NetEase Announces Second Quarter 2020 Unaudited Financial Results

BEIJING, Aug. 13, 2020 /PRNewswire/ -- NetEase, Inc. (NASDAQ: NTES and HKEX: 9999, "NetEase" or the "Company"), one of China's leading internet and online game services providers, today announced its unaudited financial results for the second quarter ended June 30, 2020.

Second Quarter 2020 Financial Highlights

    --  Net revenues were RMB18.2 billion (US$2.6 billion), an increase of 25.9%
        compared with the second quarter of 2019. - Online game services net
        revenues were RMB13.8 billion (US$2.0 billion), an increase of 20.9%
        compared with the second quarter of 2019. - Youdao net revenues were
        RMB623.3 million (US$88.2 million), an increase of 93.1% compared with
        the second quarter of 2019. - Innovative businesses and others net
        revenues were RMB3.7 billion (US$528.4 million), an increase of 38.7%
        compared with the second quarter of 2019.
    --  Gross profit was RMB9.8 billion (US$1.4 billion), an increase of 26.6%
        compared with the second quarter of 2019.
    --  Total operating expenses were RMB5.6 billion (US$795.8 million), an
        increase of 40.1% compared with the second quarter of 2019.
    --  Net income from continuing operations attributable to the Company's
        shareholders was RMB4.5 billion (US$642.3 million). Non-GAAP net income
        from continuing operations attributable to the Company's shareholders
        was RMB5.2 billion (US$739.7 million).( [1])
    --  Basic net income from continuing operations was US$4.95 per ADS (US$0.20
        per share). Non-GAAP basic net income from continuing operations was
        US$5.70 per ADS (US$0.23 per share). ([1])

Second Quarter 2020 and Recent Operational Highlights

    --  Launched exciting new titles including EVE Echoes, Fantasy Westward
        Journey H5, King of Hunters, PES Club Manager and MARVEL Duel.
    --  Introduced PC game Justice's two-year anniversary expansion pack in
        June, propelling high popularity and driving increased new and returning
        players.
    --  Reinforced international games presence with strong performances from
        Knives Out and Life-After in Japan.
    --  Continued popularity of Blizzard Entertainment's World of Warcraft(®)
        in China, achieving a record number of peak concurrent users in the
        first half of this year.
    --  Advanced near-term titles for release including Onmyoji: Yokai Koya, as
        well as other upcoming titles in the pipeline such as: The Lord of the
        Rings: Rise to War, Harry Potter: Magic Awakened, For All Time,
        Revelation mobile game, Ghost World Chronicle, Nightmare Breaker,
        Infinite Lagrange, Diablo(®) Immortal(TM) and Pokémon Quest.
    --  Grew Youdao's intelligent learning business steadily with net revenues
        from learning services and products reaching RMB520.1 million (US$73.6
        million), up 190.0% year-over-year, and continued positive net operating
        cash flow of RMB93.0 million (US$13.2 million).
    --  Maintained strong momentum for NetEase Cloud Music, with robust growth
        in net revenues from both membership and live streaming, and secured a
        multi-year licensing agreement with Universal Music Group recently.
    --  Completed listing on the main board of The Stock Exchange of Hong Kong
        Limited (the "Hong Kong Stock Exchange") in June 2020.
    --  Issued first Environmental, Social and Governance report in June 2020.

             [1] As used in this announcement,
              non-GAAP net income from continuing
              operations attributable to the
              Company's shareholders and non-GAAP
              basic and diluted net income from
              continuing operations per ADS and
              per share are defined to exclude
              share-based compensation expenses.
              See "Unaudited Reconciliation of
              GAAP and Non-GAAP Results" at the
              end of this announcement.

"We saw healthy gains across our business in the second quarter, with total net revenues of RMB18.2 billion, up 25.9% year-over-year, driven by strong performances from our online game services and NetEase Cloud Music," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Our games portfolio holds considerable depth and diversity, supporting our online game services net revenues of RMB13.8 billion in the second quarter. We saw steady growth in our overseas revenue in the second quarter. With the continuous expansion of our abundant games pipeline, we are more confident and committed than ever to extending our reach to a broader market. Our other core businesses such as Youdao, NetEase Cloud Music and Yanxuan, among others, also continue to track well against our strategic goals.

"In June, we celebrated the 20(th) anniversary of our listing on NASDAQ, as well as completed our listing on the Hong Kong Stock Exchange. Creating value for our supporters is always a priority. We will continue to examine ways to drive our Company's growth, keeping in mind the best interests of our long-term investors, who have extended their trust and support to us, as well as our increasingly global community of players," Mr. Ding concluded.

Second Quarter 2020 Financial Results

Net Revenues

Net revenues for the second quarter of 2020 were RMB18,184.8 million (US$2,573.9 million), compared to RMB17,062.4 million and RMB14,448.4 million for the preceding quarter and the second quarter of 2019, respectively.

Net revenues from online game services were RMB13,828.3 million (US$1,957.3 million) for the second quarter of 2020, compared to RMB13,518.2 million and RMB11,433.4 million for the preceding quarter and the second quarter of 2019, respectively. Net revenues from mobile games accounted for approximately 72.3% of net revenues from online games for the second quarter of 2020, compared to 70.3% and 72.2% for the preceding quarter and the second quarter of 2019, respectively.

Net revenues from Youdao were RMB623.3 million (US$88.2 million) for the second quarter of 2020, compared to RMB541.4 million and RMB322.8 million for the preceding quarter and the second quarter of 2019, respectively.

Net revenues from innovative businesses and others were RMB3,733.3 million (US$528.4 million) for the second quarter of 2020, compared to RMB3,002.7 million and RMB2,692.3 million for the preceding quarter and the second quarter of 2019, respectively.

Gross Profit

Gross profit for the second quarter of 2020 was RMB9,792.2 million (US$1,386.0 million), compared to RMB9,377.6 million and RMB7,736.8 million for the preceding quarter and the second quarter of 2019, respectively.

The quarter-over-quarter increase in online game services gross profit was primarily due to increased net revenues from self-developed mobile games such as Invincible, Life-After and Knives Out. The year-over-year increase was primarily due to increased net revenues from self-developed mobile games Fantasy Westward Journey 3D, Invincible and Fantasy Westward Journey mobile game, as well as certain licensed games.

The quarter-over-quarter and year-over-year increases in Youdao gross profit were primarily attributable to the significant increase in net revenues, improved economies of scale and faculty compensation structure optimization for its learning services and products.

The quarter-over-quarter increase in innovative businesses and others gross profit was primarily due to the improvement in gross profit from advertising services, Yanxuan and NetEase Cloud Music. The year-over-year increase was primarily due to increased net revenues from NetEase Cloud Music.

Gross Profit Margin

Gross profit margin for online game services for the second quarter of 2020 was 63.8%, compared to 64.1% and 63.1% for the preceding quarter and the second quarter of 2019, respectively. Gross profit margin for online game services was generally stable, fluctuating within a narrow band based on the revenue mix of mobile and PC games, as well as self-developed and licensed games.

Gross profit margin for Youdao for the second quarter of 2020 was 45.2%, compared to 43.5% and 32.9% for the preceding quarter and the second quarter of 2019, respectively. The quarter-over-quarter margin was comparatively stable. The year-over-year increase was primarily attributable to the factors enumerated above.

Gross profit margin for innovative businesses and others for the second quarter of 2020 was 18.5%, compared to 15.8% and 15.5% for the preceding quarter and the second quarter of 2019, respectively. The quarter-over-quarter increase was primarily due to improvement in gross profit margin from advertising services, Yanxuan and NetEase Cloud Music. The year-over-year increase was primarily due to increased net revenues from NetEase Cloud Music.

Operating Expenses

Total operating expenses for the second quarter of 2020 were RMB5,622.3 million (US$795.8 million), compared to RMB4,891.2 million and RMB4,012.5 million for the preceding quarter and the second quarter of 2019, respectively. The quarter-over-quarter and year-over-year increases were mainly due to increased marketing expenditures related to online game services and Youdao, as well as higher staff-related costs and research and development investments.

Other Income

Other income consisted of investment income/ (loss), interest income, exchange gains and others. The quarter-over-quarter and year-over-year increases were mainly due to the gains from fair value changes of equity investments with readily determinable fair value and government incentives recognized.

Income Taxes

The Company recorded a net income tax charge of RMB1,064.5 million (US$150.7 million) for the second quarter of 2020, compared to RMB1,082.0 million and RMB683.8 million for the preceding quarter and the second quarter of 2019, respectively. The effective tax rate for the second quarter of 2020 was 18.6%, compared to 21.5% and 16.7% for the preceding quarter and the second quarter of 2019, respectively. The effective tax rate represents certain estimates by the Company as to the tax obligations and benefits applicable to it in each quarter.

Net Income and Non-GAAP Net Income

Net income from continuing operations attributable to the Company's shareholders for the second quarter of 2020 totaled RMB4,537.8 million (US$642.3 million), compared to RMB3,551.0 million and RMB3,354.2 million for the preceding quarter and the second quarter of 2019, respectively.

Non-GAAP net income from continuing operations attributable to the Company's shareholders for the second quarter of 2020 totaled RMB5,226.0 million (US$739.7 million), compared to RMB4,212.9 million and RMB3,921.1 million for the preceding quarter and the second quarter of 2019, respectively.

NetEase reported basic and diluted net income from continuing operations per ADS of US$4.95 and US$4.89 for the second quarter of 2020, compared to US$3.89 and US$3.84, respectively for the preceding quarter and US$3.68 and US$3.65, respectively for the second quarter of 2019. NetEase reported basic and diluted net income from continuing operations per share of US$0.20 each for the second quarter of 2020, compared to US$0.16 and US$0.15, respectively for the preceding quarter and US$0.15 each for the second quarter of 2019.

Non-GAAP basic and diluted net income from continuing operations per ADS were US$5.70 and US$5.64 for the second quarter of 2020, compared to US$4.61 and US$4.55, respectively for the preceding quarter and US$4.31 and US$4.27, respectively for the second quarter of 2019. Non-GAAP basic and diluted net income from continuing operations per share were US$0.23 each for the second quarter of 2020, compared to US$0.18 each for the preceding quarter and US$0.17 each for the second quarter of 2019.

Quarterly Dividend

The board of directors has approved a dividend of US$1.485 per ADS (US$0.0594 per share) for the second quarter of 2020, to holders of ADSs and holders of ordinary shares as of the close of business on August 28, 2020, New York Time and Hong Kong Time, respectively, payable in U.S. dollars. For holders of ordinary shares, in order to qualify for the dividend, all valid documents for the transfer of shares accompanied by the relevant share certificates must be lodged for registration with the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong no later than 4:30 p.m. on August 28, 2020 (Hong Kong Time). The payment date is expected to be on September 14, 2020 for holders of ordinary shares and on or around September 18, 2020 for holders of ADSs (assuming the dividend payment is timely received by the ADS depositary).

NetEase paid a dividend of US$1.16 per ADS (US$0.0464 per share) for the first quarter of 2020 in June 2020.

Starting in the second quarter of 2019, the Company's policy has been to set quarterly dividends at an amount equivalent to approximately 20%-30% of the Company's anticipated net income after tax in each fiscal quarter. The determination to make dividend distributions and the amount of such distributions in any particular quarter will be made at the discretion of the board of directors and will be based upon the Company's operations and earnings, cash flow, financial condition and other relevant factors.

Other Information

As of June 30, 2020, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB102,993.6 million (US$14,577.8 million), compared to RMB74,406.0 million as of December 31, 2019. Cash flow generated from continuing operating activities was RMB4,772.3 million (US$675.5 million) for the second quarter of 2020, compared to RMB6,500.6 million and RMB4,928.1 million for the preceding quarter and the second quarter of 2019, respectively.

Share Purchase / Repurchase Program

On November 20, 2019, the Company announced that its board of directors had approved a share purchase program of up to US$20.0 million of Youdao's outstanding ADSs for a period not to exceed 12 months beginning on November 25, 2019. Under the terms of this program, NetEase may purchase Youdao's ADSs in open-market transactions on the New York Stock Exchange. As of June 30, 2020, approximately 198,000 ADSs had been purchased under this program for a total cost of US$3.4 million.

On February 26, 2020, the Company announced that its board of directors had approved a share repurchase program of up to US$1.0 billion of the Company's outstanding ADSs for a period not to exceed 12 months beginning on March 2, 2020. On May 19, 2020, the Company announced that its board of directors had approved an amendment to such program to increase the total authorized repurchase amount to US$2.0 billion. Under the terms of this program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market. As of June 30, 2020, approximately 2.3 million ADSs had been repurchased under this program for a total cost of US$755.7 million.

For both of the above-mentioned current programs, it is expected that the timing and dollar amount of purchase transactions will be in accordance with the Securities and Exchange Commission (SEC) Rule 10b-18 requirements and such purchases may be affected pursuant to a plan in conformity with SEC Rule 10b5-1. The extent to which NetEase repurchases its ADSs or purchases Youdao's ADSs will depend upon a variety of factors, including market conditions. These programs may be suspended or discontinued at any time.

** The United States dollar (US$) amounts disclosed in this announcement are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB7.0651 on June 30, 2020 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 2020, or at any other certain date. The percentages stated are calculated based on RMB.

Change in Segment Reporting

Effective in the third quarter of 2019, the Company has reported the following segments: online game services, Youdao and innovative businesses and others, aligning with the manner in which the Company's chief operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. The Company retrospectively revised prior period segment information to conform to current period presentation.

Initial Public Offering in Hong Kong

In June, the Company successfully listed its ordinary shares on the main board of the Hong Kong Stock Exchange with a global offering of 197,202,000 ordinary shares. Gross proceeds from the global offering, before any underwriting fees and other offering expenses, were approximately HK$24,255.8 million.

Impact of the Recently Adopted Major Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326)", which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. The Company adopted the new standard effective January 1, 2020 on a modified retrospective basis and did not restate comparative periods. The impact of new standard was immaterial to the Company.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 7:30 a.m. New York Time on Thursday, August 13, 2020 (Beijing/Hong Kong Time: 7:30 p.m., Thursday, August 13, 2020). 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 1-929-477-0324 (US), 400-120-9101 (Mainland China) or 852-3008-1527 (Hong Kong) and providing conference ID: 7890540, 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-719-457-0820 and entering passcode 7890540#. The replay will be available through August 26, 2020.

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

About NetEase, Inc.

As a leading internet technology company based in China, NetEase, Inc. (NASDAQ: NTES and HKEX: 9999, "NetEase") is dedicated to providing premium online services centered around innovative and diverse content, community, communication and commerce. NetEase develops and operates some of China's most popular mobile and PC games. In more recent years, NetEase has expanded into international markets including Japan and North America. In addition to its self-developed game content, NetEase partners with other leading game developers, such as Blizzard Entertainment and Mojang AB (a Microsoft subsidiary), to operate globally renowned games in China. NetEase's other innovative service offerings include the intelligent learning services of its majority-controlled subsidiary, Youdao (NYSE: DAO); music streaming through its leading NetEase Cloud Music business; and its private label e-commerce platform, Yanxuan. For more information, please visit: http://ir.netease.com/.

Forward Looking Statements

This announcement contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. In addition, statements that are not historical facts, including statements about NetEase's strategies and business plans, its expectations regarding the growth of its business and its revenue and the quotations from management in this announcement are or contain forward-looking statements. NetEase may also make forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission (the "SEC"), in announcements made on the website of The Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange"), in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its position in that market in China or globally; the risk that COVID-19 or other health risks in China or globally could adversely affect the Company's operations or financial results; risks associated with NetEase's business and operating strategies and its ability to implement such strategies; NetEase's ability to develop and manage its operations and business; competition for, among other things, capital, technology and skilled personnel; potential changes in government regulation that could adversely affect the industry and geographical markets in which NetEase operates; the risk that NetEase may not be able to continuously develop new and creative online services or that NetEase will not be able to set, or follow in a timely manner, trends in the market; competition in NetEase's existing and potential markets; and the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase's business and financial results. Further information regarding these and other risks is included in NetEase's filings with the SEC and announcements on the website of the Hong Kong Stock Exchange. NetEase does not undertake any obligation to update this forward-looking information, except as required under the applicable law.

Non-GAAP Financial Measures

NetEase considers and uses non-GAAP financial measures, such as non-GAAP net income from continuing operations attributable to the Company's shareholders and non-GAAP basic and diluted net income from continuing operations per ADS and per share, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

NetEase defines non-GAAP net income from continuing operations attributable to the Company's shareholders as net income from continuing operations attributable to the Company's shareholders excluding share-based compensation expenses. Non-GAAP net income from continuing operations attributable to the Company's shareholders enables NetEase's management to assess its operating results without considering the impact of share-based compensation expenses, which are non-cash charges. NetEase believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company's current operating performance and prospects in the same manner as management does, if they so choose. NetEase also believes that the use of this non-GAAP financial measure facilitates investors' assessment of its operating performance.

Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools. One of the key limitations of using non-GAAP net income from continuing operations attributable to the Company's shareholders is that it does not reflect all items of expense/ income that affect our operations. Share-based compensation expenses have been and may continue to be incurred in NetEase's business and are not reflected in the presentation of non-GAAP net income from continuing operations attributable to the Company's shareholders. In addition, the non-GAAP financial measures NetEase uses may differ from the non-GAAP measures used by other companies, including peer companies, and therefore their comparability may be limited.

NetEase compensates for these limitations by reconciling non-GAAP net income from continuing operations attributable to the Company's shareholders to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating the Company's performance. See "Unaudited Reconciliation of GAAP and Non-GAAP Results" at the end of this announcement. NetEase encourages you to review its financial information in its entirety and not rely on a single financial measure.

Contact for Media and Investors:
Margaret Shi
Email: ir@service.netease.com
Tel: (+86) 571-8985-3378
Twitter: https://twitter.com/NetEase_Global

Brandi Piacente
Email: netease@thepiacentegroup.com
Tel: (+1) 212-481-2050


                                                                      
              
                NETEASE, INC.


                                                     
              
                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


                                                               
              
                (RMB and USD in thousands)




                                                                                December 31,                                     June 30,            June 30,


                                                                                        2019                                          2020                 2020



                                                                   
               RMB                                
              RMB           
     USD (Note 1)



            
                Assets





            Current assets:


                Cash and cash equivalents                                          3,246,373                                    10,622,795            1,503,559



               Time deposits                                                     53,487,075                                    66,348,005            9,390,951



               Restricted cash                                                    3,150,354                                     3,351,610              474,390


                Accounts receivable, net                                           4,169,358                                     5,018,414              710,310



               Inventories, net                                                     650,557                                       558,789               79,091


                Prepayments and other current
                 assets                                                            4,817,422                                     6,014,017              851,229


                Short-term investments                                            15,312,595                                    19,199,417            2,717,501


                Assets held for sale                                                 271,278



            Total current assets                                                 85,105,012                                   111,113,047           15,727,031






            Non-current assets:


                Property, equipment and
                 software, net                                                     4,621,712                                     4,416,247              625,079


                Land use right, net                                                3,707,179                                     4,221,940              597,577


                Deferred tax assets                                                  903,904                                       790,046              111,824



               Time deposits                                                      2,360,000                                     6,823,390              965,788


                Other long-term assets                                            15,424,166                                    16,805,584            2,378,676


                Assets held for sale                                                   2,398


             Total non-current assets                                             27,019,359                                    33,057,207            4,678,944




            Total assets                                                        112,124,371                                   144,170,254           20,405,975





                          Liabilities,  Redeemable
                           Noncontrolling Interests
      and Shareholders' Equity





            Current liabilities:



               Accounts payable                                                   1,212,303                                       853,745              120,840


                Salary and welfare payables                                        2,957,360                                     2,570,216              363,790



               Taxes payable                                                      3,156,513                                     3,822,542              541,046



               Short-term loans                                                  16,828,226                                    21,932,603            3,104,358



               Deferred revenue                                                   8,602,227                                     9,375,909            1,327,074


                Accrued liabilities and other
                 payables                                                          5,484,228                                     6,640,467              939,897


                Liabilities held for sale                                              2,156


             Total current liabilities                                            38,243,013                                    45,195,482            6,397,005





             Non-current liabilities:


                Deferred tax liabilities                                             382,030                                       980,530              138,785


                Other long-term payable                                              456,912                                       476,640               67,464


                Liabilities held for sale                                                961


             Total non-current liabilities                                           839,903                                     1,457,170              206,249




            Total liabilities                                                    39,082,916                                    46,652,652            6,603,254





             Redeemable noncontrolling
              interests                                                           10,448,600                                    10,538,663            1,491,651




             Total NetEase, Inc.'s equity                                         61,453,699                                    85,804,783           12,144,879


             Noncontrolling interests                                              1,139,156                                     1,174,156              166,191


             Total shareholders' equity                                           62,592,855                                    86,978,939           12,311,070





             Total liabilities, redeemable
              noncontrolling                                                     112,124,371                                   144,170,254           20,405,975
      interests and shareholders'
       equity





             The accompanying notes are an integral part of this announcement.


                                                                                                                  
            
                NETEASE, INC.


                                                                                                            
     
         UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME


                                                                                                            
     
         (in thousands, except per share data or per ADS data)




                                                                                
       
         Three Months Ended                       
              
                 Six Months Ended

                                                                                                        ---

                                                                                         June 30,                       March 31,                                       June 30,   
       
             June 30,      
       
         June 30,     
       
         June 30,      
       
             June 30,


                                                                                             2019                             2020                                            2020                        2020                   2019                    2020                          2020



                                                                                  
       RMB                       
         RMB                                
               RMB             
       USD (Note 1)            
       RMB                
       RMB                 
       USD (Note 1)





            
                Net revenues                                                 14,448,442                       17,062,367                                      18,184,806                   2,573,892             28,870,651              35,247,173                     4,988,914





            
                Cost of revenues                                            (6,711,594)                     (7,684,745)                                    (8,392,631)                (1,187,900)          (13,396,129)           (16,077,376)                  (2,275,605)






            
                Gross profit                                                  7,736,848                        9,377,622                                       9,792,175                   1,385,992             15,474,522              19,169,797                     2,713,309






            Selling and marketing expenses                                           (1,289,763)                     (1,863,071)                                    (2,321,397)                  (328,572)           (2,447,853)            (4,184,468)                    (592,273)



            General and administrative expenses                                        (776,900)                       (885,434)                                      (892,622)                  (126,342)           (1,563,750)            (1,778,056)                    (251,667)



            Research and development expenses                                        (1,945,788)                     (2,142,649)                                    (2,408,306)                  (340,874)           (3,983,482)            (4,550,955)                    (644,146)




            Total operating expenses                                                 (4,012,451)                     (4,891,154)                                    (5,622,325)                  (795,788)           (7,995,085)           (10,513,479)                  (1,488,086)






            
                Operating profit                                              3,724,397                        4,486,468                                       4,169,850                     590,204              7,479,437               8,656,318                     1,225,223





            
                Other income:



            Investment income/ (loss), net                                                24,142                        (109,731)                                        711,159                     100,658                179,966                 601,428                        85,127



            Interest income, net                                                         185,227                          345,184                                         396,519                      56,124                357,433                 741,703                       104,981



            Exchange gains, net                                                           72,646                          244,057                                          17,008                       2,407                 33,126                 261,065                        36,951



            Other, net                                                                    78,026                           66,708                                         421,199                      59,617                115,190                 487,907                        69,059






            
                Income before tax                                             4,084,438                        5,032,686                                       5,715,735                     809,010              8,165,152              10,748,421                     1,521,341



            Income tax                                                                 (683,755)                     (1,082,033)                                    (1,064,455)                  (150,664)           (1,950,440)            (2,146,488)                    (303,816)






            
                Net income from continuing operations                         3,400,683                        3,950,653                                       4,651,280                     658,346              6,214,712               8,601,933                     1,217,525



            
                Net loss from discontinued operations                         (282,815)                                                                                                                       (633,570)



            
                Net income                                                    3,117,868                        3,950,653                                       4,651,280                     658,346              5,581,142               8,601,933                     1,217,525






            Accretion and deemed dividends in connection with                           (73,048)                       (386,019)                                      (150,958)                   (21,367)             (141,831)              (536,977)                     (76,004)
      repurchase of redeemable noncontrolling interests



            Net loss/ (income) attributable to noncontrolling interests                   26,547                         (13,628)                                         37,484                       5,306                 14,174                  23,856                         3,377



            
                Net income attributable to the Company's shareholders         3,071,367                        3,551,006                                       4,537,806                     642,285              5,453,485               8,088,812                     1,144,898




            
                Including:



            -Net income from continuing operations attributable to the                 3,354,182                        3,551,006                                       4,537,806                     642,285              6,087,055               8,088,812                     1,144,898
      Company's shareholders



            -Net loss from discontined operations attributable to the                  (282,815)                                                                                                                       (633,570)
      Company's shareholders





            
                Basic net income/ (loss) per share:                                0.95                             1.10                                            1.40                        0.20                   1.70                    2.50                          0.35




            -Continuing operations                                                          1.04                             1.10                                            1.40                        0.20                   1.89                    2.50                          0.35




            -Discontinued operations                                                      (0.09)                                                                                                                          (0.19)






            
                Basic net income/ (loss) per ADS:                                 23.84                            27.47                                           34.99                        4.95                  42.42                   62.48                          8.84




            -Continuing operations                                                         26.03                            27.47                                           34.99                        4.95                  47.35                   62.48                          8.84




            -Discontinued operations                                                      (2.19)                                                                                                                          (4.93)






            
                Diluted net income/ (loss) per share:                              0.95                             1.08                                            1.38                        0.20                   1.68                    2.47                          0.35




            -Continuing operations                                                          1.03                             1.08                                            1.38                        0.20                   1.88                    2.47                          0.35




            -Discontinued operations                                                      (0.08)                                                                                                                          (0.20)






            
                Diluted net income/ (loss) per ADS:                               23.64                            27.12                                           34.58                        4.89                  42.09                   61.70                          8.73




            -Continuing operations                                                         25.82                            27.12                                           34.58                        4.89                  46.98                   61.70                          8.73




            -Discontinued operations                                                      (2.18)                                                                                                                          (4.89)






            Weighted average number of ordinary shares outstanding,                    3,221,306                        3,231,395                                       3,242,061                   3,242,061              3,213,792               3,236,728                     3,236,728
      basic




            Weighted average number of ADS outstanding, basic                            128,852                          129,256                                         129,682                     129,682                128,552                 129,469                       129,469




            Weighted average number of ordinary shares outstanding,                    3,247,408                        3,273,999                                       3,281,100                   3,281,100              3,239,406               3,277,550                     3,277,550
      diluted




            Weighted average number of ADS outstanding, diluted                          129,896                          130,960                                         131,244                     131,244                129,576                 131,102                       131,102






            The accompanying notes are an integral part of this announcement.


                                                                                                                       
              
                NETEASE, INC.


                                                                                                      
              
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                                                     
         
                (RMB and USD in thousands)




                                                                                     
       
              Three Months Ended                                         
              
             Six Months Ended



                                                                                               June 30,                                               March 31,                                    June 30,   
       
              June 30,           June 30,           June 30,      
       
              June 30,


                                                                                                   2019                                                     2020                                         2020                        2020               2019                2020                           2020



                                                                                       
       RMB                                         
               RMB                             
               RMB              
       USD (Note 1)          
     RMB              
     RMB                 
       USD (Note 1)



        
                Cash flows from operating activities:



             Net income                                                                      3,117,868                                                3,950,653                                    4,651,280                     658,346          5,581,142           8,601,933                      1,217,525



             Net loss from discontinued operations                                             282,815                                                                                                                                           633,570



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



             Depreciation and amortization                                                     633,574                                                  690,057                                      892,150                     126,276          1,214,751           1,582,207                        223,947



             Fair value changes of equity security investments                                  87,034                                                  327,040                                    (503,281)                   (71,235)          (42,878)          (176,241)                      (24,945)



             Impairment losses of investments and other intangible assets                       68,883                                                    6,600                                                                                   164,982               6,600                            934



             Fair value changes of short-term investments                                    (174,316)                                               (153,106)                                   (174,738)                   (24,732)         (298,964)          (327,844)                      (46,403)



             Share-based compensation cost                                                     567,668                                                  665,814                                      691,945                      97,938          1,188,467           1,357,759                        192,178



             Allowance for/ (reversal of) provision for doubtful debts                           2,854                                                   49,939                                      (1,305)                      (185)          (15,465)             48,634                          6,884



             Losses on disposal of property, equipment and software                              1,452                                                       37                                        1,070                         151              4,190               1,107                            157



             Unrealized exchange gains                                                        (71,849)                                               (242,508)                                    (20,159)                    (2,853)          (30,043)          (262,667)                      (37,178)



             Gains on disposal of long-term investments, business and subsidiaries               (156)                                                (15,433)                                    (14,803)                    (2,095)          (12,134)           (30,236)                       (4,280)



             Deferred income taxes                                                             466,324                                                  212,848                                      499,509                      70,701            769,376             712,357                        100,828



             Net equity share of (gains)/ losses from associated companies                       (912)                                                (46,211)                                    (10,948)                    (1,550)            16,542            (57,159)                       (8,090)



             Changes in operating assets and liabilities:



                 Accounts receivable                                                           386,030                                                (430,535)                                   (498,550)                   (70,565)         (223,062)          (929,085)                     (131,503)



                 Inventories                                                                   132,712                                                   88,440                                        3,329                         471            295,716              91,769                         12,989



                 Prepayments and other assets                                                  546,551                                              (1,103,798)                                     233,607                      33,065          (432,822)          (870,191)                     (123,168)



                 Accounts payable                                                            (112,477)                                                (98,679)                                   (271,697)                   (38,456)          (18,330)          (370,376)                      (52,423)



                 Salary and welfare payables                                                    42,803                                                (537,907)                                     132,037                      18,689          (441,242)          (405,870)                      (57,447)



                 Taxes payable                                                               (833,059)                                               1,234,078                                    (568,138)                   (80,415)           106,300             665,940                         94,258



                 Deferred revenue                                                            (490,658)                                               1,379,126                                    (605,444)                   (85,695)         (339,017)            773,682                        109,507



                 Accrued liabilities and other payables                                        274,985                                                  524,194                                      336,444                      47,621          (567,092)            860,638                        121,815




             Net cash provided by continuing operating activities                            4,928,126                                                6,500,649                                    4,772,308                     675,477          7,553,987          11,272,957                      1,595,585



             Net cash (used in)/ provided by discontinued operating activities               (462,362)                                                                                                                                          298,351




             Net cash provided by operating activities                                       4,465,764                                                6,500,649                                    4,772,308                     675,477          7,852,338          11,272,957                      1,595,585




        
                Cash flows from investing activities:



             Purchase of property, equipment and software                                    (274,448)                                               (164,320)                                   (237,039)                   (33,551)         (644,038)          (401,359)                      (56,809)



             Proceeds from sale of property, equipment and software                              1,898                                                      772                                        3,970                         562              5,718               4,742                            671



             Purchase of intangible assets, content and licensed copyrights                  (298,301)                                               (306,835)                                   (839,441)                  (118,815)       (1,149,861)        (1,146,276)                     (162,245)



             Net change in short-term investments with terms of three                        1,503,083                                                (780,535)                                   1,083,342                     153,337          1,462,828             302,807                         42,860
      months or less



             Purchase of short-term investments                                            (9,110,000)                                            (10,070,000)                                 (3,080,000)                  (435,946)      (14,000,000)       (13,150,000)                   (1,861,262)



             Proceeds from maturities of short-term investments                              2,759,491                                                6,887,976                                    2,345,218                     331,944          5,070,813           9,233,194                      1,306,874



             Investment in associated companies and other long-term investments              (227,229)                                               (205,005)                                   (520,762)                   (73,708)         (619,245)          (725,767)                     (102,726)



             Proceeds from disposal of investment in equity investments, businesses             42,399                                                  196,952                                       33,856                       4,792            251,081             230,808                         32,669
      and subsidiaries



             Placement/rollover of matured time deposits                                  (16,234,752)                                            (11,667,487)                                (38,412,268)                (5,436,904)      (32,831,292)       (50,079,755)                   (7,088,329)



             Proceeds from maturities of time deposits                                      18,588,553                                               13,640,617                                   19,442,266                   2,751,874         34,548,012          33,082,883                      4,682,578



             Change in other long-term assets                                                 (56,553)                                                (10,522)                                    (76,103)                   (10,772)          (88,312)           (86,625)                      (12,261)



             Amounts (paide to)/ received from disposed businesses                           (200,690)                                                                                                                                          450,486




             Net cash used in continuing investing activities                              (3,506,549)                                             (2,478,387)                                (20,256,961)                (2,867,187)       (7,543,810)       (22,735,348)                   (3,217,980)



             Net cash provided by/ (used in) discontinued investing activities                 136,649                                                                                                                                         (567,355)




             Net cash used in investing activities                                         (3,369,900)                                             (2,478,387)                                (20,256,961)                (2,867,187)       (8,111,165)       (22,735,348)                   (3,217,980)






        The accompanying notes are an integral part of this announcement.


                                                                                                                           
              
                NETEASE, INC.


                                                                                                      
       
                UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


                                                                                                                    
              
                (RMB and USD in thousands)




                                                                                                    
       
         Three Months Ended                                          
              
             Six Months Ended

                                                                                                                              ---

                                                                                                               June 30,                                        March 31,                                    June 30,   
       
              June 30,          June 30,          June 30,      
       
              June 30,


                                                                                                                   2019                                              2020                                         2020                        2020              2019               2020                           2020



                                                                                                       
        RMB                                 
               RMB                              
               RMB             
       USD (Note 1)          
     RMB             
     RMB                
       USD (Note 1)



            
                Cash flows from financing activities:



                 Proceeds of short-term bank loans                                                             297,875                                           100,000                                      360,474                      51,022           312,875            460,474                         65,176



                 Payment of short-term bank loans                                                                                                              (98,395)                                   (358,171)                   (50,696)                          (456,566)                      (64,623)



                 Net changes in short-term loans with terms of three months or less                        (1,144,121)                                        2,539,570                                    2,305,176                     326,276         (403,008)         4,844,746                        685,729



                 Net proceeds received from issuance of shares in Hong Kong                                                                                                                              22,083,467                   3,125,712                          22,083,467                      3,125,712



                 Capital injection from/ (repurchase of) noncontrolling interests and redeemable               215,913                                         (447,632)                                     163,865                      23,194           284,524          (283,767)                      (40,165)
          noncontrolling interests shareholders, net



                 Cash received from/ (paid for) repurchase of NetEase's/ purchase of Youdao's                   10,645                                       (2,560,897)                                 (3,260,996)                  (461,564)           10,645        (5,821,893)                     (824,035)
          ADSs



                 Dividends paid to shareholders                                                              (613,117)                                        (926,545)                                 (1,115,136)                  (157,837)      (1,026,706)       (2,041,681)                     (288,981)




                 Net cash (used in)/ provided by financing activities                                      (1,232,805)                                      (1,393,899)                                  20,178,679                   2,856,107         (821,670)        18,784,780                      2,658,813






             Effect of exchange rate changes on cash, cash equivalents



                 and restricted cash held in foreign currencies                                                 35,624                                            74,100                                      180,056                      25,485            17,730            254,156                         35,973



             Net (decrease)/ increase in cash, cash equivalents and restricted cash                          (101,317)                                        2,702,463                                    4,874,082                     689,882       (1,062,767)         7,576,545                      1,072,391



            
                Cash, cash equivalents and restricted cash,                                         9,245,088                                         6,397,860                                    9,100,323                   1,288,067        10,206,538          6,397,860                        905,558
      at the beginning of the period



            
                Cash, cash equivalents and restricted cash, at end of the period                    9,143,771                                         9,100,323                                   13,974,405                   1,977,949         9,143,771         13,974,405                      1,977,949




            Less: Cash, cash equivalents and restricted cash of held for sale at end of the period             255,151                                               371                                                                                  255,151



            
                Cash, cash equivalents and restricted cash of continuing operations                 8,888,620                                         9,099,952                                   13,974,405                   1,977,949         8,888,620         13,974,405                      1,977,949
      at end of the period





            
                Supplemental disclosures of cash flow information of continuing
      operations:



                 Cash paid for income tax, net                                                                 562,032                                           202,044                                      548,556                      77,643         1,097,755            750,600                        106,241



                 Cash paid for interest expense                                                                115,410                                            96,711                                       55,301                       7,827           224,074            152,012                         21,516



            
                Supplemental schedule of non-cash investing and financing activities
      of continuing opearations:



                Fixed asset purchases financed by accounts payable and accrued                                 312,346                                           377,564                                      277,314                      39,251           312,346            277,314                         39,251
          liabilities





            The accompanying notes are an integral part of this announcement.


                                                                                                                                
           
                NETEASE, INC.


                                                                                                                          
           
              UNAUDITED SEGMENT INFORMATION


                                                                                                                     
          
           (RMB and USD in thousands, except percentages)




                                                                        
       
         Three Months Ended                    
         
              Six Months Ended

                                                                                                   ---

                                                                        
       
         June 30,                   March 31,                                 June 30,                 
        
             June 30,     
       
         June 30,      
       
         June 30,       
       
             June 30,


                                                                                      2019                         2020                                      2020                                      2020                    2019                     2020                          2020



                                                                          
       RMB                      
     RMB                           
              RMB                              
       USD (Note 1)           
       RMB                 
       RMB                  
       USD (Note 1)




     
                Net revenues:



     Online game services                                                      11,433,361                   13,518,244                                13,828,256                                 1,957,263              23,283,545               27,346,500                     3,870,646



     Youdao                                                                       322,812                      541,388                                   623,290                                    88,221                 548,543                1,164,678                       164,849



     Innovative businesses and others                                           2,692,269                    3,002,735                                 3,733,260                                   528,408               5,038,563                6,735,995                       953,419



     Total net revenues                                                        14,448,442                   17,062,367                                18,184,806                                 2,573,892              28,870,651               35,247,173                     4,988,914






     
                Cost of revenues:



     Online game services                                                     (4,220,652)                 (4,851,831)                              (5,009,354)                                (709,028)            (8,519,997)             (9,861,185)                  (1,395,760)



     Youdao                                                                     (216,749)                   (305,663)                                (341,751)                                 (48,372)              (389,585)               (647,414)                     (91,636)



     Innovative businesses and others                                         (2,274,193)                 (2,527,251)                              (3,041,526)                                (430,500)            (4,486,547)             (5,568,777)                    (788,209)



     Total cost of revenues                                                   (6,711,594)                 (7,684,745)                              (8,392,631)                              (1,187,900)           (13,396,129)            (16,077,376)                  (2,275,605)






     
                Gross profit:



     Online game services                                                       7,212,709                    8,666,413                                 8,818,902                                 1,248,235              14,763,548               17,485,315                     2,474,886



     Youdao                                                                       106,063                      235,725                                   281,539                                    39,849                 158,958                  517,264                        73,213



     Innovative businesses and others                                             418,076                      475,484                                   691,734                                    97,908                 552,016                1,167,218                       165,210



     Total gross profit                                                         7,736,848                    9,377,622                                 9,792,175                                 1,385,992              15,474,522               19,169,797                     2,713,309






     
                Gross profit margin:



     Online game services                                                           63.1%                       64.1%                                    63.8%                                    63.8%                  63.4%                   63.9%                        63.9%



     Youdao                                                                         32.9%                       43.5%                                    45.2%                                    45.2%                  29.0%                   44.4%                        44.4%



     Innovative businesses and others                                               15.5%                       15.8%                                    18.5%                                    18.5%                  11.0%                   17.3%                        17.3%





     The accompanying notes are an integral part of this announcement.

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 = RMB7.0651 on the last trading day of June 2020 (June 30, 2020) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

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




                                                                        
       
         Three Months Ended                 
     
       Six Months Ended

                                                                                              ---

                                                                                  June 30,                March 31,             June 30,    
       
             June 30,           June 30,           June 30,      
       
             June 30,


                                                                                      2019                      2020                  2020                        2020               2019                2020                          2020



                                                                          
       RMB                    
     RMB               
      RMB               
       USD (Note 1)         
     RMB              
     RMB                 
       USD (Note 1)



     Share-based compensation cost included in:



     
                Cost of revenues                                                187,141                   207,915               204,953                      29,009            386,350             412,868                        58,438



     Operating expenses



     - Selling and marketing expenses                                              21,144                    24,811                27,034                       3,826             46,391              51,845                         7,338



     - General and administrative expenses                                        187,362                   230,371               247,589                      35,044            385,220             477,960                        67,651



     - Research and development expenses                                          172,021                   202,717               212,369                      30,059            370,506             415,086                        58,752





     The accompanying notes are an integral part of this announcement.


                                                                                                              
            
                NETEASE, INC.


                                                                                                     
        
         UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS


                                                                                                     
        
         (in thousands, except per share data or per ADS data)




                                                                               
      
        Three Months Ended                                                   Six Months Ended

                                                                                                    ---

                                                                                       June 30,                        March 31,                                     June 30,   
       
             June 30,          June 30,          June 30,      
       
             June 30,


                                                                                           2019                              2020                                          2020                       2020              2019               2020                          2020



                                                                                 
      RMB                     
           RMB                               
              RMB              
       USD (Note 1)         
     RMB             
     RMB                
       USD (Note 1)



            Net income from continuing operations attributable to                    3,354,182                         3,551,006                                     4,537,806                    642,285         6,087,055          8,088,812                     1,144,898
      the Company's shareholders



            Add: Share-based compensation                                              566,869                           661,871                                       688,227                     97,412         1,187,308          1,350,098                       191,094



            Non-GAAP net income from continuing operations                           3,921,051                         4,212,877                                     5,226,033                    739,697         7,274,363          9,438,910                     1,335,992
      attributable to the Company's shareholders






            Non-GAAP basic net income from continuing                                     1.22                              1.30                                          1.61                       0.23              2.26               2.92                          0.41
      operations per share




            Non-GAAP basic net income from continuing                                    30.43                             32.59                                         40.30                       5.70             56.59              72.90                         10.32
      operations per ADS




            Non-GAAP diluted net income from continuing                                   1.21                              1.29                                          1.59                       0.23              2.25               2.88                          0.41
      operations per share




            Non-GAAP diluted net income from continuing                                  30.19                             32.17                                         39.82                       5.64             56.14              72.00                         10.19
      operations per ADS






            The accompanying notes are an integral part of this announcement.

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SOURCE NetEase, Inc.