Netease.com (Nasdaq: NTES) will report fiscal fourth-quarter results on Monday, February 26. Analysts expect the China-based online game company to post earnings of 24 cents per share on revenue of $64.8 million.

Netease's Earnings to Meet Analyst Expectations

Netease derives over 80% of its revenue from two online games: Fantasy Westward Journey and Westward Online Journey II. The two games attract millions of gamers every day, each user spending a few cents per hour to play on one of the several hundred servers available for each game. Netease's third game, Datang has failed to attract a large crowd.

The company plans to release two new high profile games this year, Tianxia 2 and Westward Journey III. But while investors anxiously await for the arrival of the new games to revitalize the company's earnings, they are closely watching the performance of the two mature games, FWJ and WJOII, for potential signs of slowdown.

In order to monitor the performance of the Netease games and estimate the company's revenues, we have developed a software solution that continuously acquires the usage levels of the game servers. We use the data to estimate the peak and average concurrent users (PCU and ACU) for each game. The revenue can be easily estimated knowing the ACUs.

Q4 Estimates

• Fantasy Westward Journey Q4 average concurrent users (ACU) decreased by 8%, to 430,000, from 468,000 in the previous quarter. The decrease is the result of an one time event (the Japanese flag incident), and it was projected by Netease in November. Peaks in game usage were observed during the Mid-Autumn Mooncake Festival in early October, and during the last week of December.
• Westward Online Journey II ACU has remained relatively stable compared to the ACU registered in the previous quarter. Our estimate is 170,000, 2% lower than in Q3.
• Datang continues to struggle, posting uninspiring ACU and PCU numbers.
• Our revenues estimate is $65 million, in line with the average analyst expectations.

Q1 Forecast

• For the first quarter 2007 we are forecasting a 5-6% increase in revenues, driven by the strong performance of the Fantasy Westward Journey game in February.
• To date, FWJ ACU is up 8% in Q1. Notable peaks in usage were observed on January 1^st and during the Chinese New Year holiday.

 Figure 1: Blue line: Fantasy Westward Journey Daily ACU. Red line: One week moving average.

About the Author

The Casual Analyst editor Daniel Vlad has an MBA in Finance and a PhD in Physics and works in the IT industry. He is particularly interested in Chinese stocks.

He welcomes your feedback at dhvlad@CasualAnalyst.com.

Disclosure

The author of this research report does not own Netease stock.