The Chinese stock market has been extremely volatile lately, and companies connected to the world's second-biggest economy have seen dramatic moves. For online gaming company NetEase (NTES 0.05%), the strength of its core market has remained strong, and coming into Wednesday night's second-quarter financial report, NetEase investors wanted confirmation that the business could keep thriving irrespective of the pressures that the broader Chinese economy was seeing. For the most part, NetEase delivered solid growth on the top and bottom line, and despite a negative reaction in the stock after the announcement, long-term investors can take comfort in the gaming company's ability to keep moving forward. Let's take a closer look at NetEase and how it managed to stay strong even during tough times.
NetEase keeps on winning
NetEase's second-quarter results continued its streak of strong growth. Sales jumped 64% in local currency, working out to dollar revenue of $779.5 million, topping even the ambitious 58% growth rate that investors had foreseen. Net income also rose, albeit at a slower 18% pace, hitting $232.6 million and working out to adjusted earnings of $1.95 per share after adding back stock-based compensation to the GAAP figures. That was far better than the $1.62 per share consensus forecast for earnings.
NetEase's various segments rose across the board. Online gaming, which brings in four-fifths of NetEase's total sales, saw revenue rise 65% to $621 million. As we've seen in previous quarters, the email and e-commerce category saw sales more than double from year-ago levels, while advertising services posted more modest but still impressive gains of 23%. Only the advertising segment managed to produce gross margin growth, though, with both online gaming and email seeing their costs of revenue soar.
Strength came from every corner of NetEase's gaming offerings. In the mobile arena, Fantasy Westward Journey set new records for simultaneous users and is the top-grossing app in the iOS China app store. On the PC front, Revelation produced extremely strong results in the 3D arena, and Demon Seals also produced favorable results. Licensed games from Blizzard Entertainment also added to NetEase's results, and the company said that it continues to work closely with Blizzard to come out with new lineups of games for the future.
CEO William Ding once again touted NetEase's success. "Our ability to grow with the mobile market and adapt our technology and creative resources to meet demand supports our strategy to expand and diversify our portfolio," Ding said, and "we will continue to focus on creating innovative new games, enhancing the synergy between PC-client and mobile games, and expanding our loyal user base."
Extra money for NetEase shareholders
NetEase's dividend policy is tied to its bottom-line success, and the gaming company said that it would raise its dividend by a nickel per share to $0.44 for the second quarter. With NetEase paying out about 25% of the company's expected after-tax net income, the boost reflects the gains that the company has seen and optimism about its future.
At the same time, though, NetEase hasn't seen everything go right. The main reason for the big drop in e-commerce revenue has to do with the temporary suspension of third-party lottery-related products since late February. China's online lotteries had expanded explosively in the recent past, and authorities stepped in to ensure that the lotteries remained under control. NetEase isn't the only company to see a big impact from the suspension, with other major Chinese e-commerce players also feeling the pinch.
Somewhat incongruously, NetEase stock fell after the results, falling nearly 4% in the first hour and a half of after-market trading following the announcement. Given how fast the online gaming company continues to grow, it's hard to fault NetEase for its performance, and the company seems to have a lot of upward momentum fundamentally to drive its results even higher in the long run.
