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NetEase Reports Fourth Quarter and Fiscal Year 2017 Unaudited Financial Results

BEIJING, Feb. 7, 2018 /PRNewswire/ -- NetEase, Inc. (NASDAQ: NTES) ("NetEase" or the "Company"), one of China's leading internet and online game services providers, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2017.

Fourth Quarter 2017 Financial Highlights

  • Net revenues were RMB14.6 billion (US$2.2 billion), an increase of 20.7% compared with the fourth quarter of 2016.
    • Online game services net revenues were RMB8.0 billion (US$1.2 billion), a decrease of 10.7% compared with the fourth quarter of 2016. 
    • E-commerce net revenues were RMB4.7 billion (US$715.3 million), an increase of 175.2% compared with the fourth quarter of 2016.
    • Advertising services net revenues were RMB736.6 million (US$113.2 million), an increase of 10.8% compared with the fourth quarter of 2016. 
    • E-mail and others net revenues were RMB1.2 billion (US$186.4 million), an increase of 54.8% compared with the fourth quarter of 2016.
  • Gross profit was RMB5.7 billion (US$882.9 million), a decrease of 11.1% compared with the fourth quarter of 2016.
  • Total operating expenses were RMB4.3 billion (US$663.6 million), an increase of 66.3% compared with the fourth quarter of 2016.
  • Net income attributable to the Company's shareholders was RMB1.3 billion (US$197.6 million). Non-GAAP net income attributable to the Company's shareholders was RMB1.9 billion (US$288.8 million).  [1]
  • Diluted earnings per ADS were US$1.49; non-GAAP diluted earnings per ADS were US$2.18.

[1] As used in this press release, non-GAAP net income attributable to the Company's shareholders is defined to exclude share-based compensation expenses and impairment on long-term investment of available-for-sale securities. See "Unaudited Reconciliation of GAAP and Non-GAAP Results" at the end of this press release.

Fourth Quarter 2017 and Recent 2018 Operational Highlights

  • Strengthened leading mobile portfolio, launched new self-developed hit mobile titles across global audiences including:
    • Knives Out: Accumulated over 100 million registered users to date and has been recommended by Google Play Store in over 10 countries since its launch in November 2017.
    • Terminator 2: Judgment Day: Accumulated over 80 million registered users to date, and the global release of Rules of Survival, has been ranked as one of the most popular games on the iOS platform and Google Play Store across multiple countries, including the U.S market, since its launch in November 2017.
    • Popular games such as Japanese-themed RPG Forever 7 launched in November 2017 and highly-anticipated MMORPG Chu Liuxiang launched in January 2018.
  • Successfully introduced Mojang's Minecraft in China across all platforms with early monetization progressing well.
  • Invigorated the popularity of Onmyoji and expanded its international reach with the release of a new content update, successful launch in Thailand in November 2017 and introduction of a new MOBA version in January 2018, which was well-received by players.
  • Reinforced strength of flagship titles with stable performances from self-developed games such as PC-client game Fantasy Westward Journey Online and mobile game Invincible.
  • Progressed pipeline diversification strategy with upcoming games including asymmetrical battle arena game Identity V, RPG Sky and 2.5D casual battle arena game Alive.

"2017 marked another year of progress with growth across each of our core business segments year-over-year. Our total net revenues for the year increased by 41.7% as we brought a number of new blockbuster online games to audiences across the globe, considerably scaled our e-commerce business and further grew our landmark advertising services and e-mail and others business lines," said Mr. William Ding, Chief Executive Officer and Director of NetEase. "For the fourth quarter, our total net revenues continued to grow year-over-year and quarter-over-quarter. Although a few mobile titles such as Onmyoji and the mobile version of New Ghost experienced a decline, we have introduced new content for these games to attract players. During the fourth quarter, we held substantial promotions to support the successful launch of our new battle arena games Knives Out, Terminator 2: Judgment Day and Rules of Survival. We also made additional investments to further scale our thriving e-commerce businesses. We believe these strategic investments provide us with extended reach and momentum to support our future long-term growth.

"Our business remains strong and our 2018 initiatives to bring exciting new titles to our robust and diverse portfolio of self-developed games are well underway. To expand our reach, we will also seek partnerships with other industry leaders to bring mobile and PC-client games to audiences worldwide. Our e-commerce businesses and advertising services are also thriving, with e-commerce accounting for approximately 22% of our total net revenues in 2017. We will continue to expand our Kaola.com and Yanxuan e-commerce platforms in 2018 along with our other business segments where we see opportunities to generate value for our shareholders, as well as serve and grow our community of users by providing best-in-class online content and services," Mr. Ding concluded.

Change in Segment Reporting

Effective as of December 31, 2017, the Company changed its segment disclosure to separately report the financial results of its e-commerce business in light of the significant growth of the revenue contribution from e-commerce to the Company's total consolidated net revenues in 2017. This segment primarily reflects the results of NetEase's two e-commerce platforms, Kaola.com and Yanxuan, which were established in January 2015 and April 2016, respectively. The Company now reports four reporting segments: online game services, e-commerce, advertising services, and e-mail and others. This change in segment reporting aligns with the manner in which the Company's operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. This change in segment presentation does not affect consolidated balance sheets, consolidated statements of income or consolidated statements of cash flows. The Company retrospectively revised prior period segment information to conform to current period presentation.

Fourth Quarter 2017 Financial Results

Net Revenues

Net revenues for the fourth quarter of 2017 were RMB14,607.6 million (US$2,245.2 million), compared to RMB12,477.8 million and RMB12,099.0 million for the preceding quarter and the fourth quarter of 2016, respectively.

Net revenues from online games were RMB8,004.4 million (US$1,230.2 million) for the fourth quarter of 2017, compared to RMB8,111.7 million and RMB8,959.1 million for the preceding quarter and the fourth quarter of 2016, respectively. Mobile games accounted for approximately 68.0% of net revenues from online games for the fourth quarter of 2017, compared to 68.3% and 64.4% for the preceding quarter and the fourth quarter of 2016, respectively.

Net revenues from e-commerce were RMB4,653.7 million (US$715.3 million) for the fourth quarter of 2017, compared to RMB2,667.5 million and RMB1,691.2 million for the preceding quarter and the fourth quarter of 2016, respectively.

Net revenues from advertising services were RMB736.6 million (US$113.2 million) for the fourth quarter of 2017, compared to RMB631.4 million and RMB664.8 million for the preceding quarter and the fourth quarter of 2016, respectively. The top performing advertising verticals in the fourth quarter of 2017 were automobile, internet services and real estate sectors.

Net revenues from e-mail and others were RMB1,213.0 million (US$186.4 million) for the fourth quarter of 2017, compared to RMB1,067.2 million and RMB783.8 million for the preceding quarter and the fourth quarter of 2016, respectively.

Gross Profit/ (Loss)

Gross profit for the fourth quarter of 2017 was RMB5,744.6 million (US$882.9 million), compared to RMB5,947.6 million and RMB6,463.3 million for the preceding quarter and the fourth quarter of 2016, respectively.

The year-over-year and quarter-over-quarter decreases in online game services gross profit were primarily due to decreased revenue contribution from self-developed mobile games such as Onmyoji.

The year-over-year and quarter-over-quarter increases in e-commerce gross profit were primarily due to the rapid development of Kaola.com and Yanxuan.

The year-over-year and quarter-over-quarter increases in advertising services gross profit were primarily due to NetEase's enhanced monetization efforts and better economies of scale.

The year-over-year and quarter-over-quarter decreases in e-mail and others gross profit were primarily due to decreased revenue contribution from certain online platform businesses, which have relatively higher margins, as well as the one-off recognition of expense related to certain copyrights in the fourth quarter of 2017.

Gross Profit/ (Loss) Margin

Gross profit margin for online game services for the fourth quarter of 2017 was 61.4%, compared to 62.5% and 60.7% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year increase in gross profit margin was mainly due to the one-off recognition of certain royalty expenses related to licensed games in the fourth quarter of 2016, which was partially offset by increased staff-related costs. The quarter-over-quarter decrease in gross profit margins was mainly due to increased staff-related costs.

Gross profit margin for e-commerce for the fourth quarter of 2017 was 7.4%, compared to 11.5% and 12.5% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter decreases in e-commerce gross profit margin were primarily due to the larger-scale promotions and certain sales discounts in the fourth quarter of 2017, such as Singles Day on November 11, 2017.

Gross profit margin for advertising services for the fourth quarter of 2017 was 71.2%, compared to 68.0% and 66.5% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter increases in gross profit margin were mainly due to NetEase's enhanced monetization efforts and better economies of scale.

Gross loss margin for e-mail and others for the fourth quarter of 2017 was 3.3%, compared to gross profit margin of 13.1% and 46.9% for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter decreases in gross margin were primarily due to the decreased revenue contribution from certain online platform businesses, which have relatively higher gross profit margins, as well as the one-off recognition of expense related to certain copyrights in the fourth quarter of 2017.

Operating Expenses

Total operating expenses for the fourth quarter of 2017 were RMB4,317.8 million (US$663.6 million), compared to RMB3,397.9 million and RMB2,596.6 million for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter increases in operating expenses were mainly due to increased selling and marketing expenses and research and development investments, and higher staff-related costs, as well as increased operating expenses related to NetEase's e-commerce businesses. Shipping and handling costs included in selling and marketing expenses for the fourth quarter of 2017 were RMB393.3 million (US$60.4 million), compared to RMB294.8 million and RMB177.2 million for the preceding quarter and the fourth quarter of 2016, respectively.

Income Taxes

The Company recorded a net income tax charge of RMB290.4 million (US$44.6 million) for the fourth quarter of 2017, compared to RMB225.5 million and RMB882.0 million for the preceding quarter and the fourth quarter of 2016, respectively. The effective tax rate for the fourth quarter of 2017 was 18.2%, compared to 8.1% and 19.2% for the preceding quarter and the fourth quarter of 2016, respectively. The changes in the effective tax rate were mainly due to the fact that certain subsidiaries of the Company were recognized as Key Software Enterprises in the third quarter and fourth quarter of 2017, and subject to a preferential tax rate of 10% for 2016. The Company recognized related tax credits in the third quarter and fourth quarter of 2017 accordingly.

Net Income After Tax

Net income attributable to the Company's shareholders for the fourth quarter of 2017 totaled RMB1.3 billion (US$197.6 million), compared to RMB2.5 billion and RMB3.7 billion for the preceding quarter and the fourth quarter of 2016, respectively. Non-GAAP net income attributable to the Company's shareholders for the fourth quarter of 2017 totaled RMB1.9 billion (US$288.8 million), compared to RMB3.0 billion and RMB4.0 billion for the preceding quarter and the fourth quarter of 2016, respectively.

During the fourth quarter of 2017, the Company had a net foreign exchange loss of RMB159.1 million (US$24.5 million), compared to a net foreign exchange loss of RMB109.9 million and a net foreign exchange gain of RMB90.5 million for the preceding quarter and the fourth quarter of 2016, respectively. The year-over-year and quarter-over-quarter changes in foreign exchange gains and losses were mainly due to unrealized exchange gains and losses 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.

NetEase reported basic and diluted earnings per ADS of US$1.50 and US$1.49, respectively, for the fourth quarter of 2017. The Company reported basic and diluted earnings per ADS of US$2.95 and US$2.93, respectively, for the preceding quarter, and basic and diluted earnings per ADS of US$4.31 and US$4.28, respectively, for the fourth quarter of 2016. Non-GAAP basic and diluted earnings per ADS were US$2.20 and US$2.18, respectively, for the fourth quarter of 2017, compared to non-GAAP basic and diluted earnings per ADS of US$3.53 and US$3.50, respectively, for the preceding quarter, and non-GAAP basic and diluted earnings per ADS of US$4.63 and US$4.59, respectively, for the fourth quarter of 2016.

Fiscal Year 2017 Financial Results

Net Revenues

Total net revenues for fiscal year 2017 were RMB54.1 billion (US$8.3 billion), compared to RMB38.2 billion for the preceding fiscal year.

Net revenues from online games were RMB36.3 billion (US$5.6 billion) for fiscal year 2017, compared to RMB28.0 billion for the preceding fiscal year. Mobile games accounted for approximately 70.8% of net revenues from online games for fiscal year 2017, compared to 61.9% for the preceding fiscal year.

Net revenues from e-commerce were RMB11.7 billion (US$1.8 billion) for fiscal year 2017, compared to RMB4.5 billion for the preceding fiscal year.

Net revenues from advertising services were RMB2.4 billion (US$370.2 million) for fiscal year 2017, compared to RMB2.2 billion for the preceding fiscal year. The top performing advertising verticals in 2017 were automobile, internet services and real estate sectors.

Net revenues from e-mail and others were RMB3.7 billion (US$575.0 million) for fiscal year 2017, compared to RMB3.5 billion for the preceding fiscal year.

Gross Profit

Gross profit for fiscal year 2017 was RMB25.9 billion (US$4.0 billion), compared to RMB21.7 billion for the preceding fiscal year.

The increase in online game services gross profit in 2017 was primarily attributable to increased revenue contribution from the Company's self-developed mobile games such as Onmyoji and the mobile version of New Ghost.

The increase in e-commerce gross profit in 2017 was primarily due to business development of Kaola.com and Yanxuan.

The increase in advertising services gross profit in 2017 was due to NetEase's enhanced monetization efforts and better economies of scale.

The decrease in e-mail and others gross profit in 2017 was primarily due to the decreased revenue contribution from certain online platform businesses, which have relatively higher margins, as well as the one-off recognition of expense related to certain copyrights in the fourth quarter of 2017.

Operating Expenses

Total operating expenses for fiscal year 2017 were RMB13.8 billion (US$2.1 billion), compared to RMB9.0 billion for the preceding fiscal year. The increase in operating expenses in 2017 was primarily due to increased selling and marketing expenses and research and development investments, and higher staff-related costs, as well as increased operating expenses related to NetEase's e-commerce businesses. Shipping and handling costs included in selling and marketing expenses for fiscal year 2017 were RMB1,182.7 million (US$181.8 million), compared to RMB503.0 million for the preceding fiscal year.

Income Taxes

The Company recorded a net income tax charge of RMB2.2 billion (US$332.3 million) and RMB2.1 billion for fiscal years 2017 and 2016, respectively. The effective tax rate was 16.6% for fiscal year 2017, compared to 15.1% for fiscal year 2016. The changes in the effective tax rate were mainly due to the higher withholding tax recorded for fiscal year 2017.

Net Income After Tax

Net income attributable to the Company's shareholders for fiscal year 2017 totaled RMB10.7 billion (US$1.6 billion), compared to RMB11.6 billion for the preceding fiscal year. Non-GAAP net income attributable to the Company's shareholders for fiscal year 2017 totaled RMB12.7 billion (US$2.0 billion), compared to RMB12.9 billion for fiscal year 2016.

For fiscal year 2017, the Company reported a net foreign exchange loss of RMB448.8 million (US$69.0 million), compared to a net foreign exchange gain of RMB146.5 million for the preceding fiscal year. The changes in foreign exchange gains and losses were mainly due to unrealized exchange gains and losses 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 these periods.

NetEase reported basic and diluted earnings per ADS of US$12.50 and US$12.41, respectively, for fiscal year 2017, and basic and diluted earnings per ADS of US$13.59 and US$13.48, respectively, for fiscal year 2016. Non-GAAP basic and diluted earnings per ADS were US$14.85 and US$14.73, respectively, for fiscal year 2017, compared to non-GAAP basic and diluted earnings per ADS of US$15.06 and US$14.94, respectively, for fiscal year 2016.

Quarterly Dividend

The board of directors has approved a dividend of US$0.38 per ADS for the fourth quarter of 2017, which is expected to be paid on March 2, 2018 to shareholders of record as of the close of business on February 23, 2018.

NetEase paid dividends of US$1.08 per ADS for the first quarter of 2017 on June 2, 2017, US$0.83 per ADS for the second quarter of 2017 on September 1, 2017 and US$0.72 per ADS for the third quarter of 2017 on December 8, 2017, respectively.

Under the Company's quarterly dividend policy announced on May 13, 2014, quarterly dividends will be set at an amount equivalent to approximately 25% 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 December 31, 2017, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB43.2 billion (US$6.6 billion), compared to RMB36.9 billion as of December 31, 2016. Cash flow generated from operating activities was RMB11.9 billion (US$1.8 billion) for fiscal year 2017, compared to RMB15.5 billion for the preceding fiscal year.

Share Repurchase Program

On November 15, 2016, the Company announced that its board of directors 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. As of November 14, 2017, the last day of such program, the Company had repurchased approximately 1.1 million ADSs for approximately US$306.1 million under this program.

On November 15, 2017, the Company announced that its board of directors has approved a new 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 November 16, 2017. As of December 31, 2017, no ADS were repurchased under this program.

Under the terms of the current approved program, NetEase may repurchase its issued and outstanding ADSs in open-market transactions on the NASDAQ Global Select Market. The timing and dollar amount of repurchase transactions will be subject to the Securities and Exchange Commission (SEC) Rule 10b-18 requirements. It is also expected that such repurchases will be effected pursuant to a plan in conformity with SEC Rule 10b5-1.  The extent to which NetEase repurchases its ADSs will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by NetEase's management team. The repurchase program may be suspended or discontinued at any time.

** The United States dollar (US$) amounts disclosed in this press release 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$1.00 = RMB6.5063 on December 29, 2017 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on December 29, 2017, or at any other certain date. The percentages stated are calculated based on RMB.

Notes to Unaudited Financial Information

The unaudited financial information disclosed in this press release is preliminary. The audit of the financial statements and related notes to be included in the Company's annual report on Form 20-F for the year ended December 31, 2017 is still in progress. In addition, because an audit of the Company's internal controls over financial reporting in connection with section 404 of the Sarbanes-Oxley Act of 2002 has not yet been completed, the Company makes no representation as to the effectiveness of those internal controls as of the end of fiscal year 2017.

Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between the Company's audited financial statements and this preliminary unaudited financial information.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 8:00 p.m. Eastern Time on Wednesday, February 7, 2018 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, February 8, 2018). 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 1-800-281-7973 (international: 1-323-794-2093), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-888-203-1112 (international: 1-719-457-0820), and entering passcode 3213566#. The replay will be available through February 21, 2018.

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.

NetEase, Inc. (NASDAQ: NTES) is a leading internet technology company in China. Dedicated to providing online services centered around content, community, communication and commerce, NetEase develops and operates some of China's most popular PC-client and mobile games, e-commerce businesses, advertising services and e-mail services. In partnership with Blizzard Entertainment, Mojang AB (a Microsoft subsidiary) and other global game developers, NetEase also operates some of the most popular international online games in China. For more information, please visit: http://ir.netease.com/.

Forward Looking Statements

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, which could occur if, for example, its new online games or expansion packs and other improvements to its existing games do not become as popular as management anticipates; the ability of NetEase to successfully expand its mobile internet offerings; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that NetEase's affiliates will not be able to continue operating Minecraft, World of Warcraft®, StarCraft® II, Hearthstone®, Diablo® III: Reaper of SoulsHeroes of the Storm®, Overwatch® or other games licensed by it for a period of time or permanently due to possible governmental actions or the risk that such games will not be popular with game players in China; the risk that changes in Chinese government regulation of the online game market and the market for NetEase's e-commerce businesses may limit future growth of NetEase's revenues or cause revenues to decline; competition in the online advertising business and the risk that investments by NetEase in its content and services may not increase the appeal of the NetEase websites among internet users or result in increased advertising revenues; the risk that NetEase may not be able to continuously develop new and creative online services, including its ability to maintain and enhance the popularity of its e-mail, mobile and e-commerce businesses and develop attractive mobile games; the risk that NetEase will not be able to control its expenses in future periods; competition in NetEase's existing and potential markets; governmental uncertainties (including possible changes in the effective tax rates applicable to NetEase and its subsidiaries and affiliates and the ability of NetEase to receive and maintain approvals of the preferential tax treatments and general competition and price pressures in the marketplace); the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase's business and financial results; and other risks outlined in NetEase's filings with the Securities and Exchange Commission. 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 attributable to the Company's shareholders and non-GAAP basic and diluted earnings per ADS, 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 attributable to the Company's shareholders as net income attributable to the Company's shareholders excluding share-based compensation expenses and impairment on long-term investment of available-for-sale securities. Non-GAAP net income attributable to the Company's shareholders enables NetEase's management to assess its operating results without considering the impact of share-based compensation expenses and impairment on long-term investment of available-for-sale securities, 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 future 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 attributable to the Company's shareholders is that it does not reflect all items of expense that affect our operations. Share-based compensation expenses and impairment on long-term investment of available-for-sale securities have been and may continue to be incurred in our business and are not reflected in the presentation of non-GAAP net income 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 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 "Reconciliation of GAAP and Non-GAAP Results" at the end of this press release. 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
NetEase, Inc.
ir@service.netease.com
Tel: (+86) 571-8985-5201

Brandi Piacente
Investor Relations
brandi@corp.netease.com
Tel: (+1) 212-481-2050

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(RMB and USD in thousands)




 December 31, 


 December 31, 


 December 31, 



2016


2017


2017



 RMB  


 RMB  


 USD (Note 1) 

Assets














Current assets:







   Cash and cash equivalents


5,439,499


2,764,140


424,841

   Time deposits


19,361,098


30,603,369


4,703,652

   Restricted cash


3,473,273


5,926,906


910,949

   Accounts receivable, net


4,251,297


3,619,725


556,342

   Inventories,net


1,578,130


5,474,929


841,481

   Prepayments and other current assets


3,697,952


3,816,028


586,514

   Short-term investments


11,582,116


9,742,663


1,497,420

Total current assets


49,383,365


61,947,760


9,521,199








Non-current assets:







   Property, equipment and software, net 


2,419,510


3,769,326


579,335

   Land use right, net


588,887


593,279


91,185

   Deferred tax assets *


560,323


823,495


126,569

   Time deposits


550,000


100,000


15,370

   Restricted cash


2,060,000


200


31

   Other long-term assets


2,469,775


3,797,355


583,641

Total non-current assets


8,648,495


9,083,655


1,396,131

Total assets 


58,031,860


71,031,415


10,917,330








Liabilities,  Redeemable Noncontrolling Interests and
    Shareholders' Equity














Current liabilities:







   Accounts payable 


1,396,187


2,442,531


375,410

   Salary and welfare payables


1,491,448


2,189,110


336,460

   Taxes payable


1,722,501


1,564,692


240,489

   Short-term loans


3,815,691


6,623,502


1,018,014

   Deferred revenue


7,531,238


6,237,969


958,758

   Accrued liabilities and other payables


3,219,419


4,692,310


721,195

Total current liabilities


19,176,484


23,750,114


3,650,326








Long-term payable:







   Deferred tax liabilities *


392,235


213,215


32,771

   Other long-term payable


200


18,250


2,805

Total liabilities


19,568,919


23,981,579


3,685,902








Redeemable noncontrolling interests 


-


614,696


94,477








Total NetEase, Inc.'s equity


38,191,081


45,732,007


7,028,881

Noncontrolling interests


271,860


703,133


108,070

Total shareholders' equity


38,462,941


46,435,140


7,136,951








Total liabilities, redeemable noncontrolling interests and
    shareholders' equity    


58,031,860


71,031,415


10,917,330








The accompanying notes are an integral part of this press release.












*In 2017, the Company adopted the guidance of ASU 2015-17 issued by FASB in November 2015, which requires entities to
present deferred tax assets ("DTA") and deferred tax liabilities ("DTL") as non-current in the balance sheets.  Pursuant to the
guidance, the Company retrospectively reclassified current DTA and current DTL to non-current assets and to non-current
liabilities, respectively, in the consolidated balance sheet as of December 31, 2016.

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(RMB and USD in thousands, except per share data)




 Quarter Ended 



Year Ended



December 31,


September 30, 


December 31,


 December 31, 



December 31,


December 31,


 December 31, 



2016


2017


2017


2017



2016


2017


2017



 RMB 


 RMB 


 RMB 


 USD (Note 1) 



 RMB 


 RMB 


 USD (Note 1) 

















Net revenues


12,099,020


12,477,789


14,607,636


2,245,152



38,178,844


54,102,019


8,315,328

















Cost of revenues


(5,635,741)


(6,530,214)


(8,863,025)


(1,362,223)



(16,515,032)


(28,189,326)


(4,332,620)

















Gross profit


6,463,279


5,947,575


5,744,611


882,929



21,663,812


25,912,693


3,982,708

















Selling and marketing expenses 


(1,255,331)


(1,645,829)


(2,397,214)


(368,444)



(4,481,815)


(6,957,596)


(1,069,362)

General and administrative expenses


(464,149)


(599,116)


(678,370)


(104,264)



(1,506,154)


(2,429,858)


(373,462)

Research and development expenses 


(877,119)


(1,152,941)


(1,242,213)


(190,925)



(3,046,979)


(4,371,428)


(671,876)

Total operating expenses


(2,596,599)


(3,397,886)


(4,317,797)


(663,633)



(9,034,948)


(13,758,882)


(2,114,700)

















Operating profit


3,866,680


2,549,689


1,426,814


219,296



12,628,864


12,153,811


1,868,008

Other income:
















Investment income, net


291,960


117,746


96,030


14,760



200,333


362,113


55,656

Interest income, net


125,335


164,684


190,733


29,315



541,969


667,323


102,566

Exchange gains/ (losses), net


90,461


(109,891)


(159,106)


(24,454)



146,510


(448,827)


(68,983)

Other, net


219,188


44,876


37,814


5,812



377,685


277,080


42,586

















Net income before tax


4,593,624


2,767,104


1,592,285


244,729



13,895,361


13,011,500


1,999,833

Income tax


(882,018)


(225,494)


(290,372)


(44,629)



(2,102,498)


(2,162,363)


(332,349)

















Net income after tax


3,711,606


2,541,610


1,301,913


200,100



11,792,863


10,849,137


1,667,484

Net income attributable to noncontrolling interests
    and redeemable noncontrolling interests


(28,506)


(14,161)


(16,300)


(2,505)



(188,343)


(141,198)


(21,702)

Net income attributable to
   the Company's shareholders


3,683,100


2,527,449


1,285,613


197,595



11,604,520


10,707,939


1,645,782

































Basic earnings per share


1.12


0.77


0.39


0.06



3.54


3.25


0.50

Basic earnings per ADS


28.06


19.18


9.79


1.50



88.40


81.36


12.50

Diluted earnings per share


1.11


0.76


0.39


0.06



3.51


3.23


0.50

Diluted earnings per ADS


27.82


19.05


9.71


1.49



87.72


80.74


12.41

















Weighted average number of
   ordinary shares outstanding, basic


3,281,411


3,294,167


3,284,028


3,284,028



3,281,729


3,290,312


3,290,312

Weighted average number of
   ADS outstanding, basic


131,256


131,767


131,361


131,361



131,269


131,612


131,612

Weighted average number of
   ordinary shares outstanding, diluted


3,310,275


3,317,373


3,310,586


3,310,586



3,307,109


3,315,478


3,315,478

Weighted average number of
   ADS outstanding, diluted


132,411


132,695


132,423


132,423



132,284


132,619


132,619

















The accompanying notes are an integral part of this press release.












 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(RMB and USD in thousands)




Quarter Ended


Year Ended



 December 31, 


 September 30,  


 December 31,  


 December 31,  


 December 31, 


 December 31, 


 December 31, 



2016


2017


2017


2017


2016


2017


2017



 RMB  


 RMB  


 RMB  


 USD (Note 1) 


 RMB  


 RMB  


 USD (Note 1) 

Cash flows from operating activities:















     Net income  


3,711,606


2,541,610


1,301,913


200,100


11,792,863


10,849,137


1,667,484

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















     Depreciation and amortization 


96,653


210,791


274,298


42,159


327,515


801,804


123,235

     Impairment loss for investments 


12,247


18,337


14,000


2,152


278,906


58,537


8,997

     Share-based compensation cost 


273,975


497,460


593,301


91,188


990,131


2,004,263


308,050

    (Reversal of)/ allowance for provision for doubtful debts 


(2,398)


17,784


28,914


4,444


9,952


60,826


9,349

     Losses/ (gains) on disposal of property,
         equipment and software 


46


(174)


5,118


787


1,276


5,072


780

     Unrealized exchange (gains)/ losses 


(77,989)


118,646


155,511


23,902


(166,638)


437,868


67,299

     Gain on disposal of long-term investments 


(234,050)


-


-


-


(234,050)


(9,595)


(1,475)

     Deferred income taxes 


(14,874)


(180,849)


(83,865)


(12,890)


66,676


(438,043)


(67,326)

     Net equity share of loss/ (gains) from associated companies 


36,050


(2,180)


(20,849)


(3,204)


85,813


12,232


1,880

     Fair value changes of short-term investments 


(95,697)


(112,996)


(81,546)


(12,533)


(304,605)


(389,793)


(59,910)

     Changes in operating assets and liabilities: 















         Accounts receivable 


(1,586,524)


125,160


(391,603)


(60,188)


(1,646,885)


565,228


86,874

         Prepayments and other current assets 


(968,609)


(1,141,181)


(655,332)


(100,723)


(1,824,362)


(4,013,039)


(616,793)

         Accounts payable 


517,861


191,847


403,973


62,090


604,089


1,100,787


169,188

         Salary and welfare payables 


704,875


(177,525)


805,435


123,793


570,466


700,479


107,662

         Taxes payable 


667,002


(577,588)


594,408


91,359


986,390


(155,904)


(23,962)

         Deferred revenue 


2,004,605


53,034


73,352


11,274


2,879,489


(1,291,890)


(198,560)

         Accrued liabilities and other payables 


333,967


73,080


864,426


132,860


1,071,240


1,591,269


244,574

             Net cash provided by operating activities 


5,378,746


1,655,256


3,881,454


596,570


15,488,266


11,889,238


1,827,346
















Cash flows from investing activities:















     Purchase of property, equipment and software 


(463,794)


(512,359)


(572,115)


(87,932)


(1,135,533)


(1,842,933)


(283,254)

     Proceeds from sale of property, equipment and software 


83


465


1,187


182


2,064


4,425


680

     Purchase of other intangible assets 


(2,005)


-


-


-


(4,434)


(25)


(4)

     Purchase of land use right 


-


(6,488)


-


-


(60)


(6,488)


(997)

     Net change in short-term investments
         with terms of three months or less 


(2,661,702)


1,943,208


(3,119,511)


(479,460)


(3,704,332)


(895,298)


(137,605)

     Purchase of short-term investments 


(2,000,000)


(1,865,000)


(1,235,000)


(189,816)


(12,439,000)


(12,491,000)


(1,919,832)

     Proceeds from maturities of short-term investments 


3,890,560


4,851,772


2,656,842


408,349


9,879,319


15,615,544


2,400,065

     Investment in associated companies 


(900)


(81,293)


(154,476)


(23,743)


(364,486)


(235,769)


(36,237)

     Proceeds from disposal of investment in associated company
        and long-term investments 


249,569


340,435


-


-


249,569


350,418


53,858

     Transfer (to)/ from restricted cash 


(713,162)


(22,341)


359,997


55,331


(2,140,421)


(394,021)


(60,560)

     Placement/rollover of matured time deposits 


(6,818,322)


(13,084,711)


(8,183,371)


(1,257,761)


(20,367,430)


(33,984,148)


(5,223,268)

     Proceeds from maturities of time deposits 


3,911,939


8,035,982


7,409,214


1,138,775


16,377,449


22,429,597


3,447,366

     Net change in other assets 


515


(566,205)


(797,504)


(122,574)


(354,519)


(1,799,593)


(276,594)

             Net cash used in investing activities 


(4,607,219)


(966,535)


(3,634,737)


(558,649)


(14,001,814)


(13,249,291)


(2,036,382)
















The accompanying notes are an integral part of this press release.









 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(RMB and USD in thousands)




Quarter Ended


Year Ended



 December 31, 


 September 30,  


 December 31,  


 December 31,  


 December 31, 


 December 31, 


 December 31, 



2016


2017


2017


2017


2016


2017


2017



 RMB  


 RMB  


 RMB  


 USD (Note 1) 


 RMB  


 RMB  


 USD (Note 1) 
















Cash flows from financing activities:















     Proceeds of short-term bank loans 


3,815,678


16,590,069


18,172,348


2,793,039


11,354,866


61,333,209


9,426,742

     Payment of short-term bank loans 


(3,005,010)


(16,133,060)


(17,197,778)


(2,643,250)


(9,860,110)


(58,228,239)


(8,949,516)

     Capital contribution from noncontrolling interests and
         redeemable noncontrolling interests shareholders 


-


60,000


40,000


6,148


4


911,500


140,095

     Repurchase of shares 


-


(933,861)


(436,630)


(67,109)


(1,199,102)


(2,061,591)


(316,862)

     Dividends paid to shareholders 


(692,524)


(735,611)


(624,395)


(95,968)


(2,546,165)


(3,257,607)


(500,685)

             Net cash provided by /(used in) financing activities      


118,144


(1,152,463)


(46,455)


(7,140)


(2,250,507)


(1,302,728)


(200,226)
















             Effect of exchange rate changes on cash      















                 held in foreign currencies 


68,025


26,764


(11,644)


(1,790)


132,067


(12,578)


(1,933)

              Net increase/ (decrease) in cash and cash equivalents 


957,696


(436,978)


188,618


28,991


(631,988)


(2,675,359)


(411,195)

Cash and cash equivalents, beginning of the period


4,481,803


3,012,500


2,575,522


395,850


6,071,487


5,439,499


836,036

Cash and cash equivalents, end of the period


5,439,499


2,575,522


2,764,140


424,841


5,439,499


2,764,140


424,841
















Supplemental disclosures of cash flow information:















     Cash paid for income tax, net of tax refund 


119,585


1,212,178


(238,447)


(36,649)


1,097,178


2,712,875


416,961

Supplemental schedule of non-cash investing 















     and financing activities:















     Fixed asset purchases financed by
         accounts payable and accrued liabilities 


260,277


259,593


293,194


45,063


260,277


293,194


45,063
















The accompanying notes are an integral part of this press release.








 

NETEASE, INC.

UNAUDITED SEGMENT INFORMATION

(RMB and USD in thousands, except percentages)

















Quarter Ended


Year Ended



December 31,


September 30, 


 December 31, 


 December 31, 


December 31,


 December 31, 


 December 31, 



2016


2017


2017


2017


2016


2017


2017



RMB


RMB


RMB


USD (Note 1)


RMB


RMB


USD (Note 1)

Net revenues:















Online game services


8,959,140


8,111,652


8,004,352


1,230,246


27,980,491


36,281,642


5,576,386

E-commerce


1,691,235


2,667,450


4,653,652


715,253


4,541,744


11,670,416


1,793,710

Advertising services


664,815


631,446


736,597


113,213


2,152,379


2,408,823


370,230

E-mail and others


783,830


1,067,241


1,213,035


186,440


3,504,230


3,741,138


575,002

Total net revenues


12,099,020


12,477,789


14,607,636


2,245,152


38,178,844


54,102,019


8,315,328
















Cost of revenues:















Online game services


(3,516,965)


(3,039,004)


(3,087,192)


(474,493)


(9,974,146)


(13,473,339)


(2,070,814)

E-commerce


(1,479,283)


(2,361,429)


(4,310,338)


(662,487)


(3,986,871)


(10,464,714)


(1,608,397)

Advertising services


(223,018)


(202,208)


(212,488)


(32,659)


(749,652)


(797,892)


(122,634)

E-mail and others


(416,475)


(927,573)


(1,253,007)


(192,584)


(1,804,363)


(3,453,381)


(530,775)

Total cost of revenues


(5,635,741)


(6,530,214)


(8,863,025)


(1,362,223)


(16,515,032)


(28,189,326)


(4,332,620)
















Gross profit/ (loss):















Online game services


5,442,175


5,072,648


4,917,160


755,753


18,006,345


22,808,303


3,505,572

E-commerce


211,952


306,021


343,314


52,766


554,873


1,205,702


185,313

Advertising services


441,797


429,238


524,109


80,554


1,402,727


1,610,931


247,596

E-mail and others


367,355


139,668


(39,972)


(6,144)


1,699,867


287,757


44,227

Total gross profit


6,463,279


5,947,575


5,744,611


882,929


21,663,812


25,912,693


3,982,708
















Gross profit/ (loss) margin:













Online game services


60.7%


62.5%


61.4%


61.4%


64.4%


62.9%


62.9%

E-commerce


12.5%


11.5%


7.4%


7.4%


12.2%


10.3%


10.3%

Advertising services


66.5%


68.0%


71.2%


71.2%


65.2%


66.9%


66.9%

E-mail and others


46.9%


13.1%


(3.3%)


(3.3%)


48.5%


7.7%


7.7%
















The accompanying notes are an integral part of this press release.









 

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 = RMB6.5063 on the last trading day of December 2017 (December 29, 2017) 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):


















Quarter Ended


Year Ended



December 31,


September 30, 


December 31,


December 31,


December 31,


December 31,


December 31,



2016


2017


2017


2017


2016


2017


2017



RMB


RMB


RMB


USD (Note 1)


RMB


RMB


USD (Note 1)

Share-based compensation cost included in:















Cost of revenue


114,539


202,887


248,433


38,183


444,187


820,281


126,075

Operating expenses















- Selling and marketing expenses


14,724


22,949


29,925


4,599


52,689


95,382


14,660

- General and administrative expenses


71,201


147,037


165,827


25,487


238,750


581,337


89,350

- Research and development expenses


73,511


124,587


149,116


22,919


254,505


507,263


77,965
















The accompanying notes are an integral part of this press release.











 

NETEASE, INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS

(RMB and USD in thousands, except per share data)

















Quarter Ended


Year Ended



December 31,


September 30, 


 December 31, 


 December 31, 


December 31,


 December 31, 


 December 31, 



2016


2017


2017


2017


2016


2017


2017



RMB


RMB


RMB


USD (Note 1)


RMB


RMB


USD (Note 1)

Net income attributable to the Company's shareholders


3,683,100


2,527,449


1,285,613


197,595


11,604,520


10,707,939


1,645,782

Add: Share-based compensation


273,975


497,460


593,301


91,188


990,131


2,004,263


308,050

         Impairment on investment 


-


-


-


-


266,659


-


-

Non-GAAP net income attributable to
    the Company's shareholders


3,957,075


3,024,909


1,878,914


288,783


12,861,310


12,712,202


1,953,832
















Non-GAAP basic earnings per share


1.21


0.92


0.57


0.09


3.92


3.86


0.59

Non-GAAP basic earnings per ADS


30.15


22.96


14.30


2.20


97.98


96.59


14.85

Non-GAAP diluted earnings per share


1.20


0.91


0.57


0.09


3.89


3.83


0.59

Non-GAAP diluted earnings per ADS


29.88


22.80


14.19


2.18


97.22


95.86


14.73
















The accompanying notes are an integral part of this press release.

Cision View original content:http://www.prnewswire.com/news-releases/netease-reports-fourth-quarter-and-fiscal-year-2017-unaudited-financial-results-300595056.html

SOURCE NetEase, Inc.


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