QUOTE AND NEWS
Market Intelligence Center  Oct 14  Comment 
The patented option-trade picking algorithms that power MarketIntelligenceCenter.com's Artifical Intelligence Center found a trading opportunity with Netease.com (NTES) that should provide a 5.62% return in just 67 days. Sell one Dec. '14 call at...
Market Intelligence Center  Oct 13  Comment 
Netease.com (NTES) closed Friday at $83.42 and technical indicators recently have been bearish. With those figures in place, the algorithms behind MarketIntelligenceCenter.com's Artificial Intelligence Center have identified a couple of attractive...
Market Intelligence Center  Oct 1  Comment 
For a hedged play on Netease.com (NTES) MarketIntelligenceCenter.com’s patented trade-picking algorithms selected a Nov. '14 $85.00 covered call for a net debit in the $81.66 area. That is also the break-even stock price for the covered call....
Market Intelligence Center  Sep 4  Comment 
Netease.com (NTES) is a good candidate for a covered call at the $87.50 level. The Dec. '14 call at that price should fetch a credit of about $5.70, which means the entire position has a net debit of about $82.56. This trade has 4.03% downside...
SeekingAlpha  Aug 26  Comment 
By ONeil Trader: NetEase (NASDAQ:NTES) delivered Q2 earnings and revenue ahead of analyst estimates. All of the company's business segments have performed very well. The online games revenue is growing nicely, while the advertising and e-commerce...
SeekingAlpha  Aug 14  Comment 
By SA Transcripts: NetEase, Inc. (NASDAQ:NTES) Q2 2014 Earnings Conference Call August 13, 2014 09:00 PM ET Executives Brandi Piacente – Investor Relations Onward Choi – Acting Chief Financial Officer William Ding – Chief...
newratings.com  Aug 14  Comment 
BEIJING (dpa-AFX) - NetEase.com, Inc. (NTES), a China-based provider of online game and web advertising services, reported Wednesday a profit for the second quarter that increased from last year, reflecting double-digit revenue growth. Both...
newratings.com  Aug 14  Comment 
BEIJING (dpa-AFX) - Chinese Internet and online game services provider NetEase, Inc. (NTES) reported net profit for the second quarter of RMB1.2 billion or RMB9.18 per ADS, compared to RMB1.1 billion or RMB8.41 per ADS for the year-ago...
Market Intelligence Center  Jul 2  Comment 
The patented option-trade picking algorithms that power MarketIntelligenceCenter.com's Artifical Intelligence Center found a trading opportunity with Netease.com (NTES) that should provide a 4.59% return in just 80 days. Sell one Sep. '14 call at...
Market Intelligence Center  Jun 24  Comment 
Monday’s trading in Netease.com (NTES) gives options traders an opportunity for a 12.30% return. By selling the Aug. '14 $75.00 call and buying the Jan. '15 call at the $54.00 level for a net debit of $18.70, traders will book a profit as long...




 

NetEase.com, Inc. (网易) (NASDAQ NTES) provides online games, web-based communication services, and interactive content in China. The overwhelming majority of the company's FY 2010 revenue was from its Online Game Services segment (89.8%).[1] The company also sells advertising on its internet portal site (providing free and fee-based services for registered and unregistered users). Advertising is a relatively small part of the company's business, about 11.2% of FY 2010 revenue.[1]

As of FY 2010, the company had 495 million accumulated registered users for its online games, and about 1.3 billion registered users for other online services.[1] According to Alexa, the company operates one of the top 10 web sites in China.[2]


Business Outline

NetEase was founded in 1997 to develop web search and email software, but evolved to operating its own web sites in 1998. The company's efforts to monetize its web sites started in 1999 when the company added a dedicated sales force to sell advertising. An IPO followed in 2000, and the company launched its fee-based products in 2001 and also entered the online game market with "Westward Journey Online" following an acquisition of a Chinese game company.[3]. Entry into the online game industry was the main driver of the company's growth: Online Game revenues were 15.9% of total FY 2002 revenues (233 million RMB) and were 81.4% of total FY 2005 revenues (1.7 billion RMB).[4]

As of FY 2010, Online Games remained the largest contributor of revenue and gross profit, making the company a "pure play" for the Chinese online gaming business.


Financial Performance

Q3 FY 2011

Net revenue grew +39.5% YoY, driven by revenue growth in all segments.[5] Online Game revenues grew +39.8% YoY, Advertising revenue grew +36.1% YoY, and Wireless and Other revenue grew +50%.

Gross profit grew +39.4% YoY, and gross profit margin was flat YoY (67.8% in Q3 FY 2011 vs. 68.0% in Q3 FY 2010).[5]

Operating profit grew +56.6% YoY to 919.2 million RMB and the operating profit margin was 47.0% vs. 41.9% in Q3 FY 2010.[5]

Net income grew +41.4% YoY to 825.8 million RMB and the net profit margin was 42.2% vs. 41.8% in Q3 FY 2010.[5]

The company reported about 11.6 billion RMB on its balance sheet.

Q2 FY 2011

Net revenue grew +32.4% YoY, driven by revenue growth in the Online Game segment. [6]

Gross profit grew +32.4% YoY and gross profit margin was flat YoY, with improvements in the Wireless and Other segments offsetting gross profit margin declines in the Online Game (70.2% vs. 71.0% in Q2 2010) and Advertising segments (43.9% vs. 43.9% in Q2 2010).[6]

Operating profit increased +29.1% YoY and operating profit margin declined to 45.4% vs. 46.6% in Q2 2010. The decline in profit margin was due to increased selling and marketing expenses (+67.2% YoY) and R&D spending (+36.1% YoY).[6]

Net income grew +59.1% YoY and net profit margin was 43.7% vs 37.1% in Q2 FY 2010. The change in net margin was mostly FX factors (a loss in 2010 vs. a gain in 2011).[6]

The company reported about 11.1 billion RMB on its balance sheet.[6]

Q1 FY 2011

Net revenue grew +28.8% YoY to 1.5 billion RMB driven by strong growth in Online Game (+27.7% YoY) and Advertising (+38.5% YoY) segments. [7]

Gross profit increased +27.5% to 985.0 million RMB, with margin expansion in the Advertising segment (33.4% in Q1 FY 2011 vs. 16.9% in Q1 FY 2010) offsetting wider losses in Wireless and Other segments. Margins in the Online Game segment declined YoY to 79.0% vs. 71.9% in Q1 FY 2010.[7]

Operating profit grew by +24.9% YoY but operating profit margin declined to 46.2% (vs. 47.7% in Q1 FY 2010) mostly due to higher general and administrative and R&D spending.[7]

Net income to common shareholders grew +63.1% YoY due to the FX gains (a non-operating item, vs. FX losses booked in Q1 2010).[7]

The company had about 10.4 billion RMB of cash on its balance sheet at quarter-end.[7]

Business Segments

The company reports performance in three segments (Online Game, Advertising Services, Wireless Value-Added Services and Others), however due to the overwhelming contribution of Online Game to FY 2010 revenue (87%) and gross profit (92%),[8] detailed discussion of other segments is omitted.

Source: Multiple NTES 20-F
Source: Multiple NTES 20-F



Online Games

The company offers massively multi-player online role playing games (MMORPG) where players compete in virtual worlds with other players or game characters. Typically, players install game software on their computer and then connect with game servers to begin play. Because game software runs on the player's computer but interacts with the game server, hardware on the player's machine and the speed of the network connection can impact game play (a slow connection to the server could result in an untimely demise for a character in the middle of a fight, for example). Players build up experience points as gameplay progresses which enhances the playing experience.

Along with the core game map, existing games can be expanded with expansion packs (new maps or challenges for players). Because expansion packs are built on the existing game software, they can be relatively lower cost to develop than new game releases, therefore extending the playing time for existing players and also potentially drawing in new players.

The company develops its own games in-house and licenses games from other companies. Notable titles that the company had licensed (as of 2010) included Blizzard's World of Warcraft and Starcraft games.

Games are monetized in two ways: either the player pays for a period of play (a monthly subscription, for example) or on a per-item basis (a player buys accessories for the in-game character). The monthly fee for Westward Journey, Westward Journey Online II, Datang, and Westward Journey Online III was 0.6 RMB per month as of FY 2010.[9] Most of the company's games use the time-based model, however the company has said that the item-based model would be used more in the future.

To pay for games, players purchase point cards either directly from NetEase or through distributors (who sell the cards in Internet cafes, etc.). Distributors purchase the point cards from NetEase at a discount and then re-sell the cards at face value to players. The distributors purchase price discount had historically been about 11-14%, but the company reduced the discounts to 6-12% in March 2009 (specific discounts are determined on total volume and other factors). The company reported 2,900 distributors as of FY 2010.[10] Discounts for the company's Blizzard-licensed games were about 9-12% in FY 2010. [10]


As of 2010, games developed by the company included:

Title Revenue Model Original Release Latest Expansion Pack
Westward Journey Online II Time-based August 2002 June 2011
Fantasy Westward Journey Time-based December 2004 January 2011
Datang Time-based July 2006 April 2011
Tianxia II Item-based June 2008 April 2010
Legend of Westward Journey Item-based September 2008 November 2010
New Fly For Fun Item-based October 2008 January 2011
Heroes of Tang Dynasty Item-based April 2010 June 2011
Westward Journey:Genesis Item-based April 2010 March 2011
Source: NetEase 2010 20-F[11]


Seasonality

The company commented that the Online Game segment was seasonally busy during holiday periods like the Chinese New Year (Q1) and other vacation periods (summer vacation, for example).[12]


Infrastructure

The company reported a server farm of about 23,500 machines powering its online games as of FY 2010.[13]

Trends and Forces

Market Growth

Image:Online_Game_Player_Trends-China.jpg

The absolute size of the online game market has been growing, although the YoY growth rate has been declining. A CNNIC survey in 2011[14] suggested that the slowing growth rate in the online game market was a result of the maturity of the industry (the early exponential growth period was over) and a lack of compelling content from game providers.

Changing Player Preferences

According to the company, player preferences are shifting from games using 2D technology to those using 3D.[15] Shifting player preferences could present a difficult problem for NetEase and its competitors: investing in R&D to develop new games (or paying licensing fees) while trying to maintain competitive positioning with existing 2D games.

Game development can be a long process from initial concept to public beta testing (and eventual launch), making the entire process labor (R&D) intensive. One possible solution to internally developing games is in-licensing games from other game companies (NetEase used this approach when it licensed World of Warcraft and Starcraft from Activision Blizzard[16][17]).


Competition

References

  1. 1.0 1.1 1.2 NetEase 2010 20-F
  2. Alexa.com Top Sites in China, retrieved November 6, 2011
  3. NTES 2003 20-F
  4. NTES 2005 20-F
  5. 5.0 5.1 5.2 5.3 NTES Q3 2011 Release
  6. 6.0 6.1 6.2 6.3 6.4 NTES Q2 2011 Release
  7. 7.0 7.1 7.2 7.3 7.4 NTES 2010 Q1 Release
  8. NetEase 2010 20-F, page 3
  9. NetEase 2010 20-F
  10. 10.0 10.1 NTES 2010 20-F, page 34
  11. NetEase 2010 20-F, page 29
  12. NTES 2010 20-F, page 45
  13. NTES 2010 20-F, page 35
  14. [CNNIC "The 28th Statistical Report on Internet Development in China"]
  15. NetEase 2010 20-F, page 6
  16. VentureBeat.com "Blizzard Cuts Deal With NetEase.com to take Starcraft II"
  17. Activision Blizzard Press Release
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