NetDragon's RMB95.4m net profit 7% above analyst's estimates

Revenues were up 44% to RMB290m.

According to OSK DMG, NetDragon announced its 3Q12 results on 23 Nov after market close. Revenue and net profit of RMB290m (+44% y-o-y) and RMB95.4m (+95% y-o-y) were 6% below and 7% above OSK estimates respectively.

Here's more from OSK DMG:

3Q12 revenue came in short on weaker than expected performance from the games unit (due to Eudemons) and mobile business (revenue recognition changed to net from gross basis).

After restating to gross basis, mobile revenue growth of 46% beat OSK forecast growth of 23% and ND’s total 3Q12 revenue was actually in line with OSK estimates.

We are becoming more positive on ND’s mobile business as: i) app/content-related revenues are becoming more significant and ii) smart phone penetration continues to rise in China.

3Q12, net profit beat due to more stringent cost controls and lack of promotional activities. As a result, ND's OPM improved to 40.5% (3Q11: 28.4%), despite a 389 increase in headcount (2Q12: 2,820). We expect ND's margins to improve further.

We raise our FY12/13/14F EPS estimates by 0.7%/16%/12% on i) higher mobile revenue and ii) lower opex. We also raise our SOTP-derived TP by 36% to HKD11.30 on a higher valuation for the mobile business of 12x (from 7x). Upgrade to BUY.

Shortfall in games offset by better mobile and lower costs. 3Q12 online games revenue (+11.2% y-o-y) was 5% below OSK estimates on weaker performance from Eudemons. However, ND combated fake accounts, which lowered average concurrent users (down 6.3% y-oy), but enhanced quarterly ARPU to RMB242 (3Q11: RMB204), which should improve playability.

Weakness in the games was, however, offset by the strong mobile segment, which accounted for 30% of 3Q12 total revenue (3Q11: 9%). Operating figures for ND’s mobile platform were also positive with unique subscribers at 175m in 3Q from 3Q11’s 45m (for both iOS and Android platform). Accumulated downloads have also surpassed 9.5bn since the platforms were launched in 2009.

We expect contribution of app/content related sales (c.40% of mobile revenue) to continue rising against ad-based revenue which should drive monetization and profitability.

Ongoing margin improvements. ND's 3Q12 overall OPM rose to 40.5% (3Q11: 28.7%) on i) cut back in promotional spending and ii) mobile GPM improved to 87.1% (2Q12: 84.6%) as mobile COS was offset against revenues. Total opex as % of revenue also fell to 4.4% from 4.7% in 3Q11.