BEIJING, Nov. 12 /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 third quarter ended
September 30, 2008.
William Ding, Chief Executive Officer and Director of NetEase commented,
'We believe that the online gaming industry in China continues to enjoy
healthy growth and shows no obvious signs of slowing. NetEase's online game
business performed well in the third quarter due to the continued popularity
of Fantasy Westward Journey (FWJ), a leading MMORPG in China. FWJ reached a
new high of 2.3 million peak concurrent users in August as a result of the
successful launch of a series of in-game marketing events during the summer
holidays. Our game pipeline remains strong through the release of expansion
packs of our existing flagship games and the development of new games. For
example, we launched a new expansion pack for Tianxia II on September 24, 2008,
and both the number of online players and consumption level have reached
expectations and showed healthy growth since the commencement of its open beta
testing on June 6, 2008. During the quarter, we commenced the closed beta
testing of Heroes of Tang Dynasty, a history-based and adventure role-playing
game, and the open beta testing of Legend of Westward Journey, an item-based
version of our popular Westward Journey game series. We are also selectively
considering licensing opportunities, such as the one we signed in the third
quarter with Blizzard Entertainment, to further penetrate the online game
market.'
Mr. Ding continued, 'The advertising revenue increase in the third quarter
reflected the Company's on-going effort in strengthening the content of its
portal. During the quarter, we made enhancements to our e-mail, blog and
search products, and raised the overall users' experience to a new level to
attract and engage new users. We plan to continue to improve our service
offerings and content to further enhance our leadership position in the
market.'
Mr. Ding further remarked, 'We believe that the outlook for the China
Internet market still looks positive and is expected to show healthy growth
for 2009, as a result of the rapid expansion of Internet users, the increasing
popularity of e-commerce and the continued shift in advertising revenue to the
Internet from traditional media advertising.'
Third Quarter 2008 Financial Results
Revenues
Total revenues for the third quarter of 2008 were RMB806.6 million
(US$118.8 million), compared to RMB715.9 million (US$105.4 million) and
RMB571.1 million (US$84.1 million) for the preceding quarter and the third
quarter of 2007, respectively.
Revenues from online games were RMB675.1 million (US$99.4 million) for the
third quarter of 2008, compared to RMB595.0 million (US$87.6 million) and
RMB468.7 million (US$69.0 million) for the preceding quarter and the third
quarter of 2007, respectively.
Revenues from advertising services were RMB113.0 million (US$16.6 million)
for the third quarter of 2008, compared to RMB103.9 million (US$15.3 million)
and RMB85.5 million (US$12.6 million) for the preceding quarter and the third
quarter of 2007, respectively.
Revenues from wireless value-added services and others ('WVAS and others')
were RMB18.5 million (US$2.7 million) for the third quarter of 2008, compared
to RMB16.9 million (US$2.5 million) for each of the preceding quarter and the
third quarter of 2007.
Gross Profit
Gross profit for the third quarter of 2008 was RMB631.3 million (US$93.0
million), compared to RMB722.8 million (US$106.5 million) and RMB441.9 million
(US$65.1 million) for the preceding quarter and the third quarter of 2007,
respectively. The quarter-over-quarter decrease was primarily attributable to
the receipt of a business tax refund of RMB146.8 million (US$21.6 million) in
June 2008 and increased content costs arising from Olympic-related price
increases by content providers. The decrease was partially offset by
increased online game and advertising services revenues in the current quarter.
The year-over-year increase in gross profit was primarily driven by increased
online game and advertising services revenues, partially offset by higher
content costs and higher staff related costs resulting from increased
headcount in the current quarter. The quarter-over-quarter increase in online
game revenue in the third quarter of 2008 was primarily attributable to
certain FWJ-related in-game marketing activities launched during the summer
holidays of 2008. The year-over-year increase in online game revenue was
primarily attributable to both FWJ-related marketing activities in 2008 and
the successful launch of an expansion pack for FWJ in late September of 2007.
The quarter-over-quarter and year-over-year increases in advertising revenue
were primarily attributable to higher demand for advertising services during
the third quarter of 2008.
Gross Profit Margin
Gross profit margin for the online game business for the third quarter of
2008 was 89.7%, compared to 91.2% and 89.4% for the preceding quarter and the
third quarter of 2007, respectively. The quarter-over-quarter decrease in
gross profit margin was primarily due to the business tax refund received in
the preceding quarter as mentioned above. The year-over-year gross profit
margin remained relatively stable.
Gross profit margin for the advertising business for the third quarter of
2008 was 26.9%, compared to 52.6% and 54.0% for the preceding quarter and the
third quarter of 2007, respectively. The quarter-over-quarter and year-over-
year decreases in gross profit margin were primarily due to increased content
cost arising from Olympic-related price increases by content providers,
partially offset by higher revenues.
Gross loss margin for the WVAS and others business for the third quarter
of 2008 was 6.4%, compared to the gross profit margin of 28.8% and the gross
loss margin of 33.3% for the preceding quarter and the third quarter of 2007,
respectively. The quarter-over-quarter decrease in gross profit margin was
primarily due to the business tax refund received in the preceding quarter as
mentioned above. The year-over-year improvement in gross loss margin was
primarily due to increased revenue from the sale of accessories and premium
email services, lower business tax resulting from certain preferential
business tax treatment in the PRC which commenced in the first quarter of 2008
and lower server depreciation expenses during the third quarter of 2008.
Operating Expenses
Total operating expenses for the third quarter of 2008 were RMB164.6
million (US$24.2 million), compared to RMB149.7 million (US$22.1 million) and
RMB179.0 million (US$26.4 million) for the preceding quarter and the third
quarter of 2007, respectively. The quarter-over-quarter increase in selling
and marketing expenses was primarily driven by higher costs related to the
marketing of FWJ and Tianxia II, higher marketing cost associated with the
Beijing Olympics and higher staff-related costs resulting from increased
headcount. The quarter-over-quarter increase in general and administrative
expenses was primarily driven by a net increase in bad debt provision during
the third quarter of 2008. Research and development expenses remained
relatively stable quarter-over-quarter. The year-over-year decrease in
operating expenses was primarily due to decreased selling and marketing
expenses related to the launch of Westward Journey Online III in the third
quarter of 2007, partially offset by increased research and development staff
cost, resulting from increased headcount in the third quarter of 2008.
Net Profit
Net profit for the third quarter of 2008 totaled RMB313.3 million (US$46.1
million), compared to RMB438.2 million (US$64.5 million) and RMB260.2 million
(US$38.3 million) for the preceding quarter and the third quarter of 2007,
respectively. During the third quarter of 2008, the Company reported a net
foreign exchange loss of RMB68.3 million (US$10.1 million) under Other, net,
compared to RMB26.4 million (US$3.9 million) and RMB11.3 million (US$1.7
million) for the preceding quarter and the third quarter of 2007, respectively.
The quarter-over-quarter and year-over-year increases in net foreign exchange
loss in the current quarter were primarily attributable to the translation
loss arising from the Company's US dollar- and Euro-denominated bank deposits
and the fact that the Company fully redeemed its zero coupon subordinated
convertible notes in July 2008 which had generated exchange gains in 2007 and
2008 prior to such redemption. NetEase reported both basic and diluted
earnings per American depositary share ('ADS') of US$0.36 for the third
quarter of 2008. The Company reported basic and diluted earnings per ADS of
US$0.53 and US$0.50 and US$0.31 and US$0.29 for the preceding quarter and the
third quarter of 2007, respectively.
Income Taxes
Effective as of January 1, 2008, the Chinese government adopted a new
income tax law which unified the enterprise income tax payable by domestic and
foreign-invested enterprises at 25%. Prior to the adoption of the new law, a
number of the Company's subsidiaries and variable interest entities (VIEs)
were entitled to various preferential tax treatments. The Company's
subsidiaries and VIEs are at various stages of progress depending on the
requirements of the different local tax authorities in applying for the
New/High Technology Enterprises ('NHTEs') preferred tax treatment pursuant to
the 'Working Guidelines for Assessment of New/High Technology Enterprises'
issued by the Chinese tax authorities on July 8, 2008. Accordingly, NetEase
followed the applicable accounting standards and adopted the statutory rate of
25% in making tax provisions for the third quarter ended September 30, 2008,
except for entities still enjoying unexpired tax holidays.
The tax charge for the third quarter of 2008 was RMB125.7 million (US$18.5
million), compared to the tax charge of RMB140.0 million (US$20.6 million) and
the tax charge of RMB19.9 million (US$2.9 million) for the preceding quarter
and the third quarter of 2007, respectively. The quarter-over-quarter
decrease in tax charge was primarily attributable to an increased level of
income recorded by the Company's subsidiaries and VIEs operating in China,
which currently enjoy unexpired tax holidays.
