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NetEase Reports Fourth Quarter and Fiscal Year 2013 Unaudited Financial Results

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SOURCE NetEase, Inc.

BEIJING, Feb. 12, 2014 /PRNewswire-FirstCall/ -- NetEase, Inc. (NASDAQ: NTES), one of China's leading Internet and online game services providers, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2013.

"Our focus on quality and innovation across our Internet games and services has been the cornerstone of our success, propelling our dynamic growth in 2013," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Throughout the year we expanded and diversified our offerings with comprehensive upgrades of our popular online games, Fantasy Westward Journey, Westward Journey Online II and Ghost, the launch of several new online games in diversified genres, and our entrance into the mobile gaming and social networking markets. Our total revenue increased by 16.6% in 2013, led by a 14.0% increase in online games revenue and 28.8% growth in advertising services revenue. We finished the year with a solid fourth quarter, growing our total revenues by 11.1% year-over-year and 2.8% quarter-over-quarter."

"Through our advanced technology, unified R&D process and the continuous optimization of our products and services, we are actively growing our loyal community of users. During the quarter, Fantasy Westward Journey II celebrated its 10-year anniversary, marking the game's longstanding popularity. Since the exciting comprehensive upgrade of this game and the launch of the mobile version in July, both the mobile and PC versions have demonstrated outstanding performances that are indicative of the resilience of our self-developed games. Other standout performances for the year were led by Kung Fu Master, New Westward Journey Online II, Heroes of Tang Dynasty II and Ghost II. In the fourth quarter, we also launched new expansion packs for Kung Fu Master, Heroes of Tang Dynasty II, Tianxia III and Legend of Fairy. Our small-scale commercial introduction of Legend of Tibet and Burst Sky in the fourth quarter was in-line with our expectations, and we plan to cultivate additional users for these two games. Burst Sky is a western fantasy style, side scrolling shooter game, and we are looking for opportunities to launch this game in overseas markets."

"Our online games business continues to grow at a steady pace. In January, we released expansion packs for Fantasy Westward Journey II, New Fly for Fun and New Westward Journey Online III. We also launched open beta testing in mainland China of Blizzard Entertainment's Hearthstone: Heroes of Warcraft™ in January, and this free-to-play digital strategy card game has been highly popular with players. We currently expect to release new expansion packs for Tianxia III and Kung Fu Master in the first half of the year. We also have plans to release our first person shooter game, Crisis 2015, later this year and launch initial small-group testing of Revelation, our 3-D epic fantasy MMORPG that is currently under development. We are augmenting the success of our online games with our mobile initiatives, offering players a new medium through which to enjoy NetEase's games. We have already released three mobile games, and in 2014 we plan to launch a number of new mobile games, including mobile versions of our existing online games, to further enrich our portfolio."

"With regard to advertising services, our strong pipeline of mobile applications rounds out our mobile Internet offerings and we plan to introduce several new mobile Internet applications later this year. As of December 31, 2013, we had more than 200 million installations of our leading Mobile News application, which is proving to be highly appealing to our advertisers. For the fourth quarter, our advertising services revenue increased by 19.9% quarter-over-quarter and 38.0% year-over-year, primarily driven by the automobile, Internet services, financial services and real estate sectors. We are also making substantial inroads with YiChat, which continues to gain traction in China's social networking market. We are building on this platform as we introduce new features including games and mobile payment solutions. To make our e-mail services and popular mobile applications even more attractive to users, we made a number of other improvements during the fourth quarter to enhance user experience, including integration of our e-mail services with YiChat. These efforts to increase the quality and functionality of our products and services are attracting more users and, as of December 31, 2013, we had approximately 620 million registered e-mail users."

"In 2014, we will continue to diversify and optimize our games and services to address our audiences' demands for both PC and mobile services. As part of our multi-platform strategy, we plan to not only introduce new online and mobile games and features in mainland China, but also to further develop our social networking platform, perpetuate our portfolio of existing mobile applications and further explore opportunities in online games markets overseas. These combined efforts are designed to serve our dedicated community with high-quality content and features that drive growth across our traditional and mobile Internet businesses and enhance returns for our shareholders as we work to increase the value of our Company. In addition, we are happy to announce that our board of directors has approved an annual cash dividend of US$1.41 per ADS, along with a US$100 million share repurchase program," Mr. Ding concluded.

Fourth Quarter 2013 Financial Results

Revenues

Total revenues for the fourth quarter of 2013 were RMB2,585.1 million (US$427.0 million), compared to RMB2,514.3 million and RMB2,326.7 million for the preceding quarter and the fourth quarter of 2012, respectively.

Revenues from online games were RMB2,109.5 million (US$348.5 million) for the fourth quarter of 2013, compared to RMB2,105.5 million and RMB1,977.4 million for the preceding quarter and the fourth quarter of 2012, respectively.

Revenues from advertising services were RMB358.2 million (US$59.2 million) for the fourth quarter of 2013, compared to RMB298.8 million and RMB259.5 million for the preceding quarter and the fourth quarter of 2012, respectively.

Revenues from e-mail, wireless value-added services and others ("E-mail, WVAS and others") were RMB117.5 million (US$19.4 million) for the fourth quarter of 2013, compared to RMB110.1 million and RMB89.8 million for the preceding quarter and the fourth quarter of 2012, respectively.

Sales Taxes

Total sales taxes for the fourth quarter of 2013 were RMB162.7 million (US$26.9 million), compared to RMB157.7 million and RMB55.8 million for the preceding quarter and the fourth quarter of 2012, respectively. The year-over-year increase in sales taxes was mainly due to a change in the tax rules in China, which resulted in the Company's online game revenues gradually becoming subject to value-added tax instead of business tax during 2013. This change in tax rules did not have a significant impact on gross profit from the Company's online game services business segment as the increase in value-added tax was substantially offset by a reduction in business taxes on intra-group revenues, which were previously recorded in cost of revenues. As a result, the year-over-year improvement in gross profit margin was primarily attributable to lower net revenue due to the increased value-added tax in sales taxes.

Gross Profit

Gross profit for the fourth quarter of 2013 was RMB1,727.2 million (US$285.3 million), compared to RMB1,746.8 million and RMB1,608.3 million for the preceding quarter and the fourth quarter of 2012, respectively.

The year-over-year increase in gross profit was primarily attributable to increased gross profit from both the online games and advertising services businesses. 

The year-over-year increase in online game revenues was primarily driven by increased revenues from the Company's self-developed games, primarily Fantasy Westward Journey II, New Westward Journey Online II, New Westward Journey Online III, Ghost II and Heroes of Tang Dynasty II, which was partially offset by a decline in revenue from World of Warcraft®, a game licensed from Blizzard Entertainment.

The year-over-year increase in advertising services revenues was primarily due to a rise in demand, mainly from the automobile, Internet services and real estate sectors.

The quarter-over-quarter decrease in gross profit was primarily attributable to decreased gross profit from online games, which was partially offset by a quarter-over-quarter increase in gross profit from advertising services, which was mainly due to a rise in demand from the automobile, financial services and real estate sectors.

The quarter-over-quarter decrease in gross profit from online games was primarily driven by a decline in revenues from the Company's self-developed games due to seasonality, which was partially offset by an increase in revenues from games licensed from Blizzard Entertainment.

Gross Profit (Loss) Margin

Gross profit margin for the online games business for the fourth quarter of 2013 was 77.7%, compared to 79.7% and 75.3% for the preceding quarter and the fourth quarter of 2012, respectively. The year-over-year increase in gross profit margin was mainly due to the changes in tax rules as mentioned above. The quarter-over-quarter decrease in gross profit margin was mainly due to increased revenue contribution from licensed games, which carry lower gross profit margins.

Gross profit margin for the advertising services business for the fourth quarter of 2013 was 57.8%, compared to 59.4% and 54.3% for the preceding quarter and the fourth quarter of 2012, respectively.

Gross loss margin for the E-mail, WVAS and others business for the fourth quarter of 2013 was 4.0%, compared to gross profit margin of 4.1% and 13.0% for the preceding quarter and the fourth quarter of 2012, respectively. The quarter-over-quarter decrease in gross profit margin was mainly due to a one-time revenue contribution from sales of higher margin game accessories in the preceding quarter.

Operating Expenses

Total operating expenses for the fourth quarter of 2013 were RMB648.3 million (US$107.1 million), compared to RMB635.2 million and RMB580.4 million for the preceding quarter and the fourth quarter of 2012, respectively. The year-over-year increase in operating expenses was mainly due to increased staff-related costs resulting from an increase in the number of employees and average compensation, as well as higher research and development investments. The quarter-over-quarter increase in operating expenses was mainly due to increased selling and marketing expenses for NetEase's advertising services business, which was partially offset by decreased general and administrative expenses caused by the reversal of bad debt provisions and decreased research and development expenses incurred in the fourth quarter following the commercial launch of certain new products.

Income Taxes

The Company recorded a net income tax charge of RMB49.4 million (US$8.2 million) for the fourth quarter of 2013, compared to RMB206.5 million and RMB184.2 million for the preceding quarter and the fourth quarter of 2012, respectively. The effective tax rate for the fourth quarter of 2013 was 3.8%, compared to 16.5% and 15.4% for the preceding quarter and the fourth quarter of 2012, respectively. The change in the effective tax rate was mainly due to the fact that certain subsidiaries of the Company were approved as Key Software Enterprises in the fourth quarter of 2013 and are subject to a preferential tax rate of 10% for fiscal years 2013 and 2014, which had the effect of reducing the effective tax rate in the fourth quarter of 2013.

Net Income after tax

Net profit for the fourth quarter of 2013 totaled RMB1.2 billion (US$204.3 million), compared to RMB1.0 billion for the preceding quarter and for the fourth quarter of 2012.

During the fourth quarter of 2013, the Company reported a net foreign exchange loss of RMB17.6 million (US$2.9 million), compared to a net foreign exchange gain of RMB5.9 million and a net foreign exchange loss of RMB5.8 million for the preceding quarter and the fourth quarter of 2012, respectively. The quarter-over-quarter and year-over-year changes in foreign exchange gains/(losses) were mainly due to the unrealized exchange gains/(losses) arising from the Company's foreign currency denominated bank deposit and short-term loan balances as of December 31, 2013 as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods.

NetEase reported basic and diluted earnings per ADS of US$1.57 each for the fourth quarter of 2013. The Company reported basic and diluted earnings per ADS of US$1.33 each for the preceding quarter, and reported basic and diluted earnings per ADS of US$1.27 each for the fourth quarter of 2012.

Fiscal Year 2013 Financial Results

Revenues

Total revenues for fiscal year 2013 were RMB9.8 billion (US$1.6 billion), compared to RMB8.4 billion for the preceding fiscal year. Revenues from online games were RMB8.3 billion (US$1.4 billion) for fiscal year 2013, compared to RMB7.3 billion for the preceding fiscal year.  Revenues from advertising services were RMB1.1 billion (US$180.8 million) for fiscal year 2013, compared to RMB850.2 million for the preceding fiscal year.  Revenues from E-mail, WVAS and others were RMB368.0 million (US$60.8 million) for fiscal year 2013, compared to RMB242.7 million for the preceding fiscal year.

Gross Profit

Gross profit for fiscal year 2013 was RMB6.7 billion (US$1.1 billion), compared to RMB5.6 billion for the preceding fiscal year.  The increase in gross profit for fiscal year 2013 was primarily driven by increased revenues from online game services and advertising services.

The increase in online game services revenue in 2013 was primarily attributable to increased revenues from the Company's self-developed games such as Fantasy Westward Journey II, Kung Fu Master, New Westward Journey Online II, Heroes of Tang Dynasty II and Ghost II, which was partially offset by decreased revenues from games licensed from Blizzard Entertainment. 

The increase in advertising services revenue in 2013 was due to a rise in demand, mainly from the Internet services, automobile and foods and beverages sectors.

Operating Expenses

Total operating expenses for fiscal year 2013 were RMB2.4 billion (US$390.7 million), compared to RMB1.9 billion for the preceding fiscal year. The increase in operating expenses in 2013 was primarily due to increased research and development expenses resulting from increased headcount and increased sales and marketing expenses as a result of marketing and promotional activities for NetEase's advertising services and online games businesses.

Net Profit

Net profit for fiscal year 2013 totaled RMB4.4 billion (US$734.1 million), compared to RMB3.6 billion for the preceding fiscal year. For fiscal year 2013, the Company reported a net foreign exchange loss of RMB15.3 million (US$2.5 million), compared to a net foreign exchange loss of RMB0.6 million for the preceding fiscal year. The net foreign exchange loss for 2013 was mainly due to exchange losses arising from the Company's U.S. dollar-denominated bank deposit and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over these periods. NetEase reported basic and diluted earnings per ADS of US$5.65 and US$5.64 for fiscal year 2013, respectively.  The Company reported basic and diluted earnings per ADS of US$4.58 and US$4.57 for the preceding fiscal year, respectively.

Income Taxes

The Company recorded a net income tax charge of RMB530.6 million (US$87.7 million) and RMB691.6 million for fiscal years 2013 and 2012, respectively. The effective tax rate was 10.7% for fiscal year 2013, compared to 16.2% for fiscal year 2012.  The change in the effective tax rate was mainly due to the fact that certain subsidiaries were approved as Key Software Enterprises for fiscal years 2013 and 2014 and enjoyed a preferential tax rate of 10% as mentioned above. Furthermore, the Company obtained such preferential tax treatment with respect to fiscal years 2011 and 2012 in the first quarter of 2013 and recorded the related tax benefit in 2013.

Annual Cash Dividend

The Company also today announced that its board of directors has declared an annual cash dividend with respect to fiscal year 2013 in the amount of US$0.0564 per ordinary share, which is equivalent to US$1.41 per ADS (each ADS represents 25 ordinary shares), on its outstanding shares, which will be payable to shareholders of record as of February 26, 2014 and is expected to be paid on March 7, 2014. The total cash payment associated with this dividend will be approximately US$183.3 million.

Other Information

As of December 31, 2013, the Company's total cash and time deposits balance was RMB18.6 billion (US$3.1 billion), compared to RMB15.2 billion as of December 31, 2012. Cash flow generated from operating activities was RMB5.2 billion (US$864.9 million) for fiscal year 2013, compared to RMB4.2 billion for the preceding fiscal year.

Share Repurchase Program

In November 2012, the Company announced that its board of directors approved a share repurchase program of up to US$100.0 million. This program expired on November 20, 2013, at which time the Company had repurchased 2.02 million ADSs for approximately US$83.0 million under this program.

The Company today announced that its board of directors approved a new share repurchase program of up to US$100 million of the Company's outstanding ADSs for a period not to exceed 12 months. Under the terms of the approved program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market. The timing and dollar amount of repurchase transactions will be subject to Securities and Exchange Commission ("SEC") Rule 10b-18 requirements. It is also expected that such repurchases will be effected pursuant to a plan in conformity with SEC Rule 10b5-1. NetEase plans to fund repurchases made under this program from available working capital.

** The United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader.  Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB6.0537 on December 31, 2013 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2013, or at any other certain date. The percentages stated are calculated based on RMB.

Notes to Unaudited Financial Information

The unaudited financial information disclosed in this press release is preliminary.  The audit of the financial statements and related notes to be included in the Company's annual report on Form 20-F for the year ended December 31, 2013 is still in progress.  In addition, because an audit of the Company's internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed, the Company makes no representation as to the effectiveness of those internal controls as of the end of fiscal year 2013.

Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between the Company's audited financial statements and this preliminary unaudited financial information.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 8:00 p.m. Eastern Time on Wednesday, February 12, 2014 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, February 13, 2014). 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 1-877-941-1427 (international: 1-480-629-9664), 10-15 minutes prior to the initiation of the call.  A replay of the call will be available by dialing 1-800-406-7325 (international 1-303-590-3030), and entering passcode 4664466#. The replay will be available through February 26, 2014.

This call will be webcast live and the replay will be available for 12 months.  Both will be available on NetEase's Investor Relations website at http://ir.netease.com.

About NetEase, Inc.


NetEase, Inc. (NASDAQ: NTES) is a leading Internet technology company in China.  Dedicated to providing online services centered around content, community, communication and commerce, NetEase develops and operates some of China's most popular online games, e-mail services, advertising services, mobile applications and games, and web portals.  In partnership with Blizzard Entertainment, NetEase also operates one of the most popular international online games in China, World of Warcraft®. For more information, please visit: http://ir.netease.com/.

*      *      *

Forward Looking Statements

This press release contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market, which could occur if, for example, its new online games such as Kung Fu Master, Heroes of Three Kingdoms, Dragon Sword, Legend of Tibet and Crisis 2015 or expansion packs and other improvements to its existing games, including its current and planned expansion packs for Fantasy Westward Journey II, New Westward Journey Online II and other games, do not become as popular as management anticipates; the ability of NetEase to successfully expand its mobile Internet offerings; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that Shanghai EaseNet will not be able to continue operating World of Warcraft®, StarCraft® II, Hearthstone™: Heroes of Warcraft™ or other games licensed by it for a period of time or permanently due to possible governmental actions or the risk that such games will not be popular with game players in China; the risk that changes in Chinese government regulation of the online game market may limit future growth of NetEase's revenues or cause revenues to decline; competition in the online advertising business and the risk that investments by NetEase in its content and services may not increase the appeal of the NetEase websites among Internet users or result in increased advertising revenues; the risk that NetEase may not be able to continuously develop new and creative online services, including its ability to maintain and enhance the popularity of its e-mail, mobile and micro-blogging services and develop attractive mobile games; the risk that NetEase will not be able to control its expenses in future periods; competition in NetEase's existing and potential markets; governmental uncertainties (including possible changes in the effective tax rates applicable to NetEase and its subsidiaries and affiliates and the ability of NetEase to receive and maintain approvals of the preferential tax treatments and general competition and price pressures in the marketplace); the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase's business and financial results; and other risks outlined in NetEase's filings with the Securities and Exchange Commission. NetEase does not undertake any obligation to update this forward-looking information, except as required under the applicable law.

Contact for Media and Investors:

Cassia Curran
NetEase, Inc.
cassia@corp.netease.com
Tel: (+86) 571-8985-2076

Brandi Piacente
Investor Relations
brandi@corp.netease.com
Tel: (+1) 212-481-2050



NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(RMB and USD in thousands)



 December 31, 


 December 31, 


 December 31, 



2012


2013


2013



 RMB  


 RMB  


 USD (Note 1) 

Assets














Current assets:







   Cash and cash equivalents


1,590,769


1,458,298


240,894

   Time deposits


13,098,661


16,625,468


2,746,332

   Restricted cash


570,506


2,136,749


352,966

   Accounts receivable, net


269,485


402,511


66,490

   Prepayments and other current assets


1,121,784


1,144,272


189,019

   Short-term investments


1,073,539


901,183


148,865

   Deferred tax assets


143,929


129,282


21,356

Total current assets


17,868,673


22,797,763


3,765,922








Non-current assets:







   Property, equipment and software, net 


815,026


872,113


144,063

   Land use right, net


11,529


11,271


1,862

   Deferred tax assets 


2,215


23,085


3,813

   Time deposits


490,000


500,000


82,594

   Other long-term assets


90,513


342,098


56,511

Total non-current assets


1,409,283


1,748,567


288,843

Total assets 


19,277,956


24,546,330


4,054,765








Liabilities and Shareholders' Equity














Current liabilities:







   Accounts payable 


157,764


219,259


36,219

   Salary and welfare payables


289,848


377,117


62,295

   Dividend payable


814,934


-


-

   Taxes payable


389,465


74,463


12,300

   Short-term loan


-


975,504


161,142

   Deferred revenue


1,160,018


1,481,036


244,650

   Accrued liabilities and other payables


764,473


957,299


158,135

   Deferred tax liabilities


-


148,506


24,532

Total current liabilities


3,576,502


4,233,184


699,273








Long-term payable:







   Other long-term payable


99,968


144,883


23,933

Total liabilities


3,676,470


4,378,067


723,206








Total NetEase, Inc.'s equity


15,680,605


20,245,168


3,344,263

Noncontrolling interests


(79,119)


(76,905)


(12,704)

Total shareholders' equity


15,601,486


20,168,263


3,331,559








Total liabilities and shareholders' equity


19,277,956


24,546,330


4,054,765








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

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(RMB and USD in thousands, except per share data)



 Quarter Ended 


Year Ended



 December 31, 


September 30,


 December 31, 


 December 31, 


December 31,


December 31,


 December 31, 



2012


2013


2013


2013

2012


2013


2013



 RMB 


 RMB 


 RMB 


 USD (Note 1) 


 RMB 


 RMB 


 USD (Note 1) 

Revenues:















Online game services


1,977,417


2,105,451


2,109,456


348,457


7,287,063


8,308,618


1,372,486

Advertising services


259,500


298,783


358,153


59,163


850,157


1,094,623


180,819

E-mail, WVAS and others


89,799


110,080


117,473


19,405


242,741


368,014


60,792

Total revenues


2,326,716


2,514,314


2,585,082


427,025


8,379,961


9,771,255


1,614,097

Sales taxes


(55,842)


(157,675)


(162,660)


(26,870)


(179,005)


(575,080)


(94,996)

Total net revenues


2,270,874


2,356,639


2,422,422


400,155


8,200,956


9,196,175


1,519,101
















Total cost of revenues


(662,600)


(609,884)


(695,214)


(114,841)


(2,578,067)


(2,478,516)


(409,422)
















Gross profit


1,608,274


1,746,755


1,727,208


285,314


5,622,889


6,717,659


1,109,679
















Selling and marketing expenses 


(321,584)


(283,026)


(328,152)


(54,207)


(906,707)


(1,093,612)


(180,652)

General and administrative expenses


(69,452)


(94,795)


(82,168)


(13,573)


(286,223)


(349,832)


(57,788)

Research and development expenses 


(189,345)


(257,345)


(237,960)


(39,308)


(718,315)


(921,618)


(152,240)

Total operating expenses


(580,381)


(635,166)


(648,280)


(107,088)


(1,911,245)


(2,365,062)


(390,680)
















Operating profit


1,027,893


1,111,589


1,078,928


178,226


3,711,644


4,352,597


718,999

Other income:















Investment income


7,523


9,041


4,890


808


43,770


37,255


6,154

Interest income


115,530


123,567


139,082


22,975


423,634


506,181


83,615

Exchange (losses)/gains


(5,782)


5,900


(17,568)


(2,902)


(554)


(15,348)


(2,535)

Other, net


52,139


1,025


90,341


14,923


99,718


95,136


15,715
















Net income before tax


1,197,303


1,251,122


1,295,673


214,030


4,278,212


4,975,821


821,948

Income tax


(184,238)


(206,503)


(49,421)


(8,164)


(691,642)


(530,603)


(87,650)
















Net income after tax


1,013,065


1,044,619


1,246,252


205,866


3,586,570


4,445,218


734,298

Net (gain)/loss attributable
   to noncontrolling interests


(4,530)


3,675


(9,227)


(1,524)


50,882


(1,308)


(216)

Net income attributable to
   the Company's shareholders


1,008,535


1,048,294


1,237,025


204,342


3,637,452


4,443,910


734,082
















Comprehensive income


1,013,065


1,044,619


1,246,252


205,866


3,586,570


4,445,218


734,298

Comprehensive (gain)/loss attributable to
   noncontrolling interests


(4,530)


3,675


(9,227)


(1,524)


50,882


(1,308)


(216)

Comprehensive income attributable
   to the Company's shareholders


1,008,535


1,048,294


1,237,025


204,342


3,637,452


4,443,910


734,082
















Earnings per share, basic


0.31


0.32


0.38


0.06


1.11


1.37


0.23

Earnings per ADS, basic


7.69


8.06


9.51


1.57


27.70


34.21


5.65

Earnings per share, diluted


0.31


0.32


0.38


0.06


1.11


1.36


0.23

Earnings per ADS, diluted


7.68


8.04


9.48


1.57


27.65


34.12


5.64
















Weighted average number of
   ordinary shares outstanding, basic


3,278,877


3,250,078


3,250,284


3,250,284


3,282,663


3,247,874


3,247,874

Weighted average number of
   ADS outstanding, basic


131,155


130,003


130,011


130,011


131,307


129,915


129,915

Weighted average number of
   ordinary shares outstanding, diluted


3,283,903


3,260,350


3,262,605


3,262,605


3,288,330


3,256,297


3,256,297

Weighted average number of
   ADS outstanding, diluted


131,356


130,414


130,504


130,504


131,533


130,252


130,252
















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



NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(RMB and USD in thousands)



Quarter Ended


Year Ended



 December 31, 


 September 30 


December 31


 December 31 


 December 31 


December 31


 December 31 



2012


2013


2013


2013


2012


2013


2013



 RMB  


 RMB  


 RMB  


 USD (Note 1) 


 RMB  


 RMB  


 USD (Note 1) 

Cash flows from operating activities:















     Net income  


1,013,065


1,044,619


1,246,252


205,866


3,586,570


4,445,218


734,298

     Adjustments to reconcile net profit to net cash
         provided by operating activities: 















     Depreciation and amortization 


37,647


39,890


40,378


6,670


233,509


158,363


26,160

     Share-based compensation cost 


28,869


83,219


84,994


14,040


203,018


306,308


50,598

      (Reversal of) allowance for provision
         for doubtful debts 


(1,063)


2,616


(5,380)


(889)


3,088


(2,007)


(332)

     Gain on disposal of property,
         equipment and software 


(11)


(268)


(22)


(4)


(42)


(509)


(84)

     Unrealized exchange loss (gain)  


4,491


(8,308)


17,770


2,935


(5,665)


12,266


2,026

     Deferred income taxes 


(6,668)


(50,011)


60,220


9,948


(31,568)


282,284


46,630

     Net equity share of (gain) loss from
         associated companies 


(87)


1,938


3,474


574


(842)


5,321


879

     Amortization of (discount) premium of 
         short-term investments 


(5,407)


641


17,419


2,878


21,758


12,355


2,041

     Changes in operating assets and liabilities: 















         Accounts receivable 


19,806


(74,931)


2,580


426


(70,318)


(131,030)


(21,644)

         Prepayments and other current assets 


12,034


50,116


(32,949)


(5,443)


(68,833)


(21,933)


(3,623)

         Accounts payable 


42,197


1,626


55,567


9,179


43,168


70,959


11,722

         Salary and welfare payables 


111,449


(46,280)


154,401


25,505


45,434


87,269


14,416

         Taxes payable 


16,904


(129,572)


(262,248)


(43,320)


(34,449)


(455,002)


(75,161)

         Deferred revenue 


3,465


98,890


161,152


26,620


145,946


321,018


53,028

         Accrued liabilities and other payables 


59,729


1,208


79,185


13,080


153,516


145,010


23,954

             Net cash provided by operating activities 


1,336,420


1,015,393


1,622,793


268,065


4,224,290


5,235,890


864,908
















Cash flows from investing activities:















     Purchase of property, equipment and software 


(41,029)


(40,437)


(109,038)


(18,012)


(178,654)


(218,936)


(36,166)

     Proceeds from sale of property,
         equipment and software 


43


276


3,544


586


777


4,516


746

     Purchase of other intangible assets 


(32)


(250)


-


-


(32)


(900)


(149)

     Net change in short-term investments
         with terms of three months or less 


430,000


330,000


(180,000)


(29,734)


(120,000)


(480,000)


(79,289)

     Purchase of short-term investments 


(876,569)


-


(300,000)


(49,556)


(1,101,691)


(400,000)


(66,075)

     Proceeds from maturities of short-term investments 


-


150,000


520,000


85,898


1,120,000


1,040,000


171,796

     Investment in an associated company 


-


(200,000)


-


-


(7,915)


(200,000)


(33,038)

     Transfer from (to) restricted cash 


(101,322)


27,218


(152,871)


(25,252)


(251,822)


(1,566,244)


(258,725)

     Placement/rollover of matured time deposits 


(5,302,981)


(7,803,312)


(4,426,928)


(731,276)


(19,204,499)


(21,807,617)


(3,602,362)

     Proceeds from maturities of time deposits 


5,382,479


6,096,194


3,583,767


591,996


15,326,801


18,231,797


3,011,678

     Net change in other assets 


(6,186)


(36,674)


(16,326)


(2,696)


(37,003)


(55,895)


(9,233)

             Net cash used in investing activities 


(515,597)


(1,476,985)


(1,077,852)


(178,046)


(4,454,038)


(5,453,279)


(900,817)

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(RMB and USD in thousands)



Quarter Ended


Year Ended



 December 31, 


 September 30 


December 31


 December 31 


 December 31 


December 31


 December 31 



2012


2013


2013


2013


2012


2013


2013



 RMB  


 RMB  


 RMB  


 USD (Note 1) 


 RMB  


 RMB  


 USD (Note 1) 
















Cash flows from financing activities:















     Proceeds of short-term bank loan 


-


-


-


-


-


1,005,680


166,127

     Proceeds from employees exercising stock options 


-


513


-


-


24,712


2,474


409

     Capital contribution from non-controlling interests 


-


916


-


-


-


916


151

     Repurchase of shares 


(414,942)


-


-


-


(414,942)


(106,809)


(17,644)

     Dividends paid to shareholders 


-


-


-


-


-


(815,413)


(134,697)

             Net cash provided by financing activities      


(414,942)


1,429


-


-


(390,230)


86,848


14,346
















     Effect of exchange rate changes on cash 















         held in foreign currencies 


342


13,985


(3,945)


(652)


(3,871)


(1,930)


(319)

             Net increase (decrease) in cash and cash equivalents 


406,223


(446,178)


540,996


89,367


(623,849)


(132,471)


(21,882)

Cash and cash equivalents, beginning of the period


1,184,546


1,363,480


917,302


151,527


2,214,618


1,590,769


262,776

Cash and cash equivalents, end of the period


1,590,769


917,302


1,458,298


240,894


1,590,769


1,458,298


240,894
















Supplemental disclosures of cash flow information:















     Cash paid for income tax, net 


195,146


75,168


238,424


39,385


683,609


687,454


113,559

Supplemental schedule of non-cash investing 















     and financing activities:















     Share repurchase financed by accounts payable 


7,547


-


-


-


7,547


-


-

     Dividend payable 


814,934


-


-


-


814,934


-


-

     Fixed asset purchases financed by
         accounts payable and accrued liabilities 


7,228


15,299


10,071


1,664


7,228


10,071


1,664
















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

NETEASE, INC.

UNAUDITED SEGMENT INFORMATION

(RMB and USD in thousands, except percentages)









Quarter Ended


Year Ended



December 31,


September 30


December 31


December 31


December 31


December 31


December 31



2012


2013


2013


2013


2012


2013


2013



RMB


RMB


RMB


USD (Note 1)


RMB


RMB


USD (Note 1)

Revenues:















Online game services


1,977,417


2,105,451


2,109,456


348,457


7,287,063


8,308,618


1,372,486

Advertising services


259,500


298,783


358,153


59,163


850,157


1,094,623


180,819

E-mail, WVAS and others


89,799


110,080


117,473


19,405


242,741


368,014


60,792

Total revenues


2,326,716


2,514,314


2,585,082


427,025


8,379,961


9,771,255


1,614,097
















Sales taxes:  















Online game services


(25,170)


(119,994)


(120,543)


(19,912)


(86,478)


(444,154)


(73,369)

Advertising services


(24,240)


(29,421)


(34,594)


(5,715)


(82,680)


(107,156)


(17,700)

E-mail, WVAS and others


(6,432)


(8,260)


(7,523)


(1,243)


(9,847)


(23,770)


(3,927)

Total sales taxes


(55,842)


(157,675)


(162,660)


(26,870)


(179,005)


(575,080)


(94,996)
















Net revenues:















Online game services


1,952,247


1,985,457


1,988,913


328,545


7,200,585


7,864,464


1,299,117

Advertising services


235,260


269,362


323,559


53,448


767,477


987,467


163,119

E-mail, WVAS and others


83,367


101,820


109,950


18,162


232,894


344,244


56,865

Total net revenues


2,270,874


2,356,639


2,422,422


400,155


8,200,956


9,196,175


1,519,101
















Cost of revenues:















Online game services


(482,513)


(402,732)


(444,180)


(73,373)


(1,872,734)


(1,649,803)


(272,528)

Advertising services


(107,555)


(109,466)


(136,698)


(22,581)


(474,165)


(461,286)


(76,199)

E-mail, WVAS and others


(72,532)


(97,686)


(114,336)


(18,887)


(231,168)


(367,427)


(60,695)

Total cost of revenues


(662,600)


(609,884)


(695,214)


(114,841)


(2,578,067)


(2,478,516)


(409,422)
















Gross profit (loss):















Online game services


1,469,734


1,582,725


1,544,733


255,172


5,327,851


6,214,661


1,026,589

Advertising services


127,705


159,896


186,861


30,867


293,312


526,181


86,920

E-mail, WVAS and others


10,835


4,134


(4,386)


(725)


1,726


(23,183)


(3,830)

Total gross profit


1,608,274


1,746,755


1,727,208


285,314


5,622,889


6,717,659


1,109,679
















Gross profit (loss) margin:















Online game services


75.3%


79.7%


77.7%


77.7%


74.0%


79.0%


79.0%

Advertising services


54.3%


59.4%


57.8%


57.8%


38.2%


53.3%


53.3%

E-mail, WVAS and others


13.0%


4.1%


(4.0%)


(4.0%)


0.7%


(6.7%)


(6.7%)
















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











NETEASE, INC.
NOTES TO UNAUDITED FINANCIAL INFORMATION

Note 1: The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00 = RMB6.0537 on the last trading day of December 2013 (December 31, 2013)as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

Note 2: Share-based compensation cost reported in the Company's unaudited condensed consolidated statements of comprehensive income is set out as follows in RMB and USD (in thousands):



Quarter Ended


Year Ended



December 31,


September 30


December 31


December 31


December 31


December 31


December 31



2012


2013


2013


2013


2012


2013


2013



RMB


RMB


RMB


USD (Note 1)


RMB


RMB


USD (Note 1)

Share-based compensation cost included in:















Cost of revenue


12,957


46,098


48,654


8,037


100,540


165,708


27,373

Operating expenses















- Selling and marketing expenses


2,397


4,759


4,820


796


13,368


17,967


2,968

- General and administrative expenses


4,260


13,144


13,380


2,210


33,374


48,350


7,987

- Research and development expenses


9,255


19,218


18,140


2,997


55,736


74,283


12,271

 

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