NetEase.com Reports Fourth Quarter and Fiscal Year 2007 Unaudited Financial Results

(Beijing -February 21, 2008) - 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 and fiscal year ended December 31, 2007.

William Ding, Chief Executive Officer and Director of NetEase stated, "As fiscal 2007 drew to a close, peak concurrent users for Fantasy Westward Journey hit an all-time high allowing us to conclude the year on a decidedly positive note. We believe that the ongoing diversification in our product offerings, including an intensified focus on item-based games and exploration of strategic licensing opportunities, will allow us to attract a larger array of game players and further solidify our leading position in the Chinese MMORPG market in 2008 and beyond." 

Mr. Ding continued, "We are pleased with our improved content and successful integration of our email and blog services, allowing us to retain and grow traffic on the NetEase websites, while providing a solid platform to enhance our advertising revenues. As the world turns its attention to Beijing during the 2008 Olympic Games, we remain focused on capturing domestic market share and building capacity to capitalize on our enhanced marketing initiatives related to our advertising service business."

Fourth Quarter 2007 Financial Results

Total revenues for the fourth quarter of 2007 were RMB622.1 million (US$85.3 million), compared to RMB571.1 million (US$78.3 million) and RMB540.3 million (US$74.1 million) for the preceding quarter and the fourth quarter of 2006, respectively. 

Revenues from online games were RMB507.0 million (US$69.5 million) for the fourth quarter of 2007, compared to RMB468.7 million (US$64.2 million) and RMB451.6 million (US$61.9 million) for the preceding quarter and the fourth quarter of 2006, respectively. 

Revenues from advertising services were RMB98.1 million (US$13.4 million) for the fourth quarter of 2007, compared to RMB85.5 million (US$11.7 million) and RMB72.1 million (US$9.9 million) for the preceding quarter and the fourth quarter of 2006, respectively. 

Revenues from wireless value-added services and others were RMB17.0 million (US$2.3 million) for the fourth quarter of 2007, compared to RMB16.9 million (US$2.3 million) and RMB16.6 million (US$2.3 million) for the preceding quarter and the fourth quarter of 2006, respectively.

Gross profit for the fourth quarter of 2007 was RMB488.0 million (US$66.9 million), compared to RMB441.9 million (US$60.6 million) and RMB456.7 million (US$62.6 million) for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter increase in gross profit was primarily driven by higher game and advertising revenues reported for the fourth quarter of 2007. The increase in online games revenues resulted in part from the full-quarter contribution of Westward Journey Online III which was commercially launched in mid-September. Higher revenues were also reported for Fantasy Westward Journey and Westward Journey Online II as a result of the October National Holiday week and the December Christmas season, which are usually peak usage periods for online game players in China. The year-over-year increase in gross profit was primarily attributable to the continued growth in revenues from Fantasy Westward Journey during the fourth quarter of 2007, which experienced a new record high number of peak concurrent users of approximately 1.5 million during that quarter. Higher advertising revenues were reported for the fourth quarter of 2007 in comparison to the preceding quarter and the same period of 2006 primarily due to the Company’s continuing improvements to its online content and successful integration of its email and blog services, which resulted in increased traffic and created premium ad spaces on screens when users log on for such services.

Gross margin for the online game business for the fourth quarter of 2007 was 90.7%, compared to 89.4% and 90.3% for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter increase was primarily due to higher game revenues reported for the fourth quarter of 2007, while related costs were stable. The year-over-year gross margin ratios remained relatively stable. 

Gross margin for the advertising business for the fourth quarter of 2007 was 52.0%, compared to 54.0% and 50.5% for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter decrease was primarily driven by higher staff-related and content costs during the fourth quarter of 2007. The year-over-year increase was primarily attributable to higher revenues reported for the fourth quarter of 2007, which outpaced the growth in related costs during the period.

Gross loss margin for the wireless value-added services and others business for the fourth quarter of 2007 was 19.5%, compared to 33.3% and 18.9% for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter decrease was primarily due to the continued rationalization of operational costs associated with the Company’s wireless value-added services business in the fourth quarter of 2007. The year-over-year increase in gross loss margin was mainly due to higher miscellaneous cost of revenues related to that business incurred during the fourth quarter of 2007.

Total operating expenses for the fourth quarter of 2007 were RMB152.8 million (US$21.0 million), compared to RMB179.0 million (US$24.5 million) and RMB123.9 million (US$17.0 million) for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter decrease was primarily driven by increased spending on the advertising and marketing promotion of Westward Journey Online III and Fantasy Westward Journey during the third quarter of 2007, which was reduced in the fourth quarter. The year-over-year increase was mainly due to higher marketing spending to promote Westward Journey Online III and Fantasy Westward Journey and higher staff-related cost as a result of an increase in research and development headcount during the fourth quarter of 2007.

Net profit for the fourth quarter of 2007 totaled RMB389.8 million (US$53.4 million), compared to RMB260.2 million (US$35.7 million) and RMB320.2 million (US$43.9 million) for the preceding quarter and the fourth quarter of 2006, respectively. In December 2007, the Company received a reinvestment incentive tax refund of RMB29.9 million (US$4.1 million), which helped reduce the Company's income tax expense for the fourth quarter of 2007. In addition, new corporate income tax laws went into effect as of January 1, 2008 which unify the tax rate generally applicable to domestic and foreign-invested enterprises in China. As the Chinese tax authorities have not yet announced detailed regulations on the applicable requirements and procedures to apply for preferential tax treatment as a high and new technology enterprise and the continued application of a preferential tax rate for the advanced technology enterprise, such as those that have been enjoyed by certain PRC subsidiaries of the Company through 2007, the Company is required under applicable accounting standards to report its deferred tax assets as of December 31, 2007 at the new statutory income tax rate of 25%. The reporting of deferred tax assets at the new statutory income tax rate resulted in a tax benefit of approximately RMB42.0 million (US$5.8 million) for the fourth quarter of 2007. It is expected that the Company will report a higher tax charge in the future quarter if and when confirmation is received from the Chinese tax authorities that such preferential tax treatments will be allowed to continue for the relevant terms, as a result of a reduction to the deferred tax assets to reflect the lower preferred tax rates.

NetEase reported basic and diluted earnings per American depositary share (ADS) of US$0.44 and US$0.41 for the fourth quarter of 2007, respectively. The Company reported basic and diluted earnings per ADS of US$0.29 and US$0.27 and US$0.35 and US$0.32 for the preceding quarter and the fourth quarter of 2006, respectively.

Fiscal Year 2007 Financial Results

Total revenues for fiscal year 2007 were RMB2.31 billion (US$316.1 million), compared to RMB2.22 billion (US$304.0 million) for the preceding year. Revenues from online games were RMB1.93 billion (US$264.9 million) for fiscal 2007, compared to RMB1.86 billion (US$254.4 million) for preceding fiscal year. Revenues from advertising services were RMB305.1 million (US$41.8 million) for fiscal 2007, compared to RMB285.8 million (US$39.2 million) for the preceding fiscal year. Revenues from wireless value-added services and others were RMB68.0 million (US$9.3 million) for fiscal 2007, compared to RMB75.4 million (US$10.3 million) for the preceding fiscal year. Gross profit for fiscal 2007 was RMB1.80 billion (US$246.5 million), compared to RMB1.78 billion (US$244.4 million) for the preceding fiscal year. The increased gross profits for fiscal year 2007 were primarily due to higher revenues reported for Fantasy Westward Journey in fiscal year 2007. 

Total operating expenses for fiscal 2007 were RMB592.2 million (US$81.2 million), compared to RMB503.2 million (US$69.0 million) for the preceding fiscal year. Higher operating expenses for fiscal 2007 were primarily due to increased marketing costs to promote Westward Journey Online III and Fantasy Westward Journey, as well as higher staff-related costs due to an increase in headcount for the online games research and development team. 

Net profit for fiscal 2007 totaled RMB1.26 billion (US$173.3 million), compared to RMB1.24 billion (US$170.4 million) for the preceding fiscal year. In 2007, the Company received reinvestment incentive tax refunds of RM54.4 million (US$7.5 million), which reduced the Company’s income tax expense for fiscal 2007. In addition, as mentioned above, the reporting of deferred tax assets at the new statutory income tax rate resulted in a tax benefit of approximately RMB42.0 million (US$5.8 million).for the fourth quarter of 2007. NetEase reported basic and diluted earnings per ADS of US$1.40 and US$1.31 for fiscal 2007, respectively. The Company reported basic and diluted earnings per ADS of US$1.32 and US$1.22 for the preceding fiscal year, respectively.

Other Information

As of December 31, 2007, the Company's total cash and time deposit balance was RMB4.16 billion (US$570.1 million), compared to RMB3.94 billion (US$539.8 million) as of December 31, 2006. As previously announced, the Company had obtained a revolving loan facility, which was taken out to enable 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 during a period from May 17, 2007 to July 31, 2008. In December 2007, the Company cancelled such facility with the bank prior to its expiration. As a result of the termination of the loan facility, the related restriction on the Company’s cash balance was removed on December 31, 2007, and the outstanding convertible notes as of December 31, 2007 were classified as current liabilities. 

Cash flow generated from operating activities was approximately RMB426.6 million (US$58.5 million) for the fourth quarter of 2007, compared to RMB339.2 million (US$46.5 million) and RMB531.5 million (US$72.9 million) for the preceding quarter and the fourth quarter of 2006, respectively. 

On July 2, 2007, the Company's Board authorized a share repurchase program of up to US$120 million of the Company's outstanding ADSs. As of December 31, 2007 the Company had spent in aggregate a total purchase consideration of approximately US$35.7 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$1.00 = RMB7.2946 on December 31, 2007 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2007, or at any other certain date. The percentages stated are calculated based on RMB.


Notes to Unaudited Financial Information
The unaudited financial information disclosed in this release is preliminary. The audit of the financial statements and related notes to be included in our annual report on Form 20-F for the year ended December 31, 2007 is still in progress. In addition, because an audit of our internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed, we make no representation as to the effectiveness of those internal controls as of the end of fiscal 2007.
Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between our audited financial statements and this preliminary unaudited financial information.

Conference Call
NetEase's management team will host a conference call at 8:00 pm Eastern Time on Wednesday, February 20, 2008, (Beijing/Hong Kong Time: 9:00 am, Thursday, February 21, 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 800-240-6709 (international: 303-262-2140), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 800-405-2236 (international 303-590-3000), and entering pass code 11108212#. The replay will be available through March 6, 2008 Easter 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, Westward Journey Online III 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.

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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 NetEase will not be successful in its product diversification efforts, including its focus on item-based games and exploration of strategic licensing opportunities; 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 effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that changes in Chinese government regulation of the online game market may limit future growth of NetEase’s revenue or cause revenue to decline; the risk that NetEase may not be able to continuously develop new and creative online services; 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), 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 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 applicable law. 



2007 Fourth Quarter Financial Statements

 

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