Aug 14, 2015

NetEase In Risky Territory With New E-Com Venture

NetEase In 'Risky' Territory With New E-Com Venture


NetEase (NASDAQ: NTES) stock tumbled Thursday after the China-based gaming and Internet company reported lower profit margins from some of its newer operations and experienced fallout from the temporary suspension of sales of some lottery products.

NetEase stock was down 6% in early afternoon trading in the stock market today, near 132.50. NetEase stock is down 14% from its all-time high of 154.88 brushed in June.

NetEase posted declines in the gross profit of its e-mail and e-commerce operations, primarily due to temporary suspensions of e-commerce services related to third-party lottery products starting in late February, Onward Choi, the company's acting CFO, said in a conference call with analysts late Wednesday.


NetEase's decline "was partially offset by increased revenue contributions from our cross-border e-commerce platform Kaola.com and e-mail services, which have lower gross profit margins," Choi said on the call.

Kaola is NetEase's self-operated cross-border e-commerce platform operated in partnership with Sinotrans, described as one of China's largest logistics service providers. The companies said that the alliance struck in January will let Chinese customers more quickly receive products purchased from suppliers overseas ʱ??

NetEase's Q2 gross profit margin for the online games business was 69.3%, down from 73.1% in Q1 and 77.6% in Q2 2014, Choi said. He said that the decline was "mainly due to increased revenue contributions from mobile games, which have relatively lower gross profit margins, as a percentage of our total online games revenues. "

Research and development costs also swelled, rising 148% year over year to 49.1 million yuan ($ 7.9 million), as the company has expanded abroad and opened new businesses.

Looking to bring its most popular titles to more English speakers, NetEase opened its first US office, in Redwood Shores, Calif., In February.

NetEase is still best known for its desktop PC games and has had a lucrative exclusive license for Activision Blizzard 's (NASDAQ: ATVI) "World of Warcraft" in mainland China since 2009. The company also develops its own games, mostly the multiplayer variety played on desktop PCs and mobile devices.

"Contrary to the certainty of its games ... Koala.com may present a certain level of risk to NetEase's general margin," wrote TH Capital analyst Tian Hou in a research report Thursday.


NetEase reported Q2 earnings that missed Wall Street expectations but revenue that beat them, as its mobile games push gained steam.

NetEase said that its Q2 net revenue jumped 67% in local currency year over year to 4.57 billion yuan ($ 736.7 million), where analysts had forecast 4.52 billion yuan. The Beijing-based Web portal said that earnings per American depositary receipt were 10.77 yuan ($ 1.55), up 23% but shy of the 10.99 yuan analyst consensus.

NetEase did not provide guidance for Q3. Analysts polled by Thomson Reuters expected net revenue to rise 61% to 5 billion yuan ($ 780 million at Thursday's exchange rate).



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