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NetEase Reports Fourth Quarter and Fiscal Year 2012 Unaudited Financial Results

February 6, 2013

BEIJING, Feb. 6, 2013 /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, 2012.

William Ding, Chief Executive Officer and Director of NetEase, stated, “2012 marked another strong year for NetEase as we continued to enhance our games and services, as well as introduce new products and services throughout the year. Our 12.1% growth in total revenues was primarily due to an 11.2% increase in our online games business and a 6.9% increase in our advertising services business. We finished the year with a solid fourth quarter, growing our total revenues by 8.3% year-over-year and 13.8% quarter-over-quarter, as well as year-over-year and quarter-over-quarter growth in revenue from our online games business.”

“The growing popularity of our self-developed games and the newly launched expansion pack for Blizzard Entertainment’s World of Warcraft(®) contributed to our 13.6% quarter-over-quarter increase in online game revenues, supported by the launch of new games Kung Fu Master, Soul of the Fighter and Heroes of Tang Dynasty II. 2012 has been a remarkable year for our self-developed online games. The continued growth from our flagship games, new game launches, and exciting expansion packs and upgrades drove our 11.2% year-over-year increase in online game revenues. Highlights for the year include Fantasy Westward Journey and Westward Journey Online II reaching record high PCU levels in August, Ghost and Tianxia III delivering solid performances during the year, and Kung Fu Master and Heroes of Tang Dynasty II receiving positive feedback following their launches in October and November, respectively.”

“Robust game expansion and pipeline development remains a core theme for the anticipated growth of our online game services in 2013. These initiatives are proceeding well in the first quarter of 2013, with expansion packs for Westward Journey Online III and New Fly for Fun planned to kick-off our online game release schedule. For the second quarter of 2013, our current plan includes the launch of expansion packs for Westward Journey Online II, Tianxia III, Heroes of Tang Dynasty II, Kung Fu Master and Soul of the Fighter and the new version of Ghost.”

“As we continue to build on our successful game platforms, we are working to diversify our portfolio into new genres, with the development of our 3D action real-time strategy game Heroes of Three Kingdoms and a first person shooter game. Moreover, we plan to introduce two additional new games that further augment our extensive game portfolio, Dragon Sword, our next generation 3D MMORPG, and Legend of Tibet, a 2.5D MMORPG that follows a unique story based on Tibetan mythology. The development of these games is well underway, with plans for commercialization in the second half of the year.”

“With regard to advertising services, our revenues for the fourth quarter grew by 6.8% quarter-over-quarter with automobile, financial services and Internet services as the three highest performing sectors. We continued to enhance our online offerings with the strategic development of our mobile initiatives, which have proved to be highly popular with our users. As of December 31, 2012, we had over 50 million installations for our Mobile News application with over 22 million active users on a daily basis, 8.5 million installations for Youdao Cloudnote and 128 million installations for Youdao Dictionary on mobile devices. As we move through 2013, we are cautiously optimistic that we will see continued spending and growth in our advertising business as we work to increase traffic to our portals with a focus on both traditional and mobile Internet.”

“2012 marked the 15th anniversary of our mailbox services, where we continue to be one of China’s leading e-mail service providers. With the launch of our new e-mail 5.0 services in August, the number of new users and user activity increased substantially in 2012. As of December 31, 2012, we had approximately 530 million registered e-mail users. We continue to optimize these services to enhance their appeal to our users.”

“We remain focused on bringing games and content to the Internet market that showcase our innovation and leadership. Our strategic initiatives are designed to build on our established online games, portal and e-mail businesses through the introduction of high quality content, leading technology and optimization. In 2013, we will work to achieve growth across our businesses with enhancements to our games and services that underscore our commitment to driving content, community, communication and commerce in China’s growing online market,” Mr. Ding concluded.

Fourth Quarter 2012 Financial Results

Revenues

Total revenues for the fourth quarter of 2012 were RMB2.3 billion (US$373.5 million), compared to RMB2.0 billion and RMB2.1 billion for the preceding quarter and the fourth quarter of 2011, respectively.

Revenues from online game services were RMB2.0 billion (US$317.4 million) for the fourth quarter of 2012, compared to RMB1.7 billion and RMB1.8 billion for the preceding quarter and the fourth quarter of 2011, respectively.

Revenues from advertising services were RMB259.5 million (US$41.7 million) for the fourth quarter of 2012, compared to RMB243.0 million and RMB278.5 million for the preceding quarter and the fourth quarter of 2011, respectively.

Revenues from e-mail, wireless value-added services and others (“E-mail, WVAS and others”) were RMB89.8 million (US$14.4 million) for the fourth quarter of 2012, compared to RMB61.9 million and RMB37.2 million for the preceding quarter and the fourth quarter of 2011, respectively.

Gross Profit

Gross profit for the fourth quarter of 2012 was RMB1.6 billion (US$258.1 million), compared to RMB1.4 billion and RMB1.5 billion for the preceding quarter and the fourth quarter of 2011, respectively.

The quarter-over-quarter increase in gross profit was primarily attributable to increased revenues from both the online games and advertising services businesses. The increase in revenues from self-developed games was mainly attributable to Tianxia III, Heroes of Tang Dynasty II, and NetEase’s two new games Kung Fu Master and Soul of the Fighter. The performances of Fantasy Westward Journey, Westward Journey Online II and Ghost were steady in the fourth quarter of 2012. The increased revenues from licensed games were mainly due to the October 2012 launch in mainland China of Mists of Pandaria(®), the fourth expansion for Blizzard Entertainment’s World of Warcraft. The quarter-over-quarter increase in gross profit from advertising services was primarily attributable to seasonality and reduced content costs due to higher content costs incurred in the third quarter for the 2012 London Olympics.

The year-over-year increase in gross profit was primarily attributable to increased revenues from NetEase’s self-developed games, which was partially offset by decreased revenues from advertising services. The increase in revenues from NetEase’s self-developed games was mainly attributable to Fantasy Westward Journey, Kung Fu Master and Soul of the Fighter.

Gross Profit (Loss) Margin

Gross profit margin for the online games business for the fourth quarter of 2012 was 75.3%, compared to 74.2% and 72.6% for the preceding quarter and the fourth quarter of 2011, respectively.

Gross profit margin for the advertising business for the fourth quarter of 2012 was 54.3%, compared to 36.2% and 54.5% for the preceding quarter and the fourth quarter of 2011, respectively. The quarter-over-quarter increase in gross profit margin was primarily due to increased revenues and reduced content costs due to higher content costs incurred in the third quarter for the 2012 London Olympics.

Gross profit margin for the E-mail, WVAS and others business for the fourth quarter of 2012 was 13.0%, compared to 6.0% and 2.2% for the preceding quarter and the fourth quarter of 2011, respectively. The quarter-over-quarter and year-over-year improvements in gross profit margin were mainly due to increased revenues from NetEase’s e-commerce and mailbox businesses, as well as the sale of game-related accessories, such as a limited edition package of World of Warcraft.

Operating Expenses

Total operating expenses for the fourth quarter of 2012 were RMB580.4 million (US$93.2 million), compared to RMB537.5 million and RMB529.0 million for the preceding quarter and the fourth quarter of 2011, respectively. The quarter-over-quarter increase in operating expenses was primarily due to increased selling and marketing expenses, mainly resulting from increased promotional activities for Kung Fu Master, World of Warcraft and Heroes of Tang Dynasty II, which was partially offset by decreased research and development costs as NetEase has recently commercially launched a number of new products. The year-over-year increase in operating expenses was primarily due to increased selling and marketing expenses and research and development staff-related costs, which was partially offset by an impairment provision of RMB50.3 million made in 2011 on the initial online game license fee of Blizzard Entertainment’s StarCraft(®) II.

Net Profit

Net profit for the fourth quarter of 2012 totaled RMB1.0 billion (US$161.9 million), compared to RMB811.9 million and RMB898.6 million for the preceding quarter and the fourth quarter of 2011, respectively. During the fourth quarter of 2012, the Company reported a net foreign exchange loss of RMB5.8 million (US$0.9 million), compared to a net foreign exchange gain of RMB23.7 million and a net foreign exchange loss of RMB36.4 million for the preceding quarter and the fourth quarter of 2011, respectively. The quarter-over-quarter and year-over-year foreign exchange gain/losses were mainly due to the exchange gain/losses arising from the Company’s foreign currency denominated bank deposit balances as of December 31, 2012, as the exchange rate of the Euro and US dollar against the RMB fluctuated over the periods.

NetEase reported basic and diluted earnings per American depositary share (“ADS”) of US$1.23 each for the fourth quarter of 2012. The Company reported basic and diluted earnings per ADS of US$0.99 each for the preceding quarter, and basic and diluted earnings per ADS of US$1.10 each for the fourth quarter of 2011.

Income Taxes

The Company recorded a net income tax charge of RMB184.2 million (US$29.6 million) for the fourth quarter of 2012, compared to RMB194.8 million and RMB122.6 million for the preceding quarter and the fourth quarter of 2011, respectively. The effective tax rate for the fourth quarter of 2012 was 15.4%, compared to 19.9% for the preceding quarter and 11.8% for the fourth quarter of 2011. The quarter-over-quarter decrease in effective tax rate was due to the occurrence in the preceding quarter of a one-time accrued withholding tax of RMB40.0 million associated with the offshore remittance of cash from China in connection with the declaration of a special cash dividend.

The Company’s various principal subsidiaries renewed their qualifications as High and New Technology Enterprises in 2011 and receive the preferential enterprise income tax rate of 15% from 2011 to 2013, subject to annual review by the relevant tax authorities in China.

Fiscal Year 2012 Financial Results

Revenues

Total revenues for fiscal year 2012 were RMB8.4 billion (US$1.3 billion), compared to RMB7.5 billion for the preceding fiscal year. Revenues from online games were RMB7.3 billion (US$1.2 billion) for fiscal year 2012, compared to RMB6.6 billion for the preceding fiscal year. Revenues from advertising services were RMB850.2 million (US$136.5 million) for fiscal year 2012, compared to RMB795.4 million for the preceding fiscal year. Revenues from E-mail, WVAS and others were RMB242.7 million (US$39.0 million) for fiscal year 2012, compared to RMB124.9 million for the preceding fiscal year.

Gross Profit

Gross profit for fiscal year 2012 was RMB5.6 billion (US$902.5 million), compared to RMB4.9 billion for the preceding fiscal year. The increase in gross profit for fiscal year 2012 was primarily driven by increased revenues, which was partially offset by increased cost of revenues.

The increase in online game services revenue in 2012 was primarily attributable to increased revenues from the Company’s self-developed games such as Fantasy Westward Journey, Ghost, Tianxia III, Kung Fu Master and Westward Journey Online II for the reasons explained above, which was partially offset by decreased revenues from games licensed from Blizzard Entertainment.

The increase in advertising services revenue in 2012 was primarily attributable to large-scale global sporting events such as Euro Cup 2012 and the 2012 London Olympics, which contributed to an increase in portal and search traffic on NetEase’s websites. The year-over-year decrease in gross profit margin was primarily due to increased headcount-related costs and content costs incurred for the 2012 London Olympics.

Operating Expenses

Total operating expenses for fiscal year 2012 were RMB1.9 billion (US$306.8 million), compared to RMB1.6 billion for the preceding fiscal year. The increase in operating expenses in 2012 was primarily due to increased selling and marketing expenses as a result of marketing and promotional activities for various games, including Kung Fu Master, Soul of the Fighter and Blizzard Entertainment’s World of Warcraft, and increased staff-related costs resulting from increased headcount in general and administration and research and development areas, which was partially offset by the impairment provision of an initial online game license fee in 2011, as mentioned above.

Net Profit

Net profit for fiscal year 2012 totaled RMB3.6 billion (US$583.9 million), compared to RMB3.2 billion for the preceding fiscal year. For fiscal year 2012, the Company reported a net foreign exchange loss of RMB0.6 million (US$0.1 million), compared to a net foreign exchange loss of RMB79.1 million for the preceding fiscal year. The net foreign exchange losses for 2012 and 2011 were mainly due to exchange losses arising from the Company’s Euro-denominated bank deposit balances as the exchange rate of the Euro against the RMB fluctuated over these periods. NetEase reported basic and diluted earnings per ADS of US$4.45 and US$4.44 for fiscal year 2012, respectively. The Company reported basic and diluted earnings per ADS of US$3.97 and US$3.96 for the preceding fiscal year, respectively.

Income Taxes

The Company recorded a net income tax charge of RMB691.6 million (US$111.0 million) and RMB392.8 million at an effective tax rate of 16.2% and 10.9% for fiscal years 2012 and 2011, respectively. The change in the effective tax rate was mainly due to the expiration of the tax exemption period for certain subsidiaries in 2012, a one-time accrued withholding tax of RMB40.0 million in 2012, as mentioned above, and a tax refund of RMB47.1 million that was received in 2011.

Other Information

As of December 31, 2012, the Company’s total cash and time deposit balance was RMB15.2 billion (US$2.4 billion), compared to RMB11.9 billion as of December 31, 2011. Total held-to-maturity investments and other short-term investments balance was RMB1.1 billion (US$172.3 million) as of December 31, 2012, compared to RMB993.6 million as of December 31, 2011. Cash flow generated from operating activities was RMB4.2 billion (US$678.0 million) for fiscal year 2012, compared to RMB4.1 billion for the preceding fiscal year.

Special Cash Dividend

In November 2012, the Company announced that its board of directors declared a special cash dividend of US$0.04 per ordinary share, which is equivalent to US$1.00 per ADS (each ADS represents 25 ordinary shares). The special cash dividend amounting to approximately US$131 million was paid to shareholders of record as of January 15, 2013.

Share Repurchase Program

In November 2012, the Company announced that its board of directors approved a new share repurchase program of up to US$100 million. As of December 31, 2012, the Company had cumulatively purchased approximately 1.66 million ADSs in open market purchases under this program for a total consideration of approximately US$67.2 million. The share repurchase program will expire on November 20, 2013.

** 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$1.00 = RMB6.2301 on the last trading day of 2012 (December 31, 2012) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2012, 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, 2012 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 2012.

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 6, 2013 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, February 7, 2013). NetEase’s management will be on the call to discuss the quarterly and annual results and answer questions.

Interested parties may participate in the conference call by dialing 1-877-941-2068 (international: 1-480-629-9712), 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 4588210#. The replay will be available through February 21, 2013.

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 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 Heroes of Tang Dynasty II, Kung Fu Master and Soul of the Fighter or expansion packs and other improvements to its existing games, including its current and planned expansion packs for Fantasy Westward Journey, Westward Journey Online II, and other games, do not become as popular as management anticipates; 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 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; 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,
                                                                                                                      2011                   2012                   2012
                                                                                                                      ----                   ----                   ----
                                                                                                   RMB                           RMB               USD (Note 1)
    Assets

    Current assets:
       Cash and cash equivalents                                                                                 2,214,618              1,590,769                255,336
       Time deposits                                                                                             9,704,777             13,098,661              2,102,480
       Restricted cash                                                                                             318,684                570,506                 91,573
       Accounts receivable, net                                                                                    230,047                269,485                 43,255
       Prepayments and other current assets                                                                        900,464              1,121,784                180,059
       Short-term investments                                                                                      993,606              1,073,539                172,315
       Deferred tax assets                                                                                         111,990                143,929                 23,102
    Total current assets                                                                                        14,474,186             17,868,673              2,868,120
                                                                                                                ----------             ----------              ---------

    Non-current assets:
       Property, equipment and software, net                                                                       848,469                815,026                130,821
       Land use right, net                                                                                          11,788                 11,529                  1,851
       License right, net                                                                                           48,962                      -                      -
       Deferred tax assets                                                                                           2,586                  2,215                    356
       Time deposits                                                                                                     -                490,000                 78,650
       Other long-term assets                                                                                       58,940                 90,513                 14,528
    Total non-current assets                                                                                       970,745              1,409,283                226,206
                                                                                                                   -------              ---------                -------
    Total assets                                                                                                15,444,931             19,277,956              3,094,326
                                                                                                                ==========             ==========              =========

    Liabilities and Shareholders' Equity

    Current liabilities:
       Accounts payable                                                                                            134,217                157,764                 25,323
       Salary and welfare payables                                                                                 244,398                289,848                 46,524
       Dividend payable                                                                                                  -                814,934                130,806
       Taxes payable                                                                                               391,769                389,465                 62,513
       Deferred revenue                                                                                          1,014,073              1,160,018                186,196
       Accrued liabilities and other payables                                                                      498,120                764,473                122,706
    Total current liabilities                                                                                    2,282,577              3,576,502                574,068
                                                                                                                 ---------              ---------                -------

    Long-term payable:
       Other long-term payable                                                                                      63,890                 99,968                 16,046
    Total liabilities                                                                                            2,346,467              3,676,470                590,114
                                                                                                                 ---------              ---------                -------

    Total NetEase, Inc.'s equity                                                                                13,126,701             15,680,605              2,516,911
    Noncontrolling interests                                                                                       (28,237)               (79,119)               (12,699)
                                                                                                                   -------                -------                -------
    Total shareholders' equity                                                                                  13,098,464             15,601,486              2,504,212
                                                                                                                ----------             ----------              ---------

    Total liabilities and shareholders' equity                                                                  15,444,931             19,277,956              3,094,326
                                                                                                                ==========             ==========              =========

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

                                                                                                                    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,
                                                                                           2011                     2012                                             2012                                 2012  2011                          2012                          2012
                                                                                           ----                     ----                                             ----                                 ----  ----                          ----                          ----
                                                                           RMB                        RMB                                            RMB                                USD (Note 1)                     RMB                           RMB                       USD (Note 1)
    Revenues:
    Online game services                                                              1,833,269                1,739,922                                        1,977,417                              317,397                     6,552,431                     7,287,063                    1,169,654
    Advertising services                                                                278,474                  243,027                                          259,500                               41,653                       795,422                       850,157                      136,460
    E-mail, WVAS and others                                                              37,249                   61,916                                           89,799                               14,414                       124,898                       242,741                       38,963
                                                                                         ------                   ------                                           ------                               ------                       -------                       -------                       ------

    Total revenues                                                                    2,148,992                2,044,865                                        2,326,716                              373,464                     7,472,751                     8,379,961                    1,345,077
    Sales taxes                                                                         (49,809)                 (42,901)                                         (55,842)                              (8,963)                     (182,099)                     (179,005)                     (28,732)
                                                                                        -------                  -------                                          -------                               ------                      --------                      --------                      -------

    Total net revenues                                                                2,099,183                2,001,964                                        2,270,874                              364,501                     7,290,652                     8,200,956                    1,316,345

    Total cost of revenues                                                             (646,086)                (640,049)                                        (662,600)                            (106,355)                   (2,372,288)                   (2,578,067)                    (413,808)
                                                                                       --------                 --------                                         --------                             --------                    ----------                    ----------                     --------

    Gross profit                                                                      1,453,097                1,361,915                                        1,608,274                              258,146                     4,918,364                     5,622,889                      902,537
                                                                                      ---------                ---------                                        ---------                              -------                     ---------                     ---------                      -------

    Selling and marketing expenses                                                     (280,680)                (259,947)                                        (321,584)                             (51,618)                     (849,205)                     (906,707)                    (145,537)
    General and administrative expenses                                                (105,787)                 (75,851)                                         (69,452)                             (11,148)                     (280,227)                     (286,223)                     (45,942)
    Research and development expenses                                                  (142,514)                (201,661)                                        (189,345)                             (30,392)                     (465,490)                     (718,315)                    (115,298)
                                                                                                                --------                                         --------                              -------                      --------                      --------                     --------
    Total operating expenses                                                           (528,981)                (537,459)                                        (580,381)                             (93,158)                   (1,594,922)                   (1,911,245)                    (306,777)
                                                                                       --------                 --------                                         --------                              -------                    ----------                    ----------                     --------

    Operating profit                                                                    924,116                  824,456                                        1,027,893                              164,988                     3,323,442                     3,711,644                      595,760
    Other income:
    Investment income                                                                     9,954                    9,353                                            7,523                                1,208                        14,128                        43,770                        7,026
    Interest income                                                                      78,624                  115,459                                          115,530                               18,544                       258,053                       423,634                       67,998
    Exchange (losses) gains                                                             (36,394)                  23,659                                           (5,782)                                (928)                      (79,058)                         (554)                         (89)
    Other, net                                                                           62,544                    5,087                                           52,139                                8,369                        99,164                        99,718                       16,006
                                                                                         ------                    -----                                           ------                                -----                        ------                        ------                       ------

    Net income before tax                                                             1,038,844                  978,014                                        1,197,303                              192,181                     3,615,729                     4,278,212                      686,701
    Income tax                                                                         (122,621)                (194,797)                                        (184,238)                             (29,572)                     (392,756)                     (691,642)                    (111,016)
                                                                                       --------                 --------                                         --------                              -------                      --------                      --------                     --------

    Net income after tax                                                                916,223                  783,217                                        1,013,065                              162,609                     3,222,973                     3,586,570                      575,685
    Net (income) loss attributable                                                      (17,598)                  28,718                                           (4,530)                                (727)                       11,291                        50,882                        8,167
       to noncontrolling interests
    Net income attributable to                                                          898,625                  811,935                                        1,008,535                              161,882                     3,234,264                     3,637,452                      583,852
       the Company's shareholders

    Comprehensive income                                                                916,223                  783,217                                        1,013,065                              162,609                     3,222,973                     3,586,570                      575,685
    Comprehensive (income) loss                                                         (17,598)                  28,718                                           (4,530)                                (727)                       11,291                        50,882                        8,167
       attributable to noncontrolling interests
    Comprehensive income attributable                                                   898,625                  811,935                                        1,008,535                              161,882                     3,234,264                     3,637,452                      583,852
       to the Company's shareholders

    Earnings per share, basic                                                              0.27                     0.25                                             0.31                                 0.05                          0.99                          1.11                         0.18
                                                                                           ====                     ====                                             ====                                 ====                          ====                          ====                         ====
    Earnings per ADS, basic                                                                6.86                     6.17                                             7.69                                 1.23                         24.76                         27.70                         4.45
                                                                                           ====                     ====                                             ====                                 ====                         =====                         =====                         ====
    Earnings per share, diluted                                                            0.27                     0.25                                             0.31                                 0.05                          0.99                          1.11                         0.18
                                                                                           ====                     ====                                             ====                                 ====                          ====                          ====                         ====
    Earnings per ADS, diluted                                                              6.85                     6.17                                             7.68                                 1.23                         24.68                         27.65                         4.44
                                                                                           ====                     ====                                             ====                                 ====                         =====                         =====                         ====

    Weighted average number of                                                        3,272,617                3,287,370                                        3,278,877                            3,278,877                     3,265,550                     3,282,663                    3,282,663
       ordinary shares outstanding, basic

    Weighted average number of                                                          130,905                  131,495                                          131,155                              131,155                       130,622                       131,307                      131,307
       ADS outstanding, basic

    Weighted average number of                                                        3,279,404                3,292,462                                        3,283,903                            3,283,903                     3,276,704                     3,288,330                    3,288,330
       ordinary shares outstanding, diluted

    Weighted average number of                                                          131,176                  131,698                                          131,356                              131,356                       131,068                       131,533                      131,533
       ADS outstanding, diluted

    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,
                                                                          2011                      2012                                             2012                     2012                      2011                      2012                     2012
                                                                          ----                      ----                                             ----                     ----                      ----                      ----                     ----
                                                          RMB                        RMB                                             RMB                     USD (Note 1)               RMB                       RMB                   USD (Note 1)
    Cash flows from operating activities:
    Net income                                                         916,223                   783,217                                        1,013,065                  162,609                 3,222,973                 3,586,570                  575,685
    Adjustments to reconcile net profit to net cash
        provided by operating activities:
    Depreciation and amortization                                       76,323                    52,310                                           37,647                    6,043                   293,239                   233,509                   37,481
    Impairment loss for license right                                   50,316                         -                                                -                        -                    50,316                         -                        -
    Share-based compensation cost                                       45,143                    47,969                                           28,869                    4,634                   122,032                   203,018                   32,587
    (Reversal of) allowance for  provision                              (6,212)                     (593)                                          (1,063)                    (171)                      416                     3,088                      495
       for doubtful debts
    (Gain) loss on disposal of property,                                   (35)                       90                                              (11)                      (2)                      (74)                      (42)                      (7)
       equipment and software
    Unrealized exchange losses (gains)                                  41,263                   (27,330)                                           4,491                      721                    76,262                    (5,665)                    (909)
    Deferred income taxes                                               22,054                     7,894                                           (6,668)                  (1,070)                  (42,442)                  (31,568)                  (5,067)
    Net equity share of loss (gain) from                                 1,010                      (389)                                             (87)                     (14)                    1,195                      (842)                    (135)
       associated companies
    Others                                                              (9,272)                   18,739                                           (5,407)                    (868)                  (12,580)                   21,758                    3,492
    Changes in operating assets and liabilities:
       Accounts receivable                                               6,603                   (31,834)                                          19,806                    3,179                    10,800                   (70,318)                 (11,288)
       Prepayments and other current assets                             79,852                  (253,134)                                          12,034                    1,932                   (83,490)                  (68,833)                 (11,049)
       Accounts payable                                                 14,477                    26,755                                           42,197                    6,773                    22,710                    43,168                    6,929
       Salary and welfare payables                                      48,575                   (29,563)                                         111,449                   17,889                    62,425                    45,434                    7,293
       Taxes payable                                                    (2,706)                   18,096                                           16,904                    2,713                    33,329                   (34,449)                  (5,530)
       Deferred revenue                                                 (3,777)                   17,241                                            3,465                      556                   240,121                   145,946                   23,426
       Accrued liabilities and other payables                          (36,144)                   40,631                                           59,729                    9,586                    75,716                   153,516                   24,641
                Net cash provided by                                 1,243,693                   670,099                                        1,336,420                  214,510                 4,072,948                 4,224,290                  678,044
                    operating activities

    Cash flows from investing activities:
          Purchase of property,                                       (171,422)                  (65,430)                                         (41,029)                  (6,586)                 (410,120)                 (178,654)                 (28,676)
             equipment and software
          Proceeds from sale of property,                                   43                       546                                               43                        7                       263                       777                      125
             equipment and software
          Purchase of other intangible assets                           (1,042)                        -                                              (32)                      (5)                   (1,042)                      (32)                      (5)
          Net change in short-term investments                               -                   150,000                                          430,000                   69,020                         -                  (120,000)                 (19,261)
             with terms of three months or less
          Purchase of short-term investments                          (407,863)                  (70,845)                                        (876,569)                (140,699)               (1,001,026)               (1,101,691)                (176,834)
          Proceeds from maturities of                                   20,000                   330,000                                                -                        -                    20,000                 1,120,000                  179,772
            short-term investments
          Purchase of license right                                          -                         -                                                -                        -                   (39,300)                        -                        -
          Investment in an associated company                                -                    (7,915)                                               -                        -                         -                    (7,915)                  (1,270)
          Transfer (to) from restricted cash                           (44,885)                   51,899                                         (101,322)                 (16,263)                 (178,085)                 (251,822)                 (40,420)
          Net change in time deposits with terms
               of three months                                        (125,205)                 (178,954)                                       1,036,845                  166,425                  (318,937)                  889,350                  142,751
          Placement/rollover of matured time deposits               (3,743,262)               (3,971,447)                                      (5,002,890)                (803,019)              (10,861,505)              (16,393,642)              (2,631,361)
          Proceeds from maturities of time deposits                  3,497,811                 3,209,753                                        4,045,543                  649,354                 9,598,470                11,626,594                1,866,197
          Net change in other assets                                     4,681                   (11,094)                                          (6,186)                    (993)                  (16,951)                  (37,003)                  (5,940)
                Net cash used in investing activities                 (971,144)                 (563,487)                                        (515,597)                 (82,759)               (3,208,233)               (4,454,038)                (714,922)
                                                                      --------                  --------                                         --------                  -------                ----------                ----------                 --------

                                                                                                                                       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,
                                                                                           2011                        2012                                             2012                     2012                    2011                    2012                   2012
                                                                                           ----                        ----                                             ----                     ----                    ----                    ----                   ----
                                                                           RMB                        RMB                                               RMB                      USD (Note 1)              RMB                     RMB                 USD (Note 1)

    Cash flows from financing activities:
         Capital contribution from                                                            -                           -                                                -                        -                     227                       -                      -
             non-controlling interests
         Proceeds from employees exercising                                               9,877                           -                                                -                        -                  73,337                  24,712                  3,967
             stock options
         Purchase of shares                                                                   -                           -                                         (414,942)                 (66,603)                      -                (414,942)               (66,603)
         Payment of other long-term payable                                                 (10)                          -                                                -                        -                     (20)                      -                      -
                Net cash provided by/ used in                                             9,867                           -                                         (414,942)                 (66,603)                 73,544                (390,230)               (62,636)
                    financing activities

       Effect of exchange rate changes on cash
         held in foreign currencies                                                     (11,327)                      2,200                                              342                       55                  (8,778)                 (3,871)                  (621)
                Net increase (decrease) in                                              271,089                     108,812                                          406,223                   65,203                 929,481                (623,849)              (100,135)
                    cash and cash equivalents
    Cash and cash equivalents, beginning                                              1,943,529                   1,075,734                                        1,184,546                  190,133               1,285,137               2,214,618                355,471
        of the period
    Cash and cash equivalents, end of the period                                      2,214,618                   1,184,546                                        1,590,769                  255,336               2,214,618               1,590,769                255,336
                                                                                      =========                   =========                                        =========                  =======               =========               =========                =======

    Supplemental disclosures of cash flow
        information:
             Cash paid for income tax, net of tax refund                                129,437                     148,758                                          160,146                   25,705                 371,238                 648,609                104,109
             Withholding income tax paid associated with
                 the repatriation of cash for a special dividend                              -                           -                                           35,000                    5,618                       -                  35,000                  5,618
    Supplemental schedule of non-cash investing
        and financing activities:
            Share repurchase financed by accounts payable                                     -                           -                                            7,547                    1,211                       -                   7,547                  1,211
            Fixed asset purchases financed by                                            37,614                      14,096                                            7,228                    1,160                  37,614                   7,228                  1,160
                accounts payable and accrued liabilities

    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,
                                                                                              2011                     2012                          2012                                    2012                     2011                     2012                    2012
                                                                                              ----                     ----                          ----                                    ----                     ----                     ----                    ----
                                                                                RMB                      RMB                         RMB                                    USD (Note 1)               RMB                      RMB                  USD (Note 1)
    Revenues:
    Online game services                                                                 1,833,269                1,739,922                     1,977,417                                 317,397                6,552,431                7,287,063               1,169,654
    Advertising services                                                                   278,474                  243,027                       259,500                                  41,653                  795,422                  850,157                 136,460
    E-mail, WVAS and others                                                                 37,249                   61,916                        89,799                                  14,414                  124,898                  242,741                  38,963
    Total revenues                                                                       2,148,992                2,044,865                     2,326,716                                 373,464                7,472,751                8,379,961               1,345,077
                                                                                         ---------                ---------                     ---------                                 -------                ---------                ---------               ---------

    Sales taxes:
    Online game services                                                                   (23,161)                 (17,053)                      (25,170)                                 (4,040)                (103,824)                 (86,478)                (13,881)
    Advertising services                                                                   (25,850)                 (24,562)                      (24,240)                                 (3,891)                 (75,349)                 (82,680)                (13,271)
    E-mail, WVAS and others                                                                   (798)                  (1,286)                       (6,432)                                 (1,032)                  (2,926)                  (9,847)                 (1,580)
    Total sales taxes                                                                      (49,809)                 (42,901)                      (55,842)                                 (8,963)                (182,099)                (179,005)                (28,732)
                                                                                           -------                  -------                       -------                                  ------                 --------                 --------                 -------

    Net revenues:
    Online game services                                                                 1,810,108                1,722,869                     1,952,247                                 313,357                6,448,607                7,200,585               1,155,773
    Advertising services                                                                   252,624                  218,465                       235,260                                  37,762                  720,073                  767,477                 123,189
    E-mail, WVAS and others                                                                 36,451                   60,630                        83,367                                  13,382                  121,972                  232,894                  37,383
    Total net revenues                                                                   2,099,183                2,001,964                     2,270,874                                 364,501                7,290,652                8,200,956               1,316,345
                                                                                         ---------                ---------                     ---------                                 -------                ---------                ---------               ---------

    Cost of revenues:
    Online game services                                                                  (495,506)                (443,789)                     (482,513)                                (77,449)              (1,859,176)              (1,872,734)               (300,594)
    Advertising services                                                                  (114,949)                (139,296)                     (107,555)                                (17,264)                (380,201)                (474,165)                (76,109)
    E-mail, WVAS and others                                                                (35,631)                 (56,964)                      (72,532)                                (11,642)                (132,911)                (231,168)                (37,105)
    Total cost of revenues                                                                (646,086)                (640,049)                     (662,600)                               (106,355)              (2,372,288)              (2,578,067)               (413,808)
                                                                                          --------                 --------                      --------                                --------               ----------               ----------                --------

    Gross profit (loss):
    Online game services                                                                 1,314,602                1,279,080                     1,469,734                                 235,908                4,589,431                5,327,851                 855,179
    Advertising services                                                                   137,675                   79,169                       127,705                                  20,498                  339,872                  293,312                  47,080
    E-mail, WVAS and others                                                                    820                    3,666                        10,835                                   1,740                  (10,939)                   1,726                     278
    Total gross profit                                                                   1,453,097                1,361,915                     1,608,274                                 258,146                4,918,364                5,622,889                 902,537
                                                                                         =========                =========                     =========                                 =======                =========                =========                 =======

    Gross profit (loss) margin:
    Online game services                                                                      72.6%                    74.2%                         75.3%                                   75.3%                    71.2%                    74.0%                   74.0%
    Advertising services                                                                      54.5%                    36.2%                         54.3%                                   54.3%                    47.2%                    38.2%                   38.2%
    E-mail, WVAS and others                                                                    2.2%                     6.0%                         13.0%                                   13.0%                   (9.0%)                     0.7%                    0.7%

    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 = RMB6.2301 on the
                           last trading day of 2012 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 operations is set
                           out as follows (in thousands):

                                  Quarter Ended Year Ended
                                  ------------- ----------
                                  December 31, September 30,    December 31,   December 31, December 31, December 31,         December 31,
                                                  2011         2012            2012               2012       2011        2012                2012
                                                  ----         ----            ----               ----       ----        ----                ----
                                      RMB              RMB          RMB             USD (Note 1)       RMB        RMB         USD (Note 1)
    Share-based compensation cost
        included in:
    Cost of revenue                             21,030       25,063          12,957              2,080     57,318     100,540              16,138
    Operating expenses
    - Selling and marketing                      3,897        2,933           2,397                385     11,357      13,368               2,146
         expenses
    - General and administrative                 7,661        7,830           4,260                684     17,897      33,374               5,357
         expenses
    - Research and development                  12,555       12,143           9,255              1,485     35,460      55,736               8,946
         expenses

SOURCE NetEase, Inc.


Source: PR Newswire