BEIJING, Aug. 17, 2016 — NetEase, Inc. (NASDAQ: NTES) (“NetEase” or the “Company”), one of China’s leading internet and online game services providers, announced its unaudited financial results for the second quarter ended June 30, 2016.
“Our outstanding second quarter results reflect NetEase’s leadership in China’s dynamic online games industry where we continue to introduce premium game content, innovative technology and effective marketing strategies,” said Mr. William Ding, Chief Executive Officer and Director of NetEase. “Our total second quarter net revenues grew 96.0% compared with the second quarter of 2015, with each business segment posting impressive year-over-year improvement, including increases of 76.0% in online game services, 24.2% in advertising services, and 310.6% in our e-mail, e-commerce and others business.”
“As we focus on delivering the highest quality games and unmatched user experiences, we also move the industry forward by exploring new technologies such as virtual reality and augmented reality and developing content for a variety of genres.”
“Our business and the overall online games industry are being driven by the popularity and demand for mobile games. We are well positioned to exploit this trend with a mobile game portfolio that now includes more than 100 titles. In the second quarter, we launched the mobile version of New Ghost, which ranked as a top 10 grossing title on China’s iOS app store, and Fantasy Westward Journey: Warriors and Raven, Korea’s top ARPG, also quickly attracted large audiences following their introductions in the second quarter. Two of our best-selling mobile games, the Fantasy Westward Journey and Westward Journey mobile games, maintained their popularity on China’s iOS app store throughout the second quarter. Our other mobile games, such as Invincible and Kai-ri-sei Million Arthur, also made solid contributions to our second quarter year-over-year growth.”
“In addition to the launch of the well-received 3D Tianxia III mobile on July 29, our new mobile game releases planned for the next several months include the 3D RPG Onmyoji, Audition Mobile, the mobile version of a popular dancing game, and HIT, a breathtaking ARPG.”
“We launched several new expansion packs and new versions for a number of our highly popular PC-client games in the second quarter including New Ghost, Tianxia III, Demon Seals, Kung Fu Master II and Revelation, which gained players’ attention. New expansion packs for Fantasy Westward Journey II, New Westward Journey Online II, New Westward Journey Online III and Heroes of Tang Dynasty Zero were also released more recently. The new expansion packs for Revelation and New Ghost will be released on August 18 and August 19, respectively. We also look forward to preparing for the first closed beta testing of our real-time action tactic thriller War Rage. I am also pleased with the ongoing development of the Chinese version of Minecraft. Our cooperation withMicrosoft and Mojang AB, the creator of Minecraft, reflects NetEase’s deep understanding of the Chinese market and ability to successfully launch the most renowned PC-client and mobile games.”
“On May 24 we brought Blizzard Entertainment’s highly anticipated team-based first-person shooter game, Overwatch®, to players in China in conjunction with its global launch. Following the release, Overwatch has received unprecedented attention and praise from the online players’ community. It surpassed the sales record established last year by Blizzard Entertainment’s Diablo III®: Reaper of Souls™ in the category of buy-to-play PC-client games in China, with nearly 3 million copies sold by the end of June. In addition, Blizzard Entertainment’s Hearthstone®: Heroes of Warcraft™ achieved new records for revenues and the number of active players in the second quarter, following the April release of its third expansion pack, Whisper of the Old Gods™.”
“Led by the automobile, internet services and real estate sectors, advertising revenue achieved another quarter of solid growth. We continued to promote our Mobile News App live streaming services and further invested in high quality content and simultaneously, we launched our NetEase Media Platform to broaden our Professionally Generated Content (PGC) platform, all of which we hope will attract additional advertisers and enlarge the user base. In addition, our cross-border e-commerce platform,Kaola.com, sustained its strong revenue and gross profit margin growth through the second quarter and is creating exciting strategic partnership opportunities.”
“China is now the world’s largest online game market, providing NetEase an opportunity to further expand its loyal customer base, develop new strategic business partnerships and enhance its industry leadership position. Our progress in the first half of 2016 clearly demonstrates that we have the resources and commitment to continue the exceptional growth and success of each of our business segments,” Mr. Ding concluded.
Second Quarter 2016 Financial Results
Net revenues for the second quarter of 2016 were RMB8,952.8 million (US$1,347.1 million), compared to RMB7,915.4 million and RMB4,567.9 million for the preceding quarter and the second quarter of 2015, respectively.
Net revenues from online games were RMB6,438.3 million (US$968.8 million) for the second quarter of 2016, compared to RMB6,015.1 million and RMB3,657.1 million for the preceding quarter and the second quarter of 2015, respectively.
Gross profit for the second quarter of 2016 was RMB5,280.4 million (US$794.5 million), compared to RMB4,586.6 million and RMB2,845.6 million for the preceding quarter and the second quarter of 2015, respectively.
The year-over-year increase in online games gross profit was primarily driven by revenue contribution from mobile games such as the Fantasy Westward Journey and Westward Journey Online mobile games, Invincible, and Blizzard Entertainment’s Hearthstone: Heroes of Warcraft and Overwatch. The quarter-over-quarter increase in online games gross profit was primarily driven by revenue contribution from Blizzard Entertainment’s Hearthstone: Heroes of Warcraft and Overwatch, as well as the Fantasy Westward Journey mobile game.
Gross Profit Margin
Gross profit margin for the online games business for the second quarter of 2016 was 66.2%, compared to 67.1% and 69.3% for the preceding quarter and the second quarter of 2015, respectively. The year-over-year decrease in gross profit margin was mainly due to increased revenue contribution from mobile games, which have relatively lower gross profit margins, as a percentage of NetEase’s total online games revenues.
Total operating expenses for the second quarter of 2016 were RMB2,232.5 million (US$335.9 million), compared to RMB1,718.9 million and RMB1,395.2 million for the preceding quarter and the second quarter of 2015, respectively. The year-over-year and quarter-over-quarter increases in operating expenses was mainly due to higher staff-related costs resulting from an increase in headcount and average compensation, increased research and development investments and selling and marketing expenses, as well as increased operating expenses related to Kaola.com.
The Company recorded a net income tax charge of RMB262.7 million (US$39.5 million) for the second quarter of 2016, compared to RMB530.7 million and RMB145.9 million for the preceding quarter and the second quarter of 2015, respectively. The effective tax rate for the second quarter of 2016 was 8.6%, compared to 17.5% and 9.2% for the preceding quarter and the second quarter of 2015, respectively. The quarter-over-quarter decrease in the effective tax rate was mainly due to the fact that certain subsidiaries of the Company were approved as Key Software Enterprises in the second quarter of 2016 and subject to a preferential tax rate of 10% for 2015, and the Company recognized related tax credits in this quarter. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter.
Net Income After Tax
Net income attributable to the Company’s shareholders for the second quarter of 2016 totaled RMB2.7 billion (US$409.4 million), compared to RMB2.5 billion and RMB1.4 billion for the preceding quarter and the second quarter of 2015, respectively. Non-GAAP net income attributable to the Company’s shareholders for the second quarter of 2016 totaled RMB3.2 billion (US$484.6 million), compared to RMB2.7 billion and RMB1.6 billion for the preceding quarter and the second quarter of 2015, respectively.
During the second quarter of 2016, the Company had a net foreign exchange gain of RMB77.3 million (US$11.6 million), compared to net foreign exchange losses of RMB36.0 million and RMB21.7 million for the preceding quarter and the second quarter of 2015, respectively. The year-over-year and quarter-over-quarter changes in foreign exchange gains and losses were mainly due to unrealized exchange gains and losses arising from the Company’s U.S. dollar-denominated bank deposits and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods.
NetEase reported basic and diluted earnings per ADS of US$3.12 and US$3.10, respectively, for the second quarter of 2016. The Company reported basic and diluted earnings per ADS of US$2.81 and US$2.79, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$1.63 and US$1.62, respectively, for the second quarter of 2015. Non-GAAP basic and diluted earnings per ADS were US$3.70 and US$3.67, respectively, for the second quarter of 2016, compared to non-GAAP basic and diluted earnings per ADS of US$3.05 and US$3.03, respectively, in the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$1.82 and US$1.81, respectively, for the second quarter of 2015.