First, taking a look at the headline numbers, NTES reported earnings of $2.55 per ADS, beating the consensus target by $0.04. After the company issued disappointing misses on the bottom line in 1Q18 and 4Q17, NTES has now posted back-to-back upside results on earnings per ADS. As mobile gaming revenue becomes a bigger piece of the company’s overall pie distribution, gross margin is expanding, helping to push earnings and cash flow higher.
On the topic of cash flow, NTES generated an impressive $526.7 mln in cash flow from operations during the quarter, up about 80% year/year. This strong cash flow generation enables NTES to initiate shareholder-friendly capital allocation plans, such as the aforementioned $1.0 bln buyback program. On top of that, the company also pays out a quarterly dividend of $0.45 per ADS.
Revenue climbed by 31% to $2.45 bln in the third quarter, modestly topping the $2.42 bln consensus. Also, NTES' revenue growth has been on the rise this year, moving from 12% in Q1 to 25% last quarter and then to the 31% mark this quarter. As noted above, this improving growth has mainly been driven by the strong performance from the company’s gaming and e-commerce segments.
Total online gaming revenue rose 28% to $1.5 bln, with mobile games accounting for 68% of total gaming sales. The growth in gaming revenue was mainly driven by self-developed mobile games along with PC-client games such as Justice, newly introduced in June 2018, and Fantasy Westward Journey Online, a title in a flagship MMORPG series set in classical Chinese-themed fantasy worlds.
With mobile and PC-client games growth out-pacing the growth of the company’s traditional online games, gross margin in this segment has expanded, improving to 65.1% from 62.5% in the year-ago quarter.
The other primary catalyst for the quarter was robust growth in the company’s e-commerce business, which surged by 67% to $649.2 mln -- its fastest growing segment. In October, NTES signed a contract with global shipping company Maersk to support and improve the global transportation and logistics business of its Kaola unit. With this agreement in place, NTES expects deliveries of overseas procurement to be timelier and for Kaola's cross-border logistics to run more smoothly. E-commerce platforms Kaola and Yanxuan are both complementary components of the company’s e-commerce strategy.
Finally, although the company did not provide any specific financial guidance going forward, it did highlight one if its core growth strategies. Specifically, NTES is looking to aggressively expand the reach of its gaming segments on an international basis. In fact, for the first time in its history, international revenue accounted for more than 10% of total gaming revenue during the quarter. So far, this has been almost entirely driven by its success in Japan as it launches new titles there. But NTES' ambitions are even bigger as it begins targeting the U.S. market. During the earnings call last night, management commented that it has entered into a collaboration with Blizzard Entertainment (ATVI) to develop Diablo Immortal for the U.S., stating that it views this as a "huge opportunity" for NTES.