Robust growth in online games and advertising helped the Chinese Internet company NetEase.com Inc to overcome a drop in its wireless messaging services in the past quarter.

NASDAQ-listed NetEase reported revenues of US$28.8 million in the past quarter with a 15.4 per cent growth over the previous one.

Net profits reached US$13.2 million, 11 per cent higher quarter-on-quarter. Earnings per diluted American depository share (ADS) were 40 US cents.

"Because of our diversified business lines, NetEase still achieved good growth despite a slowdown of our wireless business," said Ted Sun, acting CEO of NetEase.

NetEase's ADS closed at US$48.84 on Wednesday with a 1.54 per cent rise, but fell 3.26 per cent in after-hours trading when the company released the financial result.

The Chinese Internet business, controlled by Ding Lei, the sixth richest Chinese man ranked by the Forbes magazine, said its revenues from online games grew by 21.8 per cent to US$19.4 million in the past quarter, due to increasing popularity of in-house games "Westward Journey Online" and "Fantasy Westward Journey Online".

Online advertising revenues jumped to US$5.6 million with 24.9 per cent quarter-on-quarter growth.

NetEase's mobile message business fell by 16.4 per cent in the third quarter to US$3.8 million.

The country has launched a campaign to curb the spread of pornographic content through the Internet and mobile phones, which has dealt a heavy blow to service providers (SPs) - companies such as Sohu.com, Linktone and NetEase.

Although NetEase was not punished by the country's dominant mobile operator China Mobile like other SPs including Sohu, Kongzhong, Sina, all listed on the NASDAQ, its text messaging business shrank significantly due to fierce competition and the regulatory campaign.

Michael Yin, a Shanghai-based Internet industry analyst, said the performance of NetEase showed the success of its diversification of business lines.

"NetEase is very strong in online games and now its advertising revenues have also caught up," said Yin, "This will greatly help NetEase mitigate the fall in the text messaging service."

Michael Tong, chief operating officer, said he believed that the mobile text messaging service would rebound in the coming two quarters.

Yin said the drop in NetEase's ADS price might be related to its increasing cost.

The company's operating expenses more than doubled to US$7.3 million in the third quarter due to increasing advertising campaigns, and higher equipment costs because of an expansion of the capacity of its free e-mail service, as well as free messages for users of its instant messaging service Popo.

"It is right for Chinese Internet companies to diversify their product lines to offset the impacts of falling wireless businesses and to invest for the future, but the trend needs to be closely watched," Yin said.

NetEase predicted its revenues for the fourth quarter would be between US$32 million and US$38.8 million, with sequential growth between 11 per cent and 34 per cent.

Its net profits are estimated to be US$14 million to US$15 million.

Online games will be NetEase's biggest growth engine.

(China Daily November 5, 2004)