Taomee Reports Fourth Quarter and Fiscal Year 2011 Unaudited Financial Results

Fourth Quarter 2011 Financial Highlights

• Total net revenues were US$8.6 million in the fourth quarter of 2011, a decrease of 32.5% from US$12.7 million in the third quarter of 2011 and 11.0% from US$9.6 million in the fourth quarter of 2010.
• Gross margin increased to 81.3% in the fourth quarter of 2011 from 81.2% in the third quarter of 2011 and 80.8% in the fourth quarter of 2010.
• Net income attributable to the holders of ordinary shares was US$ 1.6 million in the fourth quarter of 2011, compared with US $4.4 million in the third quarter of 2011 and US $5.6 million in the fourth quarter of 2010.
• Basic and diluted earnings per ADS(1) were US$0.04 and US$0.04, respectively, in the fourth quarter of 2011, compared with US$0.12 and US$ 0.12, respectively, in the third quarter of 2011 and US$0.19 and US$0.18, respectively, in the fourth quarter of 2010.
• Non-GAAP net income attributable to holders of ordinary shares was US$2.3 million in the fourth quarter of 2011, compared with US$5.0 million in the third quarter of 2011 and US$5.7 million in the fourth quarter of 2010.
• Non-GAAP basic and diluted earnings per ADS were US$0.06 and US$0.06, respectively, in the fourth quarter of 2011, compared with US$0.14 and US$0.13, respectively, in the third quarter of 2011 and US$0.20 and US$0.18, respectively, in the fourth quarter of 2010.

Fiscal Year 2011 Financial Highlights

• Total net revenues were US$45.4 million in 2011, an increase of 26.2% from US$36.0 million in 2010.
• Net income attributable to the holders of ordinary shares was US$19.3 million, in 2011, a decrease of 8.6% from US$21.1 million in 2010.
• Basic and diluted earnings per ADS were US$0.58 and US$0.56, respectively, in 2011.
• Non-GAAP net income attributable to holders of ordinary shares was US$17.6 million in 2011.
• Non-GAAP basic and diluted earnings per ADS were US$0.53 and US$0.51, respectively, in 2011.

"We increased our total active accounts year over year and exceeded our revenue guidance in the second half of 2011," said Mr. Benson Wang, Co-founder, director and chief executive officer of Taomee. "We were pleased with the user growth and user engagement levels in the fourth quarter and continue to add loyal customers across multiple media platforms. In particular, we received high ratings for our animation series, which have been broadcast across more than 100 television channels since June 2011.

"In 2012, we plan to accelerate investments in our brands and platform, and we are willing to sacrifice short term revenue growth and operating margin in exchange for long term sustainable revenue and profit growth. China's domestic industry for family entertainment is still in its early stages, and we believe there is tremendous revenue growth potential over the foreseeable future, and more importantly, attractive returns on capital over the long term."

Operational Results for Fourth Quarter of 2011

• The number of active accounts for the Company's virtual worlds under operation in mainland China decreased 27% to approximately 27.0 million from 37.1 million in the third quarter of 2011 and increased 4% from 26.0 million in the fourth quarter of 2010.
• Active paying accounts for the Company's virtual worlds under operation in mainland China decreased to 1.7 million from 2.1 million in the third quarter of 2011 and from 2.4 million in the fourth quarter of 2010.
• The sequential decreases in active accounts and active paying accounts were primarily due to seasonality as the fourth quarter has fewer non-school days compared with the third quarter of 2011.
• The year over year increase in active accounts and decrease in active paying accounts were primarily due to the fact that the Company decided to temporarily decelerate monetization in the fourth quarter of 2011 in an effort to attract new users and enhance user stickiness.

Unaudited Financial Results for Fourth Quarter of 2011

Total Net Revenues

Total net revenues were US$8.6 million in the fourth quarter of 2011, compared with US$12.7 million in the third quarter of 2011 and US$9.6 million in the fourth quarter of 2010. 

Net online business revenues were US$7.5 million, compared with US$10.4 million in the third quarter of 2011 and US$8.8 million in the fourth quarter of 2010. The quarter-over-quarter decrease was primarily due to seasonality as the fourth quarter has fewer non-school days than the third quarter of 2011. The year-over-year decrease was partially due to the implementation of the Company's strategy to attract new users and user stickiness while reducing the monetization of online products temporarily.

Net offline business revenues were US$1.1 million in the fourth quarter of 2011, compared with US$2.3 million in the third quarter of 2011 and US$0.8 million in the fourth quarter of 2010. The sequential decrease was due to we recorded revenues from proceeds-sharing arrangements from the box offices of the movie based on the Company's Seer franchise in the third quarter of 2011 and there was no such revenue in the fourth quarter of 2011. The year-over-year increases were mainly due to a rise in offline merchandise and book licensing revenue from the Taiwanese market. 

Total Cost of Services

Total cost of services was US$1.6 million in the fourth quarter of 2011, compared with US$$2.4 million in the third quarter of 2011 and US$1.8 million in the fourth quarter of 2010.

Online business related costs were US$1.3 million in the fourth quarter of 2011, compared with US$1.5 million in the third quarter of 2011 and US$1.4 million in the fourth quarter of 2010.  The quarter-over-quarter and the year-over-year decrease were primarily due to a reduction in costs associated with prepaid card production expenses.

Offline business related costs were US$0.3 million in the fourth quarter of 2011, compared with US$0.9 million in the third quarter of 2011 and US$0.4 million in the fourth quarter of 2010. The sequential decrease was mainly due to there were no recorded costs associated with movie production in the fourth quarter of 2011. The year-over-year decrease was mainly due to the fact that the recording of costs associated with book trading in the fourth quarter of 2010 and no book trading in the fourth quarter of 2011.

Gross Profit and Gross Margin

Gross profit was US$7.0 million in the fourth quarter of 2011, compared with US$10.3 million in the third quarter of 2011 and US$7.8 million in the fourth quarter of 2010. 

Gross margin was 81.3% in the fourth quarter of 2011, compared with 81.2% in the third quarter of 2011 and 80.8% in the fourth quarter of 2010.

Gross margin for the online business was 82.1% in the fourth quarter of 2011, compared with 85.3% in the third quarter of 2011, and 83.6% in the fourth quarter of 2010.

Gross margin for the offline business was 75.3% in the fourth quarter of 2011, compared with 63.0% in the third quarter of 2011 and 48.4% in the fourth quarter of 2010.

Total Operating Expenses

Total operating expenses were US$6.4 million in the fourth quarter of 2011, compared with US$6.2 million in the third quarter of 2011 and US$2.9 million in the fourth quarter of 2010. 

• Product development expenses were US$3.1 million in the fourth quarter of 2011, compared with US$2.9 million in the third quarter of 2011 and US$1.4 million in the fourth quarter of 2010. The sequential and year-over-year increases were primarily due to costs associated with new hires, and an increase in share-based compensation.
• Sales and marketing expenses were US$1.6 million in the fourth quarter of 2011, compared with US$1.9 million in the third quarter of 2011 and US$0.6 million in the fourth quarter of 2010. The sequential decrease was attributable to the absence of film and other promotion expenses.  The year-over-year increase was largely due to an increase in animation related expenses and higher advertising expenses.
• General and administrative expenses were US$2.1 million in the fourth quarter of 2011, compared with US$2.3 million in the third quarter of 2011 and US$1.3 million in the fourth quarter of 2010. The sequential decrease was primarily due to lower professional service expenses in the fourth quarter of 2011 and the year-over-year increase was related to higher salary expenses and share based-compensation of the Company's administrative personnel.

Share of Profit/(Loss) from Equity Method Investment

Share of loss from equity method investment was US$0.3 million in the fourth quarter of 2011, compared with a profit of US$0.2 million in the third quarter of 2011 and a profit of US$0.1 million in the fourth quarter of 2010.

Profit from Operations

Profit from operations was US$0.6 million in the fourth quarter of 2011, compared with US$4.1 million in the third quarter of 2011 and US$4.9 million in the fourth quarter of 2010.

Income Tax Benefit / (Expense)

We recorded an income tax expense of US$0.1 million in the fourth quarter of 2011, compared to an income tax expense of US$0.3 million in the third quarter of 2011 and income tax benefit of US$0.7 million in the fourth quarter of 2010, the year-over-year increase was due to the changes in the corporate income tax rate eligibility of Shanghai Shengran and Shanghai Taomee from 2010 to 2011.

Net Income

Net income attributable to holders of ordinary shares was US$1.6 million in the fourth quarter of 2011, compared with US$4.4 million in the third quarter of 2011 and US$5.6 million in the fourth quarter of 2010. 

Basic and diluted earnings per ADS were US$0.04 and US$0.04 each in the fourth quarter of 2011, compared with US$0.12 and US$0.12, respectively, in the third quarter of 2011, and US$0.19 and US$0.18, respectively in the fourth quarter of 2010. 

Non-GAAP net income attributable to shareholders was US$2.3 million in the fourth quarter of 2011, compared with US$5.0 million in the third quarter of 2011 and US$5.7 million in the fourth quarter of 2010.

Non-GAAP basic and diluted earnings per ADS were US$0.06 and US$0.06 each in the fourth quarter of 2011, compared with US$0.14 and US$0.13 each, in the third quarter of 2011, and US$0.20 and US$0.18, respectively, in the fourth quarter of 2010.

Cash and Cash Equivalents

As of December 31, 2011, the Company had US$120.7 million of cash and cash equivalents, compared with US$43.1 million as of December 31, 2010.

Unaudited Financial Results for Fiscal year 2011

Net Revenues

Net revenues were 45.4 million in 2011, representing an increase of 26.1% from $36.0 million in 2010. This increase was primarily due to an increase in the revenues from the Company's online and offline businesses.

Net revenues generated from the online business increased from US$33.7 million in 2010 to US$40.3 million in 2011. The increase was driven by both the growth of our existing self-developed franchises as well as revenues from third party developed games available to users on our platform.

Net revenues generated from offline business increased significantly to US$5.1 million in 2011 from approximately US$2.3 million in 2010. This increase was primarily due to revenues generated from the Company's co-branding and merchandise licensing contracts and revenue-sharing arrangements for a film based on the Seer franchise and royalty received from publishers of children's books.

Cost of Services

Cost of services increased from US$5.9 million in 2010 to US$7.7 million in 2011, primarily due to the expansion of both online and offline businesses.

Cost of services relating to the Company's online business increased to US$6.0 million in 2011 from US$5.2 million in 2010. This increase was primarily due to an increase in the salaries and benefits expenses to the Company's employees and share based compensation.

Cost of services relating to the Company's offline business increased to US$1.7 million in 2011 from approximately US$0.7 million in 2010. This increase was primarily attributable to film and animations production costs as well as increases in the salaries and benefit payments to the newly-hired employees for the offline business.

Total Operating Expenses

Total operating expenses increased to US$22.8 million in 2011 from US$11.7 million in 2010. The increase in the operating expenses was primarily due to increases in product development expenses and sales and marketing expenses, and to a lesser extent, increases in general and administrative expenses. Details are as follows:

• Product development expenses increased by121.6% from US$4.6 million in 2010 to US$10.3 million in 2011. The increase was primarily attributable to an increase in salary and benefit expenses as additional software engineers, development staff, and creative technicians including writers, virtual world architects, and graphic artists were hired. A significant percentage of the R&D headcount additions were allocated toward the new investments in mobile, platform services, online video, and brand management.
• Sales and marketing expenses increased by298.4% from US$1.6 million in 2010 to US$6.3 million in 2011. The increase was primarily attributable to higher advertising and promotional activities, including those related to new product launches throughout 2011, as well as an increase in animation related expenses. Mole's World season one was launched in June 2011 and Seer season one in January 2012.
• General and administrative expenses increased by 39.0% from US$5.7 million in 2010 to US$8.0 million in 2011. The increase was primarily due to the increase in share-based compensation and incremental expenses as a listed company.

Share of Profit in Equity Method Investments

Share of profit in equity method investments was US$4.2 million in 2011, compared with US$0.5 million in 2010 mainly due to a US$3.7 million gain realized from the sale of 10.5% equity method interest in Elyn Corporation in February 2011.

Profit from Operations

Profit from operations was US$14.9 million in 2011, compared with US$18.5 million in 2010.

Income Tax Benefit/ (Expense)

Income tax expense was US$1.7 million in 2011, compared to an income tax benefit of approximately US$2.5 million in 2010, due to the changes in the corporate income tax rate eligibility of Shanghai Shengran and Shanghai Taomee in 2011.

Net Income

Net income attributable to holders of ordinary shares was US$19.3 million in 2011, compared with US$21.1 million in 2010. 

Basic and diluted earnings per ADS were US$0.58 and US$0.56, respectively in 2011, compared with US$0.73 and US$0.72, respectively, in 2010. 

Non-GAAP net income attributable to shareholders was US$17.6 million in 2011 compared with US$21.3 million in 2010.

Non-GAAP basic and diluted earnings per ADS were US$0.53 and US$0.51, respectively in 2011, compared with US$0.73 and US$0.73, respectively, in 2010.

Recent Business Highlights

On November 18, 2011, Taomee commercially launched the virtual world Seer II, a sequel to the original Seer virtual world.

As of December 31, 2011, Taomee had repurchased an aggregated of 123,658 ADSs, representing 2,473,160 ordinary shares, on the open market for total cash consideration of $562,502 under the share repurchased plan approved by the Company's board of directors on November 22, 2011.

On January 6, 2012, Taomee launched its online video content website of v.61.com in cooperation with iQiyi.com and Youku.com.

On January 9, 2012, the first season of Seer animation series started to broadcast in China.

On January 11, February 16 and March 1, 2012, Taomee released three games and applications for Apple iOS; Mole Kart, Mole Baby and Taomee MaMa, respectively.

On February 28, 2012, the Board of Directors approved a resolution to convert the share options that were granted by the Company on January 4 and May 24, 2011 into restricted shares at the ratio of 3:1.

On March 9, 2012, the second season of the Mole's World animation series started to broadcast in China.

Outlook for First Quarter of 2012

Net revenues for the first quarter of 2012 are expected to increase approximately 10% sequentially in comparison to the fourth quarter of 2011.

Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States, or GAAP, this press release presents non-GAAP net income attributable to the Company's shareholders and non-GAAP earnings per ADS by excluding share-based compensation charges from net income attributable to the Company's shareholders and from the calculation of earnings per ADS. For the year ended December 31, 2011, the Company also excluded its one time gain from selling its equity method investment in Elyn Corporation from net income attributable to the ordinary shareholders. The Company believes these non-GAAP financial measures are important to help investors understand the Company's operating and financial performance, compare business trends among different reporting periods on a consistent basis and assess the Company's core operating results,.  The use of the above non-GAAP financial measures has certain limitations.  Share-based compensation charge has been and will continue to be incurred and is not reflected in the presentation of the non-GAAP financial measures; it should be considered in the overall evaluation of our results.  None of the non-GAAP measures is a measure of net income attributable to the Company's shareholders, operating profit, operating performance or liquidity presented in accordance with GAAP.  We compensate for these limitations by providing the relevant disclosure of our share-based compensation charge in our reconciliations to the most directly comparable GAAP financial measures, which should be considered when evaluating our performance.  These non-GAAP financial measures should be considered in addition to financial measures prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, financial measures prepared in accordance with GAAP.  Reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP financial measure is set forth at the end of this release.

Conference Call

The Company will host a conference call and live webcast at 8:00 p.m. Eastern Time (New York) on Tuesday, March 20, 2012 (which is 8:00 a.m. in China on Wednesday, March 21, 2012).

The dial-in details for the live conference call are:

A live webcast and archive of the conference call will be available on the Investor Relations section of Taomee's website at:

http://ir.taomee.com/phoenix.zhtml?c=243417&p=irol-eventDetails&EventId=4728668

A telephone replay of the call will be available after the conclusion of the conference call at 2:00 p.m. Eastern Time on March 21, 2011 through March 28, 2012 11:59 p.m. Eastern Time. The dial-in details for the telephone replay are:

About Taomee Holdings Limited

Taomee Holdings Limited is one of the leading children's entertainment and media companies in China driven to deliver exceptional entertainment to children and families. Founded in 2007, Taomee is one the first companies in Greater China to develop animated franchises for children through online virtual world that are both fun and educational. The Company's virtual worlds are widely trusted by millions of parents and caregivers across Asia. The Company's Mole's World and Seer franchises and characters have reached millions of children and families through virtual worlds, books, monthly print magazines, mobile applications, animated television series and movies.

• Learn more about Taomee at www.taomee.com.
• Visit online virtual world communities at www.61.com.
• Watch animations and films at http://v.61.com/.
• Download mobile games and applications at http://m.61.com/.
• Share with other parents and caregivers at http://mama.61.com/.

Safe Harbor Statements

This press release contains statements that may constitute "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words or phrases such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "potential," "continue," "is/are likely to" or other similar expressions. Among other things, the management's quotations and outlook information contain forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Potential risks and uncertainties include, but are not limited to: the Company's business strategies and initiatives as well as business plans; future business development, results of operations and financial condition; expected changes in revenues and certain cost or expense items; expectations with respect to increased revenue growth and the Company's ability to sustain profitability; the Company's services and products under development or planning; the Company's ability to attract users and further enhance the Company's brand recognition; and trends and competition in the children's entertainment and media market and industry, including those for online entertainment. Further information regarding these and other risks is included in Taomee's filings with the U.S. Securities and Exchange Commission, including its registration statement on its final prospectus dated June 10, 2011. All information provided in this press release is as of the date of the press release, and the Company undertakes no obligation to update any forward-looking statements to reflect subsequent occurring events or circumstances, or changes in its expectations, except as required under applicable law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, the Company cannot assure you that their expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.

For further information, please contact

Taomee Holdings Limited
Phone: +86-21-6128-0056 x8578
Email:  ir@taomee.com