Perfect World: Q1 Earnings Preview

| About: Perfect World (PWRD)
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Perfect World (NASDAQ:PWRD) will announce its 1Q10 earnings on Monday, May 17 before the market opens. For Q1, I estimate Perfect World grew revenue by 4.6% Q/Q to $93.2 million, slightly above consensus of $92.9 and the mid-point of management guidance of $90.8-94.3 million. According to my checks, Perfect World's solid performance in Q1 was mainly driven by core games Zhu Xian, Fantasy Zhu Xian, and Perfect World II, which achieved Average Concurrent Users (ACUs) of 330K, 240K, and 200K, respectively. These three games contributed over 60% of Perfect World's total ACUs and 70% of total revenues. I believe the company's profit margins improved in Q1 due to lower marketing expenses, and I estimate GAAP EPS to be $0.84 for the quarter.

All eyes on new games Forsaken World and Dragon Excalibur. As I mentioned in a previous article, Perfect World has never failed the launch of an MMORPG. I believe this winning streak is likely to continue in its next two games: Forsaken World (Shen Mo Da Lu) and Dragon Excalibur (Xiang Long Zhi Jian). Similar to Perfect World's eight previous MMORPGs, these two games will likely provide a significant boost to the company's financial results, although the exact timing is not clear. Therefore, during Monday morning's conference call, investors should look for clues about when Forsaken World and Dragon Excalibur will start generating revenues. Currently I forecast these two games will start commercial operations in 3Q10. In my view, a good strategy is to timely buy and sell Perfect World shares based on the launching and maturing of new games.

Disclosure: No positions