Netease's Gaming and Net Revenues Expected to Decrease

Netease.com (Nasdaq: NTES), the leading Chinese online game developer and operator announces second quarter earnings on Monday, August 13. Netease's Fantasy Westward Journey is the most popular game in China and is responsible for over 60% of the company's revenues.

Last year we started tracking the utilization levels of Netease's game servers to measure the average and peak concurrent user numbers of the company's games and forecast gaming revenues. Our previous reports generated significant interest from analysts, investors and media, both Internet and printed (China Daily, February 28, 2007).

For the second quarter, our analysis of the server utilization data predicts a 15% decline in the average concurrent users [ACU] of Fantasy Westward Journey compared to the ACU achieved during the first quarter. Netease's total gaming revenues and net revenues are forecasted to decrease by 10% and 8% respectively, compared to the previous quarter.

Q2 estimates

Our estimates for the second quarter are:

Net revenues: $64 million.

Online game revenues: $56 million

EPS: $0.25

Our estimates are significantly lower than the average analyst expectations of $70.5 million in net revenues and $0.28 EPS.

Fantasy Westward Journey Falters in Q2

According to our measurements of the server utilization levels, the ACU recorded by Fantasy Westward Journey during the second quarter decreased to 430,000 from 510,000 in the previous quarter. The decrease reflects the absence of special events that positively impacted the game in Q1: the release of new game content and the Chinese New Year Holiday.

In terms of peak concurrent users, on April 1st FWJ managed briefly to reach the 1.5 million users mark.

Westward Online Journey II, Netease's second largest game, continues to lose players at a slow pace. For this game we estimate a 2% decrease in ACU vs. Q1. Datang, another game operated by Netease, also continues to struggle.

Net revenues and earnings are favorably impacted this quarter by the RMB-USD exchange rate and the fact that the second quarter has 91 days (vs. 90 days for than Q1).

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Figure 1: Fantasy Westward Journey Daily ACU and its one week moving average.

Figure 2: Fantasy Westward Journey Daily PCU and its one week moving average.

Disclosure : The author of this research report has no position in Netease.