NetEase Reports First Quarter 2017 Unaudited Financial Results

BEIJING, May 10, 2017 /PRNewswire/ --

NetEase, Inc. (NASDAQ: NTES) ("NetEase" or the "Company"), one of China's leading i nternet and online game services providers, today announced its unaudited financial results for the first quarter ended March 31, 2017.

 

First Quarter 2017 Financial Highlights

• Net revenues were RMB13.6 billion (US$2.0 billion), an increase of 72.3% compared with the first quarter of 2016.
  • Online game services net revenues were RMB10.7 billion (US$1.6 billion), an increase of 78.5% compared with the first quarter of 2016.
  • Advertising services net revenues were RMB445.2 million (US$64.7 million), an increase of 13.2% compared with the first quarter of 2016.
  • E-mail, e-commerce and others net revenues were RMB2.5 billion (US$357.4 million), an increase of 63.2% compared with the first quarter of 2016.
• Gross profit was RMB7.5 billion (US$1.1 billion), an increase of 63.2% compared with the first quarter of 2016.
• Total operating expenses were RMB2.7 billion (US$394.0 million), an increase of 57.8% compared with the first quarter of 2016.
• Net income attributable to the Company's shareholders was RMB3.9 billion (US$569.9 million), an increase of 59.4% compared with the first quarter of 2016. Non-GAAP net income attributable to the Company's shareholders was RMB4.3 billion (US$630.0 million), an increase of 62.6% compared with the first quarter of 2016.^[1]
• Diluted earnings per ADS were US$4.29; non-GAAP diluted earnings per ADS were US$4.75.

 

First Quarter 2017 Operational Highlights

• Furthered the international penetration of Onmyoji by launching it in Japan, which achieved 200 million downloads globally by February 20, 2017.
• Launched new mobile titles including Demon Seals mobile, Westward Journey: Rage and Land of Glory, all of which were well-received.
• Achieved record number of quarterly active users for Blizzard Entertainment's Hearthstone^® and launched its new expansion pack Journey to Un'Goro^™ in April 2017.

"Our strong first quarter results were led by our self-developed mobile games as we continued to bring innovative content to our massive audience," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "During the period, we advanced our strategic initiatives by rolling out new mobile games and expansion packs for our PC-client games, enhancing the monetization capabilities of our advertising services, and expanding our growing e-commerce businesses. The Company continues to introduce popular games that enrich the online game market in China, and initiated closed beta testing for Minecraft in April. We are also actively expanding our international footprint by bringing hit titles such as Onmyoji and Land of Glory to global audiences."

"Ingenuity remains the cornerstone of our success across each of our core business lines where there are ample opportunities for growth. We are devoting significant resources to our media business supported by our deep expertise and R&D capabilities. Our e-commerce businesses such as Kaola.com and Yanxuan are also thriving with promising growth trajectories. With these initiatives and our focus on creating premium content, we aim not only to expand our business, but to grow our community and elevate users' imaginations," Mr. Ding concluded.

First Quarter 2017 Financial Results

Net Revenues

Net revenues for the first quarter of 2017 were RMB13,640.5 million (US$1,981.7 million), compared to RMB12,099.0 million and RMB7,915.4 million for the preceding quarter and the first quarter of 2016, respectively.

Net revenues from online games were RMB10,735.5 million (US$1,559.7 million) for the first quarter of 2017, compared to RMB8,959.1 million and RMB6,015.1 million for the preceding quarter and the first quarter of 2016, respectively. Mobile games accounted for approximately 73.3% of net revenues from online games in the first quarter of 2017, compared to 64.4% and 63.7% for the preceding quarter and the first quarter of 2016, respectively.

Net revenues from advertising services were RMB445.2 million (US$64.7 million) for the first quarter of 2017, compared to RMB664.8 million and RMB393.2 million for the preceding quarter and the first quarter of 2016, respectively. The top performing advertising verticals in the first quarter of 2017 were automobile, real estate and telecommunication services.

Net revenues from e-mail, e-commerce and others were RMB2,459.9 million (US$357.4 million) for the first quarter of 2017, compared to RMB2,475.1 million and RMB1,507.1 million for the preceding quarter and the first quarter of 2016, respectively.

Gross Profit

Gross profit for the first quarter of 2017 was RMB7,483.6 million (US$1,087.2 million), compared to RMB6,463.3 million and RMB4,586.6 million for the preceding quarter and the first quarter of 2016, respectively.

The year-over-year increase in online games gross profit was primarily driven by revenue contribution from mobile games such as Onmyoji, the mobile version of New Ghost and Demon Seals mobile as well as Blizzard Entertainment's Overwatch^® and World of Warcraft^®. The quarter-over-quarter increase in online games gross profit was primarily driven by revenue contribution from mobile games such as Onmyoji, the mobile version of New Ghost and Demon Seals mobile.

The quarter-over-quarter decrease in advertising services gross profit was primarily due to seasonality.

The year-over-year increase in e-mail, e-commerce and others gross profit was primarily due to increased revenue contribution from NetEase's e-commerce businesses such as Kaola.com. The quarter-over-quarter decrease in e-mail, e-commerce and others gross profit was primarily due to decreased revenue contribution from certain e-commerce businesses with relatively higher gross profit margins.

Gross Profit Margin

Gross profit margin for the online games business for the first quarter of 2017 was 63.9%, compared to 60.7% and 67.1% for the preceding quarter and the first quarter of 2016, respectively. The year-over-year decrease in gross profit margin was 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 net revenues. The quarter-over-quarter increase in gross profit margin was mainly due to decreased revenue contribution from licensed games in the current quarter, which have relatively lower gross profit margins, and the one-off recognition of certain royalty expenses related to licensed games in the fourth quarter of 2016, and partially offset by the increased revenue contribution from mobile games in the current quarter.

Gross profit margin for the advertising services business for the first quarter of 2017 was 57.3%, compared to 66.5% and 62.4% for the preceding quarter and the first quarter of 2016, respectively. The year-over-year decrease in gross profit margin was mainly due to higher staff-related and content purchase costs. The quarter-over-quarter decrease in gross profit margin was mainly due to seasonality.

Gross profit margin for the e-mail, e-commerce and others businesses for the first quarter of 2017 was 14.8%, compared to 23.4% and 20.4% for the preceding quarter and the first quarter of 2016, respectively. The year-over-year and quarter-over-quarter decreases in gross profit margin were primarily attributable to decreased revenue contribution from certain e-commerce businesses with relatively higher gross profit margins.

Operating Expenses

Total operating expenses for the first quarter of 2017 were RMB2,711.7 million (US$394.0 million), compared to RMB2,596.6 million and RMB1,718.9 million for the preceding quarter and the first quarter of 2016, respectively. The year-over-year increase in operating expenses was mainly due to increased selling and marketing expenses related to online games, higher research and development investments, higher staff-related costs resulting from an increase in headcount and average compensation and operating expenses related to Kaola.com. The quarter-over-quarter increase in operating expenses was mainly due to higher staff-related costs resulting from an increase in headcount and average compensation.

Income Taxes

The Company recorded a net income tax charge of RMB943.0 million (US$137.0 million) for the first quarter of 2017, compared to RMB882.0 million and RMB530.7 million for the preceding quarter and the first quarter of 2016, respectively. The effective tax rate for the first quarter of 2017 was 19.0%, compared to 19.2% and 17.5% for the preceding quarter and the first quarter of 2016, respectively. The change in effective tax rate represents the Company's estimate of the effective tax rate for the first quarter of 2017.

Net Income After Tax

Net income attributable to the Company's shareholders for the first quarter of 2017 totaled RMB3.9 billion (US$569.9 million), compared to RMB3.7 billion and RMB2.5 billion for the preceding quarter and the first quarter of 2016, respectively. Non-GAAP net income attributable to the Company's shareholders for the first quarter of 2017 totaled RMB4.3 billion (US$630.0 million), compared to RMB4.0 billion and RMB2.7 billion for the preceding quarter and the first quarter of 2016, respectively.

During the first quarter of 2017, the Company had a net foreign exchange loss of RMB48.5 million (US$7.0 million), compared to a net foreign exchange gain of RMB90.5 million and a net foreign exchange loss of RMB36.0 million for the preceding quarter and the first quarter of 2016, respectively. The year-over-year and quarter-over-quarter changes in foreign exchange gains and losses were mainly due to unrealized exchange gains and losses arising from the Company's U.S. dollar-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$4.33 and US$4.29, respectively, for the first quarter of 2017. The Company reported basic and diluted earnings per ADS of US$4.08 and US$4.04, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$2.72 and US$2.70, respectively, for the first quarter of 2016. Non-GAAP basic and diluted earnings per ADS were US$4.79 and US$4.75, respectively, for the first quarter of 2017, compared to non-GAAP basic and diluted earnings per ADS of US$4.38 and US$4.34, respectively, in the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$2.94 and US$2.92, respectively, for the first quarter of 2016.

Quarterly Dividend

The board of directors has approved a dividend of US$1.08 per ADS for the first quarter of 2017, which is expected to be paid on June 2, 2017 to shareholders of record as of the close of business on May 26, 2017.

NetEase paid a dividend of US$1.01 per ADS for the fourth quarter of 2016 on March 10, 2017.

Under the Company's quarterly dividend policy announced on May 13, 2014, quarterly dividends will be set at an amount equivalent to approximately 25% of the Company's anticipated net income after tax in each fiscal quarter. The determination to make dividend distributions and the amount of such distributions in any particular quarter will be made at the discretion of the board of directors and will be based upon the Company's operations and earnings, cash flow, financial condition and other relevant factors.

Other Information

As of March 31, 2017, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB40.6 billion (US$5.9 billion), compared to RMB36.9 billion as of December 31, 2016. Cash flow generated from operating activities was RMB4.0 billion (US$585.7 million) for the first quarter of 2017, compared to RMB5.4 billion and RMB3.1 billion for the preceding quarter and the first quarter of 2016, respectively.

Share Repurchase Program

On November 15, 2016, the Company announced that its board of directors approved a share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months. As of March 31, 2017, the Company had repurchased approximately 83,000 ADSs for approximately US$23.7 million under this program.

** 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$1.00 = RMB6.8832 on March 31, 2017 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on March 31, 2017, or at any other certain date. The percentages stated are calculated based on RMB.

Other Announcements

The Company announced today that Mr. Onward Choi has resigned from his position as Acting Chief Financial Officer effective June 30, 2017 due to personal reasons. The Company will retain Mr. Choi as a consultant over the coming year to support a smooth transition to his successor. The Company plans to announce a new chief financial officer in the near future.

"For more than 13 years Onward has been an integral part of our executive leadership team during a period of transformational growth in NetEase's history. His leadership, insights and guidance have been instrumental in building a strong finance team within NetEase. I would like to thank him for his dedication and valuable contributions to NetEase," said Mr. Ding.

"I wish to express my heartfelt gratitude to William for giving me the privilege of working alongside the Company's incredible leadership team. My time with NetEase represents the most fulfilling part of my career. I am very proud of what has been accomplished for our employees and shareholders, and I am confident that NetEase will achieve new heights in the time ahead," said Mr. Choi.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 9:00 p.m. Eastern Time on Wednesday, May 10, 2017 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, May 11, 2017). NetEase's management will be on the call to discuss the quarterly results and answer questions.

Interested parties may participate in the conference call by dialing 1-888-267-6301 (international: 1-719-457-2664), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-888-203-1112 (international: 1-719-457-0820), and entering passcode 6590310#. The replay will be available through May 24, 2017.

This call will be webcast live and the replay will be available for 12 months. Both will be available on NetEase's Investor Relations website at http://ir.netease.com.

About NetEase, Inc.

NetEase, Inc. (NASDAQ: NTES) is a leading internet technology company in China. Dedicated to providing online services centered around content, community, communication and commerce, NetEase develops and operates some of China's most popular PC-client and mobile games, advertising services, e-mail services and e-commerce platforms. In partnership with Blizzard Entertainment, Mojang AB (a Microsoft subsidiary) and other global game developers, NetEase also operates some of the most popular international online games in China. For more information, please visit: http://ir.netease.com/.

Forward Looking Statements

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 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 successfully expand its mobile internet offerings; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that Shanghai EaseNet will not be able to continue operating World of Warcraft^®, StarCraft^® II, Hearthstone^®, Diablo^® III: Reaper of Souls^™, Heroes of the Storm^®, Overwatch^® or other games licensed by it for a period of time or permanently due to possible governmental actions or the risk that such games will not be popular with game players in China; the risk that changes in Chinese government regulation of the online game market and the market for NetEase's e-commerce businesses may limit future growth of NetEase's revenues or cause revenues to decline; competition in the online advertising business and the risk that investments by NetEase in its content and services may not increase the appeal of the NetEase websites among internet users or result in increased advertising revenues; the risk that NetEase may not be able to continuously develop new and creative online services, including its ability to maintain and enhance the popularity of its e-mail, mobile and e-commerce businesses and develop attractive mobile games; 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 and the ability of NetEase to receive and maintain approvals of the preferential tax treatments and general competition and price pressures in the marketplace); 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 the applicable law.

Non-GAAP Financial Measures

NetEase considers and uses non-GAAP financial measures, such as non-GAAP net income attributable to the Company's shareholders and non-GAAP basic and diluted earnings per ADS, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

NetEase defines non-GAAP net income attributable to the Company's shareholders as net income attributable to the Company's shareholders excluding share-based compensation expenses. Non-GAAP net income attributable to the Company's shareholders enables NetEase's management to assess its operating results without considering the impact of share-based compensation expenses, which are non-cash charges. NetEase believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company's current operating performance and future prospects in the same manner as management does, if they so choose. NetEase also believes that the use of this non-GAAP financial measure facilitates investors' assessment of its operating performance.

Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools. One of the key limitations of using non-GAAP net income attributable to the Company's shareholders is that it does not reflect all items of expense that affect our operations. Share-based compensation expenses have been and may continue to be incurred in our business and are not reflected in the presentation of non-GAAP net income attributable to the Company's shareholders. In addition, the non-GAAP financial measures NetEase uses may differ from the non-GAAP measures used by other companies, including peer companies, and therefore their comparability may be limited.

NetEase compensates for these limitations by reconciling non-GAAP net income attributable to the Company's shareholders to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating the Company's performance. See "Reconciliation of GAAP and Non-GAAP Results" at the end of this press release. NetEase encourages you to review its financial information in its entirety and not rely on a single financial measure. 

Contact for Media and Investors:

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

 

 

 

 

 

 

 

 

 

 

 

NETEASE, 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 = RMB6.8832 on the last trading day of March 2017 (March 31, 2017) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

Note 2: Share-based compensation cost reported in the Company's unaudited condensed consolidated statements of comprehensive income is set out as follows in RMB and USD (in thousands):

 

 

 

 

 

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SOURCE NetEase, Inc.