Sina Technology News, early morning of February 16th Beijing Time - NetEase (Nasdaq: NTES) announced its unaudited financial results for the fourth quarter and year ended December 31, 2011 today. The report showed that total revenue for the fourth quarter of 2011 reached RMB 2.1 billion (USD 341 million), compared to RMB 2 billion in the previous quarter and RMB 1.7 billion in the same period last year; net profit for the fourth quarter was RMB 899 million (USD 143 million), up 26% year-over-year, compared to RMB 826 million in the previous quarter and RMB 713 million in the same period last year.
Ding Lei, CEO and Director of NetEase, stated: "2011 was a year of strong growth for our business. We have adhered to providing high-quality content services to our loyal and growing user base, further solidifying NetEase's leading position in the industry. In 2011, NetEase's total revenue grew by 32.0%, online game service revenue increased by 32.5%, and advertising service revenue grew by 25.6%."
"Our self-developed games 'Tianxia 3' and 'Qian Ni You Hun' developed rapidly, leading to a 4.4% sequential increase in online game revenue in the fourth quarter and a 28.9% year-over-year increase. In October, we launched the 3D MMORPG game 'Tianxia 3', which fully utilized the user base of 'Tianxia II' and demonstrated significant growth potential in the fourth quarter, achieving new highs in both revenue and player data. Additionally, through elite internal testing in April and comprehensive testing in September, 'Qian Ni You Hun' became one of the most popular 2.5D MMORPG games in China in 2011, achieving record player data in the fourth quarter. 'Meng Huan Xi You Online', 'Da Hua Xi You Online II', and 'Da Tang Wu Shuang' also achieved solid performance in the fourth quarter of 2011 and throughout the year. Among them, 'Meng Huan Xi You Online' and 'Da Hua Xi You Online II' set historical revenue records in 2011, showcasing the enduring charm of these two games. These games, along with 'World of Warcraft' licensed from Blizzard Entertainment, were the main drivers of online game revenue growth in 2011."
"User demand-oriented technological innovation and product diversification will be our core strategy for development in 2012. We plan to launch a series of expansion packs in the first half of 2012 to enhance our game lineup, including 'Da Tang Wu Shuang', 'Tianxia 3', 'Meng Huan Xi You Online', 'Zhan Ge', 'Xin Fei Fei', and 'Jing Ling Chuan Shuo', and conduct open beta tests for 'Qian Ni You Hun' and 'Tianxia 3'. Additionally, we plan to test two new self-developed games in mid-2012."
Ding Lei noted, "As a major media platform for Chinese advertisers, internet advertising is developing rapidly. In 2011, led by advertising in the financial services, food and beverage, and internet services sectors, our advertising service revenue continued to grow strongly. Seasonal factors, as well as advertisers' increasing recognition of our innovative content, integrated services, and NetEase user base, led to a 26.3% sequential increase and a 19.2% year-over-year increase in advertising revenue in the fourth quarter of 2011."
"We continuously evaluate the market and improve our products and services to meet the demands of a highly competitive market and constantly changing needs. As China's largest free email operator, as of December 31, 2011, our email registered user count reached 450 million, up 4.7% sequentially. The number of registered users on Weibo reached 97.6 million, up 10.3% sequentially."
Ding Lei summarized, "Our innovation and sharing have been evident in the Chinese Internet market for a long time. Continuing to provide high-quality, innovative products and services for Internet users remains our top priority for work in 2012."
Financial Results for the Fourth Quarter of 2011
Revenue
Total revenue for the fourth quarter of 2011 reached RMB 2.1 billion (USD 341 million), compared to RMB 2 billion in the previous quarter and RMB 1.7 billion in the same period last year.
Online game service revenue for the fourth quarter of 2011 reached RMB 1.8 billion (USD 291 million), compared to RMB 1.8 billion in the previous quarter and RMB 1.4 billion in the same period last year.
Advertising service revenue for the fourth quarter of 2011 reached RMB 279 million (USD 44.2 million), compared to RMB 221 million in the previous quarter and RMB 234 million in the same period last year.
Wireless value-added services and other business revenue for the fourth quarter of 2011 was RMB 37.2 million (USD 5.9 million), compared to RMB 31.3 million in the previous quarter and RMB 23.3 million in the same period last year.
Gross Profit
Gross profit for the fourth quarter of 2011 was RMB 1.5 billion (USD 231 million), compared to RMB 1.3 billion in the previous quarter and RMB 1.1 billion in the same period last year. The sequential and year-over-year increases in gross profit were mainly due to the increase in online game and advertising revenue, but were partially offset by the increase in costs such as royalties and consulting fees related to licensed games, as well as the growth in labor costs.
The year-over-year increase in online game revenue was mainly due to the growth in revenue from various self-developed games, but was partially offset by the decline in revenue from 'World of Warcraft' licensed from Blizzard Entertainment.
'Tianxia 3' performed well after its launch in October 2011. Benefiting from newly launched expansion packs, 'Qian Ni You Hun', 'Meng Huan Xi You Online', and 'Da Hua Xi You Online II' also maintained their strong performances in the fourth quarter. The year-over-year and sequential increases in advertising service revenue were mainly due to seasonal factors, enhanced attractiveness of the company's portal site to users and advertisers, and increased search traffic on the NetEase website.
Gross Margin
The gross margin for online games in the fourth quarter of 2011 was 72.6%, compared to 71.5% in the previous quarter and 71.8% in the same period last year.
The gross margin for advertising services in the fourth quarter of 2011 was 54.5%, compared to 48.4% in the previous quarter and 53.5% in the same period last year. The sequential increase in gross margin was mainly due to scale effects, as advertising costs did not increase proportionally with the increase in advertising revenue in the fourth quarter.
The gross margin for wireless value-added services and other businesses in the fourth quarter of 2011 was 2.2%, compared to loss margins of 13.2% in the previous quarter and 19.7% in the same period last year. The sequential and year-over-year improvements in gross margin were mainly due to the increase in revenue from e-commerce and email services.
Operating Expenses
Operating expenses for the fourth quarter of 2011 were RMB 529 million (USD 84 million), compared to RMB 408 million in the previous quarter and RMB 321 million in the same period last year. The sequential increase in operating expenses was mainly due to the increase in sales and marketing expenses caused by promotional activities for 'Tianxia 3', 'World of Warcraft', and 'Qian Ni You Hun', the increase in research and development labor costs, and the provision for impairment of the first agency fee for 'StarCraft II' licensed from Blizzard Entertainment amounting to RMB 50.3 million (USD 8 million) in the fourth quarter. The year-over-year increase in operating expenses was mainly due to the increase in sales and marketing expenses and labor costs, as well as the aforementioned provision for impairment included in administrative expenses.
Net Profit
Net profit for the fourth quarter of 2011 was RMB 899 million (USD 143 million), compared to RMB 826 million in the previous quarter and RMB 713 million in the same period last year. In the fourth quarter of 2011, the company recorded a net foreign exchange loss of RMB 36.4 million (USD 5.8 million), compared to net foreign exchange losses of RMB 65 million and RMB 36.4 million in the previous quarter and the same period last year, respectively.
The sequential and year-over-year changes in foreign exchange gains (losses) were mainly due to the translation effect of the company's euro bank deposit balance as of December 31, 2011, fluctuating with the euro-to-renminbi exchange rate.
Earnings Per Share (ADS)
Earnings per share (ADS) for the fourth quarter of 2011 were USD 1.09 (basic and diluted). In the previous quarter, it was USD 1.0 (basic and diluted), and in the same period last year, it was USD 0.87 (basic and diluted).
Income Tax
The income tax expense for the fourth quarter of 2011 was RMB 123 million (USD 19.5 million), compared to RMB 141 million in the previous quarter and RMB 83.2 million in the same period last year. The effective tax rate for the fourth quarter of 2011 was 11.8%, compared to 14.7% in the previous quarter and 10.3% in the same period last year.
The main subsidiaries of the group continued to apply for the qualification of high-tech enterprises, allowing them to enjoy a preferential corporate income tax rate of 15% from 2008 to 2010. Due to these subsidiaries continuing to obtain this qualification, they can still enjoy the unchanged preferential corporate income tax rate from 2011 to 2013. The relevant Chinese tax authorities will conduct annual reviews of this qualification.
Annual Financial Results for 2011
Revenue
Total revenue for 2011 was RMB 7.5 billion (USD 1.2 billion), compared to RMB 5.7 billion in 2010. Online game revenue for 2011 was RMB 6.6 billion (USD 1 billion), compared to RMB 4.9 billion in 2010. Advertising service revenue for 2011 was RMB 795 million (USD 126 million), compared to RMB 633 million in 2010. Wireless value-added services and other business revenue for 2011 was RMB 125 million (USD 19.8 million), compared to RMB 82.1 million in 2010.
Gross Profit
Gross profit for 2011 was RMB 4.9 billion (USD 781 million), compared to RMB 3.7 billion in 2010. The growth in gross profit for 2011 was mainly due to the growth in online game and advertising revenue, but was partially offset by the increase in costs for these two business segments.
The substantial growth in online game revenue in 2011 was mainly due to the growth in revenue from self-developed games such as 'Qian Ni You Hun', 'Meng Huan Xi You Online', 'Da Tang Wu Shuang', 'Tianxia 3', and 'Da Hua Xi You Online II', as well as the growth in revenue from games licensed from Blizzard Entertainment.
The growth in advertising revenue in 2011 was due to the combined impact of several factors, including the development of the Chinese online advertising market and the increase in traffic on the NetEase website and search engine due to the enhanced appeal of the company's portal site to users.
Operating Expenses
Operating expenses for 2011 were RMB 1.6 billion (USD 253 million), compared to RMB 1.2 billion in 2010. The increase in operating expenses for 2011 was mainly due to the increase in sales and marketing expenses caused by promotional activities for 'Qian Ni You Hun', 'Da Tang Wu Shuang', and games licensed from Blizzard Entertainment such as 'World of Warcraft' and 'StarCraft II', the increase in labor costs due to the increase in the number of management and R&D employees, and the aforementioned provision for impairment of online game agency fees.
Net Profit
Net profit for 2011 was RMB 3.2 billion (USD 514 million), compared to RMB 2.2 billion in 2010. In 2011, the company recorded a net foreign exchange loss of RMB 79.1 million (USD 12.6 million), compared to a foreign exchange loss of RMB 89.5 million in 2010. The change in foreign exchange losses in 2011 relative to 2010 was mainly due to the translation effect of the company's euro bank deposit balance as of December 31, 2011, fluctuating with the euro-to-renminbi exchange rate. Earnings per share (ADS) for 2011 were USD 3.93 (basic) and USD 3.92 (diluted). In 2010, they were USD 2.74 (basic) and USD 2.72 (diluted).
Income Tax
The income tax expense for 2011 was RMB 393 million (USD 62.4 million), with an effective tax rate of 10.9%, compared to an income tax expense of RMB 344 million in 2010 with an effective tax rate of 13.4%.
Other Information
As of December 31, 2011, the group's cash and time deposits totaled RMB 11.9 billion (USD 1.9 billion), compared to RMB 9.5 billion as of December 31, 2010. As of December 31, 2011, the balance of held-to-maturity investments was RMB 994 million (USD 158 million) (no such investment as of December 31, 2010). Net cash inflow from operating activities in the fourth quarter of 2011 was approximately RMB 1.2 billion (USD 198 million), compared to RMB 865 million and RMB 902 million in the previous quarter and the same period last year, respectively.
On December 1, 2011, the company's board of directors approved a new repurchase plan for up to USD 50 million of American Depositary Shares in circulation. As of December 31, 2011, the company had not repurchased any American Depositary Shares. This repurchase plan will end on February 29, 2012.
Conference Call
NetEase management will hold a conference call at 8:00 PM Eastern Time on Wednesday, February 15, 2012 (9:00 AM Beijing/Hong Kong Time on Thursday, February 16, 2012) to discuss the company's quarterly and annual financial and operational results and answer questions. Participants are encouraged to dial in 10-15 minutes before the start of the call at 1-877-941-4774 (International: 1-480-629-9760). The conference call replay will be available until March 1, 2012, Eastern Time, at 1-800-406-7325 (International 1-303-590-3030), passcode 4507729#. The live webcast of this earnings release will also be available on the investor relations section of NetEase's website at http://ir.netease.com for 12 months.