NetEase : Q1 2021 Earnings Release

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NetEase Reports First Quarter 2021 Unaudited Financial Results

(Beijing - May 18, 2021)- 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 first quarter ended March 31, 2021.

First Quarter 2021 Financial Highlights

• Net revenues were RMB20.5 billion (US$3.1 billion), an increase of 20.2% compared with the first quarter of 2020.
• • Online game services net revenues were RMB15.0 billion (US$2.3 billion), an increase of 10.8% compared with the first quarter of 2020.
  • Youdao net revenues were RMB1.3 billion (US$204.5 million), an increase of 147.5% compared with the first quarter of 2020.
  • Innovative businesses and others net revenues were RMB4.2 billion (US$640.4 million), an increase of 39.7% compared with the first quarter of 2020.
• Gross profit was RMB11.1 billion (US$1.7 billion), an increase of 17.9% compared with the first quarter of 2020.
• Total operating expenses were RMB6.8 billion (US$1.0 billion), an increase of 38.6% compared with the first quarter of 2020.

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• Net income attributable to the Company's shareholders was RMB4.4 billion (US$677.5 million). Non-GAAP net income attributable to the Company's shareholders was RMB5.1 billion (US$775.5 million). [1]
• Basic net income per share was US$0.20 (US$1.01 per ADS). Non-GAAP basic net income per share was US$0.23 (US$1.16 per ADS). [1]

First Quarter 2021 and Recent Operational Highlights

• Attracted new users and expanded portfolio with new game introductions including:
• • Revelation mobile game, Yu-Gi-Oh! Duel Links, Elysium of Legends and Pokémon Quest, all of which were well received after their launches.
  • Infinite Lagrange in European markets in late April, with plans for additional market introductions in the near-term.
• Delivered strong performances from longstanding flagship titles including the Fantasy Westward Journey and Westward Journey Online series, and maintained popularity of other hit titles including Life-After,Invincible and Onmyoji.
• Progressed strong game pipeline with thrilling titles planned for launch in the coming months including Harry Potter: Magic Awakened, The Lord of the Rings: Rise to War, Nightmare Breaker, Diablo® Immortal™ and Ghost World Chronicle.
• Advanced Youdao's learning services and learning products, increasing Youdao's net revenues by 147.5% year-over-year to RMB1.3 billion (US$204.5 million), and drove operating efficiency with total gross profit margin reaching 57.3% in the first quarter of 2021, the highest level since Youdao's IPO in October 2019.

"2021 is off to a strong start with our total net revenues climbing to RMB20.5 billion, up approximately 20% year-over-year," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "Net revenues from our online game services grew to RMB15.0 billion in the first quarter supported by the impressive longevity of our time-honored flagship games, as well as newer titles that broaden and diversify our games portfolio. As we near the launch of additional exciting new titles for global audiences in the coming months, we are confident we can deepen our international market presence. Our other businesses also performed well in the first quarter, with solid year-over-year net revenues growth from Youdao, NetEase Cloud Music and Yanxuan. Leveraging our innovation and technical skills, we plan to bring even more creative products and high-quality services to our users," Mr. Ding concluded.

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

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First Quarter 2021 Financial Results

Net Revenues

Net revenues were RMB20,517.2 million (US$3,131.5 million) for the first quarter of 2021, compared to RMB19,761.7 million and RMB17,062.4 million for the preceding quarter and the first quarter of 2020, respectively.

Net revenues from online game services were RMB14,981.8 million (US$2,286.7 million) for the first quarter of 2021, compared to RMB13,400.2 million and RMB13,518.2 million for the preceding quarter and the first quarter of 2020, respectively. Net revenues from mobile games accounted for approximately 72.8% of net revenues from online game services for the first quarter of 2021, compared to 72.4% and 70.3% for the preceding quarter and the first quarter of 2020, respectively.

Net revenues from Youdao were RMB1,339.9 million (US$204.5 million) for the first quarter of 2021, compared to RMB1,106.8 million and RMB541.4 million for the preceding quarter and the first quarter of 2020, respectively.

Net revenues from innovative businesses and others were RMB4,195.6 million (US$640.4 million) for the first quarter of 2021, compared to RMB5,254.8 million and RMB3,002.7 million for the preceding quarter and the first quarter of 2020, respectively.

Gross Profit

Gross profit was RMB11,052.6 million (US$1,687.0 million) for the first quarter of 2021, compared to RMB9,927.8 million and RMB9,377.6 million for the preceding quarter and the first quarter of 2020, respectively.

The quarter-over-quarter and year-over-year increases in online game services gross profit were mainly due to increased net revenues from both mobile and PC games, including the newly launched Revelation mobile game and other existing 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.

The quarter-over-quarter decrease in innovative businesses and others gross profit was primarily due to a decrease in gross profit from advertising services due to seasonality. The year-over-year increase was primarily due to the improved performance of NetEase Cloud Music.

Gross Profit Margin

Gross profit margin for online game services was 64.6% for the first quarter of 2021, compared to 63.1% and 64.1% for the preceding quarter and the first quarter of 2020, 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 was 57.3% for the first quarter of 2021, compared to 47.5% and 43.5% for the preceding quarter and the first quarter of 2020, respectively. The quarter-over-quarter and year- over-year increases were mainly due to the significant increase in net revenues, improved economies of scale, and faculty compensation structure optimization for its learning services.

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Gross profit margin for innovative businesses and others was 14.4% for the first quarter of 2021, compared to 18.0% and 15.8% for the preceding quarter and the first quarter of 2020, respectively. The quarter-over-quarter decrease was primarily due to seasonality.

Operating Expenses

Total operating expenses were RMB6,777.1 million (US$1,034.4 million) for the first quarter of 2021, compared to RMB6,915.8 million and RMB4,891.2 million for the preceding quarter and the first quarter of 2020, respectively. The quarter-over-quarter decrease was mainly due to lower marketing expenditures related to online game services and innovative businesses and others. The year-over-year increase was mainly due to increased marketing expenditures related to Youdao and other businesses, as well as higher staff-related costs and research and development investments.

Other Income/ (Expenses)

Other income/ (expenses) consisted of investment (losses)/ income, interest income, exchange gains/ (losses) and others. The quarter-over-quarter increase was mainly due to unrealized exchange gains arising from the Company's U.S. dollar-denominated bank deposits and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods, as well as investment income arising from fair value changes of equity investments with readily determinable fair value. The year-over-year increase was mainly due to investment income arising from fair value changes of equity investments with readily determinable fair value.

Income Taxes

The Company recorded a net income tax charge of RMB1,273.4 million (US$194.4 million) for the first quarter of 2021, compared to RMB552.7 million and RMB1,082.0 million for the preceding quarter and the first quarter of 2020, respectively. The effective tax rate for the first quarter of 2021 was 22.0%, compared to 37.2% and 21.5% for the preceding quarter and the first quarter of 2020, respectively. The effective tax rate represents certain estimates by the Company regarding the tax obligations and benefits applicable to it in each quarter.

Net Income and Non-GAAP Net Income

Net income attributable to the Company's shareholders totaled RMB4,439.2 million (US$677.5 million) for the first quarter of 2021, compared to RMB975.7 million and RMB3,551.0 million for the preceding quarter and the first quarter of 2020, respectively.

Non-GAAP net income attributable to the Company's shareholders for the first quarter of 2021 totaled RMB5,080.7 million (US$775.5 million), compared to RMB1,597.9 million and RMB4,212.9 million for the preceding quarter and the first quarter of 2020, respectively.

NetEase reported basic net income of US$0.20 per share (US$1.01 per ADS) for the first quarter of 2021, compared to US$0.04 per share (US$0.22 per ADS) and US$0.17 per share (US$0.84 per ADS) for the preceding quarter and the first quarter of 2020, respectively.

NetEase reported non-GAAP basic net income of US$0.23 per share (US$1.16 per ADS) for the first quarter of 2021, compared to US$0.07 per share (US$0.36 per ADS) and US$0.20 per share (US$1.00 per ADS) for the preceding quarter and the first quarter of 2020, respectively.

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Quarterly Dividend

The board of directors has approved a dividend of US$0.0600 per share (US$0.3000 per ADS) for the first quarter of 2021, to holders of ordinary shares and holders of ADSs as of the close of business on June 3, 2021, Hong Kong Time and New York 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 June 3, 2021 (Hong Kong Time). The payment date is expected to be on June 15, 2021 for holders of ordinary shares and on or around June 18, 2021 for holders of ADSs.

NetEase paid a dividend of US$0.0464 per share (US$0.2320 per ADS) for the first quarter of 2020 in June 2020, a dividend of US$0.0594 per share (US$0.2970 per ADS) for the second quarter of 2020 in September 2020, a dividend of US$0.0390 per share (US$0.1950 per ADS) for the third quarter of 2020 in December 2020 and a dividend of US$0.0120 per share (US$0.0600 per ADS) for the fourth quarter of 2020 in March 2021.

The Company's policy is 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 March 31, 2021, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB106,249.6 million (US$16,216.9 million), compared to RMB100,099.6 million as of December 31, 2020. Cash flows generated from operating activities was RMB5,542.7 million (US$846.0 million) for the first quarter of 2021, compared to RMB8,214.2 million and RMB6,500.6 million for the preceding quarter and the first quarter of 2020, respectively.

Share Repurchase Program

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. At the end of this program on March 1, 2021, approximately 22.8 million ADSs had been repurchased for a total cost of US$1.8 billion.

On February 25, 2021, the Company announced that its board of directors had approved a new share

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