NetDragon Announces 2018 Interim Financial Results

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Aug 29, 2018, 05:16 ET

Net Profit Surged more than Sixfold

HONG KONG, Aug. 29, 2018 /PRNewswire/ -- 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 first half of 2018. NetDragon's management team will host an analyst briefing session at 10:00am Hong Kong time at Nathan Room, Lower Lobby in Conrad Hong Kong on 30 August 2018 to discuss the results and recent business developments.

Mr. Dejian Liu, Chairman of NetDragon, commented: "We are excited that NetDragon delivered an excellent first half in 2018. Our revenue reached another semi-annual record-high at RMB2,469.9 million with 39.1% year-over-year growth, while profit attributable to shareholders surged by more than six times to RMB200.7 million from RMB25.8 million last year. These remarkable numbers were underpinned by our strong execution in both gaming and education segments."

"Our gaming business maintained its solid growth momentum in the first half. Mobile games were a major growth driver, with revenue increasing 53.4% year-over-year. PC games also performed well with 25.0% year-over-year growth. We also made great progress in development of our new games as our current pipeline remains very strong. As we continue to execute our strategy to maximize IP values, we are also looking to accelerate our growth further by expanding our IP portfolio, both organically and by working with our partners."

"We are also excited by the tremendous growth of our education business. In overseas, our interactive classroom product offerings continued to expand their penetration rapidly in both developed and emerging countries. As a result, our subsidiary Promethean continued to grow its revenue at a rate faster than the market, and in doing so has maintained its global market leader position^[1] in K-12 interactive classroom technologies during the period. We are also pleased to complete the acquisition of Edmodo in May. With Edmodo joining our family, we are in a unique position to offer a complete product portfolio that covers pre-class, in-class and after-class learning environments, anywhere and at any time. More importantly, our online community has accumulated more than 90 million of registered users, laying solid foundations for future monetization."

"In China, our revenue rose by 35.4% year-over-year to RMB105.6 million as we continued to drive increasing adoption of our software platforms. On the user front, the installed base of our flagship platform 101 Education PPT in China exceeded 2.3 million in June 2018, almost doubled from over 1.2 million at the end of 2017, with coverage of 31 provinces across China."

2018 First Half Financial Highlights

Revenue was RMB2,469.9 million, representing a 39.1% increase year-over-year.
Revenue from the gaming business was RMB1,039.3 million, representing 42.1% of the Company's total revenue, registered a 29.5% increase year-over-year.
Revenue from the education business was RMB1,384.1 million, representing 56.0% of the Company's total revenue, registered a 48.2% increase year-over-year.
Gross profit was RMB1,402.1 million, representing a 35.7% increase year-over-year.
Core segmental profit^[2] from the gaming business was RMB524.4 million, representing a 56.9% increase year-over-year.
Core segmental loss^[2] from the education business was RMB158.7 million, representing a 16.2% decrease year-over-year.
Non-GAAP operating profit^[3] was RMB249.3 million, representing a 422.9% increase year-over-year.
Profit attributable to owners of the Company was RMB200.7 million, representing a 678.8% increase year-over-year.
The company declared an interim dividend of HK$ 0.10 per share for the six months ended 30 June 2018.

Segmental Financial Highlights

	Six months ended 30 June 2018		Six months ended 30 June 2017		Variance
(RMB '000)	Gaming	Education	Gaming	Education	Gaming	Education
Revenue	1,039,346	1,384,074	802,405	934,077	29.5%	48.2%
Gross Profit	978,499	421,499	755,173	273,172	29.6%	54.3%
Gross Margin	94.1%	30.5%	94.1%	29.2%	-	+1.3 ppts
Core Segmental Profit (Loss)^[2]	524,376	(158,650)	334,110	(189,224)	56.9%	-16.2%
Segmental Operating Expenses
- Research and development	(222,443)	(214,525)	(203,160)	(183,791)	9.5%	16.7%
- Selling and marketing	(102,609)	(224,161)	(97,118)	(192,051)	5.7%	16.7%
- Administrative	(143,806)	(113,000)	(133,909)	(68,802)	7.4%	64.2%

^[1] Based on report issued by Futuresource Consulting dated 13 August 2018, incorporating actual shipment volumes (excluding China) of the Company.

^[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 (loss) 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, amortisation of intangible assets arising on acquisition of subsidiaries, impairment loss on available-for-sale investment, write off of inventories, impairment loss on property held for trade, impairment of property, plant and equipment and the extraordinary provision in relation to discontinued product.

Gaming Business

Our gaming business revenue grew by 29.5% year-over-year to a record-high RMB1,039.3 million in the first half. Mobile games continued to perform very well with 53.4% year-over-year growth. PC games also remained robust with 25.0% year-over-year revenue growth. With our strong top line growth, gaming's core segmental profit jumped by 56.9% year-over-year.

Our flagship IP Eudemons was a significant contributor to our growth in the first half with 37.8% year-over-year increase in revenue. In particular, its PC version recorded monthly gross billings over RMB100 million in five out of six months during the period, while the newly launched mobile version continued to be well received.

Heroes Evolved, another flagship IP saw revenue of its pocket version more than double in the first half year-over-year as we stepped up our monetization initiative. Since launch in December 2016, this game has been downloaded by over 150 million players and was ranked as one of the "top three downloaded mobile games" on Tencent Open Platform for nine consecutive months in 2017.

Looking forward, we will continue to drive revenue and profit growth by maximizing our IP values with new games and new game-play features, as well as expanding our IP portfolio. In particular, we are in discussion to license external IP to augment our own IP portfolio. Our pipeline, on the other hand, remains robust, and we expect to launch multiple new games with different genres in the second half of 2018.

Education Business

For the first half of 2018, revenue from the education business was RMB1,384.1 million, up 48.2% year-over-year. We recorded revenue of RMB1,278.5 million and RMB105.6 million in overseas and China respectively, up 49.3% and 35.4% year-over-year. Core segmental loss declined by 16.2% year-over-year.

During the period, we continued to excel in emerging markets. Not only that we materialized the sizable second phase tender in the City of Moscow, we also laid the foundation for entering the huge African market by gaining new footprints in countries like Egypt and Nigeria. In developed markets, we sustained our growth momentum in various major countries, including the U.S., the UK, Germany and France. As such, we solidified our number one international market share leadership position¹ in K-12 interactive technologies as we continued to gain market share across regions. Underpinned by our solid performance, Promethean's operating profit surged by more than ten times year-over-year to RMB114.4 million in the first half of 2018 as a result of our ongoing effort to drive revenue growth and rationalize costs aggressively.

We also made tremendous progress in building our learning community with our acquisition of Edmodo which was completed during the Period. To date, the total users of Edmodo have exceeded 90 million in over 400,000 schools in more than 190 countries. Combining Edmodo with Promethean's interactive learning technologies, our comprehensive product portfolio will support the full learning process, in and out of the classroom, including lesson preparation, lesson delivery, student collaboration, homework features, teacher-student- parent communications, education content marketplace and resources sharing. By capturing all the major use cases in K-12 learning, our complete product offerings will be in a unique position to drive significant user traffic, with monetization opportunities to follow.

In China, we recorded revenue of RMB105.6 million in the first half, up 35.4% from the same period of last year, as we continued to expand across different regions. As at 30 June 2018, our China sales backlog, representing signed sales orders to be delivered to or validated by the customers, was RMB347.0 million.

We are also pleased to see the continuous traction in terms of user scaling. As at 30 June 2018, we had over 2.3 million installations for our flagship software platform 101 Education PPT in China, almost doubled from over 1.2 million as at the end of 2017. Last but not least, we made strong progress in our product development as well as integrating new and exciting technologies into our offering, including the world's first AI Teaching Assistant which we launched during the period.

Our vision to revolutionize education with advanced technologies remains firm and clear. We possess the best-in-class learning products and technologies across our group and in the near future, our strategy to integrate all these pieces will be vital to our success. In particular, our product portfolio enables users to prepare interesting courseware, deliver interactive lessons, streamline assignments, share and purchase resources, as well as communicate with one another using advanced technologies. Without question, our learning community with integrated functionalities is shaping the future of education.

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.

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30 JUNE 2018

	Six months ended 30 June
	2018	2017
	(Unaudited)	(Unaudited)
	RMB'000	RMB'000

Revenue	2,469,941	1,775,250
Cost of revenue	(1,067,810)	(741,971)

Gross profit	1,402,131	1,033,279
Other income and gains	39,817	37,525
Impairment loss, net of reversal	(13)	(96)
Selling and marketing expenses	(332,584)	(292,490)
Administrative expenses	(409,546)	(344,853)
Development costs	(442,233)	(396,251)
Other expenses and losses	(45,430)	(17,110)
Share of losses of associates	(265)	(406)
Share of loss of a joint venture	(198)	(53)

Operating profit	211,679	19,545
Interest income on pledged bank deposits	1,755	706
Exchange (loss) gain on secured bank borrowings and convertible preferred shares	(4,172)	1,879
Net gain on convertible preferred shares	26,953	6,962
Net loss on disposal of property held for sale	(68)	-
Net fair value gain on held-for-trading investment	-	58
Finance costs	(5,358)	(4,727)

Profit before taxation	230,789	24,423
Taxation	(53,047)	(31,510)
Profit (loss) for the period	177,742	(7,087)
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	(3,109)	11,862
Fair value loss on available-for-sale investment	-	(7,940)
Items that will not be reclassified to profit or loss:
Fair value loss on equity instrument at fair value through other comprehensive income	(232)	-
Other comprehensive (expense) income for the period	(3,341)	3,922

Total comprehensive income (expense) for the period	174,401	(3,165)

Profit (loss) for the period attributable to:
- Owners of the Company	200,740	25,777
- Non-controlling interests	(22,998)	(32,864)
	177,742	(7,087)

Total comprehensive income (expense) attributable to:
- Owners of the Company	198,055	27,496
- Non-controlling interests	(23,654)	(30,661)
	174,401	(3,165)

	*RMB cents*	RMB cents
Earnings per share
- Basic	37.63	5.20
- Diluted	37.55	5.20

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2018

	30 June 2018	31 December 2017
	(Unaudited)	(Audited)
	RMB'000	RMB'000

Non-current assets
Property, plant and equipment	1,552,420	1,373,026
Prepaid lease payments	359,902	515,299
Investment properties	74,361	64,532
Intangible assets	814,341	715,578
Interests in associates	15,696	15,961
Interest in a joint venture	17,235	17,433
Available-for-sale investments	-	10,859
Equity instruments at fair value through other comprehensive income	10,627	-
Loan receivables	15,786	18,410
Trade receivables	-	3,912
Pledged bank deposit	8,555	-
Restricted bank deposit	-	5,000
Deposits made for acquisition of property, plant and equipment	10,546	7,441
Goodwill	453,063	388,675
Deferred tax assets	4,108	4,160
	3,336,640	3,140,286

Current assets
Properties under development	379,922	160,141
Property held for sale	-	9,213
Inventories	127,532	106,430
Prepaid lease payments	6,636	9,866
Loan receivables	13,050	4,662
Trade receivables	945,816	380,072
Amounts due from customers for contract work	-	16,522
Other receivables, prepayments and deposits	349,108	255,948


	30 June 2018	31 December 2017
	(Unaudited)	(Audited)
	RMB'000	RMB'000

Contract assets	17,893	-
Amounts due from related companies	1,757	1,704
Amounts due from associates	1,953	5,264
Amount due from a joint venture	356	159
Tax recoverable	393	1,497
Pledged bank deposits	147,315	145,084
Restricted bank balances	15,089	20,332
Bank balances and cash	1,074,087	1,578,477
	3,080,907	2,695,371

Current liabilities
Trade and other payables	830,354	680,736
Contract liabilities	240,976	-
Amounts due to customers for contract work	-	1,691
Provisions	49,576	41,246
Deferred income	-	95,531
Amount due to a related company	2	1,400
Amounts due to associates	580	305
Secured bank borrowings	277,919	146,132
Promissory note	-	46,226
Income tax payable	50,054	23,339
	1,449,461	1,036,606

Net current assets	1,631,446	1,658,765
Total assets less current liabilities	4,968,086	4,799,051


	30 June 2018	31 December 2017
	(Unaudited)	(Audited)
	RMB'000	RMB'000

Non-current liabilities
Other payables	1,722	2,693
Convertible preferred shares	136,518	95,249
Secured bank borrowings	93,968	86,582
Deferred tax liabilities	164,814	130,466
	397,022	314,990

Net assets	4,571,064	4,484,061

Capital and reserves
Share capital	39,029	39,094
Share premium and reserves	4,619,481	4,510,073

Equity attributable to owners of the Company	4,658,510	4,549,167
Non-controlling interests	(87,446)	(65,106)
	4,571,064	4,484,061