Business Context and Reporting Period
The9 Limited (NASDAQ: NCTY), an online game developer and operator based in Shanghai, China, filed this Form 6-K on March 26, 2015. The filing announces unaudited financial results for the six months ended December 31, 2014 (the second half of 2014), comparing performance against the first half of 2014 and the second half of 2013.
Key Financial Metrics
| Metric | Six Months Ended Dec 31, 2014 | Six Months Ended Jun 30, 2014 | Six Months Ended Dec 31, 2013 |
|---|---|---|---|
| Net Revenues | RMB 36.9 million (US$ 5.9 million) | RMB 27.4 million (US$ 4.4 million) | RMB 58.7 million (US$ 9.5 million) |
| Gross Loss | RMB 7.2 million (US$ 1.2 million) | RMB 14.3 million (US$ 2.3 million) | RMB 5.2 million (US$ 0.8 million) |
| Operating Expenses (excl. gain on disposal) | RMB 151.8 million (US$ 24.5 million) | RMB 153.0 million (US$ 24.7 million) | RMB 252.6 million (US$ 40.7 million) |
| Net Profit (Loss) Attributable to Ordinary Shareholders | RMB 34.2 million (US$ 5.5 million) | RMB (141.9) million (US$ (22.9) million) | RMB (244.4) million (US$ (39.4) million) |
| Basic EPS (RMB) | 1.48 | (6.13) | (10.64) |
| Cash and Cash Equivalents (Dec 31, 2014) | RMB 181.5 million (US$ 29.2 million) | Not provided for interim periods | |
| Total Assets (Dec 31, 2014) | RMB 517.3 million (US$ 83.4 million) | Not provided for interim periods |
Material Changes vs. Prior Periods
- Revenue Trend: Net revenues increased 34.4% compared to the first half of 2014, driven by revenue from the game "Firefall" in North America and Europe. However, revenues decreased 37.2% compared to the second half of 2013, primarily due to a decline in revenue from "Planetside 2."
- Profitability Turnaround: The company reported a net profit of RMB 34.2 million in the second half of 2014, a significant improvement from net losses of RMB 141.9 million and RMB 244.4 million in the first half of 2014 and second half of 2013, respectively.
- One-Time Gains: The profitability in the second half of 2014 was heavily influenced by a gain on the disposal of subsidiaries (Huopu Cloud) totaling RMB 165.4 million (US$ 26.7 million). Without this gain, operating expenses would have been significantly higher.
- Expense Reduction: Operating expenses (excluding the gain on disposal) decreased 39.9% year-over-year due to cost-cutting measures in product development, marketing, and general administration, as well as a reversal of an allowance on a long-term receivable.
Guidance, Outlook, and Management Commentary
- Firefall Launch in China: Management targets the launch of "Firefall" in China in the second half of 2015. A 50-50 joint venture, System Link Corporation Limited, was established with Qihoo 360 Technology Co., Ltd. to publish and operate the game in China for a five-year term.
- Strategic Investment: The joint venture agreement includes a minimum aggregate payment of US$ 160 million (license fees and royalties) to The9 over the term. Additionally, Shanghai Oriental Pearl Culture Development Co. Ltd. became a minority shareholder in Red 5 (developer of Firefall) in August 2014.
- Asset Divestiture: In August 2014, The9 sold its subsidiary Huopu Cloud for RMB 200 million, validating its in-house development capabilities.
- Mobile Strategy: The company plans to launch several mobile games in 2015.
- Risks: Forward-looking statements are subject to risks including Chinese government policies, internet regulations, player retention, and competitive market conditions.
Investor Verification Checklist
- Sustainability of Profitability: Verify if the RMB 34.2 million net profit is sustainable without the one-time RMB 165.4 million gain from the disposal of Huopu Cloud.
- Firefall Performance: Monitor the actual launch timeline and revenue performance of "Firefall" in the China market in the second half of 2015.
- Joint Venture Terms: Confirm the execution of the US$ 160 million payment schedule from the System Link Corporation Limited joint venture.
- Revenue Concentration: Assess the continued decline in revenue from legacy titles like "Planetside 2" and the ability of new mobile games to offset this.
- Liquidity Position: Review the cash balance of RMB 181.5 million against upcoming operational costs and development expenditures for 2015.