Perfect World Announces Third Quarter 2012 Unaudited Financial Results

BEIJING, Nov. 19, 2012 /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, 2012.

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Third Quarter 2012 Highlights[1]

• Total revenues were RMB695.8 million (USD110.7 million), as compared to RMB676.4 million in 2Q12 and RMB708.9 million in 3Q11.
• Gross profit was RMB566.9 million (USD90.2 million), as compared to RMB549.8 million in 2Q12 and RMB587.7 million in 3Q11.
• Operating profit was RMB109.4 million (USD17.4 million), as compared to RMB155.2 million in 2Q12 and RMB193.9 million in 3Q11.  Non-GAAP operating profit[2] was RMB127.5 million (USD20.3 million), as compared to RMB172.5 million in 2Q12 and RMB221.3 million in 3Q11.
• Net income attributable to the Company's shareholders was RMB86.2 million (USD13.7 million), as compared to RMB158.2 million in 2Q12 and RMB143.6 million in 3Q11.  Non-GAAP net income attributable to the Company's shareholders[2] was RMB104.3 million (USD16.6 million), as compared to RMB175.5 million in 2Q12 and RMB171.1 million in 3Q11.
• Basic and diluted earnings per American Depositary Share ("ADS") [3] were RMB1.78 (USD0.28) and RMB1.77 (USD0.28), respectively, as compared to RMB3.28 and RMB3.25, respectively, in 2Q12, and RMB2.96 and RMB2.83, respectively, in 3Q11.  Non-GAAP basic and diluted earnings per ADS[2] were RMB2.16 (USD0.34) and RMB2.14 (USD0.34), respectively, as compared to RMB3.64 and RMB3.60, respectively, in 2Q12, and RMB3.53 and RMB3.37, respectively, in 3Q11.
• Launched open beta testing for "Return of the Condor Heroes" in September 2012 in China.
• Released English version of "Torchlight 2" in September 2012.

Mr. Michael Chi, Chairman and Co-Chief Executive Officer of Perfect World commented, "We are pleased to announce our third quarter results.  During the third quarter, we primarily focused on content development of our portfolio and decelerated in-game promotional activities.  As such, the overall performance of our existing games came in slightly softer than the previous quarter as we expected.  However, our total revenues were 2.9% higher on a sequential basis, which was ahead of the high end of our expectations and primarily a result of solid revenue contribution from our new game.  During the third quarter, we released the English version of 'Torchlight 2,' a pay-per-install game.  This game was developed by our majority-owned subsidiary, Runic Games, Inc. ("Runic Games"), a top-tier game development studio based in the U.S.  Toward the end of the third quarter, we also launched an exciting turn-based martial arts MMORPG, 'Return of the Condor Heroes' in China.  This new title adapted from Louis Cha's literary classic of the same name is expected to gradually ramp up revenue contribution for us during the fourth quarter."

"In addition to bringing new games to our players, we also remain dedicated to maintaining a healthy life cycle for our existing games.  We continued to provide exciting new game content to players of our existing games through regular releases of expansion packs and content updates.  For example, we released expansion packs for our flagship titles, 'Zhu Xian' and 'Perfect World II,' toward the end of the third quarter."

"As we continue to enhance content for our existing games, we are also further expanding on our deep and diverse pipeline, which has always been one of our key competitive advantages.  A number of attractive titles across a variety of genres are now in development.  Among them are our highly-anticipated MMORPGs, 'Swordsman Online,' 'Saint Seiya Online' and 'Legend of the Condor Heroes,' as well as a number of web games.  We look forward to introducing these titles to game players in the coming year and beyond and believe that they will become new growth drivers for our business."

Mr. Robert Hong Xiao, Co-CEO of Perfect World continued, "In addition to the great titles our Chinese studios are developing, we also have a number of global titles in our pipeline.  Our Cryptic Studios in the U.S. is working on 'Neverwinter,' another highly-anticipated MMORPG that we plan to initially launch in North America.  Cryptic Studios, as well as our other specialized R&D studios across the world, not only bring more world-class entertainment to our pipeline, but also play an important role in our globalization strategy in terms of further strengthening our well-established R&D capabilities worldwide."

"Another world-class title that we are very excited about is 'Dota 2,' a world-famous title with a unique mix of action, RTS and RPG gameplay.  We recently obtained exclusive rights to operate this game in mainland China.  We look forward to leveraging our vast operational experience in China to bring more world-class entertainment to our players."

"Our strong operational capabilities are an important component of our globalization strategy.  In addition to China, we also have an extensive operational network overseas and we continued to make progress in our overseas operations and licensing activities.  Recently, we successfully launched licensed games, 'Dark Blood' and 'RaiderZ,' through our overseas subsidiaries in Japan and the U.S., respectively.  During the quarter, we also signed several new agreements to license more of our games to overseas operators."

"As we look forward, we will continue to capitalize on our diverse portfolio and pipeline, strong global R&D capabilities, and extensive global operating network to deliver more exciting and innovative titles to gamers all over the world."

Third Quarter 2012 Financial Results

Total Revenues

Total revenues were RMB695.8 million (USD110.7 million) in 3Q12, as compared to RMB676.4 million in 2Q12 and RMB708.9 million in 3Q11. 

Online game operation revenues, which include both domestic and overseas online game operations, were RMB608.2 million (USD96.8 million) in 3Q12, as compared to RMB626.4 million in 2Q12 and RMB643.2 million in 3Q11.  In the third quarter, the Company decelerated in-game promotional activities and continued to focus on content enhancements in order to maintain a healthy life cycle for its existing games.  

The aggregate average concurrent users (ACU) for games under operation in mainland China was approximately 601,000 in 3Q12, as compared to 739,000 in 2Q12 and 828,000 in 3Q11.  During late second quarter and throughout the third quarter, the Company stepped up its anti-cheating efforts for certain games in order to maintain a healthy and fun gaming environment for players.  The decrease from 2Q12 was mainly due to such stringent anti-cheating efforts, as well as adverse seasonality factors affecting user traffic during the third quarter.  In addition, expansion packs for certain games were released near or after the end of the third quarter.  As such, user traffic remained at a lower level prior to releases of the new content.

Licensing revenues were RMB39.0 million (USD6.2 million) in 3Q12, as compared to RMB46.9 million in 2Q12 and RMB55.8 million in 3Q11.  The decrease from 2Q12 was mainly due to lower initial license fees as the Company did not launch any new games through its partners in overseas markets in 3Q12.

Other revenues were RMB48.6 million (USD7.7 million) in 3Q12, as compared to RMB3.0 million in 2Q12 and RMB9.9 million in 3Q11.  The increase from 2Q12 was primarily due to the contribution from English version of "Torchlight 2" released in 3Q12.  "Torchlight 2" is a popular pay-per-install game developed by Runic Games, the Company's majority-owned subsidiary based in the U.S.

Cost of Revenues

The cost of revenues was RMB128.9 million (USD20.5 million) in 3Q12, as compared to RMB126.6 million in 2Q12 and RMB121.2 million in 3Q11.  

Gross Profit and Gross Margin

Gross profit was RMB566.9 million (USD90.2 million) in 3Q12, as compared to RMB549.8 million in 2Q12 and RMB587.7 million in 3Q11.  Gross margin was 81.5% in 3Q12, as compared to 81.3% in 2Q12 and 82.9% in 3Q11.  

Operating Expenses

Operating expenses were RMB457.5 million (USD72.8 million) in 3Q12, as compared to RMB394.6 million in 2Q12 and RMB393.9 million in 3Q11.  The increase in operating expenses from 2Q12 was mainly due to increases in sales and marketing expenses, and R&D expenses in 3Q12.

R&D expenses were RMB197.1 million (USD31.4 million) in 3Q12, as compared to RMB189.7 million in 2Q12 and RMB170.6 million in 3Q11.  The increase from 2Q12 was primarily due to an increase in staff cost.

Sales and marketing expenses were RMB177.1 million (USD28.2 million) in 3Q12, as compared to RMB121.8 million in 2Q12 and RMB146.7 million in 3Q11.  The increase from 2Q12 was largely due to an increase in advertising and promotional expenses associated with the launch of the Company's new game, "Return of the Condor Heroes," and releases of several expansion packs for its existing games, including the flagship titles "Zhu Xian" and "Perfect World II."  

General and administrative ("G&A") expenses were RMB83.3 million (USD13.2 million) in 3Q12, as compared to RMB83.1 million in 2Q12 and RMB76.5 million in 3Q11. 

Operating Profit

Operating profit was RMB109.4 million (USD17.4 million) in 3Q12, as compared to RMB155.2 million in 2Q12 and RMB193.9 million in 3Q11.  Non-GAAP operating profit was RMB127.5 million (USD20.3 million) in 3Q12, as compared to RMB172.5 million in 2Q12 and RMB221.3 million in 3Q11.

Total Other Income

Total other income was RMB16.1 million (USD2.6 million) in 3Q12, as compared to RMB38.9 million in 2Q12 and RMB28.5 million in 3Q11.  Due to the fluctuation of the euro against the U.S. dollar, a foreign exchange loss was realized in 3Q12 while a foreign exchange gain was realized in 2Q12. 

Income Tax Expense

Income tax expense was RMB29.1 million (USD4.6 million) in 3Q12, as compared to RMB38.1 million in 2Q12 and RMB78.8 million in 3Q11.  The decrease from 2Q12 was primarily a result of the change in the operating profit in 3Q12. 

Net Income Attributable to the Company's Shareholders

Net income attributable to the Company's shareholders was RMB86.2 million (USD13.7 million) in 3Q12, as compared to RMB158.2 million in 2Q12 and RMB143.6 million in 3Q11.  Non-GAAP net income attributable to the Company's shareholders was RMB104.3 million (USD16.6 million) in 3Q12, as compared to RMB175.5 million in 2Q12 and RMB171.1 million in 3Q11.

Basic and diluted earnings per ADS were RMB1.78 (USD0.28) and RMB1.77 (USD0.28), respectively, in 3Q12, as compared to RMB3.28 and RMB3.25, respectively, in 2Q12, and RMB2.96 and RMB2.83, respectively, in 3Q11.  Non-GAAP basic and diluted earnings per ADS were RMB2.16 (USD0.34) and RMB2.14 (USD0.34), respectively, in 3Q12, as compared to RMB3.64 and RMB3.60, respectively, in 2Q12, and RMB3.53 and RMB3.37, respectively, in 3Q11.

Cash and Cash Equivalents

As of September 30, 2012, the Company had RMB745.8 million (USD118.7 million) of cash and cash equivalents, as compared to RMB964.1 million as of June 30, 2012.  The decrease was mainly due to the Company's short-term investments in certain structured deposits, and was partially offset by the net cash inflow generated from the Company's online game operations.

Recent Developments

Obtained Exclusive Rights to Operate "Dota 2" in Mainland China

In October 2012, the Company obtained exclusive rights to operate "Dota 2," a popular online game with the unique mix of action, RTS and RPG gameplay, in mainland China.

Promoted Mr. Alex Yiran Xu to Senior Vice President

In November 2012, the Company promoted Mr. Alex Yiran Xu, the Company's Vice President of Strategy, to the Company's Senior Vice President of Business Development. 

Business Outlook

Based on the Company's current operations, total revenues for the fourth quarter of 2012 are expected to be between RMB661 million and RMB696 million, representing a flat to slight decline from the third quarter of 2012.  The Company successfully released English version of "Torchlight 2," a popular pay-per-install game, which contributed to revenues in the third quarter.  The Company does not expect the revenue contribution from this game to be as significant in the fourth quarter.  On the other hand, the Company's new game, "Return of the Condor Heroes," is expected to contribute additional revenues for the fourth quarter, but it will take time to ramp up gradually.

Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with generally accepted accounting principals 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 share-based compensation charge 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 is not reflected in the presentation of the non-GAAP financial measures.  It should be considered in the overall evaluation of our 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.  We compensate for these limitations by providing the relevant disclosure of our share-based compensation charge in our reconciliations to the most directly comparable GAAP financial measures, which should be considered when evaluating our performance.  These non-GAAP financial measures should be considered in addition to financial measures prepared in accordance with GAAP, but should not be considered 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 measure are 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 Monday, November 19, 2012 (9:00am Beijing time on Tuesday, November 20, 2012).

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, November 27, 2012.

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," "Dragon Excalibur," "Empire of the Immortals" and "Return of the Condor Heroes;" an online casual game: "Hot Dance Party;" and a number of web games and social networking games.  While a substantial portion of the revenues are generated in China, Perfect World operates its games in North America, Europe and Japan 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, Australia, New Zealand, 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.

SafeHarborStatements

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," "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 limited operating history, its 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 19, 2012, 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, Investor Relations & Corporate Communications
Joanne Deng - Investor Relations Manager 
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]

Victor Kuo
Tel: +86-10-5826-4939
Fax: +86-10-5826-4838
Email: [email protected]

SOURCE Perfect World Co., Ltd.