NetEase Reports Second Quarter 2019 Unaudited Financial Results

BEIJING,Aug. 8,2019 --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 second quarter ended June 30,2019.

Second Quarter 2019 Financial Highlights

Net revenues were RMB18,769.0 million (US$2,734.0 million),an increase of 15.3% compared to the second quarter of 2018.

- Online game services net revenues were RMB11,433.4 million (US$1,665.5 million),an increase of 13.6% compared to the second quarter of 2018.

- E-commerce net revenues were RMB5,246.9 million (US$764.3 million),an increase of 20.2% compared to the second quarter of 2018.

- Advertising services net revenues were RMB581.6 million (US$84.7 million),a decrease of 8.3% compared to the second quarter of 2018.

- Innovative businesses and others net revenues were RMB1,507.2 million (US$219.5 million),an increase of 23.2% compared to the second quarter of 2018.

Gross profit was RMB8,125.8 million (US$1,183.7 million),an increase of 12.2% compared to the second quarter of 2018.

Total operating expenses were RMB4,639.6 million (US$675.8 million),a decrease of 5.5% compared to the second quarter of 2018.

Net income attributable to the Company's shareholders was RMB3,071.4 million (US$447.4 million). Non-GAAP net income attributable to the Company's shareholders was RMB3,645.4 million (US$531.0 million).[1]

Basic earnings per ADS were US$3.47; non-GAAP basic earnings per ADS were US$4.12.[1]

SecondQuarter 2019 and Recent Operational Highlights

Launched exciting titles inChinaincluding BuildTopia,Love is Justice,Sky and an updated version of Tom and Jerry.

Strengthened global presence with NetEase's games receiving international recognition:

- Knives Outremained popular in Japan and topped the iOS grossing chart several times in May and June.

- Identity Vreached Japan's top 3 iOS grossing chart for the first time in July.

- Introduced new popular titles in Japan and the U.S. including Life-After (previously known as Night Falls: Survival),Cyber Hunter andSuper Mecha Champions.

Launched a new video game studio in Montréal,with plans to hire local and international talent to further enhance NetEase's research and development capabilities.

Acquired a minority stake in Behaviour Interactive Inc.,Canada's largest independent game studio.

Announced strategic collaborations with world-famous IP owners including Marvel Entertainment and The Pokémon Company.

Advanced pipeline with upcoming titles including Fantasy Westward Journey 3D,Xuan Yuan Sword: Dragon Upon the Cloud,Pokémon QuestandBloom & Blade.

NetEase Cloud Musiclaunched its community module known as "Cloud Village,"which influences the way users experience music.

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

"Our diverse portfolio of games and dedicated focus on our core business lines continued to lead our growth in the second quarter with net revenues and net income attributable to the Company's shareholders increasing by 15% and 46% year-over-year,respectively," said Mr. William Ding,Chief Executive Officer and Director of NetEase. "We launched several new games in China and abroad in the second quarter,further enriching our strong game portfolio that spans a variety of genres. Our global initiatives are well underway. In addition to Knives Out and Identity V,a number of our new games have gained userrecognition in Japan,including Life-After and Cyber Hunter. We are pleased with the progress we have made to introduce our games to international audiences and fortify our relationships with other industry leaders in the video games and entertainment markets. We will continue exploring overseas market opportunities and growing our games business on a global scale.

"We are executing well on our strategy to focus on our core business lines and improve operating efficiencies within each of our primary competencies. Best known for our content creation capabilities,we continue to emphasize product enhancement,offering new innovative content and better user experiences to our growing community of users. With the robust growth of our business in mind,our board of directors hasapproved a dividend of US$1.04 per ADSfor the second quarter. We are delighted to be returning value to our investors as our business continues to boast healthy and growing profits," Mr. Ding concluded.

SecondQuarter 2019 Financial Results

Net Revenues

Netrevenues for the secondquarter of 2019 were RMB18,769.0million (US$2,734.0million),compared to RMB18,356.2million and RMB16,283.9million for the preceding quarter and the second quarter of 2018,respectively.

Net revenues from online game services were RMB11,433.4million (US$1,665.5million) for the second quarter of 2019,compared to RMB11,850.2million and RMB10,060.8million for the preceding quarter and the secondquarter of 2018,respectively. Net revenues from mobile games accounted for approximately 72.2% of net revenues from online game services for the second quarter of 2019,compared to 72.1% and 74.7%forthe precedingquarter and the second quarter of 2018,respectively.

Net revenues from e-commerce were RMB5,246.9million (US$764.3million) for the second quarter of 2019,compared to RMB4,789.3million and RMB4,365.5million for the preceding quarter and the second quarter of 2018,respectively.

Net revenues from advertising services were RMB581.6million (US$84.7million) for the second quarter of 2019,compared to RMB438.6million and RMB634.1million for the preceding quarter and the second quarter of 2018,respectively. The top performing advertising verticals in the second quarter of 2019 were real estate,automobileand internet services sectors.

Net revenues from innovative businesses and others were RMB1,507.2 million (US$219.5 million) for the second quarter of 2019,compared to RMB1,278.1million and RMB1,223.5million for the preceding quarter and the second quarter of 2018,respectively.

Gross Profit/(Loss)

Gross profit for the second quarter of 2019 was RMB8,183.7million),compared to RMB8,091.0million and RMB7,245.1million for the preceding quarter and the second quarter of 2018,respectively.

The quarter-over-quarter decrease in online game services gross profit was primarily due to decreased net revenues from mobile games while certain cost of revenues was fixed.The year-over-year increase in online game services gross profit wasprimarily due to increased net revenuesfrommobile games such as Life-After,as well as certain PC-client games such as Justice and Fantasy Westward Journey Online.

The quarter-over-quarterand year-over-yearincreases in e-commerce gross profit were primarily due to the increased sales volume of Kaola and Yanxuan,as well as continuously improved procurement and operation processes.

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 decreased revenue contribution based on the evolving competitive macro-environment,and increased expenses related to staff and content purchases.

The quarter-over-quarter and year-over-year increases in innovative businesses and others gross profit were primarily due to increased net revenues from NetEase Cloud Music,NetEase CCand YoudaoOnline Education,as well as better cost controls.

Gross Profit/ (Loss) Margin

Gross profit margin for online game services for the second quarter of 2019 was 63.1%,compared to 63.7% and 64.3% for the preceding quarter and the second quarter of 2018,respectively.The quarter-over-quarter and year-over-year decreases in gross profit margin were mainly due to higher royalty fees and revenue sharing costs recognized for certain mobile games.

Gross profit margin for e-commerce for the second quarter of 2019 was 10.9%,compared to 10.2% and 10.1% for the preceding quarter and the second quarter of 2018,respectively. The quarter-over-quarter and year-over-year increases in gross profit margin were primarily due to increased sales volume of Kaola and Yanxuan,as well as continuously improved procurement and operation processes.

Gross profit margin for advertising services for the second quarter of 2019 was 55.5%,compared to 49.5% and 67.0% for the preceding quarter and the second quarter of 2018,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 decreased revenue contribution resulting from the evolving competitive macro-environment,and increased expenses related to staff and content purchases.

Gross profit margin for innovative businesses and others for the second quarter of 2019 was 1.4%,compared to gross loss margin of 13.1% and 7.3% for the preceding quarter and the second quarter of 2018,respectively. The quarter-over-quarterand year-over-year improvements in gross profit margin were primarily due to increased net revenues from NetEase Cloud Music,as well as better cost controls.

Operating Expenses

Total operating expenses for the secondquarter of 2019 were RMB4,681.6 million and RMB4,911.5 million for the preceding quarter and the secondquarter of 2018,respectively. The quarter-over-quarter decrease in operating expenses was mainly due to a slight decrease in staff-related costs,partially offset by increased marketing expenditures related to online game services. The year-over-year decrease in operating expenses was mainly due to decreased marketing expenditures related to NetEase's online game services and e-commerce businesses,partially offset by increased staff-related costs. Shipping and handling costs included in selling and marketing expenses for the secondquarter of 2019 were RMB388.2 million (US$56.6 million),compared to RMB404.6 million and RMB386.6 million for the preceding quarter and the secondquarter of 2018,respectively.

Income Taxes

The Company recorded a net income tax charge of RMB685.2 million (US$99.8 million) for the secondquarter of 2019,269.0 million and RMB420.5 million for the preceding quarter and the secondquarter of 2018,respectively. The effective tax rate for the secondquarter of 2019 was 18.0%,compared to 34.0% and 15.7% for the preceding quarter and the secondquarter of 2018,respectively. The lower effective tax rate in the second quarter of 2019 compared to the preceding quarter was mainly due to reduced losses from certain subsidiaries as well as tax credits recognized for certain subsidiaries of the Company.

Net Income After Tax

Net income attributable to the Company's shareholders for the secondquarter of 2019 totaled RMB3,071.4 million (US$447.4 million),compared to RMB2,382.1 million and RMB2,106.5 million for the preceding quarter and the secondquarter of 2018,respectively. Non-GAAP net income attributable to the Company's shareholders for the second quarter of 2019 totaled RMB3,645.4 million (US$531.0 million),compared to RMB3,017.0 million and RMB2,724.9 million for the preceding quarter and the secondquarter of 2018,respectively.

During the secondquarter of 2019,the Company had a net foreign exchange gain of RMB24.0 million (US$3.5 million),compared to a net foreign exchange loss of RMB45.4 million and a net foreign exchange gain of RMB232.8 million for the preceding quarter and the secondquarter of 2018,respectively. The changes in foreign exchange gains and losses weremainly 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,as well as certain foreign currency transactions.

NetEase reported basic and diluted earnings per ADS of US$3.47 and US$3.44,for the secondquarter of 2019. The Company reported basic and diluted earnings per ADS of US$2.71 and US$2.68,for the preceding quarter,and basic and diluted earnings per ADS of US$2.36 and US$2.35 for the secondquarter of 2018. Non-GAAP basic and diluted earnings per ADS were US$4.12 and US$4.09,for the secondquarter of 2019,compared to non-GAAP basic and diluted earnings per ADS of US$3.43 and US$3.40,and non-GAAP basic and diluted earnings per ADS of US$3.05 and US$3.04,for the secondquarter of 2018.

QuarterlyDividend

The board of directors has approved a dividend of US$1.04 per ADS for the second quarter of 2019,which is expected to be paid on August 30,2019 to shareholders of record as of the close of business on August 23,2019.

NetEase paid a dividend of US$0.69 per ADS for the first quarter of 2019 on June 7,2019.

The Company's board of directors has determined that,starting in the second quarter of 2019,quarterly dividends will be set at an amount equivalent to approximately 20%-30% 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 30,2019,the Company's total cash and cash equivalents,current and non-current time deposits and short-term investments balance totaled RMB55,601.6million (US$8,099.3million),compared to RMB50,064.3million as of December 31,2018. Cash flow generated from operating activities was RMB4,465.8million (US$650.5 million) for the second quarter of 2019,386.6million and RMB1,957.9 millionfor the preceding quarter and the second quarter of 2018,respectively.

Share Repurchase Program

On November 14,2018,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 June 30,no ADSs had been 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 affected 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$1.00 = RMB6.8650 on June 28,2019 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been,or could be,converted into US$ at that rate on June 28,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 renamed its "e-mail and others" segment to "innovative businesses and others" to better articulate the businesses included in this segment,there's no change to the business mix included in this segment. The Company now reports four reporting segments: online game services,e-commerce,advertising services and innovative businesses and others,and retrospectively revised prior period segment information to conform to current period presentation.

Impact of the Recently Adopted Major Accounting Pronouncement

In February 2016,the FASB issued ASU 2016-02 "Leases" as amended,which generally requires lessees to recognize operating andfinancing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surroundingthe amount,timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard effectiveJanuary 1,2019 on a modified retrospective basis and did not restate comparative periods. The Company recognized approximatelyRMB861.5 million as total right-of-use assets as well as total lease liabilities for the operating leases on its consolidated balance sheet as ofJanuary 1,2019. The Company recognized RMB709.5 millionand RMB746.3 million as total right-of-use assets and total lease liabilities,for the operating leaseson its consolidated balance sheet as ofJune 30,2019. Right-of-use assets are included in other long-term assets,and lease liabilities are included in accrual liabilities and other payables and other long-term payables,respectively based on payment terms on the consolidated balance sheet. Other than the foregoing,the Company does not expect the new standard to have a material impact on the net assets of theCompany's consolidated financial statements.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 9:00 p.m. Eastern Time on Wednesday,August 7,2019 (Beijing/Hong Kong Time: 9:00 a.m.,Thursday,August 8,2019). 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 1-929-477-0324 and providing conference ID: 8799967,10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-719-457-0820 and entering passcode 8799967#. The replay will be available through August 21,2019. 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 based in China dedicated to providing premium online services centered around content,community,communication and commerce. NetEase develops and operates some of the most popular PC-client and mobile games in China and has been expanding rapidly into other international markets such as Japan and North America in more recent years. In addition to its self-developed game content,NetEase also operates some of the most popular international online games in China by partnering with Blizzard Entertainment,Mojang AB (a Microsoft subsidiary) and other global game developers. NetEase also operates Kaola and Yanxuan,two e-commerce platforms that cater to the rising middle-class consumer market in China as well as offering advertising,e-mail and other innovative services including music and online education. 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 within China or globally,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 and the market for NetEase's e-commerce businesses may limit future growth of NetEase's revenues or cause revenues to decline; the risk that NetEase may not be able to continuously develop new and creative online services or that NetEase will not be able to set,or follow in a timely manner,trends in the market; the risk that the e-commerce market or the internet advertising market in China will not continue to grow and will remain subject to intense competition and the risk that investments by us in our e-commerce platforms and related services or in our advertising content and services may not increase the appeal of our websites,e-commerce platforms or mobile applications among users or result in increased e-commerce or advertising revenues; 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,

June 30,

2018

2019

2019

RMB

RMB

USD (Note 1)

Assets

Current assets:

Cash and cash equivalents

5,389,198

4,832,320

703,907

Time deposits

32,900,287

31,280,307

4,556,490

Restricted cash

4,817,340

4,311,451

628,034

Accounts receivable,net

4,288,500

4,494,715

654,729

Inventories,net

5,017,823

3,966,704

577,816

Prepayments and other current assets

4,627,797

4,718,971

687,397

Short-term investments

11,674,775

19,438,957

2,831,603

Total current assets

68,715,720

73,043,425

10,639,976

Non-current assets:

Property,equipment and software,378,560

5,477,572

797,898

Land use right,net

3,502,569

3,550,517

517,191

Deferred tax assets

1,064,295

812,129

118,300

Time deposits

100,000

50,000

7,283

Other long-term assets

8,206,784

9,866,660

1,437,241

Total non-current assets

18,252,208

19,756,878

2,877,913

Total assets

86,967,928

92,800,303

13,517,889

Liabilities,Redeemable Noncontrolling Interests and

Shareholders' Equity

Current liabilities:

Accounts payable

2,384,818

2,609,491

380,115

Salary and welfare payables

2,991,897

2,495,378

363,493

Taxes payable

2,272,023

2,375,743

346,066

Short-term loans

13,658,554

13,553,805

1,974,334

Deferred revenue

7,953,255

7,562,922

1,101,664

Accrued liabilities and other payables

5,848,463

5,335,315

777,176

Total current liabilities

35,109,010

33,932,654

4,942,848

Long-term payable:

Deferred tax liabilities

393,681

911,522

132,778

Other long-term payable

53,656

465,514

67,810

Total liabilities

35,347

35,309,690

5,143,436

Redeemable noncontrolling interests

5,385,736

5,823,281

848,257

Total NetEase,Inc.'s equity

45,231,636

50,951,338

7,421,899

Noncontrolling interests

794,209

715,994

104,297

Total shareholders' equity

46,025,845

51,667,332

7,526,196

Total liabilities,redeemable noncontrolling interests and

shareholders' equity

86,889

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

NETEASE,INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands,except per share data or per ADS data)

Quarter Ended

June 30,

March 31,

2018

2019

2019

2019

RMB

RMB

RMB

USD (Note 1)

Net revenues

16,283,885

18,356,157

18,768,999

2,734,013

Cost of revenues

(9,038,773)

(10,265,194)

(10,643,230)

(1,361)

Gross profit

7,245,112

8,090,963

8,125,769

1,183,652

Selling and marketing expenses

(2,273,243)

(1,695,392)

(1,767,316)

(257,439)

General and administrative expenses

(720,852)

(820,120)

(809,992)

(117,989)

Research and development expenses

(1,917,426)

(2,166,123)

(2,062,245)

(300,400)

Total operating expenses

(4,911,521)

(4,681,635)

(4,553)

(675,828)

Operating profit

2,333,591

3,409,328

3,486,216

507,824

Other income:

Investment (loss)/ income,net

(124,120)

155,795

24,383

3,552

Interest income,net

141,645

173,600

187,311

27,285

Exchange gains/ (losses),net

232,777

(45,394)

24,001

3,496

Other,net

99,682

38,904

81,135

11,819

Income before tax

2,683,575

3,732,233

3,803,046

553,976

Income tax

(420,525)

(1,268,959)

(685,178)

(99,807)

Net income after tax

2,263,050

2,463,274

3,117,868

454,169

Accretion and deemed dividends in connection with repurchase

of redeemable noncontrolling interests

(125,698)

(68,783)

(73,048)

(10,641)

Net (income)/ loss attributable to noncontrolling interests

(30,836)

(12,373)

26,547

3,867

Net income attributable to the Company's shareholders

2,106,516

2,382,118

3,071,367

447,395

Basic earnings per share

0.65

0.74

0.95

0.14

Basic earnings per ADS

16.20

18.57

23.84

3.47

Diluted earnings per share

0.65

0.74

0.95

0.14

Diluted earnings per ADS

16.13

18.43

23.64

3.44

Weighted average number of ordinary shares outstanding,basic

3,250,448

3,194

3,221,306

3,306

Weighted average number of ADS outstanding,basic

130,018

128,248

128,852

128,852

Weighted average number of ordinary shares outstanding,diluted

3,264,346

3,321

3,247,408

3,408

Weighted average number of ADS outstanding,diluted

130,574

129,253

129,896

129,896

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,

2018

2019

2019

2019

RMB

RMB

RMB

USD (Note 1)

Cash flows from operating activities:

Net income

2,169

Adjustments to reconcile net income to net

cash provided by operating activities:

Depreciation and amortization

470,813

587,342

642,417

93,579

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

investments in associated companies,other long-term investments

and other intangible assets

73,982

(158,461)

(18,399)

(2,680)

Share-based compensation cost

618,684

635,198

574,808

83,730

(Reversal of)/ provision for allowance for doubtful debts

(40,924)

(18,319)

2,854

416

(Gains)/ losses on disposal of property,equipment and software

(252)

2,738

1,394

203

Unrealized exchange (gains)/ losses

(240,378)

46,028

(65,947)

(9,606)

Gains on disposal of long-term investments and subsidiaries

-

(11,978)

(156)

(23)

Deferred income taxes

231,502

303,547

466,459

67,947

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

47,749

17,483

(1,153)

(168)

Changes in operating assets and liabilities:

Accounts receivable

623,889

(773,799)

584,626

85,160

Inventories

(555,048)

740,191

310,928

45,292

Prepayments and other current assets

353,950

(867,742)

594,928

86,661

Accounts payable

(295,359)

560,129

(339,356)

(49,433)

Salary and welfare payables

129,164

(555,379)

58,822

8,568

Taxes payable

(931,744)

937,352

(833,772)

(121,453)

Deferred revenue

(736,072)

396,692

(787,025)

(114,643)

Accrued liabilities and other payables

(55,079)

(917,722)

156,468

22,792

Net cash provided by operating activities

1,957,927

3,386,574

4,465,764

650,511

Cash flows from investing activities:

Purchase of property,equipment and software

(774,913)

(422,648)

(297,271)

(43,302)

Proceeds from sale of property,equipment and software

1,127

3,820

1,917

279

Purchase of intangible assets,content and licensed copyrights

(380,942)

(851,560)

(298,301)

(43,452)

Purchase of land use right

(556,171)

-

-

-

Net change in short-term investments with terms of three

months or less

1,954,370

(40,255)

1,503,083

218,949

Purchase of short-term investments with terms over three months

(6,399,000)

(4,890,000)

(9,110,000)

(1,327,021)

Proceeds from maturities of short-term investments with terms over

three months

3,014

2,322

2,759,491

401,965

Placement/rollover of matured time deposits

(4,304,035)

(16,596,540)

(16,279,752)

(2,371,413)

Proceeds from maturities of time deposits

4,935,749

15,959,459

18,588,553

2,707,728

Investment in associated companies and other long-term investments

(1,482,713)

(392,016)

(227,229)

(33,100)

Proceeds from disposal of long-term investments and business

-

208,682

42,399

6,176

Net change in other assets

(131,661)

(31,529)

(52,790)

(7,688)

Net cash used in investing activities

(3,870,175)

(4,741,265)

(3,369,900)

(490,879)

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,

2018

2019

2019

2019

RMB

RMB

RMB

USD (Note 1)

Cash flows from financing activities:

Proceeds of short-term bank loans with terms over three months

-

15,000

297,875

43,390

Net changes in short-term loans with terms of three months or less

2,807,263

741,113

(1,144,121)

(166,660)

Capital contribution from noncontrolling interests and

redeemable noncontrolling interests shareholders,net

433,872

68,611

215,913

31,451

(Cash paid)/ refund received for share repurchase

(3,341,505)

-

10,645

1,551

Dividends paid to shareholders

(191,583)

(413,589)

(613,117)

(89,311)

Net cash (used in)/ provided byfinancing activities

(291,953)

411,135

(1,232,805)

(179,579)

Effect of exchange rate changes on cash,cash equivalents

and restricted cash held in foreign currencies

77,883

(17,894)

35,624

5,189

Net decrease in cash,cash equivalents and restricted cash

(2,126,318)

(961,450)

(101,317)

(14,758)

Cash,cash equivalents and restricted cash,

beginning of the period

9,489,363

10,538

9,088

1,346,699

Cash,end of the period

7,363,045

9,088

9,771

1,331,941

Supplemental disclosures of cash flow information:

Cash paid for income tax,net

535,944

537,825

564,357

82,208

Cash paid for interest expense

74,802

108,664

115,410

16,811

Supplemental schedule of non-cash investing and financing activities:

Fixed asset purchases financed by accounts payable and accrued liabilities

362,207

318,078

382,062

55,654

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,

2018

2019

2019

2019

RMB

RMB

RMB

USD (Note 1)

Net revenues:

Online game services

10,060,827

11,850,184

11,433,361

1,665,457

E-commerce

4,365,501

4,789,330

5,246,898

764,297

Advertising services

634,071

438,569

581,589

84,718

Innovative businesses and others

1,223,486

1,278,074

1,507,151

219,541

Total net revenues

16,013

Cost of revenues:

Online game services

(3,594,833)

(4,299,345)

(4,220,652)

(614,807)

E-commerce

(3,922,430)

(4,159)

(4,677,571)

(681,365)

Advertising services

(209,320)

(221,268)

(258,825)

(37,702)

Innovative businesses and others

(1,312,190)

(1,445,422)

(1,182)

(216,487)

Total cost of revenues

(9,361)

Gross profit/ (loss):

Online game services

6,994

7,839

7,212,709

1,050,650

E-commerce

443,071

490,171

569,327

82,932

Advertising services

424,751

217,301

322,764

47,016

Innovative businesses and others

(88,704)

(167,348)

20,969

3,054

Total gross profit

7,652

Gross profit/ (loss) margin:

Online game services

64.3%

63.7%

63.1%

63.1%

E-commerce

10.1%

10.2%

10.9%

10.9%

Advertising services

67.0%

49.5%

55.5%

55.5%

Innovative businesses and others

(7.3%)

(13.1%)

1.4%

1.4%

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 = RMB6.8650 on the last trading day of June (June 28,2019) 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,

2018

2019

2019

2019

RMB

RMB

RMB

USD (Note 1)

Share-based compensation cost included in:

Cost of revenue

170,982

200,696

187,757

27,350

Operating expenses

- Selling and marketing expenses

29,288

28,852

22,572

3,288

- General and administrative expenses

197,550

203,725

191,240

27,857

- Research and development expenses

220,864

201,925

173,239

25,235

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

NETEASE,INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS

(in thousands,

2018

2019

2019

2019

RMB

RMB

RMB

USD (Note 1)

Net income attributable to the Company's

shareholders

2,395

Add: Share-based compensation

618,367

634,837

574,009

83,614

Non-GAAP net income attributable to

the Company's shareholders

2,724,883

3,016,955

3,645,376

531,009

Non-GAAP basic earnings per share

0.84

0.94

1.13

0.16

Non-GAAP basic earnings per ADS

20.96

23.52

28.29

4.12

Non-GAAP diluted earnings per share

0.83

0.93

1.12

0.16

Non-GAAP diluted earnings per ADS

20.87

23.34

28.06

4.09

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

View original content:/news-releases/netease-reports-second-quarter-2019-unaudited-financial-results-300897882.html