NetEase Starts 2015 With a Big Win

Image: NetEase.

China has always been a hotbed for gamers, and NetEase stock has performed extremely well over the past year as investors realize the potential for growth in the nation's fast-moving online gaming market. Coming into Wednesday night's first-quarter financial report, NetEase investors hoped the company could sustain a reasonable pace of growth, and the company gave its shareholders an even better showing than they had expected. Let's look more closely at what NetEase said about its most recent quarter and what it means for the online gaming specialist's future.

NetEase to its competition: Game overNetEase's first-quarter results included a number of positive developments. On the revenue side, Netease enjoyed 54% growth in local-currency terms, equating to total sales of $590.5 million. That figure was far higher than the $525 million consensus estimate among those following the stock. Earnings of $1.55 per share similarly topped expectations by $0.13 per share, as adjusted net income rose by more than 12%.

Looking at NetEase's segments, the key online gaming business led the way with a 44% sales gain. But the company's other revenue sources also contributed their fair share to NetEase's success, with advertising services revenue rising by 36% and email and e-commerce-related offerings nearly quadrupling from year-ago levels. On the margin front, though, NetEase's performance was somewhat more mixed, as big gains in advertising and e-commerce margins were offset in part by a more than 5-percentage-point drop in gross margin for online gaming.

Gaming offerings continued to drive excitement for NetEase. The company spotlighted mobile games Battle to the West and The World HD as gaining strength after their introduction late in 2014, and the flagship Fantasy Westward Journey also grew even more popular. PC-related games also performed well, with NetEase pointing to the beta test of Hegemon-King of Western Chu as particularly encouraging.

Image: NetEase.

CEO William Ding was encouraged by the company's overall results. "Mobile games and content continue to be in high demand," Ding said in the earnings press release, "further complementing our online PC-client games and services. While we expect to see continued momentum from the mobile market, our strategy will remain focused on diversity, excellence, and international expansion to achieve healthy growth."

How NetEase plans to up its gameNetEase's success doesn't mean the company plans to slow down. It has a vast pipeline of offerings coming out this year, including new mobile and PC-based games and enhanced content for its existing popular game franchises.

Strategic partnerships have also been extremely valuable for NetEase. The April launch of Diablo III: Reaper of Souls highlighted the value of working with Activision Blizzard and its Blizzard Entertainment division, and NetEase expects to begin an open-beta phase for Blizzard's Heroes of the Storm later this month.

Meanwhile, NetEase sees great potential in advertising and e-commerce. Automotive, food-and-beverage, and Internet services made up the strongest contributors to ad revenue growth, and Ding pointed to the early success of the company's Kaola cross-border e-commerce platform.

NetEase has bucked the trend among many businesses when it comes to stock repurchases. While the company authorized up to $100 million in stock buybacks early last year, NetEase said the program expired during the first quarter without any actual repurchases having taken place. Given the popularity of buybacks across the stock market, it's interesting to see NetEase find other uses for its cash.

NetEase shares climbed 5% in the first two hours of after-market trading following the positive earnings announcement. With so much growth potential, NetEase seems to have nearly limitless prospects for share-price appreciation in the months and years to come as it adds more mobile offerings to complement its PC-based strength.

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