NetEase : Q4 2016 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 - February 15, 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 fourth quarter and fiscal year ended December 31, 2016.

"We achieved growth across our business in 2016 as we continued to introduce internet content to entertain and inspire our community, growing our total net revenues by 67.4% for the year and 53.1% for the fourth quarter, compared to the same quarter of 2015," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Led by mobile games, we saw year-over-year net revenue increases in the fourth quarter of 62.8% from online games, 9.2% from advertising services, and 38.2% from our e-mail, e-commerce and others segment."

"With more than 40 new mobile titles in 2016, we have introduced a number of chart toppers to China's thriving mobile market. In the fourth quarter, our self-developed mobile games Onmyoji, Tianxia III mobile and OverOcean, as well as HIT, a stunning new licensed ARPG, delivered outstanding performances. In particular, Onmyoji was named one of the top 10 outstanding games of 2016 in China's iOS app store. To leverage this game's early success, we began our international release of Onmyoji in Southeast Asia in December, with plans to roll out this game in Japan, Canada, Europe and the United States later this year. The Westward Journey Online and Fantasy Westward Journey mobile games and the mobile version of New Ghost also continued their popularity in the fourth quarter."

"There remains massive opportunity within the mobile market, and we will continue to build our formidable and diverse pipeline. Currently, our mobile portfolio stands strong with more than 100 games, and we plan to add more mobile versions of our legacy titles and new self-developed and licensed mobile games to further this momentum. Recently, we released new mobile games including Demon Seals mobile and Heroes of Tang Dynasty mobile, both of which were well received. Other new mobile titles planned for near-term introduction include Westward Journey: Rage, an exciting ARPG edition to celebrate the 15th anniversary of this title, and Treasure Hunter, an innovative RPG."

"Our PC-client games performed steadily in the fourth quarter with a strong showing from our flagship game Fantasy Westward Journey Online. We released several new expansion packs during the fourth quarter to satisfy our PC-client game players, including Kung Fu Master II, Demon Seals, Tianxia III, Heroes of Tang Dynasty Zero and New Ghost. New expansion packs for Fantasy Westward Journey Online and Revelation were also recently released, and we expect to introduce a new expansion pack for New Westward Journey Online II in the coming months."

"Blizzard Entertainment's Overwatch®, World of Warcraft®, with its latest expansion pack Legion™, and Hearthstone® with its latest expansion pack Mean Streets of Gadgetzan™ also remained popular among loyal players in China eager for new content, as well as brought in new players. Overwatch also established a new sales record in the category of buy-to-play PC-client games in mainland China, with more than 5 million copies sold by the end of December since its late May release. Furthermore, we are currently working to bring to Chinese players both PC and mobile versions of the highly anticipated, globally acclaimed game, Minecraft."

"As data consumption mediums evolve, the internet, especially the mobile internet, is becoming the primary advertising platform in China. This trend supports the steady growth of our advertising services business. Driven primarily by our Mobile News App, as well as high-profile events such as the 2016 NetEase Annual Economist Summit and the 2016 NetEase Annual Attitude Award Ceremony, our top performing advertising verticals in the fourth quarter were automobile, internet services and financial services. Additionally, our e- commerce business continues to thrive with both Kaola.com and Yanxuan maintaining healthy growth in the fourth quarter."

"Our focus on innovation and quality has served us well, enabling NetEase to create significant value for each of our major constituencies: our players, our partners and our shareholders. In 2016, we brought best-in-class products and services to our community and continued to grow our business. As we move through 2017 we will look toward the future, designing products and services that address fluid market dynamics, enabling continued growth and value creation," Mr. Ding concluded.

Net Revenues

Net revenues for the fourth quarter of 2016 were RMB12,099.0 million (US$1,742.6 million), compared to RMB9,211.6 million and RMB7,903.0 million for the preceding quarter and the fourth quarter of 2015, respectively.

Net revenues from online games were RMB8,959.1 million (US$1,290.4 million) for the fourth quarter of 2016, compared to RMB6,568.0 million and RMB5,502.9 million for the preceding quarter and the fourth quarter of 2015, respectively.

Net revenues from advertising services were RMB664.8 million (US$95.8 million) for the fourth quarter of 2016, compared to RMB563.3 million and RMB609.0 million for the preceding quarter and the fourth quarter of 2015, respectively.

Net revenues from e-mail, e-commerce and others were RMB2,475.1 million (US$356.5 million) for the fourth quarter of 2016, compared to RMB2,080.4 million and RMB1,791.1 million for the preceding quarter and the fourth quarter of 2015, respectively.

Gross Profit

Gross profit for the fourth quarter of 2016 was RMB6,463.3 million (US$930.9 million), compared to RMB5,333.6 million and RMB4,219.7 million for the preceding quarter and the fourth quarter of 2015, respectively.

The year-over-year increase in online games gross profit was primarily driven by increased revenue contribution from mobile games such as Onmyoji and the mobile version of New Ghost, as well as Blizzard Entertainment's Overwatch and World of Warcraft. The quarter-over-quarter increase in online game gross profit was primarily driven by increased revenue contribution from mobile games such as Onmyoji and the mobile version of New Ghost.

The year-over-year and quarter-over-quarter increases in advertising services gross profit were primarily attributable to NetEase's monetization efforts for its mobile applications, primarily its Mobile News App. The top performing advertising verticals in the fourth quarter were automobile, internet services and financial services.

The year-over-year increase in e-mail, e-commerce and others gross profit was primarily due to increased revenue contribution from NetEase's e-commerce business, such as Kaola.com. The quarter-over-quarter decrease in e-mail, e-commerce and others gross profit was primarily due to decreased revenue contribution from certain NetEase e-commerce businesses with relatively higher gross profit margins.

Gross Profit Margin

Gross profit margin for the online games business for the fourth quarter of 2016 was 60.7%, compared to 65.0% and 67.2% for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year decrease in gross profit margin was mainly due to increased revenue contribution from mobile games and licensed games, which have relatively lower gross profit margins, as a percentage of NetEase's total online games revenues. The quarter-over-quarter decrease in gross profit margin was mainly due to the one-off recognition of certain royalty expenses related to licensed games in the fourth quarter of 2016, as well as increased revenue contribution from mobile games.

Gross profit margin for the advertising services business for the fourth quarter of 2016 was 66.5%, compared to 65.3% and 68.1% for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year decrease in gross profit margin was mainly due to higher staff-related costs.

Gross profit margin for the e-mail, e-commerce and others business for the fourth quarter of 2016 was 23.4%, compared to 33.5% and 6.0% for the preceding quarter and the fourth quarter of 2015, 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 fourth quarter of 2016 were RMB2,596.6 million (US$374.0 million), compared to RMB2,487.0 million and RMB1,801.7 million for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year increase in operating expenses was mainly due to higher staff-related costs resulting from an increase in headcount, average compensation, research and development investments and selling and marketing expenses. The quarter-over-quarter increase in operating expenses was mainly due to higher staff-related costs and research and development investments, which was partially offset by decreased selling and marketing expenses.

Income Taxes

The Company recorded a net income tax charge of RMB882.0 million (US$127.0 million) for the fourth quarter of 2016, compared to RMB427.2 million and RMB513.8 million for the preceding quarter and the fourth quarter of 2015, respectively. The effective tax rate for the fourth quarter of 2016 was 19.2%, compared to 13.3% and 19.2% for the preceding quarter and the fourth quarter of 2015, respectively. The quarter-over- quarter change in the effective tax rate was mainly due to the fact that certain subsidiaries of the Company were approved as Key Software Enterprises in 2016 and subject to a preferential tax rate of 10% for 2015. The Company recognized certain related tax credits in the third quarter of 2016.

Net Income After Tax

Net income attributable to the Company's shareholders for the fourth quarter of 2016 totaled RMB3.7 billion (US$530.5 million), compared to RMB2.7 billion and RMB2.2 billion for the preceding quarter and the fourth quarter of 2015, respectively. Non-GAAP net income attributable to the Company's shareholders[1] for the