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News Release

<< Back Announces 2005 First Quarter Results

Beijing -April 27, 2005
2005/04/27 08:05:26

. Total revenues for the quarter increased 17.9% quarter-over-quarter and 57.6% year-over-year to RMB327.7 million (US$39.6 million)

. Revenue from online game services grew 25.9% over the previous quarter and 135.3% year-over-year on the continued strength of in-house developed games, Fantasy Westward Journey and Westward Journey Online II

. Fantasy Westward Journey becomes one of the most popular online games in China with peak concurrent user numbers of 588,000 in March 2005

. Net profit after tax for the quarter increased 18.2% quarter-over-quarter and 48.1% year-over-year to RMB153.9 million (US$18.6 million)

(Beijing -April 27, 2005), Inc. (NASDAQ: NTES), one of China's leading Internet, online game and wireless value-added services providers, today announced financial results for its first quarter ended March 31, 2005.

Financial Results

The Company reported total revenues of RMB327.7 million (US$39.6 million) for the first quarter, representing a 17.9% increase over RMB277.9 million (US$33.6 million) for the preceding quarter, and a 57.6% increase over RMB207.9 million (US$25.1 million) for the corresponding period a year ago.

Revenues from online game services for the quarter showed continued strong growth, increasing by 25.9% quarter-over-quarter and 135.3% year-over-year to RMB262.1 million (US$31.7 million) driven by the success of Fantasy Westward Journey, which became one of China's most popular massively multi-player online role-playing games (MMORPG), with peak and average concurrent user numbers reaching 588,000 and 244,000, respectively, for the month of March 2005. Strong demand for the game can be attributed to a number of factors, including content enhancements through expansion packs released during the first quarter, improved stability of the game technology leading to smoother game play through better technical service quality and an increase in the overall number of users during the Chinese New Year holiday, which is traditionally a peak season for online game playing. Westward Journey Online II, another in-house developed game remained one of the top-five MMORPG games in China, and reported solid growth during the quarter, achieving record peak and average concurrent users of 389,000 and 175,000, respectively, for the month of March 2005.

Revenues from advertising services for the first quarter were RMB45.3 million (US$5.5 million), representing a 1.3% increase from the preceding quarter's RMB44.7 million (US$5.4 million). While the sequential increase in revenue was small due to the traditional first quarter seasonal slowdown, revenues in this area showed a strong year-over-year increase of 31.3%.

Total revenues from wireless value-added and other fee-based premium services for the first quarter fell by 18.7% quarter-over-quarter to RMB20.3 million (US$2.4 million), largely as a result of a decrease in SMS and MMS revenue. SMS and MMS revenues continued to decline as traditional SMS services are becoming less popular in China and competition in this sector remains intense. While the Company did experience strong demand for its WAP services during the quarter, this growth was not sufficient to offset the decrease in SMS and MMS revenues.

The Company reported gross profit in the first quarter of RMB253.2 million (US$30.6 million), representing a 22.1% increase over the previous quarter's RMB207.4 million (US$25.1 million) and a 59.9% increase over RMB158.4 million (US$19.1 million) for the corresponding period a year ago.

Gross margins for online games further increased from 88.3% to 89.0% in the first quarter due to increasing economies of scale. Gross margins for the Company's advertising services decreased slightly due to increased bandwidth costs and server custody fees in the first quarter. Also, gross margins for wireless value-added and other fee-based premium services improved slightly mainly due to a one-time expense resulting from prepaid revenue share for SMS services incurred in the fourth quarter of 2004. There was no such one-time expense in the first quarter of 2005.

Total operating expenses for the quarter were RMB90.5 million (US$10.9 million), representing a 17.4% increase from the previous quarter's RMB77.1 million (US$9.3 million) and a 79.1% increase from RMB50.6 million (US$6.1 million) in the corresponding period a year ago. As discussed in the preceding quarter's earnings release, in the first quarter the Company incurred a research and development expense of approximately RMB20.7 million (US$2.5 million) resulting from the purchase of a 3D game technology aimed at boosting in-house development capabilities for online games.

The Company also noted that its effective tax rate increased in the first quarter because one of its subsidiaries, which was previously exempted from paying PRC income tax, became subject to a 18% tax rate (15% Enterprise Income Tax plus a local income tax of 3%) during the quarter. The Company is in the process of applying for various preferential tax treatments for its operating subsidiaries in the PRC, as well as conducting certain tax restructuring arrangements with a view to reducing the effective tax rate of the group in China. However, there is no guarantee that such preferential tax treatments can be obtained or that such restructurings will be successful.

The Company reported net profit for the first quarter of RMB153.9 million (US$18.6 million), equivalent to US$0.58 (basic) or US$0.53 (diluted) per American Depositary Share ("ADS"). This represents an 18.2% increase over net profit of RMB130.2 million (US$15.7 million) for the preceding quarter and a 48.1% increase over net profit of RMB103.9 million (US$12.6 million) for the corresponding period in 2004.

As of March 31, 2005, the Company's total cash and held-to-maturity investments balance was RMB2.5 billion (US$300.3 million), an 8.6% increase from the previous quarter's RMB2.3 billion (US$276.6 million). The Company generated an operating cash flow of RMB204.2 million (US$24.6 million) for the quarter.

Commenting on the first quarter's results, acting Chief Executive Officer Ted Sun said, “The overwhelming success of Fantasy Westward Journey and Westward Journey Online II is a testament to the ongoing strength of our in-house development capabilities and extensive network for distributing prepaid point cards with which users can pay for our games. NetEase is now clearly one of the leaders in both online game operation and development in China. We've also been focusing on providing stronger channel content on our websites through initiatives such as strategic partnerships with vertical media companies, which are attracting more advertising spending. Additionally, we announced earlier this month that Li Ning, a well known Chinese consumer sports brand, will become the title sponsor of our sports channel. We hope to announce more sponsorship deals such as this in the future."

Chief Operating Officer Michael Tong added, "We are still witnessing robust growth in China's 2D MMORPG market as shown in the strong performance of our two in-house developed 2D games. Beta testing for our latest licensed 3D game, Fly for Fun, is ongoing. The first stage of testing was designed to address technical issues and improve server stability and has been largely completed. We expect that Fly for Fun will be ready for the commercial launch in the second half of this year. We are also finalizing development work on our two next generation in-house developed games -a 3D game based on Chinese mythology and a 2.5D game set during the Tang dynasty. We anticipate that both games will be ready for beta testing in the second half of 2005. In addition, we believe that our newly acquired game technology will enable us to launch more sophisticated 3D games in the future. On the casual online games front, we are also looking forward to the beta release of our casual games platform in the second quarter".

Denny Lee, NetEase's Chief Financial Officer, added, "Revenue growth remained strong in the first quarter and our high margin online games business enabled us to report another record quarter of net profit. NetEase is one of the few Chinese Internet companies consistently posting revenue and profit growth quarter after quarter, while maintaining a strong balance sheet and healthy margins."

** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1 = RMB8.2765. 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 websites which are operated by our affiliate. As of March 2005, the NetEase websites had more than 439 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", "Fantasy Westward Journey" and "Fly for Fun".

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 NetEase websites 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 more than 20 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.

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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 do not become as popular as management anticipates; the risk that strategic partnerships with third party content providers will not result in increased advertising or other revenue from the NetEase websites or that NetEase will not be successful in entering into and maintaining such partnerships; the risk that NetEase will be unable to compete effectively in the wireless value-added services market in China and that its share of that market will continue to decline despite strategic initiatives designed to stabilize and enhance revenue in this area; the risk of changes in Chinese government regulations and/or the policies of the mobile operators in China that limit future growth of NetEase's wireless value-added services revenue or causes such revenue to decline; 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 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; 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), 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 2005 Consolidated Balance Sheets
First Quarter 2005 Consolidated Statements of Cash Flows
First Quarter 2005 Consolidated Statements of Operations


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