NetEase.com (NTES.NASDAQ), China’s third-largest online games provider, beat analyst estimates with its US$83.8 million fourth quarter profit. Profits were down from US$84.4 million a year earlier, largely due to a one-off tax benefit worth US$11.8 million in 2008 and higher costs due to its new offering of Activision Blizzard’s (ATVI.NASDAQ) “World of Warcraft” multiplayer online role-playing game. Revenues from online games and online advertising both grew 64% to US$161 million and US$27 million, respectively.
In September, NetEase’s took over “World of Warcraft” from previous licensee The9 (NCTY.NASDAQ), then struggled with the Chinese General Administration of Press and Publication before finally receiving approval to offer the newest update of the game this month. During the same period, the company incurred royalty and consultancy fees while increasing headcount; the additional expenses pushed online gaming gross profit margins down to 70.8% from 88% a year earlier.
China’s US$4 billion online gaming market remains one of the internet’s strongest growth sectors, with 70 million users in 2009. Despite government crackdowns on content, NetEase’s license for “World of Worldcraft,” which accounted for more than US$200 million in revenues for The9, offers it a distinct advantage in the future.
The combination of the newest “World of Warcraft” expansion, “Fantasy Westward Journey” and the 163.com web portal should allow Netease to compete effectively with established rivals Tencent Holdings (700.HK) and Shanda Games (GAME.NASDAQ) as well as younger firms, such as Sohu.com spinoff Changyou.com (CYOU.NASDAQ), that are preparing new releases for 2010.