Perfect World Announces Third Quarter 2014 Unaudited Financial Results

BEIJING, Nov. 25, 2014 /PRNewswire/ -- Perfect World Co., Ltd. (NASDAQ: PWRD) ("Perfect World" or the "Company"), a leading online game developer and operator based in China, today announced its unaudited financial results for the third quarter ended September 30, 2014.

Third Quarter 2014 Highlights[1] 

• Total revenues were RMB974.3 million (USD158.7 million), compared with RMB928.4 million in the previous quarter and RMB820.2 million in the same quarter last year.
• Gross profit was RMB672.4 million (USD109.5 million), compared with RMB678.6 million in the previous quarter and RMB637.7 million in the same quarter last year.
• Operating loss was RMB23.3 million (USD3.8 million), compared with operating profit of RMB128.2 million in the previous quarter and RMB115.1 million in the same quarter last year. Excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact, non-GAAP operating profit[2] was RMB42.4 million (USD6.9 million), compared with RMB138.4 million in the previous quarter and RMB135.7 million in the same quarter last year.
• Net income attributable to the Company's shareholders was RMB60.7 million (USD9.9 million), compared with RMB161.7 million in the previous quarter and RMB120.9 million in the same quarter last year. Excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact, non-GAAP net income attributable to the Company's shareholders[2] was RMB126.4 million (USD20.6 million), compared with RMB171.9 million in the previous quarter and RMB141.5 million in the same quarter last year.
• Basic and diluted earnings per ADS[3] were RMB1.22 (USD0.20) and RMB1.20 (USD0.19), respectively, compared with RMB3.26 and RMB3.21, respectively, in the previous quarter, and RMB2.47 and RMB2.41, respectively, in the same quarter last year. Excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact, non-GAAP basic and diluted earnings per ADS[2] were RMB2.55 (USD0.42) and RMB2.49 (USD0.41), respectively, compared with RMB3.47 and RMB3.41, respectively, in the previous quarter, and RMB2.89 and RMB2.82, respectively, in the same quarter last year.

Mr. Robert Xiao, CEO of Perfect World commented, "We are pleased to announce our third quarter results.  Total revenues rose by 5% quarter-over-quarter, which came in line with our expectations.  The sequential revenue growth was mainly attributed to our newly launched mobile games 'CrossGate Mobile' and 'Forsaken World.' 'DOTA2,' a world-class title for which we have obtained exclusive rights to operate in mainland China, also continued to perform well."

"During the third quarter, we continued to expand our portfolio by launching new games and releasing expansion packs for our existing games.  In addition to launching 'CrossGate Mobile' early in the quarter, we launched 'Legend of the Condor Heroes,' a 3D MMORPG based on one of Louis Cha's classic martial arts novels, and the mobile game 'Touch' toward the end of the quarter.  We also launched the console version of 'Neverwinter' in mainland China through the Xbox One platform，and we are working on localizing a PC version of the game for China.  Moreover, we have a variety of upcoming titles in our mobile game pipeline, such as 'Forever Mars,' 'Dawn after Dark,' 'Swordsman Mobile,' and 'Saint Seiya Mobile.' "  

"Research and development continues to be our main competitive advantage.  In order to further bolster our competitive edge in this area, we recently restructured our R&D teams to form five new subsidiaries.  We believe this new structure will help better incentivize top talent, support game design flexibility, allow faster reaction to changing market trends, and boost game development productivity."  

"During the quarter, we continued to make progress in launching our games in various markets through our overseas partners and subsidiaries.  At the same time, we face fierce competition in the global market.  In view of U.S. subsidiary's recent performance and near-term business outlook that are below our expectations, we recognized acquisition-related impairments in this quarter.  However, we are still confident in the long-term prospects of our U.S. subsidiary given its strong R&D and operational capabilities as well as promising pipeline.   With our extensive overseas network that covers more than 100 countries and regions around the world, we remain committed to further expanding our overseas penetration and bolstering our global presence."

"We are constantly on the lookout to identify new market trends as we endeavor to position ourselves to capture growth opportunities in the global market.  We believe our strategies will bring long term value to our shareholders as we seek to create captivating entertainment experiences for gamers worldwide."

Third Quarter 2014 Financial Results

Total Revenues

Total revenues were RMB974.3 million (USD158.7 million), compared with RMB928.4 million in the previous quarter and RMB820.2 million in the same quarter last year.

Online game operation revenues, which include both domestic and overseas online game operations, were RMB919.5 million (USD149.8 million), compared with RMB861.1 million in the previous quarter and RMB750.2 million in the same quarter last year.   The increase from the previous quarter was mainly due to the strong performance of the Company's mobile games, such as the newly launched "CrossGate Mobile" and "Forsaken World."

The aggregate average concurrent users (ACU) for PC games under operation in mainland China was approximately 623,000, compared with 661,000 in the previous quarter and 778,000 in the same quarter last year.

Licensing revenues were RMB38.6 million (USD6.3 million), compared with RMB48.9 million in the previous quarter and RMB39.1 million in the same quarter last year.  The decrease from the previous quarter was mainly because the Company had fewer major new game launches through its partners in overseas markets in 3Q14.

Other revenues were RMB16.2 million (USD2.6 million), compared with RMB18.3 million in the previous quarter and RMB30.9 million in the same quarter last year.

Cost of Revenues

Cost of revenues was RMB301.9 million (USD49.2 million), compared with RMB249.8 million in the previous quarter and RMB182.5 million in the same quarter last year.  The increase from the previous quarter was mainly due to an increase in revenue sharing, particularly with mobile game distribution channels as a result of the strong performance of the Company's mobile games in 3Q14.

Gross Profit and Gross Margin

Gross profit was RMB672.4 million (USD109.5 million), compared with RMB678.6 million in the previous quarter and RMB637.7 million in the same quarter last year.  Gross margin was 69.0%, compared with 73.1% in the previous quarter and 77.8% in the same quarter last year.

Operating Expenses

Operating expenses were RMB695.7 million (USD113.3 million), compared with RMB550.3 million in the previous quarter and RMB522.6 million in the same quarter last year.  The increase in operating expenses from the previous quarter was mainly due to an increase in sales and marketing expenses, the goodwill impairment and the impairment of intangibles via acquisitions associated with the Company's U.S. subsidiary, as well as higher R&D expenses in 3Q14.

R&D expenses were RMB280.8 million (USD45.7 million), compared with RMB259.8 million in the previous quarter and RMB236.0 million in the same quarter last year. The increase from the previous quarter was primarily due to an increase in staff cost.

Sales and marketing expenses were RMB267.1 million (USD43.5 million), compared with RMB197.8 million in the previous quarter and RMB210.2 million in the same quarter last year.  The increase from the previous quarter was primarily due to an increase in advertising and promotional expenses associated with several recently-launched new games.

General and administrative expenses were RMB117.3 million (USD19.1 million), compared with RMB92.8 million in the previous quarter and RMB76.4 million in the same quarter last year.    The increase from the previous quarter was mainly due to the impairment of intangibles via acquisitions associated with the Company's U.S. subsidiary.   

Goodwill impairment was RMB30.5 million (USD5.0 million), as compared with Nil in the previous quarter and Nil in the same quarter last year.  The increase was primarily due to the goodwill impairment associated with the Company's U.S. subsidiary.

Operating Loss/Profit

Operating loss was RMB23.3 million (USD3.8 million), compared with operating profit of RMB128.2 million in the previous quarter and RMB115.1 million in the same quarter last year.  Excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact, non-GAAP operating profit was RMB42.4 million (USD6.9 million), compared with RMB138.4 million in the previous quarter and RMB135.7 million in the same quarter last year.

Total Other Income

Total other income was RMB100.7 million (USD16.4 million), compared with RMB42.1 million in the previous quarter and RMB26.6 million in the same quarter last year. The increase from the previous quarter was largely due to an investment gain, including the gain of approximately RMB28.5 million from the sale of 30,326,005 class A ordinary shares of Shanda Games Limited, and a foreign exchange gain recognized in 3Q14.            

Income Tax Expense

Income tax expense was RMB29.1 million (USD4.7 million), compared with RMB10.5 million in the previous quarter and RMB14.1 million in the same quarter last year.  The increase from the previous quarter was primarily because some of the Company's controlled entities that are subject to higher tax rates earned more pre-tax profit than the previous quarter.

Net Income Attributable to the Company's Shareholders

Net income attributable to the Company's shareholders was RMB60.7 million (USD9.9 million), compared with RMB161.7 million in the previous quarter and RMB120.9 million in the same quarter last year.  Excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact, non-GAAP net income attributable to the Company's shareholders was RMB126.4 million (USD20.6 million), compared with RMB171.9 million in the previous quarter and RMB141.5 million in the same quarter last year.

Basic and diluted earnings per ADS were RMB1.22 (USD0.20) and RMB1.20 (USD0.19), respectively, compared with RMB3.26 and RMB3.21, respectively, in the previous quarter, and RMB2.47 and RMB2.41, respectively, in the same quarter last year.  Excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact, non-GAAP basic and diluted earnings per ADS were RMB2.55 (USD0.42) and RMB2.49 (USD0.41), respectively, compared with RMB3.47 and RMB3.41, respectively, in the previous quarter, and RMB2.89 and RMB2.82, respectively, in the same quarter last year.

Cash and Cash Equivalents

As of September 30, 2014, the Company had RMB1,278.6 million (USD208.3 million) of cash and cash equivalents, compared with RMB883.6 million as of June 30, 2014.  The increase was mainly due to the proceeds from the sale of 30,326,005 class A ordinary shares of Shanda Games Limited and the net cash inflow generated from the Company's online game operations. This was partially offset by the investments in certain short-term structured deposits.

Business Outlook

Based on the Company's current operations, total revenues for the fourth quarter of 2014 are expected to be between RMB1,023 million and RMB1,072 million, representing an increase of 5% to 10% on a sequential basis.  This takes into consideration the expected growth from the continued strength of the Company's mobile games.

Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States, or GAAP, this press release presents non-GAAP operating profit, non-GAAP net income attributable to the Company's shareholders and non-GAAP earnings per ADS by excluding the share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact from operating profit, net income attributable to the Company's shareholders and earnings per ADS, respectively.  The Company believes these non-GAAP financial measures are important to help investors understand the Company's operating and financial performance, compare business trends among different reporting periods on a consistent basis and assess the Company's core operating results, as they exclude certain expenses that are not expected to result in cash payments.  The use of the above non-GAAP financial measures has certain limitations.  Share-based compensation charge has been and will continue to be incurred and goodwill impairment and impairment of intangibles via acquisitions of businesses and related tax impact may recur in the future. They are not reflected in the presentation of the non-GAAP financial measures, but should be considered in the overall evaluation of the Company's results.  None of the non-GAAP measures is a measure of net income attributable to the Company's shareholders, operating profit, operating performance or liquidity presented in accordance with GAAP.  The Company compensates for these limitations by providing the relevant disclosure of its share-based compensation charge, the goodwill impairment and the impairment of intangibles via acquisitions of businesses and related tax impact in the reconciliations to the most directly comparable GAAP financial measures, which should be considered when evaluating the Company's performance.  These non-GAAP financial measures should be considered in addition to, but not a substitute for, or superior to, financial measures prepared in accordance with GAAP.  Reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP financial measures is set forth at the end of this release.

Conference Call

Perfect World will host a conference call and live webcast at 8:00pm Eastern Standard Time on Tuesday, November 25, 2014 (9:00am Beijing time on Wednesday, November 26, 2014).

Dial-in numbers for the live conference call are as follows:

A live and archived webcast of the conference call will be available on the Investor Relations section of Perfect World's website at http://www.pwrd.com.

A telephone replay of the call will be available beginning two hours after the conclusion of the conference call through 11:59pm Eastern Time, December 2, 2014.

Dial-in numbers for the replay are as follows:

About Perfect World Co., Ltd. (http://www.pwrd.com)

Perfect World Co., Ltd. (NASDAQ: PWRD) is a leading online game developer and operator based in China.  Perfect World primarily develops online games based on proprietary game engines and game development platforms.  Perfect World's strong technology and creative game design capabilities, combined with extensive knowledge and experiences in the online game market, enable it to frequently and promptly introduce popular games designed to cater changing customer preferences and market trends.  Perfect World's current portfolio of self-developed online games includes massively multiplayer online role playing games ("MMORPGs"): "Perfect World," "Legend of Martial Arts," "Perfect World II," "Zhu Xian," "Chi Bi," "Pocketpet Journey West," "Battle of the Immortals," "Fantasy Zhu Xian," "Forsaken World," "Empire of the Immortals," "Return of the Condor Heroes," "Saint Seiya Online," "Swordsman Online," "Holy King" and "Legend of the Condor Heroes;" an online casual game: "Hot Dance Party;" and a number of web games and mobile games.  While a majority of the revenues are generated in China, Perfect World operates its games in North America, Europe, Japan, Korea and Southeast Asia through its own subsidiaries.  Perfect World's games have also been licensed to leading game operators in a number of countries and regions in Asia, Latin America, and the Russian Federation and other Russian speaking territories.  Perfect World intends to continue to explore new and innovative business models and is committed to maximizing shareholder value over time.

Safe Harbor Statements

This press release contains forward-looking statements.  These statements constitute forward-looking statements under the U.S. Private Securities Litigation Reform Act of 1995.  These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "confidence," "estimates" and similar statements.  Among other things, the management's quotations and "Business Outlook" contain forward-looking statements.  Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Potential risks and uncertainties include, but are not limited to, Perfect World's ability to develop and operate new games that are commercially successful, the growth of the online game market and the continuing market acceptance of its games and in-game items in China and elsewhere, its ability to protect intellectual property rights, its ability to respond to competitive pressure, its ability to maintain an effective system of internal control over financial reporting, changes of the regulatory environment in China, and economic slowdown in China and/or elsewhere.  Further information regarding these and other risks is included in Perfect World's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F.  All information provided in this press release and in the attachments is as of November 25, 2014, and Perfect World does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

For further information, please contact

Perfect World Co., Ltd.
Vivien Wang -- Vice President, Capital Market & Corporate Communications
Tel: +86-10-5780-5700 
Fax: +86-10-5780-5713
Email: [email protected]
http://www.pwrd.com

Christensen Investor Relations
Patty Bruner
Tel: +1-480-614-3036
Fax: +1-480-614-3033
Email: [email protected]

Jung Chang
Tel: +852-2117-0861
Fax: +852-2117-0869
Email: [email protected]

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SOURCE Perfect World Co., Ltd.