China Web Portal NetEase Ups Mobile Game For Growth
It's game on for China's NetEase in the mobile arena.
The Web portal and game company has teamed up withChina Telecom ( CHA ) to launch an instant messaging application for smartphones as it moves to gain muscle in the country's fast-growing mobile communications space.
The news sentNetEase ( NTES ) shares up 5.5% after the venture was announced on Aug. 19, and 11% the day after. They've settled back just a bit, and are up 74% year to date through Wednesday.
Why the surge in the stock price on the announcement? "The deal makes them a more credible player in the mobile Internet space, which is where people believe the future of the Internet is," said Oppenheimer & Co. analyst Andy Yeung.
"If they don't do anything on the mobile side, they have the risk of becoming irrelevant in the future," he said. "Being able to secure a beachhead in the mobile communication space is a key to their future in the mobile Internet. That's why people are excited about it."
One of the key features of the app, called YiChat, is that users can send free text and voice messages to any mobile phone or free voice messages to fixed lines, without the need for YiChat to be installed on the receiving devices.
China Telecom customers also get free data promotional packages with their use of YiChat.
China Telecom will hold 73% of Zhejiang Yixin Corp., which will operate the new app, and its representatives will be the joint venture's chairman and financial chief, according to the Shanghai Daily. NetEase will hold the remaining stake and be responsible for product design and operation. YiChat launched on Aug. 19.
"This partnership signals the start of NetEase's entry into the mobile instant messaging space, and is one of the key components of our mobile Internet strategy," said CEO William Ding in a statement.
The move comes on the heels of NetEase's introduction of its first mobile game in early July.
NetEase declined to comment further on the venture. But the Beijing-based company will face competition with its YiChat app, particularly from Tencent Holdings, China's biggest Internet company and developer of the WeChat app. WeChat is a popular mobile instant text and voice communication app.
"NetEase will instantly have access to the wireless subscribers of China Telecom," said Yeung. "This deal will allow them to challenge Tencent's dominance by teaming up China Telecom."
China Telecom has a total of 177 million mobile subscribers, of which 90 million are 3G subscribers, he says.
But competing against a big player like Tencent won't be easy, he adds. The WeChat app is very popular and it already has a very large user base.
WeChat -- also known as Weixin in China -- has 300 million-plus registered users in China and 100 million-plus registered international users, says Yeung.
"We're looking at a co-existence situation between YiChat and WeChat," added T.H. Capital analyst Tian Hou.
The reason: The No. 1 advantage, says Hou, is that YiChat is more user-friendly than WeChat and it's an "open application."
"YiChat is not an isolated and closed-end application," she adds. "Users can reach out to their friends. So it has a radiating effect. If you can communicate beyond YiChat, you could be able to reach out to an audience much bigger than your own YiChat registered users."
Another advantage to NetEase is China Telecom's financial support. The data usage associated with YiChat and receiving messages from YiChat are free for people who aren't registered users of YiChat, adds Hou, since China Telecom will subsidize the usage.
She says about one-fourth of mobile phones in China are sold through mobile operators and China Telecom will have the YiChat app pre-installed on their phones. That gives NetEase "distribution power," says Hou.
She says with the three advantages of financial support, distribution power and its open-application format, YiChat could see a good adoption rate.
"But how much, we really don't know at this point," she said.
NetEase operates an interactive online community in China and is a major provider of Chinese language content and services through online games, its Internet portal and wireless value-added services. It generates revenue on the fees it charges users of its online games, which includes an exclusive license in China forActivision Blizzard 's ( ATVI ) popular "World of Warcraft" multiplayer game.
Most of NetEase's revenue comes from games developed in-house, such as "Fantasy Westward Journey." It also integrates revenue from selling ads on the NetEase websites.
To complement its online games, in July NetEase introduced "Fantasy Westward Journey II," a comprehensive upgrade with an accompanying pocket mobile version of "Fantasy Westward Journey," one of its longest operating and most popular games.
"Mobile devices present a terrific platform for us to extend the reach of our games from PC to mobile players and enhance the user experience," said CEO Ding in a statement.
He said he plans to release more mobile games that leverage the company's research and development expertise in coming months.
"We find it encouraging that NetEase released its first mobile game in the quarter leveraging the content of one of its most popular PC games," wrote Morningstar analyst Dan Su in a report. "We view mobile as an attractive growth area where NetEase can tap incremental demand and achieve scale efficiency."
By The Numbers
Overall, NetEase reported a strong second quarter. Earnings rose 30% to $1.37 a share, handily beating estimates by analysts polled by Thomson Reuters. Revenue leapt 27% to $393.2 million, also topping views.
They were the best sales and earnings gains since the first quarter of 2012. Sales growth accelerated for the third straight quarter.
Revenue from NetEase's online games was up 18.2%, while ad services saw a 33.3% rise in sales. During the quarter, the company commercially launched a new 3D real-time strategy game -- "Heroes of Three Kingdoms" -- and also introduced new expansion packs for "Tianxia III," "Westward Journey Online II" and "Westward Journey Online III."
"Recently released self-developed games, coupled with major expansion packs of long-standing games, drove strong gamer activities and spending in the quarter," wrote Su.
Price increases for flagship games such as "Fantasy Westward Journey" and "Westward Journey II," which began in February, also contributed to the favorable year-over-year comparison, she adds. And efforts to "revive" the portal advertising business paid off in the quarter, with NetEase attracting more ad dollars from clients in the real estate, financial services and consumer goods sectors.
Analysts polled by Thomson Reuters see full-year earnings rising 23% to $5.48 a share. They forecast a 10% increase in 2014.