The9 (NASDAQ:NCTY), riding its one-trick pony World of Warcraft by Blizzard, surpassed analyst expectations in the first quarter. My colleague Alyce Lomax gave us a glimpse of what to look forward to in the coming months, particularly with the new partnership with video game powerhouse Electronic Arts (NASDAQ:ERTS).
In this edition of Fool on Call, utilizing the company's latest quarterly earnings conference call, we will take a deeper look at what lies ahead for the China-specific online video gaming host. Our discussion will address The9's plans to become a multigame operation, and it will also look at upcoming developments for World of Warcraft.
New world to Warcraft
Fellow Fool Rick Aristotle Munarriz pointed out that in the The9's first quarter, $34.5 million of the netted $35 million in revenues came from one game, World of Warcraft. That's staggering! It is also scary! With that many eggs in one basket, diversifying into a multigame operation makes good sense.
That's not to say that World of Warcraft will now be relegated to second-class status for the company's development strategy. During the call, CEO Jun Zhu pointed to a couple of new developments on the Warcraft front. In the second quarter, the online game will be upgraded to version 2.0. And then in the third quarter it will receive an expansion pack called Burning Crusade.
In addition to software developments, Warcraft will benefit from hardware upgrades. In late April the company began upgrading the existing server platform. Plus, with the launch of the expansion pack in the third quarter, the game will get a nice boost from an eighth server site that will be added. In the question-and-answer portion of the call we also learned that the hardware upgrade will include "higher broadband connections" that are expected to make game play smoother. The eight combined server locations will make it possible to host nearly 1 million users simultaneously.
In her prepared remarks, CFO Hannah Lee shed more color on Warcraft's development. We learned that upgrading servers is almost like changing a light bulb -- there will be periods of darkness. For the Warcraft server upgrade, it is estimated that each server will be down roughly 120 hours. With that much downtime, expect to see some impact on second-quarter results both in terms of user level and revenue.
While that's the bad news, the good news is that with the addition of the eighth upgraded server, the company will have the capacity to look at "other overseas markets." Management didn't elaborate further on its international expansion ideas, but given recent remarks by CDC's (NASDAQ:CHINA) management, India, South Korea, Japan, and Australia all seem like viable candidates.
The rising S.U.N.
Soul of the Ultimate Nations (S.U.N.) was also the topic of much discussion in this call. Developed by South Korea's Webzen (NASDAQ:WZEN), the game is receiving a strong response by gamers. Beta testing began April 18, and within one week 400,000 gamers logged on to check it out. Due to the strong response, S.U.N. was given a fifth server and part of a sixth one as well.
S.U.N. will employ a free-play add-on sales model similar to the one used by CDC. A virtual shopping mall of sorts opened last week, which means we should begin to see revenue generation from the game in the second quarter. Management did not offer a projection on the revenue it hopes to derive from S.U.N. in the coming quarter, but any amount is welcome given the company's current dependency on Warcraft.
EA's FIFA Online to enter China
In February, Electronic Arts revealed in its conference call that it planned to launch FIFA Online both in China and Japan during fiscal 2008. What we didn't know at the time was that it planned to partner with The9 to do so.
I am most curious to know whether The9 will be bringing FIFA Online to both China and Japan. Based on remarks made in the call, however, with no mention of Japan, we can probably conclude that at least for the time being, the company has exclusive distribution rights of FIFA Online only for the Chinese market.
The game has 4.4 million users in South Korea alone, so I suspect the game should be a monstrous hit in mainland China. And when you account for the fact that the 2008 Olympics will be hosted by Beijing, the response to FIFA may hit unprecedented levels. Zhu predicted that the game is going to be a "top favorite in the Chinese market."
More to love
We've mentioned Warcraft, S.U.N., and FIFA, but The9 has even more tricks up its sleeve. Fantastic Melody Online, a game that is being developed in-house by The9, is schedule for beta testing later this year. Additionally, The9 has exclusive rights to distribute an online casual dancing game in China called Audition 2. In February, the first edition of Audition had more than 780,000 peak users. And Guild Wars already underwent beta testing -- Chapters 1 through 3 of the game are now open for users.
What does all of this mean? In a nutshell, it means that current shareholders can expect continued robust revenue growth for the foreseeable future. For Foolish prospective investors it means, if you haven't taken a look at The9 yet, now is the time to do so.
As Rick mentioned, one of the knocks against The9 has been its lack of catalogue content compared to competitors like NetEase (NASDAQ:NTES) and Shanda Interactive (NASDAQ:SNDA). That is about to change -- The9 is definitely diversifying on a path toward becoming a multigame operation.
NetEase and Shanda Interactive are Motley Fool Rule Breakers selections. Electronic Arts is a pick by Motley Fool Stock Advisor. A free 30-day subscription offer is available for either service.
Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
