Business Context and Reporting Period
The9 Limited (NASDAQ: NCTY), an online game developer and operator based in Shanghai, China, reported its unaudited financial results for the first quarter ended March 31, 2012, and the second quarter ended June 30, 2012. The filing was submitted on August 24, 2012. The company's primary revenue driver remains its self-developed massively multiplayer online role-playing game, Shen Xian Zhuan.
Key Financial Metrics
| Metric | Q1 2012 (RMB) | Q1 2012 (USD) | Q2 2012 (RMB) | Q2 2012 (USD) |
|---|---|---|---|---|
| Net Revenues | 48.6 million | 7.7 million | 54.8 million | 8.6 million |
| Gross Profit | 32.8 million | 5.2 million | 38.8 million | 6.1 million |
| Operating Expenses | 154.9 million | 24.4 million | 168.8 million | 26.6 million |
| Net Loss (Ordinary Shares) | 111.4 million | 17.5 million | 118.0 million | 18.6 million |
| Loss Per Share (Diluted) | RMB 4.55 | US$ 0.72 | RMB 4.82 | US$ 0.76 |
| Cash and Equivalents | 922.6 million | 145.2 million | 793.1 million | 124.8 million |
Note: USD figures are translated at the rate of RMB 6.3530 to US$1.00 as of June 30, 2012.
Material Changes vs. Prior Periods
- Revenue Growth: Net revenues increased 74% quarter-over-quarter (QoQ) in Q1 and 13% QoQ in Q2. Year-over-year (YoY) growth was 89% in Q1 and 115% in Q2, primarily driven by Shen Xian Zhuan.
- Gross Margin Expansion: Gross profit margins improved significantly due to lower royalty expenses associated with the self-developed Shen Xian Zhuan. Gross profit increased 147% QoQ in Q1 and 18% QoQ in Q2.
- Operating Expenses: Expenses rose 11% QoQ in Q1 and 9% QoQ in Q2. Increases were attributed to marketing for Firefall and Shen Xian Zhuan, and product development for the mobile internet business and Firefall.
- Net Loss: The net loss narrowed 12% QoQ in Q1 but widened 6% QoQ in Q2. The YoY increase in Q2 loss (881%) is largely due to a one-time gain on investment disposal in Q2 2011 that did not recur.
- Liquidity: Cash and cash equivalents decreased from RMB 922.6 million in Q1 to RMB 793.1 million in Q2, reflecting operational cash burn.
Outlook, Management Commentary, and Risks
Management Commentary: CEO Jun Zhu expressed high confidence in the pipeline, specifically Firefall and Planetside 2. Firefall received a major patch in August with positive feedback and is preparing for U.S. commercialization. Red 5 Studios established an Irish subsidiary in May 2012 to prepare for a European launch. Planetside 2 is in closed beta in the U.S., with localization and internal technical testing planned for China by the end of 2012.
Risks and Contingencies: The filing includes a Safe Harbor statement regarding forward-looking statements. Key risks include Chinese government policies and regulations on the online game industry, internet content providers, and internet cafes. Additional risks involve the ability to retain players, license or acquire appealing games, and adapt to competitive market conditions.
Investor Verification Checklist
- Revenue Concentration: Verify the continued dominance of Shen Xian Zhuan in revenue generation and the timeline for monetization of Firefall and Planetside 2.
- Burn Rate: Assess the sustainability of the current cash position (RMB 793.1 million) given the consistent quarterly net losses exceeding RMB 110 million.
- Expense Trajectory: Monitor if product development and marketing expenses stabilize as new titles launch or if they continue to outpace revenue growth.
- Regulatory Environment: Review updates on Chinese government regulations regarding online gaming and internet cafes that could impact operations.