The9 Limited Reports Third Quarter 2009 Unaudited Financial Results
Third Quarter 2009 Highlights:
-- Net revenues for the third quarter of 2009 decreased by 91% quarter-over-quarter and decreased by 94% year-over-year to RMB25.5 million (US$3.7 million), mainly due to a decrease in revenue from World of Warcraft ("WoW"), for which our license agreement expired on June 7, 2009.
-- Net loss attributable to ordinary shareholders for the third quarter of 2009 of RMB73.6 million (US$10.8 million), representing a 7% decrease from a net loss of RMB79.2 million (US$11.6 million) in the previous quarter and compared with net income of RMB80.5 million (US$11.8 million) in the same period last year.
Management Comments:
Commenting on the third quarter 2009 results, Jun Zhu, Chairman and Chief Executive Officer of The9 said, "Although our revenue loss cannot be recovered within a short period of time, we are glad to see that our research and development capabilities continue to strengthen as a result of our investments. Our proprietary games have shown substantive progress and a strong potential to be well received by Chinese game players."
Xiaowei Chen, The9's President, added, "It is encouraging that in the third quarter 2009 there has been sequential growth of 55% in net revenue attributable to our current games. This was achieved due to the enhancement of our game portfolio diversification and we will continue our intense turnaround efforts."
Discussion of The9's Unaudited Third Quarter 2009 Results
Revenues
For the third quarter of 2009, The9 reported total net revenues of RMB25.5 million (US$3.7 million), a decrease of 91% compared to RMB287.9 million (US$42.2 million) in the second quarter of 2009 and a decrease of 94% compared to RMB408.4 million (US$59.8 million) in the third quarter of 2008. This decrease was mainly due to the expiration of our license agreement to operate WoW in China on June 7, 2009. No revenue was generated from WoW during the third quarter.
In the third quarter of 2009, net revenues attributable to the operations of non-WoW games increased by 55% quarter-over-quarter. The sequential increase was mainly due to an increase of revenue from Soul of The Ultimate Nation(TM) ("SUN") after the launch of new content upgrade and a theft-proof security system, and revenue contribution for a complete quarter from EA SPORTS(TM) FIFA Online 2, Atlantica and our first web-based game, Jiu Zhou Zhan Ji.
Aggregate active users increased by 6% to 3.4 million quarter- over-quarter in the third quarter, which was mainly due to Jiu Zhou Zhan Ji. Aggregate active paying accounts increased by 48% to 108,000 quarter-over-quarter in the third quarter, mainly due to SUN's improved performance. The quarterly average revenue per user was RMB240, compared with RMB221 in the previous quarter.
Gross (Loss) Profit
Gross loss for the third quarter of 2009 was RMB8.1 million (US$1.2 million), compared to gross profit of RMB64.3 million (US$9.4 million) in the second quarter of 2009 and gross profit of RMB163.0 million (US$23.9 million) in the third quarter of 2008. The gross loss in this quarter was mainly because the revenue scale in the third quarter was insufficient to cover the fixed components in costs of services, including server depreciation, license fee amortization and payroll.
Operating Expenses
For the third quarter of 2009, operating expenses were RMB109.2 million (US$16.0 million), representing a 28% decrease from RMB152.5 million (US$22.3 million) in the second quarter of 2009 and a 6% increase from RMB103.0 million (US$15.1 million) in the third quarter of 2008. The quarter-over-quarter decrease was mainly due to decreased sales and marketing expenses in the third quarter because no new games were launched during this period. The quarter-over- quarter decrease was also due to a slight decrease in product development costs due to the netting-off effect of the restructuring of our Beijing team and increased headcount in our team in Shanghai, partly offset by (i) an increase in general and administrative expenses mainly due to an increase in share-based compensation expenses in relation to a modification of stock option exercise price and (ii) an increase in legal fees.
The year-over-year increase in operating expenses was mainly due to an increase in product development costs caused by the expansion of our research and development team and an increase in general and administrative expenses caused by increased share-based compensation.
For the third quarter of 2009, share-based compensation was RMB26.7 million (US$3.9 million), compared to RMB15.0 million (US$2.2 million) in the second quarter of 2009 and RMB12.2 million (US$1.8 million) in the third quarter of 2008.
Interest Income
Interest income for the third quarter of 2009 was RMB7.2 million (US$1.1 million), compared to RMB6.9 million (US$1.0 million) in the second quarter of 2009 and RMB15.4 million (US$2.3 million) in the third quarter of 2008. The year-over-year decrease was mainly due to a reduction in bank interest rates and a decrease in cash balances compared with the same period last year.
Other Income (Expenses), net
Other income for the third quarter of 2009 was RMB56.0 million (US$8.2 million), compared to other income of RMB0.1 million (US$0.02 million) in the second quarter of 2009 and other income of RMB11.2 million (US$1.6 million) in the third quarter of 2008. The quarter-over-quarter increase of other income was primarily due to a one-off government subsidy amounting to RMB54.2 million (US$7.9 million) received in the third quarter of 2009. No such income was received in the second quarter of 2009. The year-over-year increase was mainly due to an increase in government subsidy of RMB42.2 million (US$6.2 million).
Income Tax Expense
Income tax expense for the third quarter of 2009 was RMB4.9 million (US$0.7 million), mainly representing the tax effect of the one-off government subsidy received during the third quarter, compared to income tax expenses of nil in the previous quarter and income tax expenses of RMB6.4 million (US$0.9 million) in the third quarter of 2008.
Impairment Loss on Investment
In the third quarter of 2009, we recognized an impairment loss on investment of RMB12.2 million (US$1.8 million), while there were no such impairment losses in the previous quarter or in the third quarter of last year. The impairment loss was recognized after an impairment review on our equity investment in a Singapore online game operator. This investment has been marked down to its estimated fair value as of the quarter end.
Net (Loss) Income attributable to ordinary shareholders
For the third quarter of 2009, net loss attributable to ordinary shareholders was RMB73.6 million (US$10.8 million), which decreased by 7% from net loss attributable to ordinary shareholders of RMB79.2 million (US$11.6 million) in the second quarter of 2009 and compared with net income attributable to ordinary shareholders of RMB80.5 million (US$11.8 million) in the third quarter of 2008. The change in net income was a result of the cumulative effect of the foregoing factors.
Fully diluted loss per share and per ADS for the third quarter of 2009 was RMB2.93 (US$0.43), compared with fully diluted losses per share of RMB3.15 (US$0.46) in the second quarter of 2009 and fully diluted earnings per share of RMB2.91 (US$0.43) in the third quarter of 2008.
For the third quarter of 2009, non-GAAP adjusted net loss was RMB29.6 million (US$4.3 million) compared with non-GAAP net income of RMB3.1 million (US$0.5 million) for the previous quarter and RMB177.3 million (US$26.0 million) for the same period of last year. Fully diluted non-GAAP adjusted net loss per share was RMB1.18 (US$0.17), compared with fully diluted non-GAAP adjusted net income per share of RMB0.12 (US$0.02) for the second quarter of 2009 and RMB6.41 (US$0.94) in the third quarter of 2008.
Update on Stock Repurchase Program
On September 12, 2009, The9's stock repurchase program of up to US$50.0 million of its American Depositary Shares ("ADS") ended. During this one-year stock repurchase program, The9 spent approximately US$32.7 million (including transaction costs of US$0.05 million) and repurchased approximately 2.5 million outstanding ADS. The share repurchase was funded by existing cash reserves.
Currency Convenience Translation
The conversion of Renminbi (RMB) into US dollars (US$) in this press release is based on the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York as of September 30, 2009, which was RMB6.8262 to US$1.00. The percentages stated in this press release are calculated based on the RMB amounts.
Use of Non-GAAP Measure
To supplement the consolidated financial statements presented in accordance with accounting principles generally accepted in the United States ("GAAP"), The9 uses the non-GAAP measure of non-GAAP adjusted net income, which is adjusted from the most directly comparable financial measures calculated and presented in accordance with GAAP to exclude certain expenses. The non-GAAP financial measure is provided to enhance investors' overall understanding of the Company's operating performance.
Non-GAAP adjusted net income is defined as earnings before depreciation of property, equipment and software, amortization of land use right and intangibles, share-based compensation, foreign exchange loss and income tax expenses/benefits, as applicable. The use of non-GAAP adjusted net income has certain limitations. Depreciation of property, equipment and software, amortization of land use rights and intangibles and income tax expenses/benefits have been and will be incurred and are not reflected in the presentation of non-GAAP adjusted net income. Each of these items should also be considered in the overall evaluation of our results. Non-GAAP adjusted net income should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation and amortization, and income tax expenses/benefits in our reconciliations to the GAAP financial measure, share-based compensation and income tax expenses/ benefits in our reconciliations to the GAAP financial measure, which should be considered when evaluating our performance. Non-GAAP adjusted net income is not defined under GAAP, and our non-GAAP adjusted net income is not a measure of net income, operating income, or any operating performance measure that is calculated in accordance with GAAP. In addition, our non-GAAP adjusted net income may not be comparable to similarly titled measures utilized by other companies since such other companies may not calculate non- GAAP adjusted net income in the same manner as we do. For more information on this non-GAAP financial measure, please see the tables captioned "Reconciliation of GAAP to non-GAAP results" set forth at the end of this release.
Conference Call / Webcast Information
The9's management team will host a conference call on Monday, November 23, 2009 at 8:00 PM, U.S. Eastern time, corresponding to Tuesday, November 24, 2009 at 9:00 AM, Beijing time, to present an overview of The9's financial performance and business operations.
Investors, analysts and other interested parties will be able to access the live conference by calling +1-800-884-5695, password "33466153." In the U.S., members of the financial community may also participate in the call by dialing toll-free number +1-617-786- 2960, password "33466153." A replay of the call will be available through November 23, 2009. The dial-in details for the replay: U.S. toll free number +1-888-286-8010, International dial-in number +1- 617-801-6888; Password "27870582."
The9 will also provide a live webcast of the earnings call. Participants in the webcast should log onto the Company's Investor Relations website www.corp.the9.com 15 minutes prior to the call, then click on the icon for "The9 Limited 3Q 2009 Earnings Conference Call" and follow the instructions.
About The9 Limited
The9 Limited is an online game operator and developer in China. The9's business is primarily focused on operating and developing high-quality games for the Chinese online game market. The9 directly or through affiliates operates licensed MMORPGs and advanced casual games including Soul of The Ultimate Nation(TM), Granado Espada, EA SPORTS(TM) FIFA Online 2 and Atlantica, as well as its proprietary web-based game Jiu Zhou Zhan Ji, in mainland China. It has also obtained exclusive licenses to operate other games in mainland China, including Audition 2, Kingdom Heroes 2 Online and Field of Honor. In addition, The9 is developing various proprietary games, including World of Fighter, Miracles: Ultimate X, Tiny Tribe, Monster of War and other MMORPGs and advanced causal games.
Safe Harbor Statement
This announcement contains forward-looking statements. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward- looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. Among other things, the business outlook and quotations from management in this press release contain forward-looking statements. The9 may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Forms 20-F and 6-K, etc., in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about The9's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, The9's limited operating history as an online game operator, political and economic policies of the Chinese government, the laws and regulations governing the online game industry, information disseminated over the Internet and Internet content providers in China, intensified government regulation of Internet cafes, The9's ability to retain existing players and attract new players, license, develop or acquire additional online games that are appealing to users, anticipate and adapt to changing consumer preferences and respond to competitive market conditions, and other risks and uncertainties outlined in The9's filings with the U.S. Securities and Exchange Commission, including its annual reports on Form 20-F. The9 does not undertake any obligation to update any forward- looking statement, except as required under applicable law.
For further information, please contact:
Ms. Phyllis Sai
Manager, Investor Relations
The9 Limited
Tel: +86-21-5172-9990
Email: IR@corp.the9.com
Web: www.corp.the9.com/
-- Tables follow --
THE9 LIMITED
CONSOLIDATED STATEMENTS OF INCOME INFORMATION
(Expressed in Renminbi - RMB and US Dollars - US$, except share data)
Quarter Ended
__ September 30,__ June 30,__ September 30,__ September 30,
__ 2008__ 2009__ 2009__ 2009
RMB__ RMB__ RMB__ US$
(unaudited)__ (unaudited)__ (unaudited)__ (unaudited)
Revenues:
Online game
services__ 429,341,753__ 301,491,378__ 25,744,962__ 3,771,492
Game operating
support,
website
solutions and
advertisement__ 93,288__ 247,267__ 79,208__ 11,604
Other revenues__ 1,621,709__ 2,135,763__ 1,077,513__ 157,850
431,056,750__ 303,874,408__ 26,901,683__ 3,940,946
Sales Taxes__ (22,613,391)__ (15,946,899)__ (1,410,747)__ (206,667)
Net Revenues__ 408,443,359__ 287,927,509__ 25,490,936__ 3,734,279
Cost of Services__ (245,465,001) (223,644,279)__ (33,606,420)__ (4,923,152)
Gross Profit
(loss)__ 162,978,358__ 64,283,230__ (8,115,484)__ (1,188,873)
Operating
Expenses:
Product
development__ (21,209,361)__ (31,125,521)__ (26,291,516)__ (3,851,560)
Sales and
marketing__ (24,828,740)__ (37,883,112)__ (20,709,170)__ (3,033,777)
General and
administrative__ (56,939,318)__ (53,257,372)__ (62,174,821)__ (9,108,262)
Impairment of
equipment,
intangible
assets and
goodwill__ --__ (30,199,751)__ -- --
Total operating
expenses:__ (102,977,419)__ (152,465,756)__ (109,175,507)__ (15,993,599)
Profit (loss) from
operations__ 60,000,939__ (88,182,526)__ (117,290,991)__ (17,182,472)
Interest income__ 15,423,866__ 6,905,505__ 7,188,006__ 1,053,003
Other income, net__ 11,211,080__ 112,605__ 55,967,903__ 8,198,984
Income (loss)
before income tax
expense,
impairment loss
on investment
and share of
(loss) in equity
investments__ 86,635,885__ (81,164,416)__ (54,135,082)__ (7,930,485)
Income tax expense__ (6,357,157)__ -- (4,858,272)__ (711,710)
Income (loss)
before impairment
loss on
investment and
share of (loss)
in equity
investments__ 80,278,728__ (81,164,416)__ (58,993,354)__ (8,642,195)
Impairment loss on
investment__ -- -- (12,160,769)__ (1,781,484)
Share of (loss) in
equity
investments,
net of taxes__ (250,417)__ (589,547)__ (677,625)__ (99,268)
Net income (loss)__ 80,028,311__ (81,753,963)__ (71,831,748)__ (10,522,947)
Less: Net income
(loss)
attributable to
non-controlling
interest__ (475,663)__ (2,560,155)__ 1,805,658__ 264,519
Net income (loss)
attributable to
The9 Limited__ 80,503,974__ (79,193,808)__ (73,637,406)__ (10,787,466)
Earnings (loss)
per share
attributable to
The9 Limited's
ordinary
shareholders
- Basic__ 2.92__ (3.15)__ (2.93)__ (0.43)
- Diluted__ 2.91__ (3.15)__ (2.93)__ (0.43)
Weighted average
shares
outstanding
- Basic__ 27,609,689__ 25,125,385__ 25,094,283__ 25,094,283
- Diluted__ 27,657,378__ 25,125,385__ 25,094,283__ 25,094,283
Amount
attributable to
The9 Limited's
ordinary
shareholders__ 80,503,974__ (79,193,808)__ (73,637,406)__ (10,787,466)
THE9 LIMITED
CONSOLIDATED BALANCE SHEETS INFORMATION
(Expressed in Renminbi - RMB and US Dollars - US$)
As at
December 31,__ September 30,__ September 30,
2008__ 2009__ 2009
RMB__ RMB__ US$
(audited)__ (unaudited)__ (unaudited)
Assets
Current Assets
Cash and cash equivalents__ 2,152,585,574__ 1,770,646,481__ 259,389,775
Short term investments__ 68,039,221__ 169,620__ 24,848
Accounts receivable__ 8,323,084__ 865,494__ 126,790
Due from related parties__ 637,708__ 1,050,251__ 153,856
Advances to suppliers__ 1,435,781__ 1,753,933__ 256,941
Prepayments and other
current assets__ 68,371,912__ 55,954,939__ 8,197,085
Prepaid royalties__ 138,843,227__ 63,568,330__ 9,312,404
Deferred costs__ 55,748,737__ 1,762,936__ 258,260
Total current assets__ 2,493,985,244__ 1,895,771,984__ 277,719,959
Investments in equity
investees__ 291,642,529__ 310,522,462__ 45,489,798
Available-for-sale
investments__ 29,218,400__ 10,243,500__ 1,500,615
Property, equipment and
software__ 200,034,094__ 102,937,783__ 15,079,808
Goodwill__ 30,199,751__ -- --
Intangible assets__ 136,129,801__ 117,125,552__ 17,158,236
Land use right__ 81,798,755__ 80,358,074__ 11,772,007
Prepayment for equipment__ -- -- --
Long-term deposits__ -- 795,547__ 116,543
Total Assets__ 3,263,008,574__ 2,517,754,902__ 368,836,966
Liabilities
Current Liabilities
Accounts payable__ 29,758,563__ 34,851,439__ 5,105,540
Due to related parties__ -- -- --
Income tax payable__ 56,680__ 5,372,685__ 787,068
Other taxes payable__ 99,416,815__ 4,656,110__ 682,094
Advances from customers__ 143,464,990__ 13,187,442__ 1,931,886
Deferred revenue__ 201,645,952__ 9,464,273__ 1,386,463
Liability for refund of
prepaid WOW game cards__ -- 196,984,217__ 28,857,083
Other payables and
accruals__ 69,423,536__ 47,020,336__ 6,888,215
Total current liabilities__ 543,766,536__ 311,536,502__ 45,638,349
Equity
The9 Limited shareholders'
equity
Common shares (US$0.01 par
value; 26,817,688 shares
issues and outstanding as
of December 31, 2008,
25,111,645 shares issued
and outstanding as of
September__ 30, 2009)__ 2,190,645__ 2,051,029__ 300,464
Additional paid-in capital__ 2,128,607,581__ 2,058,116,293__ 301,502,489
Statutory reserves__ 24,836,354__ 28,071,982__ 4,112,388
Accumulated other
comprehensive income__ 13,643,131__ -- --
Retained earnings__ 549,964,327__ 117,158,479__ 17,163,060
Total The9 Limited
shareholders' equity__ 2,719,242,038__ 2,205,397,783 -__ 323,078,401
Non-controlling interest__ --__ 820,617__ 120,216
Total equity__ 2,719,242,038__ 2,206,218,400__ 323,198,617
Total liabilities and equity__ 3,263,008,574__ 2,517,754,902__ 368,836,966
THE9 LIMITED
RECONCILIATION OF GAAP TO NON-GAAP RESULTS
(Expressed in Renminbi - RMB and US Dollars - US$, except share data)
Quarter Ended
September 30, June 30,__ September 30, September 30,
2008__ 2009__ 2009__ 2009
RMB__ RMB__ RMB__ US$
(unaudited)__ (unaudited)__ (unaudited)__ (unaudited)
GAAP net income (loss)__ 80,503,974__ (79,193,808) (73,637,406) (10,787,467)
Depreciation of
property, equipment__ 53,181,549__ 48,379,270__ 8,621,153__ 1,262,951
Amortization of land
use right and
intangible assets__ 24,227,801__ 19,046,925__ 5,678,641__ 831,889
Share based
compensation__ 12,220,320__ 15,016,684__ 26,695,613__ 3,910,758
Foreign exchange loss
(gain)__ 810,325__ (114,679)__ (1,781,498)__ (260,979)
Income tax expense__ 6,357,157__ -- 4,858,272__ 711,710
Non-GAAP net income
(loss)__ 177,301,126__ 3,134,392__ (29,565,225)__ (4,331,138)
GAAP earnings (loss)
per share
- Basic__ 2.92__ (3.15)__ (2.93)__ (0.43)
- Diluted__ 2.91__ (3.15)__ (2.93)__ (0.43)
Non-GAAP net income
(loss) per share
- Basic__ 6.42__ 0.12__ (1.18)__ (0.17)
- Diluted__ 6.41__ 0.12__ (1.18)__ (0.17)
Weighted average
shares outstanding
- Basic__ 27,609,689__ 25,125,385__ 25,094,283__ 25,094,283
- Diluted__ 27,657,378__ 25,125,385__ 25,094,283__ 25,094,283
SOURCE: The9 Limited
Originally published by The9 Limited.
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