NetEase Announces Third Quarter 2020 Unaudited Financial Results

BEIJING,Nov. 19,2020 -- NetEase,Inc. (NASDAQ: NTES and HKEX: 9999,"NetEase" or the "Company"),one of China's leading internet and online game services providers,today announced its unaudited financial results for the third quarter ended September 30,2020.

Third Quarter 2020 Financial Highlights

Net revenues were RMB18.7 billion (US$2.7 billion),an increase of 27.5% compared with the third quarter of 2019.

- Online game services net revenues were RMB13.9 billion (US$2.0 billion),an increase of 20.2% compared with the third quarter of 2019.

- Youdao net revenues were RMB896.0 million (US$132.0 million),an increase of 159.0% compared with the third quarter of 2019.

- Innovative businesses and others net revenues were RMB3.9 billion (US$574.4 million),an increase of 41.6% compared with the third quarter of 2019.

Gross profit was RMB9.9 billion (US$1.5 billion),an increase of 25.6% compared with the third quarter of 2019.

Total operating expenses were RMB7.0 billion (US$1.0 billion),an increase of 54.7% compared with the third quarter of 2019.

Net income from continuing operations attributable to the Company's shareholders was RMB3.0 billion (US$441.6 million),which includes net exchange losses of RMB1.6 billion (US$231.4 million). Non-GAAP net income from continuing operations attributable to the Company's shareholders was RMB3.7 billion (US$540.4 million).[1]

Basic net income from continuing operations was US$0.65 per ADS (US$0.13 per share). Non-GAAP basic net income from continuing operations was US$0.80 per ADS (US$0.16 per share).[1] [2]

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

[2]Effective October 1,2020,the Company changed the ratio of its American depositary shares ("ADSs"),representing ordinary shares,from the previous one ADS for every twenty-five ordinary shares to one ADS for every five ordinary shares. The data throughout this announcement have been revised to reflect the ratio change as if it had occurred throughout the periods presented herein.

Third Quarter 2020 and Recent Operational Highlights

Introduced new titles to the Chinese market including Onmyoji: Yokai Koya,PES Club Manager,King of Hunters and For All Time,and EVE Echoes and MARVEL Duel to overseas markets.

Extended the popularity of a number of mobile titles that climbed China's iOS top grossing chart in the past months including Invincible,Onmyoji and Sky.

Maintained steady performances of flagship PC titles such as Fantasy Westward Journey Online,New Westward Journey Online II and Justice.

Strengthened NetEase Game's international presence with strong performances from Knives Out,Life-After and Identity V in Japan.

Further developed a robust pipeline with titles including Unknown Future,Akasha Book,Revelation mobile game,Infinite Lagrange,Harry Potter: Magic Awakened,The Lord of the Rings: Rise to War,Nightmare Breaker,Ghost World Chronicle,Diablo® Immortal™ and Pokémon Quest. Several of these titles,including Revelation mobile game,will be released before Chinese New Year.

Increased net revenues from Youdao's learning services and products by over 200% year-over-year.

"With strong and steady contributions from our online game services,our total net revenues for the third quarter reached RMB18.7 billion,an increase of 27.5% year-over-year," said Mr. William Ding,Chief Executive Officer and Director of NetEase. "The strength of our games business is bolstered by our diverse and growing game portfolio with impressive longevity. Additionally,our robust pipeline of games ready for launch is hugely exciting,and we cannot wait to unveil our game sensations across multiple genres to both domestic and global players in the coming quarters.

"Our other businesses including Youdao,NetEase Cloud Musicand Yanxuanare also on track,with promising year-over-year topline growth. As we work to bring even more value to our community and shareholders,we will continue to focus on expanding our sustainable growth prospects for each of our businesses," Mr. Ding concluded.

Third Quarter 2020 Financial Results

Net Revenues

Netrevenues for the thirdquarter of 2020 were RMB18,658.2million (US$2,748.1million),compared to RMB18,184.8million and RMB14,635.7million for the preceding quarter and the third quarter of 2019,respectively.

Net revenues from online game services were RMB13,862.0 million (US$2,041.7million) for the third quarter of 2020,compared to RMB13,828.3million and RMB11,534.8 million for the preceding quarter and the third quarter of 2019,respectively. Net revenues from mobile games accounted for approximately 72.7% of net revenues from online games for the third quarter of 2020,compared to 72.3% and 71.0%forthe precedingquarter and the third quarter of 2019,respectively.

Net revenues from Youdao were RMB896.0million (US$132.0million) for the third quarter of 2020,compared to RMB623.3million and RMB345.9million for the preceding quarter and the third quarter of 2019,respectively.

Net revenues from innovative businesses and others were RMB3,900.1million (US$574.4million) for the third quarter of 2020,compared to RMB3,733.3million and RMB2,755.0million for the preceding quarter and the third quarter of 2019,respectively.

Gross Profit

Gross profit for the third quarter of 2020 was RMB9,885.8 million (US$1,456.0 million),compared to RMB9,792.2 million and RMB7,870.4 million for the preceding quarter and the third quarter of 2019,respectively.

The quarter-over-quarter gross profit in online game services was generally stable. The year-over-year increase was primarily due to increased net revenues from self-developed games such as Fantasy Westward Journey H5,Life-After and Knives Out,as well as certain licensed games.

The quarter-over-quarter and year-over-year increases in Youdao gross profit were primarily attributable to the significant increase in net revenues,improved economies of scale,and faculty compensation structure optimization for its learning services and products.

The quarter-over-quarter decrease in innovative businesses and others gross profit was primarily due to decreased gross profit from advertising services. The year-over-year increase wasprimarily due to increased net revenues from NetEaseCloud Music.

Gross Profit Margin

Gross profit margin for online game services for the third quarter of 2020 was 63.6%,compared to 63.8% each for the preceding quarter and the third quarter of 2019.Gross profit margin for online game serviceswas generally stable,fluctuating within a narrow band based on the revenue mix of mobile and PC games,as well as self-developed and licensed games.

Gross profit margin for Youdao for the third quarter of 2020 was 45.9%,compared to 45.2% and 25.8% for the preceding quarter and the third quarter of 2019,respectively.The quarter-over-quarter gross profit margin was comparatively stable. The year-over-year increasewas primarily attributable to the factors enumerated above.

Gross profit margin for innovative businesses and others for the third quarter of 2020 was 16.8%,compared to 18.5% and 15.2% for the preceding quarter and the third quarter of 2019,respectively. The quarter-over-quarter decrease was primarily due to decreased gross profit margin from advertising services. The year-over-year increase was primarily due to increased net revenues from NetEase Cloud Music.

Operating Expenses

Total operating expenses for the third quarter of 2020 were RMB7,015.7 million (US$1,033.3million),compared to RMB5,622.3million and RMB4,535.6 million for the preceding quarter and the third quarter of 2019,respectively. The quarter-over-quarterand year-over-year increases were mainly due to increased marketing expenditures related to Youdao and online game services,as well as higher staff-related costs and research and development investments.

Other Income

Other income consisted of investment income,interest income,exchange gains/ (losses) and others. The quarter-over-quarter and year-over-year decreases were mainly due to netexchange losses of RMB1,571.3 million (US$231.4 million) recorded in the third quarter of 2020,which were mainly related to net unrealized exchange 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. Such unrealized exchange losses were partially offset by increased investment income arisingfromfair value changes of equity investments with readily determinable fair value.

Income Taxes

The Company recorded a net income tax charge of RMB342.7 million (US$50.5 million) for the third quarter of 2020,compared to RMB1,064.5 million and RMB88.0 million for the preceding quarter and the third quarter of 2019,respectively. The effective tax rate for the third quarter of 2020 was 10.9%,compared to 18.6% and 2.1% for the preceding quarter and the third quarter of 2019,respectively. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter,and the rate for the third quarter of 2020 was affected by certain tax credits received and recognized during the quarter.

Net Income and Non-GAAP Net Income

Net income from continuing operations attributable to the Company's shareholders for the third quarter of 2020 totaled RMB2,998.2 million (US$441.6million),which includes net exchange losses of RMB1,571.3 million (US$231.4 million),compared to RMB4,537.8 million and RMB4,134.2 million for the preceding quarter and the third quarter of 2019,respectively.

Non-GAAP net income from continuing operations attributable to the Company's shareholders for the third quarter of 2020 totaled RMB3,669.2 million (US$540.4 million),226.0 million and RMB4,726.0 million for the preceding quarter and the third quarter of 2019,respectively.

NetEase reported basic and diluted net income from continuing operations per ADS of US$0.65 and US$0.64,respectively,for the third quarter of 2020,compared to US$1.03 and US$1.02,for the preceding quarter,and US$0.94 each for the third quarter of 2019. NetEase reported basic and diluted net income from continuing operations per share of US$0.13 each for the third quarter of 2020,compared to US$0.21 and US$0.20,and US$0.19 each for the third quarter of 2019.

Non-GAAP basic and diluted net income from continuing operations per ADS were US$0.80 and US$0.79,compared to US$1.19 and US$1.17,for the preceding quarter and US$1.08 and US$1.07,for the third quarter of 2019. Non-GAAP basic and diluted net income from continuing operations per share were US$0.16 each for the third quarter of 2020,compared to US$0.24 and US$0.23,for the preceding quarter and US$0.22 and US$0.21,for the third quarter of 2019.

QuarterlyDividend

The board of directors has approved a dividend of US$0.1950 per ADS (US$0.0390 per share) for the third quarter of 2020,to holders of ADSs and holders of ordinary shares as of the close of business on December 4,New York Time and Hong Kong Time,payable in U.S. dollars. For holders of ordinary shares,in order to qualify for the dividend,all valid documents for the transfer of shares accompanied by the relevant share certificates must be lodged for registration with the Company's Hong Kong branch share registrar,Computershare Hong Kong Investor Services Limited,at Shops 1712-1716,17th Floor,Hopewell Centre,183 Queen's Road East,Wanchai,Hong Kong no later than 4:30 p.m. on December 4,2020 (Hong Kong Time). The payment date is expected to be on December 15,2020 for holders of ordinary shares and on or around December 18,2020 for holders of ADSs (assuming the dividend payment is timely received by the ADS depositary).

NetEase paid a dividend of US$0.2320 per ADS (US$0.0464 per share) for the first quarter of 2020 in June 2020,and paid a dividend of US$0.2970 per ADS (US$0.0594 per share) for the second quarter of 2020 in September 2020.

Starting in the second quarter of 2019,the Company's policy has been to set quarterly dividends 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 September 30,the Company's total cash and cash equivalents,current and non-current time deposits and short-term investments balance totaled RMB102,650.0 million (US$15,118.7million),compared to RMB74,406.0 million as of December 31,2019. Cash flow generated from continuing operating activities was RMB5,401.0 million (US$795.5million) for the third quarter of 2020,772.3million and RMB3,846.3 million for the preceding quarter and the third quarter of 2019,respectively.

Share Purchase/ RepurchaseProgram

On November 20,2019,the Company announced that its board of directors had approved a share purchase program of up to US$20.0 million of Youdao's outstanding ADSs for a period not to exceed 12 months beginning on November 25,2019. Under the terms of this program,NetEase may purchase Youdao's ADSs in open-market transactions on the New York Stock Exchange. As of September 30,approximately198,000 ADSs had been purchased under this program for a total cost of US$3.4 million.

On February 26,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 March 2,2020.On May 19,the Company announced that its board of directors had approved an amendment to such program to increase the total authorized repurchase amount to US$2.0 billion. Under the terms of this program,NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market. As of September 30,approximately15.3 million ADSs had been repurchased under this program for a total cost of US$1.1 billion.

For both of the above-mentioned current programs,it is expected that the timing and dollar amount of purchase transactions will be in accordance with the Securities and Exchange Commission (SEC) Rule 10b-18 requirements and such purchases may be affected pursuant to a plan in conformity with SEC Rule 10b5-1. The extent to which NetEase repurchases its ADSs or purchases Youdao's ADSs will depend upon a variety of factors,including market conditions. These programs may be suspended or discontinued at any time.

** The United States dollar (US$) amounts disclosed in this announcement 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$1.00 = RMB6.7896 on September 30,2020 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been,or could be,converted into US$ at that rate on September 30,or at any other certain date. The percentages stated are calculated based on RMB.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 7:00 a.m. NewYork Time on Thursday,November 19,2020 (Beijing/Hong Kong Time: 8:00 p.m.,Thursday,2020). 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 1-646-828-8143 and providing conference ID: 5158324,15 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 5158324#. The replay will be available through December 2,2020.

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.

As a leading internet technology company based in China,NetEase,"NetEase") is dedicated to providing premium online services centered around innovative and diverse content,community,communication and commerce. NetEase develops and operates some of China's most popular mobile and PC games. In more recent years,NetEase has expanded into international markets including Japan and North America. In addition to its self-developed game content,NetEase partners with other leading game developers,such as Blizzard Entertainment and Mojang AB (a Microsoft subsidiary),to operate globally renowned games in China. NetEase's other innovative service offerings include the intelligent learning services of its majority-controlled subsidiary,Youdao (NYSE: DAO); music streaming through its leading NetEase Cloud Music business; and its private label e-commerce platform,Yanxuan. For more information,please visit: http://ir.netease.com/.

Forward Looking Statements

This announcement 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. In addition,statements that are not historical facts,including statements about NetEase's strategies and business plans,its expectations regarding the growth of its business and its revenue and the quotations from management in this announcement are or contain forward-looking statements. NetEase may also make forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission (the "SEC"),in announcements made on the website of The Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange"),in press releases and other written materials and in oral statements made by its officers,directors or employees to third parties. 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 position in that market in China or globally; the risk that COVID-19 or other health risks in China or globally could adversely affect the Company's operations or financial results; risks associated with NetEase's business and operating strategies and itsability to implement such strategies; NetEase's ability to develop and manage its operations and business; competition for,among other things,capital,technology and skilled personnel; potential changes in government regulation that could adversely affect the industry and geographical markets in which NetEase operates; 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; competition in NetEase's existing and potential markets; and the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase's business and financial results. Further information regarding these and other risks is included in NetEase's filings with the SEC and announcements on the website of the Hong Kong Stock Exchange. 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 from continuing operations attributable to the Company's shareholders and non-GAAP basic and diluted net income from continuing operations per ADS and per share,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 from continuing operations attributable to the Company's shareholders as net income from continuing operations attributable to the Company's shareholders excluding share-based compensation expenses. Non-GAAP net income from continuing operations 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 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 from continuing operations attributable to the Company's shareholders is that it does not reflect all items of expense/ income that affect our operations. Share-based compensation expenses have been and may continue to be incurred in NetEase's business and are not reflected in the presentation of non-GAAP net income from continuing operations 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 from continuing operations 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 "Unaudited Reconciliation of GAAP and Non-GAAP Results" at the end of this announcement. 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

Email: ir@service.netease.com

Tel: (+86) 571-8985-3378

Twitter: https://twitter.com/NetEase_Global

Brandi Piacente

Email: netease@thepiacentegroup.com

Tel: (+1) 212-481-2050

NETEASE,INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(RMB and USD in thousands)

December 31,

September 30,

2019

2020

2020

RMB

RMB

USD (Note 1)

Assets

Current assets:

Cash and cash equivalents

3,246,373

6,466,250

952,376

Time deposits

53,487,075

79,639,453

11,729,624

Restricted cash

3,150,354

2,885,935

425,052

Accounts receivable,net

4,169,358

4,948,999

728,909

Inventories,net

650,557

524,360

77,230

Prepayments and other current assets

4,817,422

7,005,805

1,031,843

Short-term investments

15,312,595

12,294,335

1,810,760

Assets held for sale

271,278

-

-

Total current assets

85,105,012

113,765,137

16,755,794

Non-current assets:

Property,equipment and software,621,712

4,439,270

653,834

Land use right,net

3,707,179

4,200,099

618,608

Deferred tax assets

903,904

892,862

131,504

Time deposits

2,360,000

4,250,000

625,957

Other long-term assets

15,424,166

17,184,276

2,530,970

Assets held for sale

2,398

-

-

Total non-current assets

27,019,359

30,966,507

4,560,873

Total assets

112,124,371

144,731,644

21,316,667

Liabilities,Redeemable Noncontrolling Interests

and Shareholders' Equity

Current liabilities:

Accounts payable

1,212,303

997,099

146,857

Salary and welfare payables

2,957,360

2,130,624

313,807

Taxes payable

3,156,513

4,062,230

598,302

Short-term loans

16,828,226

22,247,523

3,276,706

Deferred revenue

8,602,227

10,376,439

1,528,284

Accrued liabilities and other payables

5,484,228

7,114,994

1,047,925

Liabilities held for sale

2,156

-

-

Total current liabilities

38,243,013

46,928,909

6,911,881

Non-current liabilities:

Deferred tax liabilities

382,030

533,208

78,533

Other long-term payable

456,912

514,763

75,816

Liabilities held for sale

961

-

-

Total non-current liabilities

839,903

1,971

154,349

Total liabilities

39,082,916

47,976,880

7,066,230

Redeemable noncontrolling interests

10,448,600

10,660,981

1,570,193

Total NetEase,Inc.'s equity

61,453,699

85,787

12,555,495

Noncontrolling interests

1,139,156

846,996

124,749

Total shareholders' equity

62,592,855

86,093,783

12,680,244

Total liabilities,redeemable noncontrolling

interests and shareholders' equity

112,667

The accompanying notes are an integral part of this announcement.

NETEASE,INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

Three Months Ended

Nine Months Ended

September 30,

June 30,

2019

2020

2020

2020

2019

2020

2020

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues

14,635,690

18,806

18,658,222

2,748,059

43,506,341

53,905,395

7,939,406

Cost of revenues

(6,340)

(8,392,631)

(8,772,379)

(1,292,032)

(20,161,469)

(24,849,755)

(3,659,973)

Gross profit

7,870,350

9,792,175

9,843

1,456,027

23,344,872

29,055,640

4,279,433

Selling and marketing expenses

(1,619,531)

(2,321,397)

(3,442,821)

(507,073)

(4,067,384)

(7,627,289)

(1,123,378)

General and administrative expenses

(753,794)

(892,622)

(783,815)

(115,443)

(2,317,544)

(2,561,871)

(377,323)

Research and development expenses

(2,162,254)

(2,408,306)

(2,789,051)

(410,783)

(6,145,736)

(7,340,006)

(1,081,066)

Total operating expenses

(4,535,579)

(5,622,325)

(7,015,687)

(1,033,299)

(12,664)

(17,529,166)

(2,581,767)

Operating profit

3,334,771

4,850

2,156

422,728

10,814,208

11,526,474

1,697,666

Other income:

Investment income,net

394,907

711,159

1,280,483

188,595

574,873

1,881,911

277,176

Interest income,net

184,795

396,519

446,914

65,823

542,228

1,188,617

175,064

Exchange gains/ (losses),net

120,562

17,008

(1,571,326)

(231,431)

153,688

(1,310,261)

(192,981)

Other,net

214,847

421,199

109,940

16,192

330,037

597,847

88,053

Income before tax

4,249,882

5,715,735

3,136,167

461,907

12,415,034

13,884,588

2,044,978

Income tax

(87,957)

(1,064,455)

(342,700)

(50,474)

(2,038,397)

(2,489,188)

(366,618)

Net income from continuing operations

4,925

4,651,280

2,793,467

411,433

10,637

11,395,400

1,678,360

Net income from discontinued operations

8,596,089

-

-

-

7,962,519

-

-

Net income

12,758,014

4,433

18,339,156

11,360

Accretion and deemed dividends in connection with

repurchase of redeemable noncontrolling interests

(70,124)

(150,958)

(118,448)

(17,446)

(211,955)

(655,425)

(96,534)

Net loss attributable to noncontrolling interests

42,409

37,484

323,221

47,605

56,583

347,077

51,119

Net income attributable to the Company's shareholders

12,730,299

4,537,806

2,998,240

441,592

18,183,784

11,087,052

1,632,945

Including:

-Net income from continuing operations attributable to the

Company's shareholders

4,134,210

4,592

10,221,265

11,945

-Net income from discontinued operations attributable to the

Company's shareholders

8,519

-

-

Basic net income per share:

3.95

1.40

0.89

0.13

5.65

3.37

0.50

-Continuing operations

1.28

1.40

0.89

0.13

3.18

3.37

0.50

-Discontinued operations

2.67

-

-

-

2.47

-

-

-

-

Basic net income per ADS:

19.73

7.00

4.43

0.65

28.25

16.87

2.48

-Continuing operations

6.41

7.00

4.43

0.65

15.88

16.87

2.48

-Discontinued operations

13.32

-

-

-

12.37

-

-

-

-

Diluted net income per share:

3.91

1.38

0.87

0.13

5.60

3.33

0.49

-Continuing operations

1.27

1.38

0.87

0.13

3.15

3.33

0.49

-Discontinued operations

2.64

-

-

-

2.45

-

-

-

-

Diluted net income per ADS:

19.56

6.92

4.37

0.64

28.02

16.65

2.45

-Continuing operations

6.35

6.92

4.37

0.64

15.75

16.65

2.45

-Discontinued operations

13.21

-

-

-

12.27

-

-

Weighted average number of ordinary shares outstanding,

basic

3,225,704

3,242,061

3,384,051

3,217,806

3,286,194

3,194

Weighted average number of ADS outstanding,basic

645,141

648,412

676,810

676,810

643,561

657,239

657,239

Weighted average number of ordinary shares outstanding,

diluted

3,254,269

3,281,100

3,431,274

3,244,404

3,329,149

3,149

Weighted average number of ADS outstanding,diluted

650,854

656,220

686,255

686,255

648,881

665,830

665,830

Effective October 1,from the previous one ADS for every twenty-five

ordinary shares to one ADS for every five ordinary shares. The data throughout this announcement have been revised to reflect the ratio change as if it had occurred throughout the periods presented herein.

The accompanying notes are an integral part of this announcement.

NETEASE,INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(RMB and USD in thousands)

Three Months Ended

Nine Months Ended

September 30,

2019

2020

2020

2020

2019

2020

2020

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Cash flows from operating activities:

Net income

12,360

Net income from discontinued operations

(8,089)

-

-

-

(7,519)

-

-

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

703,387

892,150

913,049

134,478

1,918,138

2,495,256

367,511

Fair value changes of equity security investments

(144,547)

(503,281)

(1,103,428)

(162,517)

(187,425)

(1,669)

(188,475)

Impairment losses of investments and other intangible

assets

12,585

-

-

-

177,567

6,600

972

Fair value changes of short-term investments

(198,390)

(174,738)

(133,943)

(19,728)

(497,354)

(461,787)

(68,014)

Share-based compensation cost

593,259

691,945

676,751

99,675

1,781,726

2,034,510

299,651

Allowance for/ (reversal of) provision for doubtful debts

4,725

(1,305)

(2,146)

(316)

(10,740)

46,488

6,847

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

software

(2,639)

1,070

2,645

390

1,551

3,752

553

Unrealized exchange (gains)/losses

(111,807)

(20,159)

1,568,627

231,034

(141,850)

1,305,960

192,347

(Gains)/losses on disposal of long-term investments,

business and subsidiaries

(83,678)

(14,803)

2,995

441

(95,812)

(27,241)

(4,012)

Deferred income taxes

(114,434)

499,509

(550,137)

(81,026)

654,942

162,220

23,892

Net equity share of (gains)/ losses from associated

companies

(8,595)

(10,948)

(28,915)

(4,259)

7,947

(86,074)

(12,677)

Changes in operating assets and liabilities:

Accounts receivable

(333,859)

(498,550)

43,177

6,359

(556,921)

(885,908)

(130,480)

Inventories

83,150

3,329

34,429

5,071

378,866

126,198

18,587

Prepayments and other assets

(746,434)

233,607

65,383

9,630

(1,179,256)

(804,808)

(118,535)

Accounts payable

(105,131)

(271,697)

147,811

21,770

(123,461)

(222,565)

(32,780)

Salary and welfare payables

(447,025)

132,037

(447,645)

(65,931)

(888,267)

(853,515)

(125,709)

Taxes payable

(408,348)

(568,138)

240,464

35,416

(302,048)

906,404

133,499

Deferred revenue

816,599

(605,444)

1,000,530

147,362

477,582

1,774,212

261,313

Accrued liabilities and other payables

175,544

336,444

177,853

26,195

(391,548)

1,491

152,953

Net cash provided by continuing operating activities

3,846,287

4,308

5,400,967

795,477

11,274

16,673,924

2,455,803

Net cash provided by discontinued operating activities

7,136

-

-

-

305,487

-

-

Net cash provided by operating activities

3,853,423

4,705,761

16,803

Cash flows from investing activities:

Purchase of property,equipment and software

(329,722)

(237,039)

(350,866)

(51,677)

(973,760)

(752,225)

(110,791)

Proceeds from sale of property,equipment and software

5,190

3,970

4,903

722

10,908

9,645

1,421

Purchase of intangible assets,content and licensed

copyrights

(208,748)

(839,441)

(755,132)

(111,219)

(1,358,609)

(1,901,408)

(280,047)

Net change in short-term investments with terms of three

months or less

(683,304)

1,083,342

298,667

43,989

779,524

601,474

88,588

Purchase of short-term investments

(4,997,000)

(3,080,000)

(4,000)

(670,879)

(18,000)

(17,000)

(2,607,665)

Proceeds from maturities of short-term investments

5,842

2,345,218

11,295,357

1,663,626

10,972,655

20,023,529

Investment in associated companies and other long-term

investments

(711,229)

(520,762)

(647,533)

(95,371)

(1,330,474)

(1,373,300)

(202,265)

Proceeds from disposal of investment in equity

investments,businesses and subsidiaries

127,332

33,856

397,342

58,522

378,413

628,150

92,516

Placement/rollover of matured time deposits

(19,634)

(38,412,268)

(26,718,380)

(3,935,192)

(52,170,926)

(76,798,135)

(11,311,143)

Proceeds from maturities of time deposits

11,869,243

19,266

13,550,559

1,995,782

46,417,255

46,633,442

6,868,364

Change in other long-term assets

63,196

(76,103)

(21,957)

(3,234)

(25,116)

(108,582)

(15,993)

Amounts received from disposed businesses

1,488,349

-

-

-

1,938,835

-

-

Net cash used in continuing investing activities

(6,485)

(20,256,961)

(7,502,040)

(1,104,931)

(14,295)

(30,237,388)

(4,486)

Net cash used in discontinued investing activities

(264,897)

-

-

-

(832,252)

-

-

Net cash used in investing activities

(7,079,382)

(20,931)

(15,190,547)

(30,486)

The accompanying notes are an integral part of this announcement.

NETEASE,INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(RMB and USD in thousands)

Three Months Ended

Nine Months Ended

September 30,

2019

2020

2020

2020

2019

2020

2020

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Cash flows from financing activities:

Proceeds of short-term bank loans

58,840

360,474

68,978

10,159

371,715

529,452

77,980

Payment of short-term bank loans

-

(358,171)

-

-

-

(456,566)

(67,245)

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

or less

1,469,031

2,176

1,040

151,856

1,023

5,875,786

865,410

Net proceeds received from/(paid for) issuance of shares in

Hong Kong

-

22,467

(212)

(31)

-

22,255

3,252,512

Capital injection from/ (repurchase of) noncontrolling interests

and redeemable noncontrolling interests shareholders,net

128,192

163,865

4,815

709

412,716

(278,952)

(41,085)

Cash (paid for)/received from repurchase of NetEase's/

purchase of Youdao's ADSs

(7)

(3,260,996)

(2,223,165)

(327,437)

10,638

(8,045,058)

(1,909)

Dividends paid to shareholders

(923,444)

(1,115,136)

(1,377,570)

(202,894)

(1,950,150)

(3,419,251)

(503,601)

Net cash provided/(used in) by financing activities

732,612

20,178,679

(2,496,114)

(367,638)

(89,058)

16,288,666

2,399,062

Effect of exchange rate changes on cash,cash equivalents

and restricted cash held in foreign currencies

38,196

180,056

(25,033)

(3,687)

55,926

229,123

33,746

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

cash

(2,151)

4,874,082

(4,220)

(680,779)

(3,517,918)

2,954,325

435,125

Cash,cash equivalents and restricted cash,at thebeginning

of the period

9,143,771

9,100,323

13,974,405

2,058,207

10,206,538

6,397,860

942,303

Cash,at end of the

period

6,688,620

13,405

9,352,185

1,428

6,620

9,428

Less: Cash,cash equivalents and restricted cash of held for sale

at end of the period

14,693

-

-

-

14,693

-

-

Cash,cash equivalents and restricted cash of continuing

operations at end of the period

6,927

13,927

9,428

Supplemental disclosures of cash flow information of

continuing operations:

Cash paid for income tax,net

906,425

548,556

948,130

139,644

2,004,180

1,698,730

250,196

Cash paid for interest expense

73,573

55,301

47,862

7,049

297,647

199,874

29,438

Supplemental schedule of non-cash investing and financing

activities of continuing opearations:

Fixed asset purchases financed by accounts payable and accrued

liabilities

292,528

277,314

238,309

35,099

292,528

238,099

The accompanying notes are an integral part of this announcement.

NETEASE,INC.

UNAUDITED SEGMENT INFORMATION

(RMB and USD in thousands,except percentages)

Three Months Ended

Nine Months Ended

September 30,

2019

2020

2020

2020

2019

2020

2020

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues:

Online game services

11,534,763

13,256

13,862,035

2,041,657

34,818,308

41,208,535

6,069,361

Youdao

345,908

623,290

896,041

131,973

894,451

2,060,719

303,511

Innovative businesses and others

2,019

3,733,260

3,900,146

574,429

7,582

10,636,141

1,566,534

Total net revenues

14,406

Cost of revenues:

Online game services

(4,172,678)

(5,009,354)

(5,177)

(742,927)

(12,692,675)

(14,362)

(2,195,323)

Youdao

(256,674)

(341,751)

(484,488)

(71,357)

(646,259)

(1,131,902)

(166,711)

Innovative businesses and others

(2,335,988)

(3,526)

(3,714)

(477,748)

(6,822,535)

(8,812,491)

(1,297,939)

Total cost of revenues

(6,973)

Gross profit:

Online game services

7,362,085

8,902

8,858

1,298,730

22,125,633

26,303,173

3,038

Youdao

89,234

281,539

411,553

60,616

248,192

928,817

136,800

Innovative businesses and others

419,031

691,734

656,432

96,681

971,047

1,823,650

268,595

Total gross profit

7,433

Gross profit margin:

Online game services

63.8%

63.8%

63.6%

63.6%

63.5%

63.8%

63.8%

Youdao

25.8%

45.2%

45.9%

45.9%

27.7%

45.1%

45.1%

Innovative businesses and others

15.2%

18.5%

16.8%

16.8%

12.5%

17.1%

17.1%

The accompanying notes are an integral part of this announcement.

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 = RMB6.7896on the last trading day of September 2020(September 30,2020) 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):

Three Months Ended

Nine Months Ended

September 30,

2019

2020

2020

2020

2019

2020

2020

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Share-based compensation cost included in:

Cost of revenues

180,990

204,953

200,116

29,474

567,340

612,984

90,283

Operating expenses

- Selling and marketing expenses

21,176

27,034

25,563

3,765

67,567

77,408

11,401

- General and administrative expenses

200,394

247,589

236,323

34,807

585,614

714,283

105,203

- Research and development expenses

190,699

212,369

214,749

31,629

561,205

629,835

92,765

The accompanying notes are an integral part of this announcement.

NETEASE,INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS

(in thousands,

2019

2020

2020

2020

2019

2020

2020

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net income from continuing operations attributable to

the Company's shareholders

4,945

Add: Share-based compensation

591,769

688,227

671,004

98,828

1,779,077

2,021,102

297,676

Non-GAAP net income from continuing operations

attributable to the Company's shareholders

4,725,979

5,226,033

3,669,244

540,420

12,342

13,108,154

1,930,621

Non-GAAP basic net income from continuing

operations per share

1.47

1.61

1.08

0.16

3.73

3.99

0.59

Non-GAAP basic net income from continuing

operations per ADS

7.33

8.06

5.42

0.80

18.65

19.94

2.94

Non-GAAP diluted net income from continuing

operations per share

1.45

1.59

1.07

0.16

3.70

3.94

0.58

Non-GAAP diluted net income from continuing

operations per ADS

7.26

7.96

5.35

0.79

18.49

19.69

2.90

The accompanying notes are an integral part of this announcement.

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