NetEase profit, outlook hit by competition

[HenryTo]

SOHU reports tonight and SNDA reports tomorrow evening:
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NetEase profit, outlook hit by competition
Tue Nov 8, 2005 12:10 AM ET
(Recasts lead, adds quotes, Q4 guidance)
By Eric Auchard and Doug Young

SAN FRANCISCO/SHANGHAI, Nov 7 (Reuters) - NetEase.com Inc. (NTES.O: Quote, Profile, Research) , China's second biggest online game operator, more than doubled its quarterly profit, but it fell short of expectations, sending shares sharply lower.

The company, which recently transformed itself from a Web portal into a games specialist, forecast its fourth-quarter profit and revenue to be roughly flat compared with the third quarter on stiff competition with rival games.

NetEase, which has thrived on the back of its two "Westward Journey" games, singled out "World of Warcraft", a recently introduced title from rival The9 Ltd. (NCTY.O: Quote, Profile, Research) , as a force behind its lacklustre third-quarter performance and fourth-quarter outlook.

"Although we were pleased with the continued success of our games... we were slightly disappointed that the summer season was slower than we expected, which resulted in part from increased competition," NetEase Chief Operating Officer Michael Tong said on a call to discuss the results.

"During the last quarter, World of Warcraft has penetrated into more smaller cities than we would have thought they could penetrate into."

NetEase posted a third-quarter net profit of 258.6 million yuan ($32.0 million), or 89 cents per American Depositary Share (ADS), compared with 109.1 million yuan a year ago.

Revenue rose to 462.6 million yuan from 238.6 million a year earlier.

The results fell short of the company's previous forecasts for third-quarter net profit of $32.6 million to $34.2 million on revenue of $58 million to $59.7 million.

Shares in NetEase, which closed down 2.53 percent in regular Nasdaq trading on Monday, fell another 16 percent to $66.60 after hours.

WEAK OUTLOOK

NetEase said it expected to post a fourth-quarter net profit of $31.4 million to $32.6 million, on total gross revenue of $56.9 million to $58.3 million.

The outlook lagged the forecasts of analysts who were looking for a fourth-quarter net profit, excluding items, of $34.4 million on revenue of $61 million, according to Reuters Estimates.

NetEase said revenue from its core online game business -- which now accounts for about 80 percent of total revenue -- was expected to grow at a relatively anemic 2-4 percent in the fourth quarter from the third, slowing from a previous year when analysts had come to expect double-digit gains.

NetEase shares carry a significant premium to rival Shanda Interactive Games Ltd. (SNDA.O: Quote, Profile, Research) , China's number one game maker, as well as The9. Based on Friday's closing price, NetEase stock was valued at 18.9 times 2006 consensus earnings estimates compared with multiples of about 13 for both Shanda and The9.

China is one of the world's biggest markets for online games, with the annual market worth nearly $300 million last year and expected to grow to $823 million by 2008, according to IDC.

Online games, with their pay-as-you-go format accessible from a street corner Internet cafe, carry greater appeal for the average Chinese player, who often cannot afford to pay hundreds of dollars for a console like Sony Corp.'s (6758.T: Quote, Profile, Research) PlayStation or for his own PC to play computer games at home.

[TRS]

Another good reason to hedge a long position with puts prior to earnings.
That should be said with most of the China stocks.
NTES missed by .02 but grew earnings over 100% yr over yr.

NTES should be added to your train wreck list.