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Netease Reports Third Quarter 201 Unaudited Financial Results

The following excerpt is from the company's SEC filing.

(Beijing

November 11, 2015) NetEase, Inc. (NASDAQ: NTES), one of Chinas leading Internet and online game services providers, today announced its unaudited financial results for the third quarter ended September 30, 2015.

We are honored to be a leading developer and operator of some of the countrys most popular games as Chinas online game industry

is on track to become the worlds largest gaming market, said Mr. William Ding, Chief Executive Officer and Director of NetEase. Our third quarter financial results reflect our success at innovation with total net revenues increasing by 11 4.1% compared with the third quarter of last year. We grew our top-line net revenues across our three business segments both sequentially and year-over-year, with year-over-year increases of 124.5% in online games, 10.5% in advertising services and 162.2% in e-mail, e-commerce and others.

Our self-developed and licensed PC-client games maintain a healthy appeal to our users, while our mobile games are driving new growth. During the third quarter of this year, we launched our

Westward Journey Online

mobile game, which together with our

Fantasy Westward Journey

mobile game, are now the top two grossing games in the iOS China app store. Players appetite for our new self-developed PC-client game

Revelation

, a 3D oriental fantasy MMORPG, was also strong in the third quarter, and we saw continued interest in Blizzard Entertainments

Diablo III

: Reaper of Souls

Hearthstone

: Heroes of Warcraft

. A number of new expansion packs for our PC-client games were warmly received during the third quarter as well, including

Fantasy Westward Journey II

and a new version of

Ghost II,

New Ghost

. Additionally, we have entered into collaboration between

and an urban TV show, which is based on a renowned youth romance novel. This cooperation represents the initiation of our strategy to utilize innovative marketing models for our games that further extend our brand.

Today, our mobile portfolio stands strong with more than 50 titles, and we plan to grow this position with self-developed and licensed games that continue to delight our players. These include games that we have launched since July of this year that have gained immediate traction such as

Tales

: The World of the Brave

Kari-ri-sei Million Arthur

Lunar Flowers, The Beautiful Dream

Chrono Blade

. In addition, we are

planning for the exciting introduction of our highly-anticipated

Kung Fu Panda

mobile game in late November, as well as

The X-World

Fantasy Westward Journey: Warriors

Raven

in the coming months.

For our PC-client games, the new expansion pack for

Kung Fu Master II

, which we released in October, is being well received. We also look forward to bringing our PC-client players thrilling new experiences with expansion packs planned for

Tianxia III

Heroes of Tang Dynasty Zero

, and the new release of

Hegemon-King of Western Chu

Advertisers are continuing the transition from PC to mobile, a platform where our foothold is particularly strong. Supported by the popularity of our

Mobile News App

, we are seeing continued growth in our advertising revenues from mobile platforms. During the third quarter, our advertising services net revenues growth was led by the automobile, Internet services and food and beverage sectors. Our cross-border e-commerce platform

Kaola.com

also continued to grow rapidly during the third quarter and we are seeing sustained strong momentum from our e-commerce business.

Our portfolio of PC-client and mobile games is robust and growing. In addition to the domestic popularity of our mobile initiatives that span games, apps, advertising services and e-commerce, we have now launched several new games for overseas audiences to a positive reception. Along with our rapid mobile growth, our focus remains on superior quality and innovation, particularly where there is an opportunity to enhance our offerings with IP and data sharing between our PC-client and mobile games, and other product and service offerings across our business lines

, Mr. Ding concluded.

Third Quarter 201

Financial Results

Revenues

revenues for the third quarter of 2015 were RMB6,671.8 million (US$1,049.7 million), compared to RMB4,567.9 million and RMB3,116.7 million for the preceding quarter and the third quarter of 2014, respectively.

evenues from online games were RMB5,212.9 million (US$820.2 million) for the third quarter of 2015, compared to RMB3,657.1 million and RMB2,322.0 million for the preceding quarter and the third quarter of 2014, respectively.

evenues from advertising services were RMB454.9 million (US$71.6 million) for the third quarter of 2015, compared to RMB427.7 million and RMB411.7 million for the preceding quarter and the third quarter of 2014, respectively.

evenues from e-mail, e-commerce and others were RMB1,004.0 million (US$158.0 million) for the third quarter of 2015, compared to RMB483.0 million and RMB383.0 million for the preceding quarter and the third quarter of 2014, respectively.

Gross Profit

Gross profit for the third quarter of 2015 was RMB

3,849.3 million (US$605.6 million), compared to RMB2,845.6 million and RMB2,258.4 million for the preceding quarter and the third quarter of 2014, respectively.

The year-over-year and quarter-over-quarter increase

s in online games gross profit were primarily driven by revenue contribution from mobile games such as the

mobile game and licensed games such as Blizzard Entertainments

, as well as NetEases new self-developed PC-client games such as

Revelation

and quarter-over-quarter increases in advertising services gross profit were primarily attributable to strong demand from the automobile, Internet services and food and beverage sectors, and NetEases monetization efforts for its mobile applications, primarily its

decrease in e-mail, e-commerce and others gross profit was primarily due to the temporary suspension of higher margin e-commerce services related to third-party lottery products since late February 2015, which was partially offset by increased revenue contribution from NetEases other e-commerce platforms, which have relatively lower gross profit margins. The quarter-over-quarter decrease was primarily due to the one-off recognition of expenses related to certain copyrights in the third quarter of 2015.

Gross Profit Margin

Gross profit margin for the online games business for the third quarter of 2015 was

67.9%, compared to 69.3% and 77.2% for the preceding quarter and the third quarter of 2014, respectively. The year-over-year and quarter-over-quarter decreases in gross profit margin were mainly due to increased revenue contribution from mobile games, which have relatively lower gross profit margins, as a percentage of NetEases total online games revenues.

Gross profit margin for the advertising services business for the third quarter of 2015 was

67.6%, compared to 68.2% and 65.3% for the preceding quarter and the third quarter of 2014, respectively.

e-mail, e-commerce and others business for the third quarter of 2015 was 0.1%, compared to 4.2% and 51.6% for the preceding quarter and the third quarter of 2014, respectively. The year-over-year decrease in gross profit margin was primarily attributable to the temporary suspension of higher margin e-commerce services related to third-party lottery products discussed above, as well as increased revenue contribution from NetEases other e-commerce platforms, which have relatively lower gross profit margins. The quarter-over-quarter decrease was mainly due to the one-off recognition of expenses related to certain copyrights in the third quarter of 2015.

Operating Expenses

Total operating expenses for the third quarter of 2015 were RMB

1,761.2 million (US$277.1 million), compared to RMB1,395.2 million and RMB1,059.2 million for the preceding quarter and the third quarter of

and quarter-over-quarter increases in operating expenses were mainly due to increased selling and marketing expenses for mobile and PC-client games, advertising services and other mobile products, and higher staff-related costs resulting from an increase in headcount and average compensation.

Income Taxes

The Company recorded a net income tax charge of RMB

399.2 million (US$62.8 million) for the third quarter of 2015, compared to RMB145.9 million and RMB197.3 million for the preceding quarter and the third quarter of 2014, respectively. The effective tax rate for the third quarter of 2015 was 17.1%, compared to 9.2% and 14.4% for the preceding quarter and the third quarter of 2014, respectively. The year-over-year increase in the effective tax rate was mainly due to the fact that certain subsidiaries of the Company were approved as Key Software Enterprises and subject to a preferential tax rate of 10% for 2014. Those subsidiaries were subject to a tax rate of 15% in 2015. The quarter-over-quarter increase in the effective tax rate was mainly due to the fact that the Company recognized certain tax credits in the second quarter of 2015 related to annual tax...


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