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 April 18, 2013. The filing reports unaudited financial results for the third quarter ended September 30, 2012, and the fourth quarter ended December 31, 2012. The company operates proprietary Massively Multiplayer Online (MMO) games, web games, and social games.
Key Financial Metrics
| Metric | Q3 2012 (RMB) | Q3 2012 (USD) | Q4 2012 (RMB) | Q4 2012 (USD) |
|---|---|---|---|---|
| Net Revenues | 32.4 million | 5.2 million | 18.6 million | 3.0 million |
| Gross Profit (Loss) | 14.8 million | 2.4 million | (1.3 million) | (0.2 million) |
| Operating Expenses | 205.0 million | 32.9 million | 148.9 million | 23.9 million |
| Net Loss (Ordinary Shares) | 168.7 million | 27.1 million | 115.9 million | 18.6 million |
| Loss Per Share (Diluted) | 6.88 | 1.10 | 4.73 | 0.76 |
| Cash and Equivalents (End of Period) | 636.3 million | 102.1 million | 554.3 million | 89.0 million |
Liquidity and Debt: As of December 31, 2012, total current assets were RMB 664.6 million (US$ 106.7 million) against total current liabilities of RMB 317.7 million (US$ 51.0 million). The company reported no long-term debt in the provided balance sheet data, though it holds significant deferred revenue and accounts payable.
Material Changes vs. Prior Periods
- Revenue Decline: Net revenues for the second half of 2012 totaled RMB 51.0 million, a 51% decrease from the first half of 2012 and a 7% decrease from the second half of 2011. Q4 2012 revenue dropped 43% sequentially from Q3 2012.
- Profitability Deterioration: The company swung from a gross profit of RMB 14.8 million in Q3 2012 to a gross loss of RMB 1.3 million in Q4 2012. Net loss attributable to ordinary shareholders increased 30% year-over-year for the second half of 2012.
- Restructuring Impact: In Q3 2012, the company recorded a loss of RMB 18.1 million due to the restructuring of investments and termination of contractual arrangements with Fire Rain and Wanyouyl, leading to their deconsolidation.
- Cash Burn: Cash and cash equivalents decreased from RMB 1.07 billion at year-end 2011 to RMB 554.3 million at year-end 2012, driven by operating losses and reduced interest income.
Guidance, Outlook, and Risks
Management Commentary: CEO Jun Zhu characterized 2012 as a difficult year focused on product development. The company plans to launch three key MMO titles in 2013: Planetside 2 (China open beta June 25, 2013), Firefall (US/Europe open beta July 9, 2013), and QiJi2 (China open beta September 28, 2013). Management expects these launches to drive positive results in coming years.
Share Repurchase: In December 2012, the Board approved a US$ 10.0 million ADS repurchase program. As of April 11, 2013, the company had repurchased approximately 1.6 million ADSs for US$ 4.4 million.
Risks and Contingencies:
- Performance of existing titles like ShenXianZhuan was weaker than expected, leading to the deconsolidation of its developer.
- Significant reliance on the successful launch and market reception of new titles in 2013.
- Regulatory risks regarding the Chinese online game industry and government policies.
Investor Verification Checklist
- Verify the timeline and performance metrics of the upcoming Planetside 2, Firefall, and QiJi2 launches against the stated beta dates.
- Monitor cash burn rate given the reduction in cash reserves from RMB 1.07 billion to RMB 554 million over 2012.
- Assess the impact of the deconsolidation of Fire Rain and Wanyouyl on future revenue streams and development capabilities.
- Track the progress of the US$ 10.0 million share repurchase program and its effect on share count.