Positives And Negatives From The NetEase Q2 Print

Following the release of second quarter results by NetEase Inc (ADR) NTES, UBS sifted through and segregated the positives and negatives from the earnings report.

Chinese internet company NetEase reported second-quarter results showing 46.5 percent year-over-year growth in revenues to 13.4 billion yuan and non-GAAP earnings per ADS of $3.86. The results were largely in line with UBS's estimates.

Q2 Results Breakdown

• Online games revenue: 9.4 billion yuan, up 46 percent.
• Mobile games revenue: 6.83 billion yuan vs. UBS's estimate of 6.65 billion yuan, accounting for 72.4 percent of the total.
• E-commerce and other revenue: 3.35 billion yuan vs. UBS's estimate of 2.65 billion yuan.
• Gross margin: 50.4 percent vs. UBS's estimate of 53.2 percent.
• Non-GAAP operating profit margin: 20.2 percent vs. UBS's estimate of 33.6 percent due to lower e-commerce gross margin and higher operating expenditure.
• Non-GAAP net profit: 3.47 billion yuan vs. UBS's estimate of 3.52 billion yuan.

Following the results, the shares of the company were slumping 9.52 percent to $285.07.

UBS has a Buy rating and a $335 price target for the shares of the company.

Analysts Angela Xu, Ming Xu and Navin Killa indicated that they are reviewing their assumptions, especially for mobile games, and would update in due course.

"We remain constructive on the potential of its eCommerce businesses and strength in mobile games over time, although low eCommerce profitability in the ST and temporary weakness in games may weigh on share price," UBS said.

The Positives

• Higher-than-expected top line.
• Accelerated e-commerce revenue growth, driven by "6/18" promotions.
• Positive management comments on mobile games layouts in overseas markets.

The Negatives

• Lower-than-expected gross margin due to weaker e-commerce gross margin on product mix shift.
• Higher-than-expected selling expense ratio due to promotions on online games and e-commerce.
• Sequential decline in deferred revenue balance and relatively low visibility in new games performance.

At last check, shares of NetEase were down 9.41 percent at $285.40. __________ Image Credit: By LunaLuyan (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons">via Wikimedia Commons