NetEase Announces Third Quarter 2020 Unaudited Financial Results

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NetEase Announces Third Quarter 2020 Unaudited Financial Results

NetEase, Inc. (NASDAQ: NTES and HKEX: 9999, “NetEase” or the “Company”), one of China’s leading internet and online game services providers, today announced its unaudited financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Financial Highlights

  • Net revenues were RMB18.7 billion (US$2.7 billion), an increase of 27.5% compared with the third quarter of 2019.

– Online game services net revenues were RMB13.9 billion (US$2.0 billion), an increase of 20.2% compared with the third quarter of 2019.

– Youdao net revenues were RMB896.0 million (US$132.0 million), an increase of 159.0% compared with the third quarter of 2019.

– Innovative businesses and others net revenues were RMB3.9 billion (US$574.4 million), an increase of 41.6% compared with the third quarter of 2019. 

  • Gross profit was RMB9.9 billion (US$1.5 billion), an increase of 25.6% compared with the third quarter of 2019.
  • Total operating expenses were RMB7.0 billion (US$1.0 billion), an increase of 54.7% compared with the third quarter of 2019.
  • Net income from continuing operations attributable to the Company’s shareholders was RMB3.0 billion (US$441.6 million), which includes net exchange losses of RMB1.6 billion (US$231.4 million). Non-GAAP net income from continuing operations attributable to the Company’s shareholders was RMB3.7 billion (US$540.4 million).[1] 
  • Basic net income from continuing operations was US$0.65 per ADS (US$0.13 per share). Non-GAAP basic net income from continuing operations was US$0.80 per ADS (US$0.16 per share).[1] [2] 
[1] As used in this announcement, non-GAAP net income from continuing operations attributable to the Company’s shareholders and non-GAAP basic and diluted net income from continuing operations per ADS and per share are defined to exclude share-based compensation expenses. See “Unaudited Reconciliation of GAAP and Non-GAAP Results” at the end of this announcement.
[2] Effective October 1, 2020, the Company changed the ratio of its American depositary shares (“ADSs”), representing ordinary shares, from the previous one ADS for every twenty-five ordinary shares to one ADS for every five ordinary shares. The data throughout this announcement have been revised to reflect the ratio change as if it had occurred throughout the periods presented herein. 

Third Quarter 2020 and Recent Operational Highlights

  • Introduced new titles to the Chinese market including Onmyoji: Yokai Koya, PES Club Manager, King of Hunters and For All Time, and EVE Echoes and MARVEL Duel to overseas markets.
  • Extended the popularity of a number of mobile titles that climbed China’s iOS top grossing chart in the past months including Invincible, Onmyoji and Sky.
  • Maintained steady performances of flagship PC titles such as Fantasy Westward Journey Online, New Westward Journey Online II and Justice.
  • Strengthened NetEase Game’s international presence with strong performances from Knives Out, Life-After and Identity V in Japan.
  • Further developed a robust pipeline with titles including Unknown Future, Akasha Book, Revelation mobile game, Infinite Lagrange, Harry Potter: Magic Awakened, The Lord of the Rings: Rise to War, Nightmare Breaker, Ghost World Chronicle, Diablo® Immortal™ and Pokémon Quest. Several of these titles, including Revelation mobile game, will be released before Chinese New Year.
  • Increased net revenues from Youdao’s learning services and products by over 200% year-over-year.

“With strong and steady contributions from our online game services, our total net revenues for the third quarter reached RMB18.7 billion, an increase of 27.5% year-over-year,” said Mr. William Ding, Chief Executive Officer and Director of NetEase. “The strength of our games business is bolstered by our diverse and growing game portfolio with impressive longevity. Additionally, our robust pipeline of games ready for launch is hugely exciting, and we cannot wait to unveil our game sensations across multiple genres to both domestic and global players in the coming quarters.  

“Our other businesses including Youdao, NetEase Cloud Music and Yanxuan are also on track, with promising year-over-year topline growth. As we work to bring even more value to our community and shareholders, we will continue to focus on expanding our sustainable growth prospects for each of our businesses,” Mr. Ding concluded.

Third Quarter 2020 Financial Results

Net Revenues

Net revenues for the third quarter of 2020 were RMB18,658.2 million (US$2,748.1 million), compared to RMB18,184.8 million and RMB14,635.7 million for the preceding quarter and the third quarter of 2019, respectively.

Net revenues from online game services were RMB13,862.0 million (US$2,041.7 million) for the third quarter of 2020, compared to RMB13,828.3 million and RMB11,534.8 million for the preceding quarter and the third quarter of 2019, respectively. Net revenues from mobile games accounted for approximately 72.7% of net revenues from online games for the third quarter of 2020, compared to 72.3% and 71.0% for the preceding quarter and the third quarter of 2019, respectively.

Net revenues from Youdao were RMB896.0 million (US$132.0 million) for the third quarter of 2020, compared to RMB623.3 million and RMB345.9 million for the preceding quarter and the third quarter of 2019, respectively.

Net revenues from innovative businesses and others were RMB3,900.1 million (US$574.4 million) for the third quarter of 2020, compared to RMB3,733.3 million and RMB2,755.0 million for the preceding quarter and the third quarter of 2019, respectively.   

Gross Profit

Gross profit for the third quarter of 2020 was RMB9,885.8 million (US$1,456.0 million), compared to RMB9,792.2 million and RMB7,870.4 million for the preceding quarter and the third quarter of 2019, respectively.   

The quarter-over-quarter gross profit in online game services was generally stable. The year-over-year increase was primarily due to increased net revenues from self-developed games such as Fantasy Westward Journey H5, Life-After and Knives Out, as well as certain licensed games.

The quarter-over-quarter and year-over-year increases in Youdao gross profit were primarily attributable to the significant increase in net revenues, improved economies of scale, and faculty compensation structure optimization for its learning services and products. 

The quarter-over-quarter decrease in innovative businesses and others gross profit was primarily due to decreased gross profit from advertising services. The year-over-year increase was primarily due to increased net revenues from NetEase Cloud Music.

Gross Profit Margin

Gross profit margin for online game services for the third quarter of 2020 was 63.6%, compared to 63.8% each for the preceding quarter and the third quarter of 2019. Gross profit margin for online game services was generally stable, fluctuating within a narrow band based on the revenue mix of mobile and PC games, as well as self-developed and licensed games.

Gross profit margin for Youdao for the third quarter of 2020 was 45.9%, compared to 45.2% and 25.8% for the preceding quarter and the third quarter of 2019, respectively. The quarter-over-quarter gross profit margin was comparatively stable. The year-over-year increase was primarily attributable to the factors enumerated above.

Gross profit margin for innovative businesses and others for the third quarter of 2020 was 16.8%, compared to 18.5% and 15.2% for the preceding quarter and the third quarter of 2019, respectively. The quarter-over-quarter decrease was primarily due to decreased gross profit margin from advertising services. The year-over-year increase was primarily due to increased net revenues from NetEase Cloud Music.

Operating Expenses

Total operating expenses for the third quarter of 2020 were RMB7,015.7 million (US$1,033.3 million), compared to RMB5,622.3 million and RMB4,535.6 million for the preceding quarter and the third quarter of 2019, respectively. The quarter-over-quarter and year-over-year increases were mainly due to increased marketing expenditures related to Youdao and online game services, as well as higher staff-related costs and research and development investments.

Other Income

Other income consisted of investment income, interest income, exchange gains/ (losses) and others. The quarter-over-quarter and year-over-year decreases were mainly due to net exchange losses of RMB1,571.3 million (US$231.4 million) recorded in the third quarter of 2020, which were mainly related to net unrealized exchange 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. Such unrealized exchange losses were partially offset by increased investment income arising from fair value changes of equity investments with readily determinable fair value.   

Income Taxes

The Company recorded a net income tax charge of RMB342.7 million (US$50.5 million) for the third quarter of 2020, compared to RMB1,064.5 million and RMB88.0 million for the preceding quarter and the third quarter of 2019, respectively. The effective tax rate for the third quarter of 2020 was 10.9%, compared to 18.6% and 2.1% for the preceding quarter and the third quarter of 2019, respectively. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter, and the rate for the third quarter of 2020 was affected by certain tax credits received and recognized during the quarter.

Net Income and Non-GAAP Net Income 

Net income from continuing operations attributable to the Company’s shareholders for the third quarter of 2020 totaled RMB2,998.2 million (US$441.6 million), which includes net exchange losses of RMB1,571.3 million (US$231.4 million), compared to RMB4,537.8 million and RMB4,134.2 million for the preceding quarter and the third quarter of 2019, respectively.

Non-GAAP net income from continuing operations attributable to the Company’s shareholders for the third quarter of 2020 totaled RMB3,669.2 million (US$540.4 million), compared to RMB5,226.0 million and RMB4,726.0 million for the preceding quarter and the third quarter of 2019, respectively.

NetEase reported basic and diluted net income from continuing operations per ADS of US$0.65 and US$0.64, respectively, for the third quarter of 2020, compared to US$1.03 and US$1.02, respectively, for the preceding quarter, and US$0.94 each for the third quarter of 2019. NetEase reported basic and diluted net income from continuing operations per share of US$0.13 each for the third quarter of 2020, compared to US$0.21 and US$0.20, respectively, for the preceding quarter, and US$0.19 each for the third quarter of 2019.

Non-GAAP basic and diluted net income from continuing operations per ADS were US$0.80 and US$0.79, respectively, for the third quarter of 2020, compared to US$1.19 and US$1.17, respectively, for the preceding quarter and US$1.08 and US$1.07, respectively, for the third quarter of 2019. Non-GAAP basic and diluted net income from continuing operations per share were US$0.16 each for the third quarter of 2020, compared to US$0.24 and US$0.23, respectively, for the preceding quarter and US$0.22 and US$0.21, respectively, for the third quarter of 2019.

QuarterlyDividend

The board of directors has approved a dividend of US$0.1950 per ADS (US$0.0390 per share) for the third quarter of 2020, to holders of ADSs and holders of ordinary shares as of the close of business on December 4, 2020, New York Time and Hong Kong Time, respectively, payable in U.S. dollars. For holders of ordinary shares, in order to qualify for the dividend, all valid documents for the transfer of shares accompanied by the relevant share certificates must be lodged for registration with the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong no later than 4:30 p.m. on December 4, 2020 (Hong Kong Time). The payment date is expected to be on December 15, 2020 for holders of ordinary shares and on or around December 18, 2020 for holders of ADSs (assuming the dividend payment is timely received by the ADS depositary). 

NetEase paid a dividend of US$0.2320 per ADS (US$0.0464 per share) for the first quarter of 2020 in June 2020, and paid a dividend of US$0.2970 per ADS (US$0.0594 per share) for the second quarter of 2020 in September 2020. 

Starting in the second quarter of 2019, the Company’s policy has been to set quarterly dividends at an amount equivalent to approximately 20%-30% 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.

Other Information

As of September 30, 2020, the Company’s total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB102,650.0 million (US$15,118.7 million), compared to RMB74,406.0 million as of December 31, 2019. Cash flow generated from continuing operating activities was RMB5,401.0 million (US$795.5 million) for the third quarter of 2020, compared to RMB4,772.3 million and RMB3,846.3 million for the preceding quarter and the third quarter of 2019, respectively. 

Share Purchase/ RepurchaseProgram

On November 20, 2019, the Company announced that its board of directors had approved a share purchase program of up to US$20.0 million of Youdao’s outstanding ADSs for a period not to exceed 12 months beginning on November 25, 2019. Under the terms of this program, NetEase may purchase Youdao’s ADSs in open-market transactions on the New York Stock Exchange. As of September 30, 2020, approximately 198,000 ADSs had been purchased under this program for a total cost of US$3.4 million.

On February 26, 2020, the Company announced that its board of directors had approved a share repurchase program of up to US$1.0 billion of the Company’s outstanding ADSs for a period not to exceed 12 months beginning on March 2, 2020. On May 19, 2020, the Company announced that its board of directors had approved an amendment to such program to increase the total authorized repurchase amount to US$2.0 billion. Under the terms of this program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market. As of September 30, 2020, approximately 15.3 million ADSs had been repurchased under this program for a total cost of US$1.1 billion.

For both of the above-mentioned current programs, it is expected that the timing and dollar amount of purchase transactions will be in accordance with the Securities and Exchange Commission (SEC) Rule 10b-18 requirements and such purchases may be affected pursuant to a plan in conformity with SEC Rule 10b5-1. The extent to which NetEase repurchases its ADSs or purchases Youdao’s ADSs will depend upon a variety of factors, including market conditions. These programs may be suspended or discontinued at any time. 

** The United States dollar (US$) amounts disclosed in this announcement are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB6.7896 on September 30, 2020 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2020, or at any other certain date. The percentages stated are calculated based on RMB. 

Conference Call

NetEase’s management team will host a teleconference call with simultaneous webcast at 7:00 a.m. New York Time on Thursday, November 19, 2020 (Beijing/Hong Kong Time: 8:00 p.m., Thursday, November 19, 2020). NetEase’s management will be on the call to discuss the quarterly results and answer questions.

Interested parties may participate in the conference call by dialing 1-646-828-8143 and providing conference ID: 5158324, 15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-719-457-0820 and entering passcode 5158324#. The replay will be available through December 2, 2020.

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