NetEase Announces Second Quarter 2022 Unaudited Financial Results

HANGZHOU,China,Aug. 18,2022 -- NetEase,Inc. (NASDAQ: NTES and HKEX: 9999,"NetEase" or the "Company"),one of China's leading internet and onlinegame services providers,today announced its unaudited financial results for the second quarter ended June 30,2022.

Second Quarter 2022 Financial Highlights

Net revenues were RMB23.2 billion (US$3.5 billion),an increase of 12.8% compared with the second quarter of 2021.

- Games and related value-added services net revenues were RMB18.1 billion (US$2.7 billion),an increase of 15.0% compared with the second quarter of 2021.[1]

- Youdao net revenues were RMB956.2 million (US$142.8 million),a decrease of 26.1% compared with the second quarter of 2021.

- Cloud Music net revenues were RMB2.2 billion (US$327.2 million),an increase of 29.5% compared with the second quarter of 2021.

- Innovative businesses and others net revenues were RMB1.9 billion (US$279.4 million),an increase of 6.1% compared with the second quarter of 2021.[1]

Gross profit was RMB12.9 billion (US$1.9 billion),an increase of 15.7% compared with the second quarter of 2021.

Total operating expenses were RMB8.0 billion (US$1.2 billion),an increase of 7.6% compared with the second quarter of 2021.

Net income from continuing operations attributable to the Company's shareholders was RMB4.7 billion (US$696.7 million). Non-GAAP net income from continuing operations attributable to the Company's shareholders was RMB5.4 billion (US$807.7 million). [2]

Basic net income from continuing operations per share was US$0.21 (US$1.07 per ADS). Non-GAAP basic net income from continuing operations per share was US$0.25 (US$1.23 per ADS).[2]

[1]Effective as of the second quarter of 2022,the Company renamed its "online game services" segment as "games and related value-added services," and transferred certain business lines that are related or ancillary to its games from "innovative businesses and others" to "games and related value-added services." The Company retrospectively recast prior periods' segment information to conform to the current period presentation. See "Change in Segment Reporting" in this announcement.

[2]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 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.

Second Quarter 2022 and Recent Operational Highlights

Delivered captivating content updates for popular title Naraka: Bladepoint and launched itsXbox version in June.

Diablo® Immortal™,co-developed by NetEase and Blizzard Entertainment,made its debut in the global market,which topped iOS download charts in multiple regions.

Extended the longevity of leading franchise titles including both the Fantasy Westward Journey and Westward Journey Online series and maintained the popularity of other hit titles including Identity V and Infinite Lagrange.

Propelled pipeline by advancing new games under development including Naraka: Bladepoint mobile game,Justice mobile game and Ghost World Chronicle,as well as the roll-out of Harry Potter: Magic Awakened in international markets.

Achieved positive operating cashflow from Youdao,maintained sound development of its STEAM courses and demonstrated the resilience of its smart devices.

Enhanced content and product innovation at Cloud Music,driving solid growth in net revenues and continued margin improvement while securing multiple licensing agreements with major overseas and domestic music labels including SM Entertainmentand TF Entertainment.

"In the second quarter,we generated solid results with total net revenues of RMB23.2 billion,an increase of 12.8% year-over-year," said Mr. William Ding,CEO and Director of NetEase. "Players continued to gravitate to our longstanding games in the second quarter,highlighting our strength in game operations longevity. Moreover,the launch of Diablo® Immortal™ attracted the attention of gamers around the world,showcasing our exceptional mobile game development capabilities. With our strong in-house R&D team in China and our very own studios in Canada,Japan andthe U.S.,as well as plans for other regions in the future,we are spearheading the next generation of top-quality games for the global gaming community.

"Youdao and Cloud Music are also making key advancements that bolster their operations. With exciting gains across our business lines,we hope to make the NetEase brand synonymous with impressive technology,outstanding service and entertainment in its finest form," Mr. Ding concluded.

Second Quarter 2022 Financial Results

Net Revenues

Netrevenues for the second quarter of 2022 were RMB23,159.1 million (US$3,457.6million),compared with RMB23,555.8 million and RMB20,524.5million for the preceding quarter and the second quarter of 2021,respectively.

Net revenues from games and related value-added services,which include both the operation of online games as well as other related or ancillary services to thegames,were RMB18,139.8million (US$2,708.2million) for the second quarter of 2022,compared with RMB18,641.8 million and RMB15,774.8million for the preceding quarter and the second quarter of 2021,respectively. Net revenues from the operation of online games,which is the primary component of this segment,accounted for approximately 92.8% of net revenues from games and related value-added services for the second quarter of 2022,compared with 92.7% and92.1% forthe precedingquarter and the second quarter of 2021,respectively. Net revenues from mobile games accounted for approximately 66.1% of net revenues from the operation of online games for the second quarter of 2022,compared with 66.9% and 72.1%forthe precedingquarter and the second quarter of 2021,respectively.

Net revenues from Youdao were RMB956.2 million (US$142.8million) for the second quarter of 2022,compared with RMB1,200.5 million and RMB1,293.4million for the preceding quarter and the second quarter of 2021,respectively.

Net revenues from Cloud Music were RMB2,191.5 million (US$327.2million) for the second quarter of 2022,compared with RMB2,067.2 million and RMB1,692.5 million for the preceding quarter and the second quarter of 2021,respectively.

Net revenues from innovative businesses and others were RMB1,871.5 million (US$279.4 million) for the second quarter of 2022,646.3 million and RMB1,763.8 million for the preceding quarter and the second quarter of 2021,respectively.

Gross Profit

Gross profit for the second quarter of 2022 was RMB12,941.5 million (US$1,932.1million),compared with RMB12,836.4 million and RMB11,189.6million for the preceding quarter and the second quarter of 2021,respectively.

The year-over-year increase in games and related value-added services gross profit was primarily due to increased net revenues from both mobile and PC games,including the newly launched Naraka: Bladepoint and Harry Potter: Magic Awakened which were released in the third quarter of 2021 and other existing games such as Fantasy Westward Journey Online.

The quarter-over-quarter decrease inYoudao gross profit primarily resulted from a decline in economic scale due to decreased learning services revenues in the second quarter of 2022. The year-over-year decrease was mainly due to the conclusion of its after-school tutoring services for academic subjects under China's compulsory education system.

The quarter-over-quarter and year-over-year increases in Cloud Music gross profit were primarily due to increased net revenues from its membership subscriptions and social entertainment services,as well as improved cost control.

The quarter-over-quarter increase in innovative businesses and others gross profit was primarily due to increased gross profit contribution from Yanxuan and advertising services.

Gross Profit Margin

Gross profit margin for games and related value-added services for the second quarter of 2022 was 64.9%,compared with 62.2% and 63.2% for the preceding quarter and the second quarter of 2021,respectively.Gross profit margin for games and related value-added services is generally stable,fluctuating within a narrow band based on the revenue mix of NetEase's mobile and PC games,self-developed,co-developed and licensed games,as well as the relative revenue contribution from different distribution channels.

Gross profit margin for Youdao for the second quarter of 2022 was 42.8%,compared with 53.1% and 52.3% for the preceding quarter and the second quarter of 2021,respectively. The quarter-over-quarter and year-over-year decreases were primarily attributable to the factors enumerated above.

Gross profit margin for Cloud Music was 13.0% for the second quarter of 2022,compared with 12.2% and 4.1% for the preceding quarter and the second quarter of 2021,respectively. The quarter-over-quarter and year-over-year improvements were mainly due to the factors enumerated above.

Gross profit margin for innovative businesses and others for the second quarter of 2022 was 25.8%,compared with 21.7% and 27.3% for the preceding quarter and the second quarter of 2021,respectively.The quarter-over-quarter and year-over-year fluctuations were mainly due to changes in the gross profit margin from advertising services.

Operating Expenses

Total operating expenses for the second quarter of 2022 were RMB7,995.2 million (US$1,193.6 million),compared with RMB7,329.3 million and RMB7,431.5 million for the preceding quarter and the second quarter of 2021,respectively. The quarter-over-quarter and year-over-year increases were mainly due to increased marketing expenditures related to games and related value-added services,as well as higher staff-related costs and research and development investments.

Other Income/ (Expenses)

Other income/ (expenses) consisted of investment income/ (loss),interest income,exchange gains/ (losses) and others. The quarter-over-quarter increase was mainly due to net unrealized exchange gains arising from the Company's U.S. dollar-denominated bank deposits and loans balances as the exchange rate of the U.S. dollar against the RMB fluctuated in the second quarter of 2022.

Income Taxes

The Company recorded a net income tax charge of RMB1,259.3 million (US$188.0 million) for the second quarter of 2022,219.3 million and RMB1,113.2 million for the preceding quarter and the second quarter of 2021,respectively. The effective tax rate for the second quarter of 2022 was 22.0%,compared with 22.0% and 24.3% for the preceding quarter and the second quarter of 2021,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 Income

Net income from continuing operations attributable to the Company's shareholders totaled RMB4,666.6 million (US$696.7 million) for the second quarter of 2022,compared with RMB4,394.0million and RMB3,541.8 million for the preceding quarter and the second quarter of 2021,respectively. Net income from discontinued operations attributable to the Company's shareholders totaled RMB624.9 million (US$93.3 million),which was related to the disposal of the Kaola business.

Non-GAAP net income from continuing operations attributable to the Company's shareholders totaled RMB5,409.8 million (US$807.7 million) for the second quarter of 2022,compared with RMB5,117.6 million and RMB4,227.9 million for the preceding quarter and the second quarter of 2021,respectively.

NetEase reported basic net income from continuing operations of US$0.21 per share (US$1.07 per ADS) for the second quarter of 2022,compared with US$0.20 per share (US$1.00 per ADS) and US$0.16 per share (US$0.79 per ADS) for the preceding quarter and the second quarter of 2021,respectively.

NetEase reported non-GAAP basic net income from continuing operations of US$0.25 per share (US$1.23 per ADS) for the second quarter of 2022,compared with US$0.23 per share (US$1.17 per ADS) and US$0.19 per share (US$0.94 per ADS) for the preceding quarter and the second quarter of 2021,respectively.

QuarterlyDividend

The board of directors has approved a dividend of US$0.0720 per share (US$0.3600 per ADS) for the second quarter of 2022 to holders of ordinary shares and holders of ADSs as of the close of business on September 1,2022,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 1,2022 (Beijing/ Hong Kong Time). The payment date is expected to be on September 13,2022 for holders of ordinary shares and on or around September 16,2022 for holders of ADSs.

NetEase paid a dividend of US$0.0644 per share (US$0.3220 per ADS) for the first quarter of 2022 in June 2022.

Under the Company's current dividend policy,the determination to make dividend distributions and the amount of such distribution in any particular quarter will be made at the discretion of its board of directors and will be based upon the Company's operations and earnings,cash flow,financial condition and other relevant factors.

Other Information

As of June 30,the Company's total cash and cash equivalents,current and non-current time deposits and restricted cash,as well as short-term investments balance,minus short-term and long-term loans totaledRMB87.7 billion (US$13.1billion),compared with RMB85.6 billion as of December 31,2021. Cash flow generated from operating activities was RMB6.6billion (US$990.0 million) for the second quarter of 2022,compared with RMB4.6billion and RMB4.7billion for the preceding quarter and the second quarter of 2021,respectively.

Change in Segment Reporting

Effective as of the second quarter of 2022,the Company implemented certain changes to align its segment financial reporting more closely with the manner in which the Company's management currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. The Company renamed its "online game services" segment as "games and related value-added services," and transferred certain business lines that are related or ancillary to its games from "innovative businesses and others" to "games and related value-added services," including the NetEase CC live streaming service (a platform offering various live streaming content with a primary focus on game broadcasting) and other value-added services.The Company retrospectively recast prior periods' segment information to conform to current period presentation. These changes had no impact on NetEase's previously reported consolidated net revenues,net income or net income per share.

Share Repurchase/ Purchase Program

On February 25,2021,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 June30,approximately 23.6 million ADSs had been repurchased under this program for a total cost of US$2.3 billion.

On August 31,the Company announced that its board of directors had approved a share purchase program 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 June 30,approximately 1.7 millionADSs had been purchased under this program for a total cost of US$17.7 million.

The Company also purchased approximately 0.8 million ordinary shares of Cloud Music in open market transactions on the Hong Kong Stock Exchange for a total cost of US$8.3 million during the second quarter of 2022.

The extent to which NetEase repurchases its ADSs and its ordinary shares or purchases Youdao's ADSs and Cloud Music's ordinary shares 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. 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 Thursday,August 18,2022 (Beijing/ Hong Kong Time: 8:00 p.m.,Thursday,2022). 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 1-323-701-0160 and providing conference ID: 1239376,15 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 1239376#. The replay will be available through August 31,2022.

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,Inc. (NASDAQ: NTES and HKEX:9999,"NetEase") provides premium online services centered around content creation. With extensive offerings across its expanding gaming ecosystem,the Company develops and operates some of China's most popular and longest running mobile and PC games. Powered by industry-leading in-house R&D capabilities in China and globally,NetEase creates superior gaming experiences,inspires players,and passionately delivers value for its thriving community worldwide. By infusing play with culture and education with technology,NetEase transforms gaming into a meaningful vehicle to build a more entertaining and enlightened world.

Beyond games,NetEase service offerings include its majority-controlled subsidiaries Youdao (NYSE: DAO),China's leading technology-focused intelligent learning company,and Cloud Music (HKEX: 9899),China's leading online music content community,as well as Yanxuan,NetEase's private label consumer lifestyle brand.

NetEase's ESG initiatives are among the best in the global media and entertainment industry,earning it a distinction as one of the S&P Global Industry Movers and an "A" rating from MSCI. 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 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; potential changes in government regulation that could adversely affect the industry and geographical markets in which NetEase operates,including,among others,initiatives to enhance supervision of companies listed on an overseas stock exchange and tighten scrutiny over data privacy and data security,as well as the risk that NetEase's ADSs could be barred from trading in the United States as a result of the Holding Foreign Companies Accountable Act and the rules promulgated thereunder; 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. 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

NETEASE,INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

December 31,

June 30,

2021

2022

2022

RMB

RMB

USD (Note 1)

Assets

Current assets:

Cash and cash equivalents

14,498,157

16,461,908

2,457,698

Time deposits

70,754,846

84,916,751

12,677,737

Restricted cash

2,876,628

3,089,413

461,237

Accounts receivable,net

5,507,988

5,213,151

778,303

Inventories

964,733

843,767

125,971

Prepayments and other current assets,net

6,235,857

7,317,644

1,092,495

Short-term investments

12,281,548

10,166,531

1,517,823

Assets held for sale

497

-

-

Total current assets

113,120,254

128,009,165

19,111,264

Non-current assets:

Property,equipment and software,433,858

6,022,365

899,115

Land use right,net

4,108,090

4,156,674

620,575

Deferred tax assets

1,297,954

1,254,640

187,313

Time deposits

5,823,840

4,473,840

667,927

Restricted cash

1,330

1,129

169

Other long-term assets,net

23,857,510

24,261,773

3,622,187

Assets held for sale

1,088

-

-

Total non-current assets

40,523,670

40,170,421

5,997,286

Total assets

153,643,924

168,179,586

25,550

Liabilities,Redeemable Noncontrolling Interests

and Shareholders' Equity

Current liabilities:

Accounts payable

985,059

942,070

140,647

Salary and welfare payables

4,133,254

3,211,330

479,439

Taxes payable

4,537,050

3,260,873

486,835

Short-term loans

19,352,313

28,027,125

4,184,340

Contract liabilities

12,132,743

12,316,763

1,838,844

Accrued liabilities and other payables

9,360,907

9,686,526

1,446,160

Total current liabilities

50,501,326

57,444,687

8,576,265

Non-current liabilities:

Deferred tax liabilities

1,345,874

1,448,250

216,218

Long-term loans

1,275,140

3,355,700

500,993

Other long-term payable

1,097,708

1,023,880

152,861

Total non-current liabilities

3,718,722

5,827,830

870,072

Total liabilities

54,220,048

63,272,517

9,337

Redeemable noncontrolling interests

145,238

142,579

21,286

NetEase,Inc.'s shareholders' equity

95,328,080

100,830,817

15,053,645

Noncontrolling interests

3,950,558

3,933,673

587,282

Total shareholders' equity

99,278,638

104,764,490

15,640,927

Total liabilities,redeemable noncontrolling

interests and shareholders' equity

153,550

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,

2021

2022

2022

2022

2021

2022

2022

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues

20,524,501

23,555,842

23,159,078

3,559

41,041,712

46,714,920

6,974,354

Cost of revenues

(9,334,887)

(10,719,463)

(10,217,587)

(1,525,446)

(18,799,459)

(20,937,050)

(3,125,819)

Gross profit

11,189,614

12,836,379

12,941,491

1,932,113

22,242,253

25,777,870

3,848,535

Operating expenses:

Selling and marketing expenses

(3,013,447)

(2,915,489)

(3,300,705)

(492,782)

(5,780,129)

(6,216,194)

(928,053)

General and administrative expenses

(1,011,183)

(1,015,769)

(1,112,755)

(166,130)

(1,961,377)

(2,128,524)

(317,780)

Research and development expenses

(3,406,859)

(3,398,082)

(3,581,700)

(534,734)

(6,467,048)

(6,979,782)

(1,042,054)

Total operating expenses

(7,431,489)

(7,329,340)

(7,995,160)

(1,193,646)

(14,208,554)

(15,324,500)

(2,287,887)

Operating profit

3,758,125

5,039

4,946,331

738,467

8,033,699

10,453,370

1,560,648

Other income/ (expenses):

Investment income/ (loss),net

889,392

(548,702)

(707,489)

(105,625)

1,584,690

(1,256,191)

(187,544)

Interest income,net

386,207

458,244

505,991

75,542

775,135

964,235

143,956

Exchange (losses)/gains,net

(591,720)

(97,880)

865,283

129,183

(312,401)

767,403

114,570

Other,net

147,588

216,330

121,175

18,091

295,555

337,505

50,388

Income before tax

4,589,592

5,535,031

5,731,291

855,658

10,376,678

11,266,322

1,682,018

Income tax

(1,113,228)

(1,219,271)

(1,259,320)

(188,012)

(2,386,636)

(2,478,591)

(370,044)

Net income from continuing operations

3,476,364

4,315,760

4,471,971

667,646

7,990,042

8,787,731

1,311,974

Net income from discontinued operations

-

-

624,864

93,290

-

624,290

Net income

3,760

5,096,835

760,936

7,042

9,412,595

1,405,264

Accretion of redeemable noncontrolling

interests

(145,415)

(733)

(754)

(113)

(289,242)

(1,487)

(222)

Net loss attributable to noncontrolling

interests

210,805

78,996

195,395

29,172

280,106

274,391

40,965

Net income attributable to the

Company's shareholders

3,541,754

4,394,023

5,291,476

789,995

7,980,906

9,685,499

1,007

Including:

-Net income from continuing operations

attributable to the Company's shareholders

3,023

4,666,612

696,705

7,060,635

1,717

-Net income from discontinued operations

attributable to the Company's shareholders

-

-

624,290

Basic net income per share *

1.06

1.34

1.62

0.24

2.38

2.96

0.44

-Continuing operations

1.06

1.34

1.43

0.21

2.38

2.77

0.41

-Discontinued operations

-

-

0.19

0.03

-

0.19

0.03

Basic net income per ADS *

5.29

6.70

8.08

1.21

11.92

14.78

2.21

-Continuing operations

5.29

6.70

7.13

1.07

11.92

13.83

2.07

-Discontinued operations

-

-

0.95

0.14

-

0.95

0.14

Diluted net income per share *

1.05

1.33

1.60

0.24

2.35

2.93

0.44

-Continuing operations

1.05

1.33

1.41

0.21

2.35

2.74

0.41

-Discontinued operations

-

-

0.19

0.03

-

0.19

0.03

Diluted net income per ADS *

5.23

6.63

8.00

1.19

11.76

14.63

2.18

-Continuing operations

5.23

6.63

7.05

1.05

11.76

13.69

2.04

-Discontinued operations

-

-

0.95

0.14

-

0.94

0.14

Weighted average number of ordinary

shares used in calculating net income

per share *

Basic

3,347,507

3,277,280

3,274,695

3,348,567

3,980

3,980

Diluted

3,385,953

3,129

3,305,504

3,392,961

3,310,809

3,809

* 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,

2021

2022

2022

2022

2021

2022

2022

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Cash flows from operating activities:

Net income

3,264

Net income from discontinued operations

-

-

(624,864)

(93,290)

-

(624,290)

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

814,370

766,180

609,036

90,927

1,634,200

1,375,216

205,314

Fair value changes of equity security investments

(203,720)

1,002

735,159

109,756

(681,317)

2,276,161

339,822

Impairment losses of investments and other long-term assets

4,797

5,000

243,085

36,292

4,797

248,085

37,038

Fair value changes of short-term investments

(170,676)

(79,776)

(119,882)

(17,898)

(288,680)

(199,658)

(29,808)

Share-based compensation cost

700,114

746,154

764,447

114,129

1,350,367

1,510,601

225,527

Allowance for/ (reversal of) expected credit losses

27,384

(313)

10,965

1,637

40,988

10,652

1,590

Losses on disposal of property,equipment and software

1,424

1,445

481

72

1,265

1,926

288

Unrealized exchange losses/(gains)

572,708

98,034

(890,066)

(132,883)

298,661

(792,032)

(118,247)

Gains on disposal of long-term investments,business and

subsidiaries

(166,505)

(4,000)

-

-

(173,828)

(4,000)

(597)

Deferred income taxes

202,894

315,228

(169,539)

(25,312)

530,969

145,689

21,751

Share of results on equity method investees and revaluation

results from previously held equity interest

(342,760)

(911,498)

(134,569)

(20,091)

(394,652)

(1,046,067)

(156,174)

Changes in operating assets and liabilities:

Accounts receivable

573,111

212,075

82,282

12,284

88,768

294,357

43,946

Inventories

(9,608)

103,591

17,791

2,656

(263,103)

121,382

18,122

Prepayments and other assets

593,379

(569,843)

(163,612)

(24,426)

(191,845)

(733,455)

(109,502)

Accounts payable

(178,097)

(92,373)

48,452

7,234

(238,751)

(43,921)

(6,557)

Salary and welfare payables

856,775

(1,756,224)

782,789

116,867

(369,380)

(973,435)

(145,330)

Taxes payable

(1,397,390)

73,446

(538,234)

(80,355)

161,228

(464,788)

(69,391)

Contract liabilities

(381,446)

(78,200)

279,669

41,754

359,492

201,469

30,078

Accrued liabilities and other payables

(250,312)

(103,136)

600,934

89,717

406,252

497,798

74,319

Net cash provided by operating activities

4,722,806

4,582,552

6,631,159

990,006

10,265,473

11,711

1,674,163

Cash flows from investing activities:

Purchase of property,equipment and software

(421,872)

(749,361)

(445,054)

(66,445)

(751,618)

(1,194,415)

(178,321)

Proceeds from sale of property,equipment and software

2,458

12,565

23,338

3,484

3,977

35,903

5,360

Purchase of intangible assets,content and licensed copyrights

(566,736)

(143,836)

(85,121)

(12,708)

(992,869)

(228,957)

(34,182)

Net change in short-term investments with terms of three

months or less

1,668,673

1,710,845

(159,173)

(23,764)

5,001,283

1,551,672

231,659

Purchase of short-term investments with terms over three

months

(2,450,000)

(1,250,000)

-

-

(10,000)

(186,620)

Proceeds from maturities of short-term investments with terms

over three months

813,211

553,831

1,459,172

217,849

3,670,552

2,003

300,533

Investment in long-term investments and acquisition of

subsidiaries

(3,973)

(1,690,271)

(899,968)

(134,362)

(3,935,414)

(2,590,239)

(386,713)

Proceeds from disposal of long-term investments,businesses

and subsidiaries

266,284

34,237

6,413

957

465,184

40,650

6,069

Placement/rollover of matured time deposits

(27,223,584)

(24,045,997)

(33,122,029)

(4,944,989)

(42,333)

(57,168,026)

(8,534,962)

Proceeds from maturities of time deposits

25,790,186

14,699,795

32,100,141

4,792,425

37,271,321

46,936

6,987,046

Change in other long-term assets

(44,877)

(169,545)

(60,900)

(9,092)

(99,530)

(230,445)

(34,405)

Net cash used in investing activities

(5,543,230)

(11,037,737)

(1,183,181)

(176,645)

(12,447)

(12,918)

(1,824,536)

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,

2021

2022

2022

2022

2021

2022

2022

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Cash flows from financing activities:

Net changes in bank loans with terms of three months or less

4,978,642

3,403,195

2,721,487

406,307

7,683

6,124,682

914,391

Proceed of bank loans with terms over three months

1,320,614

1,210

1,641,708

245,101

1,557,530

3,556,918

531,034

Payment of bank loans with terms over three months

(582,328)

-

(32,273)

(4,818)

(750,028)

(32,818)

Amounts paid for NetEase's issuance of shares in Hong Kong

-

-

-

-

(13,800)

-

-

Net Amounts received/ (paid) related to capital contribution from

or repurchase of noncontrolling interests and redeemable

noncontrolling interests shareholders

8,176

(102,042)

33,200

4,957

1,515,225

(68,842)

(10,278)

Cash paid for repurchase of NetEase's ADSs/ purchase of

subsidiaries' ADSs and shares

(2,468,969)

(1,243,917)

(2,119,613)

(316,450)

(4,487,436)

(3,363,530)

(502,162)

Dividends paid to NetEase's shareholders

(1,879)

(1,683,472)

(1,637)

(209,557)

(1,539,721)

(3,087,109)

(460,893)

Net cash provided by financing activities

1,977,256

2,288,974

840,872

125,540

3,382,453

3,129,846

467,274

Effect of exchange rate changes on cash,cash equivalents and

restricted cash held in foreign currencies

(25,112)

(21,202)

74,898

11,182

10,881

53,696

8,017

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

1,131,720

(4,187,413)

6,748

950,083

990,360

2,176,335

324,918

Cash,cash equivalents and restricted cash,at the beginning

of the period

12,245

17,115

13,188,702

1,969,021

12,605

17,115

2,594,186

Cash,at end of the period

13,158,965

13,702

19,552,450

2,919,104

13,965

19,104

Supplemental disclosures of cash flow information:

Cash paid for income tax,net

1,240,692

1,055,096

157,522

1,883

2,570,426

383,754

Cash paid for interest expense

48,082

37,741

93,079

13,896

91,984

130,820

19,531

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,

2021

2022

2022

2022

2021

2022

2022

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net revenues:

Games and related value-added services

15,774,818

18,814

18,139,843

2,708,207

31,881,629

36,781,657

5,491,357

Youdao

1,293,407

1,200,541

956,225

142,761

2,633,274

2,766

321,997

Cloud Music

1,692,507

2,067,206

2,191,510

327,184

3,674

4,258,716

635,810

Innovative businesses and others

1,763,769

1,646,281

1,871,500

279,407

3,343,135

3,781

525,190

Total net revenues

20,354

Cost of revenues:

Games and related value-added services

(5,813,002)

(7,052,050)

(6,598)

(951,852)

(12,026,054)

(13,427,648)

(2,004,695)

Youdao

(616,661)

(562,691)

(546,498)

(81,590)

(1,076)

(1,109,189)

(165,598)

Cloud Music

(1,623,327)

(1,815,649)

(1,905,954)

(284,551)

(3,161,053)

(3,603)

(555,621)

Innovative businesses and others

(1,897)

(1,289,073)

(1,389,537)

(207,453)

(2,423,276)

(2,678,610)

(399,905)

Total cost of revenues

(9,819)

Gross profit:

Games and related value-added services

9,816

11,764

11,245

1,355

19,855,575

23,354,009

3,486,662

Youdao

676,746

637,850

409,727

61,171

1,198

1,047,577

156,399

Cloud Music

69,180

251,557

285,556

42,633

22,621

537,113

80,189

Innovative businesses and others

481,872

357,208

481,963

71,954

919,859

839,171

125,285

Total gross profit

11,535

Gross profit margin:

Games and related value-added services

63.2%

62.2%

64.9%

64.9%

62.3%

63.5%

63.5%

Youdao

52.3%

53.1%

42.8%

42.8%

54.8%

48.6%

48.6%

Cloud Music

4.1%

12.2%

13.0%

13.0%

0.7%

12.6%

12.6%

Innovative businesses and others

27.3%

21.7%

25.8%

25.8%

27.5%

23.9%

23.9%

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 = RMB6.6981on the last trading day of June 2022(June 30,2022) 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.

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,

2021

2022

2022

2022

2021

2022

2022

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Share-based compensation cost included in:

Cost of revenues

197,370

198,135

173,840

25,954

385,296

371,975

55,534

Operating expenses

Selling and marketing expenses

26,434

30,373

31,817

4,750

50,665

62,190

9,285

General and administrative expenses

258,544

279,062

297,891

44,474

488,147

576,953

86,137

Research and development expenses

217,766

238,584

260,899

38,951

426,259

499,483

74,571

The accompanying notes are an integral part of this announcement.

Note 3: The financial information prepared and presented in this announcement might be different from those published and to be published by NetEase's listed subsidiaries to meet the disclosure requirements under U.S. GAAP or different accounting standards requirement.

Note 4: The unaudited reconciliation on GAAP and non-GAAP results is set out as follows in RMB and USD(in thousands,except per share data or per ADS data):

Three Months Ended

Six Months Ended

June 30,

2021

2022

2022

2022

2021

2022

2022

RMB

RMB

RMB

USD (Note 1)

RMB

RMB

USD (Note 1)

Net income from continuing operations attributable to

the Company's shareholders

3,717

Add: Share-based compensation

686,111

723,603

743,198

110,327,645

1,466,801

218,988

Non-GAAP net income from continuing operations

attributable to the Company's shareholders

4,227,865

5,117,626

5,409,810

807,662

9,308,551

10,527,436

1,571,705

Non-GAAP basic net income from continuing

operations per share *

1.26

1.56

1.65

0.25

2.78

3.21

0.48

Non-GAAP basic net income from continuing

operations per ADS *

6.31

7.81

8.26

1.23

13.90

16.07

2.40

Non-GAAP diluted net income from continuing

operations per share *

1.25

1.54

1.64

0.24

2.74

3.18

0.47

Non-GAAP diluted net income from continuing

operations per ADS *

6.24

7.72

8.18

1.22

13.72

15.90

2.37

* Each ADS represents five ordinary shares.

The accompanying notes are an integral part of this announcement.

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