NetEase.com Reports Third Quarter 2009 Unaudited Financial Results
(Beijing – November 18, 2009) – NetEase.com, Inc. (NASDAQ: NTES), one of China’s leading Internet and online game services providers, today announced its unaudited financial results for the quarter ended September 30, 2009.<?xml:namespace prefix="o" ns="urn:schemas-microsoft-com:office:office"?>
“Fantasy Westward Journey delivered an outstanding performance highlight for the quarter with record peak concurrent users of 2.5 million on August 2, 2009, which is a clear testament to the ongoing popularity and longevity of this iconic game,” stated William Ding, Chief Executive Officer and Director of NetEase. “Our strong and talented research and development team continually provide superior gaming experiences to the growing dynamic user community in China and we believe that this is the key to the long-standing success of Fantasy Westward Journey and our other leading self-developed games. On September 19, 2009, our affiliated company, Shanghai EaseNet, commenced the commercial operation in China of the World of Warcraft®, a game licensed from Blizzard Entertainment, after receiving necessary approvals from appropriate government authorities, with huge player response. As previously announced, there is some regulatory uncertainty regarding World of Warcraft following an announcement by the PRC General Administration of Press and Publication (GAPP). We are currently seeking clarification from the relevant governmental authorities regarding this statement by GAPP and look forward to a speedy resolution from the government authorities. Separately, in September, 2009, we conducted a month-long marketing and sales campaign for the much anticipated open beta launch of Tianxia II. The open beta results met our targets in terms of both the number of players and paid users, and we are optimistic about the future growth of this game. We plan to release four expansion packs for Legend of Westward Journey, Tianxia II, New Fly for Fun and Transformer Online during the fourth quarter of 2009.”
“We are also focusing on developing new high-quality games that will further diversify our user base and enhance the popularity of our game portfolio. We expect to commercialize two new item-based games, Ghost and Heroes of Tang Dynasty in December 2009. Ghost is our new 3D online game based on “Liao-chai chih-I”, which are a collection of the classic Chinese ghost stories. With the beautiful music and vivid scene setting as well as rigorous fighting modes in the game, players can experience life and death, love and anger as well as revenge and other emotions in the human world, heaven and hell,” Mr. Ding continued.
“With regard to our advertising business, our recent consolidation of the portal business operations in Beijing and other new marketing strategies launched in the beginning of the year began to deliver promising results despite the fact that the overall economy in China remained cautiously optimistic during the third quarter. We achieved sequential quarter-over-quarter gains in terms of both the number of active advertisers and sales revenue during the third quarter of 2009 and remain cautiously optimistic about the course of our advertising business through the remainder of 2009 and into 2010.”
“With an eventful game pipeline as well as new service introductions in email, blog and search, we are confident in maintaining our market-leading position in the Chinese MMORPG market and accelerating our position as a portal of choice for the dynamic and growing user community across China,” Mr. Ding concluded.
Third Quarter 2009 Financial Results
Total revenues for the third quarter of 2009 were RMB879.4 million (US$128.8 million), compared to RMB872.1 million (US$127.8 million) and RMB806.6 million (US$118.2 million) for the preceding quarter and the third quarter of 2008, respectively.
Revenues from online games were RMB775.1 million (US$113.6 million) for the third quarter of 2009, compared to RMB781.5 million (US$114.5 million) and RMB675.1 million (US$98.9 million) for the preceding quarter and the third quarter of 2008, respectively.
Revenues from advertising services were RMB86.0 million (US$12.6 million) for the third quarter of 2009, compared to RMB72.8 million (US$10.7 million) and RMB113.0 million (US$16.6 million) for the preceding quarter and the third quarter of 2008, respectively.
Revenues from wireless value-added services and others, or WVAS and others, were RMB18.3 million (US$2.7 million) for the third quarter of 2009, compared to RMB17.8 million (US$2.6 million) and RMB18.5 million (US$2.7 million) for the preceding quarter and the third quarter of 2008, respectively.
Gross profit for the third quarter of 2009 was RMB627.0 million (US$91.9 million), compared to RMB691.9 million (US$101.4 million) and RMB631.3 million (US$92.5 million) for the preceding quarter and the third quarter of 2008, respectively. The quarter-over-quarter decrease in gross profit was primarily attributable to the additional cost of revenues incurred for the ramp-up and operation of the licensed game, World of Warcraft, mainly comprising of server depreciation charges, custody fees and royalties, which was partially offset by increased advertising revenues in the third quarter of 2009.
The year-over-year decrease in gross profit was primarily attributable to the significant increase in cost of revenues incurred for the ramp-up and operation of World of Warcraft as detailed above and decreased advertising revenue, partially offset by increased game revenue in the third quarter of 2009. Lower advertising revenue was reported for the third quarter of 2009 as the 2008 Olympic-effect ceased. Higher game revenue was reported for the third quarter of 2009 mainly due to the continued popularity of the Company’s self-developed games during the summer holidays as well as the commercialization of World of Warcraft on September 19, 2009.
Gross Profit (Loss) Margin
Gross profit margin for the online game business for the third quarter of 2009 was 79.9%, compared to 88.3% and 89.7% for the preceding quarter and the third quarter of 2008, respectively. The quarter-over-quarter and year-over-year decreases in gross profit margin were primarily attributable to the additional cost of revenues incurred for the ramp-up and operation of World of Warcraft in the third quarter of 2009.
Gross profit margin for the advertising business for the third quarter of 2009 was 23.1%, compared to 16.6% and 26.9% for the preceding quarter and the third quarter of 2008, respectively. The quarter-over-quarter increase in gross profit margin was mainly attributable to the sequential increase in revenue during the third quarter of 2009. The recently completed consolidation of the Company's portal business operations in Beijing and certain new market development initiatives conducted since the beginning of 2009 have allowed the Company to strengthen its market competitiveness, resulting in a steady growth in both the number of advertisers and sales revenue amid an uncertain economic environment. The year-over-year decrease in gross profit margin was mainly attributable to the decrease in revenue in the third quarter of 2009 as the 2008 Olympic-effect ceased.
Gross loss margin for the WVAS and others business for the third quarter of 2009 was 45.0%, compared to 43.0% and 6.4% for the preceding quarter and the third quarter of 2008, respectively. The quarter-over-quarter and year-over-year increases in gross loss margin were mainly due to increased bandwidth and server custody fees resulting from increased traffic for email and photo blog services, as well as increased staff-related costs resulting from increased headcount in the third quarter of 2009.
Total operating expenses for the third quarter of 2009 were RMB218.9 million (US$32.1 million), compared to RMB174.8 million (US$25.6 million) and RMB164.6 million (US$24.1 million) for the preceding quarter and the third quarter of 2008, respectively. The quarter-over-quarter and year-over-year increases in operating expenses were mainly due to the nationwide promotion activities conducted for many of our self-developed games during the summer holiday season and the relaunch of World of Warcraft in September 2009 along with increased advertising media and exhibition costs to promote the Company’s portal business during the third quarter of 2009. We also recorded quarter-over-quarter and year-over-year increases in research and development costs during the third quarter of 2009, mainly resulting from increased headcount and increased server custody fee and bandwidth charges related to our research and development activities.
Net profit for the third quarter of 2009 totaled RMB393.8 million (US$57.7 million), compared to RMB468.1 million (US$68.6 million) and RMB313.3 million (US$45.9 million) for the preceding quarter and the third quarter of 2008, respectively. During the current quarter, the Company reported a net foreign exchange gain of RMB25.3 million (US$3.7 million) under Other, net, compared to RMB47.2 million (US$6.9 million) for the preceding quarter and a net foreign exchange loss of RMB68.3 million (US$10.0 million) for the third quarter of 2008. The quarter-over-quarter and year-over-year changes in foreign exchange gains/losses were mainly due to the translation gains/losses arising from the Company’s Euro-denominated bank deposit balances as of September 30, 2009 as the exchange rate of the Euro against the RMB fluctuated over the periods. NetEasereported basic and diluted earnings per American depositary share, or ADS of US$0.45 and US$0.44, respectively for the third quarter of 2009. The Company reported basic and diluted earnings per ADS of US$0.53 each for the preceding quarter, and US$0.36 and US$0.35, respectively for the third quarter of 2008.
The Company recorded income tax charge of RMB65.5 million (US$9.6 million), RMB115.4 million (US$16.9 million) and RMB125.7 million (US$18.4 million) for the current quarter, the preceding quarter and the third quarter of 2008, respectively. The effective tax rate for the third quarter of 2009 was 14.3% as compared to 19.8% and 28.6% for the preceding quarter and the third quarter of 2008, respectively. The quarter-over-quarter decrease in tax charge was primarily due to the payment of an extra tax charge of RMB38.5 million (US$5.6 million) recorded in June 2009 related to the tax assessment of 2008 and the first quarter of 2009 by one of the Company’s subsidiaries. The year-over-year decrease in tax charge was primarily due to the application of the statutory tax rate of 25% on the income of the Company’s subsidiaries in the third quarter of 2008 as approval for the preferred tax status of High and New Technology Enterprises was not received until December 2008.
As of September 30, 2009, the Company’s cash and time deposits totaled RMB6.4 billion (US$939.1 million), compared to RMB5.6 billion (US$822.3 million) as of December 31, 2008. In addition, the Company had a restricted cash balance of RMB82.0 million (US$12.0 million), representing a security deposit placed with a court in Guangzhou, China during the second quarter of 2009 in connection with certain arbitration proceedings against the property developer of an office building located in Guangzhou, China, which is occupied by the Company.
Cash flows generated from operating activities totaled RMB270.0 million (US$39.5 million) for the third quarter of 2009, compared to RMB544.4 million (US$79.7 million) and RMB495.5 million (US$72.6 million) for the preceding quarter and the third quarter of 2008, respectively.
On September 12, 2008, the Company’s Board authorized a share repurchase program of up to US$100 million of the Company's outstanding ADSs for a period not to exceed one year. As of September 11, 2009 when the share repurchase program ended, the Company had spent in aggregate a total purchase consideration of approximately US$13.1 million (including transaction costs).
** The United States dollar (US$) 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$1.00 = RMB6.8262 on September 30, 2009 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2009, 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 p.m. Eastern Time on Wednesday, November 18, 2009 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, November 19, 2009). NetEase’s management will be on the call to discuss the quarterly results and answer questions.
Interested parties may participate in the conference call by dialing 877-941-1427 (international: 480-629-9664), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 800-406-7325 (international 303-590-3030), and entering passcode 4175189. The replay will be available through December 2, 2009.
This call is being webcast live and the replay will be available for 12 months. Both will be available 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 in-house development or licensing of massively multi-player online role-playing games, including Fantasy Westward Journey, Westward Journey Online II, Westward Journey Online III, Tianxia II and Datang, as well as the licensed game, Blizzard Entertainment’s World of Warcraft.
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 advertising 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 advertisements, matchmaking, alumni clubs and community forums. NetEase is also the largest provider of free email 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 entry into strategic licensing arrangements; 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 Shanghai EaseNet will not be able to continue operating World of Warcraft or other games licensed by it for a period of time or permanently due to the position of GAPP or other governmental actions; the risk that Shanghai EaseNet or NetEase will be subject to penalties or operating restrictions imposed by governmental authorities in the PRC resulting from the operations of their online games, including suspension of their Internet service or other penalties; 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 and maintain approvals of the preferential tax treatments and general competition and price pressures in the marketplace); the risk that the online advertising industry in China will continue to be adversely affected by the recent global economic slowdown or other factors beyond NetEase’s control; 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 the applicable law.
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