NetEase.com (NTES)

[eastunder]

NetEase Q4 Beats; Investors Worry About New Games

By KEVIN SHALVEY, INVESTOR'S BUSINESS DAILY Posted 02/16/2012 04:10 PM ET

http://news.investors.com/Article.aspx?id=601408&p=1&ibdbot=1

NetEase executives late Wednesday disappointed investors by giving no word about any deals with game-maker Activision, and U.S. shares of the Chinese firm closed down 4% to 48.68 on Thursday.

Besides producing its own games such as "Ghost" and "Fantasy Westward Journey," Chinese game website NetEase (NTES) licenses the popular "World of Warcraft" franchise from U.S.-based Activision Blizzard (ATVI).

WoW has powered growth at NetEase, but its Q4 WoW revenue fell 10% from Q3, Roth Capital analyst Adam Krejcik wrote in a research note Thursday.


Workers test games at a NetEase R&D center in Hangzhou, China. View Enlarged Image

NetEase's overall game revenue rose 4.7% compared with Q3 and rose 29% from the year-earlier quarter. The rise was "primarily attributable" to an increase in revenue from in-house games, the company says.

"The company's internally produced games are doing well," Doug Creutz, a Cowen & Co. analyst, told IBD. "But the games they license from Activision aren't doing well. That was a little concerning."

Investors agreed Thursday, though the stock is still up more than 35% since early October.

"Given the recent strength in shares of NTES, we would not be surprised to see a shallow pullback," Krejcik wrote in his Thursday note.

NetEase said total revenue rose 35% to $333.5 million. Wall Street had estimated sales at $317.3 million, according to analysts polled by Thomson Reuters.

Per-share profit minus items rose 31% to $1.09 from 83 cents, the company says. Analysts had expected $1.02. The company didn't provide an outlook.

"I think there are always questions about what comes next," Creutz said.

Most observers have been assuming that NetEase also will get exclusive Chinese licensing for popular Activision franchises "Call of Duty" and "Diablo III," says Andy Yeung, an analyst with Oppenheimer & Co.

NetEase already has proven itself able to handle Activision Blizzard games, so it would be the logical choice for such a license in China, analysts say.

But in a conference call with analysts late Wednesday, company executives offered no details.

"We do maintain a good and smooth cooperation with Blizzard," acting Chief Financial Officer Onward Choi said, in answer to a question. That was about it.

Analysts are keeping alert.

Deal Is Up For Renewal

"The Activision partnership is going to come up for renewal in the summer," analyst Yeung said. He says it's likely the two companies will renew the deal.

Because WoW has driven revenue growth at NetEase, it's unlikely the company will want to sever ties with Activision Blizzard, says Creutz.

Richard Ji, an analyst with Morgan Stanley Research, writes in a note that NetEase's "Ghost" game seems to be growing in popularity.

"According to Baidu's (BIDU) search queries, which are typically the leading indicators for gamers' interest and hence game sales, "Ghost" rapidly rose to No. 11 in Q4, which it was not in the top 50 in Q3," wrote Ji, who rates NetEase as overweight, or buy.

NetEase's non-gaming products provide about 10% of revenue, mostly advertising. But the Internet portal is getting a lot of eyeballs.

In Q4, NetEase says its number of email users rose 5% from Q3 to 450 million.

And its microblog users now number 98 million, up 10% from Q3, NetEase says. But that lags the 250 million users for rival Sina's (SINA) Weibo microblog.

There's another possible hurdle for NetEase and other Chinese Internet companies in Q1. The Chinese economy's growth could slow, and the just-ended, multiweek Chinese New Year typically reduces Internet usage.

"What investors and analysts are concerned about is that there might be a drop in advertising spending online in China during the first quarter of this year," Yeung said.

That fear rose on Monday, when NetEase rival Sohu.com (SOHU) gave tepid guidance for the current quarter. It said it expects profit minus items of 50 cents to 55 cents a share, less than half the $1.20 Wall Street had expected.

Analysts have since dropped Sohu Q1 earnings-per-share forecasts to 48 cents, according to analysts polled by Thomson Reuters. The outlook for NetEase dropped just a penny on Thursday, down to 97 cents EPS minus items.

That 97 cents would mark its first sequential EPS decline since Q1 2009.

"Obviously the economic situation, overseas and locally, was moderating toward the end of last year, so people coming into the new year have been a little cautious about committing to an advertising contract," Yeung said.