Netease's net revenue in the first quarter increased by 116.3% year-on-year. Mobile games are still the main force of revenue growth

Netease's net income for the first quarter of 2016 was 7.915 billion yuan (US$1.228 billion), a year-on-year increase of 116.3%, and net profit was 2.461 billion yuan (US$382 million), a year-on-year increase of 94.69%.

On May 12, Netease today announced the company's unaudited financial results for the first quarter ended March 31, 2016. Netease's net income for the first quarter of 2016 was 7.915 billion yuan (US$1.228 billion), a year-on-year increase of 116.3%, and net profit was 2.461 billion yuan (US$382 million), a year-on-year increase of 94.69%.

"The first quarter's performance was a good start for 2016. Netease's various businesses have developed comprehensively and continue to maintain its leading position in China's online game industry,"said Mr. Ding Lei, CEO and Director of Netease." Net income in the first quarter increased by 116.3% year-on-year, of which net income from online games increased by 104.5%, net income from advertising services increased by 32.0% year-on-year, and net income from mailbox, e-commerce and other businesses increased by 257.8% year-on-year."

"In the first quarter, mobile games remained the main driver of revenue growth. Our mobile game product line now includes more than 90 products of different styles and has always been the first choice for new and old players. The popular mobile version of "Fantasy Westward Journey" and "Westward Journey" continued to rank among the top sellers in Apple's China App Store in the first quarter. The newly released "Kung Fu Panda 3" and "World X World" in January attracted the attention and praise of players. "Wild Land","Divergent Million King Arthur" and "Fighting to the West" performed well in the first quarter and continued to attract new users."

"Our mobile game product line is rich and diverse. On April 15, we released the ARPG mobile game "Predator", which is widely popular among Korean players, in the domestic market and attracted the attention of players. We plan to launch several products with great market potential in May, such as "Fantasy Westward Journey Unparalleled Edition" and the "Ghost Story" mobile game with outstanding closed beta results. This year, we will also release mobile games versions of "World 3","Tang Dynasty Unparalleled Zero" and "Journey to the West", as well as a series of mobile games products adapted from the best-selling works of the famous martial arts writer Mr. Gu Long."

"The performance of end-game games was stable in the first quarter. In April this year, we launched new expansions for "New Ghost Story","Martial Soul 2" and "Demon Suppression Song". In the next few months, we also plan to launch new expansions for "Westward Journey 2" and "World 3" and other games to meet the needs of players. The launch of the real-time action strategy end-game "Fighting to Fight" is in preparation. In addition to self-developed games, we will also release the highly anticipated first-person shooter "Overwatch" from Blizzard Entertainment on May 24 simultaneously in the mainland of China and around the world."

"Although the downturn in the macroeconomic environment has brought severe challenges, Netease is still the priority for advertisers. This is due to the good performance of Netease's news client and the overall layout of Netease's mobile product matrix. Online advertising performance remained strong this quarter, especially advertising revenue from the three major industries of transportation, network services and communication services. In addition, our e-commerce businesses such as Netease Kola Haigou continue to develop steadily. In the first quarter, Netease Kola Haigou showed a good growth momentum. As its business scale continued to expand, its net profit also increased."

Financial results for the first quarter of 2016

, net income

for the first quarter of 2016 was 7.915 billion yuan (US$1.228 billion), compared with 7.903 billion yuan and 3.660 billion yuan respectively in the previous quarter and the same period last year.

Net income from online game services in the first quarter of 2016 was 6.015 billion yuan (US$933 million), compared with 5.503 billion yuan in the previous quarter and 2.941 billion yuan in the same period last year.

Net revenue from advertising services for the first quarter of 2016 was RMB 393 million (US$60.98 million), compared with RMB 609 million and RMB 298 million in the previous quarter and the same period last year, respectively.

Net income from mailbox, e-commerce and other businesses in the first quarter of 2016 was 1.507 billion yuan (US$234 million), compared with 1.791 billion yuan and 421 million yuan respectively in the previous quarter and the same period last year. The month-on-month decline in net income from mailbox, e-commerce and other businesses was mainly due to the transformation of certain Netease's e-commerce products from a self-operated model to a platform model.

Gross Profit

Gross profit for the first quarter of 2016 was 4.587 billion yuan (US$711 million), compared with 4.220 billion yuan and 2.489 billion yuan in the previous quarter and the same period last year, respectively.

The year-on-year increase in gross profit of online game services was mainly due to mobile games, such as the mobile version of "Fantasy Westward Journey" and "Westward Journey", and "Hearthstone: The Legend of the Heroes of Warcraft", which was represented by Blizzard Entertainment. The month-on-month increase in gross profit of online game services was mainly due to the revenue contribution of mobile games, such as the mobile version of "Westward Journey","Kung Fu Panda 3" and "The Land of the Land", as well as "Hearthstone: The Legend of the Heroes of Warcraft", which was represented by Blizzard Entertainment.

The year-on-year increase in advertising service gross profit was mainly due to the growth in advertising service demand for transportation, network services and communication services, as well as the commercialization progress of mobile applications such as Netease News Client. The month-on-month decline in advertising service gross profit was mainly due to the decline in revenue caused by seasonal factors.

The year-on-year increase in gross profit of mailbox, e-commerce and other businesses was mainly due to the growth in revenue from e-commerce businesses such as Netease Kola Haigou, and was partially offset by the decrease in revenue caused by the suspension of third-party lottery business with relatively high gross profit starting in February 2015. The month-on-month increase in gross profit of mailbox, e-commerce and other businesses was mainly due to the growth in gross profit of Netease Kola Haigou and other e-commerce businesses.

Gross profit margin

The gross profit margin of online games in the first quarter of 2016 was 67.1%, compared with 67.2% and 73.1% respectively in the previous quarter and the same period last year. The year-on-year change in online game gross profit margin was mainly due to the increase in the proportion of mobile game revenue with relatively low gross profit margins in total game revenue.

The gross profit margin of advertising services in the first quarter of 2016 was 62.4%, compared with 68.1% and 59.2% in the previous quarter and the same period last year. The main reason for the year-on-year increase in gross profit margin was the economies of scale caused by the increase in advertising service revenue. The month-on-month decline in gross profit margin was mainly due to the decline in revenue caused by seasonal factors.

The gross profit margin of mailbox, e-commerce and other businesses in the first quarter of 2016 was 20.4%, compared with 6.0% and 38.9% respectively in the previous quarter and the same period last year. The year-on-year decline in gross profit margin was mainly due to the suspension of the third-party lottery business with relatively high gross profit mentioned above. The main reason for the month-on-month increase in gross profit margin is the improvement in gross profit margins of Netease's e-commerce businesses such as Netease Kola Haigou, and the increase in gross profit margins caused by the transformation of certain e-commerce products from self-operated models to platform models mentioned above.

Operating expenses

Operating expenses in the first quarter of 2016 were 1.719 billion yuan (US$267 million), compared with 1.802 billion yuan and 1.173 billion yuan respectively in the previous quarter and the same period last year. The year-on-year increase in operating expenses was due to the increase in operating expenses of Netease Kola Haigou, marketing expenses and R & D investment in online games and advertising businesses, as well as the increase in personnel costs due to the increase in the number of employees and average salary. The month-on-month decrease in operating expenses was mainly due to a decrease in marketing expenses for online games and advertising businesses, which was partially offset by an increase in operating expenses for Netease Koola Haigou.

Income tax

Corporate income tax expenses for the first quarter of 2016 were RMB 531 million (US$82.3 million), compared with RMB 514 million and RMB 215 million in the previous quarter and the same period last year, respectively. The effective tax rate for the first quarter of 2016 was 17.5%, compared with 19.2% in the previous quarter and 14.1% in the same period last year. The change in the effective tax rate reflects the Group's estimate of the effective tax rate for the first quarter of 2016.

Net profit

Net profit for the first quarter of 2016 was 2.461 billion yuan (US$382 million), compared with 2.164 billion yuan in the previous quarter and 1.264 billion yuan in the same period last year. Based on non-GAAP, net profit for the first quarter of 2016 was 2.666 billion yuan (US$414 million), compared with 2.355 billion yuan and 1.425 billion yuan in the previous quarter and the same period last year, respectively.

In the first quarter of 2016, the company recorded a net exchange loss of RMB 36.03 million (US$5.59 million), compared with a net exchange gain of RMB 66.29 million and RMB 22.69 million respectively in the previous quarter and the same period last year. The change in net exchange gains and losses was mainly due to the translation of the Company's US dollar bank deposits and loan balances with fluctuations in the exchange rate between US dollar and RMB.

Net income per ADRs for the first quarter of 2016 was $2.90 (basic) and $2.88 (diluted). The previous quarter was $2.55 (basic) and $2.53 (diluted), compared with $1.50 (basic) and $1.49 (diluted) in the same period last year. Based on non-GAAP, net income per American depositary receipt for the first quarter of 2016 was $3.14 (basic) and $3.12 (diluted), compared with $2.78 (basic) and $2.76 (diluted) in the previous quarter, and $1.69 (basic) and $1.68 (diluted) in the same period last year.

Quarterly Dividend

The Board of Directors approved a dividend for the first quarter of 2016 of US$0.73 per American Depositary Receipt, which is expected to be paid on June 3, 2016 to all shareholders registered after the May 25, 2016 close.

The fourth quarter of 2015 was US$0.64 per American Depositary Receipt, which was paid on March 18, 2016.

According to the quarterly dividend policy announced by Netease on May 13, 2014, the quarterly dividend payment amount is approximately 25% of the company's net profit after tax in each financial quarter. The payment and specific amount of dividends each quarter shall be decided by the board of directors with the sole discretion of the board of directors and will be based on the company's operating and profitability, cash flow, financial status and other relevant factors.

Other Information

As at March 31, 2016, the Group's cash and cash equivalents, time deposits and short-term investments totaled RMB 28.430 billion (US$4.409 billion), which was RMB 26.788 billion as of December 31, 2015. Net cash inflow from operating activities in the first quarter of 2016 was approximately RMB 3.093 billion (US$480 million), compared with RMB 3.114 billion in the previous quarter and RMB 1.925 billion in the same period last year.

Share Repurchase Plan

On September 1, 2015, the company announced that its board of directors had approved a new share repurchase plan. The company will repurchase outstanding American Depositary Receipts with a total amount of no more than US$500 million within a period of no more than 12 months. As of March 31, 2016, the company has repurchased approximately 690,000 American Depositary Receipts, totaling approximately US$92.01 million.

Note: The dollar figures listed in this press release are for ease of reading only. The conversion basis between the US dollar and the RMB is the RMB buying exchange rate at noon on the last trading day of March 2016 (March 31, 2016) announced by the Federal Reserve Bank H.10 statistics, namely: 1 US dollar =6.4480 yuan. There is no formal statement that RMB has been or may be converted into U.S. dollars at the exchange rate of March 31, 2016 or any other specific date. The percentages in this press release are calculated on a RMB basis.

Editor: vian