NetEase Announces Second Quarter 2021 Unaudited Financial Results

HANGZHOU,China,Aug. 31,2021 -- 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 second quarter ended June 30,2021.

Second Quarter 2021 Financial Highlights

Net revenues were RMB20.5 billion (US$3.2 billion),an increase of 12.9% compared with the second quarter of 2020.

Online game services net revenues were RMB14.5 billion (US$2.3 billion),an increase of 5.1% compared with the second quarter of 2020.

Youdao net revenues were RMB1.3 billion (US$200.3 million),an increase of 107.5% compared with the second quarter of 2020.

Innovative businesses and others net revenues were RMB4.7 billion (US$728.4 million),an increase of 26.0% compared with the second quarter of 2020.

Gross profit was RMB11.2 billion (US$1.7 billion),an increase of 14.3% compared with the second quarter of 2020.

Total operating expenses were RMB7.4 billion (US$1.2 billion),an increase of 32.2% compared with the second quarter of 2020.

Net income attributable to the Company's shareholders was RMB3.5billion (US$548.5million). Non-GAAP net income attributable to the Company's shareholders was RMB4.2 billion (US$654.8million).[1]

Basic net income per share was US$0.16 (US$0.82 per ADS). Non-GAAP basic net income per share was US$0.20 (US$0.98 per ADS).[1]

Second Quarter 2021 and Recent Operational Highlights

Expanded user base and diversified portfolio with new games including:

Naraka: Bladepoint,which led the top-sellers chart on Steam following its global launch in August.

Other exciting titles such as Infinite Lagrange,Pokémon Quest,MARVEL Super War and Ace Racer thrilled players.

Invigorated players with longstanding flagship titles including the Fantasy Westward Journey and Westward Journey Online series,as well as popular hit games including Life-After,Onmyoji and Onmyoji Arena.

Announced that the mobile game Harry Potter: Magic Awakened,co-developed by NetEase and Warner Bros. Interactive Entertainment under the Portkey Games label,will launch on September 9.

Enriched strong game development pipeline with exciting titles including Nightmare Breaker,The Lord of the Rings: Rise to War,Diablo® Immortal™ and Ghost World Chronicle.

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

"Our businesses continued to thrive in the second quarter generating total net revenues of RMB20.5 billion,growing 12.9% year-over-year," said Mr. William Ding,Chief Executive Officer and Director of NetEase. "Our existing games grew steadily despite a high base last year,and we are excited about our robust pipeline of new titles that buildson our leading game roster. We kicked off our game-release schedule for the second half of the year with several gripping new hitssuch as Naraka: Bladepoint,capturing wide interest from passionate game players globally. Withconfirmed plans to release the game Harry Potter: Magic Awakened on September 9,we are eager to introduce more amazing titles later this year. In addition,we continue to boost our content ecosystem and bring innovative product additions to NetEase Cloud Music strengthening its highly engaged music-centric community," Mr. Ding concluded.

Second Quarter 2021 Financial Results

Net Revenues

Netrevenues for the secondquarter of 2021 were RMB20,524.5million (US$3,178.8million),compared with RMB20,517.2 million and RMB18,184.8million for the preceding quarter and the second quarter of 2020,respectively.

Net revenues from online game services were RMB14,528.1million (US$2,250.1million) for the second quarter of 2021,compared with RMB14,981.8 million and RMB13,828.3million for the preceding quarter and the second quarter of 2020,respectively. Net revenues from mobile games accounted for approximately 72.1% of net revenues from online game services for the second quarter of 2021,compared with 72.8% and 72.3%forthe precedingquarter and the second quarter of 2020,respectively.

Net revenues from Youdao were RMB1,293.4million (US$200.3million) for the second quarter of 2021,compared with RMB1,339.9 million and RMB623.3million for the preceding quarter and the second quarter of 2020,respectively.

Net revenues from innovative businesses and others were RMB4,703.0million (US$728.4million) for the second quarter of 2021,compared with RMB4,195.6million and RMB3,733.3million for the preceding quarter and the second quarter of 2020,respectively.

Gross Profit

Gross profit for the second quarter of 2021 was RMB11,189.6million (US$1,733.1million),compared with RMB11,052.6 million and RMB9,792.2million for the preceding quarter and the second quarter of 2020,respectively.

The year-over-year increase in online game services gross profit wasprimarily due to increased net revenues from both mobile and PC games,including the newly launched Revelation mobile game and other existing games such as Fantasy Westward JourneyOnline.

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

The quarter-over-quarter and year-over-year increases in innovative businesses and others gross profit were primarily due to the increased net revenues from,and improved cost control at,NetEase Cloud Music.

Gross ProfitMarginGross profit margin for online game services for the second quarter of 2021 was 66.1%,compared with 64.6% and 63.8% for the preceding quarter and the second quarter of 2020,respectively.Gross profit margin for online game servicesis generally stable,fluctuating within a narrow band based on the revenue mix of mobile and PC games,as well as NetEase's self-developed and licensed games.Gross profit margin for Youdao for the second quarter of 2021 was 52.3%,compared with 57.3% and 45.2% for the preceding quarter and the second quarter of 2020,respectively.The year-over-year increasewas primarily attributable to the factors enumerated above.Gross profit margin for innovative businesses and others for the second quarter of 2021 was 19.3%,compared with 14.4% and 18.5% for the preceding quarter and the second quarter of 2020,respectively.The quarter-over-quarter and year-over-year increases were primarily attributable to the factors enumerated above.Operating ExpensesTotal operating expenses for the second quarter of 2021 were RMB7,431.5million (US$1,151.0million),compared with RMB6,777.1 million and RMB5,622.3 million for the preceding quarter and the second quarter of 2020,respectively. The quarter-over-quarterand year-over-year increases were mainly due to increased marketing expenditures related to Youdao and other businesses,as well as higher staff-related costs and research and development investments.Other Income/ (Expenses)Other income/ (expenses) consisted of investment income,interest income,exchange gains/ (losses) and others. The quarter-over-quarter and year-over-year decreases were mainly due to 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.Income TaxesThe Company recorded a net income tax charge of RMB1,113.2 million (US$172.4 million) for the second quarter of 2021,273.4 million and RMB1,064.5 million for the preceding quarter and the second quarter of 2020,respectively. The effective tax rate for the second quarter of 2021 was 24.3%,compared with 22.0% and 18.6% for the preceding quarter and the second quarter of 2020,respectively. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter.Net Income and Non-GAAP Net IncomeNet income attributable to the Company's shareholders totaled RMB3,541.8 million (US$548.5 million) for the second quarter of 2021,439.2million and RMB4,537.8 million for the preceding quarter and the second quarter of 2020,respectively.Non-GAAP net income attributable to the Company's shareholders totaled RMB4,227.9 million (US$654.8 million) for the second quarter of 2021,compared with RMB5,080.7 million and RMB5,226.0 million for the preceding quarter and the second quarter of 2020,respectively.NetEase reported basic net income of US$0.16 per share (US$0.82 per ADS) for the second quarter of 2021,compared with US$0.21 per share (US$1.03 per ADS) and US$0.22 per share (US$1.08 per ADS) for the preceding quarter and the second quarter of 2020,respectively.NetEase reported non-GAAP basic net income of US$0.20 per share (US$0.98 per ADS) for the second quarter of 2021,compared with US$0.24 per share (US$1.17 per ADS) and US$0.25 per share (US$1.25 per ADS) for the preceding quarter and the second quarter of 2020,respectively.QuarterlyDividendThe board of directors has approved a dividend of US$0.0480 per share (US$0.2400 per ADS) for the second quarter of 2021,to holders of ordinary shares and holders of ADSs as of the close of business on September 14,2021,Beijing/ Hong Kong Time and New York Time,respectively,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 September 14,2021 (Beijing/ Hong Kong Time). The payment date is expected to be on September 27,2021 for holders of ordinary shares and on or around September 30,2021 for holders of ADSs.NetEase paid a dividend of US$0.0600 per share (US$0.3000 per ADS) for the first quarter of 2021 in June 2021.The Company's policy is 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 InformationAs of June 30,the Company's total cash and cash equivalents,current and non-current time deposits and short-term investments balance totaled RMB108.0 billion (US$16.7billion),compared with RMB100.1billion as of December 31,2020. Cash flow generated from operating activities was RMB4.7billion (US$731.5million) for the second quarter of 2021,compared with RMB5.5billion and RMB4.8billion for the preceding quarter and the second quarter of 2020,respectively.Update on PRC Regulatory Policy Related to YoudaoAs previously announced by Youdao,its business,financial condition and corporate structure are expected to be materiallyaffected in future periods by the changing regulatory environment primarily in China's K-12 educationindustry,although the magnitude of the impact remains uncertain at this time.Share Repurchase/ Purchase ProgramOn February 25,the Company announced that its board of directors had approved a new share repurchase program of up to US$2.0 billion of the Company's outstanding ADSs and ordinary shares in open market transactions for a period not to exceed 24 months beginning on March 2,2021. As of June30,approximately 4.6 million ADSs had been repurchased under this program for a total cost of US$0.5 billion.The Company today announced that its board of directors has approved an amendment to such program to increase the total authorized repurchase amount to US$3.0 billion.The Company today also announced that its board of directors has approved a share purchaseprogram of up to US$50.0 million of Youdao's outstanding ADSs for a period not to exceed 36 monthsbeginning on September 2,2021. Under the terms of this program,NetEase may purchase Youdao's ADSs inopen-market transactions on the New York Stock Exchange.The extent to which NetEase repurchases its ADSs and its ordinary shares or purchases Youdao's ADSs will depend upon a variety of factors,including market conditions. These programs may be suspended or discontinued at any time.** The United States dollar (US$) 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$1.00 = RMB6.4566 on June 30,2021 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been,or could be,converted into US$ at that rate on June 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 8:00 a.m. NewYork Time on Tuesday,August 31,2021 (Beijing/ Hong Kong Time: 8:00 p.m.,Tuesday,2021). 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 1-646-828-8193 and providing conference ID: 7055363,10-15 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 7055363#. The replay will be available through September 13,2021.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") provides 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 StatementsThis 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; potential changes in government regulations,or changes in the interpretation and implementation of government regulations,that could adversely affect the industries and geographical markets in which NetEase and its subsidiaries operate,including,among others,recently announced government initiatives to enhance supervision of overseas-listed,China-based companies and increase scrutiny of data security and cross-border data flow,as well as recent guidelines restricting certain activities in China's education market; 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 its ability 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; 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 attributable to the Company's shareholders and non-GAAP basic and diluted net income 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 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. 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 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 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 "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_GlobalNETEASE,INC.UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)

December 31,

June 30,

2020

2021

2021

RMB

RMB

USD (Note 1)Assets

Current assets:

Cash and cash equivalents

9,117,219

9,935,805

1,538,860Time deposits

71,079,327

75,702,252

11,724,786Restricted cash

3,051,386

3,222,560

499,111Accounts receivable,net

4,576,445

4,452,504

689,605Inventories,net

621,207

884,311

136,962Prepayments and other current assets,net

6,112,433

6,516,881

1,009,337Short-term investments

13,273,026

15,244,872

2,361,130Total current assets

107,831,043

115,959,185

17,791

Non-current assets:

Property,equipment and software,555,406

4,694,354

727,063Land use right,178,257

4,134,607

640,369Deferred tax assets

1,086,759

1,104,852

171,120Time deposits

6,630,000

7,100,000

1,099,650Restricted cash

-

600

93Other long-term assets,net

17,593,117

21,863,425

3,386,213Total non-current assets

34,043,539

38,897,838

6,024,508Total assets

141,874,582

154,857,023

23,984,299

Liabilities,Redeemable Noncontrolling Interests

and Shareholders' Equity

Current liabilities:

Accounts payable

1,413

889,722

137,800Salary and welfare payables

3,732

3,203,904

496,222Taxes payable

4,282,835

4,443,565

688,221Short-term loans

19,504,696

27,188,198

4,210,916Deferred revenue

10,945,143

11,364,656

1,760,161Accrued liabilities and other payables

7,337,672

7,251,678

1,123,142Total current liabilities

46,743,491

54,341,723

8,416,462

Non-current liabilities:

Deferred tax liabilities

713,439

1,266,791

196,201Other long-term payable

623,728

733,665

113,630Total non-current liabilities

1,167

2,000,456

309,831Total liabilities

48,080,658

56,342,179

8,726,293

Redeemable noncontrolling interests

10,796,120

11,091,541

1,717,861

NetEase,Inc.'s shareholders' equity

82,126,798

86,136,044

13,340,774Noncontrolling interests

871,006

1,287,259

199,371Total shareholders' equity

82,997,804

87,423,303

13,540,145

Total liabilities,redeemable noncontrolling

interests and shareholders' equity

141,299

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

Six Months Ended

June 30,

March 31,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues

18,184,806

20,517,211

20,524,501

3,840

35,247,173

41,041,712

6,356,552Cost of revenues

(8,392,631)

(9,464,572)

(9,334,887)

(1,445,790)

(16,077,376)

(18,799,459)

(2,911,665)Gross profit

9,792,175

11,052,639

11,189,614

1,733,050

19,169,797

22,242,253

3,444,887

Operating expenses:

Selling and marketing expenses

(2,321,397)

(2,766,682)

(3,013,447)

(466,724)

(4,468)

(5,780,129)

(895,228)General and administrative expenses

(892,622)

(950,194)

(1,011,183)

(156,612)

(1,778,056)

(1,961,377)

(303,779)Research and development expenses

(2,408,306)

(3,060,189)

(3,406,859)

(527,655)

(4,550,955)

(6,467,048)

(1,001,618)Total operating expenses

(5,622,325)

(6,777,065)

(7,431,489)

(1,150,991)

(10,513,479)

(14,208,554)

(2,200,625)Operating profit

4,850

4,275,574

3,758,125

582,059

8,656,318

8,033,699

1,262

Other income/(expenses):

Investment income,net

711,159

695,298

889,392

137,749

601,428

1,584,690

245,437Interest income,net

396,519

388,928

386,207

59,816

741,703

775,135

120,053Exchange gains/(losses),008

279,319

(591,720)

(91,646)

261,065

(312,401)

(48,385)Other,net

421,199

147,967

147,588

22,858

487,907

295,555

45,776Income before tax

5,715,735

5,787,086

4,589,592

710,836

10,748,421

10,376,607,143Income tax

(1,064,455)

(1,408)

(1,113,228)

(172,417)

(2,146,488)

(2,636)

(369,643)Net income

4,651,280

4,678

3,476,364

538,419

8,601,933

7,990,042

1,237,500

Accretion and deemed dividends in

connection with repurchase of

redeemable noncontrolling interests

(150,958)

(143,827)

(145,415)

(22,522)

(536,977)

(289,242)

(44,798)Net loss attributable to noncontrolling

interests

37,484

69,301

210,805

32,650

23,856

280,106

43,383Net income attributable to the

Company's shareholders

4,537,806

4,439,152

3,541,754

548,547

8,088,812

7,980,906

1,236,085

Net income per share *

Basic

1.40

1.33

1.06

0.16

2.50

2.38

0.37Diluted

1.38

1.31

1.05

0.16

2.47

2.35

0.36

Net income per ADS *

Basic

7.00

6.63

5.29

0.82

12.50

11.92

1.85Diluted

6.92

6.53

5.23

0.81

12.34

11.76

1.82

Weighted average number of ordinary

shares used in calculating net income

per share *

Basic

3,061

3,349,638

3,347,507

3,728

3,348,567

3,567Diluted

3,281,100

3,399,981

3,385,953

3,277,550

3,961

3,961

* Each ADS represents five ordinary shares.

The accompanying notes are an integral part of this announcement.

NETEASE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

Three Months Ended

Six Months Ended

June 30,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)Cash flows from operating activities:

Net income

4,500Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

892,150

819,830

814,370

126,130

1,582,207

1,634,200

253,105Fair value changes of equity security investments

(503,281)

(477,597)

(203,720)

(31,552)

(176,241)

(681,317)

(105,523)Impairment losses of investments and other intangible

assets

-

-

4,797

743

6,600

4,797

743Fair value changes of short-term investments

(174,738)

(118,004)

(170,676)

(26,434)

(327,844)

(288,680)

(44,711)Share-based compensation cost

691,945

650,253

700,114

108,434

1,357,350,367

209,145(Reversal of)/ allowance for expected credit losses

(1,305)

13,604

27,384

4,241

48,634

40,988

6,348Losses/ (gains) on disposal of property,equipment and

software

1,070

(159)

1,424

221

1,107

1,265

196Unrealized exchange (gains)/ losses

(20,159)

(274,047)

572,708

88,701

(262,667)

298,661

46,257Gains on disposal of long-term investments,

business and subsidiaries

(14,803)

(7,323)

(166,505)

(25,788)

(30,236)

(173,828)

(26,923)Deferred income taxes

499,509

328,075

202,894

31,424

712,357

530,969

82,237Share of results on equity method investees and revaluation

gains from previously held equity interest

(10,948)

(51,892)

(342,760)

(53,087)

(57,159)

(394,652)

(61,124)Changes in operating assets and liabilities:

Accounts receivable

(498,550)

(484,343)

573,111

88,764

(929,085)

88,768

13,748Inventories

3,329

(253,495)

(9,608)

(1,488)

91,769

(263,103)

(40,749)Prepayments and other assets

233,607

(785,224)

593,379

91,903

(870,191)

(191,845)

(29,713)Accounts payable

(271,697)

(60,654)

(178,097)

(27,584)

(370,376)

(238,751)

(36,978)Salary and welfare payables

132,037

(1,226,155)

856,775

132,698

(405,870)

(369,380)

(57,210)Taxes payable

(568,138)

1,558,618

(1,397,390)

(216,428)

665,940

161,228

24,971Deferred revenue

(605,444)

740,938

(381,446)

(59,078)

773,682

359,492

55,678Accrued liabilities and other payables

336,444

656,564

(250,312)

(38,768)

860,638

406,252

62,921Net cash provided by operating activities

4,772,308

5,542,667

4,722,806

731,471

11,272,957

10,265,473

1,918

Cash flows from investing activities:

Purchase of property,equipment and software

(237,039)

(329,746)

(421,872)

(65,340)

(401,359)

(751,618)

(116,411)Proceeds from sale of property,equipment and software

3,970

1,519

2,458

381

4,742

3,977

616Purchase of intangible assets,content and licensed

copyrights

(839,441)

(426,133)

(566,736)

(87,776)

(1,276)

(992,869)

(153,776)Net change in short-term investments with terms of three

months or less

1,083,342

3,332,610

1,668,673

258,445

302,807

5,283

774,600Purchase of short-term investments

(3,000)

(7,905,000)

(2,450,000)

(379,457)

(13,000)

(10,355,000)

(1,603,785)Proceeds from maturities of short-term investments

2,345,218

2,341

813,211

125,950

9,233,194

3,670,552

568,496Investment in long-term investments and acquisition of

subsidiaries

(520,762)

(558,441)

(3,973)

(523,027)

(725,767)

(3,414)

(609,518)Proceeds from disposal of long-term investments,

businesses and subsidiaries

33,856

198,900

266,284

41,242

230,808

465,184

72,048Placement/rollover of matured time deposits

(38,412,268)

(15,749)

(27,223,584)

(4,216,396)

(50,755)

(42,946,333)

(6,540)Proceeds from maturities of time deposits

19,442,266

11,481,135

25,790,186

3,994,391

33,082,883

37,271,321

5,593Change in other long-term assets

(76,103)

(54,653)

(44,877)

(6,951)

(86,625)

(99,530)

(15,415)Net cash used in investing activities

(20,256,961)

(7,125,217)

(5,543,230)

(858,538)

(22,735,348)

(12,447)

(1,962,092)

The accompanying notes are an integral part of this announcement.

NETEASE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(in thousands)

Three Months Ended

Six Months Ended

June 30,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)Cash flows from financing activities:

Proceeds of short-term loans

360,474

236,916

1,320,614

204,537

460,474

1,557,530

241,231Payment of short-term loans

(358,171)

(167,700)

(582,328)

(90,191)

(456,566)

(750,028)

(116,165)Net changes in short-term loans with terms of three months

or less

2,305,176

2,122,041

4,978,642

771,093

4,844,746

7,683

1,756Net amounts received from/ (paid for) issuance of shares

in Hong Kong

22,467

(13,800)

-

-

22,800)

(2,137)Capital contribution from/ (repurchase of)noncontrolling interests

and redeemable noncontrolling interests shareholders,net

163,865

1,507,049

8,176

1,266

(283,767)

1,515,225

234,678Cash paid for repurchase of NetEase's/purchase of Youdao's

ADSs

(3,260,996)

(2,018,467)

(2,468,969)

(382,395)

(5,821,893)

(4,487,436)

(695,015)Dividends paid to shareholders

(1,115,136)

(260,842)

(1,278,879)

(198,073)

(2,681)

(1,539,721)

(238,472)Net cash provided by financing activities

20,679

1,405,197

1,977,256

306,237

18,784,780

3,382,453

523,876

Effect of exchange rate changes on cash,cash equivalents

and restricted cash held in foreign currencies

180,056

35,993

(25,112)

(3,889)

254,156

10,685Net increase/ (decrease)in cash,cash equivalents and restricted

cash

4,082

(141,360)

1,131,720

175,281

7,545

990,360

153,387Cash,cash equivalents and restricted cash,at the beginning

of the period

9,323

12,168,605

12,027,245

1,862,783

6,860

12,605

1,884,677Cash,at end of the

period

13,974,405

12,245

13,158,965

2,038,064

13,405

13,064

Supplemental disclosures of cash flow information:

Cash paid for income tax,net

548,556

550,191

1,240,692

192,159

750,600

1,883

277,372Cash paid for interest expense

55,301

43,902

48,082

7,447

152,012

91,984

14,247

The accompanying notes are an integral part of this announcement.

NETEASE,INC.UNAUDITED SEGMENT INFORMATION(in thousands,except percentages)

Three Months Ended

Six Months Ended

June 30,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)Net revenues:

Online game services

13,828,256

14,981,784

14,528,082

2,250,113

27,346,500

29,509,866

4,570,496Youdao

623,290

1,339,867

1,293,407

200,323

1,164,678

2,633,274

407,842Innovative businesses and others

3,260

4,195,560

4,703,012

728,404

6,995

8,898,572

1,378,214Total net revenues

18,552

Cost of revenues:

Online game services

(5,354)

(5,302,713)

(4,921,966)

(762,315)

(9,861,185)

(10,224,679)

(1,583,601)Youdao

(341,751)

(572,415)

(616,661)

(95,509)

(647,414)

(1,076)

(184,164)Innovative businesses and others

(3,526)

(3,444)

(3,260)

(587,966)

(5,568,777)

(7,704)

(1,143,900)Total cost of revenues

(8,665)

Gross profit:

Online game services

8,818,902

9,679,071

9,606,116

1,798

17,485,315

19,285,187

2,986,895Youdao

281,539

767,452

676,746

104,814

517,264

1,198

223,678Innovative businesses and others

691,734

606,116

906,752

140,438

1,167,218

1,512,868

234,314Total gross profit

9,887

Gross profit margin:

Online game services

63.8%

64.6%

66.1%

66.1%

63.9%

65.4%

65.4%Youdao

45.2%

57.3%

52.3%

52.3%

44.4%

54.8%

54.8%Innovative businesses and others

18.5%

14.4%

19.3%

19.3%

17.3%

17.0%

17.0%

The accompanying notes are an integral part of this announcement.

NETEASE,INC.NOTES TO UNAUDITED FINANCIALINFORMATIONNote 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00 = RMB6.4566on the last trading day of June 2021(June 30,2021) 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

Six Months Ended

June 30,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)Share-based compensation cost included in:

Cost of revenues

204,953

187,926

197,370

30,569

412,868

385,296

59,675Operating expenses

- Selling and marketing expenses

27,034

24,231

26,434

4,094

51,845

50,665

7,847- General and administrative expenses

247,589

229,603

258,544

40,043

477,960

488,147

75,604- Research and development expenses

212,369

208,493

217,766

33,728

415,086

426,259

66,019

The accompanying notes are an integral part of this announcement.

NETEASE,INC.UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS(in thousands,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)Net income attributable to the Company's shareholders

4,085Add: Share-based compensation

688,227

641,534

686,111

106,265

1,098

1,327,645

205,626Non-GAAP net income attributable to the Company's

shareholders

5,033

5,686

4,227,865

654,812

9,438,910

9,308,551

1,441,711

Non-GAAP net income per share *

Basic

1.61

1.52

1.26

0.20

2.92

2.78

0.43Diluted

1.59

1.49

1.25

0.19

2.88

2.74

0.42

Non-GAAP net income per ADS *

Basic

8.06

7.58

6.31

0.98

14.58

13.90

2.15Diluted

7.96

7.47

6.24

0.97

14.40

13.72

2.12

* Each ADS represents five ordinary shares.

The accompanying notes are an integral part of this announcement.

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