NetEase Becomes First Chinese Dot-Com to Post Profit

By Michael Forsythe

(Bloomberg) -- NetEase.com, Inc became the first of China's three U.S.-listed Internet companies to report a profit, aided by sales that surged during the World Cup soccer tournament in June.


Nasdaq-listed NetEase reported a profit of $4,600, or 1 cent an American depositary receipt, in the second quarter, compared with a net loss of $2.1 million, or 29 cents, a year earlier. Sales rose sevenfold to $4.65 million from a year ago, as millions of Internet subscribers in China used NetEase's Web site to download World Cup-related music and pictures onto their mobile phones.


"Although the number is not big, it symbolizes that we are not burning cash," Chief Executive Officer Ted Sun told reporters in Beijing. "We are not losing money."


The shares of Beijing-based NetEase have almost tripled and the shares of rivals Sina.com and Sohu.com Inc. have risen 25 percent and 12.5 percent respectively this year. The Nasdaq Composite Index has declined 36 percent in the same period.


NetEase, Sina and Sohu are benefiting from revenue-sharing plans by China Mobile Communications Corp. and China United Communications Corp., which count on Internet companies to promote the use of mobile-phone data services among the nation's 45 million Web users. China Mobile expects to handle 50 billion messages this year, or about 140 million a day.


Fees


While the phone companies handle person-to-person text messages internally, they rely on so-called Internet "portals" and other software companies to sell more expensive programs such as downloadable ring tones or pictures of soccer balls that can be displayed on handset screens. Sohu, Sina and NetEase keep about 80 percent of the fees they charge for this service, which range from 2 cents to about $4.00, analysts said.


"The first beneficiaries are the portals," said Duncan Clark, managing director of BDA China Ltd., a Beijing telecommunications company. "This can take off very quickly because it is not limited by the number of users."


NetEase reported a $630,000 operating loss for the second quarter. Interest income from its $63.7 million in cash as well as the settlement of several disputes with advertisers through arbitration allowed the company to report a net profit, Sun said.


Revenue grew 60.7 percent from the first quarter. Sun expects revenue growth will slow in the current quarter in part because sales from the World Cup, which ended in late June, will not recur. World Cup sales made up more than 20 percent of NetEase's $970,000 in advertising revenue and an unspecified percentage of its 3.7 million in non-advertising sales, over half of which came from mobile-phone messaging.


Outlook


Sun would not give specific profit or sales targets for the current quarter. He said the company planned to have an operating profit in the current quarter.


"I would expect a double digit (revenue) increase but it will be smaller than in the previous quarter," Sun said.


Sun said NetEase had been cleared of any potential delisting from the Nasdaq Stock Market after the exchange notified the company last month that it failed to maintain a proper audit committee. The company replaced one board member who had past business ties with NetEase with a new director.


"Nasdaq was satisfied by that," Sun said. "We have already received confirmation from Nasdaq that the case is closed."


Last year NetEase shares were suspended from trading for four months because the company failed to file its 2000 annual report. The company later restated its 2000 earnings after an internal investigation found its accounting procedures were faulty.


One hundred common shares of NetEase make up one American depositary receipt.

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