revenues in 4Q09 and become the major growth driver in 2010. This delay has caused investors to significantly reduce their expectations for Changyou's 2010 earnings.
In addition, despite the official explanation for the delay, which is to further enhance the game, some investors may have speculated on other worse reasons. Also, they are not sure whether DMD will be delayed again in the future. CYOU dropped mainly because of these newly emerged uncertainties surrounding DMD.
Decreased level of transparency. Changyou announced that total PCU for its two games declined 2% from last quarter to 950,000, but it no longer disclosed the revenue and PCU of TLBB, its flagship game.
This change of disclosure policy is understandable: Most Chinese online gaming companies do not disclose PCUs of single games because they don't want competitors to know too much about them.
However, when a publicly traded company reduces its level of disclosure, its stock typically faces some downward pressure because investors receive less information and therefore feel more uncertain about the company. Some investors may have worried that Changyou stopped disclosing TLBB's details because TLBB's concurrent users have stopped growing. My monitoring of TLBB shows that its PCU surpassed 950,000 on July 19.
This means TLBB has performed very well in the first month of 3Q09. If Changyou regularly announces new PCU records like what NetEase (NASDAQ:NTES) has been doing on FWWJ and WWJ2, its stock will become more popular among investors.
Weak 3Q09 guidance. Changyou has provided 3Q09 revenue guidance of $67 million-$69 million, implying a growth rate of 0.6%-3.6% from 2Q09. I believe CYOU dropped yesterday partly because some investors thought this guidance was weak: The third quarter is typically the strongest quarter for online games because students have much more time to play online games during summer holidays.
Considering this seasonal factor, Changyou's guidance does appear to be weak. However, the guidance is merely a forecast by the company. While it may really indicate weakness in 3Q09, it is also possible that Changyou has provided a conservative guidance, which is very likely to be exceeded by actual earnings results.
I think it is not a good idea to read too much into this guidance.
Disclosure: No positions