Online gaming has fallen out of the spotlight lately in the U.S., as social-media companies have largely turned to other sources of revenue and left gaming to specialist companies with fairly limited current prospects. But in China, NetEase (NASDAQ:NTES) and a host of other players in the online gaming industry continue to vie for supremacy and an important market. NetEase reported third-quarter results Wednesday afternoon, and investors hope to see continued strong growth in the company's sales and net income, even as smaller companies like Perfect World (NASDAQ:PWRD) and Changyou.com (NASDAQ:CYOU) have had more difficulty in sustaining their share prices. Let's look at how NetEase did last quarter and what the results mean for its future.
NetEase wins the growth race
NetEase's third-quarter numbers looked reasonably strong. Revenue climbed by more than 32%, with gains from all three of its segments. Gross profit margin fell somewhat from the year-ago level, but earnings of $1.45 per share were more than 10% higher than the $1.31 per share the company posted in 2013.
Strength in NetEase's sales came from all corners. Online gaming revenue still represents the largest source of funds for the company, and it gained almost 17% from the previous year. While advertising-services revenue remains a relatively small piece of NetEase's overall sales, it soared 60% over the third quarter of 2013. E-commerce and related revenue more than tripled from a year ago and now represents more than 10% of NetEase's total revenue.
NetEase's success has come in large part from games the company developed itself. The company's licensing arrangements have gone well, but by taking some of its popular online games and moving them to mobile formats, NetEase should build on its past success while taking advantage of the increasing popularity of mobile gaming. Expansion packs for its existing franchises have become an essential part of NetEase's growth strategy, and the company is also looking at the social-networking aspects of its mobile platform with the aim of building an ecosystem from which to launch future initiatives.
What's the next game for NetEase to win?
As important as the past quarter's results are to investors, NetEase is already looking forward for new ways to drive its future results. On Nov. 18, the company will release the latest installment of the World of Warcraft series -- Warlords of Draenor -- in China. In combination with Activision Blizzard's (NASDAQ:ATVI) Blizzard Entertainment, NetEase expects to host a live event in Beijing two days before the official release. Some question whether the aging World of Warcraft franchise can produce the growth it once did, but it's still important enough to NetEase to warrant attention.
The biggest question facing NetEase is whether it can continue to transition away from PC-based gaming toward mobile platforms. Despite the growing importance of mobile gaming, NetEase has been slow to launch offerings aimed at mobile players, and the company hasn't gotten a huge amount of revenue from that side of the business in recent quarters.
To thrive in the long run, NetEase must find a new way to reinvigorate its gaming business. If it can successfully build a viable mobile strategy, as well as make the most of a waning PC-centered business, then the company could justify the hopes that shareholders have had for its prospects recently. Otherwise, NetEase could go back to languishing in the same share-price doldrums that Perfect World and Changyou have endured for a long time.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and NetEase.com. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.