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NetEase.com Announces 2004 First Quarter Results

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NetEase.com via BizWire

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Apr 29, 2004, 5:10:43 PM4/29/04

BEIJING--(BUSINESS WIRE)--April 30, 2004--NetEase.com, Inc.
(Nasdaq:NTES)

-- Total net revenue for the quarter increased 66.8%
year-over-year and 15.5% quarter-over-quarter to RMB186.8
million (US$22.6 million)

-- Net profit for the quarter increased 50.8% year-over-year and
10.5% quarter-over-quarter to RMB103.9 million (US$12.6
million), equivalent to US$0.40 per American Depositary Share
(basic) or US$0.38 per American Depositary Share (diluted)

-- Cash flow from operating activities for the quarter amounted
to RMB145.8 million (US$17.6 million)

NetEase.com, Inc. (Nasdaq:NTES), one of China's leading Internet,
online game and wireless value-added services companies, today
announced financial results for its first quarter ended March 31,
2004.
Denny Lee, NetEase's Chief Financial Officer, said, "We are very
pleased that NetEase has posted another quarter of record results,
driven by strong performance from our online games and advertising
businesses."

Financial Results

The Company reported total net revenues of RMB186.8 million
(US$22.6 million) for the quarter, representing a 66.8% increase over
total net revenues of RMB112.0 million (US$13.5 million) for the
corresponding period a year ago and a 15.5% increase over total net
revenues of RMB161.8 million for the preceding quarter.
Revenues from online game services for the quarter grew by 41.4%
quarter-over-quarter to a record RMB100.0 million (US$12.1 million)
reflecting the successful launch of the Company's new online game
title, Fantasy Westward Journey Online, and the continued growth in
revenue contribution from Westward Journey Online Version 2.0.
Revenues from wireless value-added and other services for the
quarter decreased 12.3% quarter-over-quarter to RMB56.7 million
(US$6.8 million) as a result of increased competition in the SMS
services market during the period. Although revenues from 2.5G
applications remain modest, growth in this area is better than
expected.
Revenues from advertising services for the quarter increased 13.9%
quarter-over-quarter to RMB30.1 million (US$3.6 million). Growth in
this segment was strong even though the first quarter is traditionally
a slow one for Internet advertising.
The Company reported gross profit in the first quarter of RMB158.4
million (US$19.1 million), representing a 72.5% increase over RMB91.8
million for the corresponding period a year ago and a 16.3% increase
over RMB136.2 million for the preceding quarter. Revenue growth also
favorably impacted gross margins, which increased to 84.8% in the
first quarter from 84.2% in the preceding quarter.
Total operating expenses for the quarter were RMB50.6 million
(US$6.1 million), representing a 78.9% increase over RMB28.3 million
for the corresponding period a year ago, and a 33.3% increase over
RMB37.9 million for the preceding quarter. The increase was mainly due
to an increase in marketing expenses in connection with the launch of
the Company's new online game and revamping the Company's Web site
homepage.
The Company reported a net profit of RMB103.9 million (US$12.6
million), equivalent to US$0.40 (basic) or US$0.38 (diluted) per
American Depositary Share ("ADS"), compared to a net profit of RMB68.9
million, equivalent to US$0.26 diluted net earnings per ADS, for the
corresponding period a year ago and a net profit of RMB94.1 million,
equivalent to US$0.35 diluted net earnings per ADS for the preceding
quarter.
As of March 31, 2004, the Company's total cash and
held-to-maturity investments balance was RMB1.8 billion (US$223.1
million). The Company generated an operating cash flow of RMB145.8
million (US$17.6 million) for the quarter.

Other Company News

Earlier this month, NetEase announced that the Company's acting
Chief Executive Officer, Ted Sun, is taking a temporary medical leave
of absence and that Michael Tong, Executive Director, and Denny Lee,
Chief Financial Officer, have assumed Mr. Sun's day-to-day
responsibilities during his absence. The Company's board of directors,
management and staff all wish him a speedy return to health and look
forward to his return.
Commenting on the first quarter's results, Executive Director
Michael Tong, said, "The response to our latest online game, Fantasy
Westward Journey Online, has been very encouraging and helped drive
the impressive performance of our online games business this quarter.
NetEase has a strong track record of developing and launching in-house
developed games for the China market, and we are confident that this
will continue in the future."
Mr. Tong added, "NetEase's Internet advertising business also
performed well this quarter, as our efforts to increase value for
current and future advertisers are paying off. For example, a revamp
of several areas of the portal, further investment in content
development and a series of marketing activities continue to reinforce
NetEase's position as a leading Chinese portal. We are optimistic
about the growth prospects for this business segment this year as we
continue to benefit from the strong market demand for online
promotional services in China."
"While our wireless value-added and other services revenues were
affected this quarter by a fiercely competitive marketplace in the SMS
services area, we plan to launch and promote higher-end applications
and services that can leverage the competitive advantages of NetEase's
existing large community and email user base."
Denny Lee, NetEase's Chief Financial Officer added, "This was
another good quarter for NetEase led by strong revenue growth from
online games and advertising. We continue to benefit from a strong
business model based on diversified revenue streams. We will continue
to invest in new people, products and services to ensure that we build
on our past successes and continue to create value for our
shareholders."

** Note: The conversion of Renminbi (RMB) into U.S. dollars in
this release is based on the exchange rate of US$1 = RMB8.2770. 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 March 31, 2004 we had approximately 194 million
accumulated registered accounts, and our average daily pageviews for
the month ended March 31, 2004 exceeded 341 million.
Community products and services which the NetEase Web sites offer
include instant messaging, personals, matchmaking, alumni clubs,
personal home pages and community forums. NetEase is also the largest
provider of free e-mail services in China. Furthermore, the NetEase
Web sites provide 21 channels of content. NetEase sources news content
on world events, sports, science and technology, and financial markets
as well as entertainment content such as cartoons, games, astrology
and jokes from over one hundred international and domestic content
providers.
NetEase offers Internet 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.

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 Internet advertising market in
China will not continue to grow and will remain subject to intense
competition; the risk that NetEase will not be able to 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.

NETEASE.COM, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS

December 31, March 31, March 31,
2003 2004 2004
-------------- -------------- --------------
RMB RMB USD (Note 3)

Assets

Current assets:
Cash 1,356,069,544 1,680,318,181 203,010,533
Held-to-maturity
investments 332,093,546 166,263,413 20,087,400
Accounts receivable, net - 77,368,710 9,347,434
Prepayments and other
current assets 19,749,369 25,254,979 3,051,224
Due from related
parties, net (Note 2) 15,182,589 - -
Deferred tax assets 9,669,543 7,271,496 878,518
-------------- -------------- --------------

Total current
assets 1,732,764,591 1,956,476,779 236,375,109

Non-current rental
deposit 1,430,544 2,096,946 253,346
Property, equipment and
software, net 40,410,264 48,578,914 5,869,145
Deferred assets 12,086,693 10,127,056 1,223,518
-------------- -------------- --------------

Total assets 1,786,692,092 2,017,279,695 243,721,118
============== ============== ==============

Liabilities and
Shareholders' Equity

Current liabilities:
Accounts payable 10,738,090 22,677,649 2,739,838
Salary and welfare
payable 17,405,624 19,882,758 2,402,170
Taxes payable 15,976,343 45,046,370 5,442,355
Deferred revenue - 79,677,405 9,626,363
Due to related parties,
net (Note 2) 21,947,411 - -
Accrued liabilities 11,698,760 16,560,452 2,000,780
-------------- -------------- --------------

Total current
liabilities 77,766,228 183,844,634 22,211,506
-------------- -------------- --------------

Long-term payable: 827,901,449 839,062,620 101,372,794
-------------- -------------- --------------

Total liabilities 905,667,677 1,022,907,254 123,584,300
-------------- -------------- --------------

Shareholders' equity:
Ordinary shares,
US$0.0001 par value:
1,000,300,000,000
shares authorized,
3,128,958,189 shares
issued and outstanding
as of December 31,
2003, and
3,143,312,789
shares issued and
outstanding as of
March 31, 2004 2,589,756 2,601,731 314,333
Additional paid-in
capital 993,254,740 1,002,664,921 121,138,688
Statutory reserve 33,699,834 33,699,834 4,071,503
Deferred compensation (69,175) (55,340) (6,686)
Translation adjustments 210,838 210,838 25,473
Accumulated deficit (148,661,578) (44,749,543) (5,406,493)
-------------- -------------- --------------

Total shareholders'
equity 881,024,415 994,372,441 120,136,818
-------------- -------------- --------------

Total liabilities and
shareholders' equity 1,786,692,092 2,017,279,695 243,721,118
============== ============== ==============

Note 1: On January 17, 2003, the Financial Accounting Standards Board
issued FASB Interpretation No. 46: Consolidation of Variable Interest
Entities, an interpretation of ARB 51 ("FIN 46"), which was
subsequently amended by a revised interpretation ("FIN 46-R").
According to the requirements of FIN 46 and FIN 46-R, the Company has
evaluated its relationship with two previously unconsolidated related
companies Guangzhou NetEase Computer System Co., Ltd. and Guangyitong
Advertising Co., Ltd.. Guangzhou NetEase Computer System Co., Ltd. and
Guangyitong Advertising Co., Ltd. are concluded as variable interest
entities ("VIE") of the Company. And the Company is concluded to be
the primary beneficiary of these two VIEs. Effective January 1, 2004,
the Company adopted the provisions of FIN 46 and consolidated these
two VIEs on a prospective basis in the Company's consolidated
financial statements. Adoption of FIN 46 did not significantly affect
the company's financial statements.

Note 2: Upon the adoption of FIN 46 and consolidation of Guangzhou
NetEase Computer System Co., Ltd. and Guangyitong Advertising Co.,
Ltd., amounts due from/ to these two related parties have been
eliminated in the consolidated financial statements of the Company.
The major effect of consolidation of these companies on the Company's
consolidated financial statements was the recognition of the VIEs'
accounts receivable, deferred revenue and tax payable and others, and
a corresponding elimination of the due to and due from related parties
balances. The net effect on shareholders' equity was nil. The
following figures represent the due to and due from related parties
balances as of December 31, 2003, and the corresponding balances of
accounts receivable, deferred revenue and tax payable and others on
the balance sheet of the VIE's as of that date:

RMB

Due from related parties, net 15,182,589
Due to related parties, net (21,947,411)
-------------

Amount due to related parties, net (6,764,822)
=============

Represented by:
Accounts receivable, net 71,826,810
Deferred revenue (57,727,133)
Tax payable and others, net (20,864,499)
-------------

Amount due to related parties, net (6,764,822)
=============

Note 3: The conversion of Renminbi (RMB) into United States dollars
(USD) is based on the noon buying rate of USD1.00=RMB 8.2770 on March
31, 2004 in The City of New York for cable transfers of Renminbi as
certified for customs purposes by the Federal Reserve Bank of New
York.

NETEASE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Quarter Ended
-----------------------------
March 31, December 31,
2003 2003
-------------- --------------
RMB RMB
Net revenues:
Online game services 34,277,552 70,728,416
Wireless value-added and other services 66,358,091 64,587,038
Advertising services 11,397,431 26,477,574
-------------- --------------

Total net revenues 112,033,074 161,793,028
-------------- --------------

Cost of revenues:
Online game services (4,470,702) (7,696,695)
Wireless value-added and other services (10,329,603) (9,000,874)
Advertising services (5,416,646) (8,882,933)
-------------- --------------

Total cost of revenues (20,216,951) (25,580,502)
-------------- --------------

Gross profit 91,816,123 136,212,526
-------------- --------------

Operating expenses:
Selling, general and administrative
expenses (23,844,491) (31,357,504)
Research and development
expenses (4,159,767) (6,651,157)
Share compensation cost (250,260) 66,786
-------------- --------------

Total operating expenses (28,254,518) (37,941,875)
-------------- --------------

Operating profit 63,561,605 98,270,651

Other income (expenses):
Investment income - 538,278
Interest income 1,738,018 3,986,707
Interest expense - -
Other, net 5,518,548 (141,983)
-------------- --------------

Profit before tax 70,818,171 102,653,653

Income tax (1,902,670) (8,573,459)
-------------- --------------

Net profit 68,915,501 94,080,194
============== ==============

Earnings per share, basic 0.02 0.03
============== --------------
Earnings per ADS, basic 2.22 3.01
============== --------------
Earnings per share, diluted 0.02 0.03
============== ==============
Earnings per ADS, diluted 2.15 2.88
============== ==============
Weighted average number of ordinary
shares outstanding, basic 3,102,842,755 3,127,532,135
============== ==============
Weighted average number of ADS
outstanding, basic 31,028,428 31,275,321
============== ==============
Weighted average number of ordinary
shares outstanding, diluted 3,207,939,611 3,268,091,968
============== ==============
Weighted average number of ADS
outstanding, diluted 32,079,396 32,680,920
============== ==============

Quarter Ended
------------------------------
March 31, March 31,
2004 2004
-------------- --------------
RMB USD (Note 2)
Net revenues:
Online game services 99,999,719 12,081,638
Wireless value-added and other services 56,674,565 6,847,235
Advertising services 30,147,494 3,642,322
-------------- --------------

Total net revenues 186,821,778 22,571,195
-------------- --------------

Cost of revenues:
Online game services (9,837,708) (1,188,560)
Wireless value-added and other services (8,510,279) (1,028,184)
Advertising services (10,105,410) (1,220,902)
-------------- --------------

Total cost of revenues (28,453,397) (3,437,646)
-------------- --------------

Gross profit 158,368,381 19,133,549
-------------- --------------

Operating expenses:
Selling, general and administrative
expenses (43,340,619) (5,236,271)
Research and development
expenses (7,202,306) (870,159)
Share compensation cost (13,835) (1,672)
-------------- --------------

Total operating expenses (50,556,760) (6,108,102)
-------------- --------------

Operating profit 107,811,621 13,025,447

Other income (expenses):
Investment income 1,363,507 164,734
Interest income 3,782,606 457,002
Interest expense (931,171) (112,501)
Other, net 1,800 218
-------------- --------------

Profit before tax 112,028,363 13,534,900

Income tax (8,116,327) (980,588)
-------------- --------------

Net profit 103,912,036 12,554,312
============== ==============

Earnings per share, basic 0.03 0.01
-------------- --------------
Earnings per ADS, basic 3.32 0.40
-------------- --------------
Earnings per share, diluted 0.03 0.01
============== ==============
Earnings per ADS, diluted 3.18 0.38
============== ==============
Weighted average number of ordinary
shares outstanding, basic 3,132,850,697 3,132,850,697
============== ==============
Weighted average number of ADS
outstanding, basic 31,328,507 31,328,507
============== ==============
Weighted average number of ordinary
shares outstanding, diluted 3,265,989,154 3,265,989,154
============== ==============
Weighted average number of ADS
outstanding, diluted 32,659,892 32,659,892
============== ==============

Note 2: The conversion of Renminbi (RMB) into United States dollars
(USD) is based on the noon buying rate of USD1.00=RMB 8.2770 on March
31, 2004 in The City of New York for cable transfers of Renminbi as
certified for customs purposes by the Federal Reserve Bank of New
York.

NETEASE.COM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Quarter Ended

March December March March
31, 2003 31, 2003 31, 2004 31, 2004
------------ -------------- -------------- ------------
RMB RMB RMB USD (Note 2)
Cash flows
from
operating
activities:
Net profit 68,915,501 94,080,194 103,912,036 12,554,311
Adjustments
for:
Depreciation 3,593,182 4,493,899 5,744,954 694,087
Share
compensation
cost 250,260 (66,786) 13,835 1,671
Provision for
doubtful
debts 1,469,529 1,613,926 1,594,981 192,700
Amortization
of issuance
cost of
convertible
bonds - 1,978,391 1,959,637 236,757
Increase in
accounts
receivable - - (7,136,881) (862,255)
(Increase)
Decrease in
prepayments
and other
current
assets (3,270,505) 5,084,094 (4,109,527) (496,500)
(Increase)
Decrease in
due from/to
related
parties 6,689,240 (4,945,452) - -
(Increase)
Decrease in
deferred tax
assets (3,104,112) (431,837) 2,398,047 289,724
Increase
(Decrease)
in accounts
payable and
other
liabilities 7,278,380 (271,835) 21,765,133 2,629,593
Increase in
deferred
revenue - - 21,950,272 2,651,960
Increase
(Decrease)
in salary
and welfare
payable (1,055,337) 3,341,596 (2,296,687) (277,478)
------------ -------------- -------------- ------------

Net cash
provided by
operating
activities 80,766,138 104,876,190 145,795,800 17,614,570
------------ -------------- -------------- ------------

Cash flows
from
investing
activities
(Increase)
Decrease in
held-to-
maturity
investments - (332,093,546) 165,830,133 20,035,053
Purchase of
property,
equipment
and software (4,277,932) (11,262,621) (12,078,529) (1,459,288)
(Increase)
Decrease in
non-current
deposit (41,289) (116,707) (541,362) (65,406)
------------ -------------- -------------- ------------

Net cash
(used in)
provided by
investing
activities (4,319,221) (343,472,874) 153,210,242 18,510,359
------------ -------------- -------------- ------------

Cash flows
from
financing
activities:
Proceed from
employee
exercising
stock options 1,600,297 603,301 9,422,157 1,138,354
Increase
(Decrease)
in long-term
payable from
issuance of
convertible
bonds - (114,866) 30,000 3,625
------------ -------------- -------------- ------------

Net cash
provided by
financing
activities 1,600,297 488,435 9,452,157 1,141,979
------------ -------------- -------------- ------------

Effect of
exchange rate
changes on
cash (24,849) - - -
------------ -------------- -------------- ------------

Net increase
(decrease) in
cash 78,022,365 (238,108,249) 308,458,198 37,266,908

Less:
(Increase)
Decrease in
restricted
cash (4,456) - - -

Cash,
beginning of
the quarter 560,069,711 1,594,177,793 1,371,859,983 165,743,625
------------ -------------- -------------- ------------

Cash, end of
the quarter 638,087,620 1,356,069,544 1,680,318,181 203,010,533
============ ============== ============== ============

Supplemental
disclosures
of cash flow
information:
Cash paid
during the
quarter for
income taxes - 7,737,704 7,610,124 919,430
============ ============== ============== ============

Supplemental
schedule of
non-cash
investing
and financing
activities:
Compensation
costs, arising
from transfer
of ordinary
shares and
issuance of
stock options
in the Company
to senior
management
personnel
and some
non-employees
of the
Company 250,260 (66,786) 13,835 1,671
============ ============== ============== ============

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