Software

The9 Reports Third Quarter 2005 Financial Results

The9's (NCTY) newly reported net revenues for the third quarter of 2005 grew by 232% quarter-over-quarter and 2,096% year-over-year to CNY184.8 million.

The company says the increase was mainly due to significant growth in revenues from online games as a result of The9's commercial operations of World of Warcraft (WoW) in China which commenced in June 2005. Net revenues attributable to the operation of WoW for the third quarter of 2005 was CNY180.6 million.

For the third quarter of 2005, revenues from game operating support, website solutions and advertisement were CNY0.9 million, a decrease of 20.2% from the second quarter of 2005 or 85.1% from the corresponding period in 2004. These revenues, which are mainly generated from the provision of game operating support to 9Webzen related to the operation of MU in China, decreased in the third quarter of 2005 as a result of a decline in MU revenues.

Other revenues in the third quarter of 2005, which mainly included sales of game-related accessories and promotional activities related to WoW, increased to CNY3.1 million from CNY2.1 million in the second quarter of 2005.

Gross profit for the third quarter of 2005 increased by 207% to CNY92.6 million from CNY30.1 million in the second quarter of 2005. Gross profit margin declined to 50.1% for the third quarter of 2005 from 54.1% in the second quarter of 2005.

The decline in gross margin was primarily related to two factors. First, one-month amortization of intangibles assets of CNY7.4 million relating to assets acquired in connection with The9's acquisition of the remaining 31.1% interest in C9I. Second, costs such as internet data center rental, server depreciation and certain staff costs incurred prior to commercial launch of WoW in June 2005, were previously included in the product development expenses; after the commercial launch of WoW, such costs have been included in the company's cost of services.

Operating expenses decreased by 24.9% to CNY42.2 million in the third quarter of 2005 from CNY56.1 million in the second quarter of 2005. This was mainly due to a significant decrease in product development expenses in the third quarter.

Other expenses for the third quarter of 2005 was CNY2.8 million compared to other income of CNY5.2 million in the second quarter of 2005.

As a result of the cumulative effect of the foregoing factors, net income for the third quarter of 2005 was CNY37.7 million compared to net loss of CNY23.0 million in the second quarter of 2005, representing earnings per share and per ADS of CNY1.56 (US$0.19).

As of September 30, 2005, the company's total cash and cash equivalents balance was CNY483.0 million. The decrease in cash and cash equivalents from CNY793.4 million as at December 31, 2004 was mainly due to the combined result of purchases of WoW servers, prepaid royalty payment for the first year of WoW's operating term, and partial payment to the joint venture partner for the purchase of the remaining 31.1% interest in C9I, offset in part by receipts of prepaid card proceeds and repayments received against loan receivable.

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