I forgive you, Shanda Interactive (NASDAQ:SNDA).
I was skeptical two months ago, when Shanda issued a $175 million convertible senior note offering to pay for a $200 million share buyback. China's online gaming pioneer had more than enough cash on its books to pull it off, so why -- ironically enough -- dilute shareowners with a financed buyback?
At least last night's third-quarter report is easier to understand. Shanda is standing in one place, with Wall Street mavens huddling somewhere else entirely with their lowball estimates.
Revenue climbed 43% to $137.3 million, well ahead of the $131.9 million that analysts were expecting. The sweeter surprise came on the bottom line. Earnings may have only increased by 41% to $0.68 a share, but the pros were braced for a profit of just $0.55 a share. Don't make the assumption that margins are contracting. Operating income actually grew at a 50% clip. A higher tax rate was the net-margin nibbler, as the company dished out nearly double the tax load as it had a year earlier.
Humbling the pros is a familiar feeling for Shanda, which has now topped profit expectations in 10 consecutive quarters.
Shanda's bread-and-butter business of serving up Web-based multiplayer role-playing games is smoking. It accounts for 82% of the company's business, with casual games carving out the second-thickest slice of the revenue-mix pie at 13%. The two segments combine for nearly 7 million active paying accounts.
It's a sweet place to be. China's growth may be hitting a little turbulence, but companies with the right games are having no trouble winning over China's young adults at the local Internet cafe.
Giant Interactive (NYSE:GA) was the anomaly in posting a sharp financial decline this past quarter. All of the other online gaming companies that have posted their quarterly results -- Perfect World (NASDAQ:PWRD), The9 (NASDAQ:NCTY), NetEase.com (NASDAQ:NTES), and Sohu.com (NASDAQ:SOHU) -- grew nicely during the period.
So where do we go from here? Giant's mortality shows that being in the right place isn't enough. Shanda also went through its growing pains a few years ago. However, when Shanda is doing so well and analysts are getting smoked every three months, your best bet is to ride Shanda until it runs out of gas.
Three more ways to play in China:
