NetDragon Announces 2016 Third Quarter Financial Results

HONG KONG, Dec. 1, 2016

• Games business continues year-over-year growth momentum, poised for strong growth in 2017 with a robust pipeline
• Laying solid foundation for education users ramp-up and revenue growth in 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. NetDragon's management team will hold a conference call and webcast at 6:30 p.m. Hong Kong time on December 1 to discuss the results and recent business developments.

Mr. Dejian Liu, Chairman and Executive Director of NetDragon, commented: "NetDragon recorded solid financial results of RMB694.5 million in revenue representing 167.7% increase year-over-year. Calibur of Spirit and Eudemons Online continued to be well received among our players and the main driver for revenue growth and segmental profit on a year-over-year basis.  On a quarterly basis, our performance in the third quarter was in line with seasonality that is largely consistent with historical pattern in recent years." Mr. Liu also expressed: "I'm excited to see our pipeline for new games entering its strongest phase in recent years, with at least five new games to be launched in 2017, taking our games business to a new level."

"Our education business continued to register a strong third quarter with revenues of RMB392.2 million, representing over 40 times growth year-over-year. For the international education business, Promethean recorded a 20.3% year-over-year increase in revenue on a pro-forma basis resulting in an improved gross profit margin and a positive EBITDA for the quarter. ClassFlow™, our international flagship cloud-based education platform, has grown its user base to 2.4 million users at the end of third quarter (including over 1 million teachers), forming a strong foundation for user base growth in 2017. In China, encouraged by the very positive user engagement feedback on our 101 Education PPT software, we have started to accelerate product sales during the quarter.  Finally, I am very excited about the commercialization of our Virtual Reality (VR) Editor in 2017. This will be the world's first DIY VR editor software used for education."

Financial Highlights

• Revenue was RMB694.5 million, representing a 167.7% increase year-over-year.
• Revenue from the games business was RMB286.6 million, representing 41.3% of the Company's total revenue, registered a 19.9% increase year-over-year.
• Revenue from the education business was RMB392.2 million, representing 56.5% of the Company's total revenue, registered over 40 times increase year-over-year.
• Gross profit was RMB385.0 million, representing a 78.7% increase year-over-year.
• Core segmental profit[1] from the games business was RMB80.1 million, representing a 26.6% increase year-over-year.
• Core segmental loss[1] from the education business was RMB106.3 million, representing a 44.3% increase year-over-year.
• Non-GAAP[2] operating loss was RMB88.9 million, mainly attributable to non-cash exchange difference, difference in government grants that tends to fluctuate from quarter to quarter, and lower revenue contribution from Promethean due to seasonality impact that is consistent with historical Q3 vs Q2 trend.
• Net loss attributable to owners of the Company was RMB65.4 million.

2016 Q3 Gaming Operational Metrics

• Monthly average revenue per user ("ARPU") for online games was approximately RMB240, a 17.6% increase year-over-year.
• Average Concurrent Users ("ACU") for online games was approximately 342,000, a 5.0% decrease year-over-year.
• Peak Concurrent Users ("PCU") for online games was approximately 720,000, a 5.4% decrease year-over-year.

[1] ARIVA.DE Börsen-Geflüster Kurse NETDRAGON WEBSOFT -   0,00%

Core segmental profit (loss) figures are derived from the Company's reported segmental profit (loss) figures (presented in accordance with 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 derivative financial instrument

[2]

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

Segmental Financial Highlights

Games Business

The Company's games business continued its growth momentum in the third quarter, with revenue at RMB286.6 million, a 19.9% increase year-over-year, and core segmental profit at RMB80.1 million, a 26.6% increase year-over-year.  The solid performance was mainly attributable to broad-based revenue growth of Calibur of Spirit and Eudemons Online PC and pocket version.  

While the third quarter being a traditionally low season for Eudemons Online, its revenue recorded a strong 17.4% increase year-over-year. In addition, Eudemons Online Pocket version continued to receive strong traction and recorded a record high monthly gross revenue in August on the back of the launch of new game-play features. Another flagship game, Calibur of Spirit, also experienced 17.9% growth in revenue year-on-year demonstrating the continuous popularity of this game.

Various operational indicators including ACU and PCU have experienced fluctuations in the third quarter, due to seasonality and the stepped-up efforts in clearing bots during the period. Such clearing efforts are necessary for maintaining the healthy balance of the gaming ecosystem, which will strengthen our monetization scheme over time.

Looking into the rest of the year, the Company is confident to see strong revenue contribution from Eudemons Online driven by the expansion pack launched in October. Furthermore, the English version and Traditional Chinese version of Tiger Knight, our new large-scale 3D online war game, were released on Steam platform in October and will start generating revenue for the fourth quarter.

Our management is excited about the pipeline we have built and a number of new games to be released in the next 12 months, including the new Eudemons Online mobile game to be co-developed with Kingsoft, several new games leveraging the technologies of Calibur of Spirit, and the simplified Chinese version of Tiger Knight. Such strong pipeline is expected to drive robust growth for the Company's games business in 2017 and beyond. 

Finally, the Company has made significant progress in the integration VR and Augmented Reality (AR) technologies in our games. We have started adding VR capability to Tiger Knight, which delivers an immersive real battle fighting experience to our players.  The Company is confident that its proprietary technologies and know-how in gaming products will open up new revenue streams in the future.

Education Business

Revenue from the education business was RMB392.2 million for the third quarter of 2016, over 40 times increase year-over-year, which reflected the consolidation of Promethean's revenue and the beginning of revenue ramp-up of our education business in China.

On a pro-forma basis, our Promethean subsidiary registered a 20.3% increase year-over-year in revenue, demonstrating the success of the Company's acquisition and integration strategy.  In addition, Promethean continued to make progress on streamlining operations as well as cost rationalization, resulted in a positive EBITDA for the third quarter.

The Company continued to invest in the development and marketing of ClassFlow™, its flagship cloud-based interactive K-12 (Kindergarten-to-Grade 12) software for the international market, with a user base that has grown to 2.4 million users (including over 1 million teachers) at the end of the third quarter.   

The management is confident that 2017 will be a big year of user scaling and user engagement for ClassFlow™ because (1) we are on track to convert users of ActivInspire, our popular legacy lesson preparation software that works with our K-12 interactive display products, into users of ClassFlow™ through a number of initiatives that will enable a seamless transition; (2) users of our Promethean Planet community portal have recently been converted into ClassFlow™, thus directing traffic and activity into ClassFlow™; and (3) we are ramping up its engagement efforts through various online and high touch initiatives. Going forward, we will continue to execute our strategy of solving teachers' pain points and driving teachers' engagement and adoption of ClassFlow™, which in turn will drive adoption by students and parents.  

Revenue from the education business in China was RMB55.5 million in the third quarter, a 482.5% increase year-over-year. Our contracted revenue is at around RMB90.5 million from January to October this year. The third quarter marks the beginning of the large scale commercialization in China, backed by the very positive user engagement feedback on our flagship 101 Education PPT software, including time-saving in lesson preparation, enhancement of classroom interactivity and the high frequency of user log-in and usage of the software. Such positive feedback is a validation to the value that our software creates for our users, which lays the foundation for a strong user ramp up in 2017 as we commence our broad-based user acquisition and engagement efforts.

During the quarter, the Company also completed the development of the beta version of our VR Editor, which we believe will be the world's first DIY VR Editor for education purpose with a comprehensive 3D content library. We will begin the commercialization of VR Editor in the first half of 2017 in both K-12 and the higher-education space, and we expect such product to form a core component of our revenue going forward.  

Looking forward, the Company also plans to expand its education business to emerging markets including India and the Middle East, while continues to focus on growing the user base of our products in the existing markets, which in turn will help drive revenue growth.

Management Conference Call

NetDragon will host a management conference call with PowerPoint presentation and webcast to review its third quarter on December 1, 2016, at 6:30 p.m. Hong Kong time. Management attending the conference call includes Simon Leung, Vice Chairman and Executive Director; Ben Yam, Chief Financial Officer.

Details of the live conference call are as follows:

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Hong Kong Toll Free	800-906-601
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