NetEase Reports First Quarter 2017 Unaudited Financial Results
- Net revenues were RMB13.6 billion (US$2.0 billion), an increase of 72.3% compared with the first quarter of 2016.
- Online game services net revenues were RMB10.7 billion (US$1.6 billion), an increase of 78.5% compared with the first quarter of 2016.
- Advertising services net revenues were RMB445.2 million (US$64.7 million), an increase of 13.2% compared with the first quarter of 2016.
- E-mail, e-commerce and others net revenues were RMB2.5 billion (US$357.4 million), an increase of 63.2% compared with the first quarter of 2016.
- Gross profit was RMB7.5 billion (US$1.1 billion), an increase of 63.2% compared with the first quarter of 2016.
- Total operating expenses were RMB2.7 billion (US$394.0 million), an increase of 57.8% compared with the first quarter of 2016.
- Net income attributable to the Company’s shareholders was RMB3.9 billion (US$569.9 million), an increase of 59.4% compared with the first quarter of 2016. Non-GAAP net income attributable to the Company’s shareholders was RMB4.3 billion (US$630.0 million), an increase of 62.6% compared with the first quarter of 2016.[1]
- Diluted earnings per ADS were US$4.29; non-GAAP diluted earnings per ADS were US$4.75.
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[1] As used in this press release, non-GAAP net income attributable to the Company’s shareholders is defined to exclude share-based compensation expenses. See “Unaudited Reconciliation of GAAP and Non-GAAP Results” at the end of this press release. |
First Quarter 2017 Operational Highlights
- Furthered the international penetration of Onmyoji by launching it in Japan, which achieved 200 million downloads globally by February 20, 2017.
- Launched new mobile titles including Demon Seals mobile, Westward Journey: Rage and Land of Glory, all of which were well-received.
- Achieved record number of quarterly active users for Blizzard Entertainment’s Hearthstone® and launched its new expansion pack Journey to Un’Goro™ in April 2017.
“Our strong first quarter results were led by our self-developed mobile games as we continued to bring innovative content to our massive audience,” said Mr. William Ding, Chief Executive Officer and Director of NetEase. “During the period, we advanced our strategic initiatives by rolling out new mobile games and expansion packs for our PC-client games, enhancing the monetization capabilities of our advertising services, and expanding our growing e-commerce businesses. The Company continues to introduce popular games that enrich the online game market in China, and initiated closed beta testing for Minecraft in April. We are also actively expanding our international footprint by bringing hit titles such as Onmyoji and Land of Glory to global audiences.”
“Ingenuity remains the cornerstone of our success across each of our core business lines where there are ample opportunities for growth. We are devoting significant resources to our media business supported by our deep expertise and R&D capabilities. Our e-commerce businesses such as Kaola.com and Yanxuan are also thriving with promising growth trajectories. With these initiatives and our focus on creating premium content, we aim not only to expand our business, but to grow our community and elevate users’ imaginations,” Mr. Ding concluded.
First Quarter 2017 Financial Results
Net Revenues
Net revenues for the first quarter of 2017 were RMB13,640.5 million (US$1,981.7 million), compared to RMB12,099.0 million and RMB7,915.4 million for the preceding quarter and the first quarter of 2016, respectively.
Net revenues from online games were RMB10,735.5 million (US$1,559.7 million) for the first quarter of 2017, compared to RMB8,959.1 million and RMB6,015.1 million for the preceding quarter and the first quarter of 2016, respectively. Mobile games accounted for approximately 73.3% of net revenues from online games in the first quarter of 2017, compared to 64.4% and 63.7% for the preceding quarter and the first quarter of 2016, respectively.
Net revenues from advertising services were RMB445.2 million (US$64.7 million) for the first quarter of 2017, compared to RMB664.8 million and RMB393.2 million for the preceding quarter and the first quarter of 2016, respectively. The top performing advertising verticals in the first quarter of 2017 were automobile, real estate and telecommunication services.
Net revenues from e-mail, e-commerce and others were RMB2,459.9 million (US$357.4 million) for the first quarter of 2017, compared to RMB2,475.1 million and RMB1,507.1 million for the preceding quarter and the first quarter of 2016, respectively.
Gross Profit
Gross profit for the first quarter of 2017 was RMB7,483.6 million (US$1,087.2 million), compared to RMB6,463.3 million and RMB4,586.6 million for the preceding quarter and the first quarter of 2016, respectively.
The year-over-year increase in online games gross profit was primarily driven by revenue contribution from mobile games such as Onmyoji, the mobile version of New Ghost and Demon Seals mobile as well as Blizzard Entertainment’s Overwatch® and World of Warcraft®. The quarter-over-quarter increase in online games gross profit was primarily driven by revenue contribution from mobile games such as Onmyoji, the mobile version of New Ghost and Demon Seals mobile.
The quarter-over-quarter decrease in advertising services gross profit was primarily due to seasonality.
The year-over-year increase in e-mail, e-commerce and others gross profit was primarily due to increased revenue contribution from NetEase’s e-commerce businesses such as Kaola.com. The quarter-over-quarter decrease in e-mail, e-commerce and others gross profit was primarily due to decreased revenue contribution from certain e-commerce businesses with relatively higher gross profit margins.
Gross Profit Margin
Gross profit margin for the online games business for the first quarter of 2017 was 63.9%, compared to 60.7% and 67.1% for the preceding quarter and the first quarter of 2016, 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 net revenues. The quarter-over-quarter increase in gross profit margin was mainly due to decreased revenue contribution from licensed games in the current quarter, which have relatively lower gross profit margins, and the one-off recognition of certain royalty expenses related to licensed games in the fourth quarter of 2016, and partially offset by the increased revenue contribution from mobile games in the current quarter.
Gross profit margin for the advertising services business for the first quarter of 2017 was 57.3%, compared to 66.5% and 62.4% for the preceding quarter and the first quarter of 2016, respectively. The year-over-year decrease in gross profit margin was mainly due to higher staff-related and content purchase costs. The quarter-over-quarter decrease in gross profit margin was mainly due to seasonality.
Gross profit margin for the e-mail, e-commerce and others businesses for the first quarter of 2017 was 14.8%, compared to 23.4% and 20.4% for the preceding quarter and the first quarter of 2016, respectively. The year-over-year and quarter-over-quarter decreases in gross profit margin were primarily attributable to decreased revenue contribution from certain e-commerce businesses with relatively higher gross profit margins.
Operating Expenses
Total operating expenses for the first quarter of 2017 were RMB2,711.7 million (US$394.0 million), compared to RMB2,596.6 million and RMB1,718.9 million for the preceding quarter and the first quarter of 2016, respectively. The year-over-year increase in operating expenses was mainly due to increased selling and marketing expenses related to online games, higher research and development investments, higher staff-related costs resulting from an increase in headcount and average compensation and operating expenses related to Kaola.com. The quarter-over-quarter increase in operating expenses was mainly due to higher staff-related costs resulting from an increase in headcount and average compensation.
Income Taxes
The Company recorded a net income tax charge of RMB943.0 million (US$137.0 million) for the first quarter of 2017, compared to RMB882.0 million and RMB530.7 million for the preceding quarter and the first quarter of 2016, respectively. The effective tax rate for the first quarter of 2017 was 19.0%, compared to 19.2% and 17.5% for the preceding quarter and the first quarter of 2016, respectively. The change in effective tax rate represents the Company’s estimate of the effective tax rate for the first quarter of 2017.
Net Income After Tax
Net income attributable to the Company’s shareholders for the first quarter of 2017 totaled RMB3.9 billion (US$569.9 million), compared to RMB3.7 billion and RMB2.5 billion for the preceding quarter and the first quarter of 2016, respectively. Non-GAAP net income attributable to the Company’s shareholders for the first quarter of 2017 totaled RMB4.3 billion (US$630.0 million), compared to RMB4.0 billion and RMB2.7 billion for the preceding quarter and the first quarter of 2016, respectively.
During the first quarter of 2017, the Company had a net foreign exchange loss of RMB48.5 million (US$7.0 million), compared to a net foreign exchange gain of RMB90.5 million and a net foreign exchange loss of RMB36.0 million for the preceding quarter and the first quarter of 2016, 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$4.33 and US$4.29, respectively, for the first quarter of 2017. The Company reported basic and diluted earnings per ADS of US$4.08 and US$4.04, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$2.72 and US$2.70, respectively, for the first quarter of 2016. Non-GAAP basic and diluted earnings per ADS were US$4.79 and US$4.75, respectively, for the first quarter of 2017, compared to non-GAAP basic and diluted earnings per ADS of US$4.38 and US$4.34, respectively, in the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$2.94 and US$2.92, respectively, for the first quarter of 2016.
Quarterly Dividend
The board of directors has approved a dividend of US$1.08 per ADS for the first quarter of 2017, which is expected to be paid on June 2, 2017 to shareholders of record as of the close of business on May 26, 2017.
NetEase paid a dividend of US$1.01 per ADS for the fourth quarter of 2016 on March 10, 2017.
Under the Company’s quarterly dividend policy announced on May 13, 2014, quarterly dividends will be set at an amount equivalent to approximately 25% of the Company’s anticipated net income after tax in each fiscal quarter. The determination to make dividend distributions and the amount of such distributions in any particular quarter will be made at the discretion of the board of directors and will be based upon the Company’s operations and earnings, cash flow, financial condition and other relevant factors.
