About this Blog

The purpose of this blog is for my personal use. It serves as my personal diary as I investigate Chinese internet/gaming companies for investment purpose. If you have any comments or disagreement, please give me feedbacks.

Tuesday, February 27, 2007

Netease - My takes on the 4Q conference call

The management seems to have an adversary view on the stock analysts. Seems like Jekyll and Hyde. They treated their customers so well while it seems they can hardly tolerate those analysts (both Chinese and American alike).

Looks like this company is still run like a high tech start up company. All the people in management are technical guys. I don’t think MBA, marketing, etc. are their forte.

In 3Q conference call, they said they won’t provide guidance no more, and they didn’t in 4Q. In some ways, it makes sense. They are going to have so many new games coming out this year. Their guidance is probably not going to be much better than my guess. Again, I doubt they have a big rigorous structure and big marketing team where they would spend 6 months on doing a thorough marketing study. The advantage is they can be nimble and be able to change on a dime, the disadvantage is they can seem going blind some times. Again, a company ran like a high-tech start-up.

Because the company managers are clearly not enjoying this, even though they had a great quarter (blow away both earning and revenue), they just won’t divulge much information. You would get a lot more information from my blog than the conference call.

Let me run through some interesting stuff.

Effective tax rate for 2007 in the low teens. It was 10% for 2006. This can’t be good news. But what does that mean. 11% or 15%? Company is not telling. For a bunch of tech guys, they probably don’t really know.

They have a junior partner in search. They are also looking for partners to run their travel, health, and culture channel. I like it. To me, it is thinking outside of box. For peripheral business, you want to grow it, but you don’t have the time necessary to manage it properly. Might as well get somebody to do it. It is human nature that if it is a company employee, it is just a job to him and he probably doesn’t care. But if it is his baby, he would go night and day to get it right. NTES can always hire him as a manager later if it works out.

By the way, I enjoy the firework between that Citigroup analyst and the company management. That citigroup analyst asked some great questions and some not so great question.

First, the Citigroup analyst asked for the PCU and ACU for the TX2. No answer is given. Actually, I could have tell him the answer. The answer for PCU is 10k. Why? Because there are only two servers and each server can support a maximum of about 5k users.

NTES gave out 100k user accounts but they never expect to have more than 10k users at any given times. This information is out there 4 or 5 months ago. Nothing new.

As a matter of fact, just one month ago, they had an activity called “Crash the Server”. They would get as many players on it as possible to test the server load.

There is absolutely no reason for NTES to keep track of PCU or ACU at this point for TX2.

Second, the management first said they won’t license foreign game in 3Q, but in the 4Q call, they said they won’t reject to license foreign games or buy foreign R&D companies.

I like it. I hated it when they said they won’t license foreign games in 3Q. They will always be an in-house game company. But I want them to bid for game if not to actually license the game but to jack up the price of license and make the life of their competitors (NCTY, SNDA) hard.

But mostly, it is just the way these managers are. They really do change their mind quite frequently.

FF2 is probably the 2nd most important new game by NTES this year. It is going to be the first free-to-play game made by NTES. Guess what, it is a licensed game. It is a Korean game. NTES definitely will license foreign games.

From these two reason, the Citigroup analyst deducted that TX2 might not do well. I would talk about what I feel about TX2 in a day or two. But these two are definitely not the reasons to say how well or how badly TX2 will do.

The Citigroup analyst also asked a great question about what’s their strategy on video. The company management gave an answer that qualify as the worst answer of the year. Basically, he just said he doesn’t have a plan.

Again, knowing the management style, I am not very worry at all. But I will start to keep track of their video activities.

Finally, the company management feels their portal, email, blog technology is much better than their peers. That catches my ear. If it is other companies, it is expected for the company to show confidence. But Netease management is so low key that I actually starts to pay attention.

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