Business Context and Reporting Period
Company: NetEase, Inc. (NASDAQ: NTES)
Filing Type: Form 6-K (Press Release)
Reporting Period: Fourth Quarter and Fiscal Year ended December 31, 2009
Date of Filing: February 25, 2010
NetEase is a leading China-based Internet technology company providing online game services, advertising, and wireless value-added services. The reporting period covers the full fiscal year 2009 and the fourth quarter, highlighting the re-launch of World of Warcraft in September 2009 and the commercial launch of the web-based game Storm of Empires.
Key Financial Metrics
| Metric | Q4 2009 (RMB) | Q4 2009 (USD) | FY 2009 (RMB) | FY 2009 (USD) |
|---|---|---|---|---|
| Total Revenues | 1,290.2 million | 189.0 million | 3,823.5 million | 560.1 million |
| Gross Profit | 844.1 million | 123.7 million | 2,804.7 million | 410.9 million |
| Net Profit | 571.8 million | 83.8 million | 1,850.4 million | 271.1 million |
| Operating Cash Flow | 712.4 million | 104.4 million | 2,094.5 million | 306.8 million |
| Cash & Time Deposits | 7.0 billion (RMB) / 1.0 billion (USD) as of Dec 31, 2009 | |||
| Earnings per ADS (Diluted) | $0.64 | $2.09 |
Revenue Breakdown (Q4 2009)
- Online Games: RMB 1.09 billion (US$159.4 million)
- Advertising Services: RMB 183.7 million (US$26.9 million)
- WVAS and Others: RMB 18.5 million (US$2.7 million)
Material Changes vs. Prior Period
- Revenue Growth: Q4 2009 total revenue increased 46.7% year-over-year (YoY) and 46.8% quarter-over-quarter (QoQ). Online game revenue drove this growth, up 61.8% YoY, primarily due to the full quarter reporting of World of Warcraft operations following its September 2009 re-launch.
- Advertising Surge: Advertising revenue rose 63.9% YoY and 113.6% QoQ, attributed to increased consumer spending and successful restructuring of portal business operations.
- Margin Compression: Online game gross profit margin decreased to 70.8% in Q4 2009 from 88.0% in Q4 2008. This decline is due to royalties, license fee amortization, and technical consultancy fees associated with World of Warcraft.
- Profitability: Net profit for Q4 2009 was RMB 571.8 million, slightly down 0.7% from Q4 2008 (RMB 575.9 million) but up 45.2% from Q3 2009. The YoY stability was impacted by a net foreign exchange loss of RMB 15.3 million in Q4 2009 compared to a gain in the prior quarter.
- Operating Expenses: Increased 40.6% YoY to RMB 237.0 million, driven by higher staff-related costs (headcount increases and bonuses) and marketing expenses.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Game Portfolio: Management expects continued growth in the MMORPG market. New expansion packs for Tianxia II and Fantasy Westward Journey are performing well.
- Advertising: Outlook for 2010 is "cautiously optimistic," with opportunities tied to major events like Expo 2010, the Asian Games, and the FIFA World Cup.
- Strategy: Focus remains on diversifying the game portfolio and cross-pollinating game, email, and blog services with the portal business.
Risks and Contingencies
- Regulatory Risk: Potential penalties or operating restrictions from Chinese government authorities (GAPP) regarding online game operations.
- Licensing Risk: Uncertainty regarding the ability to continue operating licensed games like World of Warcraft.
- Market Competition: Risks related to product diversification success and maintaining market share in a competitive environment.
- Currency Fluctuation: Exposure to Renminbi exchange rate fluctuations against other currencies.
Investor Verification Checklist
- Audit Status: Verify that the financial information is unaudited and preliminary; final audited figures in the Form 20-F may differ.
- World of Warcraft Impact: Confirm the sustainability of revenue growth from World of Warcraft and the long-term impact of royalty fees on gross margins.
- Advertising Sustainability: Assess whether the Q4 advertising revenue spike is a seasonal anomaly or a structural shift in the portal business.
- Cash Position: Review the composition of the RMB 7.0 billion cash balance, noting the significant portion held in time deposits.
- Tax Status: Verify the continued eligibility of subsidiaries for "High and New Technology Enterprise" (HNTE) tax preferences (15% rate).