NetEase Announces Third Quarter 2021 Unaudited Financial Results

HANGZHOU,China,Nov. 16,2021 --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 third quarter ended September 30,2021.

Third Quarter 2021 Financial Highlights

Net revenues were RMB22.2 billion (US$3.4 billion),an increase of 18.9% compared with the third quarter of 2020.

- Online game services net revenues were RMB15.9 billion (US$2.5 billion),an increase of 14.7% compared with the third quarter of 2020.

- Youdao net revenues were RMB1.4 billion (US$215.3 million),an increase of 54.8% compared with the third quarter of 2020.

- Innovative businesses and others net revenues were RMB4.9 billion (US$761.1 million),an increase of 25.7% compared with the third quarter of 2020.

Gross profit was RMB11.8 billion (US$1.8 billion),an increase of 19.5% compared with the third quarter of 2020.

Total operating expenses were RMB8.0 billion (US$1.2 billion),an increase of 14.5% compared with the third quarter of 2020.

Net income attributable to the Company's shareholders was RMB3.2 billion (US$493.8 million). Non-GAAP net income attributable to the Company's shareholders was RMB3.9 billion (US$598.7 million). [1]

Basic net income per share was US$0.15 (US$0.74 per ADS). Non-GAAP basic net income per share was US$0.18 (US$0.90 per ADS). [1]

Third Quarter 2021 and Recent Operational Highlights

Broadened games portfolio and strengthened global appeal with new games in diverse genres including:

- Naraka: Bladepoint,which broke the sales record of buy-to-play games by Chinese developers and led the Steam top-sellers chart,remaining in the top 5 for weeks following its global launch in August.

- Harry Potter:Magic Awakened,which led China's iOS top grossing chart and top download chart following its launch in September.

- Exciting new titles in China such as Ace Racer,Infinite Lagrange and Nightmare Breaker.

- Launched The Lord of the Rings: Rise to War in Europe,the Americas,Oceania and Southeast Asia.

Extended solid popularity of franchise titles including the Fantasy Westward Journey and Westward Journey Online series.

Enriched dynamic game development pipeline with exciting advancements to upcoming games including The Showbiz: Dream Chaser,the console version of Naraka: Bladepoint,Diablo® Immortal™,as well as Ghost World Chronicle,and Harry Potter: Magic Awakened in international markets.

Progressed Youdao's capabilities as an education technology provider,with steady advancements in STEAM courses,adult learning and smart learning hardware devices.

Expanded NetEase Cloud Music's content ecosystem and product innovation capabilities to strengthen its highly-engaged music-enteric community,delivering a solid financial performance.

[1]As used in this announcement,non-GAAP net income attributable to the Company's shareholders and non-GAAP basic 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.

"With strong and steady contributions from our online game services,our total net revenues for the third quarter reached RMB22.2 billion,an increase of 18.9% year-over-year," said Mr. William Ding,Chief Executive Officer and Director of NetEase. "It was a very fruitful season of diversification for our online games. Our flagship titles remained strong,and we introduced several new successful hits for PC and mobile platforms. New games such as Naraka: Bladepoint and Harry Potter: Magic Awakened captured wide interest from passionate game players who appreciate high quality game design. We will continue to bring more masterpieces to both domestic and global players in upcoming quarters. In addition,Youdao,NetEase Cloud Music and Yanxuan maintain their diverse and differentiated offerings. As an innovation-driven content creator,we will continue to deliver thoughtful premium content and products to our users across each of our carefully cultivated disciplines," Mr. Ding concluded.

Third Quarter 2021 Financial Results

Net Revenues

Netrevenues for the third quarterof 2021 were RMB22,190.7million (US$3,444.0million),compared with RMB20,524.5million and RMB18,658.2million for the preceding quarter and the third quarter of 2020,respectively.

Net revenues from online game services were RMB15,899.1million (US$2,467.5million) for the third quarter of 2021,compared with RMB14,528.1million and RMB13,862.0million for the preceding quarter and the third quarter of 2020,respectively. Net revenues from mobile games accounted for approximately69.2% of net revenues from online game services for the third quarter of 2021,compared with 72.1% and 72.7%forthe precedingquarter and the third quarter of 2020,respectively.

Net revenues from Youdao were RMB1,387.3million (US$215.3million) for the third quarter of 2021,compared with RMB1,293.4million and RMB896.0million for the preceding quarter and the third quarter of 2020,respectively.

Net revenues from innovative businesses and others were RMB4,904.4million (US$761.1million) for the third quarter of 2021,compared with RMB4,703.0 million and RMB3,900.1million for the preceding quarter and the third quarter of 2020,respectively.

Gross Profit

Gross profit for the third quarter of 2021was RMB11,810.8million (US$1,833.0million),compared with RMB11,189.6million and RMB9,885.8million for the preceding quarter and the third quarter of 2020,respectively.

The quarter-over-quarter and year-over-year increases in online game services gross profit were primarily due to increased net revenues resulting from the launch of new games such as Naraka: Bladepoint and Harry Potter: Magic Awakened,as well as from existing games such as Fantasy Westward Journey Online and Westward Journey Online II.

The quarter-over-quarter and year-over-year increases in Youdao gross profit were 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 decrease in innovative businesses and others gross profit was primarily due to decreased gross profit from NetEase CC and other services. The year-over-year increase wasprimarily due to the increased net revenues from and improved cost control at NetEase Cloud Music.

Gross Profit Margin

Gross profit margin for online game services for the third quarter of 2021was 64.5%,compared with 66.1% and 63.6% for the preceding quarter and the third quarter of 2020,respectively.Gross profit margin for online game servicesgenerally fluctuates 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 third quarter of 2021was 56.6%,compared with 52.3% and 45.9% for the preceding quarter and the third quarter of 2020,respectively.The quarter-over-quarter and year-over-year increaseswere primarily attributable to the factors enumerated above.

Gross profit margin for innovative businesses and others for the third quarter of 2021was 15.6%,compared with 19.3% and 16.8% for the preceding quarter and the third quarter of 2020,respectively.The fluctuation of gross profit margin is influenced by revenue contributions of different businesses and their respective gross profit margin.

Operating Expenses

Total operating expenses for the third quarter of 2021 were RMB8,035.6million (US$1,247.1million),compared with RMB7,431.5million and RMB7,015.7 million for the preceding quarter and the third quarter of 2020,respectively. The quarter-over-quarterand year-over-year increases were mainly due to higher staff-related costs and research and development investments.

Other Income/ (Expenses)

Other income/ (expenses) comprised investment income/ (loss),interest income,exchange (losses)/ gainsand others. The quarter-over-quarter and year-over-year changes were mainly due to investment income/ (loss)arising from fair value changes of equity investments with readily determinable fair valueand unrealized net exchange (losses)/ gains 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 RMB807.6 million (US$125.3 million) for the third quarter of 2021,113.2 million and RMB342.7 million for the preceding quarter and the third quarter of 2020,respectively. The effective tax rate for the third quarter of 2021 was 19.6%,compared with 24.3% and 10.9% for the preceding quarter and the third 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 RMB3,181.8 million (US$493.8 million) for the third quarter of 2021,compared with RMB3,541.8 million and RMB2,998.2 million for the preceding quarter and the third quarter of 2020,respectively.Non-GAAP net income attributable to the Company's shareholders totaled RMB3,857.8 million (US$598.7 million) for the third quarter of 2021,227.9 million and RMB3,669.2 million for the preceding quarter and the third quarter of 2020,respectively.NetEase reported basic net income of US$0.15 per share (US$0.74 per ADS) for the third quarter of 2021,compared with US$0.16 per share (US$0.82 per ADS) and US$0.14 per share (US$0.69 per ADS) for the preceding quarter and the third quarter of 2020,respectively.NetEase reported non-GAAP basic net income of US$0.18 per share (US$0.90 per ADS) for the third quarter of 2021,compared with US$0.20 per share (US$0.98 per ADS) and US$0.17 per share (US$0.84 per ADS) for the preceding quarter and the third quarter of 2020,respectively.QuarterlyDividendThe board of directors has approved a dividend of US$0.0450 per share (US$0.2250 per ADS) for the third quarter of 2021,to holders of ordinary shares and holders of ADSs as of the close of business on December 1,2021,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 December 1,2021 (Beijing/ Hong Kong Time). The payment date is expected to be on December 13,2021 for holders of ordinary shares and on or around December 16,2021 for holders of ADSs.NetEase paid a dividend of US$0.0480 per share (US$0.2400 per ADS) for the second quarter of 2021 in September 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 September 30,the Company's total cash and cash equivalents,current and non-current time deposits and short-term investments balance totaled RMB98.3billion (US$15.3billion),compared with RMB100.1billion as of December 31,2020. Cash flow generated from operating activities was RMB6.3 billion (US$976.6million) for the third quarter of 2021,compared with RMB4.7 billion and RMB5.4billion for the preceding quarter and the third quarter of 2020,respectively.Update on Youdao's Disposition of Academic After-School Tutoring BusinessAs previously disclosed,in order to comply with applicable regulatory requirements,Youdao plans to dispose of its after-school tutoring businessfor academic subjects included in China's compulsory education system. Youdao currently expects the transaction to be completed by the end of 2021,subject to execution of the definitive agreements and regulatory approval,although there can be no assurance as to if or when the proposed transaction will be completed.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. On August 31,the Company announced that its board of directors hadapproved an amendment to such program to increase the total authorized repurchase amount to US$3.0 billion. As of September 30,approximately 13.5 million ADSs had been repurchased under this program for a total cost of US$1.3billion.On August 31,the Company 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. As of September 30,approximately 0.1 millionADSs had been purchased under this program for a total cost of US$1.8 million.The extent to which NetEase repurchases its ADSs and its ordinary shares or purchases Youdao's ADSs will depend upon a variety of factors,including market conditions. These programs may be suspended or discontinued at any time.** The United States dollar (US$) 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$1.00 = RMB6.4434 on September 30,2021 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been,or could be,converted into US$ at that rate on 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 Tuesday,November 16,2021 (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: 1483146,10-15 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 1483146#. The replay will be available through November 29,2021.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,

September 30,

2020

2021

2021

RMB

RMB

USD (Note 1)Assets

Current assets:

Cash and cash equivalents

9,117,219

22,266,781

3,455,750Time deposits

71,079,327

59,412,400

9,220,660Restricted cash

3,051,386

3,461,021

537,142Accounts receivable,net

4,576,445

5,422,326

841,532Inventories,net

621,207

1,038,607

161,189Prepayments and other current assets,net

6,112,433

7,688,224

1,193,194Short-term investments

13,273,026

9,654,498,309Total current assets

107,831,043

108,943,566

16,907,776

Non-current assets:

Property,equipment and software,555,406

4,956,832

769,288Land use right,178,257

4,765

638,291Deferred tax assets

1,086,759

1,103,624

171,280Time deposits

6,630,000

6,953,000

1,089Restricted cash

-

1,409

219Other long-term assets,net

17,593,117

21,717,108

3,370,442Total non-current assets

34,043,539

38,844,738

6,028,609Total assets

141,874,582

147,788,304

22,936,385

Liabilities,Redeemable Noncontrolling Interests

and Shareholders' Equity

Current liabilities:

Accounts payable

1,134,413

1,098,916

170,549Salary and welfare payables

3,538,732

2,584,787

401,153Taxes payable

4,282,835

4,009,110

622,204Short-term loans

19,504,696

19,614,143

3,044,067Deferred revenue

10,945,143

13,570,701

2,106,140Accrued liabilities and other payables

7,337,672

8,130,628

1,261,854Total current liabilities

46,743,491

49,008,285

7,605,967

Non-current liabilities:

Deferred tax liabilities

713,439

1,582,558

245,609Other long-term payable

623,728

747,260

115,973Total non-current liabilities

1,167

2,329,818

361,582Total liabilities

48,080,658

51,338,103

7,967,549

Redeemable noncontrolling interests

10,796,120

11,345,638

1,760,815

NetEase,Inc.'s shareholders' equity

82,126,798

83,780,065

13,002,462Noncontrolling interests

871,006

1,324,498

205,559Total shareholders' equity

82,997,804

85,104,563

13,208,021

Total liabilities,redeemable noncontrolling

interests and shareholders' equity

141,385

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,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues18,658,222

20,524,501

22,190,749

3,443,950

53,905,395

63,232,461

9,813,524Cost of revenues(8,772,379)

(9,334,887)

(10,379,981)

(1,610,948)

(24,849,755)

(29,179,440)

(4,528,578)Gross profit9,885,843

11,189,614

11,810,768

1,833,002

29,055,640

34,053,021

5,284,946

Operating expenses:

Selling and marketing expenses(3,442,821)

(3,013,447)

(3,030)

(486,394)

(7,627,289)

(8,914,159)

(1,383,456)General and administrative expenses(783,815)

(1,011,183)

(1,140,296)

(176,971)

(2,561,871)

(3,101,673)

(481,372)Research and development expenses(2,789,051)

(3,406,859)

(3,761,239)

(583,735)

(7,340,006)

(10,228,287)

(1,587,405)Total operating expenses(7,015,687)

(7,431,489)

(8,035,565)

(1,247,100)

(17,529,166)

(22,244,119)

(3,452,233)Operating profit2,870,156

3,758,125

3,775,203

585,902

11,526,474

11,808,902

1,832,713

Other income/ (expenses):

Investment income/ (loss),net1,280,483

889,392

(264,611)

(41,067)

1,881,911

1,320,079

204,873Interest income,net446,914

386,207

349,550

54,249

1,188,617

1,124,685

174,548Exchange (losses)/ gains,net(1,571,326)

(591,720)

153,310

23,793

(1,310,261)

(159,091)

(24,691)Other,net109,940

147,588

117,636

18,257

597,847

413,191

64,126Income before tax3,136,167

4,589,592

4,131,088

641,134

13,884,588

14,507,766

2,251,569Income tax(342,700)

(1,113,228)

(807,648)

(125,345)

(2,489,188)

(3,194,284)

(495,745)Net income2,793,467

3,476,364

3,323,440

515,789

11,395,400

11,313,482

1,755,824

Accretion and deemed dividends in

connection with repurchase of

redeemable noncontrolling interests(118,448)

(145,415)

(147,825)

(22,942)

(655,425)

(437,067)

(67,832)Net loss attributable to noncontrolling

interests323,221

210,805

6,167

957

347,077

286,273

44,429Net income attributable to the

Company's shareholders2,998,240

3,541,754

3,181,782

493,804

11,087,052

11,162,688

1,732,421

Net income per share *

Basic0.89

1.06

0.96

0.15

3.37

3.34

0.52Diluted0.87

1.05

0.95

0.15

3.33

3.30

0.51

Net income per ADS *

Basic4.43

5.29

4.78

0.74

16.87

16.71

2.59Diluted4.37

5.23

4.73

0.73

16.65

16.50

2.56

Weighted average number of ordinary

shares used in calculating net income

per share *

Basic3,384,051

3,347,507

3,325,892

3,286,194

3,925

3,925Diluted3,274

3,385,953

3,361,727

3,149

3,382,467

* 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

Nine Months Ended

September 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

2,824Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

913,049

814,370

805,485

125,009

2,495,256

2,439,685

378,633Fair value changes of equity security investments

(1,428)

(203,720)

1,338

185,358

(1,279,669)

513,021

79,620Impairment losses of investments and other long-term assets

-

4,797

26,055

4,044

6,600

30,852

4,788Fair value changes of short-term investments

(133,943)

(170,676)

(184,564)

(28,644)

(461,787)

(473,244)

(73,446)Share-based compensation cost

676,751

700,114

688,226

106,811

2,034,510

2,593

316,385(Reversal of)/ allowance for expected credit losses

(2,146)

27,384

212,010

32,903

46,488

252,998

39,265Losses on disposal of property,equipment and software

2,645

1,424

4,008

622

3,752

5,273

818Unrealized exchange losses/ (gains)

1,568,627

572,708

(157,292)

(24,411)

1,305,960

141,369

21,940Losses/ (gains) on disposal of long-term investments,

business and subsidiaries

2,995

(166,505)

(1)

-

(27,241)

(173,829)

(26,978)Deferred income taxes

(550,137)

202,894

307,994

47,800

162,220

838,963

130,205Share of results on equity method investees and revaluation

gains from previously held equity interest

(28,915)

(342,760)

(730,363)

(113,351)

(86,074)

(1,125,015)

(174,600)Changes in operating assets and liabilities:

Accounts receivable

43,177

573,111

(1,290)

(182,868)

(885,908)

(1,089,522)

(169,091)Inventories

34,429

(9,608)

(154,072)

(23,911)

126,198

(417,175)

(64,745)Prepayments and other assets

65,383

593,379

(38,490)

(5,974)

(804,808)

(230,335)

(35,747)Accounts payable

147,811

(178,097)

172,696

26,802

(222,565)

(66,055)

(10,251)Salary and welfare payables

(447,645)

856,775

(647,029)

(100,417)

(853,515)

(1,016,409)

(157,744)Taxes payable

240,464

(1,397,390)

(434,893)

(67,494)

906,404

(273,665)

(42,472)Deferred revenue

1,000,530

(381,446)

2,154,751

334,412

1,774,212

2,514,243

390,204Accrued liabilities and other payables

177,853

(250,312)

928,647

144,124

1,491

1,899

207,173Net cash provided by operating activities

5,400,967

4,722,806

6,292,656

976,604

16,673,924

16,558,129

2,569,781

Cash flows from investing activities:

Purchase of property,equipment and software

(350,866)

(421,872)

(407,688)

(63,272)

(752,225)

(1,159,306)

(179,921)Proceeds from sale of property,equipment and software

4,903

2,458

11,030

1,712

9,645

15,007

2,329Purchase of intangible assets,content and licensed

copyrights

(755,132)

(566,736)

(218,168)

(33,859)

(1,901,408)

(1,211,037)

(187,950)Net change in short-term investments with terms of three

months or less

298,667

1,668,673

167,978

26,070

601,474

5,169,261

802,257Purchase of short-term investments

(4,000)

(2,450,000)

(630,000)

(97,774)

(17,705,000)

(10,985,000)

(1,704,845)Proceeds from maturities of short-term investments

11,295,357

813,211

6,750

970,256

20,551

9,922,302

1,539,917Investment in long-term investments and acquisition of

subsidiaries

(647,533)

(3,376,973)

(586,124)

(90,965)

(1,373,300)

(4,521,538)

(701,732)Proceeds from disposal of long-term investments,

businesses and subsidiaries

397,342

266,284

33,731

5,235

628,150

498,915

77,431Placement/rollover of matured time deposits

(26,718,380)

(27,223,584)

(11,723,614)

(1,819,476)

(76,798,135)

(54,669,947)

(8,484,643)Proceeds from maturities of time deposits

13,550,559

25,790,186

28,328,155

4,396,461

46,633,442

65,599,476

10,180,879Change in other long-term assets

(21,957)

(44,877)

(69,429)

(10,775)

(108,582)

(168,959)

(26,222)Net cash (used in)/ provided by investing activities

(7,502,040)

(5,543,230)

21,157,621

3,283,613

(30,237,388)

8,174

1,317,500

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

Nine Months Ended

September 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

68,978

1,614

612,885

95,118

529,452

2,170,415

336,843Payment of short-term loans

-

(582,328)

(235,284)

(36,516)

(456,566)

(985,312)

(152,918)Net changes in short-term loans with terms of three months

or less

1,031,040

4,978,642

(7,910)

(1,236,600)

5,875,786

(867,227)

(134,592)Net amounts (paid for)/ received from issuance of shares

in Hong Kong

(212)

-

-

-

22,083,255

(13,800)

(2,142)Capital contribution from/ (repurchase of) noncontrolling interests

and redeemable noncontrolling interests shareholders,815

8,176

34,800

5,401

(278,952)

1,025

240,560Cash paid for repurchase of NetEase's/purchase of Youdao's

ADSs

(2,165)

(2,468,969)

(6,841)

(979,427)

(8,045,058)

(10,277)

(1,675,866)Dividends paid to shareholders

(1,377,570)

(1,278,879)

(1,116)

(159,561)

(3,419,251)

(2,567,837)

(398,522)Net cash (used in)/ provided by financing activities

(2,496,114)

1,977,256

(14,894,466)

(2,311,585)

16,288,666

(11,512,013)

(1,786,637)

Effect of exchange rate changes on cash,cash equivalents

and restricted cash held in foreign currencies

(25,033)

(25,112)

14,435

2,240

229,123

25,316

3,929Net (decrease)/ increase in cash,cash equivalents and restricted cash

(4,622,220)

1,720

12,246

1,950,872

2,954,325

13,560,606

2,573Cash,cash equivalents and restricted cash,at the beginning

of the period

13,974,405

12,027,245

13,158,965

2,042,239

6,860

12,168,605

1,888,538Cash,at end of the

period

9,352,185

13,965

25,729,211

3,993,111

9,185

25,111

Supplemental disclosures of cash flow information:

Cash paid for income tax,net

948,130

1,240,692

898,112

139,385

1,698,730

2,995

417,325Cash paid for interest expense

47,862

48,082

52,765

8,189

199,874

144,749

22,465

The accompanying notes are an integral part of this announcement.

NETEASE,INC.

UNAUDITED SEGMENT INFORMATION

(in thousands,except percentages)

Three Months Ended

Nine Months Ended

September 30,

2020

2021

2021

2021

2020

2021

2021

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)Net revenues:

Online game services

13,862,035

14,082

15,899,070

2,467,497

41,535

45,408,936

7,047,356Youdao

896,041

1,293,407

1,387,292

215,304

2,060,719

4,020,566

623,982Innovative businesses and others

3,900,146

4,703,012

4,904,387

761,149

10,636,141

13,802,959

2,142,186Total net revenues

18,524

Cost of revenues:

Online game services

(5,177)

(4,921,966)

(5,637,027)

(874,853)

(14,362)

(15,861,706)

(2,698)Youdao

(484,488)

(616,661)

(601,741)

(93,389)

(1,902)

(1,817)

(277,930)Innovative businesses and others

(3,243,714)

(3,260)

(4,141,213)

(642,706)

(8,812,491)

(11,917)

(1,950)Total cost of revenues

(8,578)

Gross profit:

Online game services

8,817,858

9,606,116

10,262,043

1,592,644

26,303,173

29,547,230

4,585,658Youdao

411,553

676,746

785,551

121,915

928,817

2,229,749

346,052Innovative businesses and others

656,432

906,752

763,174

118,443

1,823,650

2,276,042

353,236Total gross profit

9,946

Gross profit margin:

Online game services

63.6%

66.1%

64.5%

64.5%

63.8%

65.1%

65.1%Youdao

45.9%

52.3%

56.6%

56.6%

45.1%

55.5%

55.5%Innovative businesses and others

16.8%

19.3%

15.6%

15.6%

17.1%

16.5%

16.5%

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 = RMB6.4434on the last trading day of September 2021(September 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

Nine Months Ended

September 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

200,116

197,370

180,669

28,039

612,984

565,965

87,836Operating expenses

- Selling and marketing expenses

25,563

26,434

29,289

4,546

77,408

79,954

12,409- General and administrative expenses

236,323

258,544

258,805

40,166

714,283

746,952

115,925- Research and development expenses

214,749

217,766

219,463

34,060

629,835

645,722

100,215

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

2,421Add: Share-based compensation

671,004

686,111

675,999

104,913

2,021,102

2,003,644

310,961Non-GAAP net income attributable to the Company's

shareholders

3,244

4,227,865

3,857,781

598,717

13,108,154

13,166,332

2,382

Non-GAAP net income per share *

Basic

1.08

1.26

1.16

0.18

3.99

3.94

0.61Diluted

1.07

1.25

1.15

0.18

3.94

3.89

0.60

Non-GAAP net income per ADS *

Basic

5.42

6.31

5.80

0.90

19.94

19.70

3.06Diluted

5.35

6.24

5.74

0.89

19.69

19.46

3.02

* Each ADS represents five ordinary shares.

The accompanying notes are an integral part of this announcement.

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