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NetEase Reports Fourth Quarter and Fiscal Year 2017 Unaudited Financial Results

BEIJING, Feb. 7, 2018 /PRNewswire/ -- 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, 2017.

Fourth Quarter 2017 Financial Highlights

  • Net revenues were RMB14.6 billion (US$2.2 billion), an increase of 20.7% compared with the fourth quarter of 2016.
    • Online game services net revenues were RMB8.0 billion (US$1.2 billion), a decrease of 10.7% compared with the fourth quarter of 2016. 
    • E-commerce net revenues were RMB4.7 billion (US$715.3 million), an increase of 175.2% compared with the fourth quarter of 2016.
    • Advertising services net revenues were RMB736.6 million (US$113.2 million), an increase of 10.8% compared with the fourth quarter of 2016. 
    • E-mail and others net revenues were RMB1.2 billion (US$186.4 million), an increase of 54.8% compared with the fourth quarter of 2016.
  • Gross profit was RMB5.7 billion (US$882.9 million), a decrease of 11.1% compared with the fourth quarter of 2016.
  • Total operating expenses were RMB4.3 billion (US$663.6 million), an increase of 66.3% compared with the fourth quarter of 2016.
  • Net income attributable to the Company's shareholders was RMB1.3 billion (US$197.6 million). Non-GAAP net income attributable to the Company's shareholders was RMB1.9 billion (US$288.8 million).  [1]
  • Diluted earnings per ADS were US$1.49; non-GAAP diluted earnings per ADS were US$2.18.

[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 impairment on long-term investment of available-for-sale securities. See "Unaudited Reconciliation of GAAP and Non-GAAP Results" at the end of this press release.

Fourth Quarter 2017 and Recent 2018 Operational Highlights

  • Strengthened leading mobile portfolio, launched new self-developed hit mobile titles across global audiences including:
    • Knives Out: Accumulated over 100 million registered users to date and has been recommended by Google Play Store in over 10 countries since its launch in November 2017.
    • Terminator 2: Judgment Day: Accumulated over 80 million registered users to date, and the global release of Rules of Survival, has been ranked as one of the most popular games on the iOS platform and Google Play Store across multiple countries, including the U.S market, since its launch in November 2017.
    • Popular games such as Japanese-themed RPG Forever 7 launched in November 2017 and highly-anticipated MMORPG Chu Liuxiang launched in January 2018.
  • Successfully introduced Mojang's Minecraft in China across all platforms with early monetization progressing well.
  • Invigorated the popularity of Onmyoji and expanded its international reach with the release of a new content update, successful launch in Thailand in November 2017 and introduction of a new MOBA version in January 2018, which was well-received by players.
  • Reinforced strength of flagship titles with stable performances from self-developed games such as PC-client game Fantasy Westward Journey Online and mobile game Invincible.
  • Progressed pipeline diversification strategy with upcoming games including asymmetrical battle arena game Identity V, RPG Sky and 2.5D casual battle arena game Alive.

"2017 marked another year of progress with growth across each of our core business segments year-over-year. Our total net revenues for the year increased by 41.7% as we brought a number of new blockbuster online games to audiences across the globe, considerably scaled our e-commerce business and further grew our landmark advertising services and e-mail and others business lines," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "For the fourth quarter, our total net revenues continued to grow year-over-year and quarter-over-quarter. Although a few mobile titles such as Onmyoji and the mobile version of New Ghost experienced a decline, we have introduced new content for these games to attract players. During the fourth quarter, we held substantial promotions to support the successful launch of our new battle arena games Knives Out, Terminator 2: Judgment Day and Rules of Survival. We also made additional investments to further scale our thriving e-commerce businesses. We believe these strategic investments provide us with extended reach and momentum to support our future long-term growth.

"Our business remains strong and our 2018 initiatives to bring exciting new titles to our robust and diverse portfolio of self-developed games are well underway. To expand our reach, we will also seek partnerships with other industry leaders to bring mobile and PC-client games to audiences worldwide. Our e-commerce businesses and advertising services are also thriving, with e-commerce accounting for approximately 22% of our total net revenues in 2017. We will continue to expand our Kaola.com and Yanxuan e-commerce platforms in 2018 along with our other business segments where we see opportunities to generate value for our shareholders, as well as serve and grow our community of users by providing best-in-class online content and services," Mr. Ding concluded.

Change in Segment Reporting

Effective as of December 31, 2017, the Company changed its segment disclosure to separately report the financial results of its e-commerce business in light of the significant growth of the revenue contribution from e-commerce to the Company's total consolidated net revenues in 2017. This segment primarily reflects the results of NetEase's two e-commerce platforms, Kaola.com and Yanxuan, which were established in January 2015 and April 2016, respectively. The Company now reports four reporting segments: online game services, e-commerce, advertising services, and e-mail and others. This change in segment reporting aligns with the manner in which the Company's operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. This change in segment presentation does not affect consolidated balance sheets, consolidated statements of income or consolidated statements of cash flows. The Company retrospectively revised prior period segment information to conform to current period presentation.

Fourth Quarter 2017 Financial Results

Net Revenues

Net revenues for the fourth quarter of 2017 were RMB14,607.6 million (US$2,245.2 million), compared to RMB12,477.8 million and RMB12,099.0 million for the preceding quarter and the fourth quarter of 2016, respectively.

Net revenues from online games were RMB8,004.4 million (US$1,230.2 million) for the fourth quarter of 2017, compared to RMB8,111.7 million and RMB8,959.1 million for the preceding quarter and the fourth quarter of 2016, respectively. Mobile games accounted for approximately 68.0% of net revenues from online games for the fourth quarter of 2017, compared to 68.3% and 64.4% for the preceding quarter and the fourth quarter of 2016, respectively.

Net revenues from e-commerce were RMB4,653.7 million (US$715.3 million) for the fourth quarter of 2017, compared to RMB2,667.5 million and RMB1,691.2 million for the preceding quarter and the fourth quarter of 2016, respectively.

Net revenues from advertising services were RMB736.6 million (US$113.2 million) for the fourth quarter of 2017, compared to RMB631.4 million and RMB664.8 million for the preceding quarter and the fourth quarter of 2016, respectively. The top performing advertising verticals in the fourth quarter of 2017 were automobile, internet services and real estate sectors.

Net revenues from e-mail and others were RMB1,213.0 million (US$186.4 million) for the fourth quarter of 2017, compared to RMB1,067.2 million and RMB783.8 million for the preceding quarter and the fourth quarter of 2016, respectively.

Gross Profit/ (Loss)

Gross profit for the fourth quarter of 2017 was RMB5,744.6 million (US$882.9 million), compared to RMB5,947.6 million and RMB6,463.3 million for the preceding quarter and the fourth quarter of 2016, respectively.

The year-over-year and quarter-over-quarter decreases in online game services gross profit were primarily due to decreased revenue contribution from self-developed mobile games such as Onmyoji.

The year-over-year and quarter-over-quarter increases in e-commerce gross profit were primarily due to the rapid development of Kaola.com and Yanxuan.

The year-over-year and quarter-over-quarter increases in advertising services gross profit were primarily due to NetEase's enhanced monetization efforts and better economies of scale.

The year-over-year and quarter-over-quarter decreases in e-mail and others gross profit were primarily due to decreased revenue contribution from certain online platform businesses, which have relatively higher margins, as well as the one-off recognition of expense related to certain copyrights in the fourth quarter of 2017.

Gross Profit/ (Loss) Margin

Gross profit margin for online game services for the fourth quarter of 2017 was 61.4%, compared to 62.5% and 60.7% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year increase 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, which was partially offset by increased staff-related costs. The quarter-over-quarter decrease in gross profit margins was mainly due to increased staff-related costs.

Gross profit margin for e-commerce for the fourth quarter of 2017 was 7.4%, compared to 11.5% and 12.5% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter decreases in e-commerce gross profit margin were primarily due to the larger-scale promotions and certain sales discounts in the fourth quarter of 2017, such as Singles Day on November 11, 2017.

Gross profit margin for advertising services for the fourth quarter of 2017 was 71.2%, compared to 68.0% and 66.5% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter increases in gross profit margin were mainly due to NetEase's enhanced monetization efforts and better economies of scale.

Gross loss margin for e-mail and others for the fourth quarter of 2017 was 3.3%, compared to gross profit margin of 13.1% and 46.9% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter decreases in gross margin were primarily due to the decreased revenue contribution from certain online platform businesses, which have relatively higher gross profit margins, as well as the one-off recognition of expense related to certain copyrights in the fourth quarter of 2017.

Operating Expenses

Total operating expenses for the fourth quarter of 2017 were RMB4,317.8 million (US$663.6 million), compared to RMB3,397.9 million and RMB2,596.6 million for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter increases in operating expenses were mainly due to increased selling and marketing expenses and research and development investments, and higher staff-related costs, as well as increased operating expenses related to NetEase's e-commerce businesses. Shipping and handling costs included in selling and marketing expenses for the fourth quarter of 2017 were RMB393.3 million (US$60.4 million), compared to RMB294.8 million and RMB177.2 million for the preceding quarter and the fourth quarter of 2016, respectively.

Income Taxes

The Company recorded a net income tax charge of RMB290.4 million (US$44.6 million) for the fourth quarter of 2017, compared to RMB225.5 million and RMB882.0 million for the preceding quarter and the fourth quarter of 2016, respectively. The effective tax rate for the fourth quarter of 2017 was 18.2%, compared to 8.1% and 19.2% for the preceding quarter and the fourth quarter of 2016, respectively. The changes in the effective tax rate were mainly due to the fact that certain subsidiaries of the Company were recognized as Key Software Enterprises in the third quarter and fourth quarter of 2017, and subject to a preferential tax rate of 10% for 2016. The Company recognized related tax credits in the third quarter and fourth quarter of 2017 accordingly.

Net Income After Tax

Net income attributable to the Company's shareholders for the fourth quarter of 2017 totaled RMB1.3 billion (US$197.6 million), compared to RMB2.5 billion and RMB3.7 billion for the preceding quarter and the fourth quarter of 2016, respectively. Non-GAAP net income attributable to the Company's shareholders for the fourth quarter of 2017 totaled RMB1.9 billion (US$288.8 million), compared to RMB3.0 billion and RMB4.0 billion for the preceding quarter and the fourth quarter of 2016, respectively.

During the fourth quarter of 2017, the Company had a net foreign exchange loss of RMB159.1 million (US$24.5 million), compared to a net foreign exchange loss of RMB109.9 million and a net foreign exchange gain of RMB90.5 million for the preceding quarter and the fourth 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$1.50 and US$1.49, respectively, for the fourth quarter of 2017. The Company reported basic and diluted earnings per ADS of US$2.95 and US$2.93, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$4.31 and US$4.28, respectively, for the fourth quarter of 2016. Non-GAAP basic and diluted earnings per ADS were US$2.20 and US$2.18, respectively, for the fourth quarter of 2017, compared to non-GAAP basic and diluted earnings per ADS of US$3.53 and US$3.50, respectively, for the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$4.63 and US$4.59, respectively, for the fourth quarter of 2016.

Fiscal Year 2017 Financial Results

Net Revenues

Total net revenues for fiscal year 2017 were RMB54.1 billion (US$8.3 billion), compared to RMB38.2 billion for the preceding fiscal year.

Net revenues from online games were RMB36.3 billion (US$5.6 billion) for fiscal year 2017, compared to RMB28.0 billion for the preceding fiscal year. Mobile games accounted for approximately 70.8% of net revenues from online games for fiscal year 2017, compared to 61.9% for the preceding fiscal year.

Net revenues from e-commerce were RMB11.7 billion (US$1.8 billion) for fiscal year 2017, compared to RMB4.5 billion for the preceding fiscal year.

Net revenues from advertising services were RMB2.4 billion (US$370.2 million) for fiscal year 2017, compared to RMB2.2 billion for the preceding fiscal year. The top performing advertising verticals in 2017 were automobile, internet services and real estate sectors.

Net revenues from e-mail and others were RMB3.7 billion (US$575.0 million) for fiscal year 2017, compared to RMB3.5 billion for the preceding fiscal year.

Gross Profit

Gross profit for fiscal year 2017 was RMB25.9 billion (US$4.0 billion), compared to RMB21.7 billion for the preceding fiscal year.

The increase in online game services gross profit in 2017 was primarily attributable to increased revenue contribution from the Company's self-developed mobile games such as Onmyoji and the mobile version of New Ghost.

The increase in e-commerce gross profit in 2017 was primarily due to business development of Kaola.com and Yanxuan.

The increase in advertising services gross profit in 2017 was due to NetEase's enhanced monetization efforts and better economies of scale.

The decrease in e-mail and others gross profit in 2017 was primarily due to the decreased revenue contribution from certain online platform businesses, which have relatively higher margins, as well as the one-off recognition of expense related to certain copyrights in the fourth quarter of 2017.

Operating Expenses

Total operating expenses for fiscal year 2017 were RMB13.8 billion (US$2.1 billion), compared to RMB9.0 billion for the preceding fiscal year. The increase in operating expenses in 2017 was primarily due to increased selling and marketing expenses and research and development investments, and higher staff-related costs, as well as increased operating expenses related to NetEase's e-commerce businesses. Shipping and handling costs included in selling and marketing expenses for fiscal year 2017 were RMB1,182.7 million (US$181.8 million), compared to RMB503.0 million for the preceding fiscal year.

Income Taxes

The Company recorded a net income tax charge of RMB2.2 billion (US$332.3 million) and RMB2.1 billion for fiscal years 2017 and 2016, respectively. The effective tax rate was 16.6% for fiscal year 2017, compared to 15.1% for fiscal year 2016. The changes in the effective tax rate were mainly due to the higher withholding tax recorded for fiscal year 2017.

Net Income After Tax

Net income attributable to the Company's shareholders for fiscal year 2017 totaled RMB10.7 billion (US$1.6 billion), compared to RMB11.6 billion for the preceding fiscal year. Non-GAAP net income attributable to the Company's shareholders for fiscal year 2017 totaled RMB12.7 billion (US$2.0 billion), compared to RMB12.9 billion for fiscal year 2016.

For fiscal year 2017, the Company reported a net foreign exchange loss of RMB448.8 million (US$69.0 million), compared to a net foreign exchange gain of RMB146.5 million for the preceding fiscal year. The 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 these periods.

NetEase reported basic and diluted earnings per ADS of US$12.50 and US$12.41, respectively, for fiscal year 2017, and basic and diluted earnings per ADS of US$13.59 and US$13.48, respectively, for fiscal year 2016. Non-GAAP basic and diluted earnings per ADS were US$14.85 and US$14.73, respectively, for fiscal year 2017, compared to non-GAAP basic and diluted earnings per ADS of US$15.06 and US$14.94, respectively, for fiscal year 2016.

Quarterly Dividend

The board of directors has approved a dividend of US$0.38 per ADS for the fourth quarter of 2017, which is expected to be paid on March 2, 2018 to shareholders of record as of the close of business on February 23, 2018.

NetEase paid dividends of US$1.08 per ADS for the first quarter of 2017 on June 2, 2017, US$0.83 per ADS for the second quarter of 2017 on September 1, 2017 and US$0.72 per ADS for the third quarter of 2017 on December 8, 2017, respectively.

Under the Company's quarterly dividend policy announced on May 13, 2014, quarterly dividends will be set at an amount equivalent to approximately 25% of the Company's anticipated net income after tax in each fiscal quarter. The determination to make dividend distributions and the amount of such distributions in any particular quarter will be made at the discretion of the board of directors and will be based upon the Company's operations and earnings, cash flow, financial condition and other relevant factors.

Other Information

As of December 31, 2017, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB43.2 billion (US$6.6 billion), compared to RMB36.9 billion as of December 31, 2016. Cash flow generated from operating activities was RMB11.9 billion (US$1.8 billion) for fiscal year 2017, compared to RMB15.5 billion for the preceding fiscal year.

Share Repurchase Program

On November 15, 2016, the Company announced that its board of directors approved a share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months. As of November 14, 2017, the last day of such program, the Company had repurchased approximately 1.1 million ADSs for approximately US$306.1 million under this program.

On November 15, 2017, the Company announced that its board of directors has approved a new share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months beginning on November 16, 2017. As of December 31, 2017, no ADS were repurchased under this program.

Under the terms of the current approved program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market. The timing and dollar amount of repurchase transactions will be subject to the Securities and Exchange Commission (SEC) Rule 10b-18 requirements. It is also expected that such repurchases will be effected pursuant to a plan in conformity with SEC Rule 10b5-1.  The extent to which NetEase repurchases its ADSs will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by NetEase's management team. The repurchase program may be suspended or discontinued at any time.

** 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$1.00 = RMB6.5063 on December 29, 2017 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 29, 2017, or at any other certain date. The percentages stated are calculated based on RMB.

Notes to Unaudited Financial Information

The unaudited financial information disclosed in this press release is preliminary. The audit of the financial statements and related notes to be included in the Company's annual report on Form 20-F for the year ended December 31, 2017 is still in progress. In addition, because an audit of the Company's internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed, the Company makes no representation as to the effectiveness of those internal controls as of the end of fiscal year 2017.

Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between the Company's audited financial statements and this preliminary unaudited financial information.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 8:00 p.m. Eastern Time on Wednesday, February 7, 2018 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, February 8, 2018). 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 1-800-281-7973 (international: 1-323-794-2093), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-888-203-1112 (international: 1-719-457-0820), and entering passcode 3213566#. The replay will be available through February 21, 2018.

This call will be 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. (NASDAQ: NTES) is a leading internet technology company in China. Dedicated to providing online services centered around content, community, communication and commerce, NetEase develops and operates some of China's most popular PC-client and mobile games, e-commerce businesses, advertising services and e-mail services. In partnership with Blizzard Entertainment, Mojang AB (a Microsoft subsidiary) and other global game developers, NetEase also operates some of the most popular international online games in China. For more information, please visit: http://ir.netease.com/.

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 or expansion packs and other improvements to its existing games do not become as popular as management anticipates; the ability of NetEase to successfully expand its mobile internet offerings; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that NetEase's affiliates will not be able to continue operating Minecraft, World of Warcraft®, StarCraft® II, Hearthstone®, Diablo® III: Reaper of SoulsHeroes of the Storm®, Overwatch® 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 and the market for NetEase's e-commerce businesses may limit future growth of NetEase's revenues or cause revenues 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 revenues; 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 e-mail, mobile and e-commerce businesses and develop attractive mobile games; 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 outlined 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.

Non-GAAP Financial Measures

NetEase considers and uses non-GAAP financial measures, such as non-GAAP net income attributable to the Company's shareholders and non-GAAP basic and diluted earnings per ADS, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

NetEase defines non-GAAP net income attributable to the Company's shareholders as net income attributable to the Company's shareholders excluding share-based compensation expenses and impairment on long-term investment of available-for-sale securities. Non-GAAP net income attributable to the Company's shareholders enables NetEase's management to assess its operating results without considering the impact of share-based compensation expenses and impairment on long-term investment of available-for-sale securities, which are non-cash charges. NetEase believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company's current operating performance and future prospects in the same manner as management does, if they so choose. NetEase also believes that the use of this non-GAAP financial measure facilitates investors' assessment of its operating performance.

Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools. One of the key limitations of using non-GAAP net income attributable to the Company's shareholders is that it does not reflect all items of expense that affect our operations. Share-based compensation expenses and impairment on long-term investment of available-for-sale securities have been and may continue to be incurred in our business and are not reflected in the presentation of non-GAAP net income attributable to the Company's shareholders. In addition, the non-GAAP financial measures NetEase uses may differ from the non-GAAP measures used by other companies, including peer companies, and therefore their comparability may be limited.

NetEase compensates for these limitations by reconciling non-GAAP net income attributable to the Company's shareholders to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating the Company's performance. See "Reconciliation of GAAP and Non-GAAP Results" at the end of this press release. NetEase encourages you to review its financial information in its entirety and not rely on a single financial measure. 

Contact for Media and Investors:

Margaret Shi
NetEase, Inc.
ir@service.netease.com
Tel: (+86) 571-8985-5201

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

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(RMB and USD in thousands)

 
   

 December 31, 

 

 December 31, 

 

 December 31, 

   

2016

 

2017

 

2017

   

 RMB  

 

 RMB  

 

 USD (Note 1) 

Assets

           
             

Current assets:

           

   Cash and cash equivalents

 

5,439,499

 

2,764,140

 

424,841

   Time deposits

 

19,361,098

 

30,603,369

 

4,703,652

   Restricted cash

 

3,473,273

 

5,926,906

 

910,949

   Accounts receivable, net

 

4,251,297

 

3,619,725

 

556,342

   Inventories,net

 

1,578,130

 

5,474,929

 

841,481

   Prepayments and other current assets

 

3,697,952

 

3,816,028

 

586,514

   Short-term investments

 

11,582,116

 

9,742,663

 

1,497,420

Total current assets

 

49,383,365

 

61,947,760

 

9,521,199

             

Non-current assets:

           

   Property, equipment and software, net 

 

2,419,510

 

3,769,326

 

579,335

   Land use right, net

 

588,887

 

593,279

 

91,185

   Deferred tax assets *

 

560,323

 

823,495

 

126,569

   Time deposits

 

550,000

 

100,000

 

15,370

   Restricted cash

 

2,060,000

 

200

 

31

   Other long-term assets

 

2,469,775

 

3,797,355

 

583,641

Total non-current assets

 

8,648,495

 

9,083,655

 

1,396,131

Total assets 

 

58,031,860

 

71,031,415

 

10,917,330

             

Liabilities,  Redeemable Noncontrolling Interests and
    Shareholders' Equity

           
             

Current liabilities:

           

   Accounts payable 

 

1,396,187

 

2,442,531

 

375,410

   Salary and welfare payables

 

1,491,448

 

2,189,110

 

336,460

   Taxes payable

 

1,722,501

 

1,564,692

 

240,489

   Short-term loans

 

3,815,691

 

6,623,502

 

1,018,014

   Deferred revenue

 

7,531,238

 

6,237,969

 

958,758

   Accrued liabilities and other payables

 

3,219,419

 

4,692,310

 

721,195

Total current liabilities

 

19,176,484

 

23,750,114

 

3,650,326

             

Long-term payable:

           

   Deferred tax liabilities *

 

392,235

 

213,215

 

32,771

   Other long-term payable

 

200

 

18,250

 

2,805

Total liabilities

 

19,568,919

 

23,981,579

 

3,685,902

             

Redeemable noncontrolling interests 

 

-

 

614,696

 

94,477

             

Total NetEase, Inc.'s equity

 

38,191,081

 

45,732,007

 

7,028,881

Noncontrolling interests

 

271,860

 

703,133

 

108,070

Total shareholders' equity

 

38,462,941

 

46,435,140

 

7,136,951

             

Total liabilities, redeemable noncontrolling interests and
    shareholders' equity    

 

58,031,860

 

71,031,415

 

10,917,330

             

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

       
             

*In 2017, the Company adopted the guidance of ASU 2015-17 issued by FASB in November 2015, which requires entities to
present deferred tax assets ("DTA") and deferred tax liabilities ("DTL") as non-current in the balance sheets.  Pursuant to the
guidance, the Company retrospectively reclassified current DTA and current DTL to non-current assets and to non-current
liabilities, respectively, in the consolidated balance sheet as of December 31, 2016.

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(RMB and USD in thousands, except per share data)

 
   

 Quarter Ended 

   

Year Ended

   

December 31,

 

September 30, 

 

December 31,

 

 December 31, 

   

December 31,

 

December 31,

 

 December 31, 

   

2016

 

2017

 

2017

 

2017

   

2016

 

2017

 

2017

   

 RMB 

 

 RMB 

 

 RMB 

 

 USD (Note 1) 

   

 RMB 

 

 RMB 

 

 USD (Note 1) 

                               

Net revenues

 

12,099,020

 

12,477,789

 

14,607,636

 

2,245,152

   

38,178,844

 

54,102,019

 

8,315,328

                               

Cost of revenues

 

(5,635,741)

 

(6,530,214)

 

(8,863,025)

 

(1,362,223)

   

(16,515,032)

 

(28,189,326)

 

(4,332,620)

                               

Gross profit

 

6,463,279

 

5,947,575

 

5,744,611

 

882,929

   

21,663,812

 

25,912,693

 

3,982,708

                               

Selling and marketing expenses 

 

(1,255,331)

 

(1,645,829)

 

(2,397,214)

 

(368,444)

   

(4,481,815)

 

(6,957,596)

 

(1,069,362)

General and administrative expenses

 

(464,149)

 

(599,116)

 

(678,370)

 

(104,264)

   

(1,506,154)

 

(2,429,858)

 

(373,462)

Research and development expenses 

 

(877,119)

 

(1,152,941)

 

(1,242,213)

 

(190,925)

   

(3,046,979)

 

(4,371,428)

 

(671,876)

Total operating expenses

 

(2,596,599)

 

(3,397,886)

 

(4,317,797)

 

(663,633)

   

(9,034,948)

 

(13,758,882)

 

(2,114,700)

                               

Operating profit

 

3,866,680

 

2,549,689

 

1,426,814

 

219,296

   

12,628,864

 

12,153,811

 

1,868,008

Other income:

                             

Investment income, net

 

291,960

 

117,746

 

96,030

 

14,760

   

200,333

 

362,113

 

55,656

Interest income, net

 

125,335

 

164,684

 

190,733

 

29,315

   

541,969

 

667,323

 

102,566

Exchange gains/ (losses), net

 

90,461

 

(109,891)

 

(159,106)

 

(24,454)

   

146,510

 

(448,827)

 

(68,983)

Other, net

 

219,188

 

44,876

 

37,814

 

5,812

   

377,685

 

277,080

 

42,586

                               

Net income before tax

 

4,593,624

 

2,767,104

 

1,592,285

 

244,729

   

13,895,361

 

13,011,500

 

1,999,833

Income tax

 

(882,018)

 

(225,494)

 

(290,372)

 

(44,629)

   

(2,102,498)

 

(2,162,363)

 

(332,349)

                               

Net income after tax

 

3,711,606

 

2,541,610

 

1,301,913

 

200,100

   

11,792,863

 

10,849,137

 

1,667,484

Net income attributable to noncontrolling interests
    and redeemable noncontrolling interests

 

(28,506)

 

(14,161)

 

(16,300)

 

(2,505)

   

(188,343)

 

(141,198)

 

(21,702)

Net income attributable to
   the Company's shareholders

 

3,683,100

 

2,527,449

 

1,285,613

 

197,595

   

11,604,520

 

10,707,939

 

1,645,782

                               
                               

Basic earnings per share

 

1.12

 

0.77

 

0.39

 

0.06

   

3.54

 

3.25

 

0.50

Basic earnings per ADS

 

28.06

 

19.18

 

9.79

 

1.50

   

88.40

 

81.36

 

12.50

Diluted earnings per share

 

1.11

 

0.76

 

0.39

 

0.06

   

3.51

 

3.23

 

0.50

Diluted earnings per ADS

 

27.82

 

19.05

 

9.71

 

1.49

   

87.72

 

80.74

 

12.41

                               

Weighted average number of
   ordinary shares outstanding, basic

 

3,281,411

 

3,294,167

 

3,284,028

 

3,284,028

   

3,281,729

 

3,290,312

 

3,290,312

Weighted average number of
   ADS outstanding, basic

 

131,256

 

131,767

 

131,361

 

131,361

   

131,269

 

131,612

 

131,612

Weighted average number of
   ordinary shares outstanding, diluted

 

3,310,275

 

3,317,373

 

3,310,586

 

3,310,586

   

3,307,109

 

3,315,478

 

3,315,478

Weighted average number of
   ADS outstanding, diluted

 

132,411

 

132,695

 

132,423

 

132,423

   

132,284

 

132,619

 

132,619

                               

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

 

Year Ended

   

 December 31, 

 

 September 30,  

 

 December 31,  

 

 December 31,  

 

 December 31, 

 

 December 31, 

 

 December 31, 

   

2016

 

2017

 

2017

 

2017

 

2016

 

2017

 

2017

   

 RMB  

 

 RMB  

 

 RMB  

 

 USD (Note 1) 

 

 RMB  

 

 RMB  

 

 USD (Note 1) 

Cash flows from operating activities:

                           

     Net income  

 

3,711,606

 

2,541,610

 

1,301,913

 

200,100

 

11,792,863

 

10,849,137

 

1,667,484

     Adjustments to reconcile net income to net
         cash provided by operating activities: 

                           

     Depreciation and amortization 

 

96,653

 

210,791

 

274,298

 

42,159

 

327,515

 

801,804

 

123,235

     Impairment loss for investments 

 

12,247

 

18,337

 

14,000

 

2,152

 

278,906

 

58,537

 

8,997

     Share-based compensation cost 

 

273,975

 

497,460

 

593,301

 

91,188

 

990,131

 

2,004,263

 

308,050

    (Reversal of)/ allowance for provision for doubtful debts 

 

(2,398)

 

17,784

 

28,914

 

4,444

 

9,952

 

60,826

 

9,349

     Losses/ (gains) on disposal of property,
         equipment and software 

 

46

 

(174)

 

5,118

 

787

 

1,276

 

5,072

 

780

     Unrealized exchange (gains)/ losses 

 

(77,989)

 

118,646

 

155,511

 

23,902

 

(166,638)

 

437,868

 

67,299

     Gain on disposal of long-term investments 

 

(234,050)

 

-

 

-

 

-

 

(234,050)

 

(9,595)

 

(1,475)

     Deferred income taxes 

 

(14,874)

 

(180,849)

 

(83,865)

 

(12,890)

 

66,676

 

(438,043)

 

(67,326)

     Net equity share of loss/ (gains) from associated companies 

 

36,050

 

(2,180)

 

(20,849)

 

(3,204)

 

85,813

 

12,232

 

1,880

     Fair value changes of short-term investments 

 

(95,697)

 

(112,996)

 

(81,546)

 

(12,533)

 

(304,605)

 

(389,793)

 

(59,910)

     Changes in operating assets and liabilities: 

                           

         Accounts receivable 

 

(1,586,524)

 

125,160

 

(391,603)

 

(60,188)

 

(1,646,885)

 

565,228

 

86,874

         Prepayments and other current assets 

 

(968,609)

 

(1,141,181)

 

(655,332)

 

(100,723)

 

(1,824,362)

 

(4,013,039)

 

(616,793)

         Accounts payable 

 

517,861

 

191,847

 

403,973

 

62,090

 

604,089

 

1,100,787

 

169,188

         Salary and welfare payables 

 

704,875

 

(177,525)

 

805,435

 

123,793

 

570,466

 

700,479

 

107,662

         Taxes payable 

 

667,002

 

(577,588)

 

594,408

 

91,359

 

986,390

 

(155,904)

 

(23,962)

         Deferred revenue 

 

2,004,605

 

53,034

 

73,352

 

11,274

 

2,879,489

 

(1,291,890)

 

(198,560)

         Accrued liabilities and other payables 

 

333,967

 

73,080

 

864,426

 

132,860

 

1,071,240

 

1,591,269

 

244,574

             Net cash provided by operating activities 

 

5,378,746

 

1,655,256

 

3,881,454

 

596,570

 

15,488,266

 

11,889,238

 

1,827,346

                             

Cash flows from investing activities:

                           

     Purchase of property, equipment and software 

 

(463,794)

 

(512,359)

 

(572,115)

 

(87,932)

 

(1,135,533)

 

(1,842,933)

 

(283,254)

     Proceeds from sale of property, equipment and software 

 

83

 

465

 

1,187

 

182

 

2,064

 

4,425

 

680

     Purchase of other intangible assets 

 

(2,005)

 

-

 

-

 

-

 

(4,434)

 

(25)

 

(4)

     Purchase of land use right 

 

-

 

(6,488)

 

-

 

-

 

(60)

 

(6,488)

 

(997)

     Net change in short-term investments
         with terms of three months or less 

 

(2,661,702)

 

1,943,208

 

(3,119,511)

 

(479,460)

 

(3,704,332)

 

(895,298)

 

(137,605)

     Purchase of short-term investments 

 

(2,000,000)

 

(1,865,000)

 

(1,235,000)

 

(189,816)

 

(12,439,000)

 

(12,491,000)

 

(1,919,832)

     Proceeds from maturities of short-term investments 

 

3,890,560

 

4,851,772

 

2,656,842

 

408,349

 

9,879,319

 

15,615,544

 

2,400,065

     Investment in associated companies 

 

(900)

 

(81,293)

 

(154,476)

 

(23,743)

 

(364,486)

 

(235,769)

 

(36,237)

     Proceeds from disposal of investment in associated company
        and long-term investments 

 

249,569

 

340,435

 

-

 

-

 

249,569

 

350,418

 

53,858

     Transfer (to)/ from restricted cash 

 

(713,162)

 

(22,341)

 

359,997

 

55,331

 

(2,140,421)

 

(394,021)

 

(60,560)

     Placement/rollover of matured time deposits 

 

(6,818,322)

 

(13,084,711)

 

(8,183,371)

 

(1,257,761)

 

(20,367,430)

 

(33,984,148)

 

(5,223,268)

     Proceeds from maturities of time deposits 

 

3,911,939

 

8,035,982

 

7,409,214

 

1,138,775

 

16,377,449

 

22,429,597

 

3,447,366

     Net change in other assets 

 

515

 

(566,205)

 

(797,504)

 

(122,574)

 

(354,519)

 

(1,799,593)

 

(276,594)

             Net cash used in investing activities 

 

(4,607,219)

 

(966,535)

 

(3,634,737)

 

(558,649)

 

(14,001,814)

 

(13,249,291)

 

(2,036,382)

                             

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

               

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(RMB and USD in thousands)

 
   

Quarter Ended

 

Year Ended

   

 December 31, 

 

 September 30,  

 

 December 31,  

 

 December 31,  

 

 December 31, 

 

 December 31, 

 

 December 31, 

   

2016

 

2017

 

2017

 

2017

 

2016

 

2017

 

2017

   

 RMB  

 

 RMB  

 

 RMB  

 

 USD (Note 1) 

 

 RMB  

 

 RMB  

 

 USD (Note 1) 

                             

Cash flows from financing activities:

                           

     Proceeds of short-term bank loans 

 

3,815,678

 

16,590,069

 

18,172,348

 

2,793,039

 

11,354,866

 

61,333,209

 

9,426,742

     Payment of short-term bank loans 

 

(3,005,010)

 

(16,133,060)

 

(17,197,778)

 

(2,643,250)

 

(9,860,110)

 

(58,228,239)

 

(8,949,516)

     Capital contribution from noncontrolling interests and
         redeemable noncontrolling interests shareholders 

 

-

 

60,000

 

40,000

 

6,148

 

4

 

911,500

 

140,095

     Repurchase of shares 

 

-

 

(933,861)

 

(436,630)

 

(67,109)

 

(1,199,102)

 

(2,061,591)

 

(316,862)

     Dividends paid to shareholders 

 

(692,524)

 

(735,611)

 

(624,395)

 

(95,968)

 

(2,546,165)

 

(3,257,607)

 

(500,685)

             Net cash provided by /(used in) financing activities      

 

118,144

 

(1,152,463)

 

(46,455)

 

(7,140)

 

(2,250,507)

 

(1,302,728)

 

(200,226)

                             

             Effect of exchange rate changes on cash      

                           

                 held in foreign currencies 

 

68,025

 

26,764

 

(11,644)

 

(1,790)

 

132,067

 

(12,578)

 

(1,933)

              Net increase/ (decrease) in cash and cash equivalents 

 

957,696

 

(436,978)

 

188,618

 

28,991

 

(631,988)

 

(2,675,359)

 

(411,195)

Cash and cash equivalents, beginning of the period

 

4,481,803

 

3,012,500

 

2,575,522

 

395,850

 

6,071,487

 

5,439,499

 

836,036

Cash and cash equivalents, end of the period

 

5,439,499

 

2,575,522

 

2,764,140

 

424,841

 

5,439,499

 

2,764,140

 

424,841

                             

Supplemental disclosures of cash flow information:

                           

     Cash paid for income tax, net of tax refund 

 

119,585

 

1,212,178

 

(238,447)

 

(36,649)

 

1,097,178

 

2,712,875

 

416,961

Supplemental schedule of non-cash investing 

                           

     and financing activities:

                           

     Fixed asset purchases financed by
         accounts payable and accrued liabilities 

 

260,277

 

259,593

 

293,194

 

45,063

 

260,277

 

293,194

 

45,063

                             

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

             

 

NETEASE, INC.

UNAUDITED SEGMENT INFORMATION

(RMB and USD in thousands, except percentages)

                             
 

Quarter Ended

 

Year Ended

   

December 31,

 

September 30, 

 

 December 31, 

 

 December 31, 

 

December 31,

 

 December 31, 

 

 December 31, 

   

2016

 

2017

 

2017

 

2017

 

2016

 

2017

 

2017

   

RMB

 

RMB

 

RMB

 

USD (Note 1)

 

RMB

 

RMB

 

USD (Note 1)

Net revenues:

                           

Online game services

 

8,959,140

 

8,111,652

 

8,004,352

 

1,230,246

 

27,980,491

 

36,281,642

 

5,576,386

E-commerce

 

1,691,235

 

2,667,450

 

4,653,652

 

715,253

 

4,541,744

 

11,670,416

 

1,793,710

Advertising services

 

664,815

 

631,446

 

736,597

 

113,213

 

2,152,379

 

2,408,823

 

370,230

E-mail and others

 

783,830

 

1,067,241

 

1,213,035

 

186,440

 

3,504,230

 

3,741,138

 

575,002

Total net revenues

 

12,099,020

 

12,477,789

 

14,607,636

 

2,245,152

 

38,178,844

 

54,102,019

 

8,315,328

                             

Cost of revenues:

                           

Online game services

 

(3,516,965)

 

(3,039,004)

 

(3,087,192)

 

(474,493)

 

(9,974,146)

 

(13,473,339)

 

(2,070,814)

E-commerce

 

(1,479,283)

 

(2,361,429)

 

(4,310,338)

 

(662,487)

 

(3,986,871)

 

(10,464,714)

 

(1,608,397)

Advertising services

 

(223,018)

 

(202,208)

 

(212,488)

 

(32,659)

 

(749,652)

 

(797,892)

 

(122,634)

E-mail and others

 

(416,475)

 

(927,573)

 

(1,253,007)

 

(192,584)

 

(1,804,363)

 

(3,453,381)

 

(530,775)

Total cost of revenues

 

(5,635,741)

 

(6,530,214)

 

(8,863,025)

 

(1,362,223)

 

(16,515,032)

 

(28,189,326)

 

(4,332,620)

                             

Gross profit/ (loss):

                           

Online game services

 

5,442,175

 

5,072,648

 

4,917,160

 

755,753

 

18,006,345

 

22,808,303

 

3,505,572

E-commerce

 

211,952

 

306,021

 

343,314

 

52,766

 

554,873

 

1,205,702

 

185,313

Advertising services

 

441,797

 

429,238

 

524,109

 

80,554

 

1,402,727

 

1,610,931

 

247,596

E-mail and others

 

367,355

 

139,668

 

(39,972)

 

(6,144)

 

1,699,867

 

287,757

 

44,227

Total gross profit

 

6,463,279

 

5,947,575

 

5,744,611

 

882,929

 

21,663,812

 

25,912,693

 

3,982,708

                             

Gross profit/ (loss) margin:

                       

Online game services

 

60.7%

 

62.5%

 

61.4%

 

61.4%

 

64.4%

 

62.9%

 

62.9%

E-commerce

 

12.5%

 

11.5%

 

7.4%

 

7.4%

 

12.2%

 

10.3%

 

10.3%

Advertising services

 

66.5%

 

68.0%

 

71.2%

 

71.2%

 

65.2%

 

66.9%

 

66.9%

E-mail and others

 

46.9%

 

13.1%

 

(3.3%)

 

(3.3%)

 

48.5%

 

7.7%

 

7.7%

                             

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 = RMB6.5063 on the last trading day of December 2017 (December 29, 2017) 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

 

Year Ended

   

December 31,

 

September 30, 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

   

2016

 

2017

 

2017

 

2017

 

2016

 

2017

 

2017

   

RMB

 

RMB

 

RMB

 

USD (Note 1)

 

RMB

 

RMB

 

USD (Note 1)

Share-based compensation cost included in:

                           

Cost of revenue

 

114,539

 

202,887

 

248,433

 

38,183

 

444,187

 

820,281

 

126,075

Operating expenses

                           

- Selling and marketing expenses

 

14,724

 

22,949

 

29,925

 

4,599

 

52,689

 

95,382

 

14,660

- General and administrative expenses

 

71,201

 

147,037

 

165,827

 

25,487

 

238,750

 

581,337

 

89,350

- Research and development expenses

 

73,511

 

124,587

 

149,116

 

22,919

 

254,505

 

507,263

 

77,965

                             

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

                   

 

 

NETEASE, INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS

(RMB and USD in thousands, except per share data)

                             
 

Quarter Ended

 

Year Ended

   

December 31,

 

September 30, 

 

 December 31, 

 

 December 31, 

 

December 31,

 

 December 31, 

 

 December 31, 

   

2016

 

2017

 

2017

 

2017

 

2016

 

2017

 

2017

   

RMB

 

RMB

 

RMB

 

USD (Note 1)

 

RMB

 

RMB

 

USD (Note 1)

Net income attributable to the Company's shareholders

 

3,683,100

 

2,527,449

 

1,285,613

 

197,595

 

11,604,520

 

10,707,939

 

1,645,782

Add: Share-based compensation

 

273,975

 

497,460

 

593,301

 

91,188

 

990,131

 

2,004,263

 

308,050

         Impairment on investment 

 

-

 

-

 

-

 

-

 

266,659

 

-

 

-

Non-GAAP net income attributable to
    the Company's shareholders

 

3,957,075

 

3,024,909

 

1,878,914

 

288,783

 

12,861,310

 

12,712,202

 

1,953,832

                             

Non-GAAP basic earnings per share

 

1.21

 

0.92

 

0.57

 

0.09

 

3.92

 

3.86

 

0.59

Non-GAAP basic earnings per ADS

 

30.15

 

22.96

 

14.30

 

2.20

 

97.98

 

96.59

 

14.85

Non-GAAP diluted earnings per share

 

1.20

 

0.91

 

0.57

 

0.09

 

3.89

 

3.83

 

0.59

Non-GAAP diluted earnings per ADS

 

29.88

 

22.80

 

14.19

 

2.18

 

97.22

 

95.86

 

14.73

                             

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

 

Cision View original content:http://www.prnewswire.com/news-releases/netease-reports-fourth-quarter-and-fiscal-year-2017-unaudited-financial-results-300595056.html

SOURCE NetEase, Inc.