What to Expect From NetEase’s Q4 Earnings

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NetEase (NASDAQ: NTES) was in terrific form last year. Shares of the Chinese internet specialist soared over 60% in 2017 thanks to a series of robust quarterly results, driven by strong growth in mobile gaming and the increasing contribution from the advertising business.

Investors are now hoping NetEase can extend its impressive momentum when it releases its fourth-quarter results on Feb. 7. But will the company be able to sustain its great form?

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The headline numbers

Wall Street expects NetEase to report $2.12 per share in earnings on $2.19 billion in revenue. By comparison, the company earned $4.40 per share in the prior-year period on revenue of $1.91 billion, which implies that it is going to take a big hit to the bottom line.

NetEase didn't provide fourth-quarter guidance, but there is a good chance that the company will trump analyst expectations because of its recently launched game titles.

For instance, NetEase completed the launch of the highly popular Minecraft franchise in China across the PC, iOS, and Android platforms by the end of last October. This title boosted NetEase's user count by 30 million by the end of that month.

The complete launch of Minecraft during Q4 should give a nice boost to its top line for the December-ended quarter, allowing it to report stronger year-over-year growth than the 14.6% jump expected by analysts. And NetEase's international expansion gained momentum during the final quarter of 2017 with its Onmyoji title being launched in Korea.

What's more, Onmyoji was well received by users in North America during the test phase, setting the stage for the game's launch outside Asia.

However, the bottom-line performance will weaken as compared to the prior-year period because of lower margins in NetEase's mobile gaming and e-commerce businesses. For instance, the company's gross margin from the online gaming business, which supplies almost two-thirds of the revenue, fell 2.5 percentage points year over year during Q3 of 2017.

The situation was worse in the email and e-commerce business, which accounts for almost 30% of total revenue. The gross margin from this segment was down to 11.9% as compared to 33.5% from the year-ago period.

Why NetEase can get better this year

Video gaming will continue being a big catalyst for NetEase in 2018 and beyond. That's because the company is going all out to boost its mobile gaming business by venturing into international markets and striking lucrative partnerships.

For instance, the company recently announced that Onmyoji will be launched in markets outside Asia during the current quarter across the Google and Apple app stores, as well as Facebook's Gameroom for PC. This game is already quite popular in the Asian market with more than 200 million registered users, so it can give NetEase a shot in the arm going forward.

Meanwhile, NetEase has entered into two notable partnerships of late that could help it carve out a bigger slice of the video gaming market. One of these partnerships is with toy maker Mattel, which is looking to leverage the popularity of properties like Hot Wheels and Barbie. Mattel executive Sid Mathur wants to go after the $58 billion mobile gaming market using NetEase's expertise in this space.

The two companies have entered into a 50-50 joint venture, and have already announced that Mattel's popular card game Uno will make its debut this year on Facebook, Android, and the Apple app stores. Going forward, the joint venture will focus on developing content based on other Mattel properties like Barbie and Fisher-Price. NetEase can use the popularity of Mattel's intellectual properties to boost its mobile gaming portfolio.

The other important partnership that NetEase has struck of late is with Niantic, which developed Pokemon Go. NetEase has reportedly invested in Niantic's latest round of funding, allowing the former to launch both old and new games from the developer in the Chinese market. It is anticipated that NetEase will launch Pokemon Go in China in the second half of 2018.

Additionally, Niantic is said to be working on a Harry Potter video game utilizing augmented reality. This partnership could turn out to be lucrative for NetEase as it will have access to highly popular video game properties.

And NetEase's e-commerce business should keep getting better this year because of its recent $6 billion investment to source new products from the U.S. and Europe for sale in the Chinese market. In all, NetEase looks well placed to sustain its top-line momentum in 2018 and beyond, which should eventually filter down to the bottom line and help the stock deliver more upside.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, and NetEase. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short March 2018 $200 calls on Facebook, and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.