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NetEase.com Reports Second Quarter 2007 Unaudited Financial Results

Beijing -August 14, 2007
2007/08/14 09:05:30

(Beijing - August 14, 2007) - NetEase.com, Inc. (NASDAQ: NTES), one of China's leading Internet and online game services providers, today announced its unaudited financial results for the quarter ended June 30, 2007.

William Ding, Chief Executive Officer and Director of 
NetEase stated, "Despite relatively flat game revenues quarter-over-quarter, we are aligning the right balance of resources with our long-standing MMORPG expertise and market leadership to build and diversify our game portfolio for near-term growth. Open beta testing for Westward Journey Online III, the upgraded version of Westward Journey Online II, is scheduled to begin in August 2007, and we plan to release an expansion pack for Fantasy Westward Journey during the fourth quarter of 2007. We are also making positive progress with our programming and design improvements for Tianxia II." 

Mr. Ding continued, "With respect to our portal business, our expanded content on our news, sports and entertainment channels has enabled us to maintain our momentum in traffic growth. We remain confident about our future opportunity through our focused channel content and email service strategies."


Second Quarter 2007 Financial Results

Total revenues for the second quarter of 2007 were RMB558.0 million (US$73.3 million), compared to RMB554.6 million (US$72.9 million) and RMB575.3 million (US$75.6 million) for the preceding quarter and the second quarter of 2006, respectively. 

Revenues from online games were RMB475.1 million (US$62.4 million) for the second quarter of 2007, compared to RMB481.9 million (US$63.3 million) and RMB486.0 million (US$63.8 million) for preceding quarter and the second quarter of 2006, respectively. 

Revenues from advertising services were RMB65.3 million (US$8.6 million) for the second quarter of 2007, compared to RMB56.2million (US$7.4 million) and RMB68.8 million (US$9.0 million) for the preceding quarter and the second quarter of 2006, respectively. 

Revenues from wireless value-added services and others were RMB17.5 million (US$2.3 million) for the second quarter of 2007, compared to RMB16.6 million (US$2.2 million) and RMB20.5 million (US$2.7 million) for the preceding quarter and the second quarter of 2006, respectively.

Gross profit for the second quarter of 2007 was RMB437.8 million (US$57.5 million), compared to RMB430.1 million (US$56.5 million) and RMB457.4 million (US$60.1 million) for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase in gross profit was primarily due to higher advertising services revenue in the second quarter of 2007. The year-over-year decrease in gross profit was mainly due to a decrease in all revenue segments as a result of more intense competition in the PRC internet industry.

Gross margin for the online game business for the second quarter of 2007 was 90.2%, compared to 89.6% and 90.7% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase primarily resulted from operational cost savings which more than offset a decrease in online game revenues in the second quarter of 2007. The year-over-year decrease was primarily driven by a decrease in online game services revenue from Westward Journey Online II and higher staff-related costs as a result of an increase in headcount.

Gross margin for the advertising business for the second quarter of 2007 was 47.2%, compared to 35.7% and 49.8% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase in gross margin was primarily driven by the seasonal increase in advertising spending coupled with savings in content costs in the second quarter of 2007. The year-over-year decline in gross margin was primarily due to decreased advertising services revenue as a result of increased competition.

Gross loss margin for the wireless value-added services and others business for the second quarter of 2007 was 28.1%, compared to gross loss margin of 36.1% and 2.3% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter improved gross loss margin was primarily due to increased revenues from online fee-based premium services supplied to registered users of the NetEasewebsites, including premium matchmaking and dating services and product sales generated from registered users. The year-over-year decline in gross margin was primarily driven by a decrease in revenue from wireless services. 

Total operating expenses for the second quarter of 2007 were RMB142.8 million (US$18.8 million), compared to RMB117.7 million (US$15.5 million) and RMB134.3 million (US$17.6 million) for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase was primarily due to an additional provision for doubtful debts of RMB2.0 million (US$0.3 million) made during the second quarter of 2007, compared to a reversal of provision for doubtful debts of approximately RMB8.2 million (US$1.1 million) as a result of the collection of outstanding accounts receivables with respect to the advertising business during the first quarter of 2007. The increase was also due to increased selling and marketing costs of RMB6.5 million (US$0.9 million) in relation to the marketing of Tianxia II, Westward Journey III and seasonal promotional activities during the second quarter of 2007 and an increase in research and development costs of RMB4.8 million (US$0.6 million) associated with the increased staffing for enhancing existing products and developing new products. The year-over-year increase was mainly due to an increase in selling and marketing costs, higher staff-related costs as a result of an increase in headcount and increased depreciation charges. 

Net profit for the second quarter of 2007 totaled RMB312.6 million (US$41.1 million), compared to RMB301.5 million (US$39.6 million) and RMB314.1 million (US$41.3 million) for the preceding quarter and the second quarter of 2006, respectively. In June 2007, the Company received a reinvestment incentive tax refund of RMB24.4 million (US$3.2 million), which significantly reduced the Company’s income tax expense for the second quarter of 2007. NetEase reported basic and diluted earnings per American depositary shares (ADS) of US$0.33 and US$0.31 for the second quarter of 2007, respectively. The Company reported basic and diluted earnings per ADS of US$0.31 and US$0.29 and US$0.32 and US$0.29 for the preceding quarter and the second quarter of 2006, respectively.

Other Information

As of June 30, 2007, the Company's total cash and time deposit balance was RMB3.0 billion (US$391.5 million), compared to RMB3.9 billion (US$517.3 million) and RMB3.6 billion (US$474.4 million) as of December 31, 2006 and June 30, 2006, respectively. In addition, there was a restricted cash balance of RMB761.6 million (US$100.1 million) as of June 30, 2007 primarily related to the Company's committed revolving loan facility. The loan facility can be used by the Company at its discretion to fund any redemption requests made by the holders of its zero coupon convertible subordinated notes in accordance with the terms of those notes. Cash flow generated from operating activities was approximately RMB331.0 million (US$43.5 million) for the second quarter of 2007, compared to RMB283.0 million (US$37.2 million) and RMB296.5 million (US$39.0 million) for the preceding quarter and the second quarter of 2006, respectively. 

On March 13, 2007, the Company's Board authorized a share repurchase program of up to US$100 million of the Company's outstanding ADSs for a period not to exceed three months. When the share repurchase program ended on June 12, 2007, the Company had spent in aggregate a total purchase consideration of approximately US$95.7 million (including transaction costs). With respect to the separate share repurchase program of up to US$120 million authorized by the Company’s Board on July 2, 2007, at July 31, 2007 the Company had spent in aggregate a total purchase consideration of approximately US$5.6 million (including transaction costs). The share repurchase program will end on July 1, 2008.


** 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$1.00 = RMB7.6120 on June 29, 2007 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 29, 2007, or at any other certain date. The percentages stated are calculated based on RMB.


Conference Call
NetEase's management team will host a conference call at 9:00 pm Eastern Time on Monday, August 13, 2007, (Beijing/Hong Kong Time: 9:00 am, Tuesday, August 14, 2007). Chief Executive Officer William Ding, Acting Chief Financial Officer Onward Choi, and Co-Chief Operating Officer Michael Tong will be on the call to discuss the quarterly results and answer questions. 

Interested parties may participate in the conference call by dialing 800-238-9007 (international: 719-457-2622), 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 passcode 4257393. The replay will be available through August 26, 2007 Eastern Time.

This call is being webcast live and archived, and will be available for 12 months on NetEase's corporate web site at http://corp.netease.com, Investor Info: Earnings Call.

About NetEase.com,Inc. 

NetEase.com, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. NetEase's online communities and personalized premium services have established a large and stable user base for the NetEase websites which are operated by its affiliates. 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 Fantasy Westward Journey, Westward Journey Online II and Datang. 

NetEase also offers online advertising on its websites which enables advertisers to reach its 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 various 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.




Second Quarter Financial Statements






Contact:

Grace Zhao
NetEase.com, Inc.
IR@service.netease.com
8610-8518-0163x8208