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The9 (NASDAQ:NCTY), the online game company, and operator of World of Warcraft in China reports earnings on Tuesday, August 28.

My estimate of the World of Warcraft average concurrent users [ACU] recorded during the second quarter is 310,000. The ACU, derived from my measurements of the WoW server utilization levels, is lower than the 330,000 number achieved during the first quarter. The main reason for this decline is the scheduled server downtime for the upgrade of the hardware required by The Burning Crusade WoW expansion.

The average downtime experienced by each one of the 280 game servers during the second quarter was about 5 days.

Except for this server downtime, the users levels were relatively stable compared to those in the first quarter. The calculated PCU was 680,000 unchanged from Q1.

Q2 Earnings Estimates

My estimates for the second quarter earnings are:

Net revenues: $39 million a 11% increase from $35 million in the first quarter.

WoW net revenues: $33 million vs. $34.5 million in Q1, a decrease of 4%.

SUN net revenues: $5.5 million. SUN revenues are difficult to estimate. The game is new and relies on a free to play, pay for items model.

Net income: $10.4 million, a 21% increase from $8.6 million in the first quarter.

Earnings per share: $0.36, a 6% increase from $0.34 in Q1. The EPS percentage increase is lower than the increase in net income due to the increase in shares outstanding (Electronic Arts investment).

SUN

SUN commercialization was launched on May 18. The game is monetized using the micro-transactions revenue model. The highly anticipated game recorded 400,000 peak concurrent users during its beta trial. Reports from gamers indicate some slowdown following the commercial launch. Recent game updates seem to be positive for the game and user levels.

The Burning Crusade Expansion Delayed

Chinese gamers and investors are still waiting for the arrival of the highly anticipated TBC expansion. Rumors that the expansion is still waiting for the Chinese government approval had a negative impact on the stock price.

The Audition Deal

The9 secured the Audition and Audition 2 licenses in a background of ongoing licensing disputes between 9You, the current Chinese Audition operator and T3 and Yedang, the game developer and publisher. The9 is paying big money for the Audition license: a license fee of $8 million, plus a royalty of 30 percent of game revenue. It may look like an expensive deal, but The9 is not only getting a blockbuster game (the current Audition user levels, revenue and generated income are on par or exceed those of World of Warcraft in China) but also, more importantly, The9 is crafting another strategic partnership with another game developer. As part of the Audition 2 deal, The9 secured the exclusive right of first refusal for Audition 3 and two other online games owned or distributed by G10.

The9's New Strategy: Long Term Partnerships with Proven Game Developers

The Audition deal, together with the Electronic Arts partnership, the renewal of its collaboration with Webzen and with SUN, and the successful negotiation of The Burning Crusade expansion with Blizzard, sheds some light on The9's new strategy: moving from signing single hit games to crafting long term relationships with established game developers.

Negotiating an extension of the WoW license beyond 2009 may turn out to be just another page from the same play book.

Timeline

May 18: SUN commercialization.

May 21: The9 and Electronic Arts announce a licensing agreement that gives The9 exclusive publishing rights for FIFA Online in China. Simultaneously, EA invests US$167 million in exchange of 15 percent of The9.

May 21: The9 obtains the license to operate Audition 2 in China.

June 25: The9 opens the 8th server site for WoW.

June 26: WoW version 2.1.2 content upgrade is launched. The upgrade paves the way for The Burning Crusade expansion pack.

July 9: The9 obtains the license to operate Field of Honor in China.

July 30: The9 announces that it will take over the Audition license effective August 1, 2008.

 

Disclosure: Daniel Vlad is a long term investor in The9. He owns NCTY stock since 2005.

NCTY 1-yr chart:

Source: The9 Q2 Earnings Preview