SHANGHAI, China, Nov. 16 /Xinhua-PRNewswire/ -- The9 Limited (Nasdaq:
NCTY), a leading online game operator in China, today announced its unaudited
financial results for the quarter ended September 30, 2006.
Third Quarter 2006 Financial Highlights:
-- Net revenues for the third quarter of 2006 decreased by 9%
quarter-over-quarter and increased by 26% year-over-year to
RMB233.4 million (US$29.5 million).
-- Net revenues attributable to the operations of Blizzard
Entertainment(R)'s World of Warcraft(R) ("WoW")(1), which included
revenues from game playing time, merchandise and installation package
sales, were RMB230.2 million (US$29.1 million) in the third quarter
of 2006, a 10% decrease from the previous quarter.
-- Net income for the third quarter of 2006 was RMB64.3 million (US$8.1
million), a 24% decrease from RMB84.3 million (US$10.7 million) in the
second quarter of 2006. Excluding financial subsidy of RMB11.2 million
(US$1.4 million) received from the Chinese local government in the
second quarter of 2006, net income for the third quarter of 2006
decreased by 12% sequentially from the previous quarter.
-- EBITDA (non-GAAP) was RMB105.4 million (US$13.3 million) in the third
quarter of 2006, compared with EBITDA (non-GAAP) of RMB124.7 million
(US$15.8 million) in the second quarter of 2006, a decrease of 16%.
-- Fully diluted earnings per share (one American Depositary Share "ADS"
represents one ordinary share) were RMB2.61 (US$0.33) for the third
quarter of 2006 compared with RMB3.42 (US$0.43) for the second quarter
of 2006. Fully diluted EBITDA (non-GAAP) per share were RMB4.28
(US$0.54) for the third quarter of 2006 compared with RMB5.06
(US$0.64) for the second quarter of 2006.
Management Comments:
Commenting on the third quarter 2006 results, Jun Zhu, Chairman and Chief
Executive Officer of The9 Limited, said, "As communicated in August, the
third quarter is a transitional quarter. Several important milestones were
achieved in the third quarter for our operation of Blizzard Entertainment
(R)'s World of Warcraft(R) game in China, including merging of servers,
launching content upgrade patch and adding new server site to pave the way
for future growth. In the third quarter, WoW game attained peak and average
concurrent users of approximately 595,000 and 280,000, respectively, in
mainland China. Subsequent to the quarter end with the launch of the seventh
server site, we have achieved peak concurrent users of over 660,000 for the
WoW game. As of September 30, 2006, over 5.9 million paid accounts have been
activated(2).
With respect to new games, we are on schedule to launch open beta testing
for the Guild Wars(R) game in China before year-end. This is a milestone
towards achieving our strategy of operating various diversified and high-
caliber games in China through our strong operation platform. I am very
confident in The9's solid game pipeline and execution capabilities which will
lead to our future success."
Hannah Lee, Vice President and Chief Financial Officer, commented, "We
consider the third quarter of 2006 as our preparation quarter for Blizzard
Entertainment(R)'s World of Warcraft(R) during which we have not only merged
servers to improve utilization but also upgraded server hardware and built
the seventh server site for the anticipated demand from players. Our work in
the third quarter has proven to be fruitful, with strong response from
players to our new server site and the new content introduced in early
October 2006. As usual, we will continue to demonstrate our strong operations
ability in the future with planned launches of several high-caliber games in
our portfolio."
Discussion of The9's Unaudited Third Quarter 2006 Results
Revenues
For the third quarter of 2006, The9 reported total gross revenues of
RMB245.8 million (US$31.1 million), a 9% decrease from RMB271.3 million
(US$34.3 million) in the second quarter of 2006. Total net revenues were
RMB233.4 million (US$29.5 million), a 9% decrease from RMB257.6 million
(US$32.6 million) in the previous quarter.
Net revenues attributable to the operations of Blizzard Entertainment
(R)'s World of Warcraft(R), including game playing time, merchandise and
installation package sales, were RMB230.2 million (US$29.1 million) in the
third quarter of 2006, a 10% decrease from the previous quarter. For the
third quarter of 2006, revenues from game playing time accounted for 99.4% of
total net revenues attributable to the operation of WoW.
For the third quarter of 2006, online game services gross revenues were
RMB241.2 million (US$30.5 million), decreased by 10% from RMB 269.3 (US$34.1
million) in the second quarter of 2006. The decrease in game services revenue
was mainly due to server shut downs related to certain server merges, and the
postponement of new content upgrade in China to ensure necessary
infrastructure upgrades were in place.
For the third quarter of 2006, gross revenues from game operating
support, website solutions and advertisement, were RMB2.7 million (US$0.3
million), a 204% increase from RMB0.9 million (US$0.1 million) in the
previous quarter. The increase in such revenues was mainly due to certain
technical support services rendered in the quarter.
Other gross revenues mainly included sales of Blizzard Entertainment(R)'s
World of Warcraft(R) related merchandise and installation packages. For the
third quarter of 2006, other gross revenues increased to RMB1.9 million
(US$0.2 million) from RMB1.1 million (US$0.1 million) in the second quarter
of 2006.
Gross Profit
Gross profit for the third quarter of 2006 decreased by 13% to RMB107.9
million (US$13.6 million) from RMB124.1 million (US$15.7 million) in the
second quarter of 2006. Gross profit margin decreased to 46% for the third
quarter of 2006 from 48% in the previous quarter. This decrease in gross
profit margin was primarily because our net revenues declined in the third
quarter while certain fixed costs, such as server depreciation, internet data
center rentals and intangible assets amortization, did not decrease
proportionally to the decrease in our net revenues.
Operating Expenses
For the third quarter of 2006, operating expenses decreased by 18% to
RMB44.6 million (US$5.6 million) from RMB54.1 million (US$6.9 million) in the
second quarter of 2006. The decrease was primarily because we adjusted our
sales and marketing plan according to the delayed launch in China of new
content for Blizzard Entertainment(R)'s World of Warcraft(R), which was due
to the need for infrastructure upgrades to support said content, lower
professional fees due to the revised Sarbanes-Oxley compliance requirements,
and better control of general and administrative expenditures.
Share-based compensation expenses, which were allocated to related
expense categories, amounted to RMB4.5 million (US$0.6 million) in the third
quarter of 2006 compared to RMB4.8 million (US$0.6 million) in the prior
quarter.
Profit from Operations
As a result of the aforementioned factors, for the third quarter of 2006,
profit from operations decreased by 10% to RMB63.3 million (US$8.0 million)
from RMB70.0 million (US$8.9 million) in the second quarter of 2006.
Other Income (Expenses)
Other expenses for the third quarter of 2006 was RMB1.0 million (US$0.1
million) compared to other income of RMB10.8 million (US$1.4 million) in the
second quarter of 2006. This was primarily because in the second quarter of
2006, we received financial subsidy from the Chinese local government which
amounted to RMB11.2 million (US$1.4 million), whereas no similar financial
subsidy was received in the third quarter of 2006.
Equity in Profit (Loss) of Affiliated Companies
For the third quarter of 2006, equity in loss from affiliated companies,
net of taxes, amounted to RMB1.2 million (US$0.2 million), compared to equity
in profit from affiliated companies of RMB0.4 million (US$0.05 million) for
the second quarter of 2006. This was mainly because the two joint ventures to
which we made investment in the third quarter of 2006 are both in pre-
operation phase and are experiencing losses.
Net Income
For the third quarter of 2006, net income was RMB64.3 million (US$8.1
million), which included share-based compensation expenses of RMB4.5 million
(US$0.6 million), decreasing 24% from RMB84.3 million (US$10.7 million),
which included share-based compensation expenses of RMB4.8 million (US$0.6
million), in the second quarter of 2006. This was a result of the cumulative
effect of the foregoing factors. Fully diluted earnings per share and per ADS
for the third quarter of 2006 was RMB2.61 (US$0.33), compared to RMB3.42
(US$0.43) in the second quarter of 2006.
EBITDA (non-GAAP) is defined as earnings or loss, respectively, before
depreciation of fixed assets, amortization of intangibles and income tax
expenses/benefits, as applicable. For the third quarter of 2006, EBITDA (non-
GAAP) was RMB105.4 million (US$13.3 million), compared to EBITDA (non-GAAP)
of RMB124.7 million (US$15.8 million) for the previous quarter. Fully diluted
EBITDA (non-GAAP) per share for the third quarter of 2006 was RMB4.28
(US$0.54) compared with RMB5.06 (US$0.64) for the previous quarter.
As of September 30, 2006, the Company's total cash and cash equivalents
balance was RMB761.9 million (US$96.4 million), compared to the total cash
and cash equivalents of RMB657.8 million (US$83.2 million) as of June 30,
2006. The increase was mainly due to the proceeds received from the sales of
prepaid cards, offset in part by prepaid royalty payments to the licensor
relating to Blizzard Entertainment(R)'s World of Warcraft(R)'s China
operations and the capital expenditures relating to the seventh server site
for WoW game in the third quarter of 2006.
The conversion of Renminbi (RMB) into U.S. dollars (US$) in this press
release is based on the noon buying rate in The City of New York for cable
transfers in Renminbi per U.S. dollar as certified for customs purposes by
the Federal Reserve Bank of New York as of September 29, 2006 (the last
business day of third quarter 2006), which was RMB7.9040 to US$1.00. The
percentages stated in this press release are calculated based on the RMB
amounts.
Non-GAAP Measure
To supplement the consolidated financial statements presented in
accordance with accounting principles generally accepted in the United States
("GAAP"), The9 uses the non-GAAP measure of EBITDA, which is adjusted from
the most directly comparable financial measures calculated and presented in
accordance with GAAP to exclude certain expenses. The non-GAAP financial
measure is provided to enhance investors' overall understanding of the
Company's operating performance.
EBITDA (non-GAAP) is defined as earnings and loss, respectively, before
depreciation of fixed assets, amortization of intangibles and income tax
expenses/benefits, as applicable. The Company believes its EBITDA provides
useful information to both management and investors as it excludes certain
expenses that are not expected to result in future cash payments. The use of
EBITDA has certain limitations. Depreciation and amortization expense for
various assets and income tax expenses/benefits have been and will be
incurred and are not reflected in the presentation of EBITDA. Each of these
items should also be considered in the overall evaluation of our results.
EBITDA should not be considered as a measure of our liquidity. We compensate
for these limitations by providing the relevant disclosure of our
depreciation and amortization, and income tax expenses/benefits in our
reconciliations to the GAAP financial measure, which should be considered
when evaluating our performance. EBITDA is not defined under GAAP,and our
EBITDA is not a measure of net income, operating income, operating
performance or liquidity presented in accordance with GAAP. When assessing
our operating performance, you should not consider this data in isolation or
as a substitute for our net income, operating income or any other operating
performance measure that is calculated in accordance with GAAP. In addition,
our EBITDA may not be comparable to similarly titled measures utilized by
other companies since such other companies may not calculate EBITDA in the
same manner as we do. For more information on this non-GAAP financial
measure, please see the tables captioned "Reconciliation of non-GAAP to GAAP
results" set forth at the end of this release.
Recent Development
The9 today also announced that Ms. Nancy Zhou will resign as Vice
President - Operations of the Company, effective November 17, 2006, to pursue
other personal interests. Ms. Zhou joined The9 as Vice President - Operations
in September 2005, and has been overseeing various aspects of The9's game
operations. "Nancy brought valuable experience in multi-product operations
and project management to The9. In the past year, we have continued to
attract outstanding personnel and to improve our systems to facilitate our
future game product launches. I believe The9 will continue to break new
grounds in the Chinese online game industry and we wish Nancy all the best in
her future endeavors." said Jun Zhu, The9's Chairman and CEO.
(1) World of Warcraft and Blizzard Entertainment are trademarks or
registered trademarks of Blizzard Entertainment, Inc. in the U.S.
and/or other countries.
(2) Activated paid accounts represent the number of CD Keys that we sold
to customers and have been activated by customers to log-on to
Blizzard Entertainment(R)'s World of Warcraft(R) game in China.
Conference Call / Webcast Information
The9's management team will host a conference call on Wednesday, November
15, 2006 at 8:00 PM, U.S. Eastern Time, corresponding with Thursday, November
16, 2006 at 9:00 AM Beijing Time, to present an overview of The9's financial
performance and business operations.
Investors, analysts and other interested parties will be able to access
the live conference by calling +1-617-786-2903, password "77700488." In the
U.S., members of the financial community may also participate in the call by
dialing toll-free +1-800-299-9086, password "77700488". A replay of the call
will be available through November 22, 2006. The dial-in details for the
replay: U.S. toll free number +1-888-286-8010, International dial-in number
+1-617-801-6888; Password "78251888".
The9 Limited will also provide a live webcast of the earnings call.
Participants in the webcast should log onto the Company's web site
http://www.corp.the9.com 15 minutes prior to the call, then click on the icon
for "The9 Limited Q3 2006 Earnings Conference Call" and follow the
instructions.
About The9 Limited
The9 Limited is a leading online game operator in China. The9's business
is primarily focused on operating and developing MMORPGs for the Chinese
online game players market. The9 directly or through affiliates operates
licensed MMORPGs, consisting of Blizzard Entertainment(R)'s World of Warcraft
(R), MU(R) and Mystina Online(R) and its first proprietary MMORGP, "Joyful
Journey West", in China. It has also obtained exclusive licenses to operate
additional MMORPGs in China, including Granado Espada(R), Soul of The
Ultimate Nation(R), Guild Wars(R), and Hellgate: London(R). In addition, The9
is also working on the development of a 3D fantasy MMORPG game, "Fantasy
Melody Online".
Safe Harbor Statement
This announcement contains forward-looking statements. These statements
are made under the "safe harbor" provisions of the U.S. Private Securities
Litigation Reform Act of 1995. These forward-looking statements can be
identified by terminology such
as "will," "expects," "anticipates,""future," "intends," "plans," "believes,"
"estimates" and similar statements. Among other things, the business outlook
and quotations from management in this press release contain forward-looking
statements. The9 may also make written or oral forward-looking statements in
its periodic reports to the U.S. Securities and Exchange Commission on Forms
20-F and 6-K, etc., in its annual report to shareholders, in press releases
and other written materials and in oral statements made by its officers,
directors or employees to third parties. Statements that are not historical
facts, including statements about The9's beliefs and expectations, are
forward-looking statements. Forward-looking statements involve inherent risks
and uncertainties. A number of important factors could cause actual results
to differ materially from those contained in any forward-looking statement.
Potential risks and uncertainties include, but are not limited to, The9's
limited operating history as an online game operator, political and economic
policies of the Chinese government, the laws and regulations governing the
online game industry, information disseminated over the Internet and Internet
content providers in China, intensified government regulation of Internet
cafes, The9's ability to retain existing players and attract new players,
license, develop or acquire additional online games that are appealing to
users, anticipate and adapt to changing consumer preferences and respond to
competitive market conditions, and other risks and uncertainties outlined in
The9's filings with the U.S. Securities and Exchange Commission, including
its annual reports on Form 20-F. The9 does not undertake any obligation to
update any forward-looking statement, except as required under applicable law.
- Tables follow -
THE9 LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in Renminbi - RMB and US Dollars - US$, except share data)
Quarter Ended
September 30, June 30, September 30, September 30,
2005 2006 2006 2006
RMB RMB RMB US$
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Online game
services 190,369,969 269,297,417 241,164,777 30,511,738
Game operating
support,
website
solutions and
advertisement 886,274 877,805 2,671,945 338,050
Other revenues 3,251,232 1,118,881 1,917,314 242,575
194,507,475 271,294,103 245,754,036 31,092,363
Sales Taxes (9,668,918) (13,678,907) (12,367,467) (1,564,710)
Net Revenues 184,838,557 257,615,196 233,386,569 29,527,653
Cost of Services (92,269,316)(133,494,332)(125,522,051) (15,880,826)
Gross Profit 92,569,241 124,120,864 107,864,518 13,646,827
Operating Expenses:
Product
development (2,943,205) (8,949,190) (7,749,225) (980,418)
Sales and
marketing (21,732,114) (18,866,530) (11,699,467) (1,480,196)
General and
administrative (17,498,567) (26,331,381) (25,112,296) (3,177,163)
Total operating
expenses: (42,173,886) (54,147,101) (44,560,988) (5,637,777)
Profit from
operations 50,395,355 69,973,763 63,303,530 8,009,050
Interest income,
net 2,576,425 2,424,839 2,479,258 313,671
Other income
(expenses), net (2,791,569) 10,826,408 (1,034,921) (130,936)
Income before
income tax
benefit, minorty
interest and
equity in profit
(loss) of
affiliated
companies 50,180,211 83,225,010 64,747,867 8,191,785
Income tax benefit 1,421,498 670,935 794,368 100,502
Minority interests (9,309,731) -- -- --
Income before
equity in profit
(loss) of
affiliated
companies 42,291,978 83,895,945 65,542,235 8,292,287
Equity in profit
(loss) of
affiliated
companies, net of
taxes (4,628,782) 370,749 (1,208,010) (152,835)
Net Income 37,663,196 84,266,694 64,334,225 8,139,452
Other comprehensive
income (loss):
Translation
adjustments (1,049,913) (59,383) -- --
Comprehensive
Income 36,613,283 84,207,311 64,334,225 8,139,452
Earnings per share
- Basic 1.56 3.44 2.62 0.33
- Diluted 1.54 3.42 2.61 0.33
Weighted average
shares outstanding
- Basic 24,189,655 24,495,701 24,508,974 24,508,974
- Diluted 24,404,593 24,640,329 24,615,761 24,615,761
THE9 LIMITED
CONSOLIDATED BALANCE SHEETS
(Expressed in Renminbi - RMB and US Dollars - US$)
As at
December 31, September 30, September 30,
2005 2006 2006
RMB RMB US$
(audited) (unaudited) (unaudited)
Assets
Current Assets
Cash and cash equivalents 488,244,667 761,867,382 96,390,104
Accounts receivable 10,593,866 6,832,322 864,413
Due from related parties 12,395,125 13,222,944 1,672,943
Advances to suppliers 4,289,443 10,085,054 1,275,943
Deferred costs 24,075,214 31,541,728 3,990,603
Prepayments and other current
assets 28,395,864 15,176,558 1,920,111
Prepaid royalties 42,995,946 43,601,240 5,516,351
Total current assets 610,990,125 882,327,228 111,630,468
Investments in affiliated
companies 46,835,993 70,926,125 8,973,447
Property, equipment and
software 231,436,683 234,553,704 29,675,317
Goodwill 30,199,751 30,199,751 3,820,819
Intangible assets 289,035,226 265,656,844 33,610,431
Long-term deposits 3,132,338 3,132,338 396,298
Deferred tax assets, non-
current 2,104,464 4,375,554 553,587
Total Assets 1,213,734,580 1,491,171,544 188,660,367
Liabilities and Shareholders'
Equity
Current Liabilities
Accounts payable 15,948,674 9,319,020 1,179,026
Due to related parties 3,181,004 500,696 63,347
Other taxes payable 8,123,356 7,416,477 938,319
Advances from customers 61,651,267 128,743,462 16,288,393
Deferred revenue 76,514,940 103,213,218 13,058,352
Other payables and accruals 26,793,070 35,607,776 4,505,033
Acquisition related liability 79,537,653 -- --
Total current liabilities 271,749,964 284,800,649 36,032,470
Minority interests -- -- --
Commitments and contingencies -- -- --
Shareholders' Equity
Common shares (US$0.01 par
value; 24,214,130 shares
issued and outstanding as of
December 31 2005, 24,530,734
issued and outstanding as of
September 30 2006) 2,004,033 2,029,389 256,755
Additional paid-in capital 860,068,478 917,080,035 116,027,332
Statutory reserves 54,172 20,745,422 2,624,674
Accumulated other comprehensive
income 59,346 -- --
Retained earnings 79,798,587 266,516,049 33,719,136
Total shareholders' equity 941,984,616 1,206,370,895 152,627,897
Total liabilities and
shareholders' equity 1,213,734,580 1,491,171,544 188,660,367
THE9 LIMITED
RECONCILIATION OF NON-GAAP TO GAAP RESULTS
(Expressed in Renminbi - RMB and US Dollars - US$, except share data)
Quarter Ended
September 30, June 30, September 30, September 30,
2005 2006 2006 2006
RMB RMB RMB US$
(unaudited) (unaudited) (unaudited) (unaudited)
GAAP net income 37,663,196 84,266,694 64,334,225 8,139,452
Depreciation of fixed
assets 12,653,810 17,947,284 18,513,748 2,342,326
Amortization of
intangibles 9,232,897 23,152,240 23,306,626 2,948,713
Income tax benefit (1,421,498) (670,935) (794,368) (100,502)
EBITDA (Non-GAAP) 58,128,405 124,695,283 105,360,231 13,329,989
GAAP earnings per share
- Basic 1.56 3.44 2.62 0.33
- Diluted 1.54 3.42 2.61 0.33
Non-GAAP EBITDA per
share
- Basic 2.40 5.09 4.30 0.54
- Diluted 2.38 5.06 4.28 0.54
Weighted average shares
outstanding
- Basic 24,189,655 24,495,701 24,508,974 24,508,974
- Diluted 24,404,593 24,640,329 24,615,761 24,615,761
