NetDragon Announces 2017 Third Quarter Financial Results

HONG KONG, Dec. 6, 2017 — NetDragon Websoft Holdings Limited ('NetDragon' or the 'Company'; Hong Kong Stock Code: 777), a global leader in building internet communities, today announced its financial results for the third quarter ended 30 September 2017. NetDragon's management team will hold a conference call and webcast at 6:30pm Hong Kong time on 6 December 2017 to discuss the results and recent business developments.

Mr. Dejian Liu, Chairman of NetDragon, commented: “We are delighted that NetDragon recorded profitability for consecutive quarters, supported by the robust performance in both gaming and education businesses. The gaming business continued its outstanding performance in the third quarter on the back of our flagship game Eudemons Online that has reached another quarter of historical record-high revenue. Our mobile games also delivered phenomenal growth, with mobile gaming revenue increasing 124.1% year-over-year. The pocket versions of our two flagship IPs, Eudemons Online and Heroes Evolved, continued to perform exceptionally well during the quarter. Meanwhile, our pipeline of new games is stronger than ever, and for that we are confident in the growth trajectory of our gaming business going forward.”

“We are equally excited by the strong progress of our education business. We are pleased to announce that the installed user base of our flagship platform 101 Education PPT in China has reached our end-of-year target of one million K-12 teachers as of end of November. Our tender sales traction in China also reached a record quarter as we achieved RMB150 million of contracted sales in Q3 alone. Outside of China, our international business had another remarkable quarter as overseas revenue increased by 56.2% year-over-year, as a result of very strong growth in both the U.S. and emerging markets as Promethean further solidifies our global market share[1] leadership in deployment of K-12 interactive classroom technologies.”

2017 Q3 Financial Highlights

  • Revenue was RMB1,060.6 million, representing a 52.7% increase year-over-year.
  • Revenue from the gaming business was RMB440.2 million, representing 41.5% of the Company's total revenue, registered a 53.6% increase year-over-year.
  • Revenue from the education business was RMB595.9 million, representing 56.2% of the Company's total revenue, registered a 51.9% increase year-over-year.
  • Gross profit was RMB584.9 million, representing a 51.9% increase year-over-year.
  • Core segmental profit[2] from the gaming business was RMB179.1 million, representing a 123.5% increase year-over-year.
  • Core segmental loss[2] from the education business was RMB107.9 million, representing a 1.5% increase year-over-year
  • Non-GAAP operating profit[3] was RMB12.6 million, compared to non-GAAP operating loss[3] of RMB88.9 million for the same period last year.
  • Profit attributable to owners of the Company was RMB5.1 million, compared to loss attributable to owners of the Company of RMB65.4 million for the same period last year.

[1] Based on report issued by Futuresource dated 13 November 2017, incorporating actual third quarter shipment volumes of the Company and excluding China.

[2] Core segmental profit (loss) figures are derived from the Company's reported segmental profit (loss) figures (presented in accordance with Hong Kong Financial Reporting Standard 8 (“HKFRS 8”) but exclude non-core/operating, non-recurring or unallocated items including government grants, fair value change and finance cost of financial instruments and fair value change of convertible preferred shares.

[3] To supplement the consolidated results of the Company prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”), the use of non-GAAP operating profit measure is provided solely to enhance the overall understanding of the Company's current financial performance. The non-GAAP operating profit measure is not expressly permitted measure under HKFRSs and may not be comparable to similarly titled measure for other companies. The non-GAAP operating profit of the Company excludes share-based payments expense and amortisation of intangible assets arising on acquisition of subsidiaries.

2017 Q3 Gaming Operational Metrics

  • Monthly Average Revenue Per User (“ARPU”) was approximately RMB405, a 51.7% increase year-over-year.
  • Average Concurrent Users (“ACU”) were approximately 362,000, a 3.7% increase year-over-year.
  • Peak Concurrent Users (“PCU”) were approximately 727,000, a 1.5% decrease year-over-year.
  • Active Paying Accounts (“APA”) were approximately 740,000, a 38.4% increase year-over-year.

Segmental Financial Highlights

2017Q3

2017Q2

2016Q3

(RMB '000)

Gaming

Education

Gaming

Education

Gaming

Education

Revenue

440,229

595,935

403,904

636,306

286,559

392,220

Gross Profit

409,997

168,175

377,898

204,609

266,002

115,436

Gross Margin

93.1%

28.2%

93.6%

32.2%

92.8%

29.4%

Core Segmental
Profit (Loss)[2]

179,061

(107,850)

165,349

(31,425)

80,110

(106,301)

Segmental
Operating
Expenses[4]

–       Research and
        development

(112,645)

(107,346)

(103,633)

(94,831)

(91,283)

(95,717)

–       Selling and 
        marketing

(53,838)

(107,673)

(47,480)

(97,713)

(39,223)

(81,561)

–       Administrative

(70,675)

(42,753)

(68,038)

(32,698)

(62,046)

(32,569)

[4] Segmental operating expenses exclude unallocated expenses such as depreciation and amortisation that have been grouped into SG&A categories on the Company's reported consolidated financial statements but cannot be allocated to specific business segments for purpose of calculating the segmental profit (loss) figures in accordance with HKFRS 8.

Gaming Business

The Company's gaming business delivered another exceptional quarter with record high revenue at RMB440.2 million in the third quarter, registering a 53.6% increase year-over-year, and core segmental profit at RMB179.1 million, a 123.5% increase year-over-year. The robust performance was attributable to overall revenue growth of games under our flagship IPs, Eudemons Online and Heroes Evolved, as well as increasing contribution from mobile games as mobile gaming revenue increased by 124.1% year-over-year. We achieved our revenue growth with a broad-based uptick of key operating metrics including 51.7% increase in ARPU and 38.4% increase in APA on a year-over-year basis. In addition, Monthly Active Users (“MAU”) and Daily Active Users (“DAU”) also increased significantly by 86.7% and 19.0% respectively on a year-over-year basis.

Our dual strategy of IP value maximization and mobile extension continued to pay dividends. Our flagship IP Eudemons Online continued to produce outstanding result as the PC version delivered six consecutive months of monthly gross billings over RMB100 million, while the pocket version reached a record high monthly gross billing in September and was ranked as the 'top ten most outstanding app by billings' on Tencent Open Platform in August and September. A new Eudemons Online browser-based game with IP licensed by the Company also went open-beta launch in September with monthly gross billing of RMB27.1 million. Our long-awaited flagship Eudemons Online Mobile (launched in partnership with Kingsoft) was officially launched in October and produced a gross billing of over RMB100 million in the first month of operation.

Heroes Evolved, another flagship IP, continued to expand on its user base as MAU under this IP increased by 33.4% quarter-over-quarter and 140.9% year-over-year. Mobile monetization gained significant traction in the quarter as revenue of the pocket version increased by 181.3% quarter-over-quarter. To date, this game has already been downloaded by over 100 million players, and has been ranked as the 'top three downloaded mobile games' on Tencent Open Platform for nine consecutive months.

Looking forward, we expect momentum to carry on as we build on this initial success of our IP and mobile strategy with an exciting pipeline of new games which we are confident will bring our gaming business to another level.

Education Business

Our education business delivered another strong quarter both in China and in overseas markets. Promethean, our international education subsidiary, achieved revenue of RMB525.9 million, a 56.2% increase year-over-year, and a second consecutive quarter of operating profitability. This is on the back of our proven success in major markets including the U.S., Europe, Middle East and Central Asia, as we remain as the K-12 market share leader in international markets1.

We have seen the U.S. market pick up significantly in Q3 as total K-12 market shipment volumes in the U.S. increased by 48.8%1 year-over-year, while Promethean's shipment volume exceeded the market growth by growing 107.2% year-over-year. As the K-12 space continues to embrace interactive classroom technologies with increasing traction, we expect this trend will bode well for (1) higher adoption by emerging countries as they follow the lead of the U.S., and (2) increasing need of internet platforms to work with the hardware, which plays into the strength of NetDragon with our internet and platform capabilities.

We continued to see fruitful results along the Belt and Road Initiatives as revenue from our partnership in the City of Moscow materialized during the year as we prepare ourselves for upcoming opportunities. Meanwhile, we also see significant opportunities in other emerging countries, particularly in Turkey and Malaysia. Overall, our progress in the emerging markets is strong and on track.

In China, our contracted sales reached a record-high of RMB150 million in the third quarter as we won over 100 tenders in the quarter, more than three times year-over-year. As of end of Q3, our China sales backlog, representing signed sales order to be delivered to or validated by the customers, was RMB344 million. We believe the increasing traction that we are seeing in our sales orders is a testament to the market receptiveness of our software products. 

As at the end of November, we achieved our year-end goal of reaching one million installed teachers of our flagship software platform 101 Education PPT. This is on the back of our successful user acquisition strategy of launching teacher training programs nationwide across a large span of cities and provinces, and working closely with education bureaus. With this critical mass of installed teachers in China, we will focus on developing our engagement with these teachers and the stickiness of our platform, as we aim to make 101 Education PPT the platform of choice for delivery of digital classroom and content distribution in China.

Looking forward, with our leading interactive classroom and internet platform technologies, we expect the rapid digitization of classrooms around the world will be conducive to not only our revenue growth, but also adoption of our software platform which we aim to become the world's largest learning community. 

Management Conference Call

NetDragon will host a management conference call with a PowerPoint presentation and webcast to review its third quarter financial results on 6 December 2017 at 6:30 p.m. Hong Kong time.

Details of the live conference call are as follows:

International Toll

+65-6713-5090

US Toll Free

+1-866-519-4004

Hong Kong Toll Free

800-906-601

China Toll Free (for fixed line users)

800-819-0121

China Toll Free (for mobile users)

400-620-8038

Passcode

NetDragon

A live and archived webcast of the conference call will be available on the Investor Relations section of NetDragon's website at http://www.netdragon.com/investor/ir-webcasts.shtml. Participants in the live webcast should visit the aforementioned website 10 minutes prior to the call, then click on the icon for “3Q 2017 Results Conference Call” and follow the registration instructions.

About NetDragon Websoft Holdings Limited

NetDragon Websoft Holdings Limited (HKSE: 0777) is a global leader in building internet communities. Established in 1999, NetDragon is a vertically integrated, cutting-edge R&D powerhouse with a highly successful track record which includes the development of flagship MMORPGs including Eudemons Online, Heroes Evolved (formerly known as Calibur of Spirit) and Conquer Online. The company also established China's number one online gaming portal, 17173.com, and China's most influential smartphone app store platform, 91 Wireless, which was sold to Baidu in 2013 in what was at the time the largest Internet M&A transaction in China. Being China's pioneer in overseas expansion, NetDragon also directly operates a number of game titles in over 10 languages internationally since 2003. In recent years, NetDragon has emerged as a major player in the global online and mobile learning space as it works to leverage its mobile Internet technologies and operational know-how to develop a game-changing learning ecosystem. For more information, please visit www.netdragon.com.

For investor enquiries, please contact:
NetDragon Websoft Holdings Limited
Ms. Maggie Zhou
Senior Director of Investor Relations
Tel.: +852 2850 7266 / +86 591 8754 3120
Email: [email protected] 
Website: ir.netdragon.com

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2017

Three Months Ended

30/09/2017

30/06/2017

30/09/2016

(Unaudited)

(Unaudited)

(Unaudited)

RMB'000

RMB'000

RMB'000

Revenue

1,060,602

1,061,808

694,544

Cost of revenue

(475,716)

(474,332)

(309,579)

Gross profit

584,886

587,476

384,965

Other income and gains

9,315

26,999

12,406

Selling and marketing expenses

(163,252)

(146,452)

(122,819)

Administrative expenses

(186,571)

(172,600)

(172,074)

Development costs

(224,661)

(202,445)

(191,788)

Other expenses and losses

(20,222)

(12,647)

(16,041)

Share of losses of associates

(144)

(211)

(184)

Share of loss of a joint venture

(98)

(46)

Operating (loss) profit

(747)

80,074

(105,535)

Interest income on pledged bank deposits

925

706

Exchange (loss) gain on secured bank borrowings and convertible     preferred shares

(84)

1,630

(5,733)

Net gain on convertible preferred shares

5,545

1,744

37,276

Net loss on disposal of held-for-trading investment

(36)

Net gain on held-for-trading investment

5,656

Finance costs

(2,804)

(2,538)

(1,927)

Profit (loss) before taxation

2,835

81,580

(70,263)

Taxation

(13,370)

(15,599)

(4,082)

(Loss) profit for the period

(10,535)

65,981

(74,345)

Other comprehensive (expense)  income  for the period, net of    income tax:

Items that may be reclassified subsequently to profit or loss:

Exchange differences arising on translation of foreign operations

1,953

8,427

(5,359)

Fair value loss on available-for-sale investment

(3,110)

(8,328)

(3,131)

Other comprehensive income (expense) for the period

(1,157)

99

(8,490)

Total comprehensive (expense)  income for the period

(11,692)

66,080

(82,835)

Profit (loss) for the period attributable to:

– Owners of the Company

5,094

71,443

(65,435)

– Non-controlling interests

(15,629)

(5,462)

(8,910)

(10,535)

65,981

(74,345)

Total comprehensive income

   (expense) attributable to:

– Owners of the Company

3,173

69,921

(73,095)

– Non-controlling interests

(14,865)

(3,841)

(9,740)

(11,692)

66,080

(82,835)

RMB cents

RMB cents

RMB cents

Earnings (loss) per share

– Basic

1.02

14.40

(13.18)

– Diluted

1.02

14.40

(13.18)

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 SEPTEMBER 2017

30 September 2017

31 December 2016

(Unaudited)

(Audited)

RMB'000

RMB'000

Non-current assets

Property, plant and equipment

1,355,154

1,284,494

Prepaid lease payments

526,352

509,018

Investment properties

62,280

57,964

Intangible assets

757,838

722,498

Interests in associates

16,233

16,783

Interest in a joint venture

17,849

Available-for-sale investments

17,194

17,883

Loan receivables

19,867

20,477

Trade receivables

7,741

11,490

Deposits made for acquisition of property, plant and equipment

5,554

14,585

Goodwill

381,253

338,237

Deferred tax assets

3,591

3,445

3,170,906

2,996,874

Current assets

Properties under development

108,544

55,429

Property held for sale

11,009

Inventories

139,219

125,285

Prepaid lease payments

6,303

6,003

Loan receivables

5,273

13,712

Trade receivables

468,174

351,693

Amounts due from customers for contract work

15,226

10,640

Other receivables, prepayments and deposits

228,188

121,564

Amounts due from related companies

1,770

1,704

Amounts due from associates

1,879

8,561

Amount due from a joint venture

69

Tax recoverable

393

3,281

Held-for-trading investment

151,783

Restricted bank balance

13,611

Pledged bank deposits

145,280

411

Bank deposit

55,496

Bank balances and cash

1,743,471

876,532

2,888,409

1,782,094

Current liabilities

Trade and other payables

824,090

531,757

Amounts due to customers for contract work

2,148

988

Provisions

45,183

45,876

Deferred income

99,409

84,567

Promissory note

46,966

Amount due to a related company

10

978

Amounts due to associates

1,827

4,558

Convertible preferred shares

87,091

104,101

Secured bank borrowings

141,234

29,000

Income tax payable

31,856

18,364

1,279,814

820,189

Net current assets

1,608,595

961,905

Total assets less current liabilities

4,779,501

3,958,779

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About the Author: Carrie Brunner

Carrie Brunner grew up in a small town in northern New Brunswick. She studied chemistry in college, graduated, and married her husband one month later. They were then blessed with two baby boys within the first four years of marriage. Having babies gave their family a desire to return to the old paths – to nourish their family with traditional, homegrown foods; rid their home of toxic chemicals and petroleum products; and give their boys a chance to know a simple, sustainable way of life. They are currently building a homestead from scratch on two little acres in central Texas. There’s a lot to be done to become somewhat self-sufficient, but they are debt-free and get to spend their days living this simple, good life together with their five young children. Carrie writes mostly on provincial stories.
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