NetEase.com Reports Record Fourth Quarter and Fiscal Year 2003 Financial Results

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 fourth quarter and fiscal year ended December 31, 2003.

"Our strong performance in the fourth quarter has ended another outstanding year for NetEase, resulting in a second consecutive year of profit," said Ted Sun, Acting Chief Executive Officer of NetEase. "2003 was the year NetEase solidified its position as one of China's leading online game providers, and with our wireless value-added and other e-commerce services and online advertising businesses also performing well, we believe that we are well positioned for another year of growth."

Financial Results

For the fourth quarter ended December 31, 2003, the Company reported total net revenues of RMB161.8 million (US$19.5 million), a 16.4% and 77.9% increase over total net revenues of RMB138.9 million (US$16.8 million) for the preceding quarter and RMB90.9 million (US$11.0 million) for the corresponding period in 2002, respectively. The Company reported net profit of RMB94.1 million (US$11.4 million), or US$0.36 per American Depositary Share (basic), a 11.9% and 118.3% increase over net profit of RMB84.1 million (US$10.2 million) for the preceding quarter and RMB43.1 million (US$5.2 million) for the corresponding period in 2002, respectively.

For the year ended December 31, 2003, the Company reported total net revenues of RMB542.1 million (US$65.5 million), a strong increase of 145.4% over total net revenues of RMB220.9 million (US$26.7 million) for the fiscal year 2002. For the fiscal year 2003, NetEase reported a gross profit and operating profit of RMB456.7 million (US$55.2 million) and RMB326.8 million (US$39.5 million), respectively, representing a substantial increase over gross profit of RMB149.3 million (US$18.0 million) and operating profit of RMB4.0 million (US$0.49 million) for the fiscal year 2002. The Company reported net profit of RMB322.9 million (US$39.0 million), or US$1.25 per American Depositary Share (basic), compared to the previous year's net profit of RMB16.3 million (US$2.0 million).

For the fourth quarter ended December 31, 2003, online game services continued to grow steadily to RMB70.7 million (US$8.5 million), representing a 31.8% and 222.2% increase over RMB53.7 million (US$6.5 million) for the preceding quarter and RMB21.9 million (US$2.6 million) for the corresponding period a year ago, respectively. Strong growth in this revenue segment was largely due to the continued increase in popularity of the Company's self-developed online game title, Westward Journey Online Version 2.0, which had approximately 1.6 million unique paying users for the month of December 2003.

Revenues from wireless value-added and other e-commerce services for the quarter were RMB64.6 million (US$7.8 million), representing a 8.4% increase over the preceding quarter's RMB59.6 million (US$7.2 million) and a 13.0% increase over RMB57.2 million (US$6.9 million) for the corresponding period a year ago. This increase in revenues from wireless value-added and e-commerce services reflected ongoing demand for value-added services by Chinese mobile phone customers and positive response to new company offerings in this area.

Advertising revenues were RMB26.5 million (US$3.2 million), representing a 3.0% increase over the preceding quarter's RMB25.7 million (US$3.1 million) and a 123.8% increase over RMB11.8 million (US$1.4 million) for the corresponding period a year ago.

The Company achieved gross profit in the fourth quarter of RMB136.2 million (US$16.5 million), increasing 12.4% over the previous quarter's RMB121.2 million (US$14.6 million) and 95.7% over RMB69.6 million (US$8.4 million) for the corresponding period a year ago. Gross margins were at 84.2% in the fourth quarter.

Total operating expenses were RMB37.9 million (US$4.6 million), a 11.2% increase from the previous quarter's RMB34.1 million (US$4.1 million) and a 23.8% increase from the corresponding period a year ago of RMB30.7 million (US$3.7 million). This rise was partly due to ongoing investments in both product development staffing and online game product development, as well as an increase in marketing spending. The Company reported an operating profit of RMB98.3 million (US$11.9 million) in the fourth quarter, representing a 12.9% and 152.2% increase over last quarter's operating profit of RMB87.1 million (US$10.5 million) and RMB39.0 million (US$4.7 million) for the corresponding period last year, respectively.

The Company reported a net profit of RMB94.1 million (US$11.4 million) in the fourth quarter, an increase of 11.9% over the previous quarter's net profit of RMB84.1 million (US$10.2 million) and 118.4% over RMB43.1 million (US$5.2 million) for the corresponding period a year ago. The Company's net profit was affected by an increase in the effective tax rate during the fourth quarter, which was primarily due to a smaller deferred tax credit adjustment made in the fourth quarter as compared with the third quarter relating to tax losses carry forwards.

As of December 31, 2003, the Company's total cash and held-to-maturity investments balance was RMB1.7 billion (US$204.0 million), a 5.9% increase from the previous quarter's RMB1.6 billion (US$192.6 million). Cash flow generated from operating activities was approximately RMB104.9 million (US$12.7 million) during the quarter.

Commenting on the Company's earnings, Ted Sun said, "In the fourth quarter, our growth was led by our online games division, which we expect will continue to be a major growth driver in 2004. Our first in-house developed game, Westward Journey Online Version 2.0, has met with much success in the Chinese market-it continues to rank among the most popular online games in China and has received numerous awards, including Top 10 Most Popular Domestic Developed Games by "China Game Industry Report 2003" sponsored by the General Administration of Press and Publication of the People's Republic of China. At the end of the quarter we also launched a new in-house developed game, Fantasy Westward Journey. This game is targeted at a different demographic segment and geographic base than our other titles and initial results have been very encouraging. Our proven in-house online game development capabilities is a key strength for the Company and has given us an important early lead in this fast-growing sector."

"Our wireless value-added and other e-commerce business rebounded from last quarter, and our user base in this market is continuing to expand, due in part to new offerings and services made available during the quarter. While we expect the wireless value-added and other e-commerce related market in China to become increasingly competitive, we expect consumer demand to grow and we will continue to develop new and innovative services to attract users. The growth of advertising revenues was slow in the fourth quarter. However, advertising revenue showed good growth year-over-year, and will continue to be an important revenue driver for the Company in the coming year."

Denny Lee, NetEase's Chief Financial Officer said, "NetEase continues to be on a very strong financial footing, with diversified revenue streams and positive operating cash flow. We will continue to invest in new products and services and our employee base, so as to maintain our leading position as one of the most innovative and profitable listed portals in China."

Ted Sun concluded, "We are optimistic about the Company's prospects for growth going forward. We believe that NetEase's strong market position in online advertising and wireless value-added services, combined with our offerings targeted to the fast growing online game industry in China will again benefit the Company in 2004."

Users of the NetEase Web sites continued to grow, with 167 million accumulated registered accounts at the end of the fourth quarter, an increase of 16.0% over the 144 million accounts at the end of the previous quarter and a 74.5% increase over the 95.7 million accounts at the same time a year ago.

** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1 = RMB8.2767. 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 December 31, 2003 we had approximately 167 million accumulated registered accounts, and our average daily page views for the month ended December 31, 2003 exceeded 390 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 20 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 on-line 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, multi-media messaging services and wireless application protocol technologies, and online game services through three massively multi-player online role-playing game titles, Westward Journey Online Version 2.0, Fantasy Westward Journey and PristonTale 2.0.
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This press release contains statements of a forward-looking nature. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market; the risk that NetEase will be unable to compete effectively in the wireless value-added services market; 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 NetEase may not be able to continuously develop new and creative online services; the risk that the online 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 continue to successfully monetize the user base of the NetEase Web sites and that its e-commerce and other fee-based services revenues will not continue to grow; 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; the risk that current or future appointees to management are not effective in their respective positions; the difficulty in locating and recruiting suitable candidates for middle and senior management positions; the risk that NetEase may not be able to satisfy its obligations with respect to its Zero Coupon Convertible Subordinated Notes which could lead to a default on the Notes and an adverse affect on its business and financial condition; the risk that NetEase may not use the proceeds from the offering of those Notes and its other cash in a productive manner; NetEase's ability to develop and implement additional operational and financial systems to manage NetEase's operations; 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.
Fourth Quarter and Fiscal Year 2003 Consolidated Balance Sheets
Fourth Quarter and Fiscal Year 2003 Consolidated Statements of Operations
Fourth Quarter and Fiscal Year 2003 Consolidated Statements of Cash Flows

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