Business Context and Reporting Period
Company: NetEase, Inc. (NASDAQ: NTES)
Filing Type: Form 6-K (Press Release regarding Unaudited Financial Results)
Reporting Period: Fourth Quarter and Fiscal Year ended December 31, 2006
Business Overview: A leading China-based Internet technology company providing online game services, online advertising, wireless value-added services, and free email services.
Key Financial Metrics
| Metric | Q4 2006 (RMB) | Q4 2006 (USD) | FY 2006 (RMB) | FY 2006 (USD) |
|---|---|---|---|---|
| Total Revenues | 540.3 million | $69.2 million | 2,217.2 million | $284.1 million |
| Online Game Revenues | 451.6 million | $57.9 million | 1,856.1 million | $237.8 million |
| GAAP Net Profit | 320.2 million | $41.0 million | 1,242.8 million | $159.2 million |
| Non-GAAP Net Profit | 343.3 million | $44.0 million | 1,344.1 million | $172.2 million |
| GAAP EPS (Diluted) | US$0.30 | US$1.14 | ||
| Non-GAAP EPS (Diluted) | US$0.32 | US$1.23 | ||
| Cash & Time Deposits | RMB 3.9 billion ($504.6 million) | RMB 3.9 billion ($504.6 million) | ||
| Operating Cash Flow (Q4) | RMB 531.5 million ($68.1 million) | N/A |
Note: USD conversions based on exchange rate of US$1 = RMB 7.8041.
Material Changes vs. Prior Periods
- Quarter-over-Quarter (Q4 2006 vs. Q3 2006):
- Total revenues decreased 5.5% to RMB 540.3 million.
- Online game revenues decreased 3.5% to RMB 451.6 million, though this was better than company guidance.
- Advertising revenues decreased 13.5% due to seasonal declines.
- GAAP net profit increased 1.7% to RMB 320.2 million.
- Non-GAAP gross margin increased to 83.1% from 82.5%, driven by a one-time business tax refund of RMB 35.5 million.
- Year-over-Year (FY 2006 vs. FY 2005):
- Total revenues grew 30.9% to RMB 2,217.2 million.
- Online game revenues grew 34.5% to RMB 1,856.1 million.
- GAAP net profit grew 33.3% to RMB 1,242.8 million.
- Advertising revenues grew 18.5%, while wireless value-added services grew 2.3%.
Guidance, Outlook, and Management Commentary
- Game Development Pipeline:
- Tianxia II: Phase II unlimited open beta testing launched March 1, 2007, with commercial launch expected in Q1 2007.
- Westward Journey III: Final development stage; internal close beta testing scheduled for Q2 2007.
- Fantasy Westward Journey: Reported record peak concurrent users of 1,335,000; latest expansion pack released late December 2006.
- Other Initiatives:
- New proprietary search engine entered beta testing in December 2006; open beta expected in Q2 2007.
- Management highlighted strong growth in total revenues and net profit for FY 2006 and satisfaction with Q4 results.
- Share Repurchase Program:
- Authorized up to US$100 million (announced August 29, 2006).
- As of December 31, 2006, repurchased 3.6 million ADSs for US$60.1 million (60.1% of authorized amount).
- Program scheduled to end March 4, 2007.
- Risks and Contingencies:
- Financial statements are unaudited; final audit may result in adjustments.
- Internal controls audit under Sarbanes-Oxley Section 404 is not yet completed.
- Forward-looking statements subject to risks including market competition, regulatory changes in China, and currency fluctuations.
Investor Verification Checklist
- Verify the final audited figures in the upcoming Form 20-F, as current data is preliminary and unaudited.
- Monitor the commercial launch success and user adoption rates of Tianxia II in Q1 2007.
- Track the completion of the US$100 million share repurchase program ending March 4, 2007.
- Assess the impact of the one-time RMB 35.5 million tax refund on Q4 gross margins when analyzing future profitability.
- Review the effectiveness of internal controls over financial reporting once the Section 404 audit is completed.