NETEASE, INC. Juliet Yang NetEase, Inc.
hzyangyy@corp.netease.com Tel: (+86) 571-8985-3378
Brandi Piacente Investor Relations
brandi@corp.netease.com Tel: (+1) 212-481-2050
(Beijing - November 11, 2015) - NetEase, 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, 2015.
'We are honored to be a leading developer and operator of some of the country's most popular games as China's online game industry is on track to become the world's largest gaming market,' said Mr. William Ding, Chief Executive Officer and Director of NetEase. 'Our third quarter financial results reflect our success at innovation with total net revenues increasing by 114.1% compared with the third quarter of last year. We grew our top-line net revenues across our three business segments both sequentially and year-over-year, with year-over-year increases of 124.5% in online games, 10.5% in advertising services and 162.2% in e-mail, e- commerce and others.'
'Our self-developed and licensed PC-client games maintain a healthy appeal to our users, while our mobile games are driving new growth. During the third quarter of this year, we launched our Westward Journey Online mobile game, which together with our Fantasy Westward Journey mobile game, are now the top two grossing games in the iOS China app store. Players' appetite for our new self-developed PC-client game Revelation, a 3D oriental fantasy MMORPG, was also strong in the third quarter, and we saw continued interest in Blizzard Entertainment's Diablo III®: Reaper of Souls™ and Hearthstone®: Heroes of Warcraft™. A number of new expansion packs for our PC-client games were warmly received during the third quarter as well, including Fantasy Westward Journey II and a new version of Ghost II, named New Ghost. Additionally, we have entered into collaboration between New Ghost and an urban TV show, which is based on a renowned youth romance novel. This cooperation represents the initiation of our strategy to utilize innovative marketing models for our games that further extend our brand.'
'Today, our mobile portfolio stands strong with more than 50 titles, and we plan to grow this position with self-developed and licensed games that continue to delight our players. These include games that we have launched since July of this year that have gained immediate traction such as Fairy Tales: The World of the Brave, Kari-ri-sei Million Arthur, Lunar Flowers, The Beautiful Dream and Chrono Blade. In addition, we are
planning for the exciting introduction of our highly-anticipated Kung Fu Panda mobile game in late November, as well as The X-World, Fantasy Westward Journey: Warriors and Raven in the coming months. For our PC-client games, the new expansion pack for Kung Fu Master II, which we released in October, is being well received. We also look forward to bringing our PC-client players thrilling new experiences with expansion packs planned for Tianxia III, Heroes of Tang Dynasty Zero, and the new release of Hegemon-King of Western Chu.'
'Advertisers are continuing the transition from PC to mobile, a platform where our foothold is particularly strong. Supported by the popularity of our Mobile News App, we are seeing continued growth in our advertising revenues from mobile platforms. During the third quarter, our advertising services' net revenues growth was led by the automobile, Internet services and food and beverage sectors. Our cross-border e- commerce platform Kaola.com also continued to grow rapidly during the third quarter and we are seeing sustained strong momentum from our e-commerce business.'
'Our portfolio of PC-client and mobile games is robust and growing. In addition to the domestic popularity of our mobile initiatives that span games, apps, advertising services and e-commerce, we have now launched several new games for overseas audiences to a positive reception. Along with our rapid mobile growth, our focus remains on superior quality and innovation, particularly where there is an opportunity to enhance our offerings with IP and data sharing between our PC-client and mobile games, and other product and service offerings across our business lines,' Mr. Ding concluded.
Net Revenues
Net revenues for the third quarter of 2015 were RMB6,671.8 million (US$1,049.7 million), compared to RMB4,567.9 million and RMB3,116.7 million for the preceding quarter and the third quarter of 2014, respectively.
Net revenues from online games were RMB5,212.9 million (US$820.2 million) for the third quarter of 2015, compared to RMB3,657.1 million and RMB2,322.0 million for the preceding quarter and the third quarter of 2014, respectively.
Net revenues from advertising services were RMB454.9 million (US$71.6 million) for the third quarter of 2015, compared to RMB427.7 million and RMB411.7 million for the preceding quarter and the third quarter of 2014, respectively.
Net revenues from e-mail, e-commerce and others were RMB1,004.0 million (US$158.0 million) for the third quarter of 2015, compared to RMB483.0 million and RMB383.0 million for the preceding quarter and the third quarter of 2014, respectively.
Gross Profit
Gross profit for the third quarter of 2015 was RMB3,849.3 million (US$605.6 million), compared to RMB2,845.6 million and RMB2,258.4 million for the preceding quarter and the third quarter of 2014, respectively.
The year-over-year and quarter-over-quarter increases in online games gross profit were primarily driven by revenue contribution from mobile games such as the Fantasy Westward Journey mobile game and licensed games such as Blizzard Entertainment's Diablo III®: Reaper of Souls™ and Hearthstone®: Heroes of Warcraft™, as well as NetEase's new self-developed PC-client games such as Revelation.
The year-over-year and quarter-over-quarter increases in advertising services gross profit were primarily attributable to strong demand from the automobile, Internet services and food and beverage sectors, and NetEase's monetization efforts for its mobile applications, primarily its Mobile News App.
The year-over-year decrease in e-mail, e-commerce and others gross profit was primarily due to the temporary suspension of higher margin e-commerce services related to third-party lottery products since late February 2015, which was partially offset by increased revenue contribution from NetEase's other e-commerce platforms, which have relatively lower gross profit margins. The quarter-over-quarter decrease was primarily due to the one-off recognition of expenses related to certain copyrights in the third quarter of 2015.
Gross Profit Margin
Gross profit margin for the online games business for the third quarter of 2015 was 67.9%, compared to 69.3% and 77.2% for the preceding quarter and the third quarter of 2014, respectively. The year-over-year and quarter-over-quarter decreases in gross profit margin were mainly due to increased revenue contribution from mobile games, which have relatively lower gross profit margins, as a percentage of NetEase's total online games revenues.
Gross profit margin for the advertising services business for the third quarter of 2015 was 67.6%, compared to 68.2% and 65.3% for the preceding quarter and the third quarter of 2014, respectively.
Gross profit margin for the e-mail, e-commerce and others business for the third quarter of 2015 was 0.1%, compared to 4.2% and 51.6% for the preceding quarter and the third quarter of 2014, respectively. The year- over-year decrease in gross profit margin was primarily attributable to the temporary suspension of higher margin e-commerce services related to third-party lottery products discussed above, as well as increased revenue contribution from NetEase's other e-commerce platforms, which have relatively lower gross profit margins. The quarter-over-quarter decrease was mainly due to the one-off recognition of expenses related to certain copyrights in the third quarter of 2015.
Operating Expenses
Total operating expenses for the third quarter of 2015 were RMB1,761.2 million (US$277.1 million), compared to RMB1,395.2 million and RMB1,059.2 million for the preceding quarter and the third quarter of
2014, respectively. The year-over-year and quarter-over-quarter increases in operating expenses were mainly due to increased selling and marketing expenses for mobile and PC-client games, advertising services and other mobile products, and higher staff-related costs resulting from an increase in headcount and average compensation.
Income Taxes
The Company recorded a net income tax charge of RMB399.2 million (US$62.8 million) for the third quarter of 2015, compared to RMB145.9 million and RMB197.3 million for the preceding quarter and the third quarter of 2014, respectively. The effective tax rate for the third quarter of 2015 was 17.1%, compared to 9.2% and 14.4% for the preceding quarter and the third quarter of 2014, respectively. The year-over-year increase in the effective tax rate was mainly due to the fact that certain subsidiaries of the Company were approved as Key Software Enterprises and subject to a preferential tax rate of 10% for 2014. Those subsidiaries were subject to a tax rate of 15% in 2015. The quarter-over-quarter increase in the effective tax rate was mainly due to the fact that the Company recognized certain tax credits in the second quarter of 2015 related to annual tax filing benefits, most of which comprised extra tax deductions for research and development expenses approved by the tax authorities.
Net Income After Tax
Net income attributable to the Company's shareholders for the third quarter of 2015 totaled RMB1.9 billion (US$296.1 million), compared to RMB1.4 billion and RMB1.2 billion for the preceding quarter and the third quarter of 2014, respectively. Non-GAAP net income attributable to the Company's shareholders [1] for the third quarter of 2015 totaled RMB2.1 billion (US$322.6 million), compared to RMB1.6 billion and RMB1.3 billion for the preceding quarter and the third quarter of 2014, respectively.
During the third quarter of 2015, the Company had a net foreign exchange gain of RMB66.5 million (US$10.5 million), compared to a net foreign exchange loss of RMB21.7 million and a net foreign exchange gain of RMB2.2 million for the preceding quarter and the third quarter of 2014, respectively. The year-over-year and quarter-over-quarter changes in foreign exchange gains/(losses) were mainly due to unrealized exchange gains/(losses) arising from the Company's foreign currency-denominated bank deposits and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods.
NetEase reported basic and diluted earnings per ADS of US$2.25 and US$2.24, respectively, for the third quarter of 2015. The Company reported basic and diluted earnings per ADS of US$1.70 and US$1.69, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$1.40 and US$1.39, respectively, for the third quarter of 2014. Non-GAAP basic and diluted earnings per ADS were US$2.45 and US$2.44, respectively, for the third quarter of 2015, compared to non-GAAP basic and diluted earnings per ADS of US$1.90 and US$1.89, respectively, in the preceding quarter, and US$1.51 each for the third quarter of 2014.
[1] As used in this press release, non-GAAP net income attributable to the Company's shareholders is defined to exclude share-based compensation expenses. See 'Unaudited Reconciliation of GAAP and Non-GAAP Results' at the end of this press release.
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