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NetEase’s (NTES) CEO William Ding on Q3 2014 Results – Earnings Call Transcript

By noreply@blogger.com (InfoseekChina)

(Seeking Alpha) Q3 2014 Earnings Call November 12, 2014.

William Ding – Chief Executive Officer

Thank you, Brandi. Before I begin, please note that for the purposes of this discussion, all percentages are based on renminbi. Our portfolio of traditional online and growing mobile offerings continued to be embraced by China’s dynamic online market place. During the third quarter, our revenues increased 32.3% year-over-year and 12.7% sequentially with growth across each of our three business segments.

Our growth was led by our online gaming services, which grew 16.8% and our advertising services, which grew 60.1%. We also saw an increasing contributions from our email, e-commerce and others business, which improved by 252.5% compared with the same period last year.

During the third quarter, we continue to see compelling user statistics for a number of our self-developed games and we were also encouraged by the adoptions of our mobile games. Our strategy to increase our focus on mobile games and broaden our market reach is also progressing well, as we ramp up R&D and marketing expenses in third quarter.

Look at some of our individual game performance. We saw standout performance in the third quarter from the PC and mobile versions of Fantasy Westward Journey II as well as our mobile card battle game, Mini Westward Journey. New Westward Journey Online II also delivered a strong performance as users welcome the introduction of an expansion pack in July. As well as and an item-based version that came out in August.

For our licensed games, Blizzard Entertainment’s Hearthstone, Heroes of Warcraft, performed well, and we rolled out Curse of Naxxramas, Blizzard’s first solo adventure for this game, in July. We continue to work closely with Blizzard to bring exciting new games to Chinese audiences, and an early test version of Blizzard’s free-to-play, online team brawler Heroes of the Storm was launched in China in October. We are also looking forward to the Chinese launch of the fifth expansion for Blizzard’s World of Warcraft, Warlords of Draenor on November 18, 2014.

Our games are designed to withstand the pass of time and engage our users in new and interesting ways and attract new users. The introductions of new expansions pack and unique game play are key to accomplishing the skills. During the third quarter, we launched new expansion packs for New Westward Journey Online III, Ghost II, Heroes of Tang Dynasty II and Heroes of Three Kingdoms.

We have also released a handful of expansion packs, so far this quarter. In October, we released an expansion pack for Fantasy Westward Journey II and a comprehensive upgrade of The Legend of Tibet and earlier this month, we released another expansion pack for New Westward Journey Online II. For the remainder of the year, we have a number of new release plan to have extend the longevity of our games and encourage new players to join our gaming community.

To name a few, we are currently planning to release new expansion packs for Tianxia III, Heroes of Tang Dynasty II and Legend of Fairy. For us the fourth quarter, we also plan to release new mobile titles that build on the successful September release of mobile games such as Stay Calm! My Lord! and Dark Blade.

We are also excited to commercially launch our first-person shooter Crisis 2015 in the fourth quarter.

Next in the queue, is our 3-D oriental fantasy MMORPG, Revelation. Beta testing for this game has result in very positive feedback so far and we continue to develop this exciting new game in preparation of its commercial launch. We have done additional MMORPG under development. This game offers players and all-new warfare gaming experience and we will begin first-round testing later this year.

As we have discussed on previous calls, the mobile market in China is thriving. Looking our social networking platform YiChat, an ideal vehicle for integrating our mobile applications and services.

During the quarter, we continue to introduce a number of new and exciting functions. This new capabilities such as video chat and integrated community photo sharing are being well received by each end users.

This supports our growing user base and increase activity levels on this platforms. Our focus remains on introducing new features that fit in our Fresh Social Life strategies. With that in mind, you can expect to see even more differentiate and innovative social networking functions incorporated into YiChat in the future.

Looking at our prosperous advertising services business. The top performing advertising verticals in the third quarters were automobile, food and beverage and financial services. We saw additional monetization from our mobile user applications and 2014 Fifa World Cup. Which directly supports revenue growth from this business segments in the third quarter?

Our email service is also demonstrating steady momentum and by the end of the third quarter, we have 710 million internet users. Additionally, we are very happy with the rapid growth of our e-commerce business during the period. Over the past few quarters, we have seen a considerable increase from this business driven by e-commerce sales.

We continue to look for ways to diversify and expand our offerings for the traditional online community and is rapidly expanding mobile counterpart. At the same time, we remain dedicated to our roots of introducing innovative products and services. Key investments in our marketing and research capabilities enable us to further just go [ph], position us well for our next wave of growth.

As we near the end of the year, and look to 2015. We are focused on introducing top quality offerings that diversify our portfolio with complementary products and services that support our growth and strengthen our pipeline. This concludes William’s update.

Now I will provide a review of our third quarter financial results.

Onward Choi – Acting Chief Financial Officer

I will primarily focus, under discussions of margins and expense fluctuations along with net profit.

Total sales tax for the third quarter of 2014 were RMB 209.2 million or $34.1 million compared to RMB184.4 million and RMB157.7 million for the preceding quarter and the third quarter of 2013, respectively.

The year-over-year and quarter-over-quarter increases in sales tax were mainly due to the increase in our total revenues. Gross profit for the third quarter of 2014 was RMB2.3 billion or $367.9 million compared to RMB2 billion for the preceding quarter and RMB1.7 billion for the third quarter of 2013.

The year-over-year and quarter-over-quarter increases in online games gross profit were primarily driven by increased of revenues from certain of our self-developed games such as Fantasy Westward Journey II and New Westward Journey Online II as well as from our various mobile game products.

The year-over-year and quarter-over-quarter increases in advertising services gross profit were primarily the results of strong demand from the automobile, food and beverage and financial services sectors. The monetizations of our mobile news applications and other mobile applications as well as advertising revenues related to the 2014 Fifa World Cup.

The year-over-year and quarter-over-quarter increases in email, e-commerce and others gross profit were primarily attributable to an increase in revenues from our e-commerce business. Gross profit margins for our online game business for the third quarter of 2014 was 77.2% compared to a gross profit margins of 77.6% and 79.7% for the preceding quarter and third quarter of 2013 respectively.

The year-over-year decreased in gross profit margins was mainly due to increase in revenue contributions from both mobile games and license game as a percentage of our total online game revenues. Our gross profit margins for the advertising services business for the third quarter of 2014 was 66.3% compared to a gross profit margins of 60.9% and 50.4% for the preceding quarter and the third quarter of 2013 respectively.

The year-over-year and quarter-over-quarter increases in gross profit margin were mainly due to enhance, the economies of scale driven by revenue growth. Gross profit margins for the e-mail, e-commerce and others business for the third quarter of 2014 was 49.6%, compared to a gross profit margin of 35.7% and 4.1 % for the preceding quarter and the third quarter of 2013, respectively.

The year-over-year and quarter-over-quarter increases in gross profit margin were mainly due to
increased revenue from our e-commerce business, which has a relatively higher gross profit margins.

Our total operating expenses for the third quarter of 2014 were RMB1.1 billion or $172.6 million compared to RMB823.7 million and RMB635.2 million for the preceding quarter and third quarter of 2013 respectively. The year-over-year increase in operating expenses was mainly due to increase the selling and marketing expenses for our e-commerce business and advertising services promotions most of which were related to our mobile news applications and in 2014 Fifa World Cup.

Promotions of our online and mobile games as well as staff-related research and development cost resulting from an increased and the number of employees and average compensations. The quarter-over-quarter increase in operating expenses was mainly due to increase the selling and marketing expenses for our online games and e-commerce business as well as higher staff-related research and development expenditures and share based compensation cost.

For the third quarter of 2014, we recorded a net income tax charge of RMB197.3 million or $32.2 million compared to RMB97.9 million and RMB206.5 million for the preceding quarter and third quarter of 2013 respectively. The effective tax rate for the third quarter of 2014 was
14.4%, compared to7.4% and 16.5% for the preceding quarter and the third quarter of 2013, respectively.

The year-over-year decrease in the effective tax rate was mainly due to the fact that certain of our subsidiaries were approved as Key Software Enterprises in the fourth quarter of 2013 and are subject to a preferential tax rate of 10% for 2014. The quarter-over-quarter increase in the effective tax rate was mainly due to the fact that we recognized certain tax credits related to annual tax filing benefits in the second quarter of 2014, most of which comprised extra tax deductions for research and development expenses approved by the tax authorities.

We also had a net foreign exchange gain of RMB2.2 million or $0.4 million in the third quarter of 2014 compared to net foreign exchange loss of RMB20.2 million and the net foreign exchange gain of RMB5.9 million for the preceding quarter and the third quarter of 2013 respectively.

The quarter-over-quarter and year-over-year changes in foreign exchange gains or losses were mainly due to exchange gains or losses of rising from our foreign currency denominated bank deposits, short-term loan balances as the exchange rate of the US Dollars gains to RMB fluctuated over the periods.

Our Net profit for the third quarter of 2014 totaled RMB1.2 billion or $188.8million compared to RMB1.2 billion and RMB1 billion for the preceding quarter and for the third quarter
of 2013, respectively.

We reported basic earnings per ADS of $1.45 and diluted earnings per ADS of $1.44 for the third quarter of 2014. Our basic and diluted earnings per ADS were $1.50 each for the preceding
quarter and $1.31 each for the third quarter of 2013.

As of September 30, 2014 our total cash and time deposits balance was RMB20.4 billion or $3.3 billion compared to RMB18.6 billion as of December 31, 2013. Our cash flow generated from operating activities was RMB1.1 billion or $186.9 million for the third quarter of 2014, compared to RMB1.2 billion and RMB1 billion for the preceding quarter and the third quarter of 2013, respectively.

In addition, as of September 30, 2014 we had a loan from an offshore bank in the principal amount of $90 million that was secured by RMB deposits of the Company in an onshore branch of this bank in the amount of RMB614.2 million, which was recognized as a short-term investment.

We continue to return value to our shareholders and are pleased to announce that, in line with our quarterly dividend policy. The Board of Directors has approved a dividend of $0.36 per ADS, we expect to pay this on December 5, 2014 to shareholders of record as of the close of business on November 28, 2014.

Thank you for your attention.

Source: Seeking Alpha | Photo: China Daily

Source:: NetEase’s (NTES) CEO William Ding on Q3 2014 Results – Earnings Call Transcript

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