NetEase Finishes 2016 on a Winning Note

Video games are serious business in China, and NetEase (NASDAQ: NTES) has worked hard to reach the pinnacle of the industry in the world's second-largest economy. Yet gaming has made many advances over the years, and it's important for companies to keep up with the times and to find ways to gain competitive advantages over rivals.

Coming into Wednesday's fourth-quarter financial report, NetEase investors had extremely high expectations for the company to continue stellar growth rates on the top and bottom line, and the video-game giant was able to meet all those expectations and then some.

Let's take a closer look at NetEase to see how it did and what 2017 will bring.

Mobile games are making consoles obsolete. Image source: Getty Images.

NetEase says game over to the competition

NetEase's fourth-quarter results were extremely attractive even by the company's own very high standards. Revenue jumped by more than half compared to the year-ago quarter, weighing in at $1.74 billion, and that was far above the 37% growth rate that most investors were expecting to see. Adjusted net income soared by roughly two-thirds, working out to $569.9 million, and that equated to adjusted earnings of $4.30 per share. That compared very favorably against the consensus forecast for $3.44 per share on the bottom line.

Taking a closer look at the numbers, NetEase continued to see some similar trends drive its business forward. Sales from the key online game segment jumped more than 60%, making up almost three-quarters of NetEase's total revenue. The email, e-commerce, and other revenue category saw growth slow from previous quarters, climbing 38%, and advertising revenue growth continued to lag behind the rest, posting gains of just 9%.

However, NetEase suffered renewed pressure on its gross margin. Gross margin figures for the online gaming segment fell by more than six percentage points to 60.7%, and the company said that mobile and licensed games made up a larger portion of its overall sales. Those products tend to produce lower margins than other sources of revenue. Gross margin rose in email, e-commerce, and other revenue, but it fell in advertising services.

CEO William Ding was pleased with NetEase's performance. "We achieved growth across our business in 2016," Ding said, "as we continued to introduce internet content to entertain and inspire our community." The CEO also pointed to new mobile titles that have performed extremely well in China, building positive momentum coming into 2017.

What's ahead for NetEase?

NetEase doesn't see its growth stopping anytime soon. As Ding said, "As we move through 2017, we will look toward the future, designing products and services that address fluid market dynamics, enabling continued growth and value creation."

One opportunity that NetEase has identified is that the internet in general and the mobile internet in particular is becoming the primary advertising platform in the Chinese market. That has helped NetEase's advertising services business, and its mobile games also help take advantage of the fact that its consumers are already on their devices anyway. It also helps to bring customers to its e-commerce business, producing growth in that segment as well.

Even better news came for shareholders who count on getting income from the online gaming giant. NetEase gave investors a huge bump in its quarterly payout, declaring a dividend of $1.01 per share. The move reflects NetEase's ongoing policy to return about 25% of its net income each quarter in the form of a dividend. The boost amounted to almost 30%, which was a welcome sight after the disappointment of flat dividend payments last quarter.

NetEase shareholders were quite happy with the company's results, and the stock climbed 7% in after-hours trading following the announcement to reach new all-time record highs. Yet even after its gains, NetEase still has fundamental momentum on its side, and further growth appears not only possible but also likely in 2017 and beyond.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends NetEase. The Motley Fool has a disclosure policy.