NetEase Releases Q1 2024 Financial Report

Hangzhou, China, May 23, 2024 - Leading internet and gaming service provider NetEase, Inc. (NASDAQ: NTES, HKEX: 9999, "NetEase" or the "Company"), today announced its unaudited financial results for the first quarter ended March 31, 2024.

Key Financial Highlights for Q1 2024:

• Net revenue was RMB 26.9 billion (USD 3.7 billion), a 7.2% year-over-year increase.
• Net revenue from games and related value-added services was RMB 21.5 billion (USD 3.0 billion), up 7.0% year-over-year.
• Net revenue from Youdao was RMB 1.4 billion (USD 192.8 million), a 19.7% year-over-year increase.
• Net revenue from Cloud Music was RMB 2.0 billion (USD 281.1 million), a 3.6% year-over-year increase.
• Net revenue from innovation and other businesses was RMB 2.0 billion (USD 272.8 million), up 6.1% year-over-year.
• Gross profit was RMB 17.0 billion (USD 2.4 billion), a 14.2% year-over-year increase.
• Total operating expenses were RMB 9.4 billion (USD 1.3 billion), up 22.4% year-over-year.
• Net profit attributable to the Company's shareholders was RMB 7.6 billion (USD 1.1 billion). Non-GAAP net profit attributable to the Company's shareholders was RMB 8.5 billion (USD 1.2 billion).
• Basic earnings per share were $0.33 (basic earnings per American depositary share were $1.65). Non-GAAP basic earnings per share were $0.37 (non-GAAP basic earnings per American depositary share were $1.84).

Q1 2024 and Recent Operational Highlights:

• Many popular games continued to be well-received by players, demonstrating long-term sustainability with a loyal user base.
• Popular games like "Egg Party," "Identity V," and "The Land of Warriors" remained favorites among players. "Identity V" performed well in Q1, with strong momentum during its sixth-anniversary celebration, reaching a new high in daily active users in May.
• Our popular games were recently launched in more regions, expanding our reach.
• "All-Star Streetball Party" entered the markets of Hong Kong, Macau, and Taiwan in April, immediately topping the iOS download charts in these regions, ranking first in Taiwan and Hong Kong's iOS bestseller lists.
• After a season update in April, "Top Speed" once again topped the iOS bestseller list in Taiwan and rose to first and second place in Macau and Hong Kong, respectively.
• We introduced exciting new games for domestic players in Q1. "Beyond the World" quickly rose to the top of the China iOS download chart and reached third place in the iOS bestseller list with the release of new content.
• With a strong game product lineup, we have more highly anticipated new releases in the pipeline, including the open-world action-adventure RPG "Sixteen Sounds of Yan Yun" in the third quarter, expanded releases of the mobile game "Justice," and other noteworthy titles like "Endless Hell," "Seven Days World," and "Marvel Frontline."
• We updated our distribution agreement with Blizzard Entertainment to bring beloved games back to the Chinese market and expand cooperation with Microsoft Gaming.
• Youdao focused strategically on digital content services, online marketing services, and AI-driven membership subscription services, achieving net profit for two consecutive quarters for the first time.
• Cloud Music continued to focus on its core music business, with recent comprehensive upgrades to the NetEase Cloud Music app aimed at building a music-centric ecosystem for sustainable long-term growth.

"In addition to witnessing the enduring success of flagship games, we continue to explore diversification in categories, forging new milestones in game operations, user communities, and external partnerships. With a high-quality and diverse product matrix, we have laid a solid foundation to deliver premium gaming experiences to players worldwide," said Mr. Ding Lei, CEO and Director of NetEase. "Backed by strong R&D capabilities, we are committed to innovation and category expansion, collaborating with global talents and partners to explore more opportunities for mutual success.

"In the vast NetEase family, both Cloud Music and Youdao have performed well, consistently delivering innovative content in their respective fields. In 2024, we will continue to pour our passion into refining products and content, expanding markets, providing excellent experiences, and ultimately creating value for our users and the company," Mr. Ding Lei concluded.

Q1 2024 Financial Performance:

Net Revenue:

Net revenue for Q1 2024 was RMB 26.9 billion (USD 3.7 billion), compared to RMB 27.1 billion in the previous quarter and RMB 25.0 billion in the same period last year.

Net revenue from games and related value-added services in Q1 2024 was RMB 21.5 billion (USD 3.0 billion), compared to RMB 20.9 billion in the previous quarter and RMB 20.1 billion in the same period last year. This quarter, net revenue from online games accounted for approximately 95.2% of this segment's net revenue, compared to 93.4% in the previous quarter and 92.7% in the same period last year. Net revenue from mobile games accounted for approximately 78.6% of net revenue from online games this quarter, compared to 76.7% in the previous quarter and 72.3% in the same period last year.

Net revenue from Youdao in Q1 2024 was RMB 1.4 billion (USD 192.8 million), compared to RMB 1.5 billion in the previous quarter and RMB 1.2 billion in the same period last year. In the first quarter of 2024, the net revenue of Cloud Music was 20 billion RMB (281.1 million USD), the same as the previous quarter and the same period last year.

In the first quarter of 2024, the net revenue from innovation and other businesses was 20 billion RMB (272.8 million USD), compared to 28 billion RMB and 19 billion RMB in the previous quarter and the same period last year, respectively.

Gross Profit

In the first quarter of 2024, the gross profit was 170 billion RMB (24 billion USD), compared to 168 billion RMB and 149 billion RMB in the previous quarter and the same period last year, respectively.

The gross profit growth in gaming and related value-added services was mainly due to increased net revenue from mobile games like "Egg Party" and several newly launched games.

The decrease in gross profit for Youdao was mainly due to a decline in revenue contribution from its learning services and smart hardware. The year-over-year increase was primarily driven by increased revenue contribution from its online marketing services.

The gross profit growth for Cloud Music was mainly due to one-time adjustments in certain copyright fees, increased subscription revenue, and continuous improvement in cost control.

The decrease in gross profit for innovation and other businesses was mainly influenced by seasonal factors, with declines in net revenue from selected e-commerce and advertising businesses. The year-over-year increase was mainly due to gross profit growth in selected and other businesses within this segment.

Gross Margin

In the first quarter of 2024, the gross margin for gaming and related value-added services was 69.5%, the same as the previous quarter and the same period last year. The year-over-year increase was mainly due to changes in revenue contribution from different platforms and self-developed games.

In the first quarter of 2024, Youdao's gross margin was 49.0%, compared to 49.9% and 51.7% in the previous quarter and the same period last year, respectively. The decrease in gross margin was mainly due to increased revenue contribution from online marketing services, resulting in a lower margin compared to other products and services.

In the first quarter of 2024, the gross margin for Cloud Music was 38.0%, compared to 30.3% and 22.4% in the previous quarter and the same period last year, respectively. The increase in gross margin was mainly due to the aforementioned reasons. The one-time adjustment in copyright fees increased the gross margin by approximately five percentage points in the first quarter of 2024.

In the first quarter of 2024, the gross margin for innovation and other businesses was 33.4%, compared to 34.4% and 25.4% in the previous quarter and the same period last year, respectively. The decrease in gross margin was mainly due to reduced revenue contribution from advertising services. The year-over-year increase was mainly driven by improved gross margins in selected and other businesses within this segment.

Operating Expenses

Total operating expenses in the first quarter of 2024 were 9.4 billion RMB (1.3 billion USD), compared to 10 billion RMB and 7.7 billion RMB in the previous quarter and the same period last year, respectively. The decrease was mainly due to reduced research and development investment in gaming and related value-added services, as well as lower marketing and personnel-related costs. The year-over-year increase was mainly due to higher marketing and personnel-related costs.

Other Income/(Expenses)

Other income/(expenses) include investment gains/losses, interest income, exchange gains/losses, and others. The increase in the first quarter of 2024 was mainly due to the recognition of net exchange gains, compared to net exchange losses in the previous quarter. The year-over-year increase was mainly driven by increased interest income from the improvement in net cash balance and the recognition of net exchange gains in the first quarter of 2024, compared to net exchange losses in the same period last year.

Income Tax

The income tax expense recognized in the first quarter of 2024 was 1.5 billion RMB (205.8 million USD), compared to 1.1 billion RMB and 1.6 billion RMB in the previous quarter and the same period last year, respectively. The effective tax rate for the first quarter of 2024 was 16.0%, compared to 13.8% and 19.5% in the previous quarter and the same period last year, respectively. The effective tax rate reflects the company's estimates of tax obligations and rights applicable for each quarter.

Net Profit and Net Profit under Non-GAAP

The net profit attributable to the company's shareholders in the first quarter of 2024 was 7.6 billion RMB (1.1 billion USD), compared to 6.6 billion RMB and 6.8 billion RMB in the previous quarter and the same period last year, respectively.

The basic earnings per share in the first quarter of 2024 were 0.33 USD (basic earnings per American depositary share were 1.65 USD), compared to 0.28 USD (basic earnings per American depositary share were 1.42 USD) in the previous quarter and 0.29 USD (basic earnings per American depositary share were 1.45 USD) in the same period last year.

Under non-GAAP, the net profit attributable to the company's shareholders in the first quarter of 2024 was 8.5 billion RMB (1.2 billion USD), compared to 7.4 billion RMB and 7.6 billion RMB in the previous quarter and the same period last year, respectively.

Under non-GAAP, the basic earnings per share in the first quarter of 2024 were 0.37 USD (basic earnings per American depositary share were 1.84 USD), compared to 0.32 USD (basic earnings per American depositary share were 1.59 USD) in the previous quarter and 0.33 USD (basic earnings per American depositary share were 1.63 USD) in the same period last year.

Other Financial Information

As of March 31, 2024, the company's net cash balance (cash and cash equivalents, current and non-current deposits, restricted cash, and short-term investment balances, minus short-term and long-term borrowings) was 113.4 billion RMB (15.7 billion USD), compared to 110.9 billion RMB as of December 31, 2023. The net cash flow from operating activities in the first quarter of 2024 was 9.6 billion RMB (1.3 billion USD), compared to 11.8 billion RMB and 6.0 billion RMB in the previous quarter and the same period last year, respectively. Quarterly Dividend

The board has approved the first quarter dividend for 2024 at $0.0990 per share ($0.4950 per American Depositary Share), payable in US dollars to registered common stockholders and American Depositary Share holders after the market closes on June 6, 2024, in Beijing/Hong Kong time and New York time. To qualify for the dividend, common stockholders must transfer all valid share transfer records along with relevant stock certificates to the Hong Kong branch of Netease's share transfer registrar, Central Registration Limited, located at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, by 4:30 PM on June 6, 2024, Beijing/Hong Kong time. The expected payment date for common stock dividends is June 17, 2024, and for American Depositary Share dividends is around June 21, 2024.

The fourth quarter dividend for 2023 was $0.21597 per share ($1.07985 per American Depositary Share) and was paid in March 2024.

As per the company's current dividend policy, the distribution and amount of dividends for any specific quarter will be determined at the discretion of the board based on the company's operations, profitability, cash flow, financial condition, and other relevant factors.

Share Repurchase Program

On November 17, 2022, the company announced board approval for a share repurchase program to repurchase up to $5 billion worth of outstanding American Depositary Shares and common stock in the open market. The program commenced on January 10, 2023, and will be implemented over a period not exceeding 36 months. As of March 31, 2024, the company has repurchased approximately 8.9 million American Depositary Shares under this program, totaling around $811.0 million.

The repurchase of American Depositary Shares and common stock by Netease will depend on various factors, including market conditions. These plans are subject to potential suspension or termination at any time.

**The US dollar figures mentioned in this announcement are for convenience only. Percentages in this announcement are calculated based on Renminbi.

Conference Call

Netease management will host a conference call on Thursday, May 23, 2024, at 7:00 AM New York time (7:00 PM Beijing/Hong Kong time on Thursday, May 23, 2024), discussing the company's quarterly performance and addressing questions.

Interested participants can dial 1-914-202-3258 and provide the conference ID: 10038664 fifteen minutes before the start of the meeting. The conference call replay will be available until May 30, 2024, at 1-855-883-1031, with the PIN: 10038664.

Additionally, the company's investor relations website at http://ir.netease.com/ will livestream the earnings release and keep the replay available for 12 months.