NTES – 1Q 2009 revenue might be weaker than predicted

I had been tracking the server statistics on NTES’s game for a while now. I tried to use that statistics to predict the quarterly earnings for NTES. But my last prediction was horrible. I was off by $11M in my prediction for the last quarter, please see the following article:
http://chinese-net-gaming-stock.blogspot.com/2009/03/ntes-4q2008-revenue-prediction-error.html

The reasons for the bad predictions are two folds. Firstly, I don’t know how to take account of the seasonal factor between quarters. I use last quarter’s ACU (Average Concurrent Users) number as a base to compare to this quarter’s server counts. That provides me with an estimate of this quarter’s ACU. But there is a seasonal factor between quarters. At this point, I am using trial and error to come out with a seasonal factor that can accurately capture this effect.

The second reason for my bad prediction last time is that I was confused about closed beta status of NTES’s two new games, TX2 and XYW. Both had achieved significant success. Both games gets about 100k to 150k players playing consistently and are still growing. But both games are only in closed beta. NTES already monetized them. Players can buy items within the game’s virtual store.

For every other companies, they would have commercialized these two games long time ago. But not NTES, she is so deliberate. Items within the virtual store has very little power and therefore are only there as part of closed beta test. It is there to test the working of the virtual store and the items themselves, but not to make money.

For a 100k-150k item based game, one can easily get $8M per quarter. I thought NTES started commercialize these two games. When NTES said that these two games are still in closed beta, I thought it can’t be right because other companies would had commercialize the game (that already achieved 100k to 150k players).

Because of the above two factors, I would not provide quarterly revenue estimates.

But according to my server count, I observed a lower server count in 1Q2009 compare to that of 4Q2008. According to analysts estimate (in Yahoo), 1Q2009’s revenue is $116M. That would only be $1.5M lower than that of 4Q2008.

Somehow, I think 1Q2009 revenue will be hard to get to that level.

Financial crisis clearly had a affect on China’s gaming sector. It is a very mild affect, but still a negative effect. It is also a temporary effect because according to my server count, the games are starting to grow again in April.


But the wild cards are TX2 and XYW. Both games are popular and are still growing. But NTES is not commercialize them. That represents approximately $16M of unrealized money. I wonder just how long is NTES going to wait before they start making money on these two games.

With the stock so high right now, I wonder what would happen if there is a revenue short fall in 1Q2009.

Medium to long term, I can’t express how strong NTES is going to be. There are significant activities in NTES’s 3G effort, portal effort, licensed games (WOW and Starcraft) and self developed games. I will have several write-up on each of these activities.

Two years from now, we might be looking at a company that is several times larger than the NTES of now.