News Release

<< Back Announces 2004 First Quarter Results

Beijing-April 30, 2004
2004/04/30 09:09:48

-Total net revenue for the quarter increased 66.8% year-over-year and 15.5% quarter-over-quarter to RMB186.8 million (US$22.6 million)

-Net profit for the quarter increased 50.8% year-over-year and 10.5% quarter-over-quarter to RMB103.9 million (US$12.6 million), equivalent to US$0.40 per American Depositary Share (basic) or US$0.38 per American Depositary Share (diluted)

-Cash flow from operating activities for the quarter amounted to RMB145.8 million (US$17.6 million), Inc. (Nasdaq: NTES), one of China's leading Internet, online game and wireless value-added services companies, today announced financial results for its first quarter ended March 31, 2004.

Denny Lee, NetEase's Chief Financial Officer, said, "We are very pleased that NetEase has posted another quarter of record results, driven by strong performance from our online games and advertising businesses."

Financial Results

The Company reported total net revenues of RMB186.8 million (US$22.6 million) for the quarter, representing a 66.8% increase over total net revenues of RMB112.0 million (US$13.5 million) for the corresponding period a year ago and a 15.5% increase over total net revenues of RMB161.8 million for the preceding quarter.

Revenues from online game services for the quarter grew by 41.4% quarter-over-quarter to a record RMB100.0 million (US$12.1 million) reflecting the successful launch of the Company's new online game title, Fantasy Westward Journey Online, and the continued growth in revenue contribution from Westward Journey Online Version 2.0.

Revenues from wireless value-added and other services for the quarter decreased 12.3% quarter-over-quarter to RMB56.7 million (US$6.8 million) as a result of increased competition in the SMS services market during the period. Although revenues from 2.5G applications remain modest, growth in this area is better than expected.

Revenues from advertising services for the quarter increased 13.9% quarter-over-quarter to RMB30.1 million (US$3.6 million). Growth in this segment was strong even though the first quarter is traditionally a slow one for Internet advertising.

The Company reported gross profit in the first quarter of RMB158.4 million (US$19.1 million), representing a 72.5% increase over RMB91.8 million for the corresponding period a year ago and a 16.3% increase over RMB136.2 million for the preceding quarter. Revenue growth also favorably impacted gross margins, which increased to 84.8% in the first quarter from 84.2% in the preceding quarter.

Total operating expenses for the quarter were RMB50.6 million (US$6.1 million), representing a 78.9% increase over RMB28.3 million for the corresponding period a year ago, and a 33.3% increase over RMB37.9 million for the preceding quarter. The increase was mainly due to an increase in marketing expenses in connection with the launch of the Company's new online game and revamping the Company's Web site homepage.

The Company reported a net profit of RMB103.9 million (US$12.6 million), equivalent to US$0.40 (basic) or US$0.38 (diluted) per American Depositary Share ("ADS"), compared to a net profit of RMB68.9 million, equivalent to US$0.26 diluted net earnings per ADS, for the corresponding period a year ago and a net profit of RMB94.1 million, equivalent to US$0.35 diluted net earnings per ADS for the preceding quarter.

As of March 31, 2004, the Company's total cash and held-to-maturity investments balance was RMB1.8 billion (US$223.1 million). The Company generated an operating cash flow of RMB145.8 million (US$17.6 million) for the quarter.

Other Company News

Earlier this month, NetEase announced that the Company's acting Chief Executive Officer, Ted Sun, is taking a temporary medical leave of absence and that Michael Tong, Executive Director, and Denny Lee, Chief Financial Officer, have assumed Mr. Sun's day-to-day responsibilities during his absence. The Company's board of directors, management and staff all wish him a speedy return to health and look forward to his return.

Commenting on the first quarter's results, Executive Director Michael Tong, said, "The response to our latest online game, Fantasy Westward Journey Online, has been very encouraging and helped drive the impressive performance of our online games business this quarter. NetEase has a strong track record of developing and launching in-house developed games for the China market, and we are confident that this will continue in the future."

Mr. Tong added, "NetEase's Internet advertising business also performed well this quarter, as our efforts to increase value for current and future advertisers are paying off. For example, a revamp of several areas of the portal, further investment in content development and a series of marketing activities continue to reinforce NetEase's position as a leading Chinese portal. We are optimistic about the growth prospects for this business segment this year as we continue to benefit from the strong market demand for online promotional services in China."

"While our wireless value-added and other services revenues were affected this quarter by a fiercely competitive marketplace in the SMS services area, we plan to launch and promote

higher-end applications and services that can leverage the competitive advantages of NetEase's existing large community and email user base."

Denny Lee, NetEase's Chief Financial Officer added, "This was another good quarter for NetEase led by strong revenue growth from online games and advertising. We continue to benefit from a strong business model based on diversified revenue streams. We will continue to invest in new people, products and services to ensure that we build on our past successes and continue to create value for our shareholders."

** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1 = RMB8.2770. The percentages stated in this press release are calculated based on RMB.**

About 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. Our online communities and personalized premium services have established a large and stable user base for the NetEase Web sites which are operated by our affiliate. As of March 31, 2004 we had approximately 194 million accumulated registered accounts, and our average daily pageviews for the month ended March 31, 2004 exceeded 341 million.

Community products and services which the NetEase Web sites offer include instant messaging, personals, 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 Web sites provide 21 channels of content. NetEase sources 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.

NetEase offers Internet advertising on its Web sites as well as paid listings on its Search Engine, Web Directory and Classified Ads services, and 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 sent over short-messaging services, multi-media messaging services and wireless application protocol technologies, and online game services through three massively multi-player online role-playing game titles, Westward Journey Online Version 2.0, Fantasy Westward Journey and PristonTale 2.0.

* * *
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; the risk that NetEase will be unable to compete effectively in the wireless value-added services market; the risk that the current popularity of SMS in China will not continue for whatever reason, including SMS being superseded by other technologies for which NetEase is unable to offer attractive products and services; the risk that NetEase may not be able to continuously develop new and creative online services; the risk that the Internet advertising market in China will not continue to grow and will remain subject to intense competition; the risk that NetEase will not be able to continue to successfully monetize the user base of the NetEase Web sites and that its e-commerce and other fee-based services revenues will not continue to grow; the risk that NetEase will not be able to control its expenses in future periods; the impact of the outbreak of severe acute respiratory syndrome, or SARS, in China and risks related to any possible recurrence of SARS or another public health problem in China; the risk that the trading price of NetEase's American Depositary Shares may decrease for a variety of reasons, some of which may be beyond the control of management; the risk that current or future appointees to management are not effective in their respective positions; the difficulty in locating and recruiting suitable candidates for middle and senior management positions; the risk that NetEase may not be able to satisfy its obligations with respect to its Zero Coupon Convertible Subordinated Notes which could lead to a default on the Notes and an adverse affect on its business and financial condition; the risk that NetEase may not use the proceeds from the offering of those Notes and its other cash in a productive manner; NetEase's ability to develop and implement additional operational and financial systems to manage NetEase's operations; competition in NetEase's existing and potential markets; governmental uncertainties, general competition and price pressures in the marketplace; uncertainty as to future profitability; the risk that security, reliability and confidentiality concerns may impede broad use of the Internet and e-commerce and other services; and other risks outlined in NetEase's filings with the Securities and Exchange Commission, including its registration statements on Form F-1 and Form F-3, as amended. NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.
First Quarter 2004 Consolidated Balance Sheets
First Quarter 2004 Consolidated Statements of Operations
First Quarter 2004 Consolidated Statements of Cash Flows


Grace Zhao, Inc.