NetEase Reports Fourth Quarter and Fiscal Year 2019 Unaudited Financial Results
BEIJING, Feb. 26, 2020 /PRNewswire/ -- NetEase, Inc. (NASDAQ: NTES) ("NetEase" or the "Company"), one of China's leading internet and online game services providers, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2019.
Fourth Quarter 2019 Financial Highlights([1])
-- Net revenues were RMB15,734.8 million (US$2,260.2 million), an increase
of 9.2% compared with the fourth quarter of 2018.
- Online game services net revenues were RMB11,604.3 million (US$1,666.9 million), an increase of 5.3% compared with the fourth quarter of 2018.
- Youdao net revenues were RMB410.4 million (US$59.0 million), an increase of 78.4% compared with the fourth quarter of 2018.
- Innovative businesses and others net revenues were RMB3,720.0 million (US$534.4 million), an increase of 17.9% compared with the fourth quarter of 2018.
-- Gross profit was RMB8,210.4 million (US$1,179.4 million), an increase of
9.0% compared with the fourth quarter of 2018.
-- Total operating expenses were RMB5,234.0 million (US$751.8 million), an
increase of 17.5% compared with the fourth quarter of 2018.
-- Net income from continuing operations attributable to the Company's
shareholders was RMB3,053.7 million (US$438.6 million). Non-GAAP net
income from continuing operations attributable to the Company's
shareholders was RMB3,662.3 million (US$526.1 million).([2])
-- Basic net income per ADS from continuing operations was US$3.40.
Non-GAAP basic net income per ADS from continuing operations was
US$4.07.([2])
[1] In September 2019, NetEase sold
its Kaola e-commerce business, the
principal terms of which were
previously announced. As a result,
Kaola has been deconsolidated from
the Company and its historical
financial results are reflected in
the Company's consolidated financial
statements as discontinued
operations accordingly. The
financial information and non-GAAP
financial information disclosed in
this press release are presented on
a continuing operations basis,
unless otherwise specifically
stated.
[2] As used in this press release,
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 are
defined to exclude share-based
compensation expenses. See
"Unaudited Reconciliation of GAAP
and Non-GAAP Results" at the end of
this press release.
Fourth Quarter 2019 and Recent 2020 Operational Highlights
-- Expanded user base and diversified portfolio with new games launched in
China including:
- Fantasy Westward Journey 3D, released in December, topped China's iOS download chart soon after its launch, capturing wide interest from game players.
- Introduced other thrilling new titles including Xuan Yuan Sword: Dragon Upon the Cloud, Bloom & Blade, Onmyoji: The Card Game and Champion of the Fields, The Ninth Institute and Astracraft.
-- Deepened international brand recognition with popular games:
- Knives Out remained popular in Japan and topped the iOS grossing chart several times in the fourth quarter.
- Identity V ranked third on Japan's top iOS grossing chart several times in November and December.
- Marvel Super War, released in December in several Southeast Asian markets, gained popularity and topped many iOS download charts.
-- Continued popularity of Blizzard Entertainment's World of Warcraft(®)
in China, bolstered by the release of World of Warcraft Classic,
achieving a record number of total monthly subscribers in the fourth
quarter, with increased revenue quarter-over-quarter.
-- Advanced exciting game pipeline, including: Onmyoji: Yokai Koya, Harry
Potter: Magic Awakened?EVE Echoes, Ghost World Chronicle, Revelation
mobile game, Marvel Duel, Diablo(®) Immortal((TM)) and Pokémon Quest.
-- Net revenues from Youdao's learning services and products were RMB311.9
million (US$44.8 million) for the fourth quarter of 2019, a 128.6%
increase from the same period in 2018.
-- Advanced NetEase Cloud Music with strong revenue growth, expanding the
Company's community of independent musicians to more than 100,000 and
over 270 billion playbacks of their songs in 2019.
"We saw strong growth across our primary businesses, increasing our total annual net revenues and net income from continuing operations attributable to the Company's shareholders year-over-year by 16% and 60%, respectively, due to strong performances in our online game services as well as other business segments," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Our online game services net revenues continued to grow, propelled by the sustained and growing popularity of our existing titles, again demonstrating the longevity of our game franchises. At the end of the year, we launched the long-anticipated Fantasy Westward Journey 3D, which gave us a wonderful start to the first quarter. We will continue to bring more masterpieces to both domestic and global players in 2020.
"Our online education and music businesses also performed remarkably well. Youdao is exploring new approaches to grow its business, replicating successful course experiences to produce premium learning content, products and scale with a positive impact to its margins. Our differentiation in music offerings is also becoming more evident. We are helping hundreds of thousands of independent musicians create and promote their work to Chinese music lovers with our platform's specialized promotion and distribution capabilities in independent music. We believe that NetEase's orientation as a forerunner in these evolving markets positions us well for growth and the ability to create additional value for our stakeholders. Finally, with respect to the COVID-19 outbreak, we currently expect to see some impact to our business lines in the near-term, however, the situation is evolving. NetEase is committed to providing support to affected communities and working together as we move through this challenging time," Mr. Ding concluded.
Fourth Quarter 2019 Financial Results
Net Revenues
Net revenues for the fourth quarter of 2019 were RMB15,734.8 million (US$2,260.2 million), compared to RMB14,635.7 million and RMB14,405.3 million for the preceding quarter and the fourth quarter of 2018, respectively.
Net revenues from online game services were RMB11,604.3 million (US$1,666.9 million) for the fourth quarter of 2019, compared to RMB11,534.8 million and RMB11,019.6 million for the preceding quarter and the fourth quarter of 2018, respectively. Net revenues from mobile games accounted for approximately 70.4% of net revenues from online games for the fourth quarter of 2019, compared to 71.0% and 69.7% for the preceding quarter and the fourth quarter of 2018, respectively.
Net revenues from Youdao were RMB410.4 million (US$59.0 million) for the fourth quarter of 2019, compared to RMB345.9 million and RMB230.1 million for the preceding quarter and the fourth quarter of 2018, respectively.
Net revenues from innovative businesses and others were RMB3,720.0 million (US$534.4 million) for the fourth quarter of 2019, compared to RMB2,755.0 million and RMB3,155.6 million for the preceding quarter and the fourth quarter of 2018, respectively.
Gross Profit
Gross profit for the fourth quarter of 2019 was RMB8,210.4 million (US$1,179.4 million), compared to RMB7,870.4 million and RMB7,530.5 million for the preceding quarter and the fourth quarter of 2018, respectively.
Gross profit for online game services was stable quarter-over-quarter. The year-over-year increase in online game services gross profit was primarily due to increased revenue contribution from mobile games including Life-After, Invincible and Identity V.
The quarter-over-quarter and year-over-year increases in Youdao gross profit were primarily due to increased net revenues from its learning services and products.
The quarter-over-quarter increase in innovative businesses and others gross profit was primarily contributed from NetEase Cloud Music and NetEase's advertising services. The year-over-year increase in innovative businesses and others gross profit was primarily due to increased net revenues from NetEase Cloud Music.
Gross Profit Margin
Gross profit margin for online game services for the fourth quarter of 2019 was 63.1%, compared to 63.8% and 62.8% for the preceding quarter and the fourth quarter of 2018, respectively. Gross profit margin for online game services was generally stable, fluctuating within a narrow band based on the revenue mix of mobile and PC-client, as well as self-developed and licensed games.
Gross profit margin for Youdao for the fourth quarter of 2019 was 29.8%, compared to 25.8% and 29.7% for the preceding quarter and the fourth quarter of 2018, respectively. The quarter-over-quarter increase in Youdao gross profit margin was mainly due to an improvement from its learning services and products and online marketing services. Gross profit margin for Youdao was stable year-over-year.
Gross profit margin for innovative businesses and others for the fourth quarter of 2019 was 20.6%, compared to 15.2% and 17.0% for the preceding quarter and the fourth quarter of 2018, respectively. The quarter-over-quarter increase in innovative businesses and others gross profit margin was primarily contributed from NetEase Cloud Music and NetEase's advertising services. The year-over-year increase in innovative businesses and others gross profit margin was primarily due to increased net revenues from NetEase Cloud Music.
Operating Expenses
Total operating expenses for the fourth quarter of 2019 were RMB5,234.0 million (US$751.8 million), compared to RMB4,535.6 million and RMB4,455.4 million for the preceding quarter and the fourth quarter of 2018, respectively. The quarter-over-quarter and year-over-year increases in total operating expenses were mainly due to increased marketing expenditures related to online game services.
Other Income([3])
Other income consisted of investment income, interest income, foreign exchange gains and losses and others. The quarter-over-quarter and year-over-year increases in other income for the fourth quarter of 2019 were mainly due to the fair value changes of equity investments in publicly traded companies.
Income Taxes([3])
The Company recorded a net income tax charge of RMB876.3 million (US$125.9 million) for the fourth quarter of 2019, compared to RMB88.0 million and RMB917.7 million for the preceding quarter and the fourth quarter of 2018, respectively. The effective tax rate for the fourth quarter of 2019 was 22.1%, compared to 2.1% and 25.9% for the preceding quarter and the fourth quarter of 2018, respectively. The effective tax rate represents certain estimates by the Company regarding the tax obligations and benefits applicable to it in each quarter.
Net Income and Non-GAAP Net Income([3] )
Net income from continuing operations attributable to the Company's shareholders for the fourth quarter of 2019 totaled RMB3,053.7 million (US$438.6 million), compared to RMB4,134.2 million and RMB2,536.2 million for the preceding quarter and the fourth quarter of 2018, respectively.
Non-GAAP net income from continuing operations attributable to the Company's shareholders for the fourth quarter of 2019 totaled RMB3,662.3 million (US$526.1 million), compared to RMB4,726.0 million and RMB3,181.2 million for the preceding quarter and the fourth quarter of 2018, respectively.
NetEase reported basic and diluted net income from continuing operations per ADS of US$3.40 and US$3.36, respectively, for the fourth quarter of 2019. The Company reported basic and diluted net income from continuing operations per ADS of US$4.60 and US$4.56, respectively, for the preceding quarter, and basic and diluted net income from continuing operations per ADS of US$2.85 and US$2.83, respectively, for the fourth quarter of 2018.
Non-GAAP basic and diluted net income from continuing operations per ADS were US$4.07 and US$4.03, respectively, for the fourth quarter of 2019, compared to non-GAAP basic and diluted net income from continuing operations per ADS of US$5.26 and US$5.22, respectively, for the preceding quarter, and non-GAAP basic and diluted net income from continuing operations per ADS of US$3.57 and US$3.55, respectively, for the fourth quarter of 2018.
[3] The Company has adjusted the
gain from the disposal of its
Kaola e-commerce business in the
third quarter of 2019 from
continuing operations to
discontinued operations. This
resulted in, among other things, a
decrease in "Other, net," "Income
tax" and "Net income from
continuing operations attributable
to the Company's shareholders" for
the third quarter of 2019. Please
see the footnote to the
consolidated statements of income
in this press release for
additional information.
Fiscal Year 2019 Financial Results
Net Revenues
Net revenues for fiscal year 2019 were RMB59,241.1 million (US$8,509.5 million), compared to RMB51,178.6 million for fiscal year 2018.
Net revenues from online game services were RMB46,422.6 million (US$6,668.2 million) for fiscal year 2019, compared to RMB40,190.1 million for fiscal year 2018. Mobile games accounted for approximately 71.4% of net revenues from online game services for fiscal year 2019, compared to 71.0% for fiscal year 2018.
Net revenues from Youdao were RMB1,304.9 million (US$187.4 million) for fiscal year 2019, compared to RMB731.6 million for fiscal year 2018.
Net revenues from innovative businesses and others were RMB11,513.6 million (US$1,653.8 million) for fiscal year 2019, compared to RMB10,256.9 million for fiscal year 2018.
Gross Profit
Gross profit for fiscal year 2019 was RMB31,555.3 million (US$4,532.6 million), compared to RMB27,346.1 million for fiscal year 2018.
The year-over-year increase in online game services gross profit for fiscal year 2019 was primarily attributable to increased revenue contribution from mobile games such as Life-After, Invincible and Identity V.
The year-over-year increase in Youdao gross profit for fiscal year 2019 was primarily attributable to the rapid development of its learning services and products.
The year-over-year increase in innovative businesses and others gross profit for fiscal year 2019 was primarily due to increased net revenues from NetEase Cloud Music, CC live-streaming and Yanxuan, as well as improved cost control.
Operating Expenses
Total operating expenses for fiscal year 2019 were RMB17,764.6 million (US$2,551.7 million), compared to RMB17,368.8 million for fiscal year 2018. The year-over-year increase in total operating expenses for fiscal year 2019 was primarily due to increased research and development investments and staff-related costs, partially offset by decreased selling and marketing expenditures.
Other Income
Other income consisted of investment income/ (loss), interest income, foreign exchange gains and losses and others. The year-over-year increase in other income for fiscal year 2019 was mainly due to fair value changes of equity investments in publicly traded companies.
Income Taxes
The Company recorded a net income tax charge of RMB2,914.7 million (US$418.7 million) and RMB2,460.7 million for fiscal years 2019 and 2018, respectively. The effective tax rate was 17.8% for fiscal year 2019, compared to 22.2% for fiscal year 2018. The lower effective tax rate for fiscal year 2019 was mainly due to reduced losses from certain subsidiaries of the Company.
Net Income and Non-GAAP Net Income
Net income from continuing operations attributable to the Company's shareholders for fiscal year 2019 totaled RMB13,275.0 million (US$1,906.8 million), compared to RMB8,291.1 million for fiscal year 2018.
Non-GAAP net income from continuing operations attributable to the Company's shareholders for fiscal year 2019 totaled RMB15,662.7 million (US$2,249.8 million), compared to RMB10,761.3 million for fiscal year 2018.
NetEase reported basic and diluted net income from continuing operations per ADS of US$14.80 and US$14.67, respectively, for fiscal year 2019, and basic and diluted net income from continuing operations per ADS of US$9.20 and US$9.15, respectively, for fiscal year 2018.
Non-GAAP basic and diluted net income from continuing operations per ADS were US$17.46 and US$17.31, respectively, for fiscal year 2019, compared to non-GAAP basic and diluted net income from continuing operations per ADS of US$11.94 and US$11.87, respectively, for fiscal year 2018.
Quarterly Dividend
The board of directors has approved a dividend of US$1.02 per ADS for the fourth quarter of 2019, which is expected to be paid on March 20, 2020 to shareholders of record as of the close of business on March 13, 2020.
NetEase paid a dividend of US$7.59 per ADS for the third quarter of 2019 on December 13, 2019.
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 December 31, 2019, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB74,406.0 million (US$10,687.8 million), compared to RMB49,652.5 million as of December 31, 2018. Cash flow generated from continuing operating activities was RMB16,911.0 million (US$2,429.1 million) for fiscal year 2019, compared to RMB14,659.8 million for fiscal year 2018.
Share Repurchase/ Purchase Program
On November 14, 2018, 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 November 16, 2018. As of November 15, 2019, the last day of such program, approximately 1,000 ADSs had been repurchased under this program.
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 December 31, 2019, approximately 50,000 ADSs had been purchased under this program.
On February 26, 2020, the Company announced that its board of directors had approved a share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months beginning on March 2, 2020. Under the terms of this program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market.
For both of the above-mentioned current programs, it is expected that the timing and dollar amount of purchase transactions will be in accordance with the Securities and Exchange Commission (SEC) Rule 10b-18 requirements and such purchases may be affected pursuant to a plan in conformity with SEC Rule 10b5-1. The extent to which NetEase repurchases its ADSs or purchases Youdao's ADSs will depend upon a variety of factors, including market conditions. These programs may be suspended or discontinued at any time.
** The United States dollar (US$) amounts disclosed in this press release 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$1.00 = RMB 6.9618 on December 31, 2019 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2019, or at any other certain date. The percentages stated are calculated based on RMB.
Change in Segment Reporting
Effective in the third quarter of 2019, the Company changed its segment disclosure to add the financial results of its certain advertising services and Yanxuan into innovative businesses and others in light of the relatively small revenue contribution from those businesses to the Company's total consolidated net revenues in 2019. The Company sold its Kaola e-commerce business in September 2019. In addition, the Company has commenced separately reporting the results of its majority-controlled subsidiary Youdao, Inc. which completed its initial public offering and listing on the New York Stock Exchange in October 2019. As a result, since the third quarter of 2019 the Company has reported the following segments: online game services, Youdao and innovative businesses and others. The Company retrospectively revised prior period segment information to conform to current period presentation. This change in segment reporting aligns with the manner in which the Company's operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments.
Impact of the Recently Adopted Major Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 "Leases" as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard effective January 1, 2019 on a modified retrospective basis and did not restate comparative periods. The Company recognized approximately RMB577.0 million as total right-of-use assets as well as total lease liabilities for the operating leases on its consolidated balance sheet as of January 1, 2019, excluding the impact from held-for-sale businesses. The Company recognized RMB463.7 million and RMB471.4 million as total right-of-use assets and total lease liabilities, respectively, for the operating leases on its consolidated balance sheet as of December 31, 2019. Right-of-use assets are included in other long-term assets, and lease liabilities are included in accrual liabilities and other payables and other long-term payables, respectively based on payment terms on the consolidated balance sheet. Other than the foregoing, the Company does not expect the new standard to have a material impact on the net assets of the Company's consolidated financial statements.
Notes to Unaudited Financial Information
The unaudited financial information disclosed in this press release is preliminary. The audit of the financial statements and related notes to be included in the Company's annual report on Form 20-F for the year ended December 31, 2019 is still in progress. In addition, because an audit of the Company's internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed, the Company makes no representation as to the effectiveness of those internal controls as of the end of fiscal year 2019.
Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between the Company's audited financial statements and this preliminary unaudited financial information.
Conference Call
NetEase's management team will host a teleconference call with simultaneous webcast at 9:00 p.m. Eastern Time on Wednesday, February 26, 2020 (Beijing/Hong Kong Time: 10:00 a.m., Thursday, February 27, 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 1-929-477-0324 and providing conference ID: 3349954, 10-15 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 3349954#. The replay will be available through March 11, 2020.
This call will be webcast live and the replay will be available for 12 months. Both will be available on NetEase's Investor Relations website at http://ir.netease.com.
About NetEase, Inc.
NetEase, Inc. (NASDAQ: NTES) is a leading internet technology company based in China dedicated to providing premium online services centered around content, community, communication and commerce. NetEase develops and operates some of the most popular PC-client and mobile games in China and has been expanding rapidly into other international markets such as Japan and North America in more recent years. In addition to its self-developed game content, NetEase also operates some of the most popular international online games in China by partnering with Blizzard Entertainment, Mojang AB (a Microsoft subsidiary) and other global game developers. NetEase also offers other innovative services, including the intelligent learning services of its majority-controlled subsidiary, Youdao, music streaming and its private label e-commerce platform, Yanxuan. For more information, please visit: http://ir.netease.com/.
Forward Looking Statements
This press release contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market within China or globally, which could occur if, for example, its new online games or expansion packs and other improvements to its existing games do not become as popular as management anticipates; the risk that Covid-19 or other health risks in China or globally could adversely affect the Company's operations or financial results; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that changes in Chinese government regulation of the market for online games, education products and services and e-commerce may limit future growth of NetEase's revenues or cause revenues to decline; the risk that NetEase may not be able to continuously develop new and creative online services or that NetEase will not be able to set, or follow in a timely manner, trends in the market; the risk that the e-commerce market or the internet advertising market in China will not grow and will remain subject to intense competition; the risk that NetEase will not be able to control its expenses in future periods; competition in NetEase's existing and potential markets; governmental uncertainties (including possible changes in the effective tax rates applicable to NetEase and its subsidiaries and affiliates and the ability of NetEase to receive and maintain approvals of the preferential tax treatments); the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase's business and financial results; and other risks outlined in NetEase's filings with the Securities and Exchange Commission. NetEase does not undertake any obligation to update this forward-looking information, except as required under the applicable law.
Non-GAAP Financial Measures
NetEase considers and uses non-GAAP financial measures, such as 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, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
NetEase defines non-GAAP net income from continuing operations attributable to the Company's shareholders as net income from continuing operations attributable to the Company's shareholders excluding share-based compensation expenses. Non-GAAP net income from continuing operations attributable to the Company's shareholders enables NetEase's management to assess its operating results without considering the impact of share-based compensation expenses, which are non-cash charges. NetEase believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company's current operating performance and prospects in the same manner as management does, if they so choose. NetEase also believes that the use of this non-GAAP financial measure facilitates investors' assessment of its operating performance.
Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools. One of the key limitations of using non-GAAP net income from continuing operations attributable to the Company's shareholders is that it does not reflect all items of expense/ income that affect our operations. Share-based compensation expenses have been and may continue to be incurred in our business and are not reflected in the presentation of non-GAAP net income from continuing operations attributable to the Company's shareholders. In addition, the non-GAAP financial measures NetEase uses may differ from the non-GAAP measures used by other companies, including peer companies, and therefore their comparability may be limited.
NetEase compensates for these limitations by reconciling non-GAAP net income from continuing operations attributable to the Company's shareholders to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating the Company's performance. See "Reconciliation of GAAP and Non-GAAP Results" at the end of this press release. NetEase encourages you to review its financial information in its entirety and not rely on a single financial measure.
Contact for Media and Investors:
Margaret Shi
NetEase, Inc.
ir@service.netease.com
Tel: (+86) 571-8985-3378
Brandi Piacente
Investor Relations
netease@thepiacentegroup.com
Tel: (+1) 212-481-2050
NETEASE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(RMB and USD in thousands)
December 31,
December 31,
December 31,
2018 2019 2019
RMB
RMB
USD (Note 1)
Assets
Current assets:
Cash and cash equivalents 4,977,432 3,246,373 466,312
Time deposits 32,900,287 53,487,075 7,682,937
Restricted cash 4,692,050 3,150,354 452,520
Accounts receivable, net 4,002,487 4,169,358 598,891
Inventories, net 1,065,615 650,557 93,447
Prepayments and other current assets 3,925,205 4,817,422 691,979
Short-term investments 11,674,775 15,312,595 2,199,517
Assets held for sale 5,477,869 271,278 38,967
Total current assets 68,715,720 85,105,012 12,224,570
Non-current assets:
Property, equipment and software, net 4,672,079 4,621,712 663,867
Land use right, net 3,271,512 3,707,179 532,503
Deferred tax assets 1,064,295 903,904 129,838
Time deposits 100,000 2,360,000 338,993
Other long-term assets 8,175,177 15,424,166 2,215,543
Assets held for sale 969,145 2,398 344
Total non-current assets 18,252,208 27,019,359 3,881,088
Total assets 86,967,928 112,124,371 16,105,658
Liabilities, Redeemable Noncontrolling Interests and
Shareholders' Equity
Current liabilities:
Accounts payable 1,201,210 1,212,303 174,136
Salary and welfare payables 2,799,212 2,957,360 424,798
Taxes payable 2,260,646 3,156,513 453,405
Short-term loans 13,658,554 16,828,226 2,417,223
Deferred revenue 7,718,485 8,602,227 1,235,633
Accrued liabilities and other payables 5,005,190 5,484,228 787,760
Liabilites held for sale 2,465,713 2,156 310
Total current liabilities 35,109,010 38,243,013 5,493,265
Non-current liabilities:
Deferred tax liabilities 392,598 382,030 54,875
Other long-term payable 48,921 456,912 65,631
Liabilites held for sale 5,818 961 138
Total non-current liabilities 447,337 839,903 120,644
Total liabilities 35,556,347 39,082,916 5,613,909
Redeemable noncontrolling interests 5,385,736 10,448,600 1,500,847
Total NetEase, Inc.'s equity 45,231,636 61,453,699 8,827,272
Noncontrolling interests 794,209 1,139,156 163,630
Total shareholders' equity 46,025,845 62,592,855 8,990,902
Total liabilities, redeemable noncontrolling interests and 86,967,928 112,124,371 16,105,658
shareholders' equity
The accompanying notes are an integral part of this press release.
NETEASE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data or per ADS data)
Quarter Ended
Year Ended
December 31,
September 30,
December 31,
December 31,
December 31,
December 31,
December 31,
2018 2019 2019 2019 2018 2019 2019
RMB
RMB
RMB
USD (Note 1)
RMB
RMB
USD (Note 1)
Net revenues 14,405,268 14,635,690 15,734,804 2,260,163 51,178,575 59,241,145 8,509,458
Cost of revenues (6,874,738) (6,765,340) (7,524,376) (1,080,809) (23,832,426) (27,685,845) (3,976,823)
Gross profit 7,530,530 7,870,350 8,210,428 1,179,354 27,346,149 31,555,300 4,532,635
Selling and marketing expenses (1,603,137) (1,619,531) (2,153,743) (309,366) (6,911,710) (6,221,127) (893,609)
General and administrative expenses (821,925) (753,794) (812,754) (116,745) (3,078,635) (3,130,298) (449,639)
Research and development expenses (2,030,323) (2,162,254) (2,267,488) (325,704) (7,378,460) (8,413,224) (1,208,484)
Total operating expenses (4,455,385) (4,535,579) (5,233,985) (751,815) (17,368,805) (17,764,649) (2,551,732)
Operating profit 3,075,145 3,334,771 2,976,443 427,539 9,977,344 13,790,651 1,980,903
Other income:
Investment income/ (loss), net 46,366 394,907 731,447 105,066 (22,383) 1,306,320 187,641
Interest income, net 166,291 184,795 279,546 40,154 586,671 821,774 118,040
Exchange (losses)/ gains, net (15,906) 120,562 (128,522) (18,461) (51,799) 25,166 3,615
Other, net 272,948 214,847 109,385 15,712 586,916 439,422 63,119
Income before tax 3,544,844 4,249,882 3,968,299 570,010 11,076,749 16,383,333 2,353,318
Income tax (917,654) (87,957) (876,329) (125,877) (2,460,650) (2,914,726) (418,674)
Net income from continuing operations 2,627,190 4,161,925 3,091,970 444,133 8,616,099 13,468,607 1,934,644
Net (loss)/ income from discontinued operations (838,492) 8,596,089 (2,138,682) 7,962,519 1,143,744
Net income 1,788,698 12,758,014 3,091,970 444,133 6,477,417 21,431,126 3,078,388
Deemed dividends attributable to redeemable (54,604) (70,124) (59,588) (8,559) (248,098) (271,543) (39,005)
noncontrolling interests
Net (income)/ loss attributable to noncontrolling (36,395) 42,409 21,350 3,067 (76,912) 77,933 11,194
interests
Net income attributable to the Company's 1,697,699 12,730,299 3,053,732 438,641 6,152,407 21,237,516 3,050,577
shareholders
Including:
-Net income from continuing operations attributable to 2,536,191 4,134,210 3,053,732 438,641 8,291,089 13,274,997 1,906,833
the Company's shareholders
-Net (loss)/ income from discontined operations (838,492) 8,596,089 (2,138,682) 7,962,519 1,143,744
attributable to the Company's shareholders
Basic net income/ (loss) per share: 0.53 3.95 0.95 0.14 1.90 6.59 0.95
-Continuing operations 0.79 1.28 0.95 0.14 2.56 4.12 0.59
-Discontinued operations (0.26) 2.67 (0.66) 2.47 0.36
Basic net income/ (loss) per ADS: 13.27 98.66 23.65 3.40 47.54 164.86 23.68
-Continuing operations 19.82 32.04 23.65 3.40 64.07 103.05 14.80
-Discontinued operations (6.55) 66.62 (16.53) 61.81 8.88
Diluted net income/ (loss) per share: 0.53 3.91 0.93 0.13 1.89 6.53 0.94
-Continuing operations 0.79 1.27 0.93 0.13 2.55 4.08 0.59
-Discontinued operations (0.26) 2.64 (0.66) 2.45 0.35
Diluted net income/ (loss) per ADS: 13.18 97.80 23.37 3.36 47.26 163.37 23.47
-Continuing operations 19.69 31.76 23.37 3.36 63.69 102.12 14.67
-Discontinued operations (6.51) 66.04 (16.43) 61.25 8.80
Weighted average number of ordinary shares 3,199,277 3,225,704 3,228,387 3,228,387 3,235,324 3,220,473 3,220,473
outstanding, basic
Weighted average number of ADS outstanding, basic 127,971 129,028 129,135 129,135 129,413 128,819 128,819
Weighted average number of ordinary shares 3,220,724 3,254,269 3,266,587 3,266,587 3,254,689 3,249,972 3,249,972
outstanding, diluted
Weighted average number of ADS outstanding, diluted 128,829 130,171 130,663 130,663 130,188 129,999 129,999
Note: The Company has adjusted the related gain from disposal of Kaola e-commerce business in the third quarter of 2019 from continuing operations to discontinued
operations. This resulted in a decrease in "Other, net" and "Income tax", and an increase in "Net (loss)/ income from discontinued operations", in the Company's
consolidated statements of income, amounting to RMB8,751.2 million for the third quarter of 2019. Accordingly, basic and diluted net income per ADS from continuing
operations decreased by RMB67.82 and RMB67.23, respectively, and basic and diluted net income per ADS from discontinued operations increased by the same amounts
for the third quarter of 2019. There is no impact on "Net income attributable to the Company's shareholders".
The accompanying notes are an integral part of this press release.
NETEASE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(RMB and USD in thousands)
Quarter Ended
Year Ended
---
December September December
December December December
December
31, 30, 31, 31, 31, 31, 31,
2018 2019 2019 2019 2018 2019 2019
RMB
RMB
RMB
USD (Note 1)
RMB
RMB
USD (Note 1)
Cash flows from operating activities:
Net income 1,788,698 12,758,014 3,091,970 444,133 6,477,417 21,431,126 3,078,388
Net loss/ (income) from discontinued operations 838,492 (8,596,089) 2,138,682 (7,962,519) (1,143,744)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 666,790 703,387 695,644 99,923 2,060,135 2,613,782 375,446
Fair value changes and impairment losses of short-term (87,895) (330,352) (724,520) (104,071) (55,611) (1,231,732) (176,927)
investments, investments in associated companies,
other long-term investments and other intangible assets, net
Share-based compensation cost 645,458 593,259 622,363 89,397 2,471,731 2,404,089 345,326
(Reversal of)/ allowance for provision for doubtful debts (2,090) 4,725 (17,843) (2,563) 50,954 (28,583) (4,106)
(Gains)/ losses on disposal of property, equipment and software (640) (2,639) 3,571 513 (1,385) 5,122 736
Unrealized exchange losses/ (gains) 2,348 (111,807) 131,869 18,942 31,998 (9,981) (1,434)
Gains on disposal of long-term investments and businesses (175,957) (83,678) (2,677) (385) (213,339) (98,489) (14,147)
Deferred income taxes (133,514) (114,434) (504,313) (72,440) (70,621) 150,629 21,637
Net equity share of losses/ (gains) from associated companies 17,643 (8,595) (12,269) (1,762) 98,301 (4,322) (621)
Changes in operating assets and liabilities:
Accounts receivable 340,955 (333,859) 545,607 78,372 (612,656) (11,314) (1,625)
Inventories (129,588) 83,150 36,191 5,199 (81,440) 415,057 59,619
Land use right/ prepayments of land use right (418,876) (45,295) (6,506) (464,171) (66,674)
Other prepayments and current assets 105,360 (327,558) (264,013) (37,923) (719,035) (1,024,393) (147,145)
Accounts payable 12,090 (105,131) 136,690 19,634 112,435 13,229 1,900
Salary and welfare payables 283,346 (447,025) 1,034,413 148,584 725,515 146,146 20,993
Taxes payable 429,145 (408,348) 168,247 24,167 685,024 (133,801) (19,219)
Deferred revenue 542,501 816,599 406,160 58,341 1,757,874 883,742 126,942
Accrued liabilities and other payables 135,999 175,544 208,902 30,007 (196,136) (182,646) (26,235)
Net cash provided by continuing operating activities 5,279,141 3,846,287 5,510,697 791,562 14,659,843 16,910,971 2,429,110
Net cash provided by/ (used in) discontinued operating activities 656,301 7,136 (1,243,966) 305,487 43,880
Net cash provided by operating activities 5,935,442 3,853,423 5,510,697 791,562 13,415,877 17,216,458 2,472,990
Cash flows from investing activities:
Purchase of property, equipment and software (304,900) (329,722) (235,717) (33,859) (2,169,404) (1,209,477) (173,731)
Proceeds from sale of property, equipment and software 922 5,190 49,693 7,138 6,688 60,601 8,705
Purchase of intangible assets, content and licensed copyrights (635,495) (208,748) (760,698) (109,267) (1,741,225) (2,119,307) (304,419)
Purchase of land use right (31,759) (2,926,795)
Net change in short-term investments with terms of three (2,619,634) (683,304) (1,802,689) (258,940) (1,172,326) (1,023,165) (146,969)
months or less
Purchase of short-term investments with terms over three months (2,940,000) (4,997,000) (3,373,000) (484,501) (13,393,000) (22,370,000) (3,213,249)
Proceeds from maturities of short-term investments with terms 5,302,899 5,901,842 9,252,687 1,329,065 13,071,359 20,225,342 2,905,189
over three months
Investment in associated companies and other long-term (393,801) (711,229) (231,714) (33,284) (3,023,491) (1,562,188) (224,394)
investments
Proceeds from disposal of long-term investments 127,332 28,289 4,064 406,702 58,419
Placement/rollover of matured time deposits (19,933,370) (19,339,634) (24,912,424) (3,578,446) (41,553,428) (77,083,350) (11,072,330)
Proceeds from maturities of time deposits 13,349,755 11,869,243 7,964,392 1,144,013 39,924,525 54,381,647 7,811,435
Net change in other assets 46,513 63,196 (17,229) (2,475) (133,039) (42,345) (6,082)
Amounts received from/(paid to) disposed businesses 436,593 1,488,349 7,092,216 1,018,733 (1,889,560) 9,031,051 1,297,229
Net cash used in continuing investing activities (7,722,277) (6,814,485) (6,946,194) (997,759) (14,999,696) (21,304,489) (3,060,197)
Net cash (used in)/ provided by discontinued investing activities (509,944) (264,897) 1,430,181 (832,252) (119,546)
Net cash used in investing activities (8,232,221) (7,079,382) (6,946,194) (997,759) (13,569,515) (22,136,741) (3,179,743)
The accompanying notes are an integral part of this press release.
NETEASE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(RMB and USD in thousands)
Year Ended
Quarter Ended
December 31,
September 30,
December 31,
December 31,
December 31,
December 31,
December 31,
2018 2019 2019 2019 2018 2019 2019
RMB
RMB
RMB
USD (Note 1)
RMB
RMB
USD (Note 1)
Cash flows from financing activities:
Proceeds of short-term bank loans with terms over three months 25,000 58,840 358,372 51,477 34,256 730,087 104,870
Payment of short-term bank loans with terms over three months (296,823) (42,636) (18,761) (296,823) (42,636)
Net changes in short-term loans with terms of three months or less 16,163 1,469,031 1,472,244 211,475 6,194,113 2,538,267 364,599
Capital contribution from noncontrolling interests and 3,216,112 128,192 6,528,274 937,728 4,334,684 6,940,990 997,011
redeemable noncontrolling interests shareholders, net
Cash (paid)/ refund received for share repurchase (61,574) (7) (7,516,679) 10,638 1,528
Dividends paid to shareholders (399,374) (923,444) (6,890,484) (989,756) (1,440,194) (8,840,634) (1,269,878)
Net cash provided by financing activities 2,796,327 732,612 1,171,583 168,288 1,587,419 1,082,525 155,494
Effect of exchange rate changes on cash, cash equivalents
and restricted cash held in foreign currencies (14,517) 38,196 (26,846) (3,856) 81,511 29,080 4,177
Net increase/ (decrease) in cash, cash equivalents and restricted cash 485,031 (2,455,151) (290,760) (41,765) 1,515,292 (3,808,678) (547,082)
Cash, cash equivalents and restricted cash, 9,721,507 9,143,771 6,688,620 960,760 8,691,246 10,206,538 1,466,077
at the beginning of the period
Cash, cash equivalents and restricted cash, at end of the period 10,206,538 6,688,620 6,397,860 918,995 10,206,538 6,397,860 918,995
Less: Cash, cash equivalents and restricted cash of held for sale 537,056 14,693 1,133 163 537,056 1,133 163
Cash, cash equivalents and restricted cash of continuing 9,669,482 6,673,927 6,396,727 918,832 9,669,482 6,396,727 918,832
operations at end of the period
Supplemental disclosures of cash flow information of continuing
operations:
Cash paid for income tax, net 418,783 906,425 1,189,622 170,879 2,003,158 3,193,802 458,761
Cash paid for interest expense 98,528 73,573 133,748 19,212 301,761 431,395 61,966
Supplemental schedule of non-cash investing and financing
activities of continuing opearations:
Fixed asset purchases financed by accounts payable and accrued 351,610 292,528 304,944 43,802 351,610 304,944 43,802
liabilities
The accompanying notes are an integral part of this press release.
NETEASE, INC.
UNAUDITED SEGMENT INFORMATION
(RMB and USD in thousands, except percentages)
Quarter Ended
Year Ended
---
December 31,
September 30,
December 31,
December 31,
December 31,
December 31,
December 31,
2018 2019 2019 2019 2018 2019 2019
RMB
RMB
RMB
USD (Note 1)
RMB
RMB
USD (Note 1)
Net revenues:
Online game services 11,019,553 11,534,763 11,604,332 1,666,858 40,190,057 46,422,640 6,668,195
Youdao 230,091 345,908 410,432 58,955 731,598 1,304,883 187,435
Innovative businesses and 3,155,624 2,755,019 3,720,040 534,350 10,256,920 11,513,622 1,653,828
others
Total net revenues 14,405,268 14,635,690 15,734,804 2,260,163 51,178,575 59,241,145 8,509,458
Cost of revenues:
Online game services (4,094,688) (4,172,678) (4,281,559) (615,007) (14,617,656) (16,974,234) (2,438,196)
Youdao (161,810) (256,674) (288,002) (41,369) (515,133) (934,261) (134,198)
Innovative businesses and (2,618,240) (2,335,988) (2,954,815) (424,433) (8,699,637) (9,777,350) (1,404,429)
others
Total cost of revenues (6,874,738) (6,765,340) (7,524,376) (1,080,809) (23,832,426) (27,685,845) (3,976,823)
Gross profit:
Online game services 6,924,865 7,362,085 7,322,773 1,051,851 25,572,401 29,448,406 4,229,999
Youdao 68,281 89,234 122,430 17,586 216,465 370,622 53,237
Innovative businesses and 537,384 419,031 765,225 109,917 1,557,283 1,736,272 249,399
others
Total gross profit 7,530,530 7,870,350 8,210,428 1,179,354 27,346,149 31,555,300 4,532,635
Gross profit margin:
Online game services 62.8% 63.8% 63.1% 63.1% 63.6% 63.4% 63.4%
Youdao 29.7% 25.8% 29.8% 29.8% 29.6% 28.4% 28.4%
Innovative businesses and 17.0% 15.2% 20.6% 20.6% 15.2% 15.1% 15.1%
others
The accompanying notes are an integral part of this press release.
NETEASE, INC.
NOTES TO UNAUDITED FINANCIAL INFORMATION
Note 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00 = RMB 6.9618 on the last trading day of December 2019 (December 31, 2019) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.
Note 2: Share-based compensation cost reported in the Company's unaudited condensed consolidated statements of comprehensive income is set out as follows in RMB and USD (in thousands):
Quarter Ended
Year Ended
December 31,
September 30,
December 31,
December 31,
December 31,
December 31,
December 31,
2018 2019 2019 2019 2018 2019 2019
RMB
RMB
RMB
USD (Note 1)
RMB
RMB
USD (Note 1)
Share-based compensation cost included in:
Cost of revenue 204,776 180,990 191,470 27,503 757,341 758,810 108,996
Operating expenses
- Selling and marketing expenses 27,267 21,176 17,353 2,493 102,638 84,920 12,198
- General and administrative expenses 196,703 200,394 211,506 30,381 787,200 797,120 114,499
- Research and development expenses 216,712 190,699 202,034 29,020 824,552 763,239 109,633
The accompanying notes are an integral part of this press release.
NETEASE, INC.
UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS
(in thousands, except per share data or per ADS data)
Quarter Ended
Year Ended
---
December 31,
September 30,
December 31,
December 31,
December 31,
December 31,
December 31,
2018 2019 2019 2019 2018 2019 2019
RMB
RMB
RMB
USD (Note 1)
RMB
RMB
USD (Note 1)
Net income from continuing operations attributable to 2,536,191 4,134,210 3,053,732 438,641 8,291,089 13,274,997 1,906,833
the Company's shareholders
Add: Share-based compensation 645,038 591,769 608,598 87,420 2,470,179 2,387,675 342,968
Non-GAAP net income from continuing operations 3,181,229 4,725,979 3,662,330 526,061 10,761,268 15,662,672 2,249,801
attributable to the Company's shareholders
Non-GAAP basic net income from continuing 0.99 1.47 1.13 0.16 3.33 4.86 0.70
operations per share
Non-GAAP basic net income from continuing 24.86 36.63 28.36 4.07 83.15 121.59 17.46
operations per ADS
Non-GAAP diluted net income from continuing 0.99 1.45 1.12 0.16 3.31 4.82 0.69
operations per share
Non-GAAP diluted net income from continuing 24.69 36.31 28.03 4.03 82.66 120.48 17.31
operations per ADS
The accompanying notes are an integral part of this press release.
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SOURCE NetEase, Inc.
