Grate Expectations in China

Maybe we need to teach Perfect World (Nasdaq: PWRD  ) a thing or two about setting the bar for investors.

"The second quarter results largely came in line with our expectations," CEO Michael Chi notes in last night's earnings release.

Technically, he's right. Three months ago, Chi projected 14% to 20% in year-over-year revenue growth. The online gaming company barely landed on the low end of that range, with a 14% top-line spurt to $87.6 million.

Perfect World also doesn't provide public guidance for its bottom-line performance. This means that we can't beat up on the company because a profit of $0.55 a share is well short of both the $0.72 a share that it earned a year ago and the $0.69 a share that analysts were forecasting.

In line with expectations or in the firing line of expectations?

I miss the old Perfect World. When the Chinese web-based gaming specialist went public three years ago, it blew past Wall Street's expectations in each of its first three quarterly reports. There were some hits and misses along the way, but the past few quarters have been brutal.

This is the second time over the past three quarters that Perfect World has fallen well short of analyst profit targets. The other quarter it simply nailed bottom-line estimates.

I took Perfect World rival Giant Interactive (NYSE: GA  ) to task last week for posting year-over-year declines in revenue and net income. Perfect World may be in better shape on an absolute basis, but at least investors were braced for a crummy report out of Giant Interactive. Perfect World had grander expectations.

We'll have a little more color here after NetEase.com (Nasdaq: NTES  ) reports tomorrow. Shanda Games' (Nasdaq: GAME  ) parent Shanda Interactive (Nasdaq: SNDA  ) should follow next week.

It would be a shame if Changyou.com's (Nasdaq: CYOU  ) 17% top-line advance during the quarter winds up being the star pupil. This used to be a hot niche. The government wasn't happy about the addictive hold that these diversions had on the Chinese youth, but the gamers kept coming.

These days, the former darlings are finding themselves discounting access to extend the lifecycles of their releases. The competitive environment is hurting the blockbuster prospects of new releases as they pour from the pipeline.

If China's youthful citizens aren't carving out fantasy roles in massive multiplayer realms, where are they? As investors, we deserve to know -- just as we deserve to know the next time that Perfect World's version of " in line with expectations" won't match our own.

Will the online gaming sector in China bounce back? Share your thoughts in the comment box below.