NetEase Reports Fourth Quarter and Fiscal Year 2019 Unaudited Financial Results

BEIJING, Feb. 26, 2020 /PRNewswire/ -- NetEase, Inc. (NASDAQ: NTES) ("NetEase" or the "Company"), one of China's leading internet and online game services providers, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2019.

Fourth Quarter 2019 Financial Highlights^[1]

• Net revenues were RMB15,734.8 million (US$2,260.2 million), an increase of 9.2% compared with the fourth quarter of 2018.
  - Online game services net revenues were RMB11,604.3 million (US$1,666.9 million), an increase of 5.3% compared with the fourth quarter of 2018.
  - Youdao net revenues were RMB410.4 million (US$59.0 million), an increase of 78.4% compared with the fourth quarter of 2018.
  - Innovative businesses and others net revenues were RMB3,720.0 million (US$534.4 million), an increase of 17.9% compared with the fourth quarter of 2018.
• Gross profit was RMB8,210.4 million (US$1,179.4 million), an increase of 9.0% compared with the fourth quarter of 2018.
• Total operating expenses were RMB5,234.0 million (US$751.8 million), an increase of 17.5% compared with the fourth quarter of 2018.
• Net income from continuing operations attributable to the Company's shareholders was RMB3,053.7 million (US$438.6 million). Non-GAAP net income from continuing operations attributable to the Company's shareholders was RMB3,662.3 million (US$526.1 million).^[2]
• Basic net income per ADS from continuing operations was US$3.40. Non-GAAP basic net income per ADS from continuing operations was US$4.07.^[2]

Fourth Quarter 2019 and Recent 2020 Operational Highlights

• Expanded user base and diversified portfolio with new games launched in China including:
  - Fantasy Westward Journey 3D, released in December, topped China's iOS download chart soon after its launch, capturing wide interest from game players.
  - Introduced other thrilling new titles including Xuan Yuan Sword: Dragon Upon the Cloud, Bloom & Blade, Onmyoji: The Card Game, Champion of the Fields, The Ninth Institute and Astracraft.
• Deepened international brand recognition with popular games:
  - Knives Out remained popular in Japan and topped the iOS grossing chart several times in the fourth quarter.
  - Identity V ranked third on Japan's top iOS grossing chart several times in November and December.
  - Marvel Super War, released in December in several Southeast Asian markets, gained popularity and topped many iOS download charts.
• Continued popularity of Blizzard Entertainment's World of Warcraft^® in China, bolstered by the release of World of Warcraft Classic, achieving a record number of total monthly subscribers in the fourth quarter, with increased revenue quarter-over-quarter.
• Advanced exciting game pipeline, including: Onmyoji: Yokai Koya, Harry Potter: Magic Awakened，EVE Echoes, Ghost World Chronicle, Revelation mobile game, Diablo^® Immortal^™ and Pokémon Quest.
• Net revenues from Youdao's learning services and products were RMB311.9 million (US$44.8 million) for the fourth quarter of 2019, a 128.6% increase from the same period in 2018.
• Advanced NetEase Cloud Music with strong revenue growth, expanding the Company's community of independent musicians to more than 100,000 and over 270 billion playbacks of their songs in 2019.

"We saw strong growth across our primary businesses, increasing our total annual net revenues and net income from continuing operations attributable to the Company's shareholders year-over-year by 16% and 60%, respectively, due to strong performances in our online game services as well as other business segments," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Our online game services net revenues continued to grow, propelled by the sustained and growing popularity of our existing titles, again demonstrating the longevity of our game franchises. At the end of the year, we launched the long-anticipated Fantasy Westward Journey 3D, which gave us a wonderful start to the first quarter. We will continue to bring more masterpieces to both domestic and global players in 2020.

"Our online education and music businesses also performed remarkably well. Youdao is exploring new approaches to grow its business, replicating successful course experiences to produce premium learning content, products and scale with a positive impact to its margins. Our differentiation in music offerings is also becoming more evident. We are helping hundreds of thousands of independent musicians create and promote their work to Chinese music lovers with our platform's specialized promotion and distribution capabilities in independent music. We believe that NetEase's orientation as a forerunner in these evolving markets positions us well for growth and the ability to create additional value for our stakeholders. Finally, with respect to the COVID-19 outbreak, we currently expect to see some impact to our business lines in the near-term, however, the situation is evolving. NetEase is committed to providing support to affected communities and working together as we move through this challenging time," Mr. Ding concluded.

Fourth Quarter 2019 Financial Results

Net Revenues

Net revenues for the fourth quarter of 2019 were RMB15,734.8 million (US$2,260.2 million), compared to RMB14,635.7 million and RMB14,405.3 million for the preceding quarter and the fourth quarter of 2018, respectively.

Net revenues from online game services were RMB11,604.3 million (US$1,666.9 million) for the fourth quarter of 2019, compared to RMB11,534.8 million and RMB11,019.6 million for the preceding quarter and the fourth quarter of 2018, respectively. Net revenues from mobile games accounted for approximately 70.4% of net revenues from online games for the fourth quarter of 2019, compared to 71.0% and 69.7% for the preceding quarter and the fourth quarter of 2018, respectively.

Net revenues from Youdao were RMB410.4 million (US$59.0 million) for the fourth quarter of 2019, compared to RMB345.9 million and RMB230.1 million for the preceding quarter and the fourth quarter of 2018, respectively.

Net revenues from innovative businesses and others were RMB3,720.0 million (US$534.4 million) for the fourth quarter of 2019, compared to RMB2,755.0 million and RMB3,155.6 million for the preceding quarter and the fourth quarter of 2018, respectively.  

Gross Profit

Gross profit for the fourth quarter of 2019 was RMB8,210.4 million (US$1,179.4 million), compared to RMB7,870.4 million and RMB7,530.5 million for the preceding quarter and the fourth quarter of 2018, respectively.

Gross profit for online game services was stable quarter-over-quarter. The year-over-year increase in online game services gross profit was primarily due to increased revenue contribution from mobile games including Life-After, Invincible and Identity V.

The quarter-over-quarter and year-over-year increases in Youdao gross profit were primarily due to increased net revenues from its learning services and products.

The quarter-over-quarter increase in innovative businesses and others gross profit was primarily contributed from NetEase Cloud Music and NetEase's advertising services. The year-over-year increase in innovative businesses and others gross profit was primarily due to increased net revenues from NetEase Cloud Music.

Gross Profit Margin

Gross profit margin for online game services for the fourth quarter of 2019 was 63.1%, compared to 63.8% and 62.8% for the preceding quarter and the fourth quarter of 2018, respectively. Gross profit margin for online game services was generally stable, fluctuating within a narrow band based on the revenue mix of mobile and PC-client, as well as self-developed and licensed games.

Gross profit margin for Youdao for the fourth quarter of 2019 was 29.8%, compared to 25.8% and 29.7% for the preceding quarter and the fourth quarter of 2018, respectively. The quarter-over-quarter increase in Youdao gross profit margin was mainly due to an improvement from its learning services and products and online marketing services. Gross profit margin for Youdao was stable year-over-year.

Gross profit margin for innovative businesses and others for the fourth quarter of 2019 was 20.6%, compared to 15.2% and 17.0% for the preceding quarter and the fourth quarter of 2018, respectively. The quarter-over-quarter increase in innovative businesses and others gross profit margin was primarily contributed from NetEase Cloud Music and NetEase's advertising services. The year-over-year increase in innovative businesses and others gross profit margin was primarily due to increased net revenues from NetEase Cloud Music.

Operating Expenses

Total operating expenses for the fourth quarter of 2019 were RMB5,234.0 million (US$751.8 million), compared to RMB4,535.6 million and RMB4,455.4 million for the preceding quarter and the fourth quarter of 2018, respectively. The quarter-over-quarter and year-over-year increases in total operating expenses were mainly due to increased marketing expenditures related to online game services.

Other Income^[3]

Other income consisted of investment income, interest income, foreign exchange gains and losses and others. The quarter-over-quarter and year-over-year increases in other income for the fourth quarter of 2019 were mainly due to the fair value changes of equity investments in publicly traded companies.

Income Taxes^[3]

The Company recorded a net income tax charge of RMB876.3 million (US$125.9 million) for the fourth quarter of 2019, compared to RMB88.0 million and RMB917.7 million for the preceding quarter and the fourth quarter of 2018, respectively. The effective tax rate for the fourth quarter of 2019 was 22.1%, compared to 2.1% and 25.9% for the preceding quarter and the fourth quarter of 2018, respectively. The effective tax rate represents certain estimates by the Company regarding the tax obligations and benefits applicable to it in each quarter.

Net Income and Non-GAAP Net Income^[3]

Net income from continuing operations attributable to the Company's shareholders for the fourth quarter of 2019 totaled RMB3,053.7 million (US$438.6 million), compared to RMB4,134.2 million and RMB2,536.2 million for the preceding quarter and the fourth quarter of 2018, respectively.

Non-GAAP net income from continuing operations attributable to the Company's shareholders for the fourth quarter of 2019 totaled RMB3,662.3 million (US$526.1 million), compared to RMB4,726.0 million and RMB3,181.2 million for the preceding quarter and the fourth quarter of 2018, respectively.

NetEase reported basic and diluted net income from continuing operations per ADS of US$3.40 and US$3.36, respectively, for the fourth quarter of 2019. The Company reported basic and diluted net income from continuing operations per ADS of US$4.60 and US$4.56, respectively, for the preceding quarter, and basic and diluted net income from continuing operations per ADS of US$2.85 and US$2.83, respectively, for the fourth quarter of 2018.

Non-GAAP basic and diluted net income from continuing operations per ADS were US$4.07 and US$4.03, respectively, for the fourth quarter of 2019, compared to non-GAAP basic and diluted net income from continuing operations per ADS of US$5.26 and US$5.22, respectively, for the preceding quarter, and non-GAAP basic and diluted net income from continuing operations per ADS of US$3.57 and US$3.55, respectively, for the fourth quarter of 2018.

Fiscal Year 2019 Financial Results

Net Revenues

Net revenues for fiscal year 2019 were RMB59,241.1 million (US$8,509.5 million), compared to RMB51,178.6 million for fiscal year 2018.

Net revenues from online game services were RMB46,422.6 million (US$6,668.2 million) for fiscal year 2019, compared to RMB40,190.1 million for fiscal year 2018. Mobile games accounted for approximately 71.4% of net revenues from online game services for fiscal year 2019, compared to 71.0% for fiscal year 2018.

Net revenues from Youdao were RMB1,304.9 million (US$187.4 million) for fiscal year 2019, compared to RMB731.6 million for fiscal year 2018.

Net revenues from innovative businesses and others were RMB11,513.6 million (US$1,653.8 million) for fiscal year 2019, compared to RMB10,256.9 million for fiscal year 2018. 

Gross Profit

Gross profit for fiscal year 2019 was RMB31,555.3 million (US$4,532.6 million), compared to RMB27,346.1 million for fiscal year 2018.

The year-over-year increase in online game services gross profit for fiscal year 2019 was primarily attributable to increased revenue contribution from mobile games such as Life-After, Invincible and Identity V.

The year-over-year increase in Youdao gross profit for fiscal year 2019 was primarily attributable to the rapid development of its learning services and products.

The year-over-year increase in innovative businesses and others gross profit for fiscal year 2019 was primarily due to increased net revenues from NetEase Cloud Music, CC live-streaming and Yanxuan, as well as improved cost control.

Operating Expenses

Total operating expenses for fiscal year 2019 were RMB17,764.6 million (US$2,551.7 million), compared to RMB17,368.8 million for fiscal year 2018. The year-over-year increase in total operating expenses for fiscal year 2019 was primarily due to increased research and development investments and staff-related costs, partially offset by decreased selling and marketing expenditures.

Other Income

Other income consisted of investment income/ (loss), interest income, foreign exchange gains and losses and others. The year-over-year increase in other income for fiscal year 2019 was mainly due to fair value changes of equity investments in publicly traded companies.   

Income Taxes

The Company recorded a net income tax charge of RMB2,914.7 million (US$418.7 million) and RMB2,460.7 million for fiscal years 2019 and 2018, respectively. The effective tax rate was 17.8% for fiscal year 2019, compared to 22.2% for fiscal year 2018. The lower effective tax rate for fiscal year 2019 was mainly due to reduced losses from certain subsidiaries of the Company.

Net Income and Non-GAAP Net Income

Net income from continuing operations attributable to the Company's shareholders for fiscal year 2019 totaled RMB13,275.0 million (US$1,906.8 million), compared to RMB8,291.1 million for fiscal year 2018.

Non-GAAP net income from continuing operations attributable to the Company's shareholders for fiscal year 2019 totaled RMB15,662.7 million (US$2,249.8 million), compared to RMB10,761.3 million for fiscal year 2018.

NetEase reported basic and diluted net income from continuing operations per ADS of US$14.80 and US$14.67, respectively, for fiscal year 2019, and basic and diluted net income from continuing operations per ADS of US$9.20 and US$9.15, respectively, for fiscal year 2018.

Non-GAAP basic and diluted net income from continuing operations per ADS were US$17.46 and US$17.31, respectively, for fiscal year 2019, compared to non-GAAP basic and diluted net income from continuing operations per ADS of US$11.94 and US$11.87, respectively, for fiscal year 2018.

Quarterly Dividend

The board of directors has approved a dividend of US$1.02 per ADS for the fourth quarter of 2019, which is expected to be paid on March 20, 2020 to shareholders of record as of the close of business on March 13, 2020.

NetEase paid a dividend of US$7.59 per ADS for the third quarter of 2019 on December 13, 2019. 

Starting in the second quarter of 2019, the Company's policy has been to set quarterly dividends at an amount equivalent to approximately 20%-30% of the Company's anticipated net income after tax in each fiscal quarter. The determination to make dividend distributions and the amount of such distributions in any particular quarter will be made at the discretion of the board of directors and will be based upon the Company's operations and earnings, cash flow, financial condition and other relevant factors.

Other Information

As of December 31, 2019, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB74,406.0 million (US$10,687.8 million), compared to RMB49,652.5 million as of December 31, 2018. Cash flow generated from continuing operating activities was RMB16,911.0 million (US$2,429.1 million) for fiscal year 2019, compared to RMB14,659.8 million for fiscal year 2018. 

Share Repurchase/ Purchase Program

On November 14, 2018, the Company announced that its board of directors had approved a share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months beginning on November 16, 2018. As of November 15, 2019, the last day of such program, approximately 1,000 ADSs had been repurchased under this program.

On November 20, 2019, the Company announced that its board of directors had approved a share purchase program of up to US$20.0 million of Youdao's outstanding ADSs for a period not to exceed 12 months beginning on November 25, 2019. Under the terms of this program, NetEase may purchase Youdao's ADSs in open-market transactions on the New York Stock Exchange. As of December 31, 2019, approximately 50,000 ADSs had been purchased under this program.

On February 26, 2020, the Company announced that its board of directors had approved a share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months beginning on March 2, 2020. Under the terms of this program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market.

For both of the above-mentioned current programs, it is expected that the timing and dollar amount of purchase transactions will be in accordance with the Securities and Exchange Commission (SEC) Rule 10b-18 requirements and such purchases may be affected pursuant to a plan in conformity with SEC Rule 10b5-1. The extent to which NetEase repurchases its ADSs or purchases Youdao's ADSs will depend upon a variety of factors, including market conditions. These programs may be suspended or discontinued at any time.

** 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$1.00 = RMB 6.9618 on December 31, 2019 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2019, or at any other certain date. The percentages stated are calculated based on RMB.

Change in Segment Reporting

Effective in the third quarter of 2019, the Company changed its segment disclosure to add the financial results of its certain advertising services and Yanxuan into innovative businesses and others in light of the relatively small revenue contribution from those businesses to the Company's total consolidated net revenues in 2019. The Company sold its Kaola e-commerce business in September 2019. In addition, the Company has commenced separately reporting the results of its majority-controlled subsidiary Youdao, Inc. which completed its initial public offering and listing on the New York Stock Exchange in October 2019. As a result, since the third quarter of 2019 the Company has reported the following segments: online game services, Youdao and innovative businesses and others. The Company retrospectively revised prior period segment information to conform to current period presentation. This change in segment reporting aligns with the manner in which the Company's operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments.  

Impact of the Recently Adopted Major Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 "Leases" as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard effective January 1, 2019 on a modified retrospective basis and did not restate comparative periods. The Company recognized approximately RMB577.0 million as total right-of-use assets as well as total lease liabilities for the operating leases on its consolidated balance sheet as of January 1, 2019, excluding the impact from held-for-sale businesses. The Company recognized RMB463.7 million and RMB471.4 million as total right-of-use assets and total lease liabilities, respectively, for the operating leases on its consolidated balance sheet as of December 31, 2019. Right-of-use assets are included in other long-term assets, and lease liabilities are included in accrual liabilities and other payables and other long-term payables, respectively based on payment terms on the consolidated balance sheet. Other than the foregoing, the Company does not expect the new standard to have a material impact on the net assets of the Company's consolidated financial statements.

Notes to Unaudited Financial Information

The unaudited financial information disclosed in this press release is preliminary. The audit of the financial statements and related notes to be included in the Company's annual report on Form 20-F for the year ended December 31, 2019 is still in progress. In addition, because an audit of the Company's internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed, the Company makes no representation as to the effectiveness of those internal controls as of the end of fiscal year 2019.

Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between the Company's audited financial statements and this preliminary unaudited financial information. 

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 9:00 p.m. Eastern Time on Wednesday, February 26, 2020 (Beijing/Hong Kong Time: 10:00 a.m., Thursday, February 27, 2020). 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 1-929-477-0324 and providing conference ID: 3349954, 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-719-457-0820 and entering passcode 3349954#. The replay will be available through March 11, 2020.

This call will be webcast live and the replay will be available for 12 months. Both will be available on NetEase's Investor Relations website at http://ir.netease.com.

About NetEase, Inc.

NetEase, Inc. (NASDAQ: NTES) is a leading internet technology company based in China dedicated to providing premium online services centered around content, community, communication and commerce. NetEase develops and operates some of the most popular PC-client and mobile games in China and has been expanding rapidly into other international markets such as Japan and North America in more recent years. In addition to its self-developed game content, NetEase also operates some of the most popular international online games in China by partnering with Blizzard Entertainment, Mojang AB (a Microsoft subsidiary) and other global game developers. NetEase also offers other innovative services, including the intelligent learning services of its majority-controlled subsidiary, Youdao, music streaming and its private label e-commerce platform, Yanxuan. For more information, please visit: http://ir.netease.com/.

Forward Looking Statements

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 the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market within China or globally, 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 risk that Covid-19 or other health risks in China or globally could adversely affect the Company's operations or financial results; 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 market for online games, education products and services and e-commerce may limit future growth of NetEase's revenues or cause revenues to decline; the risk that NetEase may not be able to continuously develop new and creative online services or that NetEase will not be able to set, or follow in a timely manner, trends in the market; the risk that the e-commerce market or the internet advertising market in China will not grow and will remain subject to intense competition; 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); 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.

Non-GAAP Financial Measures

NetEase considers and uses non-GAAP financial measures, such as non-GAAP net income from continuing operations attributable to the Company's shareholders and non-GAAP basic and diluted net income from continuing operations per ADS, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

NetEase defines non-GAAP net income from continuing operations attributable to the Company's shareholders as net income from continuing operations attributable to the Company's shareholders excluding share-based compensation expenses. Non-GAAP net income from continuing operations attributable to the Company's shareholders enables NetEase's management to assess its operating results without considering the impact of share-based compensation expenses, which are non-cash charges. NetEase believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company's current operating performance and prospects in the same manner as management does, if they so choose. NetEase also believes that the use of this non-GAAP financial measure facilitates investors' assessment of its operating performance.

Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools. One of the key limitations of using non-GAAP net income from continuing operations attributable to the Company's shareholders is that it does not reflect all items of expense/ income that affect our operations. Share-based compensation expenses have been and may continue to be incurred in our business and are not reflected in the presentation of non-GAAP net income from continuing operations attributable to the Company's shareholders. In addition, the non-GAAP financial measures NetEase uses may differ from the non-GAAP measures used by other companies, including peer companies, and therefore their comparability may be limited.

NetEase compensates for these limitations by reconciling non-GAAP net income from continuing operations attributable to the Company's shareholders to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating the Company's performance. See "Reconciliation of GAAP and Non-GAAP Results" at the end of this press release. NetEase encourages you to review its financial information in its entirety and not rely on a single financial measure. 

Contact for Media and Investors:
Margaret Shi
NetEase, Inc.
ir@service.netease.com
Tel: (+86) 571-8985-3378

Brandi Piacente
Investor Relations
netease@thepiacentegroup.com
Tel: (+1) 212-481-2050

 

 

 

 

 

 

 

 

 

 

 

 

 

NETEASE, INC.
NOTES TO UNAUDITED FINANCIAL INFORMATION

Note 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00 = RMB 6.9618 on the last trading day of December 2019 (December 31, 2019) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.
Note 2: Share-based compensation cost reported in the Company's unaudited condensed consolidated statements of comprehensive income is set out as follows in RMB and USD (in thousands):

 

 

 

 

 

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SOURCE NetEase, Inc.