| The9 Earnings Preview (NCTY): Server Stats Show an Expansion of WOW in Q2 |
| Written by Daniel Vlad | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Friday, 04 August 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The Casual Analyst NCTY Q2-2006 Projections:
Q2 Earnings Preview The9 (NCTY) Q1 earnings report was generally viewed as disappointing. Three months ago the Chinese operator of the hit online game World of Warcraft reported flat revenues, prompting analysts to wonder if the company’s growth has hit a wall. With the company relying on only one game, and The9’s policy of not providing forward looking guidance, the concern was more than legitimate. The9 reports again on Wednesday, August 9 after the market close. The Q2 earnings report will either confirm or dispel the slowdown concerns. The Casual Analyst has developed automated data collection software for tracking WOW server usage levels. In our analysis, the ACU and PCU were determined by analyzing the server stats, collected since October 2005, in conjunction with the ACU and PCU reported by The9 in the previous earnings reports and conference calls. Our estimate for ACU is 308,000, a 6% increase quarter over quarter. The PCU estimate is 630,000, a 4% increase vs. Q1.
Revenues Estimates: WOW is responsible for 99% of The9’s revenues. NCTY recognizes revenue based on the actual usage of the game, instead of the value of the sold game cards. Cost of Services: We project a 7% q/q increase. The increase is driven by a 9% increase in royalty payments to Blizzard. Operating Expenses: We expect a moderate (5% q/q) increase in operating expenses. We do not expect Sales and Marketing and General and Administrative expenses to increase significantly. However, the Product Development expenses could be significantly higher this quarter, as The9 prepares for the launch of SUN and Guild Wars.
Reimbursement for Previously Paid Taxes: The9 is exempted from paying taxes in 2006. In fact, the company does pay taxes, but the local government refunds these taxes back to NCTY. The9 recognizes tax reimbursements as Other Income. The timing of the tax refunds are difficult to predict. NCTY has reported tax reimbursements during Q4-2005; there were no reimbursements in Q1. Equity in Profit from Affiliated Companies: We conservatively project a small profit, driven by the Taiwan WOW operations, offset by losses from 9Webzen and Object Software. Net Income and EPS: We project a net income of $9.8 Million and EPS of $0.41, a 35% q/q increase, providing that our assumptions on tax reimbursements realize. Excluding reimbursements, the net income and EPS stands at $8.4 Million and $0.35 respectively, increasing by 15% from Q1.
2006-2007 Estimates We are confident that World of Warcraft will continue to grow in 2006 and 2007, driven by new content updates and the release of the Burning Crusade expansion pack in 2007.
As the Chinese online gaming sector become more and more competitive, the single most important success factor for game operators will be the quality of the games they operate. SUN, GW, and GE should all be solid earners for 2007. Although I do not expected either one of them to individually match World of Warcraft in terms of user base and revenues, as a group they should be able to significantly drive The9's bottom line in 2007. HellGate:London is a different story. Many gaming analysts believe that HellGate has the potential to be the next Chinese online gaming megahit. Chinese just love their shooting games. The9 appears to be on track to deliver spectacular growth in the next two years. The question everybody is asking is, can they execute? The company will give us a hint on Wednesday.
Appendix: Comprehensive Q2-2006 Earnings Estimates
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