The world is flat at NetEase (Nasdaq: NTES), but that's not necessarily a bad thing for China's online gaming giant. The company posted slightly better-than-expected results, despite posting meager top-line dips in all three of its business categories.
This may not be the growth that NetEase investors bargained for when they bought into the company behind the popular Fantasy Westward Journey Web-based role-playing game. Total revenues fell by 3% to $73.3 million. But that's actually ahead of the $70.5 million that Wall Street's pros were expecting.
The small year-over-year decline is the result of almost negligible dips in the company's online gaming, online advertising, and wireless subsidiaries. Online gaming -- the company's bread-and-butter business in recent years -- accounts for 85% of the revenue mix.
Earnings held up well, with NetEase posting quarterly profits of $0.31 per American depositary share (ADS). Those figures smoked past analyst projections of $0.28 per ADS, not to mention the $0.29 per ADS the company earned a year earlier. However, that figure was inflated by a reinvestment incentive tax refund. In reality, pre-tax profits dipped by 9%. However, share repurchases helped reduce the fully diluted share count by about 5%. Backing out the tax break, you arrive at earnings of $0.29 per ADS, flat with last year's showing.
That's cutting things pretty close, but at least NetEase can claim to have beaten Wall Street's profit targets in all but one quarter over the past three years. This was also a period in which investors were bracing for the worst. It didn't turn out all that bad, as the company turned to new titles to help it get back on the growth track.
The pipeline is rich at NetEase. An expansion pack for its flagship Fantasy Westward Journey will roll out later this year. Open beta testing for its Westward Journey Online III game will begin later this month. The company is also working on Tianxia II, a game sent back to developers after testing poorly back in March.
Keeping its titles fresh is important, and not only because the company has to compete for gamers with established players like Shanda (Nasdaq: SNDA) and The9 (Nasdaq: NCTY) and upstarts like CDC (Nasdaq: CHINA). With the Chinese government cracking down on Internet cafe expansion and capping the amount of time that minors can spend on addictive multiplayer games, you need to stand out in a crowd.
Obviously, NetEase didn't stand out this past quarter, though we'll have to wait until Shanda and The9 post their quarterly results later this month to be sure. However, by holding its own in this tricky environment, NetEase is at least still clearly in the crowd. Like a flat world, that's not necessarily a bad place to be.
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Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is part of the
Rule Breakers
newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool's disclosure policy wonders what the Chinese word is for "pwned."
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