The9 Profits Drop as Revenues Rise

Chinese game operator and distributor The9 faces lower profits despite growing sales.

The9 Limited (NCTY), a Chinese online game operator, reported net earnings of 38.2 million renminbis ($5.1 million), down 41 percent from the previous year’s 64.3 million RMB ($8.6 million). Net revenues totaled 316.0 million RMB ($42.2 million), a 35 percent increase compared to 233.4 million RMB ($31.1 million) in the third quarter of 2006. The increase in total revenues was attributed to increased online game services revenues, offset slightly by decreased revenues from game operating support, website solutions and advertisement. Shares of The9 collapsed 32 percent last Friday from $31.65 to $21.53, reaching a new 52-week low as The9’s reported $.17 per share lagged behind analyst expectations for earnings of $.21 per share.

Jun Zhu, Chairman and Chief Executive Officer of The9, explained the company’s performance.

We are very pleased to report record total net revenues and strong bottom-line earnings for the third quarter of 2007. The solid financial results in the third quarter were supported by the strong organic growth of Blizzard Entertainment’s World of Warcraft, as well as having a full quarter of revenue contribution from Soul of The Ultimate Nation (“SUN”). With the launch of World of Warcraft: The Burning Crusade expansion pack in mainland China in early September, we have attained a record level of number of concurrent players and game-play usage After a strong debut in the second quarter, SUN continued to bring stable revenues from a different user base. In the third quarter of 2007, we attained aggregate peak concurrent users of approximately 985,000 for games that are currently in commercial operations, and as of September 30, 2007, we had over 27.6 million total registered users.

In addition, we continued to execute our diversification strategy in the third quarter by introducing another new game, Granado Espada (“GE”), to the mainland China market. After GE’s limited open-beta testing in early September, we recently commenced the game’s full-scale open-beta testing on October 31 and received promising feedback from users. With more games in commercial operation or in beta-testing phase under The9’s platform, we have further focused our management capabilities for multi-game operations, and together with our strong and diversified game pipeline that consists of various premium titles covering a wide spectrum of game genres, we believe The9 is well prepared to deliver sustained growth for the next few quarters to come.

Hannah Lee, The9’s Senior Vice President and Chief Financial Officer, commented on the growth potential for World of Warcraft in Asia.

The third quarter 2007 results were encouraging. Necessary server upgrades and infrastructure enhancements for Blizzard Entertainment’s World of Warcraft in the first half of the year have proven to be worthwhile investments, as we saw revenue growth driven by strong user demand since the launch of Blizzard’s World of Warcraft: The Burning Crusade expansion pack in September. We believe World of Warcraft will maintain its growth momentum with continuous content upgrades to be introduced on a similar basis as we have done in the past two years. With increased player demand, we have been opening up new realms in our most recently launched World of Warcraft site, and are carefully planning for a potential new server site to service World of Warcraft.