Netease sees growing revenues, less profits
By Liu Baijia (China Daily)
Updated: 2004-08-04 10:15

Chinese Internet company Netease.com Inc maintained steady growth in the second quarter thanks mainly to online games and advertising, despite a sharp decline in its wireless message service.

The NASDAQ-listed company said yesterday that its quarterly revenues reached US$25 million in the April-June period, rising 5.2 per cent quarter-on-quarter and 51.8 per cent year-on-year.

But net profits dropped to US$11.9 million from US$12.6 million in the first quarter.

"Despite a decline in our wireless business, the strong growth of online advertising and games helped us achieve sustained growth," said Ted Sun, acting chief executive officer of the Chinese Internet firm.

The diluted earnings per American depository share (ADS) of Netease were 36 US cents, down from 38 US cents in the previous quarter.

The company's ADSs closed at US$38.06 before the announcement of its financial results, up 2.17 per cent, but fell to US$37.40 in after-hours trading.

Netease's gross profit margin also shrank slightly from 80.6 to 79.5 per cent on a quarter-on-quarter basis.

The decline of its wireless business, especially the short messaging service (SMS), saw a sharp fall as previously forecast.

The Chinese Internet portal said in early July that its wireless business might fall by 37 to 41 per cent in the second quarter from the previous quarter.

Netease said yesterday its wireless value-added services fell by 37.1 per cent to US$4.5 million.

Netease's arch-rivals Sina Corp and Sohu, both NASDAQ-listed firms, also reported declines in their SMS businesses.

The declines sparked concerns among overseas investors about the wireless business of Chinese Internet companies.

Michael Yin, a Shanghai-based Internet industry analyst, believed that too much reliance on SMS and slow progresses in high-end wireless services made Netease one of the hardest-hit service providers due to tightening regulations and intensifying competition.

However, Sun said the decline would not cause much worry among its investors, as the wireless business only accounts for about 20 per cent of Netease's total.

Tong, chief operating officer of Netease, also said that despite a fall in SMS, the company had made significant progress in the so-called 2.5G services, which are based on the 2.5-generation mobile communications system.

The 2.5G services, including multimedia messaging service and wireless application protocol, accounted for 12 per cent of Netease's total wireless revenues, from 7 per cent in the first quarter.

Online games continued to be the dominant business for the Internet firm, accounting for 63 per cent of the total, rising by 25 per cent over the previous quarter.

Online advertising also grew by 18.5 per cent quarter-on-quarter and contributed US$4.5 million to the company in the second quarter.

Netease estimated its revenues in this quarter will range between US$29.5 and US$31 million.

Its advertising business is forecast to grow by 25 to 35 per cent, while its online game business will increase by 15 to 20 per cent.

Tong said the wireless services will continue to fall by 10 to 15 per cent in this quarter.

"We won't see a growth in wireless business by the end of this year or early next year," he said.

Netease recently signed an co-oepration agreement with search engine giant Google to develop a search business and share revenues.

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