NetEase's partnership with Activision Blizzard remains of key importance. Image source: Blizzard Entertainment.
Online gaming is big business in China, and among the major players there, NetEase (NTES 0.47%) remains a key participant and has captured its share of success as a result. With the company reporting its fourth-quarter and full-year 2014 results on Monday afternoon, investors had high hopes that NetEase would be able to sustain its growth and deliver impressive performance to build momentum coming into 2015. NetEase had considerable success during the quarter, but it still needs to demonstrate its ability to keep its competitive edge in an increasingly cutthroat industry. Let's take a closer look at how NetEase closed out the year and how it will fare in 2015.
NetEase keeps racking up the points
From the big-picture perspective, NetEase did well in the fourth quarter. Sales jumped by 43% in local currency terms, with dollar revenues of $593.7 million easily topping the $522 million that most investors had expected to see. Similarly, earnings per American depository share of $1.56 was better than the $1.49 consensus among those following the stock.
Source: NetEase.
All of NetEase's major segments saw impressive sales growth. Online gaming revenue climbed 36%, which is especially important given that it represents more than three-quarters of NetEase's total sales. Advertising services gained at a slower pace of just 23%, but revenue from e-commerce and other related sources more than tripled to $61.4 million. Margin growth also helped NetEase's results, with extensive gains in advertising and e-commerce gross margins offsetting a 1.7 percentage-point drop from the online gaming segment.
NetEase called out both its licensed games and its own self-developed offerings as contributing to its strong performance. In November, the company launched Warlords of Draenor, the fifth expansion set to the World of Warcraft series. Yet NetEase also cited its own Fantasy Westward Journey II and New Westward Journey Online II as driving higher sales in the online-gaming segment. Meanwhile, NetEase has seen greater demand for advertising services from the financial, communication, and real-estate industries, making up for the loss of one-time revenue related to the 2014 FIFA World Cup.
Soccer played a key role in advertising for NetEase, but it's also part of its gaming lineup. Source: NetEase.
It's game on for NetEase in 2015
NetEase understands that it can't afford to stand still despite its past performance. Already in 2015, the company has released two of its own 3-D massively multiplayer online role-playing games, and it is also working with Activision Blizzard (ATVI +0.00%) and its Blizzard Entertainment division on the beta version of Heroes of the Storm.
CEO William Ding also stressed the evolution of gaming onto mobile devices. "Mobile Internet is playing an increasing role in China's expanding Internet market," said Ding, "[and] we plan to introduce more mobile games this year." Specifically, by using its YiChat user base, NetEase hopes to improve its distribution channel for mobile games and expects to introduce an enterprise version of YiChat for small and mid-sized businesses to get even greater network effects from the service.
The key for NetEase will be finding ways to get people to migrate from PC to mobile games. Given how many popular games it already has in its arsenal, NetEase only needs to coax those users over to the mobile side in order to start reaping more benefits from the mobile world.
Still, investors have benefited already from NetEase's growth. The company announced a dividend of $0.39 per ADS for the quarter, up $0.03 from the previous quarter. With a policy to track after-tax net income with its payouts, the steady gains reflect NetEase's ongoing ability to sustain its sales and become as profitable as possible.
NetEase shares eased upward in the first half-hour following the announcement, indicating a wait-and-see attitude among shareholders. If NetEase can execute well on its core strategy, then further gains could be in store even with the ongoing challenges involved in standing up to its rivals in the Chinese gaming world.
