NetEase Reports Fourth Quarter and Fiscal Year 2018 Unaudited Financial Results

BEIJING,Feb. 21,2019 -- 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 fourth quarter and fiscal year ended December 31,2018.

Fourth Quarter 2018 Financial Highlights

Net revenues[1] were RMB19,844.3 million (US$2,886.2 million),an increase of 35.8% compared with the fourth quarter of 2017.

- Online game services net revenues were RMB11,019.6 million (US$1,602.7 million),an increase of 37.7% compared with the fourth quarter of 2017.

- E-commerce net revenues were RMB6,678.7 million (US$971.4 million),an increase of 43.5% compared with the fourth quarter of 2017.

- Advertising services net revenues were RMB760.5 million (US$110.6 million),an increase of 3.3% compared with the fourth quarter of 2017.

- Innovative businesses and others[2] net revenues were RMB1,385.5 million (US$201.5 million),an increase of 14.2% compared with the fourth quarter of 2017.

Gross profit was RMB7,657.5 million (US$1,113.7 million),an increase of 33.3% compared with the fourth quarter of 2017.

Total operating expenses were RMB5,412.3 million (US$787.2 million),an increase of 25.3% compared with the fourth quarter of 2017.

Net income attributable to the Company's shareholders was RMB1,697.7 million (US$246.9 million). Non-GAAP net income attributable to the Company's shareholders was RMB2,359.6 million (US$343.2 million).[3]

Diluted earnings per ADS were US$1.92; non-GAAP diluted earnings per ADS were US$2.66.

[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 fourth quarter of 2018 and comparable periods. See "Impact of The Recently Adopted Major Accounting Pronouncements" inthis press release.

[2]Effective as of December 31,2018,the Company renamed its "e-mail and others" segment to "innovative businesses and others" to better articulate the businesses included in this segment.See "Change in Segment Reporting" in this press release.

[3]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.

Fourth Quarter 2018 and Recent 2019 Operational Highlights

Introduced exciting new mobile titles including:

- Night Falls: Survival,which topped the China's iOS download chart in November and ranked third in China's iOS game grossing chart for November and December;

- Ink,Mountains and Mystery,with its stunning display of classical Chinese arts,reached No.1 on China's iOS download chart on January 1,2019,the day of its launch.

Expanded footprint beyond mainland China and deepened global reach:

- Maintained Knives Out's position as China's top grossing mobile game in overseas markets for five consecutive months since August 2018;

- Launched titles overseas in January 2019 including: Night Falls: Survival in Hong Kong,Macau and Taiwan and QwQ in Japan and South Korea;

- Furthered collaboration with leading game studios worldwide,including a joint development agreement with Codemasters,a UK game studio,as well as made a minority investment in Quantic Dream,a French game studio,and announced an investment in U.S.-based Second Dinner,a studio founded by ex-Blizzard veterans.

Fortified strong performance of flagship titles,such as Fantasy Westward Journey and New Westward Journey Online series with new expansion packs released (for PC-client and mobile users),which further promoted user engagement and contributed to steady sequential quarterly revenue growth.

Renewed 11-year partnership with Blizzard Entertainment in mainland China,extending the publishing agreement between the two companies until January 2023.

Advanced pipeline with upcoming titles including Fantasy Westward Journey 3D,Xuanyuan Sword,Ages of Isle and Pokémon Quest.

Opened Kaola's first flagship store and first brick-and-mortar store for Yanxuan,both located in Hangzhou's West Lake business district.

"We finished the year with total annual net revenues of RMB67 billion,a 24% increase from 2017,driven by a diverse portfolio of online games as well as healthy growth in our e-commerce,advertising services and other internet product and service offerings," said Mr. William Ding,Chief Executive Officer and Director of NetEase. "2018 was a very fruitful year of diversification for our online games. While our flagship titles remain stronger than ever,we also introduced a numberof highly successful titlesfor PC-client and mobile platforms. These new titles span a wide variety of genres and led to rapid growth in our user base,gaining us access to new demographics and instilling confidence in our ability to branch out beyond MMORPG categories.

"Throughout the year we also made a number of advancements to better position us on the world's stage,most notably in Japan. Our world-class R&D capabilities,particularly in the mobile arena,afford us an exciting opportunity to appeal to a global audience. We plan to continue to invest in global talent,IP and collaboration with other elite game developers worldwide to further this momentum.

"While online games remain the cornerstone of our business,we also see huge potential in e-commerce,music and online education. These will be the primary focus of our business strategy in 2019. Our relentless drive to create premium content has paved the way for our success,and our highly focused investments in carefully-chosen new business categories have allowed NetEase to stand the test of time in a rapidly evolving internet industry. Two decades after our inception,our focus on quality remains at the heart of our Company,propelling the unique value proposition we offer toour community and driving our growingsuccess," Mr. Ding concluded.

Fourth Quarter 2018 Financial Results

Net Revenues

Netrevenues for the fourthquarter of 2018 were RMB19,844.3million (US$2,886.2million),compared to RMB16,855.3million and RMB14,607.6million for the preceding quarter and the fourth quarter of 2017,respectively.

Net revenues from online games were RMB11,019.6million (US$1,602.7million) for the fourth quarter of 2018,compared to RMB10,348.4million and RMB8,004.4million for the preceding quarter and the fourth quarter of 2017,respectively. Mobile games accounted for approximately 69.7% of net revenues from online games for the fourth quarter of 2018,compared to 68.0%eachforthe precedingquarter and the fourth quarter of 2017.

Net revenues from e-commerce were RMB6,678.7million (US$971.4million) for the fourth quarter of 2018,compared to RMB4,458.8million and RMB4,653.7million for the preceding quarter and the fourth quarter of 2017,respectively.

Net revenues from advertising services were RMB760.5million (US$110.6million) for the fourth quarter of 2018,compared to RMB644.2million and RMB736.6million for the preceding quarter and the fourth quarter of 2017,respectively. The top performing advertising verticals in the fourth quarter of 2018 were automobile,real estateand internet services sectors.

Net revenues from innovative businesses and others were RMB1,385.5million (US$201.5million) for the fourth quarter of 2018,compared to RMB1,403.8million and RMB1,213.0million for the preceding quarter and the fourth quarter of 2017,respectively.

Gross Profit/ (Loss)

Gross profit for the fourth quarter of 2018 was RMB7,657.5million (US$1,113.7million),compared to RMB7,547.3million and RMB5,744.6million for the preceding quarter and the fourth quarter of 2017,respectively.

The quarter-over-quarter increase in online game services gross profit was primarily due to increased revenuecontributionfromnewer mobile games such as Night Falls: Survivaland Ancient Nocturne. The year-over-year increase in online game services gross profit wasprimarily due to increased revenuecontributionfrommobile games including Knives Out,Chu Liu Xiang and Identity V.

The quarter-over-quarterand year-over-year decreases in e-commerce gross profit wereprimarily due to the larger-scale promotions and certain sales discounts in the fourth quarter of 2018.

The quarter-over-quarter increase in advertising services gross profit was primarily due to seasonality. The year-over-year decrease in advertising services gross profit was primarily due to higher staff-related costs and content purchase expenditures.

The quarter-over-quarter and year-over-year increases in innovative businesses and others gross loss wereprimarily due to decreased revenue contribution from certain online platform businesses,which have relatively higher margins.

Gross Profit/ (Loss) Margin

Gross profit margin for online game services for the fourth quarter of 2018 was 62.8%,compared to 65.1% and 61.4% for the preceding quarter and the fourth quarter of 2017,respectively.The quarter-over-quarter decrease in gross profit margin was mainly due to increased revenue contribution from mobile games and licensed games,which have relatively lower profit margins than self-developed PC-client games. The year-over-year increase in gross profit margin was 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 fourth quarter of 2018 was 4.5%,compared to 10.0% and 7.4% for the preceding quarter and the fourth quarter of 2017,respectively. The quarter-over-quarter and year-over-year decreases in e-commerce gross profit margin were primarily due to the larger-scale promotions and certain sales discounts in the fourth quarter of 2018.

Gross profit margin for advertising services for the fourth quarter of 2018 was 66.3%,compared to 63.6% and 71.2% for the preceding quarter and the fourth quarter of 2017,respectively.The quarter-over-quarter increase in advertising services gross profit margin was primarily due to seasonality. The year-over-year decrease in advertising services gross profit margin was primarily due to higher staff-related costs and content purchase expenditures.

Gross loss margin for innovative businesses and others for the fourth quarter of 2018 was 5.2%,compared to gross loss margin of 3.3% each for the preceding quarter and the fourth quarter of 2017. The year-over-year and quarter-over-quarterincreases in gross loss margin wereprimarily due to decreased revenue contribution from certain online platform businesses which have relatively higher gross profit margins.

Operating Expenses

Total operating expenses for the fourth quarter of 2018 were RMB5,compared to RMB5,440.1 million and RMB4,317.8 million for the preceding quarter and the fourth quarter of 2017,respectively. The year-over-year increase in operating expenseswas mainly due to increased staff-related costs,research and development investments and shipping and handling costs. Shipping and handling costs included in selling and marketing expenses for the fourth quarter of 2018 were RMB572.5 million (US$83.3 million),compared to RMB385.5 million and RMB393.3 million for the preceding quarter and the fourth quarter of 2017,respectively.

Income Taxes

The Company recorded a net income tax charge of RMB919.7 million (US$133.8 million) for the fourth quarter of 2018,compared to RMB843.8 million and RMB290.4 million for the preceding quarter and the fourth quarter of 2017,respectively. The effective tax rate for the fourth quarter of 2018 was 34.0%,compared to 34.2% and 18.2% for the preceding quarter and the fourth quarter of 2017,respectively. The higher effective tax rate for the fourth quarter of 2018 was due to the fact that certain subsidiaries of the Company experienced higher operating losses compared with the fourth quarter of 2017.

Net Income After Tax

Net income attributable to the Company's shareholders for the fourth quarter of 2018 totaled RMB1,697.7 million (US$246.9 million),596.3 million and RMB1,285.6 million for the preceding quarter and the fourth quarter of 2017,respectively. Non-GAAP net income attributable to the Company's shareholders for the fourth quarter of 2018 totaled RMB2,359.6 million (US$343.2 million),compared to RMB2,258.8 million and RMB1,878.9 million for the preceding quarter and the fourth quarter of 2017,respectively.

During the fourth quarter of 2018,the Company had a net foreign exchange loss of RMB27.1 million (US$3.9 million),compared to a net foreign exchange gain of RMB56.1 million and a net foreign exchange loss of RMB159.1 million for the preceding quarter and the fourth quarter of 2017,respectively. The changes in foreign exchange gains and losses weremainly due to foreign currency transactions and 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$1.93 and US$1.92,respectively,for the fourth quarter of 2018. The Company reported basic and diluted earnings per ADS of US$1.81 and US$1.80,for the preceding quarter,and basic and diluted earnings per ADS of US$1.42 and US$1.41,for the fourth quarter of 2017. Non-GAAP basic and diluted earnings per ADS were US$2.68 and US$2.66,for the fourth quarter of 2018,compared to non-GAAP basic and diluted earnings per ADS of US$2.56 and US$2.55,and non-GAAP basic and diluted earnings per ADS of US$2.08 and US$2.06,for the fourth quarter of 2017.

Fiscal Year 2018Financial Results

Net Revenues

Total net revenues for fiscal year 2018 were RMB67,156.5 million (US$9,767.5million),compared to RMB54,102.0 million for fiscal year 2017.

Net revenues from online games were RMB40,190.1 million (US$5,845.4million) for fiscal year 2018,compared to RMB36,281.6million for fiscal year 2017. Mobile games accounted for approximately 71.0% of net revenues from online games for fiscal year 2018,compared to 70.8% for fiscal year 2017.

Net revenues from e-commerce were RMB19,235.5 million (US$2,797.7 million) for fiscal year 2018,compared to RMB11,670.4 million for fiscal year 2017.

Net revenues from advertising services were RMB2,500.8 million (US$363.7million) for fiscal year 2018,408.8million for fiscal year 2017. The top performing advertising verticals in 2018 were automobile,real estate and internet services sectors.

Net revenues from innovative businesses and others were RMB5,230.1million(US$760.7 million) for fiscal year 2018,compared to RMB3,741.1million for fiscal year 2017.

Gross Profit

Gross profit for fiscal year 2018 was RMB28,403.5million (US$4,131.1million),compared to RMB25,912.7 million for fiscal year 2017.

The increase in online game services gross profitin 2018 was primarily attributable to increased revenuecontribution fromthe Company's self-developed mobile games such asKnives Out and Chu Liu Xiang,as well as PC-client games such as Justice.

The increasein e-commerce gross profit in 2018wasprimarily dueto business development of Kaolaand Yanxuan.

The increase in advertising services gross profitin 2018 was due to NetEase'senhanced monetization efforts.

The decrease in innovative businesses and others gross profit in 2018 wasprimarily due to higher copyright costs related to licensed music content and decreased revenue contribution from certain online platform businesses which have relatively higher margins.

Operating Expenses

Total operating expenses for fiscal year 2018were RMB20,510.6 million (US$2,983.1million),compared to RMB13,758.9 million for fiscal year 2017. The increase in operating expenses in 2018was primarily due to increased selling and marketing expenses,research and development investments and staff-related costs,as well as increased shipping and handling costs. Shipping and handling costs included in selling and marketing expenses for fiscal year 2018 were RMB1,670.4 million (US$242.9 million),182.7 million for fiscal year 2017.

Income Taxes

The Company recorded a net income tax charge of RMB2,466.7million (US$358.8million) and RMB2,162.4 million for fiscal years 2018and 2017,respectively. The effective tax rate was 27.6%for fiscal year 2018,compared to 16.6% for fiscal year 2017. The higher effective tax rate for fiscal year 2018 was due to the fact that certain subsidiaries of the Company experienced higher operating losses compared with fiscal year 2017.

Net Income After Tax

Net income attributable to the Company's shareholders for fiscal year 2018totaled RMB6,152.4million (US$894.8million),707.9 million for fiscal year 2017. Non-GAAP net incomeattributable to the Company's shareholdersfor fiscal year2018totaled RMB8,680.5million (US$1,262.5million),compared to RMB12,712.2millionfor fiscal year 2017.

For fiscal year 2018,the Company reported a net foreign exchange loss of RMB113.3 million (US$16.5million),compared to a net foreign exchange lossof RMB448.8million for fiscal year 2017. The changes in foreign exchange gains and losses weremainly due to foreign currency transactions and 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 these years.

NetEase reported basic and diluted earnings per ADS of US$6.91and US$6.87,for fiscal year 2018,andbasic anddiluted earnings per ADS of US$11.83andUS$11.74,for fiscal year2017. Non-GAAP basic and diluted earnings per ADS were US$9.76and US$9.70,for fiscal year2018,compared to non-GAAP basic and diluted earnings per ADS of US$14.05and US$13.94,for fiscal year2017.

QuarterlyDividend

The board of directors has approved a dividend of US$0.48 per ADS for the fourth quarter of 2018,which is expected to be paid on March 15,2019 to shareholders of record as of the close of business on March 8,2019.

NetEase paid a dividend of US$0.38 per ADS for the fourth quarter of 2017 on March 2,a dividend of US$0.23 per ADS for the first quarter of 2018 on June 8,a dividend of US$0.61 per ADS for the second quarter of 2018 on August 31,2018 and a dividend of US$0.45 per ADS for the third quarter of 2018 on December 7,2018.

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 December 31,the Company's total cash and cash equivalents,current and non-current time deposits and short-term investments balance totaled RMB50,064.3million (US$7,281.5million),compared to RMB43,210.2million as of December 31,2017. Cash flow generated from operating activities was RMB13,415.9 million (US$1,951.3million) for fiscal year 2018,889.2million for fiscal year 2017.

Share Repurchase Program

On November 15,2017,the Company announced that its board of directors had approved a 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,the Company announced that its board of directors approved an amendment to expand the authorized repurchase amount to US$2.0 billion. As of November 15,the last day of such program,the Company had repurchased approximately 4.6 million ADSs for approximately US$1,178.5 million under this program.

On November 14,the Company also 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 16,2018. As of December 31,no ADS was repurchased 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$1.00 = RMB6.8755 on December 31,2018 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been,or could be,converted into US$ at that rate on December 31,or at any other certain date. The percentages stated are calculated based on RMB.

Change in Segment Reporting

Effective as of December 31,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 and Yanxuan,which were established in January 2015 and April 2016,respectively. In addition,effective as of December 31,the Company renamed its "e-mail and others" segment to "innovative businesses and others" to better articulate the businesses included in this segment. The changes in segment reporting align with the manner in which the Company's chief operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. The changes in segment presentation do not affect consolidated balance sheets,consolidated statements of income orconsolidated statements of cash flows. The Company retrospectively revised prior period segment information to conform to current period presentation. The Company now reports four reporting segments: online game services,e-commerce,advertising services and innovative businesses and others.

Impact of the Recently Adopted Major Accounting Pronouncements

On January 1,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 fiscal year 2018 and comparable periods.

On January 1,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 net investment losses of RMB215.8 million related to the equity investmentswith readily determinable fair value for fiscal year 2018. 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 investmentswithout readily determinable fair value for fiscal year 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 RMB393.8 million for fiscal year 2017,compared to the amounts presented under previous guidance.

Notes to Unaudited Financial Information

The unaudited financial information disclosed in this press release is preliminary. The audit of the financial statements and related notes to be included in the Company's annual report on Form 20-F for the year ended December 31,2018 is still in progress. In addition,because an audit of the Company's internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed,the Company makes no representation as to the effectiveness of those internal controls as of the end of fiscal year 2018.

Adjustments to the financial statements may be identified when the audit work is completed,which could result in significant differences between the Company's audited financial statements and this preliminary unaudited financial information.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 8:00 p.m. Eastern Time on Wednesday,February 20,2019 (Beijing/Hong Kong Time: 9:00 a.m.,Thursday,February 21,2019). 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 1-800-458-4121 (international: 1-929-477-0324),10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-888-203-1112 (international: 1-719-457-0820),and entering passcode 9925506#. The replay will be available through March 6,2019.

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-clientand mobile games,e-commerce businesses and advertising services,as well as a variety of other innovative businesses. In partnership with Blizzard Entertainment,Mojang AB (a Microsoft subsidiary) and other global game developers,NetEase also operates some of the most popular international online games in China. 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 toeffectively 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 businessesmay 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 online game and e-commerce businesses; 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); 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) 571-8985-3378

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,

December 31,

2017

2018

2018

RMB

RMB

USD (Note 1)

Assets

Current assets:

Cash and cash equivalents

2,764,140

5,389,198

783,827

Time deposits

30,603,369

32,900,287

4,785,148

Restricted cash

5,926,906

4,817,340

700,653

Accounts receivable,net

3,619,725

4,288,500

623,736

Inventories,net

5,474,929

5,017,823

729,812

Prepayments and other current assets

3,816,028

4,627,797

673,085

Short-term investments

9,742,663

11,674,775

1,698,026

Total current assets

61,947,760

68,715,720

9,994,287

Non-current assets:

Property,equipment and software,769,326

5,378,560

782,280

Land use right,net

593,279

3,502,569

509,428

Deferred tax assets

823,495

1,064,295

154,795

Time deposits

100,000

100,000

14,544

Restricted cash

200

-

-

Other long-term assets

3,797,355

8,206,784

1,193,627

Total non-current assets

9,083,655

18,252,208

2,654,674

Total assets

71,031,415

86,967,928

12,648,961

Liabilities,Redeemable Noncontrolling Interests and

Shareholders' Equity

Current liabilities:

Accounts payable

2,442,531

2,384,818

346,857

Salary and welfare payables

2,189,110

2,991,897

435,153

Taxes payable

1,564,692

2,272,023

330,452

Short-term loans

6,623,502

13,658,554

1,986,554

Deferred revenue

6,237,969

7,953,255

1,156,753

Accrued liabilities and other payables

4,692,310

5,848,463

850,624

Total current liabilities

23,750,114

35,109,010

5,106,393

Long-term payable:

Deferred tax liabilities

213,215

393,681

57,259

Other long-term payable

18,250

53,656

7,804

Total liabilities

23,981,579

35,556,347

5,171,456

Redeemable noncontrolling interests

614,696

5,385,736

783,323

Total NetEase,Inc.'s equity

45,732,007

45,231,636

6,578,669

Noncontrolling interests

703,133

794,209

115,513

Total shareholders' equity

46,435,140

46,025,845

6,694,182

Total liabilities,redeemable noncontrolling interests and

shareholders' equity

71,961

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

Year Ended

December 31,

September 30,

2017

2018

2018

2018

2017

2018

2018

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues

14,607,636

16,855,303

19,844,275

2,886,229

54,102,019

67,453

9,767,501

Cost of revenues

(8,863,025)

(9,307,955)

(12,186,817)

(1,772,499)

(28,326)

(38,752,957)

(5,636,384)

Gross profit

5,744,611

7,547,348

7,657,458

1,113,730

25,912,693

28,403,496

4,131,117

Selling and marketing expenses

(2,397,214)

(2,357,010)

(2,405,349)

(349,844)

(6,957,596)

(9,526,470)

(1,568)

General and administrative expenses

(678,370)

(822,292)

(851,573)

(123,856)

(2,429,858)

(3,191,537)

(464,190)

Research and development expenses

(1,242,213)

(2,260,768)

(2,155,409)

(313,491)

(4,371,428)

(7,792,550)

(1,133,379)

Total operating expenses

(4,317,797)

(5,440,070)

(5,412,331)

(787,191)

(13,758,882)

(20,510,557)

(2,983,137)

Operating profit

1,426,814

2,107,278

2,245,127

326,539

12,153,811

7,892,939

1,147,980

Other income:

Investment income/ (loss),net

96,030

(25,401)

46,484

6,761

362,113

(22,266)

(3,238)

Interest income,net

190,733

113,118

167,296

24,332

667,323

587,518

85,451

Exchange (losses)/ gains,net

(159,106)

56,097

(27,103)

(3,942)

(448,827)

(113,323)

(16,482)

Other,net

37,814

213,564

276,568

40,225

277,080

599,230

87,154

Income before tax

1,592,285

2,464,656

2,708,372

393,915

13,011,500

8,944,098

1,300,865

Income tax

(290,372)

(843,795)

(919,674)

(133,761)

(2,162,363)

(2,466,681)

(358,764)

Net income after tax

1,301,913

1,620,861

1,788,698

260,154

10,849,137

6,477,417

942,101

Accretion and deemed dividends in connection with

repurchase of redeemable noncontrolling interests

-

(18,086)

(54,604)

(7,942)

-

(248,098)

(36,084)

Net income attributable to noncontrolling interests

and redeemable noncontrolling interests

(16,300)

(6,482)

(36,395)

(5,293)

(141,198)

(76,912)

(11,186)

Net income attributable to

the Company's shareholders

1,285,613

1,596,293

1,697,699

246,919

10,707,939

6,152,407

894,831

Basic earnings per share

0.39

0.50

0.53

0.08

3.25

1.90

0.28

Basic earnings per ADS

9.79

12.43

13.27

1.93

81.36

47.54

6.91

Diluted earnings per share

0.39

0.49

0.53

0.08

3.23

1.89

0.27

Diluted earnings per ADS

9.71

12.37

13.18

1.92

80.74

47.26

6.87

Weighted average number of

ordinary shares outstanding,basic

3,284,028

3,210,940

3,199,277

3,290,312

3,235,324

3,324

Weighted average number of

ADS outstanding,basic

131,361

128,438

127,971

127,971

131,612

129,413

129,413

Weighted average number of

ordinary shares outstanding,diluted

3,310,586

3,226,763

3,220,724

3,315,478

3,254,689

3,689

Weighted average number of

ADS outstanding,diluted

132,423

129,071

128,829

128,829

132,619

130,188

130,188

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

Year Ended

December 31,

2017

2018

2018

2018

2017

2018

2018

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Cash flows from operating activities:

Net income

1,101

Adjustments to reconcile net income to net

cash provided by operating activities:

Depreciation and amortization

274,298

570,232

676,020

98,323

801,804

2,501

303,033

Fair value changes and impairment losses of short-term investments,

investments in associated companies,other long-term investments

and other financial instruments

(67,546)

6,233

(88,012)

(12,801)

(331,256)

(55,728)

(8,105)

Share-based compensation cost

593,301

663,031

662,280

96,325

2,004,263

2,529,650

367,922

Allowance for/ (reversal of) provision for doubtful debts

28,914

38,424

(2,090)

(304)

60,826

50,954

7,411

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

5,118

768

(640)

(93)

5,072

(1,385)

(201)

Unrealized exchange losses/ (gains)

155,511

(116,521)

1,675

243

437,868

39,427

5,735

Gains on disposal of long-term investments,business and

subsidiaries

-

-

(175,957)

(25,592)

(9,595)

(213,339)

(31,029)

Deferred income taxes

(83,865)

(194,858)

(133,369)

(19,398)

(438,043)

(69,899)

(10,166)

Net equity share of (gains)/ losses from associated companies

(20,849)

21,949

17,643

2,566

12,232

98,301

14,297

Changes in operating assets and liabilities:

Accounts receivable

(391,603)

(729,660)

283,044

41,167

565,228

(710,932)

(103,401)

Inventories

(806,556)

(614,998)

1,273,230

185,184

(3,896,799)

457,053

66,476

Prepayments and other current assets

151,224

(447,543)

209,737

30,505

(116,240)

(722,711)

(105,114)

Accounts payable

403,973

420,882

(188,464)

(27,411)

1,100,787

(85,195)

(12,391)

Salary and welfare payables

805,435

596,723

310,915

45,221

700,479

806,401

117,286

Taxes payable

594,408

702,261

430,123

62,559

(155,904)

693,639

100,886

Deferred revenue

73,352

1,012,281

593,199

86,277

(1,291,890)

1,804,579

262,465

Accrued liabilities and other payables

864,426

67,466

277,410

40,349

1,591,269

234,144

34,055

Net cash provided by operating activities

3,881,454

3,617,531

5,935,442

863,274

11,889,238

13,415,877

1,951,260

Cash flows from investing activities:

Purchase of property,equipment and software

(572,115)

(670,337)

(412,766)

(60,034)

(1,842,933)

(2,528,149)

(367,704)

Proceeds from sale of property,equipment and software

1,187

1,616

973

142

4,425

6,691

973

Purchase of intangible assets and licensed copyrights

of music content

(351,378)

(287,867)

(389,870)

(56,704)

(674,803)

(1,349,905)

(196,336)

Purchase of land use right

-

(2,420,029)

(31,759)

(4,619)

(6,488)

(3,007,959)

(437,489)

Net change in short-term investments with terms of three

months or less

(3,119,511)

865,824

(2,634)

(381,010)

(895,298)

(1,172,326)

(170,508)

Purchase of short-term investments

(1,000)

(2,460,940,000)

(427,605)

(12,491,000)

(13,423,000)

(1,952,294)

Proceeds from maturities of short-term investments

2,656,842

2,778,151

5,333,016

775,655

15,615,544

13,101,476

1,905,531

Investment in associated companies and long-term investments

(572,842)

(1,594)

(393,801)

(57,276)

(1,136,481)

(3,023,491)

(439,749)

Proceeds from disposal of investment in associated company

and long-term investments

-

-

-

-

350,418

-

-

Placement/rollover of matured time deposits

(8,183,371)

(11,346)

(19,933,370)

(2,899,188)

(33,984,148)

(41,553,428)

(6,043,695)

Proceeds from maturities of time deposits

7,409,214

14,306,245

13,755

1,941,641

22,597

39,924,525

5,806,781

Net change in other assets

(27,760)

(75,563)

(194,765)

(28,328)

(224,103)

(543,949)

(79,114)

Net cash used in investing activities

(3,734)

(398,900)

(8,232,221)

(1,197,326)

(12,270)

(13,569,515)

(1,973,604)

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

Year Ended

December 31,

2017

2018

2018

2018

2017

2018

2018

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Cash flows from financing activities:

Net proceeds in short-term loan with terms of three months or less

974,570

265,422

41,163

5,987

3,104,970

6,209,608

903,150

Capital contribution from noncontrolling interests and redeemable

noncontrolling interests shareholders,net

40,000

1,139,700

3,216,112

467,764

911,500

4,334,684

630,454

Repurchase of shares

(436,630)

(1,572)

(61,574)

(8,956)

(2,061,591)

(7,516,679)

(1,093,256)

Dividends paid to shareholders

(624,395)

(533,726)

(399,374)

(58,087)

(3,257,607)

(1,194)

(209,468)

Net cash (used)/ provided in financing activities

(46,455)

(914,176)

2,796,327

406,708

(1,302,728)

1,587,419

230,880

Effect of exchange rate changes on cash,cash equivalents

and restricted cash held in foreign currencies

(11,646)

54,007

(14,517)

(2,111)

(12,766)

81,511

11,855

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

restricted cash

(171,381)

2,358,462

485,031

70,545

(2,281,526)

1,515,292

220,391

Cash,cash equivalents and restricted cash,

beginning of the period *

8,862,627

7,363,045

9,721,507

1,413,935

10,972,772

8,691,246

1,264,089

Cash,end of the period *

8,246

9,507

10,538

1,484,480

8,246

10,480

Supplemental disclosures of cash flow information:

Cash (received)/ paid for income tax,net

(238,447)

600,115

419,555

61,022

2,712,875

2,006,657

291,856

Supplemental schedule of non-cash investing

and financing activities:

Fixed asset purchases financed by

accounts payable and accrued liabilities

293,194

382,176

409,222

59,519

293,194

409,519

*In 2018,the Company adopted the guidance of ASU 2016-18 issued by FASB in November2016,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

Year Ended

December 31,

2017

2018

2018

2018

2017

2018

2018

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues:

Online game services

8,352

10,348,430

11,019,553

1,602,728

36,642

40,190,057

5,845,402

E-commerce

4,653,652

4,458,828

6,678,673

971,372

11,670,416

19,476

2,684

Advertising services

736,597

644,207

760,538

110,615

2,408,823

2,500,833

363,731

Innovative businesses and others

1,213,035

1,838

1,511

201,514

3,741,138

5,230,087

760,684

Total net revenues

14,501

Cost of revenues:

Online game services

(3,087,192)

(3,611,946)

(4,094,688)

(595,548)

(13,473,339)

(14,656)

(2,126,050)

E-commerce

(4,338)

(4,132)

(6,827)

(927,762)

(10,714)

(17,688,717)

(2,572,717)

Advertising services

(212,488)

(234,800)

(256,014)

(37,236)

(797,892)

(889,677)

(129,398)

Innovative businesses and others

(1,253,007)

(1,450,077)

(1,457,288)

(211,953)

(3,453,381)

(5,907)

(808,219)

Total cost of revenues

(8,384)

Gross profit/ (loss):

Online game services

4,917,160

6,736,865

1,180

22,808,303

25,401

3,719,352

E-commerce

343,314

447,696

299,846

43,610

1,205,702

1,546,759

224,967

Advertising services

524,109

409,407

504,524

73,379

1,610,931

1,156

234,333

Innovative businesses and others

(39,972)

(46,239)

(71,777)

(10,439)

287,757

(326,820)

(47,535)

Total gross profit

5,117

Gross profit/ (loss) margin:

Online game services

61.4%

65.1%

62.8%

62.8%

62.9%

63.6%

63.6%

E-commerce

7.4%

10.0%

4.5%

4.5%

10.3%

8.0%

8.0%

Advertising services

71.2%

63.6%

66.3%

66.3%

66.9%

64.4%

64.4%

Innovative businesses and others

(3.3%)

(3.3%)

(5.2%)

(5.2%)

7.7%

(6.2%)

(6.2%)

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

NETEASE,INC.

NOTES TO UNAUDITED FINANCIALINFORMATION

Note 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00 = RMB6.8755 on the last trading day of December 2018(December 31,2018) 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

Year Ended

December 31,

2017

2018

2018

2018

2017

2018

2018

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Share-based compensation cost included in:

Cost of revenue

248,433

198,269

207,158

30,130

820,281

764,972

111,261

Operating expenses

- Selling and marketing expenses

29,925

26,779

31,819

4,628

95,382

116,611

16,960

- General and administrative expenses

165,827

206,483

201,404

29,293

581,337

804,565

117,019

- Research and development expenses

149,116

231,500

221,899

32,274

507,263

843,502

122,682

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,

2017

2018

2018

2018

2017

2018

2018

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net income attributable to the Company's shareholders

1,831

Add: Share-based compensation

593,301

662,551

661,859

96,098

367,697

Non-GAAP net income attributable to

the Company's shareholders

1,878,914

2,258,844

2,359,558

343,182

12,202

8,680,505

1,262,528

Non-GAAP basic earnings per share

0.57

0.70

0.74

0.11

3.86

2.68

0.39

Non-GAAP basic earnings per ADS

14.30

17.59

18.44

2.68

96.59

67.08

9.76

Non-GAAP diluted earnings per share

0.57

0.70

0.73

0.11

3.83

2.67

0.39

Non-GAAP diluted earnings per ADS

14.19

17.50

18.32

2.66

95.86

66.68

9.70

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

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