NetEase : Q2 2017 Earnings Release

Juliet Yang NetEase, Inc.

hzyangyy@corp.netease.com Tel: (+86) 571-8985-3378

Brandi Piacente Investor Relations

brandi@corp.netease.com Tel: (+1) 212-481-2050

(Beijing - August 9, 2017) - NetEase, Inc. (NASDAQ: NTES) ("NetEase" or the "Company"), one of China's leading internet and online game services providers, today announced its unaudited financial results for the second quarter ended June 30, 2017.

• Net revenues were RMB13.4 billion (US$2.0 billion), an increase of 49.4% compared with the second quarter of 2016.

  • Online game services net revenues were RMB9.4 billion (US$1.4 billion), an increase of 46.5% compared with the second quarter of 2016.

  • Advertising services net revenues were RMB595.6 million (US$87.9 million), an increase of 12.1% compared with the second quarter of 2016.

  • E-mail, e-commerce and others net revenues were RMB3.4 billion (US$494.2 million), an increase of 68.9% compared with the second quarter of 2016.

• Gross profit was RMB6.7 billion (US$993.7 million), an increase of 27.6% compared with the second quarter of 2016.

• Total operating expenses were RMB3.3 billion (US$491.4 million), an increase of 49.2% compared with the second quarter of 2016.

• Net income attributable to the Company's shareholders was RMB3.0 billion (US$438.4 million), an increase of 9.2% compared with the second quarter of 2016. Non-GAAP net income attributable to the Company's shareholders was RMB3.5 billion (US$512.2 million), an increase of 7.8% compared with the second quarter of 2016.[1]

• Diluted earnings per ADS were US$3.31; non-GAAP diluted earnings per ADS were US$3.86.

[1] As used in this press release, non-GAAP net income attributable to the Company's shareholders is defined to exclude share-based compensation expenses and certain impairment on investment. See "Unaudited Reconciliation of GAAP and Non-GAAP Results" at the end of this press release.

• Further expanded global footprint with Onmyoji, achieving record high downloads in Japan and Southeast Asia.

• Launched new mobile titles including Land of Glory and Treasure Hunter, both of which were well

  received by players in China.

• Many legacy titles continued to increase in popularity among players with PC-client game Fantasy Westward Journey Online and mobile game Invincible reaching record high quarterly revenues.

"Our total net revenues grew nearly 50% in the second quarter compared with last year as we continued to invest in new content development that broadens our offering and engages our community across our business lines," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Our online games, advertising services and e-commerce divisions continue to grow. While e-commerce is becoming an increasingly important revenue contributor, our self-developed mobile games remain our primary growth engine. During the second quarter, many legacy titles maintained their popularity, while our instant hit title Onmyoji had a natural ebb and flow. To bolster the power of this game's IP, we recently commenced dedicated brand expansion initiatives, and our international launch strategy is progressing well. "

"Additional penetration in China's mobile market, as well as overseas markets, offers considerable room for NetEase's ever-increasing portfolio, particularly as we introduce new gameplay options and genres that diversify and strengthen our offering. We have an exciting pipeline of upcoming games, including the highly anticipated sandbox game Minecraft, as well as Index and Forever 7, two stunning Japanese-themed RPGs. From our time-honored online games and advertising services, to our flourishing Kaola.com and Yanxuan e- commerce divisions, we will look to further strengthen our portfolio and top-quality internet services that propel our business forward," Mr. Ding concluded.

Net Revenues

Net revenues for the second quarter of 2017 were RMB13,376.0 million (US$1,973.1 million), compared to RMB13,640.5 million and RMB8,952.8 million for the preceding quarter and the second quarter of 2016, respectively.

Net revenues from online games were RMB9,430.2 million (US$1,391.0 million) for the second quarter of 2017, compared to RMB10,735.5 million and RMB6,438.3 million for the preceding quarter and the second quarter of 2016, respectively. Mobile games accounted for approximately 72.4% of net revenues from online games in the second quarter of 2017, compared to 73.3% and 61.3% for the preceding quarter and the second quarter of 2016, respectively.

Net revenues from advertising services were RMB595.6 million (US$87.9 million) for the second quarter of 2017, compared to RMB445.2 million and RMB531.1 million for the preceding quarter and the second quarter of 2016, respectively. The top performing advertising verticals in the second quarter of 2017 were automobile, internet services and real estate.

Net revenues from e-mail, e-commerce and others were RMB3,350.3 million (US$494.2 million) for the second quarter of 2017, compared to RMB2,459.9 million and RMB1,983.4 million for the preceding quarter and the second quarter of 2016, respectively.

Gross Profit

Gross profit for the second quarter of 2017 was RMB6,736.9 million (US$993.7 million), compared to RMB7,483.6 million and RMB5,280.4 million for the preceding quarter and the second quarter of 2016, respectively.

The year-over-year increase in online games gross profit was primarily driven by revenue contribution from mobile games such as Onmyoji and the mobile version of New Ghost. The quarter-over-quarter decrease in online games gross profit was primarily due to decreased revenue contribution from mobile games.

The year-over-year increase in advertising services gross profit was primarily due to NetEase's enhanced monetization efforts. The quarter-over-quarter increase in advertising services gross profit was primarily due to seasonality.

The year-over-year decrease in e-mail, e-commerce and others gross profit was primarily due to decreased revenue contribution from certain e-commerce businesses with relatively higher gross profit margins.

Gross Profit Margin

Gross profit margin for the online games business for the second quarter of 2017 was 63.1%, compared to 63.9% and 66.2% for the preceding quarter and the second quarter of 2016, respectively. The year-over-year decrease in gross profit margin was mainly due to increased revenue contribution from mobile games, which have relatively lower gross profit margins, as a percentage of NetEase's total online games net revenues.

Gross profit margin for the advertising services business for the second quarter of 2017 was 67.6%, compared to 57.3% and 65.5% for the preceding quarter and the second quarter of 2016, respectively. The year-over-year increase in gross profit margin was mainly due to NetEase's enhanced monetization efforts. The quarter-over- quarter increase in gross profit margin was mainly due to seasonality.

Gross profit margin for the e-mail, e-commerce and others businesses for the second quarter of 2017 was 11.3%, compared to 14.8% and 33.8% for the preceding quarter and the second quarter of 2016, respectively. The year-over-year and quarter-over-quarter changes in gross profit margin were primarily attributable to changes in NetEase's e-commerce business mix.

Operating Expenses

Total operating expenses for the second quarter of 2017 were RMB3,331.5 million (US$491.4 million), compared to RMB2,711.7 million and RMB2,232.5 million for the preceding quarter and the second quarter of 2016, respectively. The year-over-year and quarter-over-quarter increases in operating expenses were mainly due to higher staff-related costs resulting from an increase in headcount and average compensation, increased selling and marketing expenses mainly related to online games, and operating expenses related to NetEase's e- commerce businesses.

Income Taxes

The Company recorded a net income tax charge of RMB703.5 million (US$103.8 million) for the second quarter of 2017, compared to RMB943.0 million and RMB262.7 million for the preceding quarter and the second quarter of 2016, respectively. The effective tax rate for the second quarter of 2017 was 19.0%, compared to 19.0% and 8.6% for the preceding quarter and the second quarter of 2016, respectively. The year- over-year increase in the effective tax rate was mainly due to the fact that certain subsidiaries of the Company were recognized as Key Software Enterprises in the second quarter of 2016 and subject to a preferential tax rate of 10% for 2015, and the Company recognized related tax credits in the second quarter of 2016. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter.

Net Income After Tax

Net income attributable to the Company's shareholders for the second quarter of 2017 totaled RMB3.0 billion (US$438.4 million), compared to RMB3.9 billion and RMB2.7 billion for the preceding quarter and the second quarter of 2016, respectively. Non-GAAP net income attributable to the Company's shareholders for the second quarter of 2017 totaled RMB3.5 billion (US$512.2 million), compared to RMB4.3 billion and RMB3.2 billion for the preceding quarter and the second quarter of 2016, respectively.

During the second quarter of 2017, the Company had a net foreign exchange loss of RMB131.3 million (US$19.4 million), compared to a net foreign exchange loss of RMB48.5 million and a net foreign exchange gain of RMB77.3 million for the preceding quarter and the second quarter of 2016, respectively. The year- over-year and quarter-over-quarter changes in foreign exchange gains and losses were mainly due to unrealized exchange gains and losses arising from the Company's U.S. dollar-denominated bank deposits and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods.

NetEase reported basic and diluted earnings per ADS of US$3.33 and US$3.31, respectively, for the second quarter of 2017. The Company reported basic and diluted earnings per ADS of US$4.40 and US$4.36, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$3.06 and US$3.04, respectively, for the second quarter of 2016. Non-GAAP basic and diluted earnings per ADS were US$3.89 and US$3.86, respectively, for the second quarter of 2017, compared to non-GAAP basic and diluted earnings per ADS of US$4.86 and US$4.82, respectively, in the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$3.62 and US$3.60, respectively, for the second quarter of 2016.