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Shanghai, China – February 15, 2007.The9 Limited
(NASDAQ: NCTY)(“The9”), a leading online game operator
in China, today announced its unaudited financial results
for the fourth quarter and fiscal year ended December
31, 2006.
Fourth Quarter 2006 Financial Highlights:
-Net revenues for the fourth quarter of 2006 increased
by 21% quarter-over-quarter and 33% year-over-year to
RMB282.7 million (US$36.2 million).
-Net revenues attributable to the operations of Blizzard
Entertainment 's
World of Warcraft
(“WoW”)(1), which included revenues from game playing
time, merchandise and installation package sales, increased
by 22% quarter-over-quarter and 33% year-over-year to
RMB281.4 million (US$36.1 million) in the fourth quarter
of 2006.
-Net income for the fourth quarter of 2006 was RMB105.1
million (US$13.5 million), a 63% increase from RMB64.3
million (US$8.2 million) in the third quarter of 2006,
and a 54% increase from RMB68.3 million (US$8.8 million)
in the fourth quarter of 2005. Excluding a financial
subsidy of RMB19.8 million (US$2.5 million) received
from the local government in the fourth quarter of 2006,
net income for the fourth quarter of 2006 increased
by 33% from the previous quarter.
-EBITDA (non-GAAP) was RMB146.6 million (US$18.8 million)
in the fourth quarter of 2006, a quarter-over-quarter
increase of 39% from RMB105.4 million (US$13.5 million)
in the third quarter of 2006, and a year-over-year increase
of 35% from RMB 108.9 (US$14.0 million) in the fourth
quarter of 2005.
-Fully diluted earnings per share (one American Depositary
Share “ADS” represents one ordinary share) were RMB4.25
(US$0.54) for the fourth quarter of 2006, compared with
RMB2.61 (US$0.33) for the third quarter of 2006, and
RMB2.82 (US$0.36) for the fourth quarter of 2005. Fully
diluted EBITDA (non-GAAP) per share were RMB5.93 (US$0.76)
for the fourth quarter of 2006, compared with RMB4.28
(US$0.55) for the third quarter of 2006 and RMB4.50
(US$0.58) for the fourth quarter of 2005.
Fiscal Year 2006 Financial Highlights:
-Net revenues for the fiscal year 2006 increased by
112% year-over-year to RMB985.8 million (US$126.3 million)
from RMB465.0 million (US$59.6 million) for the fiscal
year 2005.
-Net income for the fiscal year 2006 was RMB312.5 million
(US$40.0 million), a 331% increase year-over-year from
RMB72.5 million (US$9.3 million) for the fiscal year
2005. Excluding financial subsidies of RMB31.0 million
(US$4.0 million) and RMB13.4 million (US$1.7 million)
received from the local government in fiscal year 2006
and 2005 respectively, net income for fiscal year 2006
increased by 376% from fiscal year 2005.
-EBITDA (non-GAAP) was RMB476.3 million (US$61.0 million)
for fiscal year 2006, compared with EBITDA (non-GAAP)
of RMB151.6 million (US$19.4 million) for fiscal year
2005.
-Fully diluted earnings per share were RMB12.72 (US$1.63)
and EBITDA (non-GAAP) per share were RMB19.39 (US$2.48)
for the fiscal year 2006, compared with fully diluted
earnings per share RMB2.92 (US$0.37) and fully diluted
EBITDA (non-GAAP) per share RMB6.11 (US$0.78) for the
fiscal year 2005.
Management Comments:
Commenting on the fourth quarter 2006 results, Jun Zhu,
Chairman and Chief Executive Officer of The9 said, “We
are very pleased to report record revenues and earnings
for our fourth quarter and fiscal year 2006. In the
fourth quarter of 2006, Blizzard Entertainment’s World
of Warcraft game attained peak and average concurrent
users of over 680,000 and 340,000, respectively, in
mainland China. As of December 31, 2006, approximately
6.8 million paid accounts had been activated(2).
In addition to the World of Warcraft, which continues
to experience steady growth, two of our new games, Guild
Wars and Soul of The Ultimate Nation
are currently in limited open beta testing and close
beta testing respectively. In addition, to date in 2007,
we have obtained exclusive licenses to operate in mainland
China Ragnarok Online 2 and Emil Chronicle Online, two
cartoon-style massively multiplayer online role playing
games, and Huxley, a highly-rated massively multiplayer
online first-person shooting game,. Entering 2007, we
believe The9 possesses one of the strongest and most
diversified game portfolios in the China online game
industry. With our strong pipeline of games, The9 will
continue to leverage its solid operating capabilities
to deliver multiple high-caliber games in the mainland
China market and will provide fulfilling and exciting
entertainment to Chinese online game players.”
Hannah Lee, Vice President and Chief Financial Officer,
commented, “We are encouraged to see Blizzard Entertainment's
World of Warcraft game resumed strong growth momentum
in the fourth quarter of 2006, proving that the strategy
in the third quarter of 2006, such as merging servers
and opening new server sites, were worthwhile investments
for the WoW game. In the meantime, several of our new
games are being prepared for the Chinese market. We
expect the year 2007 will be an even more exciting year
as we plan to roll out the highly anticipated expansion
pack for World of Warcraft: The Burning Crusade™, to
introduce multiple high-caliber games to the mainland
China market, and to further enhance and diversify our
product pipeline. Executing on our strategy, we will
continue to leverage The9’s leading market position
as well as operational experiences and strengths to
drive long-term sustainable shareholder value.”
Discussion of The9’s Fourth Quarter and Fiscal
Year 2006 Results (Preliminary Unaudited)
Revenues
For the fourth quarter of 2006, The9 reported net revenues
of RMB282.7 million (US$36.2 million), a 21% increase
from the third quarter of 2006 and 33% increase from
the fourth quarter of 2005. For fiscal year 2006, net
revenues increased by 112% to RMB985.8 million (US$126.3
million) from RMB 465.0 million (US$59.6 million) in
fiscal year 2005.
The substantial year-over-year revenue increase is
primarily the result of The9 commencing commercial operation
of Blizzard Entertainment’s World of Warcraft game in
mainland China in June 2005. In fiscal year 2005, approximately
seven months of revenues from WoW was recorded, whereas
in fiscal year 2006, WoW was in full year operations.
For the fourth quarter and fiscal year 2006, net revenues
attributable to the operations of WoW, including game
playing time, merchandise sales and other related revenues,
were RMB281.4 million (US$36.1 million) and RMB977.6
million (US$125.3 million), respectively.
For the fourth quarter of 2006, online game services
gross revenues were RMB296.7 million (US$38.0 million),
a 23% increase from the third quarter of 2006 and 34%
increase from the fourth quarter of 2005. For fiscal
year 2006, these revenues were RMB1,028.0 million (US$131.7
million), compared with RMB466.6 million (US$59.8 million)
in fiscal year 2005.
For the fourth quarter of 2006, gross revenues from
game operating support, website solutions and advertisement,
were RMB0.5 million (US$0.06 million), a decrease of
81% from the previous quarter and 44% from the same
period of last year. For fiscal year 2006, these revenues
were RMB4.8 million (US$0.6 million), a decrease of
21% from RMB6.1 million (US$0.8 million) in fiscal year
2005. The decrease in these revenues was mainly due
to the decline in revenues of the MU game.
Other gross revenues mainly included sales of WoW related
merchandise and installation packages. For the fourth
quarter of 2006, other gross revenues decreased to RMB0.6
million (US$0.08 million) from RMB1.9 million (US$0.2
million) in the third quarter of 2006 and RMB1.8 million
(US$0.2 million) in the fourth quarter of 2005. For
fiscal year 2006, other gross revenues decreased by
66% to RMB5.6 million (US$0.7 million) from RMB16.6
million (US$2.1 million) in fiscal year 2005, primarily
due to a decrease of sales of WoW installation packages
in fiscal year 2006 compared to such sales in fiscal
year 2005, when more installation packages were sold
with the commercialization of the WoW game in June 2005.
Gross Profit
Gross profit for the fourth quarter of 2006 increased
by 25% quarter-over-quarter and 38% year-over-year to
RMB134.7 million (US$17.3 million), mainly due to increased
revenues. Gross profit margin increased to 48% for the
fourth quarter of 2006 from 46% in both the previous
quarter and the same period of last year. The sequential
improvement in gross profit margin was mainly because
of increased player usage and utilization of server
capacities in the fourth quarter of 2006 following the
completion of planned server merges and opening of a
new server site in the third quarter of 2006.
For fiscal year 2006, gross profit increased by 106%
to RMB461.8 million (US$59.2 million) from RMB224.6
million (US$28.8 million) in fiscal year 2005. The year-over-year
increase of gross profit was primarily due to full year
revenue contribution from operations of Blizzard Entertainment’s
World of Warcraft in fiscal year 2006 versus only approximately
seven months of revenue contribution in fiscal year
2005. Gross profit margin for fiscal year 2006 was 47%,
remained relatively stable compared to 48% for fiscal
year 2005.
Operating Expenses
For the fourth quarter of 2006, operating expenses
were RMB54.7 million (US$7.0 million), a 23% increase
from RMB44.6 million (US$5.7 million) in the previous
quarter and 22% increase from RMB44.7 million (US$5.7
million) in the same period of last year. The sequential
increase in operating expenses was a combined result
of increased sales and marketing expenses relating to
the preparation for the launch of Guild Wars and the
Soul of the Ultimate Nation
games in mainland China, and increased general and administrative
expenses due to higher year-end related professional
fees.
For fiscal year 2006, operating expenses totaled RMB191.6
million (US$24.6 million), a 16% increase from RMB164.9
million (US$21.1 million) for the fiscal year of 2005.
This was primarily due to increased general and administrative
expenses primarily related to headcount increase, share-based
compensation expenses resulting from the adoption of
SFAS 123(R), Share-Based Payment, effective from January
1, 2006, and higher professional fees.
Income from Operations
For the fourth quarter of 2006, profit from operations
increased by 26% quarter-over-quarter and 52% year-over-year
to RMB80.0 million (US$10.3 million). Operating margin
for the fourth quarter of 2006 was 28%, compared to
27% in the third quarter of 2006 and 25% in the fourth
quarter of 2005.
For fiscal year 2006, we recorded profit from operations
of RMB270.2 million (US$34.6 million), a 352% increase
compared with RMB59.7 million (US$7.6 million) in fiscal
year 2005. Operating margin for the fiscal year 2006
was 27%, compared to 13% in the fiscal year 2005. Consistent
with revenue growth, this significant improvement was
primarily due to full year commercial operations of
World of Warcraft in fiscal year 2006 versus approximately
seven months in fiscal year 2005.
Other Income (Expenses)
Other income for the fourth quarter of 2006 was
RMB19.1 million (US$2.5 million) compared to other expenses
of RMB1.0 million (US$0.1 million) in the third quarter
of 2006 and RMB12.2 million (US$1.6 million) in the
fourth quarter of 2005. The sequential improvement was
primarily due to the receipt of a financial subsidy
of RMB19.8 million (US$2.5 million) from the local government,
whereas no similar financial subsidy was received in
the third quarter of 2006.
For fiscal year 2006, other income increased by 96%
to RMB28.4 million (US$3.6 million) from RMB14.5 million
(US$1.9 million) in fiscal year 2005. This was primarily
because in fiscal year 2006, we received financial subsidies
from the local government which amounted to RMB31.0
million (US$4.0 million), whereas in fiscal year 2005,
such financial subsidies only amounted to RMB13.4 million
(US$1.7 million).
Gain on Investment Disposal
In the fourth quarter of 2006, we recognized a gain
of approximately RMB23.4 million (US$3.0 million) from
the sale of our equity interest in the joint venture
in Taiwan that operates Blizzard Entertainment's World
of Warcraft in other greater China regions.
Impairment Loss on Investment
In the fourth quarter of 2006, we recorded an impairment
provision of RMB20.4 million (US$2.6 million) in connection
with an investment accounted for by the Company under
the equity method. No such impairment was recognized
in fiscal year 2005.
Loss on Equity Investments
For the fourth quarter of 2006, loss on equity
investments, net of taxes, amounted to RMB1.1 million
(US$0.1 million), which remained relatively stable compared
to a loss of RMB1.2 million (US$0.2 million) for the
third quarter of 2006, but represented a 75% improvement
compared to a loss of RMB4.6 million (US$0.6 million)
for the fourth quarter of 2005. The significant year-over-year
improvement was primarily due to the joint venture that
operates World of Warcraft in other greater China regions,
which we disposed of in late fiscal year 2006, recorded
a profit during the fourth quarter of 2006, which offset,
to a large extent, the losses made by other affiliated
companies that were still in the development or early
game commercialization stages. The joint venture recorded
a loss during the same period of last year.
For fiscal year 2006, we recorded RMB0.9 million (US$0.1
million) of loss on equity investments, net of taxes,
compared to a loss of RMB13.7 million (US$1.8 million)
for fiscal year 2005. This is also due to the reasons
explained above.
Net Income
For the fourth quarter of 2006, net income
was RMB105.1 million (US$13.5 million), which increased
by 63% quarter-over-quarter from RMB64.3 million (US$8.2
million) in the third quarter of 2006 and 54% year-over-year
from RMB68.3 million (US$8.8 million) in the fourth
quarter of 2005. This was a result of the cumulative
effect of the foregoing factors. Fully diluted earnings
per share and per ADS for the fourth quarter of 2006
was RMB4.25 (US$0.54), compared to RMB2.61 (US$0.33)
in the third quarter of 2006 and RMB2.82 (US$0.36) in
the fourth quarter of 2005.
For fiscal year 2006, net income totaled RMB312.5 million
(US$40.0 million), a 331% increase from RMB72.5 million
(US$9.3 million) for fiscal year 2005. This was a result
of the cumulative effect of the foregoing factors. Fully
diluted earnings per share and per ADS for fiscal year
2006 was RMB12.72 (US$1.63), compared to RMB2.92 (US0.37)
in fiscal year 2005.
EBITDA (non-GAAP) is defined as earnings or loss, respectively,
before depreciation of fixed assets, amortization of
intangibles and income tax expenses/benefits, as applicable.
For the fourth quarter of 2006, EBITDA (non-GAAP) was
RMB146.6 million (US$18.8 million) compared to EBITDA
(non-GAAP) of RMB105.4 million (US$13.5 million) for
the previous quarter and RMB108.9 million (US$14.0 million)
for the same period of last year. For fiscal year 2006,
EBITDA (non-GAAP) totaled RMB476.3 million (US$61.0
million) compared to EBITDA (non-GAAP) of RMB151.6 million
(US$19.4 million) for the fiscal year 2005.
For the fourth quarter of 2006, fully diluted EBITDA
(non-GAAP) per share was RMB5.93 (US$0.76) compared
with RMB4.28 (US$0.55) for the third quarter of 2006
and RMB4.50 (US$0.58) in the fourth quarter of 2005.
For fiscal year 2006, fully diluted EBITDA (non-GAAP)
per share was RMB19.39 (US$2.48) compared with EBITDA
(non-GAAP) per share of RMB6.11 (US$0.78) for fiscal
year of 2005.
As at December 31, 2006, the Company's total cash and
cash equivalents balance was RMB937.8 million (US$120.2
million). The increase in cash and cash equivalents
from RMB488.2 million (US$62.6 million) as at December
31, 2005 was mainly due to the combined result of increased
receipts from prepaid game points, and the above-mentioned
financial subsidies, offset in part by purchases of
servers, prepaid royalty payments to the licensor relating
to WoW’s China operations, the final payments in early
2006 relating to the purchase of the remaining interest
in the entity that operates WoW in China, and payments
relating to the license fees for the Guild Wars and
Hellgate: London games as well as an equity investment
made during the year.
The conversion of Renminbi (RMB) into U.S. dollars
(US$) 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 December
29, 2006 (the last business day of fourth quarter and
fiscal year 2006), which was RMB7.8041 to US$1.00. The
percentages stated in this press release are calculated
based on the RMB amounts.
Note to the Financial Information
The unaudited financial information disclosed above
is preliminary. The audit of the financial statements
and related notes to be included in our annual report
on Form 20-F for the year ended December 31, 2006 is
still in progress. Adjustments to the financial statements
may be identified when audit work is completed, which
could result in significant difference from the audited
financial statements to this preliminary unaudited financial
information. In addition, because management's evaluation
of our internal controls over financial reporting in
connection with of the Sarbanes-Oxley Act of 2002 has
not yet been completed, we make no representations as
to the effectiveness of those internal controls as of
the end of our 2006 fiscal year.
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 EBITDA, 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.
EBITDA (non-GAAP) is defined as earnings before depreciation
of fixed assets, amortization of intangibles and income
tax expenses/benefits, as applicable. The Company believes
its EBITDA provides useful information to both management
and investors as it excludes certain expenses that are
not expected to result in future cash payments. The
use of EBITDA has certain limitations. Depreciation
and amortization expense for various assets and income
tax expenses/benefits have been and will be incurred
and are not reflected in the presentation of EBITDA.
Each of these items should also be considered in the
overall evaluation of our results. EBITDA 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, which should be considered when evaluating
our performance. EBITDA is not defined under GAAP, and
our EBITDA is not a measure of net income, operating
income, operating performance or liquidity presented
in accordance with GAAP. When assessing our operating
performance, you should not consider this data in isolation
or as a substitute for our net income, operating income
or any other operating performance measure that is calculated
in accordance with GAAP. In addition, our EBITDA may
not be comparable to similarly titled measures utilized
by other companies since such other companies may not
calculate EBITDA in the same manner as we do. For more
information on this non-GAAP financial measure, please
see the tables captioned “Reconciliation of non-GAAP
to GAAP results” set forth at the end of this release.
Management Appointment
The9 today announced that it has appointed Fumin (Benjamin)
Lin as Vice President, effective February 14, 2007.
Mr. Lin will participate in leading various aspects
of The9’s game operations.
Before joining The9, since January 2006, Mr. Lin has
served as General Manager of Joypark Webstar Technology
Co., Ltd. in Beijing, an affiliated company of Softstar
Entertainment Inc. From October 2001 to December 2005,
Mr. Lin has served various management functions at Square-Enix
Webstar Inc., a joint venture between Softstar Entertainment
Inc. in Taiwan and Square Enix Co., Ltd. in Japan, and
led it to be the leading game developer and publisher
in Asia. From October 2000 to September 2001, he had
served as Assistant Vice President of Webstar Inc. in
Taipei. Prior to that, Benjamin had worked as a product
manager at Softstar Entertainment Inc. and Dynalab Inc.
Mr. Lin is experienced in leading MMORPG operations
in China. Mr. Lin received his Bachelor's degree in
Arts & Advertisement from the Chinese Culture University
in Taipei, Taiwan.
Other Developments
The9 also announced that it has entered into an agreement
to purchase the office building in Shanghai, PRC, in
which it is currently headquartered, and has leased
since mid 2005. It is expected that The9 will utilize
its existing working capital to fund this capital investment.
Conference Call / Webcast Information
The9’s management team will host a conference call
on Wednesday, February 14, 2007 at 8:00 PM, US Eastern
Time, corresponding with Thursday, February 15, 2007
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 +1-617-597-5325,
password “88306312". In the U.S., members of the
financial community may also participate in the call
by dialing toll-free +1-866-713-8566, password “88306312”.
A replay of the call will be available through February
22, 2007. 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 “34934768”.
The9 Limited will also provide a live webcast of the
earnings call. Participants in the webcast should log
onto the Company's web site www.corp.the9.com 15 minutes
prior to the call, then click on the icon for “The9
Limited Q4 and Fiscal Year 2006 Earnings Conference
Call” and follow the instructions.
About The9 Limited
The9 Limited is a leading online game operator in
China. The9's business is primarily focused on operating
and developing MMORPGs for the Chinese online game players
market. The9 directly or through affiliates operates
licensed MMORPGs, consisting of MU,
Mystina Online, Blizzard Entertainment's
World of Warcraft,
and its first proprietary MMORPG, Joyful Journey West,
in China. It has also obtained exclusive licenses to
operate additional MMORPGs in China, including Granado
Espada, Soul of The Ultimate Nation,
Guild Wars, Hellgate: London, Ragnarok Online 2, Emil
Chronicle Online and Huxley. In addition, The9 is also
working on the development of a 3D fantasy MMORPG game,
Fantasy Melody Online.
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. Dahlia Wei
Senior Manager, Investor Relations
The9 Limited
Tel: +86 (21) 5172-9990
Email: IR@corp.the9.com
Website:
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