Perfect World Is a Party Pooper

Things were going so well for China's gaming companies before last night's report from Perfect World (Nasdaq: PWRD  ) .

NetEase.com (Nasdaq: NTES  ) , Shanda Games (Nasdaq: GAME  ) , and Giant Interactive (NYSE: GA  ) all landed ahead of Wall Street's bottom-line expectations. Changyou.com (Nasdaq: CYOU  ) was the relative slacker by merely meeting analyst targets.

Along comes Perfect World to rain on the earnings parade.

Perfect World's revenue climbed 22% to $111.2 million, just shy of the $111.7 million that analysts were forecasting. Things got uglier on the way down to the bottom line. The provider of online multiplayer fantasy games clocked in with an adjusted profit of $0.53 a share, short of both the $0.60 a share it rang up a year earlier but also well shy of the $0.67 a share that the pros were looking for this time around.

Company EPS EPS est.
Giant Interactive $0.19 $0.16
Changyou.com $0.99 $0.99
NetEase.com $0.99 $0.88
Shanda Games $0.19 $0.18
Perfect World $0.53 $0.67

Source: Yahoo! Finance.

Congratulations, Perfect World. You stand out, but for the wrong reason.

Earlier this year, Perfect World was deliberately drawing out its development cycle, hoping to improve the quality of its games and slowing the monetization process to bring in more gamers. The plan appears to have worked on the top line, but margins are a mess.

The moral of the story here is that we can't paint in broad strokes. Not all of China's gaming companies are the same.

Heading into this latest wave of earnings it seemed as if NetEase would be the one facing the biggest challenge. Activision Blizzard (Nasdaq: ATVI  ) shed a problematic 800,000 net World of Warcraft gamers during the quarter, and it was assumed that the defections were stemming from China where NetEase is the game's exclusive licensed distributor. It didn't play out that way. Perfect World had also been blowing through Wall Street's profit targets with ease over the past year, save for one sloppy exception. Well, now there are two sloppy exceptions.

So let's keep an eye on all five companies as individual entities. What's good for one isn't necessarily what best for the other.

If you want to keep an eye on China's dot-com speedsters, consider adding them to MyWatchlist.

The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of NetEase.com and Activision Blizzard. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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