The9 Ltd. :NCTY-US: Earnings Analysis: For the six months ended June 30, 2017 : January 1, 2018

The9 Ltd. reports financial results for the half-year ended June 30, 2017.

Highlights

  • Summary numbers: Revenues of USD 2.29 million, Net Earnings of USD -21.75 million.
  • Gross margins widened from -23.27% to 36.40% compared to the same period last year, operating (EBITDA) margins now -582.79% from -448.87%.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-06-30 2016-12-31 2016-06-30 2015-12-31 2015-06-30
Relevant Numbers (Semi-Annual)
Revenues 2.29 4.91 3.51 3.48 3.91
Revenue Growth (YOY) -34.68 41.18 -10.2 -41.96 -11.81
Earnings -21.75 -34.97 -67.18 -36.78 -24.24
Earnings Growth (YOY) 67.62 4.93 -177.16 -2263.06 -5.7
Net Margin -948.9 -712.43 -1914.39 -1058 -620.29
EPS -0.91 -1.46 -2.82 -1.58 -1.04
Return on Equity N/A N/A N/A -7300.41 -114.65
Return on Assets -91.66 -126.98 -188.53 -99.04 -65.03

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, NCTY-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if NCTY-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by -53.30% and earnings by 37.80% compared to the previous period.

Earnings Growth Analysis

The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from -23.27% to 36.40%. However the company’s overhead costs have prevented it from fully capitalizing on these gross margin improvements. In fact, the company’s operating margins (EBITDA margins) showed no improvement over the same period last year.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

NCTY-US’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days are now -11,659.25 days compared to -5,902.88 days for the same period last year.

Margins

The company’s operating (EBIT) margins contracted from -448.87% to -582.79%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from -1,847.09% to -779.78%.

EBIT Margin History
PreTax Margin History

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Company Profile

The9 Ltd. engages in the developing and operating online games and related services. It also involves in mobile advertising and mobile application education businesses. The company was founded by Jun Zhu on December 22, 1999 and is headquartered in Shanghai, China.

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