After watching its rivals post largely impressive quarterly results in recent weeks, China didn't save the best for last with Perfect World
New games and franchise expansion packs couldn't save the online gaming specialist from shrinking. Revenue slipped to $89.8 million as adjusted earnings were nearly halved to $0.43 a share.
Analysts figured Perfect World wasn't going to keep up with some of the country's gaming speedsters, but even they weren't this pessimistic. Wall Street was banking on an adjusted profit of $0.53 a share on $90.4 million in revenue.
Perfect World argues that it's deliberately drawing out its development cycle to improve the quality of its releases, and slowing the monetization process to draw in more gamers. The strategy is producing mixed results for now. Perfect World boosted its audience size sequentially, though the gamers are generating far less revenue. Either way, Perfect World is still reaching out to a smaller audience than it was a year ago.
There's a clear gap in China between the online gaming companies that are growing and those that are falling behind. Perfect World joins Shanda Interactive
The earlier reports out of Changyou.com
Analysts have been slow in sorting the winners from the losers. Perfect World and Shanda Interactive have missed Wall Street expectations more often than not over the past five quarters.
Hopefully, investors are taking better score.
Perfect World's cash-rich balance sheet means that it's not racing against the clock. Value investors may also point to the low earnings multiple after earning an adjusted $2.68 a share for all of 2010. However, cheering a single-digit trailing P/E isn't exactly terra firma if net income continues to decline.
Perfect World better hope that its deliberate strategies play out correctly.
Will the online gaming sector in China bounce back for all players? Share your thoughts in the comment box below.
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Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.