NCTY

The9 Limited (NCTY)

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THE9 Limited (NCTY)

F2Q 2012 Earnings Call

April 17, 2013 9:00 pm ET

Executives

Phyllis Sai – Investor Relations Manager

Jun Zhu – Chairman and Chief Executive Officer

George Lai – Chief Financial Officer

Analysts

Thomas Chong – BOCI Research Ltd.

Dick Wei – JPMorgan Securities Ltd.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to The9 Limited’s Second Half 2012 Financial Results Conference Call. My name is Ben and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference call. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference, Ms. Phyllis Sai, IR Manager of The9 Limited. Please proceed ma’am.

Phyllis Sai

Thanks, Ben. Hello, everyone, and thank you for joining us today for The9’s second half 2012 financial results conference call. With me today are Mr. Jun Zhu, Chairman and Chief Executive Officer, Mr. George Lai, Chief Financial Officer. Mr. Jun will read out his prepared remarks and then George will have a detailed discussion of our financials. Then we will open the floor to take questions, before we continue, as always please allow me to review the Safe Harbor statement in connection with today’s call.

During the course of today’s call, certain projections or forward-looking statements may be made regarding The9's future financial performance or future events. We wish to caution you that such statements or predictions are based on our current information and expectations and actual results may differ materially from those projected in the forward-looking statements.

We would also like to refer you to the documents that the company filed with the United States Securities and Exchange Commission. Those documents contain additional information concerning factors that could cause actual results to differ materially from those contained in the management’s projections or forward-looking statements.

Now, I will like to turn the call over to our Chairman and CEO, Mr. Jun.

Jun Zhu

[Foreign Language]

Good day ladies and gentlemen thanks for participating in our discussion of The9 second half of 2012 results. First of all I will like to express my sincere gratefulness to our shareholder’s long-term support to our large scale strategic adjustment in the past few years.

Today I will address your concerns on when we can turn into profitable and when we will launch our big new titles to the market.

[Foreign Language]

Based on our estimation, hopefully we can be profitable in the fourth quarter of this year.

[Foreign Language]

Firefall, a game developed by our U.S. studio, Red 5, opened numerous tests and delays during its seven years development with a total investment of approximately $100 million. We will commence a full scale open beta test on July 9 this year.

[Foreign Language]

QiJi2, a game developed by our in-house Korean R&D team will have its open beta test on September 28 this year to celebrate the test and the anniversary of the launch of QiJi2 in China.

[Foreign Language]

On June 25 this year, Planetside 2 will launch its open beta test.

[Foreign Language]

We have also made significant effort in the past two years to develop our web game and mobile Internet business to ensure our growth in near term. Today, we are not going into group details here.

[Foreign Language]

Okay, so now let me take you briefly through our overview of our quarterly financial results. Our net revenues in the third quarter of 2012 were $5.2 million, representing a decrease of 41% from $8.8 million in the second quarter of 2012 and an increase of 19% from $4.4 million in the third quarter of 2011. The decrease over the previous quarter was primarily due to a decrease in revenue from ShenXianZhuan. The year-over-year increase from the third quarter of 2011 was primarily due to an increase in revenue from ShenXianZhuan which was commercialized in August 2011.

Our net revenues in the fourth quarter of 2012 were $3.0 million, representing a decrease of 43% from $5.2 million in the third quarter of 2012 and a decrease of 33% from $4.5 million in the fourth quarter of 2011. Such decreases were primarily due to a decrease in revenues from ShenXianZhuan and other MMO games during the same periods.

Our gross profit in the third quarter of 2012 was $2.4 million, representing a decrease of 62% from $6.2 million in the second quarter of 2012 and an increase of 9% from $2.2 million in the third quarter of 2011. The decrease over the second quarter of 2012 was primarily due to a decrease in net revenue from ShenXianZhuan and an increase of amortization costs related to Firefall upon its small-scale launch in September 2012. The increase over the third quarter of 2011 was primarily due to an increase in net revenue from ShenXianZhuan.

Our gross loss in the fourth quarter of 2012 was $0.2 million, compared to gross profit of $2.4 million in the third quarter of 2012 and gross profit of $2.1 million in the fourth quarter of 2011, primarily reflecting a decrease in net revenue from ShenXianZhuan and other MMO games and increase of amortization costs related to Firefall.

In the third quarter of 2012, our operating expenses were $32.9 million, representing a 21% increase from $27.1 million in the second quarter of 2012, and a 45% increase from $22.7 million in the third quarter of 2011. These increases were primarily due to an increasing marketing expenses relating to Firefall and Planetside 2, an increase in product development expenses relating to Firefall and web and mobile games and a loss recorded in the third quarter of 2012 in connection with our restructuring of our investment in Fire Rain and Wanyouyl.

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