NetEase Reports Third Quarter 2017 Unaudited Financial Results

BEIJING, Nov. 15, 2017 /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 third quarter ended September 30, 2017.

Third Quarter 2017 Financial Highlights

• Net revenues were RMB12.5 billion (US$1.9 billion), an increase of 35.5% compared with the third quarter of 2016.
  • Online game services net revenues were RMB8.1 billion (US$1.2 billion), an increase of 23.5% compared with the third quarter of 2016.
  • Advertising services net revenues were RMB631.4 million (US$94.9 million), an increase of 12.1% compared with the third quarter of 2016.
  • E-mail, e-commerce and others net revenues were RMB3.7 billion (US$561.3 million), an increase of 79.5% compared with the third quarter of 2016.
• Gross profit was RMB5.9 billion (US$893.9 million), an increase of 11.5% compared with the third quarter of 2016.
• Total operating expenses were RMB3.4 billion (US$510.7 million), an increase of 36.6% compared with the third quarter of 2016.
• Net income attributable to the Company's shareholders was RMB2.5 billion (US$379.9 million). Non-GAAP net income attributable to the Company's shareholders was RMB3.0 billion (US$454.6 million). ^[1]
• Diluted earnings per ADS were US$2.86; non-GAAP diluted earnings per ADS were US$3.43.

Third Quarter and Recent 2017 Operational Highlights

• Successfully launched Minecraft in China for PC JAVA, Android and iOS platforms, accumulating nearly 30 million new registered users as of the end of October 2017.
• Continued to expand international presence:
  • Brought Onmyoji to Korea and launched closed beta testing in the U.S. and Canada.
  • Crusaders of Light became one of the top-grossing games in more than 20 different countries since its launch.
• Increased the popularity of several legacy games, achieving record quarterly revenues for PC-client game Fantasy Westward Journey Online and mobile game Invincible.
• Progressed diversification strategy with the upcoming pipeline including MMORPG such as Chu Liu Xiangand Tribes and Empires: Storm of Prophecy, Japanese-themed RPG Forever 7 and card game HAN-GYAKU-SEI Million Arthur, as well as a battle arena game based on Onmyoji IP.

"We continue to amass one of China's preeminent mobile game portfolios while simultaneously advancing our advertising services and e-commerce business lines, growing our total net revenues by 35.5% in the third quarter," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "As expected, Onmyoji's slowdown in China persisted in the third quarter, however, we are regaining traction with the introduction of new content and promotional activities. In addition, the international reception to Onmyoji remains solid, and the early testing for the battle arena game based on Onmyoji IP is on track with our expectations. We also strengthened our portfolio in the third quarter by launching a number of expansion packs and new mobile titles. These new launches, including our Japanese-themed RPG Index and the blockbuster title Minecraft, have been positively received, with early monetization efforts underway.

"There remain ample growth opportunities in China as we further diversify our portfolio by exploring a variety of genres. We will also look to extend our popular titles overseas in markets eager for new content and where mobile growth remains robust. In addition, our advertising services and e-commerce divisions Kaola.com and Yanxuan continue to prosper. As we invest in the growth of each of these business lines, together, they strengthen not only the NetEase brand, but our commitment to our investors and community," Mr. Ding concluded.

Third Quarter 2017 Financial Results

Net Revenues

Net revenues for the third quarter of 2017 were RMB12,477.8 million (US$1,875.4 million), compared to RMB13,376.0 million and RMB9,211.6 million for the preceding quarter and the third quarter of 2016, respectively.

Net revenues from online games were RMB8,111.7 million (US$1,219.2 million) for the third quarter of 2017, compared to RMB9,430.2 million and RMB6,568.0 million for the preceding quarter and the third quarter of 2016, respectively. Mobile games accounted for approximately 68.3% of net revenues from online games in the third quarter of 2017, compared to 72.4% and 57.2% for the preceding quarter and the third quarter of 2016, respectively.

Net revenues from advertising services were RMB631.4 million (US$94.9 million) for the third quarter of 2017, compared to RMB595.6 million and RMB563.3 million for the preceding quarter and the third quarter of 2016, respectively. The top performing advertising verticals in the third quarter of 2017 were automobile, real estate and internet services sectors.

Net revenues from e-mail, e-commerce and others were RMB3,734.7 million (US$561.3 million) for the third quarter of 2017, compared to RMB3,350.3 million and RMB2,080.4 million for the preceding quarter and the third quarter of 2016, respectively.

Gross Profit

Gross profit for the third quarter of 2017 was RMB5,947.6 million (US$893.9 million), compared to RMB6,736.9 million and RMB5,333.6 million for the preceding quarter and the third quarter of 2016, respectively.

The year-over-year increase in online games gross profit was primarily driven by revenue contribution from mobile games such as Onmyoji, the mobile version of New Ghost, Land of Glory, Invincible and Demon Seals mobile, as well as the legacy PC-client game Fantasy Westward Journey Online. The quarter-over-quarter decrease in online games gross profit was primarily due to decreased revenue contribution from mobile games.

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

The year-over-year decrease in e-mail, e-commerce and others gross profit was primarily due to the increased revenue contribution from Kaola.com and Yanxuan, which have relatively lower margins, as a percentage of NetEase's e-mail, e-commerce and others net revenues.

Gross Profit Margin

Gross profit margin for the online games business for the third quarter of 2017 was 62.5%, compared to 63.1% and 65.0% for the preceding quarter and the third quarter of 2016, respectively. The year-over-year decrease in gross profit margin was mainly due to increased revenue contribution from mobile games, which have relatively lower gross profit margins, as a percentage of NetEase's total online games net revenues.

Gross profit margin for the advertising services business for the third quarter of 2017 was 68.0%, compared to 67.6% and 65.3% for the preceding quarter and the third quarter of 2016, respectively. The year-over-year increase in gross profit margin was mainly due to NetEase's enhanced monetization efforts.

Gross profit margin for the e-mail, e-commerce and others businesses for the third quarter of 2017 was 11.9%, compared to 11.3% and 33.5% for the preceding quarter and the third quarter of 2016, respectively. The year-over-year decrease in gross profit margin for the e-mail, e-commerce and others businesses was primarily due to the increased revenue contribution from Kaola.com and Yanxuan, which have relatively lower gross margins, as a percentage of NetEase's e-mail, e-commerce and others net revenues.

Operating Expenses

Total operating expenses for the third quarter of 2017 were RMB3,397.9 million (US$510.7 million), compared to RMB3,331.5 million and RMB2,487.0 million for the preceding quarter and the third quarter of 2016, respectively. The year-over-year increase in operating expenses was mainly due to higher staff-related costs resulting from an increase in headcount and average compensation, increased selling and marketing expenses and operating expenses related to NetEase's e-commerce businesses. The quarter-over-quarter increase in operating expenses was mainly due to higher staff-related costs and R&D expenditures which was partially offset by decreased selling and marketing expenses.

Income Taxes

The Company recorded a net income tax charge of RMB225.5 million (US$33.9 million) for the third quarter of 2017, compared to RMB703.5 million and RMB427.2 million for the preceding quarter and the third quarter of 2016, respectively. The effective tax rate for the third quarter of 2017 was 8.1%, compared to 19.0% and 13.3% for the preceding quarter and the third quarter of 2016, respectively. The year-over-year and quarter-over-quarter 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 of 2017 and 2016, and subject to a preferential tax rate of 10% for 2016 and 2015, respectively. The Company recognized related tax credits in the third quarter of 2017 and 2016 accordingly. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter.

Net Income After Tax

Net income attributable to the Company's shareholders for the third quarter of 2017 totaled RMB2.5 billion (US$379.9 million), compared to RMB3.0 billion and RMB2.7 billion for the preceding quarter and the third quarter of 2016, respectively. Non-GAAP net income attributable to the Company's shareholders for the third quarter of 2017 totaled RMB3.0 billion (US$454.6 million), compared to RMB3.5 billion and RMB3.0 billion for the preceding quarter and the third quarter of 2016, respectively.

During the third quarter of 2017, the Company had a net foreign exchange loss of RMB109.9 million (US$16.5 million), compared to a net foreign exchange loss of RMB131.3 million and a net foreign exchange gain of RMB14.8 million for the preceding quarter and the third 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$2.88 and US$2.86, respectively, for the third quarter of 2017. The Company reported basic and diluted earnings per ADS of US$3.39 and US$3.37, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$3.14 and US$3.12, respectively, for the third quarter of 2016. Non-GAAP basic and diluted earnings per ADS were US$3.45 and US$3.43, respectively, for the third quarter of 2017, compared to non-GAAP basic and diluted earnings per ADS of US$3.96 and US$3.94, respectively, in the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$3.46 and US$3.43, respectively, for the third quarter of 2016.

Quarterly Dividend

The board of directors has approved a dividend of US$0.72 per ADS for the third quarter of 2017, which is expected to be paid on December 8, 2017 to shareholders of record as of the close of business on December 1, 2017.

NetEase paid a dividend of US$1.08 per ADS for the first quarter of 2017 on June 2, 2017 and paid a dividend of US$0.83 per ADS for the second quarter of 2017 on September 1, 2017.

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 September 30, 2017, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB40.7 billion (US$6.1 billion), compared to RMB36.9 billion as of December 31, 2016. Cash flow generated from operating activities was RMB1.7 billion (US$248.8 million) for the third quarter of 2017, compared to RMB2.3 billion and RMB3.7 billion for the preceding quarter and the third quarter of 2016, respectively.

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.

The Company also today 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. NetEase plans to fund repurchases made under this program from available working capital.

Under the terms of the 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$1.00 = RMB6.6533 on September 29, 2017 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 29, 2017, or at any other certain date. The percentages stated are calculated based on RMB.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 8:00 p.m. Eastern Time on Wednesday, November 15, 2017 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, November 16, 2017). 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 1-800-239-9838 (international: 1-323-794-2551), 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 4285607#. The replay will be available through November 29, 2017.

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, advertising services, e-mail services and e-commerce platforms. 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 Souls^™, Heroes 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. 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, 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 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:
Juliet Yang
NetEase, Inc.
ir@service.netease.com
Tel: (+86) 571-8985-3378

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

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SOURCE NetEase, Inc.