The9 Misses By $0.08; Reports First Full Quarter of World of Warcraft; Stock Down 11% in After-Hours Trading (NCTY 3Q05 Earnings)

 |  About: The9 Limited (NCTY)

The9 (ticker: NCTY), a Chinese online game operator reported Q3 2005 earnings results today that missed consensus EPS estimates by $0.08. Key stats from the quarter:

Q3 Results
(all percentage changes and comparisons are year on year, unless stated otherwise, assumes RMB 8.0920 : US $ 1)

  • Total revenue rose 2,079.0% to $24.0 million.
  • Net revenue rose 2,096.0% to $22.8 million, and rose 232.0% sequentially. Consensus estimate of $22.9 million.
  • Net revenue from WoW was $22.3 million.
  • Online game service revenue rose 214,682.1% to $23.5 million.
  • Game operating support, website solutions, and advertising revenue fell 85.1% to $109,525, and fell 20.2% sequentially (due to decline of MU).
  • SMS revenue fell 95.7% to $14,367.
  • Other revenue rose 1,705.9% to $387,417 (due to increased sales of WoW merchandise).
  • Gross margin was 50.1% vs 70.1%, and 54.1% in Q2 2005.
  • Total operating expenses rose 364.6% to $5.2 million, but fell 24.9% sequentially.
  • Product development expenses fell 17.3% to $363,718.
  • Sales and marketing expenses rose 1,253.3% to $2.7 million.
  • General and administrative expenses rose 346.9% to $2.2 million.
  • Operating income rose to $6.2 million from a loss in Q2 2005.
  • Operating margin was 27.3%.
  • Net income rose 1,094.1% to $4.7 million, and rose from a loss in Q2 2005.
  • Net margin was 20.4%.
  • EPS of $0.19 vs consensus estimate of $0.27.
  • Adjusted EBITDA of $7.2 million.

Balance Sheet
(as of September 30, 2005, assumes RMB 8.0920 : US $ 1)

  • Cash and equivalents of $59.7 million.
Jun Zhu, Chairman and Chief Executive Officer of The9 Limited:

"The third quarter of 2005 was the first quarterly period which fully reflected our operation of Blizzard Entertainment®'s World of Warcraft® ("WoW") in China. In the third quarter, we attained peak and average concurrent WoW users of approximately 467,000 and 240,000, respectively. Notably, after a normalization of customer usage patterns in the third quarter, we have seen impressive metrics in October, with new account activations continued daily and recording peak concurrent WoW user level exceeding 500,000. As of October 31, 2005, more than 2.5 million paid accounts have been activated since launch."

Chief Financial Officer, Hannah Lee

"The revenue and earnings potential of World of Warcraft® in the China market is becoming more evident. Net revenues were US$22.8 million in the third quarter of 2005 and operating profit was US$6.2 million. Although we accounted for two months of minority interest in China The9 Interactive Limited ("C9I"), our subsidiary that operates WoW in China, before we completed the acquisition of the remaining 31.1% interest in C9I in late August 2005, we recorded net income of US$4.7 million. Starting from this quarter, we will begin presenting adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") as we believe this information will be useful to the company and investors by highlighting the major expenses that will not result in cash settlement in the future nor impact the company's future cash earnings or cash flows."

NCTY chart.