NetEase (NTES) beats estimates on strong online gaming and ad revs; wireless revs continue to decline (1Q05 earnings)

| About: NetEase, Inc (NTES)

NetEase (ticker: NTES), a Chinese Internet, online game and wireless
value-added services provider, beat Q1 EPS estimates by $0.08. Details:

Q1 Results:
(all percentage changes and comparisons are year on year, unless stated otherwise, assumes conversion rate of RMB 8.27 : US $1)

  • Total revenue rose 57.6% to $39.6 million. Consensus was $35.5 million.
  • Total revenue rose 17.9% over Q4 2004. The company guided for 17% sequential growth.
  • Revenue from online game services rose 135.3% to $31.7 million. Online game revenue rose 25.9% over Q4 2004.
  • Revenue from advertising services rose 31.3% to $5.5 million. Ad revenue increased 1.3% sequentially. Q1 showed weak sequential growth due to seasonality.
  • Revenue from wireless value-added and other fee-based premium
    services decreased 67.3% to $2.4 million. Wireless revenue fell 18.7% versus Q4 2004. The decrease in wireless revenue was largely a result of a decrease in
    SMS and MMS revenue.
  • Total operating expenses increased 79.1% to $10.9 million.
  • The Company incurred an R&D expense of approximately $2.5 million from the purchase of a 3D game technology aimed at boosting
    in-house development capabilities for online games.
  • A company subsidiary became subject to an 18% tax rate after being exempt previously.
  • Net profit increased 48.1% to $18.6 million.
  • Diluted EPS of $0.53 per American Depositary Share ("ADS"). Consensus was $0.45.

Gaming Highlights:

  • Continued strength of Fantasy Westward Journey and Westward Journey Online II.
  • Fantasy Westward Journey became one of the most popular online games in China with peak and average concurrent user numbers reaching 588,000 and 244,000, respectively, for the month of March 2005.
  • Westward Journey Online II, another in-house developed game remained
    one of the top-five MMORPG games in China, and reported solid growth
    during the quarter, achieving record peak and average concurrent users
    of 389,000 and 175,000, respectively, for the month of March 2005.

As of March 31, 2005:

  • Cash and equivalents increased 8.6% over December 31, 2004 to $300.3 million.

Q2 2005 Guidance:
(all percentage changes and comparisons are sequential, unless stated otherwise)

  • Total gross revenue of $46.0 - $47.0 million. Consensus is $40.0 million.
  • Online game services revenue to grow 18 - 20%.
  • Advertising services revenue to grow 15 - 20%.
  • Wireless and other fee-based premium services revenue to be flat to lower by 5%.
  • Net profit of $23.0 - $23.8 million.

CEO Ted Sun:

....The overwhelming success of Fantasy Westward Journey and
Westward Journey Online II is a testament to the ongoing strength of our in-house development capabilities and extensive network for distributing prepaid
point cards with which users can pay for our games. NetEase is now clearly one
of the leaders in both online game operation and development in China. We've
also been focusing on providing stronger channel content on our websites
through initiatives such as strategic partnerships with vertical media
companies, which are attracting more advertising spending.  Additionally, we
announced earlier this month that Li Ning, a well known Chinese consumer
sports brand, will become the title sponsor of our sports channel. We hope to
announce more sponsorship deals such as this in the future.

COO Michael Tong:

....We are still witnessing
robust growth in China's 2D MMORPG market as shown in the strong performance
of our two in-house developed 2D games. Beta testing for our latest licensed
3D game, Fly for Fun, is ongoing. The first stage of testing was designed to
address technical issues and improve server stability and has been largely
completed.  We expect that Fly for Fun will be ready for the commercial launch
in the second half of this year.  We are also finalizing development work on
our two next generation in-house developed games - a 3D game based on Chinese
mythology and a 2.5D game set during the Tang dynasty. We anticipate that both
games will be ready for beta testing in the second half of 2005.  In addition,
we believe that our newly acquired game technology will enable us to launch
more sophisticated 3D games in the future.  On the casual online games front,
we are also looking forward to the beta release of our casual games platform
in the second quarter.

NTES Stock Market Performance: