Giant Interactive (NYSE: GA), the online Chinese game developer and operator, came out with its third-quarter result showing a giant increase in net profits. Let's take a closer look at the results to see what's up with the gaming company.

Giant profits
Giant saw its revenue run up by 35% to $71.8 million from the previous year's quarter. The company's core online gaming business also grew 7.4% compared to the previous quarter.

Net income, on the other hand, took a giant leap by an impressive 73.1% increase to $56.6 million. This huge boost is mainly due to Giant's online gaming revenue that has notched higher than the second quarter, as well as from the previous year's quarter.

Higher net income is also due to much lower operating expenses. Giant's research and development costs took a cut by 7% to $7.7 million mainly due to the payment of higher bonuses for developers in the previous periods.

On the expenses side, Giant saw its sales and marketing costs rise by 32.6% from the previous year's quarter to $7.8 million largely due to a marketing campaign for open beta testing for its ZT and XT online games.

General and administrative expenses fell off a cliff, down by 25% to $3.9 million mainly because of office relocation expenses it incurred in the preceding quarters coupled with higher payouts for a few chosen employees and management executives. Now, let's have a look what all this meant for Giant's margins.

Giant margins
On the margins front, I must say that I'm quite impressed with Giant. A look at the company's margins reveals operating margin for the current quarter at a monstrous 61.3%. Net income margin also stood at an extraordinary 78.9%. And what's even more amazing is that Giant's margins have been high most of the time. A drop in the selling, general, and administration margin to 16.3% from 21% also shows the company's cost-cutting effectiveness.


Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Operating Margin 57.3% 51.5% 61.8% 58.7% 61.3%
Net Income Margin 61.6% 62.8% 65.0% 2.3% 78.9%

Source: S&P Capital IQ.

A quick comparison with Giant's peers reveals that Giant interactive has the best margins apart from Changyou. Need I say more?


LTM Operating Margin

LTM Net Income Margin

Giant Interactive 58.6% 51.9%
Shanda Interactive Entertainment  (Nasdaq: SNDA) 9.0% 5.1% (Nasdaq: CYOU) 58.7% 50.3%
Perfect World (Nasdaq: PWRD) 32.9% 29.5%

Source: S&P Capital IQ.  LTM= last 12 months. Latest available quarterly data used.

The Foolish bottom line
Giant has once again delivered a great set of quarterly numbers, not to mention a top-notch set of margins. However, given the high levels of competition in the video game industry, the company will need to constantly innovate and reinvent in order to stay near the top.

This means more spending on R&D and compensation in order to build the best games and retain talent. So, what do you think about Giant and the online gaming industry in China? We would love to hear from you. To stay up to speed with the latest developments for Giant, feel free to add it to your very own personalized Watchlist. It's free, and it helps you to stay on top of the latest news and analysis for your favorite companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.