NetEase Misses on Slower Than Expected Online Game Growth and Increased Competition; Stock Down 16% in After-Hours Trading (NTES 3Q05 Earnings)

| About: NetEase, Inc (NTES)

Chinese online game company NetEase (ticker: NTES) reported Q3 2005 earnings results today that missed consensus EPS estimates by $0.02. Key stats from the quarter:

Q3 Results
(all percentage changes and comparisons are year on year, unless stated otherwise, assumes RMB 8.0920 : US $ 1)

  • Total revenue rose 82.6% to $57.2 million, and rose 11.0% sequentially. Consensus estimate of $56.28 million.
  • Net revenue rose 85.9% to $54.8 million.
  • Online gaming services revenue rose 119.4% to $46.1 million, and rose 8.4% sequentially.
  • Advertising services rose 43.8% to $9.1 million, and rose 37.3% sequentially.
  • Wireless value-added services and other revenue fell 49.3% to $2.0 million.
  • Gross margin was 80.2% vs 74.9%.
  • Total operating expenses rose 17.0% to $11.7 million.
  • Sales and marketing expenses fell 24.1% to $5.7 million.
  • General and administrative expenses rose 10.5% to $3.9 million.
  • Research and development expenses rose 102.4% to $2.1 million.
  • Operating income rose 153.8% to $34.1 million.
  • Operating margin was 59.7% vs 42.9%.
  • Net income rose 137.2% to $32.0 million, and rose 6.5% sequentially.
  • Net margin was 55.9% vs 43.0%.
  • Diluted EPS of $0.89 vs $0.40, and vs consensus estimate of $0.91.

Balance Sheet (as of September 30, 2005, assumes RMB 8.0920 : US $ 1)

  • Cash of $215.4 million.
  • Time deposit of $177.0 million.
Chief Operating Officer Michael Tong:

We were pleased with our continued growth of our online games business in the third quarter despite experiencing a slower than expected summer season which resulted in part from more competition in the market. On the advertising front, we are extremely satisfied with our stronger than expected revenue growth. We continue to see positive results from the continuous enhancements we've made by providing stronger channel content on our websites through strategic partnerships and initiatives, which are now attracting more advertising spending. This is clearly demonstrated by the significant increase in the number of page views in the quarter. As we move forward, we will not only maintain a focus on our advertising growth but we will keep our efforts heavily concentrated on our online game business and living up to NetEase's strong brand name for developing high quality next generation MMORPG games.

NTES chart.