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NetEase.com Inc (ADR) : NetEase Reports First Quarter 2012 Unaudited Financial Results

05/16/2012 | 07:05pm US/Eastern
Recommend:
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BEIJING, May 16, 2012 /PRNewswire-Asia-FirstCall/ -- NetEase, Inc. (NASDAQ: NTES), one of China's leading Internet and online game services providers, today announced its unaudited financial results for the first quarter ended March 31, 2012.

William Ding, Chief Executive Officer and Director of NetEase, stated, "The growing popularity of our self-developed games continues to drive our revenues. For the first quarter, our total online games revenue increased 31.4% year-over-year, with dynamic growth from our newer games Ghost and Tianxia III and increasing contribution from several of our flagship games, Fantasy Westward Journey, Westward Journey Online II and Heroes of Tang Dynasty."

"Our online games revenue has been driven by the successful execution of our strategy to continuously improve user experience and has been further demonstrated by Ghost's rapid growth since the launch of its full scale closed beta testing in September 2011. In the second quarter, we introduced a series of new features for Ghost in its open beta testing, which has been well received by users. Benefiting from the innovative game play mode, our newest game, Tianxia III, achieved record high revenue in the first quarter. We plan to continue developing new exciting content and launch open beta testing for Tianxia III in the second quarter."

"Moreover, players continue to respond enthusiastically to expansion packs for our long running self-developed games, Fantasy Westward Journey and Westward Journey Online II. We plan to launch new expansion packs combined with large-scale promotional activities for these games in the second and third quarters. Other expansion packs or new versions planned for the second quarter include Heroes of Tang Dynasty, Westward Journey Online III and Warsong of Westward Journey."

"Diversification through the introduction of self-developed games is a key theme in 2012. We are on track to commercialize a number of new titles this year that showcase innovative content and leading technology. In the second and third quarters of 2012, we plan to initiate beta testing of several highly anticipated games in our pipeline, including 3D ARPG, Soul of Warrior, 2.5D MMORPG, Wu Hun, 3D action real-time strategy (or DotA) game, Heroes of Three Kingdoms, and a next generation 3D action MMORPG, Dragon Sword. With respect to our licensed games, we are pleased to have renewed our contract with Blizzard Entertainment to continue our existing cooperation on Blizzard Entertainment's World of Warcraft(®)( )in mainland China. We look forward to releasing Mists of Pandaria((TM)), the fourth expansion to World of Warcraft, in mainland China as soon as possible."

"Our advertising revenue grew 13.1% year-over-year, with automobile, Internet services and food and beverage services as the top performing sectors. Advertising revenues declined 48.5% quarter-over-quarter, which reflects the typical industry seasonality. We expect the usual uptick in advertising revenues in the second quarter and through the second half of 2012. We remain committed to increasing our appeal to users by offering content innovation, synthesizing user feedback and providing service integration between different mobile device platforms. To leverage the opportunities offered by the upcoming 2012 London Olympics, we have secured a number of partnerships with content providers to offer comprehensive, accurate and in-depth reporting to our portal and mobile Internet users."

Mr. Ding concluded, "Portal traffic grew steadily in the first quarter as we continued to optimize our user experience and mobile access by introducing leading applications and cutting edge technology. Usage of our micro-blogging services is also expanding. In the first quarter, the number of micro-blogging users reached 121.0 million, up 24.0% from December 31, 2011. As the leading free email provider in China, our mailbox services also performed well as we continued to optimize services through mobile access and upgrades to enhance users' experience. As of March 31, 2012, we had approximately 480 million registered email users, up 6.7% quarter-over-quarter. In addition, the number of users and paying subscribers for our corporate mailbox services have grown in their third year of operation. During the first quarter, we were named one of the top corporate mailbox service providers in China.

"With continued execution on expanding and diversifying our game portfolio and user base, as well as driving innovation in content, technology and entertainment across all demographics in China, we look forward to another great year for NetEase in 2012," Mr. Ding concluded.

First Quarter 2012 Financial Results

Revenues

Total revenues for the first quarter of 2012 were RMB2.0 billion (US$318.2 million), compared to RMB2.1 billion and RMB1.5 billion for the preceding quarter and the first quarter of 2011, respectively.

Revenues from online games were RMB1.8 billion (US$289.2 million) for the first quarter of 2012, compared to RMB1.8 billion and RMB1.4 billion for the preceding quarter and the first quarter of 2011, respectively.

Revenues from advertising services were RMB143.5 million (US$22.8 million) for the first quarter of 2012, compared to RMB278.5 million and RMB126.8 million for the preceding quarter and the first quarter of 2011, respectively.

Revenues from e-mail, wireless value-added services and others ("E-mail, WVAS and others") were RMB39.6 million (US$6.3 million) for the first quarter of 2012, compared to RMB37.2 million and RMB25.7 million for the preceding quarter and the first quarter of 2011, respectively.

Gross Profit

Gross profit for the first quarter of 2012 was RMB1.3 billion (US$211.4 million), compared to RMB1.5 billion and RMB985.0 million for the preceding quarter and the first quarter of 2011, respectively. The quarter-over-quarter decrease in gross profit was primarily attributable to a seasonal decline in advertising revenue.

The year-over-year increase in gross profit was primarily attributable to increased revenues from the Company's self-developed games, Ghost, Tianxia III and Fantasy Westward Journey, which were partially offset by a decline in revenue from Blizzard Entertainment's World of Warcraft. Revenue from Ghost has grown rapidly since the launch of its full scale closed beta testing in September 2011, coupled with successful promotional activities. Tianxia III was released in late October of 2011, and its significant growth was leveraged from the strong Tianxia II user base as well as its attractive and innovative game play mode. The year-over-year increase in cost of revenues was primarily due to increased headcount-related costs and server custody costs.

Gross Profit (Loss) Margin

Gross profit margin for the online game business for the first quarter of 2012 was 73.0%, compared to 72.6% and 70.0% for the preceding quarter and the first quarter of 2011, respectively.

Gross profit margin for the advertising business for the first quarter of 2012 was 19.8%, compared to 54.5% and 33.4% for the preceding quarter and the first quarter of 2011, respectively. The quarter-over-quarter decrease in gross profit margin was primarily due to a decrease in advertising revenues as explained above. The year-over-year decrease in gross profit margin was primarily due to increased headcount-related costs and content purchase costs in the first quarter of 2012.

Gross loss margin for the E-mail, WVAS and others business for the first quarter of 2012 was 18.0%, compared to gross profit margin of 2.2% and gross loss margin of 21.6% for the preceding quarter and the first quarter of 2011, respectively. The quarter-over-quarter change was mainly due to increased customer services costs and technology support costs in the first quarter of 2012.

Operating Expenses

Total operating expenses for the first quarter of 2012 were RMB355.7 million (US$56.5 million), compared to RMB529.0 million and RMB292.0 million for the preceding quarter and the first quarter of 2011, respectively. The quarter-over-quarter decrease in operating expenses was mainly due to the fact that there were less selling and marketing promotional activities in the first quarter of 2012. In addition, an impairment provision of RMB50.3 million on the initial online game license fee for Blizzard Entertainment's StarCraft(®) II was recorded in the fourth quarter of 2011. The year-over-year increase in operating expenses was primarily due to increased headcount-related costs and increased research and development costs related to product development.

Net Profit

Net profit for the first quarter of 2012 totaled RMB941.7 million (US$149.5 million), compared to RMB898.6 million and RMB737.4 million for the preceding quarter and the first quarter of 2011, respectively.

During the first quarter of 2012, the Company reported a net foreign exchange gain of RMB17.6 million (US$2.8 million), compared to a net foreign exchange loss of RMB36.4 million and a net foreign exchange gain of RMB25.3 million for the preceding quarter and the first quarter of 2011, respectively. The quarter-over-quarter and year-over-year changes in foreign exchange gains and losses were mainly due to the unrealized exchange gains and losses arising from the Company's Euro-denominated bank deposit balances as of March 31, 2012 as the exchange rate of the Euro against the RMB fluctuated over the periods.

NetEase reported basic and diluted earnings per ADS of US$1.14 each for the first quarter of 2012. The Company reported basic and diluted earnings per ADS of US$1.09 for the preceding quarter, and reported basic and diluted earnings per ADS of US$0.90 and US$0.89, respectively, for the first quarter of 2011.

Income Taxes

The Company recorded a net income tax charge of RMB163.1 million (US$25.9 million) for the first quarter of 2012, compared with RMB122.6 million and RMB37.2 million for the preceding quarter and the first quarter of 2011, respectively. The effective tax rate for the first quarter of 2012 was 14.9%, compared to 11.8% and 4.8% for the preceding quarter and the first quarter of 2011, respectively.

The Company's various principal subsidiaries have renewed their qualifications as High and New Technology Enterprises in 2011, and enjoy the preferential enterprise income tax rate of 15% from 2011 to 2013, subject to annual review by the relevant tax authorities in China.

The quarter-over-quarter increase in effective tax rate was mainly due to the expiration of the enterprise income tax exemption period for certain subsidiaries that were qualified as Software Enterprises, which resulted in an increase in their applicable tax rate from 0% to 12.5%. The year-over-year increase in effective tax rate was primarily due to the recognition of a tax benefit of RMB47.1 million upon receipt of the Key Software Enterprise status by certain subsidiaries during the first quarter of 2011.

Other Information

As of March 31, 2012, the Company's total cash and time deposits balance was RMB13.1billion (US$2.1 billion), compared to RMB11.9 billion as of December 31, 2011. Cash flow generated from operating activities was RMB1.3 billion (US$212.3 million) for the first quarter of 2012, compared to RMB1.2 billion and RMB969.3 million for the preceding quarter and the first quarter of 2011, respectively.

** The United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB6.2975 on the last trading day of March 2012 (March 30, 2012) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on March 30, 2012, or at any other certain date. The percentages stated are calculated based on RMB.

Conference Call

NetEase's management team will host a conference call at 9:00 p.m. Eastern Time on Wednesday, May 16, 2012 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, May 17, 2012). NetEase's management will be on the call to discuss the quarterly results and answer questions.

Interested parties may participate in the conference call by dialing 1-877-941-2068 (international: 1-480-629-9712), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-800-406-7325 (international: 1-303-590-3030), and entering passcode 4533318#. The replay will be available through June 7, 2012.

This call is being webcast live and the replay will be available for 12 months. Both will be available on NetEase's Investor Relations website at http://ir.netease.com.

About NetEase, Inc.

NetEase, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. NetEase's online communities and personalized premium services have established a large and stable user base for the NetEase websites, which are operated by its affiliates. In particular, NetEase provides online game services to Internet users through the in-house development or licensing of massively multi-player online role-playing games, including Fantasy Westward Journey, Westward Journey Online II, Westward Journey Online III, Tianxia III, Heroes of Tang Dynasty, Datang and Ghost, as well as the licensed games, Blizzard Entertainment's World of Warcraft(®) and StarCraft(®) II.

NetEase also offers online advertising on its websites, which enables advertisers to reach its substantial user base. In addition, NetEase has paid listings on its search engine and web directory and classified advertising services, as well as an online mall, which provides opportunities for e-commerce and traditional businesses to establish their own storefront on the Internet. NetEase also offers wireless value-added services such as news and information content, matchmaking services, music and photos from the web that are sent over SMS, MMS, WAP, IVR and Color Ring-back Tone technologies.

Other community services that the NetEase websites offer include instant messaging, online personal advertisements, matchmaking, alumni clubs and community forums. The Company believes that it is also the largest provider of free e-mail services in China. Furthermore, the NetEase websites as well as its micro-blogging services provide various channels of content. NetEase aggregates news content on world events, sports, science and technology, and financial markets, as well as entertainment content such as cartoons, games, astrology and jokes, from over one hundred international and domestic content providers.

Forward Looking Statements

This press release contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans,""believes," "estimates" and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market, which could occur if, for example, its new online games such as Ghost, Tianxia III and Legend of Fairy or expansion packs and other improvements to its existing games, including its current and planned expansion packs for Heroes of Tang Dynasty, Warsong of Westward Journey and Fairyland Village, do not become as popular as management anticipates; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that Shanghai EaseNet will not be able to continue operating World of Warcraft, StarCraft II or other games licensed by it for a period of time or permanently due to possible governmental actions or the risk that such games will not be popular with game players in China; the risk that changes in Chinese government regulation of the online game market may limit future growth of NetEase's revenue or cause revenue to decline; competition in the online advertising business and the risk that investments by NetEase in its content and services may not increase the appeal of the NetEase websites among Internet users or result in increased advertising revenue; the risk that NetEase may not be able to continuously develop new and creative online services, including its ability to maintain and enhance the popularity of its micro-blogging services; the risk that NetEase will not be able to control its expenses in future periods; competition in NetEase's existing and potential markets; governmental uncertainties (including possible changes in the effective tax rates applicable to NetEase and its subsidiaries and affiliates and the ability of NetEase to receive and maintain approvals of the preferential tax treatments and general competition and price pressures in the marketplace); the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase's business and financial results; and other risks out lined in NetEase's filings with the Securities and Exchange Commission. NetEase does not undertake any obligation to update this forward-looking information, except as required under the applicable law.

Contact for Media and Investors:

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

Cassia Curran
NetEase, Inc.
cassia@corp.netease.com
Tel: (+86) 571-8985-2076

                                                                                 NETEASE, INC.
                                                                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                                                                          (RMB and USD in thousands)

                                                                December 31,                                 March 31,              March 31,
                                                                                 2011                                       2012                 2012
                                                                                 ----                                       ----                 ----
                                                                     RMB                                        RMB               USD (Note 1)
    Assets

    Current assets:
       Cash and cash equivalents                                            2,214,618                                  2,012,449              319,563
       Time deposits                                                        9,704,777                                 10,671,235            1,694,519
       Restricted cash                                                        318,684                                    239,338               38,005
       Accounts receivable, net                                               230,047                                    201,016               31,920
       Prepayments and other current
        assets                                                                900,464                                    815,105              129,433
       Short-term investments                                                 993,606                                  1,214,989              192,933
       Deferred tax assets                                                    111,990                                    128,167               20,352
    Total current assets                                                   14,474,186                                 15,282,299            2,426,725
                                                                           ----------                                 ----------            ---------

    Non-current assets:
       Property, equipment and software,
        net                                                                   848,469                                    814,897              129,400
       Land use right, net                                                     11,788                                     11,723                1,862
       License right, net                                                      48,962                                     31,956                5,074
       Deferred tax assets                                                      2,586                                      2,579                  410
       Time deposits                                                                -                                    428,000               67,963
       Other long-term assets                                                  58,940                                     69,199               10,988
    Total non-current assets                                                  970,745                                  1,358,354              215,697
                                                                              -------                                  ---------              -------
    Total assets                                                           15,444,931                                 16,640,653            2,642,422
                                                                           ==========                                 ==========            =========

    Liabilities and Shareholders'
     Equity

    Current liabilities:
       Accounts payable                                                       134,217                                    142,554               22,637
       Salary and welfare payables                                            244,398                                    179,484               28,501
       Taxes payable                                                          391,769                                    412,508               65,503
       Deferred revenue                                                     1,014,073                                  1,085,450              172,362
       Accrued liabilities and other
        payables                                                              498,120                                    642,271              101,988
    Total current liabilities                                               2,282,577                                  2,462,267              390,991
                                                                            ---------                                  ---------              -------

    Long-term payable:
       Other long-term payable                                                 63,890                                     52,081                8,270

    Total liabilities                                                       2,346,467                                  2,514,348              399,261
                                                                            ---------                                  ---------              -------

    Total NetEase, Inc.'s equity                                           13,126,701                                 14,164,494            2,249,225
    Noncontrolling interests                                                  (28,237)                                   (38,189)              (6,064)
                                                                              -------                                    -------               ------
    Total shareholders' equity                                             13,098,464                                 14,126,305            2,243,161
                                                                           ----------                                 ----------            ---------

    Total liabilities and
     shareholders' equity                                                  15,444,931                                 16,640,653            2,642,422
                                                                           ==========                                 ==========            =========

    The accompanying notes are an integral part of this press release.

                                                                                                      NETEASE, INC.
                                                                           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                                                                    (RMB and USD in thousands, except per share data)
                                                                                                      
                                                                          Quarter Ended
                                                                          -------------
                                                                      March 31,                               December 31,                                March 31,                               March 31,
                                                                                   2011       2011                             2012       2012
                                                                                   ----       ----                             ----       ----
                                                                         RMB                                       RMB                                       RMB                                USD (Note 1)
    Revenues:
    Online game services                                                      1,385,643                                   1,833,269                               1,821,029                                 289,167
    Advertising services                                                        126,828                                     278,474                                 143,451                                  22,779
    E-mail, wireless value-added
         services and others                                                     25,680                                      37,249                                  39,630                                   6,293
                                                                                 ------                                      ------                                  ------                                   -----
                                                                                                                                                                                                                     
    Total revenues                                                            1,538,151                                   2,148,992                               2,004,110                                 318,239
    Business taxes                                                              (38,200)                                    (49,809)                                (38,481)                                 (6,111)
                                                                                -------                                     -------                                 -------                                  ------
                                                                                                                                                                                                                     
    Total net revenues                                                        1,499,951                                   2,099,183                               1,965,629                                 312,128
                                                                                                                                                                                                                     
    Total cost of revenues                                                     (514,990)                                   (646,086)                               (634,407)                               (100,739)
                                                                               --------                                    --------                                --------                                --------
                                                                                                                                                                                                                     
    Gross profit                                                                984,961                                   1,453,097                               1,331,222                                 211,389
                                                                                -------                                   ---------                               ---------                                 -------
                                                                                                                                                                                                                     
    Operating expenses:
    Selling and marketing expenses                                             (130,345)                                   (280,680)                               (130,497)                                (20,722)
    General and administrative expenses                                         (63,332)                                   (105,787)                                (70,284)                                (11,161)
    Research and development expenses                                           (98,306)                                   (142,514)                               (154,961)                                (24,607)
                                                                                                                           --------                                --------                                 -------
    Total operating expenses                                                   (291,983)                                   (528,981)                               (355,742)                                (56,490)
                                                                               --------                                    --------                                --------                                 -------
                                                                                                                                                                                                                     
    Operating profit                                                            692,978                                     924,116                                 975,480                                 154,899
    Other income:
    Investment income                                                                82                                       9,954                                  13,926                                   2,211
    Interest income                                                              51,363                                      78,624                                  86,490                                  13,734
    Exchange gains (losses)                                                      25,274                                     (36,394)                                 17,597                                   2,794
    Other, net                                                                    2,084                                      62,544                                   1,298                                     207
                                                                                  -----                                      ------                                   -----                                     ---
                                                                                                                                                                                                                     
    Net income before tax                                                       771,781                                   1,038,844                               1,094,791                                 173,845
    Income tax                                                                  (37,208)                                   (122,621)                               (163,063)                                (25,893)
                                                                                -------                                    --------                                --------                                 -------
                                                                                                                                                                                                                     
    Net income after tax                                                        734,573                                     916,223                                 931,728                                 147,952
    Net loss (gain) attributable to noncontrolling
     interests                                                                    2,814                                     (17,598)                                  9,952                                   1,580
    Net income attributable to the Company's shareholders                       737,387                                     898,625                                 941,680                                 149,532
                                                                                =======                                     =======                                 =======                                 =======
                                                                                                                                                                                                                     
    Comprehensive income                                                        734,573                                     916,223                                 931,728                                 147,952
    Comprehensive loss (income) attributable to
     noncontrolling interests                                                     2,814                                     (17,598)                                  9,952                                   1,580
    Comprehensive income attributable to the                                    737,387                                     898,625                                 941,680                                 149,532
         Company's shareholders
                                                                                                                                                                                                                     
                                                                                                                                                                                                                     
    Earnings per share, basic                                                      0.23                                        0.27                                    0.29                                    0.05
                                                                                   ====                                        ====                                    ====                                    ====
    Earnings per ADS, basic                                                        5.66                                        6.86                                    7.18                                    1.14
                                                                                   ====                                        ====                                    ====                                    ====
    Earnings per share, diluted                                                    0.23                                        0.27                                    0.29                                    0.05
                                                                                   ====                                        ====                                    ====                                    ====
    Earnings per ADS, diluted                                                      5.63                                        6.85                                    7.17                                    1.14
                                                                                   ====                                        ====                                    ====                                    ====
                                                                                                                                                                                                                     
    Weighted average number of ordinary shares
     outstanding, basic                                                       3,255,764                                   3,272,617                               3,278,157                               3,278,157
                                                                              =========                                   =========                               =========                               =========
    Weighted average number of ADS outstanding, basic                           130,231                                     130,905                                 131,126                                 131,126
                                                                                =======                                     =======                                 =======                                 =======
    Weighted average number of ordinary shares
     outstanding, diluted                                                     3,273,909                                   3,279,404                               3,284,428                               3,284,428
                                                                              =========                                   =========                               =========                               =========
    Weighted average number of ADS outstanding, diluted                         130,956                                     131,176                                 131,377                                 131,377
                                                                                =======                                     =======                                 =======                                 =======
                                                                                                                                                                                                                     
    The accompanying notes are an integral part of this press release.

                                                                                                       NETEASE, INC.
                                                                                 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                                 (RMB and USD in thousands)

                                                                         Quarter Ended
                                                                         -------------
                                                                     March 31,                                December 31,                 March 31,             March 31,
                                                                                    2011                                       2011                       2012                2012
                                                                                    ----                                       ----                       ----                ----
                                                                        RMB                                        RMB                        RMB               USD (Note 1)
    Cash flows from operating activities:
    Net income                                                                   734,573                                    916,223                    931,728             147,952
    Adjustments to reconcile net profit
     to net cash
        provided by operating activities:
    Depreciation and amortization                                                 65,706                                     76,323                     71,677              11,382
    Impairment loss for license right                                                  -                                     50,316                          -                   -
    Share-based compensation cost                                                 38,238                                     45,143                     68,273              10,842
    Allowance for (reversal of) provision
     for doubtful debts                                                           (1,366)                                    (6,212)                       921                 146
    Loss (gain) on disposal of property,
     equipment                                                                         4                                        (35)                      (122)                (19)
        and software
    Unrealized exchange (gains) losses                                           (31,077)                                    41,263                    (18,719)             (2,972)
    Deferred income taxes                                                         (8,401)                                    22,054                    (16,170)             (2,568)
    Net equity share of loss from
     associated companies                                                            330                                      1,010                        256                  41
    Others                                                                          (162)                                    (9,272)                     2,894                 460
    Changes in operating assets and
     liabilities:
       Accounts receivable                                                        75,613                                      6,603                     20,720               3,290
       Prepayments and other current assets                                       54,987                                     79,852                    180,825              28,714
       Accounts payable                                                          (18,560)                                    14,477                     14,857               2,359
       Salary and welfare payables                                               (64,934)                                    48,575                    (64,930)            (10,310)
       Taxes payable                                                             (30,719)                                    (2,706)                   (19,620)             (3,116)
       Deferred revenue                                                           91,107                                     (3,777)                    71,378              11,334
       Accrued liabilities and other
        payables                                                                  63,976                                    (36,144)                    92,897              14,751
                Net cash  provided by operating
                 activities                                                      969,315                                  1,243,693                  1,336,865             212,286
                                                                                 -------                                  ---------                  ---------             -------

    Cash flows from investing activities:
          Purchase of property, equipment and
           software                                                             (141,157)                                  (171,422)                   (23,280)             (3,697)
          Proceeds from sale of property,
           equipment and software                                                      1                                         43                        182                  29
          Purchase of other intangible assets                                          -                                     (1,042)                         -                   -
          Net change in short-term investments
           with terms
               of three months or less                                                 -                                          -                   (500,000)            (79,397)
          Purchase of short-term investments                                           -                                   (407,863)                  (154,277)            (24,498)
          Proceeds from maturities of short-
           term investments                                                            -                                     20,000                    430,000              68,281
          Transfer (to) from restricted cash                                           -                                    (44,885)                    79,346              12,600
          Net change in time deposits with
           terms
               of three months                                                   231,682                                   (125,205)                   117,997              18,737
          Placement/rollover of matured time
           deposits                                                           (2,863,899)                                (3,743,262)                (4,429,917)           (703,441)
          Proceeds from maturities of time
           deposits                                                            2,157,008                                  3,497,811                  2,933,775             465,863
          Net change in other assets                                              (5,844)                                     4,681                    (14,158)             (2,248)
                Net cash used in investing activities                           (622,209)                                  (971,144)                (1,560,332)           (247,771)
                                                                                --------                                   --------                 ----------            --------

    Cash flows from financing activities:
       Proceeds from employees exercising
        stock options                                                             30,252                                      9,877                     21,033               3,340
       Payment of other long-term payable                                            (10)                                       (10)                         -                   -
                Net cash  provided by financing
                 activities                                                       30,242                                      9,867                     21,033               3,340
                                                                                  ------                                      -----                     ------               -----

       Effect of exchange rate changes on
        cash held in
         foreign currencies                                                        7,112                                    (11,327)                       265                  42
                Net increase (decrease) in cash and
                 cash equivalents                                                384,460                                    271,089                   (202,169)            (32,103)
    Cash and cash equivalents, beginning
     of the period                                                             1,285,137                                  1,943,529                  2,214,618             351,666
    Cash and cash equivalents, end of the
     period                                                                    1,669,597                                  2,214,618                  2,012,449             319,563
                                                                               =========                                  =========                  =========             =======

    Supplemental disclosures of cash flow information:
             Cash paid for income tax, net of tax
              refund                                                              91,682                                    129,437                    145,625              23,124
    Supplemental schedule of non-cash
     investing and
        financing activities:
            Fixed asset purchases financed by
             accounts payable                                                     64,347                                     37,614                     35,393               5,620
               and accrued liabilities

    The accompanying notes are an integral part of this press release.

                                                                                                      NETEASE, INC.
                                                                                              UNAUDITED SEGMENT INFORMATION
                                                                                               (RMB and USD in thousands)

                                                                                Quarter Ended
                                                                                -------------
                                                           March 31,                                  December 31,           March 31,             March 31,
                                                                          2011                                         2011                 2012                 2012
                                                                          ----                                         ----                 ----                 ----
                                                              RMB                                          RMB                  RMB               USD (Note 1)
    Revenues:
    Online game services                                             1,385,643                                    1,833,269            1,821,029              289,167
    Advertising services                                               126,828                                      278,474              143,451               22,779
    E-mail, wireless value-
     added services and others                                          25,680                                       37,249               39,630                6,293
    Total revenues                                                   1,538,151                                    2,148,992            2,004,110              318,239
                                                                     ---------                                    ---------            ---------              -------

    Business taxes:
    Online game services                                               (25,392)                                     (23,161)             (23,566)              (3,742)
    Advertising services                                               (12,198)                                     (25,850)             (14,009)              (2,225)
    E-mail, wireless value-
     added services and others                                            (610)                                        (798)                (906)                (144)
    Total business taxes                                               (38,200)                                     (49,809)             (38,481)              (6,111)
                                                                       -------                                      -------              -------               ------

    Net revenues:
    Online game services                                             1,360,251                                    1,810,108            1,797,463              285,425
    Advertising services                                               114,630                                      252,624              129,442               20,554
    E-mail, wireless value-
     added services and others                                          25,070                                       36,451               38,724                6,149
    Total net revenues                                               1,499,951                                    2,099,183            1,965,629              312,128
                                                                     ---------                                    ---------            ---------              -------

    Cost of revenues:
    Online game services                                              (408,201)                                    (495,506)            (484,894)             (76,998)
    Advertising services                                               (76,316)                                    (114,949)            (103,827)             (16,487)
    E-mail, wireless value-
     added services and others                                         (30,473)                                     (35,631)             (45,686)              (7,254)
    Total cost of revenues                                            (514,990)                                    (646,086)            (634,407)            (100,739)
                                                                      --------                                     --------             --------             --------

    Gross profit (loss):
    Online game services                                               952,050                                    1,314,602            1,312,569              208,427
    Advertising services                                                38,314                                      137,675               25,615                4,067
    E-mail, wireless value-
     added services and others                                          (5,403)                                         820               (6,962)              (1,105)
    Total gross profit                                                 984,961                                    1,453,097            1,331,222              211,389
                                                                       =======                                    =========            =========              =======

    Gross profit (loss) margin:
    Online game services                                                  70.0%                                        72.6%                73.0%                73.0%
    Advertising services                                                  33.4%                                        54.5%                19.8%                19.8%
    E-mail, wireless value-
     added services and others                                          (21.6%)                                         2.2%              (18.0%)              (18.0%)

    The accompanying notes are an integral part of this press release.

                                                                                      NETEASE, INC.
                                                                        NOTES TO UNAUDITED FINANCIAL INFORMATION

    Note 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00 = RMB6.2975 on the last trading
     day of March 2012 (March 30, 2012)as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

    Note 2: Share-based compensation cost reported in the Company's unaudited condensed consolidated statements of comprehensive income is set out as
     follows in RMB and USD (in thousands):

                                                           Quarter Ended
                                                          -------------
                                                       March 31,                           December 31,                           March 31,                March 31,
                                                                  2011                                      2011                             2012                     2012
                                                                  ----                                      ----                             ----                     ----
                                                          RMB                                   RMB                                  RMB                  USD (Note 1)
    Share-based compensation
     cost included in:
    Cost of revenue                                             13,602                                    21,030                           33,215                    5,274
    Operating expenses
    -Selling and marketing
     expenses                                                    3,255                                     3,897                            4,680                      743
    -General and
     administrative expenses                                    11,237                                     7,661                           11,926                    1,894
    -Research and development
     expenses                                                   10,144                                    12,555                           18,452                    2,931

SOURCE NetEase.com, Inc.

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