NetEase (NASDAQ:NTES), one of the largest game developers in the highly competitive Chinese online gaming industry, is set to announce its Q4 2013 results after market close on Feb 12. The company has been on our positive watchlist for close to 6 months and today we preview what to expect from this Chinese gaming giant in its Q4 numbers.
2013: A turnaround year for NetEase
NetEase saw an immense improvement in its fundamentals in the year 2013. As we had previously covered in one of our articles the company saw improved revenue growth and margin expansions during the first three quarters of 2013. The growth and profit margins were driven by a greater focus on self-developed games, as the company faced slowdown in demand for its huge revenue contributing title ‘World of Warcraft’. The company’s own self developed games have turned the corner and have been hugely accepted by the huge gaming community in China, offsetting the revenue decline from licensed titles.
The revenue and profit margins of the company over the last first three quarters have been positively impacted by the focus on self-developed games. The chart below displays the revenue growth of the company for the last 8 quarters.
It can be clearly seen that the revenue growth has seen positive increases since the second half of 2012, a period which saw the companies self-developed games gain traction in the Chinese gaming community. As a result the contribution of self-developed games to the overall revenues has seen a constant increase over the last few quarters leading to margin expansions over the last four quarters. The operating and Net profit margins over the last few quarters are displayed in the chart below.
The company had an average operating margin of 46.4% over the first three quarters of 2013, a marginal improvement from 45.3% in the first three quarters of 2012. The average Net Income margin of 45.4%, for the same period, saw a 150 basis points improvement over the corresponding period in 2012. The margin expansion is a function of the increased revenue share of self-developed games. Let’s take a look at analyst consensus estimates for Q4 2013 and our estimates for Q4 2013.
Q4 2013 estimates
The current Wall Street consensus is Q4 2013 EPS of $1.42 on revenue of $411.69 million for NetEase, according to estimize.com. Streetinsider reports the analyst consensus estimate of $1.42 in EPS on revenue of $407.8 million for NetEase. The consensus estimates represent a year on year revenue growth of 9% - 10% and earnings growth of 15.4% over Q4 2012. However, we expect the company to trump consensus revenue estimate as Q4 2013 driven by the companies focus on the mobile platform and expansion packs released over Q3 and Q4. Also Q4 2014 has historically been the company’s strongest quarter for over three years and we see no headwinds for the company to report lower revenues than $410 million in Q3 2013. Keep reading for our update post the Q4 2013 ER.
To see Netease’s latest stock price movement, click here (NASDAQ:NTES)