Business Context and Reporting Period
The9 Limited (NASDAQ: NCTY), an online game developer and operator based in Shanghai, China, reported unaudited financial results for the third quarter ended September 30, 2013, and the fourth quarter ended December 31, 2013. The filing was submitted on March 26, 2014. The company operates proprietary MMO, web, and mobile games, including Firefall and Planetside 2, and has expanded into home entertainment set-top boxes via a joint venture with ZTE.
Key Financial Metrics
| Metric | Q3 2013 (RMB) | Q3 2013 (USD) | Q4 2013 (RMB) | Q4 2013 (USD) |
|---|---|---|---|---|
| Net Revenues | 33.9 million | 5.6 million | 24.8 million | 4.1 million |
| Gross Profit (Loss) | (8.2 million) | (1.4 million) | 3.0 million | 0.5 million |
| Operating Expenses | 126.1 million | 20.8 million | 126.5 million | 20.9 million |
| Net Loss (Ordinary Shares) | (121.5 million) | (20.1 million) | (122.9 million) | (20.3 million) |
| Loss Per Share (Diluted) | (5.31) | (0.88) | (5.33) | (0.88) |
| Cash and Equivalents (End of Period) | 232.6 million | 38.4 million | 157.0 million | 25.9 million |
Debt and Liquidity: As of December 31, 2013, total liabilities were RMB 356.5 million (US$ 58.9 million). Total current liabilities were RMB 330.1 million (US$ 54.5 million). The company held RMB 157.0 million (US$ 25.9 million) in cash and cash equivalents at year-end.
Material Changes vs. Prior Periods
- Revenue Volatility: Q3 2013 revenue increased 29.5% quarter-over-quarter (QoQ) driven by Planetside 2 and Firefall beta testing. However, Q4 2013 revenue dropped 26.8% QoQ due to declines in web game revenues, despite a 33.5% year-over-year (YoY) increase.
- Gross Margin Fluctuation: The company swung from a gross profit of RMB 3.0 million in Q2 2013 to a gross loss of RMB 8.2 million in Q3 2013, primarily due to impairments of prepaid royalties and deferred costs for Planetside 2. Q4 2013 returned to a gross profit of RMB 3.0 million.
- Operating Expenses: Q3 2013 expenses decreased 15.6% QoQ due to reduced share-based compensation. Q4 2013 expenses remained flat QoQ but included a significant impairment loss of RMB 33.6 million on equipment and intangible assets.
- Investment Impairments: In Q4 2013, the company recognized an additional impairment loss of RMB 15.2 million related to an investment in a Beijing-based app development company.
Guidance, Outlook, and Risks
Management Commentary: CEO Jun Zhu highlighted the launch of "Fun Box," a home entertainment set-top box developed with ZTE, which offers video conferencing and gaming capabilities. The company is exploring ways to share Fun Box business opportunities with shareholders. Additionally, Firefall received a $23 million investment from Shanghai Oriental Pearl (Group) Co., Ltd. and is in the final stage of beta testing, with a large-scale commercial launch planned for 2014.
Risks and Contingencies: The filing includes a Safe Harbor statement noting risks related to Chinese government policies, internet regulations, player retention, and the ability to license or develop appealing games. The company faces significant operating losses and has incurred substantial asset impairments in recent quarters.
Investor Verification Checklist
- Verify the commercial launch timeline and revenue projections for Firefall following the $23 million investment.
- Assess the viability and revenue potential of the "Fun Box" joint venture with ZTE.
- Monitor cash burn rate given the consistent net losses exceeding RMB 120 million per quarter and the decline in cash reserves from RMB 232.6 million (Q3) to RMB 157.0 million (Q4).
- Review the details of the RMB 33.6 million impairment on equipment/intangibles and the RMB 15.2 million investment impairment in Q4 2013 to understand asset quality.
- Confirm the sustainability of revenue from Planetside 2 and Firefall as they transition from beta testing to full commercial release.