BEIJING, Nov. 7 /Xinhua-PRNewswire/ -- 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, 2007.
William Ding, Chief Executive Officer and Director of NetEase stated, "During the third quarter of 2007, we continued to expand our research and development for new games, including fee-based and casual games. Westward Journey Online III was commercialized on September 12 and our newest expansion pack for Fantasy Westward Journey was released on September 25."
Mr. Ding continued, "We are pleased with our progress in creating and commercializing new ad space inventory via our free email services, which continue to lead the Chinese email market. We are committed to building our capacity and market share in the high growth domestic market by improved content and integrating our different products as the Beijing 2008 Olympic Games draw closer. In addition, we have added significant enhancements to our search engine, including more user-friendly and highly competitive features."
Third Quarter 2007 Financial Results
Total revenues for the third quarter of 2007 were RMB571.1 million (US$76.2 million), compared to RMB558.0 million (US$74.5 million) and RMB571.9 million (US$76.3 million) for the preceding quarter and the third quarter of 2006, respectively.
Revenues from online games were RMB468.7 million (US$62.5 million) for the third quarter of 2007, compared to RMB475.1 million (US$63.4 million) and RMB467.9 million (US$62.4 million) for the preceding quarter and the third quarter of 2006, respectively.
Revenues from advertising services were RMB85.5 million (US$11.4 million) for the third quarter of 2007, compared to RMB65.3 million (US$8.7 million) and RMB83.4 million (US$11.1 million) for the preceding quarter and the third quarter of 2006, respectively.
Revenues from wireless value-added services and others were RMB16.9 million (US$2.3 million) for the third quarter of 2007, compared to RMB17.5 million (US$2.3 million) and RMB20.6 million (US$2.8 million) for the preceding quarter and the third quarter of 2006, respectively.
Gross profit for the third quarter of 2007 was RMB441.9 million (US$59.0 million), compared to RMB437.8 million (US$58.4 million) and RMB448.1 million (US$59.8 million) for the preceding quarter and the third quarter of 2006, respectively. The quarter-over-quarter increase in gross profit was primarily due to higher advertising services revenue in the third quarter of 2007. The year-over-year decrease in gross profit was mainly due to the decrease in wireless value-added services revenue.
Gross margin for the online game business for the third quarter of 2007 was 89.4%, compared to 90.2% and 89.4% for the preceding quarter and the third quarter of 2006, respectively. The quarter-over-quarter decrease was primarily due to lower game revenues resulting from increased competition coupled with higher cost of revenues. Higher cost of revenues was mainly the result of increased headcount and higher operational costs incurred during the third quarter of 2007. The year-over-year gross margin remained relatively stable.
Gross margin for the advertising business for the third quarter of 2007 was 54.0%, compared to 47.2% and 56.1% for the preceding quarter and the third quarter of 2006, respectively. The quarter-over-quarter increase in gross margin was primarily driven by the increase in advertising services revenue coupled with a lesser extent of increase in content costs in the third quarter of 2007. The year-over-year decline in gross margin was primarily driven by increased content costs incurred during the third quarter of 2007.
Gross loss margin for the wireless value-added services and others business for the third quarter of 2007 was 33.3%, compared to gross loss margin of 28.1% and gross profit margin of 3.4% for the preceding quarter and the third quarter of 2006, respectively. Both the quarter-over-quarter and year-over-year deepening in gross loss margin was primarily due to decreased revenue from wireless value-added services while operating expenses remained relatively fixed.
Total operating expenses for the third quarter of 2007 were RMB179.0 million (US$23.9 million), compared to RMB142.8 million (US$19.1 million) and RMB131.5 million (US$17.5 million) for the preceding quarter and the third quarter of 2006, respectively. Both the quarter-over-quarter and year-over-year increase was primarily driven by increased spending on the advertising and marketing promotion of Westward Journey Online III and Fantasy Westward Journey, and higher staff-related cost as a result of an increase in research and development headcount.
Net profit for the third quarter of 2007 totaled RMB260.2 million (US$34.7 million), compared to RMB312.6 million (US$41.7 million) and RMB314.8 million (US$42.0 million) for the preceding quarter and the third quarter of 2006, respectively. In June 2007, the Company received a reinvestment incentive tax refund of RMB24.4 million (US$3.2 million), which significantly reduced the Company's income tax expense for the second quarter of 2007. NetEase reported basic and diluted earnings per American depositary share (ADS) of US$0.28 and US$0.27 for the third quarter of 2007, respectively. The Company reported basic and diluted earnings per ADS of US$0.34 and US$0.31 and US$0.33 and US$0.30 for the preceding quarter and the third quarter of 2006, respectively.
Other Information
As of September 30, 2007, the Company's total cash and time deposit balance was RMB3.1 billion (US$410.9 million), compared to RMB3.9 billion (US$525.6 million) and RMB3.8 billion (US$505.0 million) as of December 31, 2006 and September 30, 2006, respectively. In addition, there was a restricted cash balance of RMB749.7 million (US$100.1 million) as of September 30, 2007 primarily related to the Company's committed revolving loan facility, which is effective for a period from May 17, 2007 to July 31, 2008. The loan facility can be used by the Company at its discretion to fund any redemption requests made by the holders of its zero coupon convertible subordinated notes in accordance with the terms of those notes. As of September 30, 2007, the Company reclassified the callable obligations of the convertible notes as short-term payable in accordance with the terms of issue. Cash flow generated from operating activities was approximately RMB339.2 million (US$45.3 million) for the third quarter of 2007, compared to RMB331.0 million (US$44.2 million) and RMB344.5 million (US$46.0 million) for the preceding quarter and the third quarter of 2006, respectively.
On July 2, 2007, the Company's Board authorized a share repurchase program of up to US$120 million of the Company's outstanding ADSs. As of September 30, 2007 the Company had spent in aggregate a total purchase consideration of approximately US$30.8 million (including transaction costs). The share repurchase program will end on July 1, 2008.
** The United States dollar (US$) 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$1.00 = RMB7.4928 on September 28, 2007 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 28, 2007, or at any other certain date. The percentages stated are calculated based on RMB.
Conference Call
NetEase's management team will host a conference call at 8:00 pm Eastern Time on Wednesday, November 7, 2007, (Beijing/Hong Kong Time: 9:00 am, Thursday, November 8, 2007). 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 800-257-2101 (international: 303-262-2140), 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 pass code 11100033#. The replay will be available through November 23, 2007.
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.
About NetEase
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 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, personal home pages 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.
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 able to adequately address feedback from gamers to enhance the appeal of Tianxia II; 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), 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.
NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30, September 30,
2006 2007 2007
RMB RMB USD (Note 1)
Assets
Current assets:
Cash 1,206,476,526 1,205,421,516 160,877,311
Time deposits 2,731,396,687 1,873,027,445 249,976,971
Restricted cash -- 749,654,640 100,050,000
Accounts receivable, net 131,724,899 137,729,916 18,381,635
Prepayments and other
current assets 33,913,350 68,962,853 9,203,883
Deferred tax assets 25,674,468 19,817,948 2,644,932
Total current assets 4,129,185,930 4,054,614,318 541,134,732
Non-current assets:
Non-current rental deposits 3,353,209 3,074,885 410,379
Property, equipment and
software, net 224,207,833 198,828,716 26,535,970
Prepayment for land use
right -- 26,956,800 3,597,694
Investment in an associated
company -- 2,300,059 306,969
Deferred tax assets 5,502,361 7,121,072 950,389
Other long-term assets 11,458,497 11,741,367 1,567,020
Total non-current assets 244,521,900 250,022,899 33,368,421
Total assets 4,373,707,830 4,304,637,217 574,503,153
Liabilities and Shareholders'
Equity
Current liabilities:
Zero-coupon convertible
subordinated notes due
July 15, 2023 -- 664,836,144 88,730,000
Accounts payable 105,555,248 88,763,443 11,846,499
Salary and welfare payables 54,924,038 43,493,267 5,804,675
Taxes payable 95,476,498 80,602,592 10,757,339
Deferred revenue 385,720,720 369,061,304 49,255,459
Deferred tax liabilities 3,391,754 -- --
Accrued liabilities 31,340,217 33,158,852 4,425,429
Total current liabilities 676,408,475 1,279,915,602 170,819,401
Long-term payable:
Zero-coupon convertible
subordinated notes due
July 15, 2023 780,253,918 -- --
Other long-term payable 11,377,256 10,200,000 1,361,307
Total long-term payable 791,631,174 10,200,000 1,361,307
Total liabilities 1,468,039,649 1,290,115,602 172,180,708
Shareholders' equity 2,905,668,181 3,014,521,615 402,322,445
Total liabilities and
shareholders' equity 4,373,707,830 4,304,637,217 574,503,153
NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended
September 30, June 30, September 30, September 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Revenues:
Online game
services 467,910,918 475,149,731 468,651,024 62,546,848
Advertising
services 83,359,202 65,328,019 85,478,302 11,408,059
Wireless
value-added
services and
others 20,632,782 17,494,877 16,946,709 2,261,732
Total revenues 571,902,902 557,972,627 571,076,035 76,216,639
Business taxes (23,297,732) (21,926,013) (23,420,856) (3,125,782)
Total net
revenues 548,605,170 536,046,614 547,655,179 73,090,857
Total cost of
revenues (100,461,056) (98,267,119) (105,710,714) (14,108,306)
Gross profit 448,144,114 437,779,495 441,944,465 58,982,551
Operating
expenses:
Selling and
marketing
expenses (46,106,919) (49,272,271) (83,189,695) (11,102,618)
General and
administrative
expenses (46,650,953) (48,380,093) (48,276,202) (6,443,012)
Research and
development
expenses (38,730,988) (45,110,176) (47,515,112) (6,341,436)
Total
operating
expenses (131,488,860) (142,762,540) (178,981,009) (23,887,066)
Operating
profit 316,655,254 295,016,955 262,963,456 35,095,485
Other income
(expenses):
Investment
income 104,838 117,317 116,843 15,594
Interest
income 24,631,766 28,409,895 29,194,435 3,896,332
Other, net 1,588,129 (8,934,188) (12,164,815) (1,623,533)
Profit before
tax 342,979,987 314,609,979 280,109,919 37,383,878
Income tax (28,200,106) (2,013,483) (19,946,757) (2,662,123)
Net profit 314,779,881 312,596,496 260,163,162 34,721,755
Earnings per
share, basic 0.10 0.10 0.09 0.01
Earnings per
ADS, basic 2.44 2.52 2.13 0.28
Earnings per
share,
diluted 0.09 0.09 0.08 0.01
Earnings per
ADS, diluted 2.26 2.35 1.99 0.27
Weighted
average
number of
ordinary
shares
outstanding
basic 3,225,819,282 3,100,597,113 3,053,681,518 3,053,681,518
Weighted
average
number of
ADS
outstanding
basic 129,032,771 124,023,885 122,147,261 122,147,261
Weighted
average
number of
ordinary
shares
outstanding,
diluted 3,485,412,140 3,318,874,571 3,261,550,487 3,261,550,487
Weighted
average
number of
ADS
outstanding,
diluted 139,416,486 132,754,983 130,462,019 130,462,019
NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
September 30, June 30, September 30, September 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Cash flows from
operating
activities:
Net profit 314,779,881 312,596,496 260,163,162 34,721,755
Adjustments to
reconcile net
profit to net
cash provided
by operating
activities:
Depreciation 20,216,665 24,063,948 24,019,586 3,205,689
Share-based
compensation
cost 25,989,512 27,057,772 26,072,433 3,479,665
Provision for
doubtful debts 2,722,739 2,009,537 1,067,169 142,426
Amortization of
issuance cost
of convertible
notes 530,114 -- -- --
(Gain) Loss on
disposal of
property,
equipment
and software -- (321,538) 696,754 92,990
Non-cash
exchange
(gains) losses (219,222) 8,866,712 11,262,944 1,503,169
Net equity share
of loss from an
associated
company -- -- 199,941 26,684
Changes in
operating
assets and
liabilities:
Accounts
receivable (23,966,921) (47,689,980) (16,898,211) (2,255,260)
Prepayments
and other
current
assets (15,707,637) (18,488,436) 2,411,864 321,891
Deferred tax
assets (2,391,803) 4,126,531 2,060,348 274,977
Deferred tax
- non-
current -- (1,389,030) (5,356,345) (714,866)
Accounts
payable (13,204,082) 31,741,208 (12,339,449) (1,646,841)
Salary and
welfare
payables (4,015,330) 5,216,308 (10,472,826) (1,397,719)
Taxes payable 12,449,108 (347,813) 9,217,774 1,230,218
Deferred
revenue 33,785,515 (11,475,172) 39,167,706 5,227,379
Deferred tax
liabilities 479,699 (4,089,877) -- --
Accrued
liabilities (6,996,754) (829,872) 7,941,122 1,059,834
Net cash
provided by
operating
activities 344,451,484 331,046,794 339,213,972 45,271,991
Cash flows from
investing
activities:
Purchase of
property,
equipment
and software (52,529,277) (7,948,685) (16,472,855) (2,198,491)
Proceeds
from sale of
property,
equipment and
software -- 5,812 10,320 1,377
Prepayment
for land use
right -- (26,956,800) -- --
Investment
in an
associated
company -- -- (2,500,000) (333,654)
Net cash paid
Upon closure
of a VIE -- -- (1,217,831) (162,533)
Transfer to
restricted
cash -- (761,580,600) -- --
Net change
in time
deposits
with terms
of three
months (536,649,818) 313,909,363 (216,493,992) (28,893,603)
Placement/
rollover of
matured time
deposits (668,307,391) (90,542,729) (201,035,000) (26,830,424)
Uplift of
matured time
deposits 469,599,506 212,513,368 598,179,141 79,833,859
Net increase
in other
assets (2,570,962) -- (2,306) (308)
Net
cash
provided
by (used in)
investing
activities (790,457,942) (360,600,271) 160,467,477 21,416,223
Cash flows from
financing
activities:
Proceeds from
employees
exercising
stock
options 27,755,249 18,924,290 20,819,202 2,778,561
Repurchase of
company
shares (135,413,438) (574,604,375) (231,914,175) (30,951,604)
Payment of
other longterm
payable -- (38,575) -- --
Net cash used
in financing
activitiess (107,658,189) (555,718,660) (211,094,973) (28,173,043)
Effect of
exchange rate
changes on cash
held in foreign
currencies (9,186,668) (2,236,633) (3,525,100) (470,465)
Net increases
(decrease) in
cash (562,851,315) (587,508,770) 285,061,376 38,044,706
Cash, beginning
of the quarter 1,700,210,692 1,507,868,910 920,360,140 122,832,605
Cash, end of the
quarter 1,137,359,377 920,360,140 1,205,421,516 160,877,311
Supplemental
disclosures of
cash flow
information:
Cash paid for
income tax, net
of tax refund 46,273,131 16,061,871 19,457,537 2,596,831
Supplemental
schedule of
non-cash
investing and
financing
activities:
Treasury
stock
cancellation 401,741,200 643,954,432 237,971,707 31,760,051
Fixed asset
purchases
financed by
accounts
payable 1,394,727 11,520,005 11,313,407 1,509,904
NETEASE.COM, INC.
UNAUDITED SEGMENT INFORMATION
Quarter Ended
September 30, June 30, September 30, September 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Revenues:
Online game services 467,910,918 475,149,731 468,651,024 62,546,848
Advertising services 83,359,202 65,328,019 85,478,302 11,408,059
Wireless value-added
services and others 20,632,782 17,494,877 16,946,709 2,261,732
Total revenues 571,902,902 557,972,627 571,076,035 76,216,639
Business taxes:
Online game services (15,441,061) (15,679,941) (15,465,484) (2,064,046)
Advertising services (7,085,532) (5,552,882) (7,265,655) (969,685)
Wireless value-added
services and others (771,139) (693,190) (689,717) (92,051)
Total business taxes (23,297,732) (21,926,013) (23,420,856) (3,125,782)
Net revenues:
Online game services 452,469,857 459,469,790 453,185,540 60,482,802
Advertising services 76,273,670 59,775,137 78,212,647 10,438,374
Wireless value-added
services and others 19,861,643 16,801,687 16,256,992 2,169,681
Total net revenues 548,605,170 536,046,614 547,655,179 73,090,857
Cost of revenues:
Online game services (47,833,799) (45,151,473) (48,094,598) (6,418,776)
Advertising services (33,447,437) (31,585,837) (35,946,007) (4,797,406)
Wireless value-added
services and others (19,179,820) (21,529,809) (21,670,109) (2,892,124)
Total cost of
revenues (100,461,056) (98,267,119) (105,710,714)(14,108,306)
Gross profit/(loss):
Online game services 404,636,058 414,318,317 405,090,942 54,064,026
Advertising services 42,826,233 28,189,300 42,266,640 5,640,968
Wireless value-added
services and others 681,823 (4,728,122) (5,413,117) (722,443)
Total gross profit 448,144,114 437,779,495 441,944,465 58,982,551
Gross profit/(loss)
margin:
Online game services 89.4% 90.2% 89.4% 89.4%
Advertising services 56.1% 47.2% 54.0% 54.0%
Wireless value-added
services and others 3.4% (28.1%) (33.3%) (33.3%)
NETEASE.COM, 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 = RMB7.4928 on
September 28, 2007 in The City of New York for cable transfers
of Renminbi as certified for customs purposes by the Federal
Reserve Bank of New York.
Note 2: Share-based compensation cost reported in the Company's
unaudited condensed consolidated statements of operations is set
out as follows:
September June 30, September September
30, 2006 2007 30, 2007 30,2007
RMB RMB RMB USD(Note 1)
Share-based compensation
cost included in:
Cost of revenue 4,184,265 4,211,757 4,110,297 548,566
Operating expenses
- Selling and marketing
expenses 5,406,776 4,088,683 3,716,654 496,030
- General and
administrative expenses 9,534,605 9,233,855 8,824,199 1,177,690
- Research and development
expenses 6,863,866 9,523,477 9,421,283 1,257,379
