NetEase.com Reports Third Quarter 2010 Unaudited Financial Results

BEIJING, Nov. 18, 2010 /PRNewswire-Asia/ -- NetEase.com, Inc. (Nasdaq: NTES), one of China's leading Internet and online game services providers, today announced its unaudited financial results for the third quarter ended September 30, 2010.

William Ding, Chief Executive Officer and Director of NetEase, stated, "As a result of large-scale sales promotional and branding activities starting since the second quarter of 2010, Fantasy Westward Journey broke another record for peak concurrent users on July 4，2010.  Fantasy Westward Journey's strong performance was the leading catalyst for our third quarter online game revenue growth of 6% quarter-over-quarter.  This game continues to rank as one of the most popular massively multiplayer online games ever in the Chinese market.  In addition to Fantasy Westward Journey, our year-over-year online games revenue growth of over 60% was primarily driven by World of Warcraft^®, a game licensed from Blizzard Entertainment, Heroes of Tang Dynasty and Tianxia II."

"Turning to our game expansion and development pipeline during the third quarter of 2010, expansion packs for Westward Journey Online II and III were released in August and September, respectively, and Secret of Dream Dragon, an expansion pack for Tianxia II, was launched in conjunction with the game's one year commercial anniversary on September 28.  As a follow up to the success of Heroes of Tang Dynasty, we are working on expanding our 2.5D game market share with new games under development including Ghost which entered closed beta testing on July 22, 2010 and started to generate revenue during the third quarter.   At the moment, we expect that the next expansion pack for Fantasy Westward Journey will be released in the first quarter of 2011."  

"The World of Warcraft expansion pack Wrath of the Lich King™ was released in China on August 31, 2010 to tremendous player enthusiasm.  World of Warcraft is a world-renowned massively-multiplayer online role-playing game, and with NetEase's strong regional promotional and sales support, we are optimistic about its continued growth opportunity throughout China."  

"Advertising services revenue increased 11% quarter-over-quarter and 88% year-over-year for the third quarter of 2010," Mr. Ding continued.  "These strong growth rates reflected our sponsorship and promotional activities supporting The 16th Asian Games in Guangzhou along with a seasonal upturn in advertising activity in the third quarter of 2010.  Our continued investment and integration of technology, channels and products has brought about further improvement in our user traffic statistics, which we believe has attracted advertisers' attention and has been driving increasing demand for our advertising services.   Email and mobile internet services each performed well during the third quarter, and we added important functionality to our micro-blog service.  We are pleased to report a 40% increase in portal traffic year-to-date which has bolstered both our portal ranking and advertising returns on investment.  Overall, the third quarter of 2010 marked another consecutively strong quarter of growth and innovation in our portal business."

Third Quarter 2010 Financial Results

Revenues

Total revenues for the third quarter of 2010 were RMB1.4 billion (US$215.1 million), compared to RMB1.3 billion and RMB879.4 million for the preceding quarter and the third quarter of 2009, respectively.

Revenues from online games were RMB1.3 billion (US$187.7 million) for the third quarter of 2010, compared to RMB1.2 billion and RMB775.1 million for the preceding quarter and the third quarter of 2009, respectively.

Revenues from advertising services were RMB162.0 million (US$24.2 million) for the third quarter of 2010, compared to RMB145.9 million and RMB86.0 million for the preceding quarter and the third quarter of 2009, respectively.

Revenues from wireless value-added services and others ("WVAS and others") were RMB20.9 million (US$3.1 million) for the third quarter of 2010, compared to RMB19.9 million and RMB18.3 million for the preceding quarter and the third quarter of 2009, respectively.

Gross Profit

Gross profit for the third quarter of 2010 was RMB959.2 million (US$143.4 million), compared to RMB878.4 million and RMB627.0 million for the preceding quarter and the third quarter of 2009, respectively.  The quarter-over-quarter increase in gross profit was primarily attributable to increased game revenues from Fantasy Westward Journey during the third quarter of 2010, as well as increased advertising services revenue and non-recurrence of certain event-based information costs incurred in the prior quarter.  Fantasy Westward Journey performed well during the current quarter resulting from the success in the Company's overall sales promotional program.  The increase in advertising services revenue was attributable to a combination of factors, including primarily Asian-Games theme related advertising, seasonality and improved portal traffic.

The year-over-year increase in gross profit was primarily attributable to increased revenues from online games and advertising services.  Increased online game revenue was primarily attributable to World of Warcraft, Heroes of Tang Dynasty and Tianxia II.  Increased advertising services revenue was attributable to a combination of factors as described above.  The foregoing revenue increases were partially offset by increased cost of revenues such as royalties and consultancy fees, server depreciation charges and other fees related to World of Warcraft operations and an increase in headcount-related costs for online game and advertising services businesses during the third quarter of 2010.  

Gross Profit (Loss) Margin

Gross profit margin for the online game business for the third quarter of 2010 was 72.0%, compared to 71.3% and 79.9% for the preceding quarter and the third quarter of 2009, respectively. Quarter-over-quarter gross profit margin remained relatively stable during the third quarter of 2010.  The year- over-year decrease in gross profit margin was primarily due to the reporting of a full-quarter result for World of Warcraft in the current quarter as the game was officially re-launched at the end of September 2009.  Lower profit margin was reported for World of Warcraft operations compared to the Company's self-developed games primarily because of royalties, amortization of license fees, technical consultancy service fees and hardware depreciation associated with the licensing and operation of this game.  

Gross profit margin for the advertising services business for the third quarter of 2010 was 54.2%, compared to 46.4% and 23.1% for the preceding quarter and the third quarter of 2009, respectively. The quarter-over-quarter and year-over-year increases in gross profit margin were primarily due to the significant increase in advertising services revenues during the third quarter of 2010 as well as the non-recurrence of certain event-based information cost incurred in the prior quarter.    

Gross loss margin for the WVAS and others business for the third quarter of 2010 was 41.3%, compared to 38.7% and 45.0% for the preceding quarter and the third quarter of 2009, respectively.  

Operating Expenses

Total operating expenses for the third quarter of 2010 were RMB372.2 million (US$55.6 million), compared to RMB268.7 million and RMB218.9 million for the preceding quarter and the third quarter of 2009, respectively. The quarter-over-quarter increase in operating expenses was primarily due to marketing and promotional costs incurred for Fantasy Westward Journey, Heroes of Tang Dynasty, World of Warcraft and Tianxia II, and increased staff-related costs resulting from new research and development headcount in the areas of search and online game businesses, partially offset by decreased bad debt provision as a result of improved control over long-outstanding accounts receivable and satisfactory legal settlement of a long-outstanding accounts receivable balance during the current quarter.  The year-over-year increase in operating expenses was primarily due to increased marketing promotional costs and increased staff-related costs in the current quarter as explained above.  

Net Profit

Net profit for the third quarter of 2010 totaled RMB585.3 million (US$87.5 million), compared to RMB485.7 million and RMB393.8 million for the preceding quarter and the third quarter of 2009, respectively. During the third quarter of 2010, the Company reported a net foreign exchange gain of RMB54.3 million (US$8.1 million), compared to a net foreign exchange loss of RMB67.8 million in the preceding quarter and a net foreign exchange gain of RMB25.3 million in the third quarter of 2009.  The quarter-over-quarter and year-over-year changes in foreign exchange gains/losses were mainly due to the translation changes arising from the Company's Euro-denominated bank deposit balances as of September 30, 2010, as the exchange rate of the Euro against the RMB fluctuated over the periods.  NetEase reported basic and diluted earnings per ADS of US$0.67 each for the third quarter of 2010.  The Company reported basic and diluted earnings per ADS of US$0.56 each and US$0.45 each for the preceding quarter and the third quarter of 2009, respectively.

Income Taxes

The Company recorded a net income tax charge of RMB91.3 million (US$13.6 million) for the third quarter of 2010, compared with RMB75.5 million and RMB65.5 million for the preceding quarter and the third quarter of 2009, respectively.  The effective tax rate for the third quarter of 2010 was 13.7% as compared to 13.4% and 14.3% for the preceding quarter and the third quarter of 2009, respectively. 

Other Information

As of September 30, 2010, the Company's total cash and time deposit balance was RMB8.8 billion (US$1.3 billion), compared to RMB7.0 billion as of December 31, 2009.

Cash flows generated from operating activities were RMB532.6 million (US$79.6 million) for the third quarter of 2010, compared to RMB744.3 million and RMB270.0 million for the preceding quarter and the third quarter of 2009, respectively.  

** 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$1.00 = RMB6.6905 on September 30, 2010 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.  No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2010, 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 p.m. Eastern Time on Wednesday, November 17, 2010 (Beijing/Hong Kong Time: 9:00 a.m, Thursday, November 18, 2010).  Chief Executive Officer William Ding and Acting Chief Financial Officer Onward Choi will be on the call to discuss the quarterly results and answer questions.

Interested parties may participate in the conference call by dialing 1-877-941-2069 (international: 1-480-629-9713), 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 4375443#.  The replay will be available through December 2, 2010.

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.

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 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, Heroes of Tang Dynasty 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.

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, which could occur if, for example, its new online games or expansion packs and other improvements to its existing games, including its planned and recent expansion packs for Fantasy Westward Journey, 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 possible 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; uncertainty regarding the effectiveness of marketing programs for NetEase's online advertising business and online games business in China; 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 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.