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NetEase Announces Second Quarter 2006 Unaudited Financial Results

Beijing -August 15, 2006


2006/08/15 09:43:17

(Beijing ,-August 15, 2006) -NetEase.com, Inc. (NASDAQ: NTES), one of China's leading Internet and online game services providers, today announced its unaudited financial results for the second quarter ended June 30, 2006.

Highlights for Second Quarter 2006

. Total revenues for the quarter increased 8.6% quarter-over-quarter and 38.0% year-over-year to RMB575.3 million (US$72.0 million);

. Online game revenues for the quarter grew 7.9% quarter-over-quarter and 41.4% year-over-year to RMB486.0 million (US$60.8 million), primarily attributable to the continued growth in the popularity of Fantasy Westward Journey;

. Advertising services revenue increased 11.7% quarter-over-quarter and 28.7% year-over-year to RMB68.8 million (US$8.6 million), primarily driven by both the traditional seasonal increase in advertising spending in the second quarter and overall increased advertising expenditures resulting from NetEase’s enhanced website content;

. U.S. GAAP net profit for the quarter was RMB314.1 million (US$39.3 million), equivalent to US$0.28 (diluted) earnings per American Depositary Share (ADS);

. Non-GAAP net profit for the second quarter, which is exclusive of non-cash, share-based compensation costs, grew 6.5% quarter-over-quarter and 40.2% year-over-year to RMB340.4 million (US$42.6 million), equivalent to US$0.30 (diluted) earnings per ADS; 

. Fantasy Westward Journey achieved record peak concurrent user number of approximately 1,313,000 during the second quarter;

. Datang, the Company's new online 2.5D game which was commercially launched on July 19, 2006, achieved solid results after a period of approximately one and one-half months open beta testing;

. The internal beta testing of the Company's next generation online 3D game, Tianxia II, remains on track, and open beta testing is expected to commence by the end of 2006; and 

. Approximately 2.4 million of the Company's issued and outstanding ADSs were repurchased for an aggregate purchase consideration of US$50.3 million (including transaction costs) in accordance with the share repurchase program announced on May 18, 2006.

William Ding, Chief Executive Officer and Director of NetEase stated, "We experienced another quarter of solid revenue growth driven by sequential growth in all business lines. We intend to bolster the popularity of Fantasy Westward Journey by launching a new expansion pack with rich content updates by the end of 2006. Additionally, for our original and most mature online game, Westward Journey Online II, we are in the process of revamping the game by adding new game playing features, content and artwork and by creating a new game engine in order to spur future usage growth and enhance the overall longevity of the game. We anticipate initiating closed beta testing of this improved version of Westward Journey Online II in early 2007."

"In addition, we are pleased with the initial results of the launch of our newest online game, Datang. We are confident that we will be able to build on this initial success and to increase the popularity of this game by adding new content and playing features, as well as by signing-up more promotion partners for this game. Moreover, we are on track for the development of Tianxia II and we plan to commence the open beta testing by the end of 2006."

"In turn, the Company's growth in advertising revenue benefited from the traditional seasonal increase in advertising spending in the second quarter. Equally importantly, we believe our improved content channels and new services for Internet users continued to widen our audience, which attracted more spending from advertisers."

Total revenues increased to RMB575.3 million (US$72.0 million) for the second quarter of 2006, representing 8.6% growth from RMB529.8 million (US$66.1 million) for the first quarter of 2006, and 38.0% growth from RMB416.9 million (US$50.4 million) for the second quarter of 2005.

Online game revenues increased to RMB486.0 million (US$60.8 million) for the second quarter of 2006 representing a 7.9% increase over RMB450.6 million (US$56.2 million) for the first quarter of 2006 and a 41.4% increase over RMB343.7 million (US$41.5 million) for the second quarter of 2005. 

Revenues from advertising services increased 11.7% to RMB68.8 million (US$8.6 million) from RMB61.6 million (US$7.7 million) for the first quarter of 2006. Advertising services revenues increased 28.7% over RMB53.4 million (US$6.5 million) for the second quarter of 2005. 

Revenues from the Company's wireless value-added services and others increased to RMB20.5 million (US$2.6 million) for the second quarter of 2006, representing an increase of 16.3% over RMB17.6 million (US$2.2 million) for the first quarter of 2006 and an increase of 4.0% from RMB19.7 million (US$2.4 million) for the second quarter of 2005.

GAAP gross profit for the second quarter of 2006 was RMB457.4 million (US$57.2 million). The Company’s non-GAAP gross profit in the second quarter was RMB461.7 million (US$57.8 million), representing an 8.6% increase over the previous quarter's non-GAAP gross profit of RMB425.3 million (US$53.0 million), and a 41.3% increase over non-GAAP gross profit of RMB326.8 million (US$39.5 million) for the corresponding period a year ago. The non-GAAP financial measures included in this release exclude the effect of certain non-cash, share based compensation expenses. The reconciliation of GAAP measures with non-GAAP measures for gross profit, operating expenses, net profit and net profit per ADS is set forth in the Company's unaudited financial information below. 

Total GAAP gross margin for the Company for the second quarter of 2006 was 82.8%. Total non-GAAP gross margin for the second quarter was 83.5% compared with non-GAAP gross margin of 83.6% for the preceding quarter and 83.2% for the same period last year. 

GAAP gross margin for the online game business for the second quarter of 2006 was 90.7%. Non-GAAP gross margin for the online game business for the second quarter of 2006 was 91.0% compared with non-GAAP gross margin of 90.7% for the preceding quarter and 90.2% for the second quarter of 2005. 

GAAP gross margin for the advertising business for the second quarter of 2006 was 49.8%. Non-GAAP gross margin for the online advertising business for the second quarter of 2006 decreased to 53.3% from non-GAAP gross margin of 55.3% for the preceding quarter and 62.1% for the second quarter of 2005, primarily due to an increase in the salaries and other benefits paid to content editors.

GAAP gross margin for the wireless value-added services and others business for the second quarter of 2006 was -2.3%. Non-GAAP gross margin for the wireless value-added services and others business for the second quarter of 2006 was 1.9% compared with non-GAAP gross margin of -7.1% for the preceding quarter and 18.4% for the second quarter of 2005. 

Total GAAP operating expenses for the second quarter of 2006 were RMB134.3 million (US$16.8 million). Total non-GAAP operating expenses for the second quarter of 2006 were RMB112.4 million (US$14.1 million), compared with RMB91.9 million (US$11.5 million) for the preceding quarter and RMB80.1 million (US$9.7 million) for the same period last year. The increase in non-GAAP operating expenses in comparison to the preceding quarter was primarily due to a write-off of RMB11.6 million (US$1.4 million) in software cost for the Company's licensed online 3D game, Fly for Fun. The Company's management intends to continue modifying this software to improve the game's stability and playing features before it is commercially launched.

As a result of foreign currency translation from currencies other than the Renminbi into Renminbi in accordance with applicable accounting standards, the Company reported a RMB45,000 (US$6,000) foreign exchange loss in the second quarter of 2006, compared to a foreign exchange loss of RMB2.1 million (US$0.3 million) in the preceding quarter. The decrease in foreign exchange loss was primarily due to a decrease in the Company’s foreign currency denominated cash balance resulting from the Company's repurchase of certain of its ADSs and, to a lesser extent, due to the stabilization of the exchange rate of Renminbi versus other currencies in the second quarter. No significant foreign exchange losses were reported in the corresponding quarter a year ago.

GAAP net profit for the second quarter totaled RMB314.1 million (US$39.3 million). Non-GAAP net profit for the second quarter totaled RMB340.4 million (US$42.6 million), a 6.5% increase over the previous quarter’s non-GAAP net profit of RMB319.7 million (US$39.9 million) and a 40.2% increase over non-GAAP net profit of RMB242.8 million (US$30.0 million) for the second quarter of 2005. NetEase reported GAAP basic and diluted earnings per ADS of US$0.30 and US$0.28, respectively, which include the impact of approximately US$3.3 million, or US$0.02 per ADS, in non-cash, share-based compensation costs. The Company recorded GAAP basic and diluted earnings per ADS of US$0.23 and US$0.21 for the second quarter of 2005 and US$0.28 and US$0.26 for the first quarter of 2006, respectively.

As of June 30, 2006, the Company's total cash and time deposit balance was RMB3.6 billion (US$451.8 million), a decrease of 4.1% from RMB3.8 billion (US$469.8 million) at March 31, 2006, primarily due to the utilization of approximately US$50.3 million (including transaction costs) for the repurchase of certain of the Company's issued and outstanding ADSs. Cash flow generated from operating activities was approximately RMB296.5 million (US$37.1 million), a decrease of 28.1% from the previous quarter’s RMB412.4 million (US$51.4 million) but a 16.1% increase from RMB255.3 million (US$30.8 million) for the second quarter of 2005. The quarter-on-quarter decrease in cash flow generated from operating activities was primarily due to the decrease in accounts payable resulting from the repayment of option proceeds held on behalf by the Company to employees and the seasonal increase in accounts receivable balance in the second quarter of 2006.

During the second quarter of 2006, the Company repurchased approximately 2.4 million ADSs for an aggregate purchase consideration of US$50.3 million (including transaction costs) in accordance with the share repurchase program announced on May 18, 2006. The Company is in the process of canceling these repurchased ADSs, which are recorded as treasury stock in the balance sheet as of June 30, 2006.

Denny Lee, NetEase's Chief Financial Officer, added, "In addition to our strong revenue and EPS performance for the quarter, we were pleased to have completed a share repurchase that underscores our confidence in the long-term value of our company and returns value back to our shareholders."

Non-GAAP Disclosure To supplement the unaudited consolidated financial statements presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"), NetEase's management uses non-GAAP measures of gross margin, gross profit, operating expenses, net profit and net profit per American Depositary Share, which are adjusted from results based on GAAP to exclude the compensation cost of share-based awards granted to employees under Statement of Financial Accounting Standard 123R, effective from January 1, 2006. The non-GAAP financial measures, by excluding the non-cash, stock-based compensation costs, are provided to enhance the investors' overall understanding of NetEase's current financial performance and prospects for the future. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Reconciliations of NetEase's non-GAAP financial measures to unaudited Consolidated Statements of Operations are set forth at the end of this release.

NetEase's management believes that excluding the share-based compensation expense from its GAAP financial measures of gross margin, gross profit, operating expenses, net profit and net profit per American Depositary Share are useful for itself and investors, because it makes a more meaningful comparison of NetEase's current operating results to those periods prior to the adoption of Statement of Financial Accounting Standard 123R and improves readers' understanding of NetEase's performance.

**Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1=RMB7.9943. The percentages stated are calculated based on RMB.**

Conference Call

NetEase's management team will host a conference call on August 14, 2006, at 9:00PM Eastern Time, corresponding with August 15 at 9:00AM Beijing/Hong Kong time, to present an overview of NetEase's financial and operational performance. Interested parties may participate in the conference call by dialing 800-967-7184 (international 719-457-2633), 10-15 minutes prior to the initiation of the call, or listen to a live webcast by going to the company’s website at http://corp.netease.com, Investors: Earnings Call. A replay of the call will be available by dialing 888-203-1112 (international 719-457-0820), and entering access code 5287494. The replay will be available through August 28, 2006 at midnight Eastern Time. An archived webcast will be available on the investor relations section of the Company’s website at http://corp.netease.com under Investors: Earnings Call for twelve months.

About NetEase.com,Inc.

NetEase.com, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. Our online communities and personalized premium services have established a large and stable user base for the NetEase websites which are operated by our affiliates. For the month of June 2006, the NetEase websites had more than 702 million average daily page views, making us one of the most popular destinations in China and on the World Wide Web. In particular, NetEase provides online game services to Internet users through the licensing or in-house development of massively multi-player online role-playing games, including Westward Journey Online II and Fantasy Westward Journey. 

NetEase also offers online advertising on its websites which enables advertisers to reach our substantial user base. In addition, NetEase has paid listings on its search engine and web directory and classified ads 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 which are sent over SMS, MMS, WAP, IVR and Color Ring-back Tone technologies. Other community services which the NetEasewebsites offer include instant messaging, online personal ads, matchmaking, alumni clubs, personal home pages and community forums. NetEase is also the largest provider of free e-mail services in China. Furthermore, the NetEase websites 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. 

Second Quarter 2006 Financial Statement





Contact:

Grace Zhao
NetEase.com, Inc.
IR@service.netease.com
8610-8518-0163x8208