EX-99.1 2 tm2326530d1_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

 

Contact for Media and Investors:

Margaret Shi

Email: ir@service.netease.com

Tel: (+86) 571-8985-3378

Twitter: https://twitter.com/NetEase_Global

 

NetEase, Inc. (NASDAQ: NTES and HKEX: 9999, “NetEase” or the “Company”) announced its unaudited financial results for the three months and six months ended June 30, 2023 on August 24, 2023. The Company hereby provides its interim report to shareholders of the Company for the six months ended June 30, 2023 under Rule 13.48(1) of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Hong Kong Listing Rules”).

 

Second Quarter 2023 Financial Highlights

 

·Net revenues were RMB24.0 billion (US$3.3 billion), an increase of 3.7% compared with the second quarter of 2022.

 

·Games and related value-added services net revenues were RMB18.8 billion (US$2.6 billion), an increase of 3.6% compared with the second quarter of 2022.

 

·Youdao net revenues were RMB1.2 billion (US$166.4 million), an increase of 26.2% compared with the second quarter of 2022.

 

·Cloud Music net revenues were RMB1.9 billion (US$268.7 million), a decrease of 11.1% compared with the second quarter of 2022.

 

·Innovative businesses and others net revenues were RMB2.1 billion (US$283.7 million), an increase of 9.9% compared with the second quarter of 2022.

 

·Gross profit was RMB14.4 billion (US$2.0 billion), an increase of 11.1% compared with the second quarter of 2022.

 

·Total operating expenses were RMB8.3 billion (US$1.1 billion), an increase of 4.0% compared with the second quarter of 2022.

 

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·Net income attributable to the Company’s shareholders was RMB8.2 billion (US$1.1 billion). Non-GAAP net income from continuing operations attributable to the Company’s shareholders was RMB9.0 billion (US$1.2 billion).[1]

  

·Basic net income per share was US$0.35 (US$1.77 per ADS). Non-GAAP basic net income from continuing operations per share was US$0.39 (US$1.93 per ADS).[1]

 

Second Quarter 2023 and Recent Operational Highlights

 

·Released new hit titles in June across diverse genres and strengthened global appeal:

 

·Justice mobile game led China’s iOS top grossing and download charts following its launch.

 

·Racing Master ranked No. 3 on China’s iOS top grossing chart soon after its launch.

 

·Badlanders ranked No. 2 on China’s iOS top download chart soon after its launch.

 

·Launched Harry Potter: Magic Awakened in the global market, including Japan, North America and Europe.

 

·Achieved steady performances with longstanding flagship titles including the Fantasy Westward Journey series and maintained the popularity of hit games including Eggy PartyIdentity V and Justice.

 

·Bolstered robust game pipeline with ongoing development of multiple highly anticipated games in diversified genres.

 

·Delivered notable growth of subscription-based memberships for Cloud Music, driving meaningful profit margin expansion and setting the stage for future development.

 

·Achieved robust year-over-year revenue growth and improved operating cash flow for Youdao, driven by the strong performance of learning services and online marketing services.

 

“Our steady second quarter results reflect our dedication to producing exceptional content across our businesses, which generated total net revenues of RMB24.0 billion, up nearly 4% year-over-year,” said Mr. William Ding, Chief Executive Officer and Director of NetEase. “Players continue to revere our flagship Fantasy Westward Journey series, while embracing newer titles like Eggy Party that extend our reach in casual games. The June releases of widely acclaimed Justice mobile game and Racing Master further showcase our endless drive to bring players innovative, first-rate games in diversified genres. We believe that each addition to our game portfolio validates our exceptional R&D capabilities and the broad influence our ingenuity has in the marketplace, including expanding the casual game market and altering the face of traditional MMOs.

 

 

[1] As used in this announcement, non-GAAP net income from continuing operations attributable to the Company’s shareholders and non-GAAP basic and diluted net income from continuing operations 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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“In addition to games, our Cloud Music and Youdao businesses remain on track and are generating premium content. Throughout the NetEase family, we prioritize the creation of novel and high-quality products and services that grow our global appeal, elevate user experiences, and advance their respective industries,” Mr. Ding concluded.

 

Second Quarter 2023 Financial Results

 

Net Revenues

 

Net revenues for the second quarter of 2023 were RMB24,011.3 million (US$3,311.3 million), compared with RMB25,046.3 million and RMB23,159.1 million for the preceding quarter and the second quarter of 2022, respectively.

 

Net revenues from games and related value-added services were RMB18,798.6 million (US$2,592.5 million) for the second quarter of 2023, compared with RMB20,065.6 million and RMB18,139.8 million for the preceding quarter and the second quarter of 2022, respectively. Net revenues from the operation of online games accounted for approximately 91.7% of the segment’s net revenues for the second quarter of 2023, compared with 92.7% and 92.8% for the preceding quarter and the second quarter of 2022, respectively. Net revenues from mobile games accounted for approximately 73.6% of net revenues from the operation of online games for the second quarter of 2023, compared with 72.3% and 66.1% for the preceding quarter and the second quarter of 2022, respectively.

 

Net revenues from Youdao were RMB1,206.6 million (US$166.4 million) for the second quarter of 2023, compared with RMB1,163.3 million and RMB956.2 million for the preceding quarter and the second quarter of 2022, respectively.

 

Net revenues from Cloud Music were RMB1,948.5 million (US$268.7 million) for the second quarter of 2023, compared with RMB1,959.8 million and RMB2,191.5 million for the preceding quarter and the second quarter of 2022, respectively.

 

Net revenues from innovative businesses and others were RMB2,057.5 million (US$283.7 million) for the second quarter of 2023, compared with RMB1,857.6 million and RMB1,871.5 million for the preceding quarter and the second quarter of 2022, respectively.

 

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Gross Profit

 

Gross profit for the second quarter of 2023 was RMB14,375.4 million (US$1,982.5 million), compared with RMB14,896.5 million and RMB12,941.5 million for the preceding quarter and the second quarter of 2022, respectively.

 

The quarter-over-quarter decrease in games and related value-added services’ gross profit was primarily due to decreased net revenues from the operation of online games as a result of seasonality. The year-over-year increase was primarily due to increased net revenues from the operation of online games such as Eggy Party, as well as decreased royalty fees due to the termination of certain licensed games.

 

The quarter-over-quarter decrease in Youdao’s gross profit primarily resulted from decreased revenue contribution from its learning services. The year-over-year increase primarily resulted from increased revenue contribution from its online marketing services and learning services.

 

The quarter-over-quarter and year-over-year increases in Cloud Music’s gross profit primarily resulted from increased net revenues from sales of membership subscriptions and continued improvement in cost control measures.

 

The quarter-over-quarter and year-over-year increases in innovative businesses and others’ gross profit were primarily due to increased e-commerce net revenues from Yanxuan.

 

Gross Profit Margin

 

Gross profit margin for games and related value-added services for the second quarter of 2023 was 67.4%, compared with 66.7% and 64.9% for the preceding quarter and the second quarter of 2022, respectively. The quarter-over-quarter and year-over-year increases were primarily attributable to changes in the revenue mix of NetEase’s self-developed, co-developed and licensed games.

 

Gross profit margin for Youdao for the second quarter of 2023 was 47.0%, compared with 51.7% and 42.8% for the preceding quarter and the second quarter of 2022, respectively. The quarter-over-quarter decrease was mainly due to the reduction in revenue contribution from its learning services which have a higher gross profit margin compared to its other products and services. The year-over-year increase was mainly due to increased revenue contribution from its online marketing services and learning services.

 

Gross profit margin for Cloud Music for the second quarter of 2023 was 27.0%, compared with 22.4% and 13.0% for the preceding quarter and the second quarter of 2022, respectively. The quarter-over-quarter and year-over-year improvements were mainly due to the factors enumerated above.

 

Gross profit margin for innovative businesses and others for the second quarter of 2023 was 29.5%, compared with 25.4% and 25.8% for the preceding quarter and the second quarter of 2022, respectively. The quarter-over-quarter and year-over-year increases were mainly due to margin improvement from Yanxuan.

 

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Operating Expenses

 

Total operating expenses for the second quarter of 2023 were RMB8,312.8 million (US$1,146.4 million), compared with RMB7,676.5 million and RMB7,995.2 million for the preceding quarter and the second quarter of 2022, respectively. The quarter-over-quarter increase was mainly due to increased marketing and research and development expenditures related to games and related value-added services. The year-over-year increase was mainly due to higher staff-related costs.

 

Other Income/ (Expenses)

 

Other income/ (expenses) consisted of investment (loss)/ income, interest income, exchange gains/ (losses) and others. The quarter-over-quarter increase was mainly due to net unrealized exchange gains arising from the Company’s U.S. dollar-denominated bank deposits and loans balances as the exchange rate of the U.S. dollar against the RMB fluctuated in the second quarter of 2023. The year-over-year increase was mainly due to higher investment income from fair value changes of equity investments with readily determinable fair value, as well as higher net unrealized exchange gains.

 

Income Tax

 

The Company recorded a net income tax charge of RMB712.1 million (US$98.2 million) for the second quarter of 2023, compared with RMB1,628.6 million and RMB1,259.3 million for the preceding quarter and the second quarter of 2022, respectively. The effective tax rate for the second quarter of 2023 was 8.0%, compared with 19.5% and 22.0% for the preceding quarter and the second quarter of 2022, respectively. The lower effective tax rate for the second quarter of 2023 was primarily due to tax benefits recognized in the quarter. The effective tax rate represents certain estimates by the Company as to 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 RMB8,242.8 million (US$1,136.7 million) for the second quarter of 2023, compared with RMB6,754.6 million and RMB5,291.5 million for the preceding quarter and the second quarter of 2022, respectively.

 

NetEase reported basic net income of US$0.35 per share (US$1.77 per ADS) for the second quarter of 2023, compared with US$0.29 per share (US$1.45 per ADS) and US$0.22 per share (US$1.11 per ADS) for the preceding quarter and the second quarter of 2022, respectively.

 

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Non-GAAP net income from continuing operations attributable to the Company’s shareholders totaled RMB9,017.5 million (US$1,243.6 million) for the second quarter of 2023, compared with RMB7,566.2 million and RMB5,409.8 million for the preceding quarter and the second quarter of 2022, respectively.

 

NetEase reported non-GAAP basic net income from continuing operations of US$0.39 per share (US$1.93 per ADS) for the second quarter of 2023, compared with US$0.32 per share (US$1.62 per ADS) and US$0.23 per share (US$1.14 per ADS) for the preceding quarter and the second quarter of 2022, respectively.

 

Other Financial Information

 

As of June 30, 2023, the Company’s total cash and cash equivalents, current and non-current time deposits and restricted cash, as well as short-term investments balance, minus short-term and long-term loans, totaled RMB99.6 billion (US$13.7 billion), compared with RMB95.6 billion as of December 31, 2022. Cash flow generated from operating activities was RMB7.7 billion (US$1.1 billion) for the second quarter of 2023, compared with RMB6.0 billion and RMB6.6 billion for the preceding quarter and the second quarter of 2022, respectively.

 

Quarterly Dividend

 

On August 24, 2023, the board of directors has approved a dividend of US$0.1050 per share (US$0.5250 per ADS) for the second quarter of 2023 to holders of ordinary shares and holders of ADSs as of the close of business on September 8, 2023, Beijing/Hong Kong Time and New York Time, respectively (“Record Date”), payable in U.S. dollars. The Company’s announcement dated September 10, 2023 (Beijing/Hong Kong Time) announced that such Record Date in Hong Kong for holders of ordinary shares was changed from September 8, 2023 to September 11, 2023. 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 September 11, 2023 (Beijing/ Hong Kong Time). Such Record Date for the holders of American depositary shares held by The Bank of New York Mellon was not affected and remained September 8, 2023. The payment date is expected to be September 19, 2023 for holders of ordinary shares, and on or around September 22, 2023 for holders of ADSs.

 

NetEase paid a dividend of US$0.0930 per share (US$0.4650 per ADS) for the first quarter of 2023 in June 2023.

 

Under the Company’s current dividend policy, the determination to make dividend distributions and the amount of such distribution in any particular quarter will be made at the discretion of its board of directors and will be based upon the Company’s operations and earnings, cash flow, financial condition and other relevant factors.

 

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Share Repurchase Program

 

On November 17, 2022, the Company announced that its board of directors had approved a new share repurchase program of up to US$5.0 billion of the Company’s ADSs and ordinary shares in open market transactions. This share repurchase program commenced on January 10, 2023 following the completion of the prior program on January 9, 2023, and will be in effect for a period not to exceed 36 months from such date. As of June 30, 2023, approximately 6.1 million ADSs had been repurchased under this program for a total cost of US$536.4 million.

 

The extent to which NetEase repurchases its ADSs and its ordinary shares depends upon a variety of factors, including market conditions. These programs may be suspended or discontinued at any time.

 

** The United States dollar (US$) amounts disclosed in this announcement are presented solely for the convenience of the reader. The percentages stated are calculated based on RMB.

 

About NetEase, Inc.

 

NetEase, Inc. (NASDAQ: NTES and HKEX: 9999, “NetEase”) is a leading internet and game services provider centered around premium content. With extensive offerings across its expanding gaming ecosystem, the Company develops and operates some of the most popular and longest running mobile and PC games available in China and globally.

 

Powered by one of the largest in-house game R&D teams focused on mobile, PC and console, NetEase creates superior gaming experiences, inspires players, and passionately delivers value for its thriving community worldwide. By infusing play with culture, and education with technology, NetEase transforms gaming into a meaningful vehicle to build a more entertaining and enlightened world.

 

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Beyond games, NetEase service offerings include its majority-controlled subsidiaries Youdao (NYSE: DAO), an intelligent learning company with industry-leading technology, and Cloud Music (HKEX: 9899), a well-known online music platform featuring a vibrant content community, as well as Yanxuan, NetEase’s private label consumer lifestyle brand.

 

NetEase’s market-leading ESG initiatives are among the most recognized in the global media and entertainment industry, earning it inclusion in 2022 Dow Jones Sustainability World Index, 2022 Dow Jones Sustainability Emerging Markets Index, and 2023 Bloomberg Gender-Equality Index, as well as receiving an “A” rating from MSCI. For more information, please visit: http://ir.netease.com/.

 

Forward Looking Statements

 

This announcement 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. In addition, statements that are not historical facts, including statements about NetEase’s strategies and business plans, its expectations regarding the growth of its business and its revenue and the quotations from management in this announcement are or contain forward-looking statements. NetEase may also make forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission (the “SEC”), in announcements made on the website of The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”), in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. 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 games market will not continue to grow or that NetEase will not be able to maintain its position in that market in China or globally; risks associated with NetEase’s business and operating strategies and its ability to implement such strategies; NetEase’s ability to develop and manage its operations and business; competition for, among other things, capital, technology and skilled personnel; potential changes in government regulation that could adversely affect the industry and geographical markets in which NetEase operates; the risk that NetEase may not be able to continuously develop new and creative online services or that NetEase will not be able to set, or follow in a timely manner, trends in the market; the risk related to economic uncertainty and capital market disruption; the risk related to the expansion of NetEase’s businesses and operations internationally; and the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase’s business and financial results. Further information regarding these and other risks is included in NetEase’s filings with the SEC and announcements on the website of the Hong Kong Stock Exchange. NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.

 

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Non-GAAP Financial Measures

 

NetEase considers and uses non-GAAP financial measures, such as non-GAAP net income from continuing operations attributable to the Company’s shareholders and non-GAAP basic and diluted net income from continuing operations per ADS and per share, 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 from continuing operations attributable to the Company’s shareholders as net income from continuing operations attributable to the Company’s shareholders excluding share-based compensation expenses. Non-GAAP net income from continuing operations attributable to the Company’s shareholders enables NetEase’s management to assess its operating results without considering the impact of share-based compensation expenses. NetEase believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company’s current operating performance and 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 from continuing operations attributable to the Company’s shareholders is that it does not reflect all items of expense/ income that affect our operations. Share-based compensation expenses have been and may continue to be incurred in NetEase’s business and are not reflected in the presentation of non-GAAP net income from continuing operations 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 from continuing operations 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 “Unaudited Reconciliation of GAAP and Non-GAAP Results” at the end of this announcement. NetEase encourages you to review its financial information in its entirety and not rely on a single financial measure.

 

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NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

   December 31,   June 30,   June 30, 
   2022   2023   2023 
    RMB    RMB    USD (Note 1)  
Assets               
Current assets:               
Cash and cash equivalents   24,889,000    12,766,270    1,760,549 
Time deposits   84,947,679    90,195,524    12,438,532 
Restricted cash   2,699,055    2,912,852    401,701 
Accounts receivable, net   5,002,872    5,343,028    736,837 
Inventories   993,636    806,960    111,285 
Prepayments and other current assets, net   5,448,284    5,352,876    738,195 
Short-term investments   7,622,673    6,846,342    944,154 
Total current assets   131,603,199    124,223,852    17,131,253 
                
Non-current assets:               
Property, equipment and software, net   6,342,330    7,347,204    1,013,226 
Land use rights, net   4,121,767    4,147,468    571,962 
Deferred tax assets   1,480,789    1,320,697    182,132 
Time deposits   2,973,840    2,681,840    369,843 
Restricted cash   270    290    40 
Other long-term assets   26,238,790    28,184,371    3,886,803 
Total non-current assets   41,157,786    43,681,870    6,024,006 
Total assets   172,760,985    167,905,722    23,155,259 
                
Liabilities, Redeemable Noncontrolling Interests and Shareholders’ Equity               
Current liabilities:               
Accounts payable   1,507,141    740,607    102,134 
Salary and welfare payables   4,732,941    3,386,236    466,983 
Taxes payable   2,813,096    2,560,047    353,047 
Short-term loans   23,875,704    11,881,623    1,638,551 
Contract liabilities   12,518,890    12,943,844    1,785,038 
Accrued liabilities and other payables   11,381,075    10,826,617    1,493,060 
Total current liabilities   56,828,847    42,338,974    5,838,813 
                
Non-current liabilities:               
Deferred tax liabilities   2,126,120    2,209,583    304,715 
Long-term loans   3,654,964    3,953,664    545,235 
Other long-term liabilities   1,277,574    1,137,672    156,892 
Total non-current liabilities   7,058,658    7,300,919    1,006,842 
Total liabilities   63,887,505    49,639,893    6,845,655 
                
Redeemable noncontrolling interests   136,440    135,415    18,675 
                
NetEase, Inc.’s shareholders’ equity   104,731,317    114,264,783    15,757,834 
Noncontrolling interests   4,005,723    3,865,631    533,095 
Total equity   108,737,040    118,130,414    16,290,929 
                
Total liabilities, redeemable noncontrolling interests and shareholders’ equity   172,760,985    167,905,722    23,155,259 

 

The accompanying notes are an integral part of this announcement.

 

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NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data or per ADS data)

 

   Three Months Ended   Six Months Ended 
   June 30,   March 31,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2022   2023   2023   2023   2022   2023   2023 
   RMB   RMB   RMB   USD (Note 1)   RMB   RMB   USD (Note 1) 
Net revenues   23,159,078    25,046,287    24,011,301    3,311,310    46,714,920    49,057,588    6,765,351 
Cost of revenues   (10,217,587)   (10,149,741)   (9,635,888)   (1,328,851)   (20,937,050)   (19,785,629)   (2,728,563)
Gross profit   12,941,491    14,896,546    14,375,413    1,982,459    25,777,870    29,271,959    4,036,788 
                                    
Operating expenses:                                   
Selling and marketing expenses   (3,300,705)   (2,905,046)   (3,271,705)   (451,188)   (6,216,194)   (6,176,751)   (851,813)
General and administrative expenses   (1,112,755)   (1,021,678)   (1,132,147)   (156,130)   (2,128,524)   (2,153,825)   (297,026)
Research and development expenses   (3,581,700)   (3,749,732)   (3,908,907)   (539,063)   (6,979,782)   (7,658,639)   (1,056,175)
Total operating expenses   (7,995,160)   (7,676,456)   (8,312,759)   (1,146,381)   (15,324,500)   (15,989,215)   (2,205,014)
Operating profit   4,946,331    7,220,090    6,062,654    836,078    10,453,370    13,282,744    1,831,774 
                                    
Other income/ (expenses):                                   
Investment(loss)/ income, net   (707,489)   471,368    287,691    39,674    (1,256,191)   759,059    104,679 
Interest income, net   505,991    776,030    935,578    129,022    964,235    1,711,608    236,042 
Exchange gains/ (losses), net   865,283    (386,568)   1,464,956    202,027    767,403    1,078,388    148,717 
Other, net   121,175    258,033    120,826    16,663    337,505    378,859    52,247 
Income before tax   5,731,291    8,338,953    8,871,705    1,223,464    11,266,322    17,210,658    2,373,459 
Income tax   (1,259,320)   (1,628,559)   (712,090)   (98,202)   (2,478,591)   (2,340,649)   (322,790)
                                    
Net income from continuing operations   4,471,971    6,710,394    8,159,615    1,125,262    8,787,731    14,870,009    2,050,669 
Net income from discontinued operations   624,864    -    -    -    624,864    -    - 
Net income   5,096,835    6,710,394    8,159,615    1,125,262    9,412,595    14,870,009    2,050,669 
                                    
Accretion of redeemable noncontrolling interests   (754)   (860)   (868)   (120)   (1,487)   (1,728)   (238)
Net loss attributable to noncontrolling interests   195,395    45,100    84,020    11,587    274,391    129,120    17,806 
Net income attributable to the Company’s shareholders   5,291,476    6,754,634    8,242,767    1,136,729    9,685,499    14,997,401    2,068,237 
Including:                                   
-Net income from continuing operations attributable to the Company’s shareholders   4,666,612    6,754,634    8,242,767    1,136,729    9,060,635    14,997,401    2,068,237 
-Net income from discontinued operations attributable to the Company’s shareholders   624,864    -    -    -    624,864    -    - 
                                    
Basic net income per share *   1.62    2.10    2.56    0.35    2.96    4.66    0.64 
-Continuing operations   1.43    2.10    2.56    0.35    2.77    4.66    0.64 
-Discontinued operations   0.19    -    -    -    0.19    -    - 
                                    
Basic net income per ADS *   8.08    10.49    12.80    1.77    14.78    23.29    3.21 
-Continuing operations   7.13    10.49    12.80    1.77    13.83    23.29    3.21 
-Discontinued operations   0.95    -    -    -    0.95    -    - 
                                    
Diluted net income per share *   1.60    2.07    2.54    0.35    2.93    4.61    0.64 
-Continuing operations   1.41    2.07    2.54    0.35    2.74    4.61    0.64 
-Discontinued operations   0.19    -    -    -    0.19    -    - 
                                    
Diluted net income per ADS *   8.00    10.37    12.69    1.75    14.63    23.05    3.18 
-Continuing operations   7.05    10.37    12.69    1.75    13.69    23.05    3.18 
-Discontinued operations   0.95    -    -    -    0.94    -    - 
                                    
Weighted average number of ordinary shares used in calculating net income per share *                                   
Basic   3,274,695    3,221,083    3,218,783    3,218,783    3,275,980    3,219,926    3,219,926 
Diluted   3,305,504    3,256,511    3,248,916    3,248,916    3,310,809    3,252,707    3,252,707 

 

*  Each ADS represents five ordinary shares.

 

The accompanying notes are an integral part of this announcement.

 

 11 

 

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   March 31,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2022   2023   2023   2023   2022   2023   2023 
   RMB     RMB     RMB     USD (Note 1)   RMB     RMB     USD (Note 1)  
Cash flows from operating activities:                                   
Net income   5,096,835    6,710,394    8,159,615    1,125,262    9,412,595    14,870,009    2,050,669 
Net income from discontinued operations   (624,864)   -    -    -    (624,864)   -    - 
Adjustments to reconcile net income to net cash provided by operating activities:                                   
Depreciation and amortization   609,036    1,082,269    661,363    91,206    1,375,216    1,743,632    240,458 
Fair value changes of equity security investments   735,159    (226,720)   (78,035)   (10,762)   2,276,161    (304,755)   (42,028)
Impairment losses of investments and other long-term assets   243,085    -    47,870    6,602    248,085    47,870    6,602 
Fair value changes of short-term investments   (119,882)   (137,916)   (96,884)   (13,361)   (199,658)   (234,800)   (32,380)
Share-based compensation cost   764,447    822,413    787,862    108,652    1,510,601    1,610,275    222,067 
Allowance for expected credit losses   10,965    20,720    8,540    1,178    10,652    29,260    4,035 
Losses/ (gains) on disposal of property, equipment and software   481    (610)   252    35    1,926    (358)   (49)
Unrealized exchange (gains)/ losses   (890,066)   385,961    (1,466,295)   (202,211)   (792,032)   (1,080,334)   (148,985)
Gains on disposal of long-term investments   -    (5,768)   (16,382)   (2,259)   (4,000)   (22,150)   (3,055)
Deferred income taxes   (169,539)   577,666    (334,380)   (46,113)   145,689    243,286    33,551 
Share of results on equity method investees   (134,569)   (95,808)   (129,292)   (17,830)   (1,046,067)   (225,100)   (31,043)
Changes in operating assets and liabilities:                                   
Accounts receivable   82,282    (1,116,282)   770,551    106,264    294,357    (345,731)   (47,678)
Inventories   17,791    117,330    69,410    9,572    121,382    186,740    25,753 
Prepayments and other assets   (163,612)   125,827    (7,233)   (997)   (733,455)   118,594    16,355 
Accounts payable   48,452    (612,939)   (115,791)   (15,968)   (43,921)   (728,730)   (100,496)
Salary and welfare payables   782,789    (2,225,737)   758,106    104,548    (973,435)   (1,467,631)   (202,396)
Taxes payable   (538,234)   733,716    (992,892)   (136,926)   (464,788)   (259,176)   (35,742)
Contract liabilities   279,669    489,991    (41,196)   (5,681)   201,469    448,795    61,892 
Accrued liabilities and other payables   600,934    (643,836)   (306,784)   (42,312)   497,798    (950,620)   (131,099)
Net cash provided by operating activities   6,631,159    6,000,671    7,678,405    1,058,899    11,213,711    13,679,076    1,886,431 
                                    
Cash flows from investing activities:                                   
Purchase of property, equipment and software   (445,054)   (652,939)   (520,544)   (71,786)   (1,194,415)   (1,173,483)   (161,831)
Proceeds from sale of property, equipment and software   23,338    2,504    4,292    592    35,903    6,796    937 
Purchase of intangible assets, content and licensed copyrights   (85,121)   (826,682)   (283,321)   (39,072)   (228,957)   (1,110,003)   (153,076)
Net change in short-term investments with terms of three months or less   (159,173)   (723,151)   1,630,013    224,789    1,551,672    906,862    125,062 
Purchase of short-term investments with terms over three months   -    -    -    -    (1,250,000)   -    - 
Proceeds from maturities of short-term investments with terms over three months   1,459,172    104,269    -    -    2,013,003    104,269    14,379 
Investment in long-term investments   (899,968)   (1,229,048)   (270,228)   (37,266)   (2,590,239)   (1,499,276)   (206,760)
Proceeds from disposal of long-term investments   6,413    41,280    16,531    2,280    40,650    57,811    7,973 
Placement/ rollover of matured time deposits   (33,122,029)   (36,320,103)   (10,874,831)   (1,499,708)   (57,168,026)   (47,194,934)   (6,508,479)
Proceeds from maturities of time deposits   32,100,141    22,332,349    21,918,791    3,022,740    46,799,936    44,251,140    6,102,511 
Change in other long-term assets   (60,900)   (120,841)   (31,189)   (4,301)   (230,445)   (152,030)   (20,966)
Net cash (used in)/ provided by investing activities   (1,183,181)   (17,392,362)   11,589,514    1,598,268    (12,220,918)   (5,802,848)   (800,250)

 

The accompanying notes are an integral part of this announcement.

 

 12 

 

 

NETEASE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   March 31,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2022   2023   2023   2023   2022   2023   2023 
   RMB   RMB   RMB   USD (Note 1)   RMB   RMB   USD (Note 1) 
Cash flows from financing activities:                                   
Net changes from loans with terms of three months or less   2,721,487    2,638,040    (14,970,935)   (2,064,586)   6,124,682    (12,332,895)   (1,700,784)
Proceed of loans with terms over three months   1,641,708    1,279,559    2,171,541    299,469    3,556,918    3,451,100    475,928 
Payment of loans with terms over three months   (32,273)   (40,422)   (3,233,500)   (445,920)   (32,273)   (3,273,922)   (451,494)
Net Amounts received/ (paid) related to capital contribution from or repurchase of noncontrolling interests shareholders   33,200    24,349    22,228    3,065    (68,842)   46,577    6,423 
Cash paid for repurchase of NetEase’s ADSs/ purchase of subsidiaries’ ADSs and shares   (2,119,613)   (2,116,757)   (2,195,210)   (302,733)   (3,363,530)   (4,311,967)   (594,647)
Dividends paid to NetEase’s shareholders   (1,403,637)   (1,212,340)   (2,119,316)   (292,267)   (3,087,109)   (3,331,656)   (459,456)
Net cash provided by/ (used in) financing activities   840,872    572,429    (20,325,192)   (2,802,972)   3,129,846    (19,752,763)   (2,724,030)
                                    
Effect of exchange rate changes on cash, cash equivalents and restricted cash held in foreign currencies   74,898    15,498    (47,876)   (6,602)   53,696    (32,378)   (4,465)
Net increase/ (decrease) in cash, cash equivalents and restricted cash   6,363,748    (10,803,764)   (1,105,149)   (152,407)   2,176,335    (11,908,913)   (1,642,314)
Cash, cash equivalents and restricted cash, at the beginning of the period   13,188,702    27,588,325    16,784,561    2,314,697    17,376,115    27,588,325    3,804,604 
Cash, cash equivalents and restricted cash, at end of the period   19,552,450    16,784,561    15,679,412    2,162,290    19,552,450    15,679,412    2,162,290 
                                    
Supplemental disclosures of cash flow information:                                   
Cash paid for income tax, net   1,055,096    1,074,579    1,625,045    224,104    2,570,426    2,699,624    372,295 
Cash paid for interest expense   93,079    275,714    326,646    45,047    130,820    602,360    83,069 

 

The accompanying notes are an integral part of this announcement.

 

 13 

 

 

NETEASE, INC.

UNAUDITED SEGMENT INFORMATION

(in thousands, except percentages)

 

   Three Months Ended   Six Months Ended 
   June 30,   March 31,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2022   2023   2023   2023   2022   2023   2023 
   RMB   RMB   RMB   USD (Note 1)   RMB   RMB   USD (Note 1) 
Net revenues:                                   
Games and related value-added services   18,139,843    20,065,597    18,798,646    2,592,452    36,781,657    38,864,243    5,359,624 
Youdao   956,225    1,163,270    1,206,634    166,402    2,156,766    2,369,904    326,825 
Cloud Music   2,191,510    1,959,841    1,948,539    268,716    4,258,716    3,908,380    538,990 
Innovative businesses and others   1,871,500    1,857,579    2,057,482    283,740    3,517,781    3,915,061    539,912 
Total net revenues   23,159,078    25,046,287    24,011,301    3,311,310    46,714,920    49,057,588    6,765,351 
                                    
Cost of revenues:                                   
Games and related value-added services   (6,375,598)   (6,683,048)   (6,122,836)   (844,379)   (13,427,648)   (12,805,884)   (1,766,012)
Youdao   (546,498)   (561,420)   (639,459)   (88,185)   (1,109,189)   (1,200,879)   (165,609)
Cloud Music   (1,905,954)   (1,520,378)   (1,422,855)   (196,221)   (3,721,603)   (2,943,233)   (405,890)
Innovative businesses and others   (1,389,537)   (1,384,895)   (1,450,738)   (200,066)   (2,678,610)   (2,835,633)   (391,052)
Total cost of revenues   (10,217,587)   (10,149,741)   (9,635,888)   (1,328,851)   (20,937,050)   (19,785,629)   (2,728,563)
                                    
Gross profit:                                   
Games and related value-added services   11,764,245    13,382,549    12,675,810    1,748,073    23,354,009    26,058,359    3,593,612 
Youdao   409,727    601,850    567,175    78,217    1,047,577    1,169,025    161,216 
Cloud Music   285,556    439,463    525,684    72,495    537,113    965,147    133,100 
Innovative businesses and others   481,963    472,684    606,744    83,674    839,171    1,079,428    148,860 
Total gross profit   12,941,491    14,896,546    14,375,413    1,982,459    25,777,870    29,271,959    4,036,788 
                                    
Gross profit margin:                                   
Games and related value-added services   64.9%   66.7%   67.4%   67.4%   63.5%   67.0%   67.0%
Youdao   42.8%   51.7%   47.0%   47.0%   48.6%   49.3%   49.3%
Cloud Music   13.0%   22.4%   27.0%   27.0%   12.6%   24.7%   24.7%
Innovative businesses and others   25.8%   25.4%   29.5%   29.5%   23.9%   27.6%   27.6%

 

The accompanying notes are an integral part of this announcement.

 

 14 

 

 

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 = RMB7.2513 on the last trading day of June 2023 (June 30, 2023) 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 June 30, 2023, or at any other certain date.

 

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):

 

   Three Months Ended   Six Months Ended 
   June 30,   March 31,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2022   2023   2023   2023   2022   2023   2023 
   RMB   RMB   RMB   USD (Note 1)   RMB   RMB   USD (Note 1) 
Share-based compensation cost included in:                                   
Cost of revenues   173,840    203,514    193,001    26,616    371,975    396,515    54,682 
Operating expenses                                   
Selling and marketing expenses   31,817    32,353    31,069    4,285    62,190    63,422    8,746 
General and administrative expenses   297,891    294,281    281,326    38,797    576,953    575,607    79,380 
Research and development expenses   260,899    292,265    282,466    38,954    499,483    574,731    79,259 

 

The accompanying notes are an integral part of this announcement.

 

Note 3: The financial information prepared and presented in this announcement might be different from those published and to be published by NetEase’s listed subsidiaries to meet the disclosure requirements under U.S. GAAP or different accounting standards requirement.

 

Note 4: The unaudited reconciliation of GAAP and non-GAAP results is set out as follows in RMB and USD (in thousands, except per share data or per ADS data):

 

   Three Months Ended   Six Months Ended 
   June 30,   March 31,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2022   2023   2023   2023   2022   2023   2023 
   RMB   RMB   RMB   USD (Note 1)   RMB   RMB   USD (Note 1) 
Net income  from continuing operations attributable to the Company’s shareholders   4,666,612    6,754,634    8,242,767    1,136,729    9,060,635    14,997,401    2,068,237 
Add: Share-based compensation   743,198    811,600    774,683    106,834    1,466,801    1,586,283    218,758 
Non-GAAP net income from continuing operations attributable to the Company’s shareholders   5,409,810    7,566,234    9,017,450    1,243,563    10,527,436    16,583,684    2,286,995 
                                    
Non-GAAP basic net income from continuing operations per share *   1.65    2.35    2.80    0.39    3.21    5.15    0.71 
Non-GAAP basic net income from continuing operations per ADS *   8.26    11.74    14.01    1.93    16.07    25.75    3.55 
Non-GAAP diluted net income from continuing operations per share *   1.64    2.32    2.78    0.38    3.18    5.10    0.70 
Non-GAAP diluted net income from continuing operations per ADS *   8.18    11.62    13.88    1.91    15.90    25.49    3.52 

 

* Each ADS represents five ordinary shares.

The accompanying notes are an integral part of this announcement.

 

 15 

 

 

Note 5: Reconciliation between U.S. GAAP and International Financial Reporting Standards

  

The Company’s consolidated financial statements for its primary listing in the United States are prepared in accordance with U.S. GAAP. As a secondary listed issuer of the Hong Kong Stock Exchange, the Company is required to include a reconciliation statement in its annual financial statements starting from the first full financial year commencing on or after January 1, 2022, and in all subsequent annual and interim financial statements.

 

For the interim reporting with the Hong Kong Stock Exchange for the six months ended June 30, 2023, the Company has prepared the reconciliation statement of the unaudited condensed consolidated statements of income for the six months ended June 30, 2023 and the unaudited condensed consolidated balance sheets as at June 30, 2023 between the accounting policies adopted of the relevant period in accordance with U.S. GAAP and the International Financial Reporting Standards (the “IFRSs”) issued by the International Accounting Standards Board (together, the “Reconciliation Statement”).

 

PricewaterhouseCoopers, the auditor of the Company in Hong Kong, has performed a limited assurance engagement on the Reconciliation Statement in accordance with International Standard on Assurance Engagements 3000 (Revised) “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information”.

 

The unaudited condensed consolidated financial information is prepared in accordance with U.S. GAAP, which differ in certain respects from IFRSs. The effects of material differences between the unaudited condensed consolidated financial information prepared under U.S. GAAP and IFRSs are as follows in RMB (in thousands):

 

Reconciliation of unaudited condensed consolidated statements of income (Extract):

 

       For the Six Months Ended June 30, 2022 IFRSs adjustments     
   Amounts as
reported under U.S.
   Investments measured at fair
value
   Redeemable
preferred shares
   Amounts as
reported under
 
   GAAP   (Note (a))   (Note (b))   IFRSs 
Investment (loss)/income, net   (1,256,191)   423,616    -    (832,575)
Income before tax   11,266,322    423,616    -    11,689,938 
Income tax   (2,478,591)   (915)   -    (2,479,506)
Net income   9,412,595    422,701    -    9,835,296 
Accretion of redeemable noncontrolling interests   (1,487)   -    1,487    - 
Net loss attributable to noncontrolling interests   274,391    -    (5,116)   269,275 
Net income attributable to the Company’s shareholders   9,685,499    422,701    (3,629)   10,104,571 

 

       For the Six Months Ended June 30, 2023 IFRSs adjustments     
   Amounts as
reported under U.S.
   Investments measured at fair
value
   Redeemable
preferred shares
   Amounts as
reported under
 
   GAAP   (Note (a))   (Note (b))   IFRSs 
Investment income, net   759,059    694,453    -    1,453,512 
Income before tax   17,210,658    694,453    -    17,905,111 
Income tax   (2,340,649)   15,289    -    (2,325,360)
Net income   14,870,009    709,742    -    15,579,751 
Accretion of redeemable noncontrolling interests   (1,728)   -    1,728    - 
Net loss attributable to noncontrolling interests   129,120    -    (3,879)   125,241 
Net income attributable to the Company’s shareholders   14,997,401    709,742    (2,151)   15,704,992 

 

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Reconciliation of unaudited condensed consolidated balance sheets (Extract):

 

       As of December 31, 2022 IFRSs adjustments     
   Amounts as
reported under U.S.
   Investments measured at fair
value
   Redeemable
preferred shares
   Amounts as
reported under
 
   GAAP   (Note (a))   (Note (b))   IFRSs 
Other long-term assets   26,238,790    (13,305,116)   -    12,933,674 
Financial assets at fair value through profit or loss   -    16,445,317    -    16,445,317 
Total Assets   172,760,985    3,140,201    -    175,901,186 
Redeemable preferred shares   -    -    168,215    168,215 
Deferred tax liabilities   2,126,120    27,969    -    2,154,089 
Total Liabilities   63,887,505    27,969    168,215    64,083,689 
Redeemable noncontrolling interests   136,440    -    (136,440)   - 
Total equity   108,737,040    3,112,232    (31,775)   111,817,497 
Total liabilities, redeemable noncontrolling interests and shareholders’ equity   172,760,985    3,140,201    -    175,901,186 

 

       As of June 30, 2023 IFRSs adjustments     
   Amounts as
reported under U.S.
   Investments measured at fair
value
   Redeemable
preferred shares
   Amounts as
reported under
 
   GAAP   (Note (a))   (Note (b))   IFRSs 
Other long-term assets   28,184,371    (14,868,819)   -    13,315,552 
Financial assets at fair value through profit or loss   -    18,703,473    -    18,703,473 
Total Assets   167,905,722    3,834,654    -    171,740,376 
Redeemable preferred shares   -    -    168,215    168,215 
Deferred tax liabilities   2,209,583    12,680    -    2,222,263 
Total Liabilities   49,639,893    12,680    168,215    49,820,788 
Redeemable noncontrolling interests   135,415    -    (135,415)   - 
Total equity   118,130,414    3,821,974    (32,800)   121,919,588 
Total liabilities, redeemable noncontrolling interests and shareholders' equity   167,905,722    3,834,654    -    171,740,376 

 

Notes:

 

Basis of Preparation

 

The Company is responsible for preparation of the Reconciliation Statement in accordance with the relevant requirements of the Hong Kong Listing Rules and relevant guidance in HKEX-GL111-22. The Reconciliation Statement was prepared based on the Company’s unaudited interim condensed consolidated financial information for the six months ended June 30, 2023 prepared under U.S. GAAP, with material adjustments made (if any) thereto in arriving at the unaudited financial information of the Company prepared under IFRSs. The adjustments reflect the material differences between the Company’s accounting policies under U.S. GAAP and IFRSs.

 

Note a. Investments measured at fair value

 

Under U.S. GAAP, the investments in convertible redeemable preferred shares and ordinary shares with preferential rights that are issued by privately-held companies and therefore without readily determinable fair values could be accounted for using measurement alternative as an accounting policy choice. NetEase elected the measurement alternative to record these investments at cost, less impairment, and plus or minus subsequent adjustments for observable price changes.

 

Under IFRSs, these investments were classified as financial assets at fair value through profit or loss and measured at fair value with changes in fair value recognized through profit or loss.

 

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Note b. Redeemable Preferred Shares

 

Under U.S. GAAP, SEC guidance provides for mezzanine- equity (temporary equity) category in addition to the financial liability and permanent equity categories. The purpose of this “in- between” category is to indicate that a security whose redemption is outside the control of the issuer may not be classified as a permanent part of equity. NetEase classified the redeemable preferred shares issued by certain subsidiaries as redeemable noncontrolling interests in the condensed consolidated balance sheets and recorded them initially at fair value, net of issuance costs. NetEase recognized accretion to the respective redemption value of the redeemable preferred shares over the period starting from issuance date to the earliest redemption date.

 

Under IFRSs, there is no concept of mezzanine or temporary equity classification. NetEase designated the redeemable preferred shares as financial liabilities at fair value through profit or loss which are measured at fair value. Subsequent to initial recognition, the amounts of changes in fair value that were attributed to changes in credit risk of the issuer were recognized in other comprehensive income, and the remaining amounts of changes in fair value were recognized in the profit or loss.

 

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