NetEase.com Announces Strong Second Quarter Results
Financial Highlights for the second quarter 2003:
- Advertising revenues grow by 159.3% year-over-year to RMB20.8 million (US$2.5 million)
- E-commerce and other revenues grow by 280.2% year-over-year to RMB115.3 million (US$13.9 million)
- Continued revenue growth results in further enhanced gross margins of 78.9%
- Company achieves operating profit of RMB77.9 million (US$9.4 million) and net profit of RMB75.8 million (US$9.2 million), or US$0.29 per American Depositary Share (basic)
NetEase.com, Inc. (Nasdaq: NTES), a leading Internet technology provider in China, today announced financial results for its second quarter ended June 30, 2003.
The Company reported total revenues of RMB136.2 million (US$16.5 million) for the second quarter, a 15.5% increase over total revenues of RMB117.9 million (US$14.2 million) for the preceding quarter ended March 31, 2003 and a 253.8% increase over total revenues of RMB38.5 million (US$4.6 million) for the corresponding period in 2002. The Company reported a net profit of RMB75.8 million (US$9.2 million), or US$0.29 and US$0.28 per basic and diluted American Depositary Share, respectively, compared to the previous quarter's net profit of RMB68.9 million (US$8.3 million), or US$0.27 and US$0.26 per basic and diluted American Depositary Share, respectively. The same quarter in the previous year had a net profit of RMB38,300 (US$4,600).
Advertising revenues were RMB20.8 million (US$2.5 million) for the quarter ended June 30, 2003, representing a 73.6% increase over RMB12.0 million (US$1.4 million) for the preceding quarter and a 159.3% increase over RMB8.0 million (US$1.0 million) for the corresponding period a year ago.
Revenues from e-commerce and other services for the quarter were RMB115.3 million (US$13.9 million), representing a 9.0% increase over the preceding quarter's RMB105.8 million (US$12.8 million) and a 280.2% increase over RMB30.3 million (US$3.7 million) for the corresponding period a year ago. The relatively slower growth quarter-over-quarter is largely due to the temporary closure of Internet cafes in parts of China during the SARS outbreak, which impacted user rates for online games.
The Company reported gross profit in the second quarter of RMB107.5 million (US$13.0 million), increasing 17.1% over the previous quarter's RMB91.8 million (US$11.1 million) and 389.1% over RMB22.0 million (US$2.7 million) for the corresponding period a year ago. Strong revenue growth also favorably impacted gross margins, which increased from 77.9% in the preceding quarter to 78.9% in the second quarter.
Total operating expenses were RMB29.6 million (US$3.6 million), a 4.7% increase from the previous quarter's RMB28.3 million (US$3.4 million) and a 8.8% increase from the corresponding period a year ago of RMB27.2 million (US$3.3 million). This increase is largely due to the write-back made in the first quarter of a provision for a loan previously made to an ex-employee of the Company, and to a lesser extent, the increase in legal and professional fees for regulatory compliance work in the second quarter. The Company made full provision for the loan in 2001. Upon the repayment of such loan in the first quarter, the Company reversed the provision previously made, which resulted in the reduction in the total operating expenses during that period.
The Company reported an operating profit of RMB77.9 million (US$9.4 million) in the second quarter, representing continued improvement over last quarter's operating profit of RMB63.6 million (US$7.7 million) and the previous year's second quarter's operating loss of RMB5.2 million (US$0.6 million).
Despite higher income tax expense, the Company reported a net profit of RMB75.8 million (US$9.2 million) in the second quarter, increasing 10.0% over the previous quarter's net profit of RMB68.9 million (US$8.3 million) (which included a one-time other income of RMB5.5 million (US$0.7 million)) and representing 1,977 times the net profit of RMB38,300 (US$4,600) for the corresponding period a year ago. The increase in the effective tax rate during the second quarter is primarily due to a higher proportion of profit earned in a subsidiary company with a higher tax rate than the other group companies when compared to the first quarter.
As of June 30, 2003, the Company's total net cash balance was RMB729.9 million (US$88.2 million), a 14.2% increase from the previous quarter's RMB639.3 million (US$77.2 million). Operating cash flow was approximately RMB85.1 million (US$10.3 million) during the quarter.
Commenting on these second quarter results, Ted Sun, acting Chief Executive Officer and Director of the Company said, "We believe that this past quarter demonstrated the strength of NetEase's diversified revenues strategy. Even with the outbreak of SARS, which had a temporary impact on the growth of our online games business, we were able to generate healthy increases in total revenues. The growth of our advertising business was due in part to the abilities of our advertising sales team and continued enhancements made to our content offerings. During the second quarter, for example, we revamped our Entertainment Channel (http://ent.163.com), Automobile Channel (http://auto.163.com), and Mobile Phone Channel (http://mobile.163.com). In the coming quarters, we will continue to work to grow our advertising business, and to improve and develop new content and service offerings in order to expand our user base, and provide innovative online marketing solutions to advertisers.
"Since the end of the SARS outbreak in late May, we are also pleased to note that the usage of our online games has quickly bounced back to previous levels, and we hope to achieve continued positive results from this business in the future. In the coming quarters, for example, we will be launching upgraded versions of our existing popular titles as well as offering new games so that we can foster enthusiasm among our current users and attract new ones to build upon our leading position."
Mr. Sun continued, "We continue to see significant opportunities in our SMS business, which remains a very significant revenue source for the company. In addition to building upon our wide platform of SMS services already offered to our consumers, we are working to develop new opportunities to further expand and enhance our service offerings, promotional campaigns and distribution channels.
"During the second quarter, we also took steps to build upon our already strong professional Board of Directors and executive management team. Bringing deep experience in the Chinese telecom industry as well as financial expertise, Donghua Ding joined our Board as an independent director in June 2003. In addition, Michael Tong, who has served on our Board as independent director since 1999, joined as an Executive Director and in this new capacity is focusing on overall management of the company as well as more specifically on our online games business."
Denny Lee, NetEase's Chief Financial Officer added, "We believe that NetEase continues to be in a sound financial position, as evidenced by continued improvements in our gross margins and operating margins. Recently, we also built upon an already strong cash position, as the Company completed its offering of US$75.0 million in Zero Coupon Convertible Subordinate Notes on July 14, 2003, giving us added flexibility to take advantage of opportunities for expansion in the China market."
Users of the NetEase Web sites continued to grow, with 127 million registered accounts at the end of the second quarter, an increase of 11.5% over the 114 million accounts at the end of the previous quarter and a 95.5% increase over the 65 million accounts at the same time a year ago.
"In conclusion," said Mr. Sun, "the second quarter brought a number of positive developments to NetEase, notwithstanding the SARS outbreak and its impact on China. We are focused on continually innovating and bringing new services to both our users and partners which we expect will position us well for continued growth in the coming quarter and long term."
On May 16, 2003, the definitive settlement of the class action litigation filed in the U.S. District Court for the Southern District of New York against NetEase and certain other parties was approved and declared final by the District Court. The aggregate settlement amount, which was paid to those persons who purchased NetEase's American Depositary Shares during the period from July 3, 2000 to August 31, 2001, was US$4.35 million. This settlement has been reflected in the Company's third quarter and full-year financial statements for 2002 as a one-time charge.
** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of USD1 = RMB8.2776. The percentages stated in this press release are calculated based on RMB.**
NetEase will host a conference call to discuss second quarter earnings at 7:30 pm Eastern Time today (Beijing/Hong Kong time: July 29, 2003 at 7:30am). The management team will discuss quarterly results and highlights, and answer questions. This call can be accessed at NetEase's corporate web site at http://corp.netease.com, through CCBN's individual investor center at www.companyboardroom.com or by visiting any of the investor sites in CCBN's Individual Investor Network. Institutional investors can access the call via CCBN's password-protected event management site, StreetEvents (www.streetevents.com).
NetEase.com, Inc., Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. The NetEase Web sites, operated by a company affiliate, organize and provide access to 18 content channels through distribution arrangements with more than one hundred international and domestic content providers. In addition, the
NetEase Web sites offer a variety of products and services, including Instant Messaging (Popo), Dating, Love, Alumni and Personal Home Page. These products and services enable users to communicate about interests and areas of expertise. The sites also offer online interactive community services through community forums.
NetEase also offers short-messaging services, online multi-player games and e-mail services, as well as online mall technology services that provide opportunities for e-commerce and traditional businesses to establish an online e-commerce presence on the NetEase Web sites.
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This press release contains statements of a forward-looking nature. These statements are made under the ``safe harbor'' provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the impact of the outbreak of severe acute respiratory syndrome, or SARS, in China and risks related to any possible recurrence of SARS on another public health problem in China; the risk that the online advertising market in China will not continue to grow and will remain subject to intense competition; the risk that NetEase will not be able to continue to successfully monetize the user base of the NetEase Web sites and that its e-commerce and other fee-based services revenues will not continue to grow; the risk that the current popularity of SMS in China will not continue for whatever reason, including SMS being superseded by other technologies for which NetEase is unable to offer attractive products and services; the risk that NetEase may not be able to continuously develop new and creative online services; the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market; the risk that NetEase will not be able to control its expenses in future periods; the risk that the trading price of NetEase's American Depositary Shares may decrease for a variety of reasons, some of which may be beyond the control of management; the risk that current or future appointees to management are not effective in their respective positions; the difficulty in locating and recruiting suitable candidates for middle and senior management positions; the risk that NetEase may not be able to satisfy its obligations with respect to its Zero Coupon Convertible Subordinated Notes which could lead to a default on the Notes and an adverse affect on its business and financial condition; the risk that NetEase may not use the proceeds from the offering of those Notes and its other cash in a productive manner; NetEase's ability to develop and implement additional operational and financial systems to manage NetEase's operations; competition in NetEase's existing and potential markets; governmental uncertainties, general competition and price pressures in the marketplace; uncertainty as to future profitability; the risk that security, reliability and confidentiality concerns may impede broad use of the Internet and e-commerce and other services; and other risks outlined in NetEase's filings with the Securities and Exchange Commission, including its registration statement on Form F-1, as amended. NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.
Second Quarter 2003 Consolidated Statements of Operations
Second Quarter 2003 Consolidated Balance Sheets