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NetEase Reports Second Quarter 2018 Unaudited Financial Results

BEIJING, Aug. 8, 2018 /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 second quarter ended June 30, 2018.

Second Quarter 2018 Financial Highlights

  • Net revenues[1] were RMB16.3 billion (US$2.5 billion), an increase of 21.7% compared with the second quarter of 2017.

- Online game services net revenues were RMB10.1 billion (US$1.5 billion), an increase of 6.7% compared with the second quarter of 2017.
- E-commerce net revenues were RMB4.4 billion (US$659.7 million), an increase of 75.2% compared with the second quarter of 2017.
- Advertising services net revenues were RMB634.1 million (US$95.8 million), an increase of 6.5% compared with the second quarter of 2017.
- E-mail and others net revenues were RMB1.2 billion (US$184.9 million), an increase of 42.5% compared with the second quarter of 2017.

  • Gross profit was RMB7.2 billion (US$1.1 billion), an increase of 7.5% compared with the second quarter of 2017.
  • Total operating expenses were RMB4.9 billion (US$742.2 million), an increase of 47.4% compared with the second quarter of 2017.
  • Net income attributable to the Company's shareholders was RMB2.1 billion (US$318.3 million). Non-GAAP net income attributable to the Company's shareholders was RMB2.7 billion (US$411.8 million).[2]
  • Diluted earnings per ADS were US$2.44; non-GAAP diluted earnings per ADS were US$3.15.

 

[1] The Company adopted ASC 606 as of January 1, 2018 on a modified retrospective basis. The adoption did not have a significant impact on the Company's operating results for the second quarter of 2018 and comparable periods. See "Impact of the recently adopted major accounting pronouncements" in this press release.

[2] As used in this press release, non-GAAP net income attributable to the Company's shareholders is defined to exclude share-based compensation expenses. See "Unaudited Reconciliation of GAAP and Non-GAAP Results" at the end of this press release.

Second Quarter 2018 and Recent Operational Highlights

  • Introduced new, highly acclaimed PC-client game Justice (formerly named Open Range) on June 29.
  • Further diversified game portfolio with the launch of several successful non-MMORPG mobile games including Shadowverse, Identity V and QwQ.
  • Strengthened global footprint with internationally acclaimed titles including:

- Knives Out: Ranked No.1 on June's iOS top grossing chart in Japan.
- Identity V: Launched in Japan and became No.1 on the iOS and Google Play download charts in early July.

  • Maintained popularity for PC-client and mobile flagship titles including Fantasy Westward Journey, Westward Journey Online, New Ghost, Onmyoji and Invincible.
  • Expanded popularity of Minecraft in China reaching more than 100 million registered users.
  • Acquired a minority stake in Bungie to support the incubation of new creative gameplay.
  • Furthered pipeline expansion with advances in upcoming titles including Ancient Nocturne and Night Falls: Survival.
  • Progressed growing e-commerce business and improved quarter-over-quarter gross profit margins.

"We are pleased with the solid growth we achieved across all of our business segments, including online games, e-commerce and advertising services, and the strong improvement to our bottom line," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Our PC-client and mobile games continue to serve as dual growth engines. At the end of June, we launched the highly anticipated PC-client game Justice. Featuring exciting new state-of-the-art technology and graphics, Justice has become one of the most acclaimed PC games launched in China in recent years.

"On the mobile game side, our diversification strategy to expand our games portfolio beyond the MMORPG genre is proving effective. During the second quarter, we launched a number of highly successful games in non-MMORPG categories, including Shadowverse, Identity V and QwQ, each of which climbed to the top of the charts in China. With a number of new titles suitable for a global audience, we have quickly gained traction in overseas markets, led by games such as Knives Out and Identity V.

"Our e-commerce business also continues to thrive, and we are seeing improved quarter-over-quarter gross profit margin as we further optimize our product mix and procurement process.

"Innovation and craftsmanship continue to serve as the cornerstone of each of our businesses. For more than two decades we have maintained these principles, propelling our relevancy and competitive edge. We believe these core values, our considerable R&D capabilities, and strong business acumen will continue to drive our future success," concluded Mr. Ding.

Second Quarter 2018 Financial Results

Net Revenues

Net revenues for the second quarter of 2018 were RMB16,283.9 million (US$2,460.9 million), compared to RMB14,173.0 million and RMB13,376.0 million for the preceding quarter and the second quarter of 2017, respectively.

Net revenues from online games were RMB10,060.8 million (US$1,520.4 million) for the second quarter of 2018, compared to RMB8,761.2 million and RMB9,430.2 million for the preceding quarter and the second quarter of 2017, respectively. Mobile games accounted for approximately 74.7% of net revenues from online games for the second quarter of 2018, compared to 71.8% and 72.4% for the preceding quarter and the second quarter of 2017, respectively.

Net revenues from e-commerce were RMB4,365.5 million (US$659.7 million) for the second quarter of 2018, compared to RMB3,732.5 million and RMB2,492.0 million for the preceding quarter and the second quarter of 2017, respectively.

Net revenues from advertising services were RMB634.1 million (US$95.8 million) for the second quarter of 2018, compared to RMB462.0 million and RMB595.6 million for the preceding quarter and the second quarter of 2017, respectively. The top performing advertising verticals in the second quarter of 2018 were automobile, internet services and real estate sectors.

Net revenues from e-mail and others were RMB1,223.5 million (US$184.9 million) for the second quarter of 2018, compared to RMB1,217.3 million and RMB858.3 million for the preceding quarter and the second quarter of 2017, respectively.

Gross Profit/ (Loss)

Gross profit for the second quarter of 2018 was RMB7,245.1 million (US$1,094.9 million), compared to RMB5,953.6 million and RMB6,736.9 million for the preceding quarter and the second quarter of 2017, respectively.  

The year-over-year and quarter-over-quarter increases in online game services gross profit were primarily due to increased revenue contribution from self-developed mobile games such as Chu Liu Xiang, Knives Out and Identity V.

The year-over-year and quarter-over-quarter increases in e-commerce gross profit were primarily due to the rapid development of Kaola.com and Yanxuan.

The year-over-year increase in advertising services gross profit was primarily due to its enhanced monetization efforts. The quarter-over-quarter increase in advertising services gross profit was primarily due to seasonality.

The year-over-year increase in e-mail and others gross loss was primarily due to decreased revenue contribution from certain online platform businesses, which have relatively higher gross profit margins, as well as higher recognized costs related to certain licensed music content. The quarter-over-quarter decrease in e-mail and others gross loss was primarily due to higher recognized costs related to certain licensed music content in the preceding quarter.

Gross Profit/ (Loss) Margin

Gross profit margin for online game services for the second quarter of 2018 was 64.3%, compared to 62.1% and 63.1% for the preceding quarter and the second quarter of 2017, respectively. The year-over-year and quarter-over-quarter increases in gross profit margin were mainly due to increased revenue, while certain costs related to the Company's online games segment were fixed.

Gross profit margin for e-commerce for the second quarter of 2018 was 10.1%, compared to 9.5% and 12.6% for the preceding quarter and the second quarter of 2017, respectively. The year-over-year decrease in e-commerce gross profit margin was primarily due to certain sales discounts in the second quarter of 2018 to support the rapid development of Kaola.com and Yanxuan. The quarter-over-quarter increase in e-commerce gross profit margin was primarily due to improved product mix and procurement process.

Gross profit margin for advertising services for the second quarter of 2018 was 67.0%, compared to 59.0% and 67.6% for the preceding quarter and the second quarter of 2017, respectively. The quarter-over-quarter increase in gross profit margin was mainly due to seasonality.

Gross loss margin for e-mail and others for the second quarter of 2018 was 7.3%, compared to gross loss margin of 9.9% and gross profit margin of 7.7% for the preceding quarter and the second quarter of 2017, respectively. The year-over-year decrease in gross margin was primarily due to decreased revenue contribution from certain online platform businesses, which have relatively higher gross profit margins, as well as higher recognized costs related to certain licensed music content in the second quarter of 2018. The quarter-over-quarter improvement in e-mail and others gross margin was primarily due to higher recognized costs related to certain licensed music content in the preceding quarter.

Operating Expenses

Total operating expenses for the second quarter of 2018 were RMB4,911.5 million (US$742.2 million), compared to RMB4,746.6 million and RMB3,331.5 million for the preceding quarter and the second quarter of 2017, respectively. The year-over-year increase in operating expenses was mainly due to increased marketing expenditures, research and development investments and shipping and handling costs, as well as higher staff-related costs. The quarter-over-quarter increase in operating expenses was mainly due to increased staff-related costs and research and development investments, and partially offset by decreased marketing expenditures related to online games. Shipping and handling costs included in selling and marketing expenses for the second quarter of 2018 were RMB386.6 million (US$58.4 million), compared to RMB325.8 million and RMB281.3 million for the preceding quarter and the second quarter of 2017, respectively.

Income Taxes

The Company recorded a net income tax charge of RMB420.5 million (US$63.6 million) for the second quarter of 2018, compared to RMB282.7 million and RMB703.5 million for the preceding quarter and the second quarter of 2017, respectively. The effective tax rate for the second quarter of 2018 was 15.7%, compared to 26.0% and 19.0% for the preceding quarter and the second quarter of 2017, 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 second quarter of 2018, and therefore subject to a preferential tax rate of 10% for 2017. The Company recognized related tax credits in the second quarter of 2018 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 second quarter of 2018 totaled RMB2.1 billion (US$318.3 million), compared to RMB751.9 million and RMB3.0 billion for the preceding quarter and the second quarter of 2017, respectively. Non-GAAP net income attributable to the Company's shareholders for the second quarter of 2018 totaled RMB2.7 billion (US$411.8 million), compared to RMB1.3 billion and RMB3.5 billion for the preceding quarter and the second quarter of 2017, respectively.

During the second quarter of 2018, the Company had a net foreign exchange gain of RMB232.8 million (US$35.2 million), compared to net foreign exchange losses of RMB375.1 million and RMB131.3 million for the preceding quarter and the second quarter of 2017, 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$2.45 and US$2.44, respectively, for the second quarter of 2018. The Company reported basic and diluted earnings per ADS of US$0.87 and US$0.86, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$3.41 and US$3.39, respectively, for the second quarter of 2017. Non-GAAP basic and diluted earnings per ADS were US$3.17 and US$3.15, respectively, for the second quarter of 2018, compared to non-GAAP basic and diluted earnings per ADS of US$1.54 and US$1.53, respectively, for the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$3.98 and US$3.96, respectively, for the second quarter of 2017.

Quarterly Dividend

The board of directors has approved a dividend of US$0.61 per ADS for the second quarter of 2018, which is expected to be paid on August 31, 2018 to shareholders of record as of the close of business on August 24, 2018.

NetEase paid a dividend of US$0.38 per ADS for the fourth quarter of 2017 on March 2, 2018 and paid a dividend of US$0.23 per ADS for the first quarter of 2018 on June 8, 2018.

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 June 30, 2018, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB44.3 billion (US$6.7 billion), compared to RMB43.2 billion as of December 31, 2017. Cash flow generated from operating activities was RMB2.0 billion (US$295.9 million) for the second quarter of 2018, compared to RMB1.9 billion and RMB2.3 billion for the preceding quarter and the second quarter of 2017, respectively.

Share Repurchase Program

On November 15, 2017, the Company announced that its board of directors had 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. On June 11, 2018, the Company announced that its board of directors approved an amendment to its share repurchase program, authorizing the repurchase of up to an additional US$1.0 billion of the Company's outstanding ADSs. This expands the US$1.0 billion repurchase program that was approved on November 15, 2017 for a period not to exceed 12 months, bringing the total authorized repurchase amount to US$2.0 billion.

As of June 30, 2018, the Company had repurchased approximately 3.4 million ADSs for approximately US$912.0 million under this program.

Under the terms of the current 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$1.00 = RMB6.6171 on June 29, 2018 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 29, 2018, or at any other certain date. The percentages stated are calculated based on RMB.

Change in Segment Reporting

Effective in the fourth quarter of 2017, the Company changed its segment disclosure to separately report the financial results of its e-commerce business in light of the significant growth of the revenue contribution from e-commerce to the Company's total consolidated net revenues in 2017. This segment primarily reflects the results of NetEase's two e-commerce platforms, Kaola.com and Yanxuan, which were established in January 2015 and April 2016, respectively. The Company now reports four reporting segments: online game services, e-commerce, advertising services, and e-mail and others. This change in segment reporting aligns with the manner in which the Company's operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. This change in segment presentation does not affect consolidated balance sheets, consolidated statements of income or consolidated statements of cash flows. The Company retrospectively revised prior period segment information to conform to current period presentation.

Impact of the recently adopted major accounting pronouncements

On January 1, 2018, the Company adopted Topic 606 "Revenue from Contracts with Customers" using the modified-retrospective transition approach and recorded a reduction of its deferred revenue of approximately RMB81.7 million and a net increase to its retained earnings of approximately RMB27.4 million (net of tax) as a result of estimating game point breakage. The adoption of Topic 606 did not have a significant impact on the Company's operating results for the second quarter of 2018 and comparable periods.

On January 1, 2018, the Company adopted ASU No. 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.", and reclassified RMB38.2 million of accumulated other comprehensive income for the Company's available-for-sale equity securities that existed as of December 31, 2017 into retained earnings upon the adoption. In addition, the Company recorded a net investment loss of RMB78.5 million and RMB56.3 million related to the equity investments with readily determinable fair value in the second quarter and the first quarter of 2018, respectively. Given that there were no material observable price changes in orderly transactions for the identical or similar investments of the same issuer, the Company did not record any changes to the carrying value of equity investments without readily determinable fair value in the first half of 2018.

The Company also adopted ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash" starting from the first quarter of 2018. Pursuant to the new guidance, the Company's cash, cash equivalents and restricted cash increased by an aggregate of RMB717.9 million for the second quarter of 2017, compared to the amounts presented under previous guidance.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 9:00 p.m. Eastern Time on Wednesday, August 8, 2018 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, August 9, 2018). 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 1-929-477-0324 (international: 1-800-458-4121), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-719-457-0820 (international: 1-888-203-1112), and entering passcode 8957911#. The replay will be available through August 22, 2018.

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, and partners with Blizzard Entertainment, Mojang AB (a Microsoft subsidiary) and other global game developers to operate some of the most popular international online games in China. NetEase also operates Kaola.com and Yanxuan, two e-commerce platforms that cater to the rising middle-class consumer market in China. In addition, NetEase offers advertising, e-mail and other services. 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:

Margaret Shi
NetEase, Inc.
ir@service.netease.com
Tel: (+86) 571-8985-2955

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

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(RMB and USD in thousands)



 December 31, 


 June 30, 


 June 30, 



2017


2018


2018



 RMB  


 RMB  


 USD (Note 1) 

Assets














Current assets:







   Cash and cash equivalents


2,764,140


3,079,286


465,353

   Time deposits


30,603,369


28,652,007


4,329,995

   Restricted cash


5,926,906


4,283,759


647,377

   Accounts receivable, net


3,619,725


3,863,986


583,939

   Inventories,net


5,474,929


5,676,108


857,794

   Prepayments and other current assets


3,816,028


4,422,491


668,342

   Short-term investments


9,742,663


12,396,615


1,873,421

Total current assets


61,947,760


62,374,252


9,426,221








Non-current assets:







   Property, equipment and software, net 


3,769,326


4,873,181


736,453

   Land use right, net


593,279


586,951


88,702

   Deferred tax assets 


823,495


789,535


119,317

   Time deposits


100,000


150,000


22,669

   Restricted cash


200


-


-

   Other long-term assets


3,797,355


6,626,149


1,001,368

Total non-current assets


9,083,655


13,025,816


1,968,509

Total assets 


71,031,415


75,400,068


11,394,730








Liabilities,  Redeemable Noncontrolling Interests and
    Shareholders' Equity














Current liabilities:







   Accounts payable 


2,442,531


2,308,212


348,825

   Salary and welfare payables


2,189,110


2,084,242


314,978

   Taxes payable


1,564,692


1,128,385


170,526

   Short-term loans


6,623,502


12,725,741


1,923,160

   Deferred revenue


6,237,969


6,355,372


960,447

   Accrued liabilities and other payables


4,692,310


5,018,767


758,454

Total current liabilities


23,750,114


29,620,719


4,476,390








Long-term payable:







   Deferred tax liabilities


213,215


447,148


67,575

   Other long-term payable


18,250


143,986


21,760

Total liabilities


23,981,579


30,211,853


4,565,725








Redeemable noncontrolling interests 


614,696


958,965


144,922








Total NetEase, Inc.'s equity


45,732,007


43,611,502


6,590,727

Noncontrolling interests


703,133


617,748


93,356

Total shareholders' equity


46,435,140


44,229,250


6,684,083








Total liabilities, redeemable noncontrolling interests and
    shareholders' equity    


71,031,415


75,400,068


11,394,730








The accompanying notes are an integral part of this press release.





 

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(RMB and USD in thousands, except per share data)



 Quarter Ended 



June 30,


March 31, 


June 30,


 June 30, 



2017


2018


2018


2018



 RMB 


 RMB 


 RMB 


 USD (Note 1) 










Net revenues


13,376,048


14,172,990


16,283,885


2,460,879










Cost of revenues


(6,639,158)


(8,219,412)


(9,038,773)


(1,365,972)










Gross profit


6,736,890


5,953,578


7,245,112


1,094,907










Selling and marketing expenses 


(1,685,699)


(2,490,868)


(2,273,243)


(343,541)

General and administrative expenses


(594,344)


(796,820)


(720,852)


(108,938)

Research and development expenses 


(1,051,477)


(1,458,947)


(1,917,426)


(289,768)

Total operating expenses


(3,331,520)


(4,746,635)


(4,911,521)


(742,247)










Operating profit


3,405,370


1,206,943


2,333,591


352,660

Other income:









Investment income/ (loss), net


105,053


80,771


(124,120)


(18,757)

Interest income, net


162,078


165,459


141,645


21,406

Exchange (losses)/ gains, net


(131,305)


(375,094)


232,777


35,178

Other, net


156,703


9,416


99,682


15,064










Income before tax


3,697,899


1,087,495


2,683,575


405,551

Income tax


(703,465)


(282,687)


(420,525)


(63,551)










Net income after tax


2,994,434


804,808


2,263,050


342,000

Accretion and deemed dividends in connection with 
    repurchase of redeemable noncontrolling interests


-


(49,710)


(125,698)


(18,996)

Net income attributable to noncontrolling interests
    and redeemable noncontrolling interests


(22,323)


(3,199)


(30,836)


(4,660)

Net income attributable to
   the Company's shareholders


2,972,111


751,899


2,106,516


318,344



















Basic earnings per share


0.90


0.23


0.65


0.10

Basic earnings per ADS


22.55


5.73


16.20


2.45

Diluted earnings per share


0.90


0.23


0.65


0.10

Diluted earnings per ADS


22.41


5.68


16.13


2.44










Weighted average number of
   ordinary shares outstanding, basic


3,294,950


3,281,948


3,250,448


3,250,448

Weighted average number of
   ADS outstanding, basic


131,798


131,278


130,018


130,018

Weighted average number of
   ordinary shares outstanding, diluted


3,315,410


3,308,240


3,264,346


3,264,346

Weighted average number of
   ADS outstanding, diluted


132,616


132,330


130,574


130,574










The accompanying notes are an integral part of this press release.





 

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(RMB and USD in thousands)



Quarter Ended



 June 30, 


 March 31,  


 June 30,  


 June 30,  



2017


2018


2018


2018



 RMB  


 RMB  


 RMB  


 USD (Note 1) 

Cash flows from operating activities:









     Net income  


2,994,434


804,808


2,263,050


342,000

     Adjustments to reconcile net income to net
         cash provided by operating activities: 









     Depreciation and amortization 


170,571


366,436


470,813


71,151

     Fair value changes and impairment losses of  short-term investments,
         associated companies and other long-term investments 


(101,746)


(47,931)


73,982


11,180

     Share-based compensation cost 


500,082


585,655


618,684


93,497

     Allowance for/ (reversal of) provision for doubtful debts 


10,940


55,544


(40,924)


(6,185)

     Losses /(gains) on disposal of property,
         equipment and software 


444


(1,261)


(252)


(38)

     Unrealized exchange losses/ (gains) 


121,586


394,651


(240,378)


(36,327)

     Gains on disposal of subsidiaries 


(9,595)


(37,382)


-


-

     Deferred income taxes 


105,717


26,826


231,502


34,985

     Net equity share of losses from associated companies 


8,187


10,960


47,749


7,216

     Changes in operating assets and liabilities: 









         Accounts receivable 


266,928


(888,205)


623,889


94,284

         Inventories 


(1,332,712)


353,869


(555,048)


(83,881)

         Prepayments and other current assets 


419,056


(838,855)


353,950


53,492

         Accounts payable 


334,678


(22,254)


(295,359)


(44,636)

         Salary and welfare payables 


233,427


(230,401)


129,164


19,520

         Taxes payable 


(952,134)


492,999


(931,744)


(140,809)

         Deferred revenue 


(844,471)


935,171


(736,072)


(111,238)

         Accrued liabilities and other payables 


395,975


(55,653)


(55,079)


(8,322)

             Net cash provided by operating activities 


2,321,367


1,904,977


1,957,927


295,889










Cash flows from investing activities:









     Purchase of property, equipment and software 


(433,021)


(670,133)


(774,913)


(117,108)

     Proceeds from sale of property, equipment and software 


1,921


2,975


1,127


170

     Purchase of other intangible assets and licensed copyrights
         of video content 


(149,574)


(337,592)


(334,576)


(50,562)

     Prepayment for purchase of land use right 


-


-


(556,171)


(84,051)

     Net change in short-term investments with terms of three
          months or less 


(1,558,339)


(1,372,886)


1,954,370


295,351

     Purchase of short-term investments 


(4,926,000)


(1,624,000)


(6,399,000)


(967,040)

     Proceeds from maturities of short-term investments 


4,877,695


1,722,295


3,268,014


493,874

     Acquisitions of long-term investments 


(57,123)


(115,383)


(1,482,713)


(224,073)

     Proceeds from disposal of long-term investments  


9,983


-


-


-

     Placement/rollover of matured time deposits 


(3,859,217)


(5,910,677)


(4,304,035)


(650,441)

     Proceeds from maturities of time deposits 


3,875,136


7,332,776


4,935,749


745,908

     Net change in other assets 


(94,639)


(95,594)


(178,027)


(26,902)

             Net cash used in investing activities 


(2,313,178)


(1,068,219)


(3,870,175)


(584,874)










The accompanying notes are an integral part of this press release.









 

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(RMB and USD in thousands)


Quarter Ended


 June 30, 


 March 31,  


 June 30,  


 June 30,  


2017


2018


2018


2018


 RMB  


 RMB  


 RMB  


 USD (Note 1) 









Cash flows from financing activities:








     Proceeds of short-term bank loans 

14,433,788


22,966,267


46,794,505


7,071,754

     Payment of short-term bank loans 

(13,450,327)


(19,870,507)


(43,987,242)


(6,647,511)

     Capital contribution from/ (repurchase of) noncontrolling
        interests and redeemable noncontrolling interests shareholders 

311,500


(455,000)


433,872


65,568

     Repurchase of shares 

(527,821)


(2,328,028)


(3,341,505)


(504,980)

     Dividends paid to shareholders 

(980,513)


(315,511)


(191,583)


(28,953)

             Net cash used in financing activities      

(213,373)


(2,779)


(291,953)


(44,122)









             Effect of exchange rate changes on cash, cash equivalents 








                  and restricted cash held in foreign currencies 

(23,785)


(35,862)


77,883


11,770

              Net (decrease)/ increase in cash, cash equivalents and
                 restricted cash 

(228,969)


798,117


(2,126,318)


(321,337)

Cash, cash equivalents and restricted cash,
    beginning of the period *

9,506,323


8,691,246


9,489,363


1,434,067

Cash, cash equivalents and restricted cash,  end of the period *

9,277,354


9,489,363


7,363,045


1,112,730









Supplemental disclosures of cash flow information:








     Cash paid for income tax, net of tax refund 

735,718


451,043


535,944


80,994

Supplemental schedule of non-cash investing 








     and financing activities:








     Fixed asset purchases financed by
         accounts payable and accrued liabilities 

259,657


327,030


362,207


54,738

















*In 2018, the Company adopted the guidance of ASU 2016-18 issued by FASB in November 2016, which requires that a statement of cash flows
explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, the Company included restricted cash with cash and cash equivalents when reconciling the beginning-of-
period and end-of-period total amounts shown in the statement of cash flows. Pursuant to the guidance, the Company retropsectively restated the statement of cash
flows in the comparative periods.









The accompanying notes are an integral part of this press release.








 

 

NETEASE, INC.

UNAUDITED SEGMENT INFORMATION

(RMB and USD in thousands, except percentages)











Quarter Ended



June 30,


March 31, 


 June 30, 


 June 30, 



2017


2018


2018


2018



RMB


RMB


RMB


USD (Note 1)

Net revenues:









Online game services


9,430,175


8,761,247


10,060,827


1,520,428

E-commerce


2,491,975


3,732,474


4,365,501


659,730

Advertising services


595,593


462,017


634,071


95,823

E-mail and others


858,305


1,217,252


1,223,486


184,898

Total net revenues


13,376,048


14,172,990


16,283,885


2,460,879










Cost of revenues:









Online game services


(3,475,188)


(3,316,189)


(3,594,833)


(543,264)

E-commerce


(2,178,430)


(3,376,328)


(3,922,430)


(592,772)

Advertising services


(192,955)


(189,543)


(209,320)


(31,633)

E-mail and others


(792,585)


(1,337,352)


(1,312,190)


(198,303)

Total cost of revenues


(6,639,158)


(8,219,412)


(9,038,773)


(1,365,972)










Gross profit/ (loss):









Online game services


5,954,987


5,445,058


6,465,994


977,164

E-commerce


313,545


356,146


443,071


66,958

Advertising services


402,638


272,474


424,751


64,190

E-mail and others


65,720


(120,100)


(88,704)


(13,405)

Total gross profit


6,736,890


5,953,578


7,245,112


1,094,907










Gross profit/ (loss) margin:







Online game services


63.1%


62.1%


64.3%


64.3%

E-commerce


12.6%


9.5%


10.1%


10.1%

Advertising services


67.6%


59.0%


67.0%


67.0%

E-mail and others


7.7%


(9.9%)


(7.3%)


(7.3%)










The accompanying notes are an integral part of this press release.



NETEASE, INC.
NOTES TO UNAUDITED FINANCIAL INFORMATION

Note 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate
             of USD1.00 = RMB6.6171 on the last trading day of June 2018 (June 29, 2018) as set forth in the H.10
             statistical release of the U.S. Federal Reserve Board.

Note 2: Share-based compensation cost reported in the Company's unaudited condensed consolidated statements
             of comprehensive income is set out as follows in RMB and USD (in thousands):



Quarter Ended



June 30,


March 31, 


June 30,


June 30,



2017


2018


2018


2018



RMB


RMB


RMB


USD (Note 1)

Share-based compensation cost included in:









Cost of revenue


198,732


188,563


170,982


25,839

Operating expenses









- Selling and marketing expenses


22,899


28,725


29,288


4,426

- General and administrative expenses


147,515


199,128


197,550


29,854

- Research and development expenses


130,936


169,239


220,864


33,378










The accompanying notes are an integral part of this press release.





 

NETEASE, INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS

(RMB and USD in thousands, except per share data)












Quarter Ended



June 30,


March 31, 


 June 30, 


 June 30, 



2017


2018


2018


2018



RMB


RMB


RMB


USD (Note 1)

Net income attributable to the Company's shareholders


2,972,111


751,899


2,106,516


318,344

Add: Share-based compensation


500,082


585,321


618,367


93,450

Non-GAAP net income attributable to
    the Company's shareholders


3,472,193


1,337,220


2,724,883


411,794










Non-GAAP basic earnings per share


1.05


0.41


0.84


0.13

Non-GAAP basic earnings per ADS


26.34


10.19


20.96


3.17

Non-GAAP diluted earnings per share


1.05


0.40


0.83


0.13

Non-GAAP diluted earnings per ADS


26.18


10.11


20.87


3.15










The accompanying notes are an integral part of this press release.







 

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SOURCE NetEase, Inc.


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