Perfect World shares fall on weak profit, margins

Tue Aug 17, 2010 1:44pm EDT

Aug 17 (Reuters) - Shares of Perfect World Co Ltd (PWRD.O) fell more than 8 percent Tuesday, a day after the Chinese online game developer posted weak quarterly results as marketing expenses surged and lack of fresh game launches sparked investor concerns.

Perfect World, known for its popular role-playing game "Legend of Martial Arts," said it plans to release "Forsaken World" and "Dragon Excalibur," without providing any time frame.

Game launches are key growth drivers for Chinese game operators looking to increase their share in the $4 billion Chinese online gaming market.

Gaming companies in China have seen torrid growth but are facing strong headwinds this year as companies failed to come out with fresh titles amid an increasingly competitive environment.

Perfect World said marketing expenses soared 47 percent from the last quarter even as revenue fell due to cut backs in in-game promotions to lengthen the life span of games.

Cutting in-game promotions allows gamers to spend more time on the game and access higher gaming levels without paying for accessories like weapons, lives and other aids.

"We believe near-term revenue growth may be constrained," brokerage Brean Murray Carret & Co said in a note.

Content may also face pressure from the relaunch of "World of Warcraft" (Activision Blizzard (ATVI.O)), the brokerage said, adding Perfect World "lacks meaningful game launches until mid-2011".

Brokerage Auriga said though Perfect World has strong R&D capabilities, all gaming companies in China would face a decline in operating margins due to various difficulties, including the longer time frame needed to develop new content.

The company reported gross margins of 83.6 percent in the second quarter, down from 87.2 percent a year ago. * Roth Capital Partners said the profit miss reflected growing competition, changing user preferences and increased regulations in the Chinese online game space.

"Sales & marketing expenses appear to be out of control and we question the return the company is now getting for every marketing dollar spent," Roth Capital said in a note to clients.

The brokerage said the company should repurchase shares at current levels to restore some investor confidence and slow down its aggressive acquisition strategy.

Adjusted second-quarter earnings were 55 cents a share, while total revenue rose 19 percent to $87.6 million.

Analysts were expecting a profit of 68 cents a share on revenue of about 88 million, according to Thomson Reuters I/B/E/S.

For the third quarter, the company expects revenue to grow up to 5 percent on a sequential basis.

Shares of the company, which shed almost 39 percent of their value in the past year, were trading down $1.31 at $23.50 in afternoon trade on Nasdaq, after touching an intraday low of $22.79.

About 1.5 million Perfect World shares changed hands by 12:30 ET, compared with its 50-day moving average of 731,974 shares.

(Reporting by Sayantani Ghosh in Bangalore; Editing by Saumyadeb Chakrabarty, Prem Udayabhanu)

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