News Release

<< Back Announces Results For Third Quarter 2005

Beijing -November 8, 2005
2005/11/08 08:52:34

(Beijing -November 8, 2005) -, Inc. (NASDAQ: NTES), one of China's leading Internet and online game services providers, today announced financial results for its third quarter ended September 30, 2005.


.Total revenues for the quarter increased 11.0% quarter-over-quarter and 82.6% year-over-year to RMB462.6 million (US$57.2 million);

.Revenue from online game services increased 8.4% over the previous quarter and 119.4% year-over-year to RMB372.7 million (US$46.1 million);

.Online advertising revenue grew 37.3% to RMB73.4 million (US$9.1 million) over the previous quarter and 43.8% year-over-year; and

.Fantasy Westward Journey and Westward Journey Online II reported peak concurrent user numbers of approximately 827,000 and 515,000, respectively, for the third quarter of 2005.

Commenting on the third quarter's results, Chief Operating Officer Michael Tong said, "We were pleased with our continued growth of our online games business in the third quarter despite experiencing a slower than expected summer season which resulted in part from more competition in the market. On the advertising front, we are extremely satisfied with our stronger than expected revenue growth. We continue to see positive results from the continuous enhancements we've made by providing stronger channel content on our websites through strategic partnerships and initiatives, which are now attracting more advertising spending. This is clearly demonstrated by the significant increase in the number of page views in the quarter. As we move forward, we will not only maintain a focus on our advertising growth but we will keep our efforts heavily concentrated on our online game business and living up to NetEase’s strong brand name for developing high quality next generation MMORPG games."

Financial Results

The Company reported total revenues of RMB462.6 million (US$57.2 million) for the third quarter, representing an 11.0% increase over RMB416.9 million (US$50.4 million) for the preceding quarter, and an 82.6% increase over RMB253.4 million (US$30.6 million) for the corresponding period a year ago.

Revenues from online game services for the quarter increased 8.4% quarter-over-quarter and 119.4% year-over-year to RMB372.7 million (US$46.1 million), which was driven by the continued increase in popularity in the Company's leading games, Fantasy Westward Journey and Westward Journey Online II. Fantasy Westward Journey continued to be the most popular game in China in terms of user numbers and its peak and average concurrent user numbers reached approximately 827,000 and 345,000, respectively, for the third quarter of 2005. In addition, Westward Journey Online II reported peak and average concurrent users of approximately 515,000 and 198,000, respectively, for the third quarter of 2005.

Revenues from advertising services increased by 37.3% to RMB73.4 million (US$9.1 million) over the preceding quarter's RMB53.4 million (US$6.5 million) and 43.8% over RMB51.0 million (US$6.2 million) for the corresponding period a year ago. The increase was mainly due to increased spending from our existing advertisers as they increased their marketing activities during the summer and new advertisers gained in the quarter. NetEase continues to drive its advertising revenues via a combination of website content enhancement and an aggressive focus on broadening its network of marketing channels and sales efforts.

Revenues from wireless value-added services and others decreased from RMB19.7 million (US$2.4 million) for the preceding quarter to RMB16.5 million (US$2.0 million) for the third quarter. Revenues from wireless value-added services and others in the third quarter of 2004 were RMB32.5 million (US$3.9 million). This decrease was mainly due to continued strong competition in the wireless industry.

Mr. Tong continued, "During the quarter, we were able to maintain the number one and number three position in China in terms of number of players with our two blockbuster games Fantasy Westward Journey and Westward Journey Online II. The market is rapidly changing, and the MMORPG market is becoming increasingly competitive. In order to maintain our strong position in the market, we are focused on solid growth with our existing MMORPG games while investing heavily in our game pipeline which includes Datang, our 2.5D game which is based on the background of the Tang Dynasty, and Tianxia, our 3D game based on Chinese mythology. Currently, both games are in various stages of beta testing. We expect the commercial launch of these games to be in the first half of 2006. We believe that NetEase has strong brand recognition in the online game community in China and is known for not compromising quality for quantity. Our team continues to set the standard for high quality development of leading games in the industry in China."

The Company reported gross profit in the third quarter of RMB370.9 million (US$45.8 million), representing a 13.5% increase over the previous quarter's RMB326.8 million (US$39.5 million) and a 95.4% increase over RMB189.8 million (US$22.9 million) for the corresponding period a year ago.

Gross margins for online games declined slightly to 89.7% in the third quarter from 90.2% in the prior quarter as a result of higher bandwidth costs incurred in the third quarter. Gross margins for advertising services improved to 68.1% in the third quarter from 62.1% in the prior quarter due to increasing economies of scale. Gross margins for wireless value-added services and others decreased to 11.3% in the third quarter from 18.4% in the prior quarter mainly due to the higher costs associated with our free services such as email accounts which are included in this business segment.

Total operating expenses for the quarter were RMB94.7 million (US$11.7 million), representing an 18.3% increase from the previous quarter's RMB80.1million (US$9.7 million) and a 17.0% increase from RMB81.0 million (US$9.8 million) in the corresponding period a year ago. The increase in total operating expenses as compared with the preceding quarter was mainly due to the increased marketing spending for the enhancement of our websites and increased outdoor advertising and channel events.

In July 2005, the Chinese government announced that it is pegging the exchange rate of the Chinese Renminbi against a number of currencies, rather than just the U.S. dollar. This change in policy has resulted in a slight appreciation in the value of the Renminbi against the US dollar. Although the Company generates substantially all of its revenues in Renminbi which has become more valuable in US dollar terms, the Company tranlates its monetary assets and liabilities which are denominated in currencies other than Renminbi into Renminbi as of each accounting period end, in accordance with applicable accounting standards. As a result of this foreign currency translation, the Company reported a RMB6.4 million (US$0.8 million) exchange loss in the third quarter.

The Company reported net profit for the third quarter of RMB258.6 million (US$32.0 million), equivalent to US$0.98 (basic) or US$0.89 (diluted) per American Depositary Share ("ADS"). This represents a 6.5% increase over net profit of RMB242.8 million (US$29.3 million) for the preceding quarter and a 137.2% increase over net profit of RMB109.1 million (US$13.2 million) for the corresponding period in 2004.

As of September 30, 2005, the Company's total cash, time deposits and held-to-maturity investments balance was RMB3.2 billion (US$392.4 million), a 16.5% increase from the previous quarter's RMB2.7 billion (US$329.2 million). The Company generated an operating cash flow of RMB424.9 million (US$52.5 million) for the quarter, a 66.4% increase from the previous quarter's RMB255.3 million (US$30.8 million).

The Company also noted that its effective tax rate increased in the third quarter mainly because of the write back of a tax provision of approximately RMB16.1 million (US$2.0 million) in the second quarter due to the confirmation of a lower tax rate for one of the Company's operating subsidiaries during the quarter, while there was no such similar write back in the third quarter.

Denny Lee, NetEase's Chief Financial Officer, concluded, "Our focus on driving growth through our online game and advertising platforms continues to work extremely well. With respect to our advertising segment, we were able to deliver stronger than expected top line growth demonstrating the strength we command in our target markets. Additionally, we are taking our game portfolio to new levels with the upcoming launch of our 2.5D and 3D games in 2006. We look forward to the commercial launch of these games."

Conference Call

NetEase's management team will host a conference call on November 7, 2005 at 7:00 p.m. Eastern Standard Time, corresponding with November 8, 2005 at 8:00 a.m. Beijing/Hong Kong time, to present an overview of NetEase's financial and operational performance. Interested parties may participate in the conference call by dialing 800-500-0311 (international: 719-457-2698), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 888-203-1112 (international 719-457-0820), and entering access code 5608425. The replay will be available through November 21, 2005 at midnight Eastern Time.

This call is being web cast live and archived; and will be available on NetEase's corporate web site at for 90 days.

** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1 = RMB8.092. 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 September 2005, the NetEase websites had more than 614 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 recent changes in Chinese government regulation of the online game market, or any additional regulatory changes in the future, may limit future growth of NetEase's revenue or cause revenue to decline; the risk that strategic partnerships with third parties 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 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; 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; the risk that security, reliability and confidentiality concerns may impede broad use of the Internet and e-commerce and other services; the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect our 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 applicable law.

Third Quarter 2005 Consolidated Balance Sheets
Third Quarter 2005 Consolidated Statements of Cash Flows
Third Quarter 2005 Consolidated Statements of Operations


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