PWRD 1Q2011 - Not impressive

Q1 results went beyond analyst expectations. +10% revenue beat and resultant operating leverage led to +40% EPS beat. The upbeat results were due to monetization by forcing players to pay-up for various digital goodies. This milking caused ACU (average concurrent users) to decline to 905,000 in 1Q '11 as compared to 999,000 in 4Q '10 and 993,000 in 1Q '10. Since management plans lesser monetization for Q2, guided revenue was flat qoq. Thus it was a give and take sort of quarter and the stellar financial performance did not impress much as some long term concerns have arisen.

Decline in ACU becomes more critical, in the context of two new games. Forsaken World and Empire of Immortals had full quarter contribution. That means gamer enthusiasm towards new games was not there to balance the monetization efforts of the company. This is an alarming sign for game popularity and future monetization potential. A news article on Forsaken World communicated the same feelings.     

The company has been heavily investing to develop new games. Management announced that it will add another 700 people to the current 2200 R&D employee base – i.e. a 32% increase. Considering ACU was not able to defend against the monetization efforts, the increased R&D does not seem to be efficient or effective.

Tactical Strategy: PWRD would continue its downward journey for some time, till it become a value-buy between $20 - $22. News flow with regard to Forsaken World and Empire of Immortals remain critical for stock price performance and we recommend no position till such news flow emerge.