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NetEase.com Announces 2004 Second Quarter Results

August 3,2004 Beijing
2004/08/03 10:57:32

. Total net revenues for the quarter increased 5.2% over the previous quarter to RMB206.7 million (US$25.0 million), despite a 37.1% drop in net revenues from wireless value-added and other fee-based premium services

. Net revenues from online game services for the quarter grew 25.2% over the previous quarter on the strength of the Company's two self-developed titles, Fantasy Westward Journey Online and Westward Journey Online Version 2.0

. Net revenues from advertising services for the quarter grew 18.5% over the previous quarter driven by increased demand for advertising space on the NetEase websites

(Beijing-August 2, 2004)-NetEase.com, Inc. (Nasdaq: NTES), one of China's leading Internet, online game and wireless value-added services providers, today announced financial results for its second quarter ended June 30, 2004.

Financial Results

The Company reported total net revenues of RMB206.7 million (US$25.0 million) for the second quarter, representing a 5.2% increase over total net revenues of RMB196.6 million (US$23.8 million) for the preceding quarter, and a 51.8% increase over total revenues(Note ) of RMB136.2 million for the corresponding period a year ago.
Net revenues from online game services for the quarter grew by 25.2% quarter-over-quarter to RMB131.8 million (US$15.9 million) driven by the continued growth of NetEase's latest title, Fantasy Westward Journey Online, and the steady performance of Westward Journey Online Version 2.0.

Consistent with the Company's previous guidance announced on July 7, 2004, net revenues from wireless value-added and other fee-based premium services decreased 37.1% quarter-over-quarter to RMB37.6 million (US$4.5 million). As anticipated, the decline was primarily attributable to a fall in sales of SMS services as a result of intense competition and new Chinese regulations and mobile operator policies that led to a slow down in the rate of growth of new users and a higher turnover rate.

Net revenues from advertising services for the quarter increased 18.5% quarter-over-quarter to

RMB37.4 million (US$4.5 million) driven by continued increased demand for advertising space on the NetEase websites.

The Company reported gross profit in the second quarter of RMB164.3 million (US$19.8 million), representing a 52.8% increase over RMB107.5 million for the corresponding period a year ago and a 3.7% increase over RMB158.4 million for the preceding quarter. Gross margins for the Company decreased slightly to 79.5% in the second quarter from 80.6% in the preceding quarter due to the decrease in gross margins from wireless value-added and other fee-based premium services. Gross margins for wireless value-added services in the second quarter of 2004 declined as costs remained stable while revenue declined. In contrast, enhanced economies of scale for online games led to record high gross margins for online games this quarter.

Total operating expenses for the quarter were RMB63.6 million (US$7.7 million), representing a 115.1% increase over RMB29.6 million for the corresponding period a year ago, and a 25.9% increase over RMB50.6 million for the preceding quarter. The increase was largely due to expenses incurred in connection with a new marketing campaign being initiated by the Company which is expected to run until the end of 2004. In the second quarter of 2004, these expenses included production costs for TV commercials, as well as billboard and bus advertisement production and placement costs. The Company anticipates that the costs for this campaign will peak in the third quarter of 2004 when the bulk of the new TV commercials will be aired. Operating expenses also increased as a result of professional fees specifically related to the Company's registration of its Zero Coupon Convertible Subordinated Notes due July 15, 2023 with the U.S. Securities and Exchange Commission.

The Company reported a net profit of RMB98.3 million (US$11.9 million), equivalent to US$0.38 (basic) or US$0.36 (diluted) per American Depositary Share ("ADS"), compared to a net profit of RMB75.8 million (US$9.2 million), equivalent to US$0.28 diluted net earnings per ADS, for the corresponding period a year ago and a net profit of RMB103.9 million (US$12.6 million), equivalent to US$0.38 diluted net earnings per ADS, for the preceding quarter.
As of June 30, 2004, the Company's total cash and held-to-maturity investments balances were RMB1.7 billion (US$205.6 million) and RMB 248.7 million (US$ 30.1 million), respectively. The Company generated an operating cash flow of RMB117.6 million (US$14.2 million) for the quarter.

Other Company News

The Company also announced today that it has recently entered into a contractual arrangement with Google Inc. to provide enhanced search services as well as to cooperate in online advertising. The new version of NetEase's search engine will employ Google's web page-search function and AdWords cost-per-click search advertising service, which will also be integrated with NetEase's current Open Directory Project("ODP) system.

In addition, the Company announced that it has licensed from a South Korean game developer an online game called Fly for Fun ("FlyFF"). Voted as an award-winning game by South Korea's Ministry of Culture in June 2004, FlyFF is a 3D game based on a fantasy world which gives players unique flying capabilities. Beta testing for FlyFF is expected to begin within the coming fourth quarter.

Commenting on the second quarter's results, acting Chief Executive Officer Ted Sun said, "We were pleased that our advertising business performed well again this quarter. As a result of our continuous improvement of content and upcoming marketing opportunities like the 2004 Athens Olympic Games, we believe that existing and new clients continue to see the value of promoting on the NetEase websites. Also, we believe that new initiatives such as our partnership with Google which we expect will significantly improve the competitive capability of NetEase's search engine, in combination with other activities such as our recent increase in the capacity of our free e-mail services, will attract new users to our websites, thereby adding further value for our advertisers."

Chief Operating Officer Michael Tong added, "In our online games business, Fantasy Westward Journey Online's popularity continued to increase, which drove revenue growth in this area. We expect future growth for our online games to come from our two current self-developed titles, the pending commercial launch of FlyFF, and two upcoming in-house developed games planned for release in the first half of 2005. We are excited about FlyFF which deploys a 3D flying system which greatly enhances gaming experience. We believe that these flying functionalities, coupled with the real-time combat style of the game, will greatly appeal to our target audience group, which consists of players between the ages of 15 to 25 in coastal provinces."

Mr. Tong continued, "While our wireless value-added and other fee-based premium services business suffered setbacks in the second quarter of 2004, we are focused on turning around the business through a variety of strategic initiatives designed to stabilize and enhance revenues. These initiatives include developing higher-end wireless value-added services and integrating NetEase Web products to differentiate NetEase from competitors, more offline marketing efforts including seeking partnerships with offline media, developing sales teams at the provincial level, and further promotion of our advanced second generation, or 2.5G, services, which experienced high growth rates, albeit from a relatively low base, in the second quarter of 2004."

Denny Lee, NetEases Chief Financial Officer added, We believe that our ongoing innovation in all of our businesses continues to bring benefits to the Company. We remain committed to our focus on continually developing diversified revenue streams to create value for our shareholders."

** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1 = RMB8.2766. The percentages stated in this press release are calculated based on RMB.**

About NetEase
NetEase.com, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. Our online communities and personalized premium services have established a large and stable user base for the NetEase Web sites which are operated by our affiliate. As of June 30, 2004, we had approximately 232 million accumulated registered accounts, and our average daily page views for the month ended June 30, 2004 exceeded 386 million.

Community products and services which the NetEase Web sites offer include instant messaging, personals, matchmaking, alumni clubs, personal home pages and community forums. NetEase is also the largest provider of free e-mail services in China. Furthermore, the NetEase Web sites provide 21 channels of content. NetEase sources news content on world events, sports, science and technology, and financial markets as well as entertainment content such as cartoons, games, astrology and jokes from over one hundred international and domestic content providers.

NetEase offers online advertising on its Web sites as well as paid listings on its search engine, web directory and classified ads services, and an online mall, which provides opportunities for e-commerce and traditional businesses to establish their own storefront on the Internet.

NetEase also offers wireless value-added services such as news and information content sent over short-messaging services, MMS and WAP technologies, and online game services through three massively multi-player online role-playing game titles, Westward Journey Online 2.0, Fantasy Westward Journey and PristonTale 2.0.

* * *
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 NetEase will be unable to compete effectively in the wireless value-added services market in China and that its share of that market will continue to decline despite strategic initiatives designed to stabilize and enhance revenue in this area; the risk of further changes in Chinese government regulations and/or the policies of the mobile operators in China that limit future growth of NetEase's wireless value-added services revenue or causes such revenue to decline; the risk that NetEase may be compelled to expend additional resources to promote its wireless value-added services which could further negatively impact its gross margins from those services; the risk that the current popularity of SMS in China will not continue for whatever reason, including SMS being superseded by other technologies for which NetEase is unable to offer attractive products and services; 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 do not become as popular as management anticipates; the risk that NetEase may not be able to continuously develop new and creative online services; the risk that the Internet advertising market in China will not continue to grow and will remain subject to intense competition; the risk that NetEase will not be able to control its expenses in future periods; the impact of the outbreak of severe acute respiratory syndrome, or SARS, in China and risks related to any possible recurrence of SARS or another public health problem in China; the risk that the trading price of NetEase's American Depositary Shares may decrease for a variety of reasons, some of which may be beyond the control of management; competition in NetEase's existing and potential markets; governmental uncertainties, general competition and price pressures in the marketplace; uncertainty as to future profitability; the risk that security, reliability and confidentiality concerns may impede broad use of the Internet and e-commerce and other services; and other risks outlined in NetEase's filings with the Securities and Exchange Commission, including its registration statements on Form F-1 and Form F-3, as amended. NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.

Second Quarter 2004 Consolidated Balance Sheets
Second Quarter 2004 Consolidated Statements of Cash Flows
Second Quarter 2004 Consolidated Statements of Operations
Second Quarter 2004 Segent Information


Grace Zhao
NetEase.com, Inc.


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