Business Context and Reporting Period
Company: The9 Limited (NASDAQ: NCTY)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter ended June 30, 2008
Business Overview: The9 is a leading online game operator and developer in China, primarily focused on operating licensed MMORPGs (including World of Warcraft and Soul of the Ultimate Nation) and developing proprietary titles.
Key Financial Metrics
| Metric | Q2 2008 (RMB) | Q2 2008 (US$) | Q1 2008 (RMB) | Q2 2007 (RMB) |
|---|---|---|---|---|
| Net Revenues | 455.1 million | 66.3 million | 439.4 million | 270.0 million |
| Gross Profit | 214.0 million | 31.2 million | 208.0 million | 114.6 million |
| Gross Margin | 47% | - | 47% | 42% |
| Operating Profit | 113.7 million | 16.6 million | 114.1 million | 40.1 million |
| Operating Margin | 25% | - | 26% | 15% |
| Net Income (GAAP) | 115.9 million | 16.9 million | 89.7 million | 50.6 million |
| Net Income (Non-GAAP) | 199.4 million | 29.1 million | 193.4 million | 125.4 million |
| Diluted EPS (GAAP) | RMB 4.19 | US$ 0.61 | RMB 3.21 | RMB 1.90 |
| Diluted EPS (Non-GAAP) | RMB 7.20 | US$ 1.05 | RMB 6.92 | RMB 4.70 |
| Cash & Equivalents | 1.43 billion | 208.1 million | 1.78 billion | 2.22 billion (Dec 31, 2007) |
Material Changes vs. Prior Periods
- Revenue Growth: Net revenues increased 4% quarter-over-quarter (QoQ) and 69% year-over-year (YoY). Subscription-based game revenues grew 6% QoQ and 69% YoY, driven by World of Warcraft and Soul of the Ultimate Nation. Item-sales based game revenues decreased 18% QoQ due to a decline in Granado Espada.
- Profitability: Net income rose 29% QoQ and 129% YoY. Non-GAAP net income increased 3% QoQ and 59% YoY.
- Operating Expenses: Increased 7% QoQ and 35% YoY, primarily due to higher sales and marketing spend for key titles and increased product development costs.
- Foreign Exchange: Foreign exchange loss decreased significantly to RMB 5.4 million from RMB 24.4 million in Q1 2008, attributed to a reduction in US Dollar cash balances following an equity investment.
- Liquidity: Cash and cash equivalents decreased from RMB 1.78 billion in Q1 to RMB 1.43 billion in Q2, mainly due to a US$38 million equity investment in G10 Entertainment and transfers to short-term fixed deposits.
Outlook, Management Commentary, and Risks
- Management Commentary: CEO Jun Zhu highlighted record revenues and earnings despite a three-day server closure to observe the earthquake tragedy. The company reported aggregate peak concurrent users (PCU) of approximately 1.3 million, with World of Warcraft surpassing 1 million PCU. Total registered users exceeded 41.5 million as of June 30, 2008.
- Strategic Initiatives: The9 added Atlantica to its pipeline, strengthened its in-house development team, and formed a joint venture with T3 Entertainment in July 2008. The company is preparing for new game launches before year-end.
- Stock Repurchase: The US$50 million share repurchase program ended on June 23, 2008. The9 spent approximately US$39.3 million to repurchase 1.8 million ADSs.
- Risks: Forward-looking statements are subject to risks including Chinese government regulations, political and economic policies, competition, and the ability to retain players and acquire appealing games.
Key Facts for Investor Verification
- Revenue Concentration: Verify the continued dominance of World of Warcraft and Soul of the Ultimate Nation in revenue generation versus the decline in Granado Espada.
- Investment Impact: Confirm the strategic value and financial return of the US$38 million investment in G10 Entertainment and the joint venture with T3 Entertainment.
- Non-GAAP Adjustments: Review the reconciliation of GAAP to Non-GAAP results, specifically the exclusion of share-based compensation (RMB 12.1 million) and foreign exchange losses.
- Regulatory Environment: Monitor potential impacts of Chinese government regulations on the online gaming industry and internet cafes.
- Cash Utilization: Track the deployment of the remaining cash balance (RMB 1.43 billion) and the performance of short-term investments.