Netease COO Exits As Chinese Internet Company Shows Sequential Revenue Drop

Chinese online game and Internet services company NetEase.com Inc. announced its unaudited financial results for the first quarter ended March 31, 2011.

Total revenues for the first quarter of 2011 were CNY1.5 billion, compared to CNY1.7 billion and CNY1.2 billion for the preceding quarter and the first quarter of 2010, respectively.

Of that total, revenues from online games were sequentially flat at CNY1.4 billion for the first quarter of 2011, compared to CNY1.4 billion and CNY1.1 billion for the preceding quarter and the first quarter of 2010, respectively. Revenues from advertising services were CNY126.8 million for the first quarter of 2011, compared to CNY233.7 million and CNY91.5 million for the preceding quarter and the first quarter of 2010, respectively. Revenues from wireless value-added services and others were CNY25.7 million for the first quarter of 2011, compared to CNY23.3 million and CNY18.1 million for the preceding quarter and the first quarter of 2010, respectively.

The company also announced that Zhan Zhonghui has resigned from his position as Netease’s chief operating officer effective May 15, 2011, for personal reasons. Zhan first joined NetEase in 1999, holding various positions culminating in co-chief operating officer in May 2006 and chief operating officer in March 2009. The company’s statement did not name a replacement.

Netease’s gross profit for the first quarter of 2011 was CNY985.0 million, compared to CNY1.1 billion and CNY772.4 million for the preceding quarter and the first quarter of 2010, respectively. Gross profit margin for the online game business for the first quarter of 2011 was 70.0%, compared to 71.8% and 71.9% for the preceding quarter and the first quarter of 2010, respectively.

Gross profit margin for the advertising business for the first quarter of 2011 was 33.4%, compared to 53.5% and 16.9% for the preceding quarter and the first quarter of 2010, respectively. Gross loss margin for the WVAS and others business for the first quarter of 2011 was 21.6%, compared to 19.7% and 35.9% for the preceding quarter and the first quarter of 2010, respectively.

Total operating expenses for the first quarter of 2011 were CNY292.0 million, compared to CNY320.7 million and CNY217.4 million for the preceding quarter and the first quarter of 2010, respectively.

Net profit for the first quarter of 2011 totaled CNY737.4 million, compared to CNY712.5 million and CNY452.3 million for the preceding quarter and the first quarter of 2010, respectively.

The company recorded a net income tax charge of CNY37.2 million for the first quarter of 2011, compared to CNY83.2 million and CNY94.5 million for the preceding quarter and for the first quarter of 2010, respectively. The effective tax rate for the first quarter of 2011 was 4.8% as compared to 10.3% for the preceding quarter and 17.4% for the first quarter of 2010. Netease’s various principal subsidiaries’ enjoyed the preferential enterprise income tax rate of 15% as High and New Technology Enterprises from 2008 to 2010. These subsidiaries are currently in the process of applying to renew the New and High Technology Enterprises qualification and expect to be able to retain this qualification for 2011 to 2013 as the qualification criteria remain unchanged.

As of March 31, 2011, Netease’s total cash and time deposit balance was CNY10.4 billion, compared to CNY9.5 billion, as of December 31, 2010.