NetEase.com Reports Third Quarter 2008 Unaudited Financial Results
(Beijing – November 13, 2008) – NetEase.com, Inc. (NASDAQ: NTES), one of China’s leading Internet and online game services providers, today announced its unaudited financial results for the third quarter ended September 30, 2008.
William Ding, Chief Executive Officer and Director of NetEase commented, “We believe that the online gaming industry in China continues to enjoy healthy growth and shows no obvious signs of slowing. NetEase’s online game business performed well in the third quarter due to the continued popularity of Fantasy Westward Journey (FWJ), a leading MMORPG in China. FWJ reached a new high of 2.3 million peak concurrent users in August as a result of the successful launch of a series of in-game marketing events during the summer holidays. Our game pipeline remains strong through the release of expansion packs of our existing flagship games and the development of new games. For example, we launched a new expansion pack for Tianxia II on September 24, 2008, and both the number of online players and consumption level have reached expectations and showed healthy growth since the commencement of its open beta testing on June 6, 2008. During the quarter, we commenced the closed beta testing of Heroes of Tang Dynasty, a history-based and adventure role-playing game, and the open beta testing of Legend of Westward Journey, an item-based version of our popular Westward Journey game series. We are also selectively considering licensing opportunities, such as the one we signed in the third quarter with Blizzard Entertainment, to further penetrate the online game market.”
Mr. Ding continued, “The advertising revenue increase in the third quarter reflected the Company’s on-going effort in strengthening the content of its portal. During the quarter, we made enhancements to our e-mail, blog and search products, and raised the overall users’ experience to a new level to attract and engage new users. We plan to continue to improve our service offerings and content to further enhance our leadership position in the market.”
Mr. Ding further remarked, “We believe that the outlook for the China Internet market still looks positive and is expected to show healthy growth for 2009, as a result of the rapid expansion of Internet users, the increasing popularity of e-commerce and the continued shift in advertising revenue to the Internet from traditional media advertising.”
Third Quarter 2008 Financial Results
Total revenues for the third quarter of 2008 were RMB806.6 million (US$118.8 million), compared to RMB715.9 million (US$105.4 million) and RMB571.1 million (US$84.1 million) for the preceding quarter and the third quarter of 2007, respectively.
Revenues from online games were RMB675.1 million (US$99.4 million) for the third quarter of 2008, compared to RMB595.0 million (US$87.6 million) and RMB468.7 million (US$69.0 million) for the preceding quarter and the third quarter of 2007, respectively.
Revenues from advertising services were RMB113.0 million (US$16.6 million) for the third quarter of 2008, compared to RMB103.9 million (US$15.3 million) and RMB85.5 million (US$12.6 million) for the preceding quarter and the third quarter of 2007, respectively.
Revenues from wireless value-added services and others (“WVAS and others”) were RMB18.5 million (US$2.7 million) for the third quarter of 2008, compared to RMB16.9 million (US$2.5 million) for each of the preceding quarter and the third quarter of 2007.
Gross profit for the third quarter of 2008 was RMB631.3 million (US$93.0 million), compared to RMB722.8 million (US$106.5 million) and RMB441.9 million (US$65.1 million) for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter decrease was primarily attributable to the receipt of a business tax refund of RMB146.8 million (US$21.6 million) in June 2008 and increased content costs arising from Olympic-related price increases by content providers. The decrease was partially offset by increased online game and advertising services revenues in the current quarter. The year-over-year increase in gross profit was primarily driven by increased online game and advertising services revenues, partially offset by higher content costs and higher staff related costs resulting from increased headcount in the current quarter. The quarter-over-quarter increase in online game revenue in the third quarter of 2008 was primarily attributable to certain FWJ-related in-game marketing activities launched during the summer holidays of 2008. The year-over-year increase in online game revenue was primarily attributable to both FWJ-related marketing activities in 2008 and the successful launch of an expansion pack for FWJ in late September of 2007. The quarter-over-quarter and year-over-year increases in advertising revenue were primarily attributable to higher demand for advertising services during the third quarter of 2008.
Gross Profit Margin
Gross profit margin for the online game business for the third quarter of 2008 was 89.7%, compared to 91.2% and 89.4% for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter decrease in gross profit margin was primarily due to the business tax refund received in the preceding quarter as mentioned above. The year-over-year gross profit margin remained relatively stable.
Gross profit margin for the advertising business for the third quarter of 2008 was 26.9%, compared to 52.6% and 54.0% for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter and year-over-year decreases in gross profit margin were primarily due to increased content cost arising from Olympic-related price increases by content providers, partially offset by higher revenues.
Gross loss margin for the WVAS and others business for the third quarter of 2008 was 6.4%, compared to the gross profit margin of 28.8% and the gross loss margin of 33.3% for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter decrease in gross profit margin was primarily due to the business tax refund received in the preceding quarter as mentioned above. The year-over-year improvement in gross loss margin was primarily due to increased revenue from the sale of accessories and premium email services, lower business tax resulting from certain preferential business tax treatment in the PRC which commenced in the first quarter of 2008 and lower server depreciation expenses during the third quarter of 2008.
Total operating expenses for the third quarter of 2008 were RMB164.6 million (US$24.2 million), compared to RMB149.7 million (US$22.1 million) and RMB179.0 million (US$26.4 million) for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter increase in selling and marketing expenses was primarily driven by higher costs related to the marketing of FWJ and Tianxia II, higher marketing cost associated with the Beijing Olympics and higher staff-related costs resulting from increased headcount. The quarter-over-quarter increase in general and administrative expenses was primarily driven by a net increase in bad debt provision during the third quarter of 2008. Research and development expenses remained relatively stable quarter-over-quarter. The year-over-year decrease in operating expenses was primarily due to decreased selling and marketing expenses related to the launch of Westward Journey Online III in the third quarter of 2007, partially offset by increased research and development staff cost, resulting from increased headcount in the third quarter of 2008.
Net profit for the third quarter of 2008 totaled RMB313.3 million (US$46.1 million), compared to RMB438.2 million (US$64.5 million) and RMB260.2 million (US$38.3 million) for the preceding quarter and the third quarter of 2007, respectively. During the third quarter of 2008, the Company reported a net foreign exchange loss of RMB68.3 million (US$10.1 million) under Other, net, compared to RMB26.4 million (US$3.9 million) and RMB11.3 million (US$1.7 million) for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter and year-over-year increases in net foreign exchange loss in the current quarter were primarily attributable to the translation loss arising from the Company’s US dollar- and Euro-denominated bank deposits and the fact that the Company fully redeemed its zero coupon subordinated convertible notes in July 2008 which had generated exchange gains in 2007 and 2008 prior to such redemption. NetEase reported both basic and diluted earnings per American depositary share (“ADS”) of US$0.36 for the third quarter of 2008. The Company reported basic and diluted earnings per ADS of US$0.53 and US$0.50 and US$0.31 and US$0.29 for the preceding quarter and the third quarter of 2007, respectively.
Effective as of January 1, 2008, the Chinese government adopted a new income tax law which unified the enterprise income tax payable by domestic and foreign-invested enterprises at 25%. Prior to the adoption of the new law, a number of the Company’s subsidiaries and variable interest entities (VIEs) were entitled to various preferential tax treatments. The Company’s subsidiaries and VIEs are at various stages of progress depending on the requirements of the different local tax authorities in applying for the New/High Technology Enterprises ("NHTEs") preferred tax treatment pursuant to the "Working Guidelines for Assessment of New/High Technology Enterprises" issued by the Chinese tax authorities on July 8, 2008. Accordingly, NetEase followed the applicable accounting standards and adopted the statutory rate of 25% in making tax provisions for the third quarter ended September 30, 2008, except for entities still enjoying unexpired tax holidays.
The tax charge for the third quarter of 2008 was RMB125.7 million (US$18.5 million), compared to the tax charge of RMB140.0 million (US$20.6 million) and the tax charge of RMB19.9 million (US$2.9 million) for the preceding quarter and the third quarter of 2007, respectively. The quarter-over-quarter decrease in tax charge was primarily attributable to an increased level of income recorded by the Company’s subsidiaries and VIEs operating in China, which currently enjoy unexpired tax holidays. The year-over-year increase in tax charge was mainly due to the lower effective tax rate in effect under the pre-2008 tax laws. Under the pre-2008 tax laws, the Company’s effective tax rate was 7.1% in the third quarter of 2007. The Company expects to reverse any excess tax provisions in subsequent periods if its subsidiaries and VIEs in China are granted the NHTE preferential tax status, which is expected to be partially offset by the anticipated reduction to deferred tax assets recorded at the lower NHTE preferred tax rates in future quarters.
As of September 30, 2008, the Company’s total cash and time deposit balance was RMB5.28 billion (US$777.5 million), compared to RMB4.16 billion (US$612.5 million) as of December 31, 2007. Cash flow generated from operating activities was approximately RMB495.5 million (US$73.0 million) for the third quarter of 2008, compared to RMB513.3 million (US$75.6 million) and RMB339.2 million (US$50.0 million) for the preceding quarter and the third quarter of 2007, respectively.
On September 12, 2008, the Company’s Board authorized a new share repurchase program of up to US$100 million of the Company's outstanding ADSs for a period not to exceed one year. The authorization followed NetEase’s completion of a 12-month share repurchase program previously announced on July 2, 2007. As of September 30, 2008, the Company has spent in aggregate a total purchase consideration of approximately US$63,000 (including transaction costs).
** The United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB6.7899 on September 30, 2008 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2008, or at any other certain date. The percentages stated are calculated based on RMB.
NetEase’s management team will host a conference call at 8:00 pm Eastern Time on Wednesday, November 12, 2008 (Beijing/Hong Kong Time: 9:00 am, Thursday, November 13, 2008). Chief Executive Officer William Ding, Acting Chief Financial Officer Onward Choi, and Co-Chief Operating Officer Michael Tong will be on the call to discuss the quarterly results and answer questions.
Interested parties may participate in the conference call by dialing 800-218-9073 (international: 303-262-2053), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 800-405-2236 (international 303-590-3000), and entering passcode 11121416#. The replay will be available through November 26, 2008 Eastern Time.
This call is being webcast live and archived, and will be available for 12 months on NetEase's corporate web site at http://corp.netease.com, Investor Info: Earnings Call.
NetEase.com, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. NetEase’s online communities and personalized premium services have established a large and stable user base for the NetEase websites which are operated by its affiliates. In particular, NetEase provides online game services to Internet users through the licensing or in-house development of massively multi-player online role-playing games, including Fantasy Westward Journey, Westward Journey Online II, Westward Journey Online III, Tianxia II and Datang.
NetEase also offers online advertising on its websites which enables advertisers to reach its substantial user base. In addition, NetEase has paid listings on its search engine and web directory and classified ads services, as well as an online mall, which provides opportunities for e-commerce and traditional businesses to establish their own storefront on the Internet. NetEase also offers wireless value-added services such as news and information content, matchmaking services, music and photos from the Web which are sent over SMS, MMS, WAP, IVR and Color Ring-back Tone technologies.
Other community services which the NetEase websites offer include instant messaging, online personal ads, matchmaking, alumni clubs and community forums. NetEase is also the largest provider of free e-mail services in China. Furthermore, the NetEase websites provide various channels of content. NetEase aggregates news content on world events, sports, science and technology, and financial markets, as well as entertainment content such as cartoons, games, astrology and jokes, from over one hundred international and domestic content providers.
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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 risk that NetEase will not be successful in its product diversification efforts, including its focus on item- and fee-based games and exploration of strategic licensing opportunities; 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, which could occur if, for example, its new online games or expansion packs and other improvements to its existing games do not become as popular as management anticipates; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that changes in Chinese government regulation of the online game market may limit future growth of NetEase’s revenue or cause revenue to decline; the risk that NetEase may not be able to continuously develop new and creative online services; the risk that NetEase will not be able to control its expenses in future periods; competition in NetEase’s existing and potential markets; governmental uncertainties (including possible changes in the effective tax rates applicable to NetEase and its subsidiaries and affiliates and the ability of NetEase to receive approvals of the preferential tax treatments previously available to certain of its subsidiaries and VIEs in China), general competition and price pressures in the marketplace; the risk that security, reliability and confidentiality concerns may impede broad use of the Internet and e-commerce and other services; the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase’s business and financial results; and other risks outlined in NetEase’s filings with the Securities and Exchange Commission. NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.
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