NetEase's (NTES 2.65%) shares sold off after the Chinese gaming leader delivered second-quarter financial results that disappointed Wall Street. Yet it was a relatively solid quarter, with revenue rising 21.7% in local currency. During NetEase's earnings call, Chief Financial Officer Zhaoxuan Yang highlighted several powerful growth drivers that could help the company's stock rebound in the quarters ahead. Here are the key points long-term shareholders will want to know.
1. Mobile is driving growth
Mobile games accounted for approximately 75% of net revenues from online games for the second quarter of 2018, compared with 72% for both the preceding quarter and the second quarter of 2017.
NetEase dominates the massively multiplayer online (MMO) game market. Yet the company is also attempting to diversify its revenue by launching more non-MMO mobile games, such as Shadowverse, Identity V, and QwQ. Impressively, each of these games promptly rose to the top of China's app download charts. They also helped online game revenue rise 6.7% in the second quarter, to $1.5 billion.
Notably, NetEase's expansion into more casual mobile game genres is helping it appeal to a different and generally younger user base. In turn, this is broadening NetEase's market opportunity beyond its core gamer base and home country of China.
2. Expanding into new markets
Now that we have more non-MMO games in our portfolio, international expansion comes naturally. Our new non-MMO games are typically less impacted by cultural influences, making them more suitable for a global audience. The advanced quality of these games, coupled with our decade-long experience in marketing and operations, have led us to see early signs of success in the global market.
NetEase is adding more localized content to its games, which is boosting their popularity in international markets. For example, NetEase's games Identity V and Knives Out have consistently topped download and sales charts in Japan. Additionally, Identity V, Rules of Survival, and Onmyoji Arena all recently enjoyed strong launches in the U.S. NetEase is becoming much more than simply a play on the Chinese gaming market -- it's an intriguing means to profit from the growth of the global video game industry.
3. Torrid e-commerce growth
Looking at our e-commerce business. Both Kaola and Yanxuan continue to thrive. For the second quarter, we grew our e-commerce revenue by 75% year over year to [4.4 billion yuan].
NetEase's primary goal for its online retail business is to rapidly scale its operations in order to gain share. It's willing to accept somewhat lower gross margin and sacrifice some short-term profit to do so. It's a smart move, as those who can establish a leadership position in China's massive e-commerce market stand to profit handsomely.
Moreover, NetEase believes that its Kaola and Yanxuan businesses are particularly well-positioned to profit from rising income and consumption patterns among China's growing middle class. Kaola helps to bring products from international brands to Chinese consumers. Yanxuan, meanwhile, uses an original design manufacturer (ODM) model, in which it partners with Chinese manufacturers to produce goods that it designs and that are sold directly from its e-commerce platform. Together, these two rapidly growing businesses could help NetEase become a powerful force in a Chinese online retail market that's projected to exceed $2 trillion in annual sales by 2020, according to eMarketer.
4. Dividend payment should rise
Returning value to our shareholders remains a top priority. For the second quarter of 2018, we plan to pay a dividend of $0.61 per ADS [American depositary share], representing 25% of the net income attributable to our shareholders.
Rather than a fixed dollar amount, NetEase typically pays out a quarter of its net income to owners of its American depositary shares each quarter. This helps to make the relationship between company profits and shareholder dividends even more explicit.
For example, NetEase paid out $0.23 in dividends based on $0.91 in earnings per share in the first quarter. When its EPS rose to $2.44 in the second quarter, the company raised its payout to $0.61. And with mobile games, international expansion, and e-commerce all likely to fuel further increases in NetEase's revenue and earnings, investors can expect to receive a rising stream of dividend income in the years ahead.