Fourth Quarter 2012 ResultsRevenues Total net revenues were RMB28.9 million (US$4.6 million), compared with RMB60.0 million in the fourth quarter of 2011 and RMB43.6 million in the prior quarter.
- Mobile phone game revenues were RMB20.7 million (US$3.3 million), a decrease of 59.3% from RMB50.8 million during the same period last year and a decrease of 50.2% from RMB41.6 million in the prior quarter. This decline is largely a result of the Company's decision to direct significant resources towards developing a new generation of Android and iOS-based social games. The Company plans to launch at least seven social games in 2013, almost twice as many games than it has at any time prior. We believe that social games will grow significantly and make most efficiently in monetization. As consumers in China continue to migrate from feature phones to smartphones, the Company is transitioning much of its business to the smartphone segment, though historically feature phones have provided the majority of the Company's revenues. In addition, China Mobile, the Company's service provider for all of its single-player game bundles, has continued to tighten its policy on the number of pop-up advertisements broadcast to its users. This has limited the promotion of the Company's single-player game bundles on China Mobile's platform and resulted in a decline in total subscriptions for the Company's single-player games, even though the Company's game bundles ranked first on China Mobile's platform in terms of revenue for 11 out of 12 months during 2012.
Beginning in the fourth quarter of 2012, the Company's chief operating decision maker has viewed the Company's mobile phone games business as one segment. Accordingly, the Company has combined feature phone game revenue and social game revenue into mobile phone game revenues. The Company believes that as technology in feature phones has improved with larger touch screens, faster CPU processing speed and better GPRS connectivity, feature phones have become increasingly like smartphones in terms of feel, look and user experience. CMGE has positioned itself in the Android- and iOS-based smartphone game business so that traditional feature phone games will contribute to a decreasing portion of the Company's total revenue. As a result, the Company believes that combining feature phone and smartphone game revenues will present to investors a clearer picture of the Company's overall trend.
- Handset design revenues were RMB8.2 million (US$1.3 million), compared with RMB9.2 million during the corresponding period in 2011 and RMB2.0 million during the prior quarter. During the fourth quarter of 2012, 84% of the handset design revenue was derived from smartphone design, compared with 23% in the third quarter of 2012. The strong sequential quarterly growth in revenue was primarily due to the Company's progress toward transitioning away from feature phone design towards smartphone handset design, which the Company views as having far greater growth potential.
- Cost of revenue for mobile phone games was RMB11.8 million (US$1.9 million), compared to RMB22.5 million during the fourth quarter in 2011 and RMB19.9 million during the prior quarter. The sequential and year-over-year declines were primarily due to a decrease in the amount paid to agents who pre-install the Company's feature phone games and a decline in distribution costs for smartphone games.
- Cost of revenue for handset design was RMB9.0 million (US$1.5 million), compared to RMB8.2 million during the fourth quarter in 2011 and RMB2.6 million during the prior quarter. The sequential increase over the prior quarter and year-over-year was largely due to higher component costs as sales orders increased.
- Gross margin for mobile phone games was 42.9% during the fourth quarter of 2012, compared to 55.8% during the fourth quarter of 2011 and 52.2% in the third quarter of 2012. The sequential and year-over-year declines were primarily due to a decline in revenues compared to fixed costs, which mainly consist of amortization in intangible assets.
- Gross margin for handset design was -10.4% during the fourth quarter of 2012, compared to 9.78% during the fourth quarter of 2011 and -30.1% in the third quarter of 2012. The sequential increase was due to an increase in sales revenues generated relative to fixed costs, which mainly consists of amortization of intangible assets and staff salaries. The year-over-year decline was primarily due to a decline in revenues compared to fixed cost.