BEIJING, Aug. 14 /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 June 30, 2007.
William Ding, Chief Executive Officer and Director of NetEase stated, "Despite relatively flat game revenues quarter-over-quarter, we are aligning the right balance of resources with our long-standing MMORPG expertise and market leadership to build and diversify our game portfolio for near-term growth. Open beta testing for Westward Journey Online III, the upgraded version of Westward Journey Online II, is scheduled to begin in August 2007, and we plan to release an expansion pack for Fantasy Westward Journey during the fourth quarter of 2007. We are also making positive progress with our programming and design improvements for Tianxia II."
Mr. Ding continued, "With respect to our portal business, our expanded content on our news, sports and entertainment channels has enabled us to maintain our momentum in traffic growth. We remain confident about our future opportunity through our focused channel content and email service strategies."
Second Quarter 2007 Financial Results
Total revenues for the second quarter of 2007 were RMB558.0 million (US$73.3 million), compared to RMB554.6 million (US$72.9 million) and RMB575.3 million (US$75.6 million) for the preceding quarter and the second quarter of 2006, respectively.
Revenues from online games were RMB475.1 million (US$62.4 million) for the second quarter of 2007, compared to RMB481.9 million (US$63.3 million) and RMB486.0 million (US$63.8 million) for preceding quarter and the second quarter of 2006, respectively.
Revenues from advertising services were RMB65.3 million (US$8.6 million) for the second quarter of 2007, compared to RMB56.2million (US$7.4 million) and RMB68.8 million (US$9.0 million) for the preceding quarter and the second quarter of 2006, respectively.
Revenues from wireless value-added services and others were RMB17.5 million (US$2.3 million) for the second quarter of 2007, compared to RMB16.6 million (US$2.2 million) and RMB20.5 million (US$2.7 million) for the preceding quarter and the second quarter of 2006, respectively.
Gross profit for the second quarter of 2007 was RMB437.8 million (US$57.5 million), compared to RMB430.1 million (US$56.5 million) and RMB457.4 million (US$60.1 million) for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase in gross profit was primarily due to higher advertising services revenue in the second quarter of 2007. The year-over-year decrease in gross profit was mainly due to a decrease in all revenue segments as a result of more intense competition in the PRC internet industry.
Gross margin for the online game business for the second quarter of 2007 was 90.2%, compared to 89.6% and 90.7% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase primarily resulted from operational cost savings which more than offset a decrease in online game revenues in the second quarter of 2007. The year- over-year decrease was primarily driven by a decrease in online game services revenue from Westward Journey Online II and higher staff-related costs as a result of an increase in headcount.
Gross margin for the advertising business for the second quarter of 2007 was 47.2%, compared to 35.7% and 49.8% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase in gross margin was primarily driven by the seasonal increase in advertising spending coupled with savings in content costs in the second quarter of 2007. The year-over-year decline in gross margin was primarily due to decreased advertising services revenue as a result of increased competition.
Gross loss margin for the wireless value-added services and others business for the second quarter of 2007 was 28.1%, compared to gross loss margin of 36.1% and 2.3% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter improved gross loss margin was primarily due to increased revenues from online fee-based premium services supplied to registered users of the NetEase websites, including premium matchmaking and dating services and product sales generated from registered users. The year-over-year decline in gross margin was primarily driven by a decrease in revenue from wireless services.
Total operating expenses for the second quarter of 2007 were RMB142.8 million (US$18.8 million), compared to RMB117.7 million (US$15.5 million) and RMB134.3 million (US$17.6 million) for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase was primarily due to an additional provision for doubtful debts of RMB2.0 million (US$0.3 million) made during the second quarter of 2007, compared to a reversal of provision for doubtful debts of approximately RMB8.2 million (US$1.1 million) as a result of the collection of outstanding accounts receivables with respect to the advertising business during the first quarter of 2007. The increase was also due to increased selling and marketing costs of RMB6.5 million (US$0.9 million) in relation to the marketing of Tianxia II, Westward Journey III and seasonal promotional activities during the second quarter of 2007 and an increase in research and development costs of RMB4.8 million (US$0.6 million) associated with the increased staffing for enhancing existing products and developing new products. The year-over-year increase was mainly due to an increase in selling and marketing costs, higher staff- related costs as a result of an increase in headcount and increased depreciation charges.
Net profit for the second quarter of 2007 totaled RMB312.6 million (US$41.1 million), compared to RMB301.5 million (US$39.6 million) and RMB314.1 million (US$41.3 million) for the preceding quarter and the second 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 shares (ADS) of US$0.33 and US$0.31 for the second quarter of 2007, respectively. The Company reported basic and diluted earnings per ADS of US$0.31 and US$0.29 and US$0.32 and US$0.29 for the preceding quarter and the second quarter of 2006, respectively.
Other Information
As of June 30, 2007, the Company's total cash and time deposit balance was RMB3.0 billion (US$391.5 million), compared to RMB3.9 billion (US$517.3 million) and RMB3.6 billion (US$474.4 million) as of December 31, 2006 and June 30, 2006, respectively. In addition, there was a restricted cash balance of RMB761.6 million (US$100.1 million) as of June 30, 2007 primarily related to the Company's committed revolving loan facility. 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. Cash flow generated from operating activities was approximately RMB331.0 million (US$43.5 million) for the second quarter of 2007, compared to RMB283.0 million (US$37.2 million) and RMB296.5 million (US$39.0 million) for the preceding quarter and the second quarter of 2006, respectively.
On March 13, 2007, the Company's Board authorized a share repurchase program of up to US$100 million of the Company's outstanding ADSs for a period not to exceed three months. When the share repurchase program ended on June 12, 2007, the Company had spent in aggregate a total purchase consideration of approximately US$95.7 million (including transaction costs). With respect to the separate share repurchase program of up to US$120 million authorized by the Company's Board on July 2, 2007, at July 31, 2007 the Company had spent in aggregate a total purchase consideration of approximately US$5.6 million (including transaction costs). The share repurchase program will end on July 1, 2008.
** The United States dollar (US$) 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$1.00 = RMB7.6120 on June 29, 2007 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 29, 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 9:00 pm Eastern Time on Monday, August 13, 2007, (Beijing/Hong Kong Time: 9:00 am, Tuesday, August 14, 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- 238-9007 (international: 719-457-2622), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 888-203-1112 (international 719-457-0820), and entering passcode 4257393. The replay will be available through August 26, 2007 Eastern Time.
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 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, June 30, June 30,
2006 2007 2007
RMB RMB USD (Note 1)
Assets
Current assets:
Cash 1,206,476,526 920,360,140 120,909,110
Time deposits 2,731,396,687 2,060,113,281 270,640,210
Accounts receivable, net 131,724,899 121,952,397 16,021,072
Prepayments and other
current assets 33,913,350 71,545,877 9,399,090
Deferred tax assets 25,674,468 21,878,296 2,874,185
Total current assets 4,129,185,930 3,195,849,991 419,843,667
Non-current assets:
Non-current rental deposits 3,353,209 3,074,885 403,952
Property, equipment and
software, net 224,207,833 207,293,823 27,232,504
Prepayment for land use
right - 26,956,800 3,541,356
Restricted cash - 761,580,600 100,050,000
Deferred tax assets 5,502,361 1,764,727 231,835
Other long-term assets 11,458,497 11,699,281 1,536,952
Total non-current assets 244,521,900 1,012,370,116 132,996,599
Total assets 4,373,707,830 4,208,220,107 552,840,266
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 105,555,248 103,931,120 13,653,589
Salary and welfare payables 54,924,038 54,216,245 7,122,470
Taxes payable 95,476,498 71,412,637 9,381,587
Deferred revenue 385,720,720 329,893,598 43,338,623
Deferred tax liabilities 3,391,754 - -
Accrued liabilities 31,340,217 22,772,754 2,991,691
Total current liabilities 676,408,475 582,226,354 76,487,960
Long-term payable:
Zero-coupon convertible
subordinated notes due
July 15, 2023 780,253,918 675,412,760 88,730,000
Other long-term payable 11,377,256 11,200,000 1,471,361
Total long-term payable 791,631,174 686,612,760 90,201,361
Total liabilities 1,468,039,649 1,268,839,114 166,689,321
Shareholders' equity 2,905,668,181 2,939,380,993 386,150,945
Minority interests - - -
Total liabilities and
shareholders' equity 4,373,707,830 4,208,220,107 552,840,266
The accompanying notes are an integral part of this press release.
NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended
June 30, March 31, June 30, June 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Revenues:
Online game services 486,006,106 481,865,952 475,149,731 62,421,142
Advertising services 68,763,795 56,195,605 65,328,019 8,582,241
Wireless value-added
services and
others 20,507,390 16,550,555 17,494,877 2,298,329
Total revenues 575,277,291 554,612,112 557,972,627 73,301,712
Business taxes (22,646,424) (21,316,231) (21,926,013) (2,880,454)
Total net revenues 552,630,867 533,295,881 536,046,614 70,421,258
Total cost of
revenues (95,269,844) (103,204,518) (98,267,119) (12,909,501)
Gross profit 457,361,023 430,091,363 437,779,495 57,511,757
Operating expenses:
Selling and
marketing expenses (44,210,634) (43,089,175) (49,272,271) (6,472,973)
General and
administrative
expenses (43,807,041) (35,181,129) (48,380,093) (6,355,766)
Research and
development
expenses (46,293,935) (39,384,969) (45,110,176) (5,926,192)
Total operating
expenses (134,311,610) (117,655,273) (142,762,540) (18,754,931)
Operating profit 323,049,413 312,436,090 295,016,955 38,756,826
Other income
(expenses):
Investment income 100,931 126,279 117,317 15,412
Interest income 24,263,200 23,262,363 28,409,895 3,732,251
Other, net (414,399) (732,222) (8,934,188) (1,173,698)
Profit before tax 346,999,145 335,092,510 314,609,979 41,330,791
Income tax (32,888,956) (33,597,844) (2,013,483) (264,514)
Net profit 314,110,189 301,494,666 312,596,496 41,066,277
Earnings per share,
basic 0.10 0.10 0.10 0.01
Earnings per ADS,
basic 2.41 2.39 2.52 0.33
Earnings per share,
diluted 0.09 0.09 0.09 0.01
Earnings per ADS,
diluted 2.23 2.21 2.35 0.31
Weighted average
number of ordinary
shares outstanding,
basic 3,254,702,252 3,160,128,710 3,100,597,113 3,100,597,113
Weighted average
number of ADS
outstanding, basic 130,188,090 126,405,148 124,023,885 124,023,885
Weighted average
number of ordinary
shares outstanding,
diluted 3,537,762,110 3,410,647,795 3,318,874,571 3,318,874,571
Weighted average
number of ADS
outstanding,
diluted 141,510,484 136,425,912 132,754,983 132,754,983
The accompanying notes are an integral part of this press release.
NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
June 30, March 31, June 30, June 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Cash flows from
operating
activities:
Net profit 314,110,189 301,494,666 312,596,496 41,066,277
Adjustments to
reconcile net
profit to net
cash provided
by operating
activities:
Depreciation 17,001,040 24,274,997 24,063,948 3,161,317
Share-based
compensation
cost 26,246,035 20,237,797 27,057,772 3,554,621
(Reversal)
provision for
doubtful debts 407,553 (8,182,712) 2,009,537 263,996
Amortization of
issuance cost
of convertible
notes 1,897,029 - - -
(Gain) Loss on
disposal of
property,
equipment and
software 526,268 416,242 (321,538) (42,241)
Write-off of
property,
equipment and
software 11,638,451 - - -
Non-cash exchange
losses 44,705 531,592 8,866,712 1,164,833
Other - 278,324 - -
Changes in operating
assets and
liabilities:
Accounts
receivable (35,163,684) 63,629,570 (47,689,980) (6,265,105)
Prepayments and
other current
assets (5,727,096) (19,599,070) (18,488,436) (2,428,854)
Deferred tax
assets 3,610,105 (330,359) 4,126,531 542,109
Deferred tax -
non-current - 5,126,664 (1,389,030) (182,479)
Accounts
payable (62,187,069) (23,295,601) 31,741,208 4,169,891
Salary and welfare
payables 5,989,995 (6,687,391) 5,216,308 685,274
Taxes payable (13,188,444) (23,419,176) (347,813) (45,693)
Deferred revenue 23,220,662 (44,351,950) (11,475,172) (1,507,511)
Deferred tax
liabilities 46,461 698,123 (4,089,877) (537,293)
Accrued
liabilities 8,024,310 (7,779,795) (829,872) (109,022)
Net cash provided
by operating
activities 296,496,510 283,041,921 331,046,794 43,490,120
Cash flows from
investing
activities:
Purchase of
property,
equipment
and software (34,694,354) (33,208,899) (7,948,685) (1,044,231)
Proceeds from
sale of
property,
equipment and
software 148,076 14,109 5,812 764
Prepayment for
land use right - - (26,956,800) (3,541,356)
Transfer to
restricted cash - - (761,580,600) (100,050,000)
Net change in
time deposits with
terms of three
months or less - 223,356,370 313,909,363 41,238,750
Placement/rollover of
matured time deposits - (75,000,000) (90,542,729) (11,894,736)
Uplift/placement of
matured time
deposits (44,367,121) 65,000,000 212,513,368 27,918,204
Net increase in
other assets (23,525,366) 4,355 - -
Net cash (used in)
provided by
investing
activities (102,438,765) 180,165,935 (360,600,271) (47,372,605)
Cash flows from
financing
activities:
Proceeds from
employees
exercising
stock options 10,560,050 1,870,625 18,924,290 2,486,113
Repurchase of
company shares (401,741,200) (160,750,459) (574,604,375) (75,486,649)
Payment of other
long-term payable (177,256) (138,681) (38,575) (5,068)
Net cash used in
financing
activities (391,358,406) (159,018,515) (555,718,660) (73,005,604)
Effect of
exchange rate
changes on cash
held in foreign
currencies (2,061,070) (2,796,957) (2,236,633) (293,830)
Net increase
(decrease) in
cash (199,361,731) 301,392,384 (587,508,770) (77,181,919)
Cash, beginning
of the quarter 1,899,572,423 1,206,476,526 1,507,868,910 198,091,029
Cash, end of
the quarter 1,700,210,692 1,507,868,910 920,360,140 120,909,110
Supplemental
disclosures
of cash flow
information:
Cash paid for
income taxes,
net of tax
refund 36,511,672 45,443,563 16,061,871 2,110,072
Supplemental schedule
of non-cash investing
and financing
activities:
Treasury stock
cancellation - 188,802,099 643,954,432 84,597,272
Fixed asset
purchases
financed
by accounts
payable 11,307,553 9,518,303 11,520,005 1,513,401
Conversion of
convertible
notes to
ordinary shares - 86,886,000 - -
The accompanying notes are an integral part of this press release.
NETEASE.COM, INC.
UNAUDITED SEGMENT INFORMATION
Quarter Ended
June 30, March 31, June 30, June 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Revenues:
Online game services 486,006,106 481,865,952 475,149,731 62,421,142
Advertising services 68,763,795 56,195,605 65,328,019 8,582,241
Wireless value-added
services and others 20,507,390 16,550,555 17,494,877 2,298,329
Total revenues 575,277,291 554,612,112 557,972,627 73,301,712
Business taxes:
Online game services (16,038,201) (15,901,576) (15,679,941) (2,059,898)
Advertising services (5,844,923) (4,776,626) (5,552,882) (729,491)
Wireless value-added
services and others (763,300) (638,029) (693,190) (91,065)
Total business taxes (22,646,424) (21,316,231) (21,926,013) (2,880,454)
Net revenues:
Online game services 469,967,905 465,964,376 459,469,790 60,361,244
Advertising services 62,918,872 51,418,979 59,775,137 7,852,750
Wireless value-added
services and others 19,744,090 15,912,526 16,801,687 2,207,264
Total net revenues 552,630,867 533,295,881 536,046,614 70,421,258
Cost of revenues:
Online game services (43,479,571) (48,506,860) (45,151,473) (5,931,618)
Advertising services (31,587,268) (33,039,634) (31,585,837) (4,149,479)
Wireless value-added
services and others (20,203,005) (21,658,024) (21,529,809) (2,828,404)
Total cost of
revenues (95,269,844) (103,204,518) (98,267,119) (12,909,501)
Gross profit/(loss):
Online game services 426,488,334 417,457,516 414,318,317 54,429,626
Advertising services 31,331,604 18,379,345 28,189,300 3,703,271
Wireless value-added
services and others (458,915) (5,745,498) (4,728,122) (621,140)
Total gross profit 457,361,023 430,091,363 437,779,495 57,511,757
Gross profit/(loss)
margin:
Online game services 90.7% 89.6% 90.2% 90.2%
Advertising services 49.8% 35.7% 47.2% 47.2%
Wireless value-added
services and others (2.3%) (36.1%) (28.1%) (28.1%)
The accompanying notes are an integral part of this press release.
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 = RMB7.6120 on June 29, 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:
Quarter Ended
June 30, March 31, June 30, June 30,
2006 2007 2007 2007
RMB RMB RMB USD (Note 1)
Share-based compensation cost
included in:
Cost of revenue 4,345,487 3,124,056 4,211,757 553,305
Operating expenses
- Selling and marketing
expenses 5,431,785 3,508,632 4,088,683 537,136
- General and administrative
expenses 9,521,066 8,006,729 9,233,855 1,213,066
- Research and development
expenses 6,947,697 5,598,380 9,523,477 1,251,114
