Business Context and Reporting Period
This Form 6-K, filed on July 15, 2009, by The9 Limited (NASDAQ: NCTY), announces the filing of its audited Annual Report on Form 20-F for the fiscal year ended December 31, 2008. The filing primarily serves to disclose significant revisions to previously reported financial data for 2008. The9 is a Chinese online game operator and developer focusing on MMORPGs and casual games, including titles such as World of Warcraft (WoW), Granado Espada, and FIFA Online 2.
Key Financial Metrics (Revised 2008 Data)
The following metrics reflect the revised audited figures presented in the Form 20-F, which supersede the unaudited figures previously reported in a February 2009 Form 6-K.
| Metric | Revised 2008 (RMB) | Revised 2008 (US$) |
|---|---|---|
| Net Revenues | 1,711,490,694 | 250,859,756 |
| Gross Profit | 713,542,154 | 104,586,610 |
| Profit from Operations | 134,549,625 | 19,721,454 |
| Net Income | 96,836,036 | 14,193,629 |
| Earnings Per Share (Basic) | 3.50 RMB | 0.51 US$ |
| Earnings Per Share (Diluted) | 3.50 RMB | 0.51 US$ |
Balance Sheet Highlights (Dec 31, 2008): Accounts receivable were revised down to RMB 8.3 million (from RMB 28.3 million). Intangible assets were reduced to RMB 136.1 million (from RMB 203.7 million) due to impairments. Deferred tax assets were written off entirely.
Material Changes Versus Prior Reporting
The revised financial statements show a drastic reduction in profitability compared to the unaudited figures released on February 24, 2009.
- Net Income Decline: Net income for the full year 2008 is 72% lower than previously reported, dropping from RMB 348.3 million to RMB 96.8 million.
- Q4 2008 Turnaround: The fourth quarter of 2008 shifted from a reported net income of RMB 44.4 million to a net loss of RMB 158.3 million.
- Revenue Adjustment: Net revenues increased slightly by RMB 3.4 million due to the recognition of additional revenue related to WoW CD-Key fees.
- Asset Write-downs: Significant write-offs occurred in accounts receivable, advances to suppliers, prepaid royalties, and intangible assets.
Outlook, Risks, and Unusual Items
The material revisions are driven by specific unusual items and risks identified subsequent to the initial reporting:
- World of Warcraft License Expiration: Blizzard Entertainment licensed World of Warcraft to a competitor following the expiration of The9's agreement on June 7, 2009. This triggered the write-off of WoW-related prepaid royalties, inventories, and equipment.
- Impairment Charges: The company recorded significant impairment provisions for intangible assets and equipment due to the non-renewal of the WoW license and lower-than-expected performance of Granado Espada.
- Depreciation Adjustments: The expected useful life and residual value of servers and equipment were adjusted, increasing depreciation charges across all quarters of 2008.
- Deferred Tax Assets: A full valuation allowance was provided for deferred tax assets based on revised estimates of future utilization following the license loss.
Investor Verification Checklist
- Verify the specific terms and financial impact of the new World of Warcraft license agreement with the competitor.
- Review the detailed impairment calculations for Granado Espada and other licensed games mentioned in the 2008 Form 20-F.
- Assess the company's pipeline of proprietary games (World of Fighter, Jiu Zhou Zhan Ji) to determine future revenue replacement for lost WoW income.
- Confirm the status of other exclusive licenses, such as Audition 2 and Field of Honor, and their contribution to current liquidity.
- Examine the revised balance sheet for remaining contingent liabilities related to the transition of the WoW license.