NetEase.com Announces 2004 Second Quarter Results.BEIJING Beijing (bā-jĭng) or Peking (pē-kĭng, pā–), city (1994 est. urban pop. 6,093,300; 1994 est. total pop. 7,240,700), capital of the People's Republic of China. It is in central Hebei prov. -- --Total net revenues for the quarter increased 5.2% over the previous quarter to RMB RMB Right Mouse Button RMB Regional Management Board (USACE) RMB Rolf Maier Bode (musician, band) RMB Ren Min Bi (currency of People's Republic of China) 206.7 million (US$25.0 million), despite a 37.1% drop in net revenues from wireless value-added val·ue-add·ed adj. Of or relating to the estimated value that is added to a product or material at each stage of its manufacture or distribution: and other fee-based premium services --Net revenues from online game services for the quarter grew 25.2% over the previous quarter on the strength of the Company's two self-developed titles, Fantasy Westward Journey Fantasy Westward Journey (Simplified Chinese: 梦幻西游; Traditional Chinese: 夢幻西遊; Pinyin: Online and Westward Journey Westward Journey (Simplified Chinese: 大话西游; Traditional Chinese: 大話西遊; Pinyin: Online Version 2.0 --Net revenues from advertising services for the quarter grew 18.5% over the previous quarter driven by increased demand for advertising space on the NetEase websites NetEase.com, Inc. (Nasdaq:NTES NTES Netease.com Inc (stock symbol) NTES National Technical Employment Services, Inc. ), one of China's leading Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the , online game and wireless value-added services A value-added service (VAS) is a telecommunications industry term for non-core services or, in short, all services beyond standard voice calls and fax transmissions. providers, today announced financial results for its second quarter ended June June: see month. 30, 2004. Financial Results The Company reported total net revenues of RMB206.7 million (US$25.0 million) for the second quarter, representing a 5.2% increase over total net revenues of RMB196.6 million (US$23.8 million) for the preceding quarter, and a 51.8% increase over total revenues (Note A) of RMB136.2 million for the corresponding period a year ago. Net revenues from online game services for the quarter grew by 25.2% quarter-over-quarter to RMB131.8 million (US$15.9 million) driven by the continued growth of NetEase's latest title, Fantasy Westward Journey Online, and the steady performance of Westward Journey Online Version 2.0. Consistent with the Company's previous guidance announced on July July: see month. 7, 2004, net revenues from wireless value-added and other fee-based premium services decreased 37.1% quarter-over-quarter to RMB37.6 million (US$4.5 million). As anticipated, the decline was primarily attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to a fall in sales of SMS (1) (Storage Management System) Software used to routinely back up and archive files. See HSM. (2) (Systems Management Server) Systems management software from Microsoft that runs on Windows NT Server. services as a result of intense competition and new Chinese Chinese, subfamily of the Sino-Tibetan family of languages (see Sino-Tibetan languages), which is also sometimes grouped with the Tai, or Thai, languages in a Sinitic subfamily of the Sino-Tibetan language stock. regulations and mobile operator policies that led to a slow down in the rate of growth of new users and a higher turnover rate. Net revenues from advertising services for the quarter increased 18.5% quarter-over-quarter to RMB37.4 million (US$4.5 million) driven by continued increased demand for advertising space on the NetEase websites. The Company reported gross profit in the second quarter of RMB164.3 million (US$19.8 million), representing a 52.8% increase over RMB107.5 million for the corresponding period a year ago and a 3.7% increase over RMB158.4 million for the preceding quarter. Gross margins for the Company decreased slightly to 79.5% in the second quarter from 80.6% in the preceding quarter due to the decrease in gross margins from wireless value-added and other fee-based premium services. Gross margins for wireless value-added services in the second quarter of 2004 declined as costs remained stable while revenue declined. In contrast, enhanced economies of scale for online games led to record high gross margins for online games this quarter. Total operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. for the quarter were RMB63.6 million (US$7.7 million), representing a 115.1% increase over RMB29.6 million for the corresponding period a year ago, and a 25.9% increase over RMB50.6 million for the preceding quarter. The increase was largely due to expenses incurred in connection with a new marketing campaign being initiated by the Company which is expected to run until the end of 2004. In the second quarter of 2004, these expenses included production costs for TV commercials, as well as billboard and bus advertisement ADVERTISEMENT. A 'notice' published either in handbills or in a newspaper. 2. The law in many instances requires parties to advertise in order to give notice of acts which are to be done; in these cases, the advertisement is in general equivalent to notice. production and placement costs. The Company anticipates that the costs for this campaign will peak in the third quarter of 2004 when the bulk of the new TV commercials will be aired. Operating expenses also increased as a result of professional fees specifically related to the Company's registration of its Zero Coupon A certificate evidencing the obligation to pay an installment of interest or a dividend that must be cut and presented to its issuer for payment when it is due. Coupons are usually attached to a document, such as a promissory note, bond, share of stock, or a bearer Convertible Subordinated Subordinated A claim ranked lower in priority than other claims. Common stock claims are always subordinated to debt. Notes due July 15, 2023 with the U.S. Securities and Exchange Commission. The Company reported a net profit of RMB98.3 million (US$11.9 million), equivalent to US$0.38 (basic) or US$0.36 (diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. ) per American Depositary Share American Depositary Share (ADS) Foreign stock issued in the US and registered in the ADR system. ("ADS"), compared to a net profit of RMB75.8 million (US$9.2 million), equivalent to US$0.28 diluted net earnings per ADS, for the corresponding period a year ago and a net profit of RMB103.9 million (US$12.6 million), equivalent to US$0.38 diluted net earnings per ADS, for the preceding quarter. As of June 30, 2004, the Company's total cash and held-to-maturity investments balances were RMB1.7 billion (US$205.6 million) and RMB 248.7 million (US$ 30.1 million), respectively. The Company generated an operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. of RMB117.6 million (US$14.2 million) for the quarter. Other Company News The Company also announced today that it has recently entered into a contractual arrangement with Google (Google, Mountain View, CA, www.google.com) The largest search engine on the Web, founded by Larry Page and Sergey Brin, two Stanford University students. In 1996, they developed their "BackRub" search engine, named after its unique page ranking method (explained below). Inc. to provide enhanced search services as well as to cooperate in online advertising. The new version of NetEase's search engine will employ Google's web page-search function and AdWords See Google AdWords. cost-per-click search advertising service, which will also be integrated with NetEase's current Open Directory Project ("ODP ODP - Open Distributed Processing ") system. In addition, the Company announced that it has licensed from a South Korean Korean, language of uncertain ancestry. It is thought by some scholars to be akin to Japanese, by others to be a member of the Altaic subfamily of the Ural-Altaic family of languages (see Uralic and Altaic languages), and by still others to be unrelated to any known game developer an online game called Fly for Fun ("FlyFF"). Voted as an award-winning Adj. 1. award-winning - having received awards; "this award-winning bridge spans a distance of five miles" game by South Korea's Ministry of Culture in June 2004, FlyFF is a 3D game based on a fantasy fantasy Mental images or imaginary narratives that distort or entirely depart from reality. Primary fantasies arise spontaneously from the unconscious, while secondary fantasies are consciously summoned and pursued. world which gives players unique flying capabilities. Beta testing (programming) beta testing - Testing a pre-release (potentially unreliable) version of a piece of software by making it available to selected users. This term derives from early 1960s terminology for product cycle checkpoints, first used at IBM but later standard throughout the for FlyFF is expected to begin within the coming fourth quarter. Commenting on the second quarter's results, acting Chief Executive Officer Ted Sun said, "We were pleased that our advertising business performed well again this quarter. As a result of our continuous improvement of content and upcoming marketing opportunities like the 2004 Athens Athens, city, Greece Athens (ăth`ĭnz), Gr. Athínai, city (1991 pop. 2,907,179; 1991 urban agglomeration pop. 3,072,922), capital of Greece, E central Greece, on the plain of Attica, between the Kifisós and Olympic Games Olympic games, premier athletic meeting of ancient Greece, and, in modern times, series of international sports contests. The Olympics of Ancient Greece Although records cannot verify games earlier than 776 B.C. , we believe that existing and new clients continue to see the value of promoting on the NetEase websites. Also, we believe that new initiatives such as our partnership with Google which we expect will significantly improve the competitive capability of NetEase's search engine, in combination with other activities such as our recent increase in the capacity of our free e-mail See Internet e-mail service. services, will attract new users to our websites, thereby adding further value for our advertisers." Chief Operating Officer Chief Operating Officer (COO) The officer of a firm responsible for day-to-day management, usually the president or an executive vice-president. Michael Michael, archangel Michael (mī`kəl) [Heb.,=who is like God?], archangel prominent in Christian, Jewish, and Muslim traditions. In the Bible and early Jewish literature, Michael is one of the angels of God's presence. Tong tong 1 tr.v. tonged, tong·ing, tongs To seize, hold, or manipulate with tongs. [Back-formation from tongs. added, "In our online games business, Fantasy Westward Journey Online's popularity continued to increase, which drove revenue growth in this area. We expect future growth for our online games to come from our two current self-developed titles, the pending commercial launch of FlyFF, and two upcoming in-house In-house In the context of general equities, keeping an activity within the firm. For example, rather than go to the marketplace and sell a security for a client to anyone, an attempt is made to find a buyer to complete the transaction with the firm. developed games planned for release in the first half of 2005. We are excited about FlyFF which deploys a 3D flying system which greatly enhances gaming experience. We believe that these flying functionalities, coupled with the real-time 1. real-time - Describes an application which requires a program to respond to stimuli within some small upper limit of response time (typically milli- or microseconds). Process control at a chemical plant is the classic example. combat style of the game, will greatly appeal to our target audience group, which consists of players between the ages of 15 to 25 in coastal provinces." Mr. Tong continued, "While our wireless value-added and other fee-based premium services business suffered setbacks in the second quarter of 2004, we are focused on turning around the business through a variety of strategic initiatives designed to stabilize stabilize See peg. and enhance revenues. These initiatives include developing higher-end wireless value-added services and integrating NetEase Web products to differentiate differentiate /dif·fer·en·ti·ate/ (dif?er-en´she-at) 1. to distinguish, on the basis of differences. 2. to develop specialized form, character, or function differing from that surrounding it or from the original. NetEase from competitors COMPETITORS, French law. Persons who compete or aspire to the same office, rank or employment. As an English word in common use, it has a much wider application. Ferriere, Dict. de Dr. h.t. , more offline (1) Not connected to the Internet, online service or internal network. See offline file. (2) Not connected to or not installed in the computer. If a terminal, printer or other device is physically connected to the computer, but is not turned on or in ready mode, it is marketing efforts including seeking partnerships with offline media, developing sales teams at the provincial Provincial has several meanings and may refer to:
The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures. Notes: Remember, historically high growth rates don't always mean a high rate of growth looking into the future. , albeit from a relatively low base, in the second quarter of 2004." Denny Denny may refer to:
adj. 1. Recurring regularly or frequently: the continual need to pay the mortgage. 2. developing diversified diversified (di·verˑ·s revenue streams to create value for our shareholders." ** Note: The conversion of Renminbi (RMB) into U.S. dollars in this release is based on the exchange rate of US$1 = RMB8.2766. The percentages stated in this press release are calculated based on RMB.** About NetEase NetEase.com, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. Our online communities and personalized per·son·al·ize tr.v. per·son·al·ized, per·son·al·iz·ing, per·son·al·iz·es 1. To take (a general remark or characterization) in a personal manner. 2. To attribute human or personal qualities to; personify. premium services have established a large and stable user base for the NetEase Web sites which are operated by our affiliate Affiliate Relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiaries of a third company. See: Subsidiaries, parent company. . As of June 30, 2004, we had approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 232 million accumulated ac·cu·mu·late v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates v.tr. To gather or pile up; amass. See Synonyms at gather. v.intr. To mount up; increase. registered accounts, and our average daily page views for the month ended June 30, 2004 exceeded 386 million. Community products and services which the NetEase Web sites offer include instant messaging Exchanging text messages in real time between two or more people logged into a particular instant messaging (IM) service. Instant messaging is more interactive than e-mail because messages are sent immediately, whereas e-mail messages can be queued up in a mail server for seconds or , personals, matchmaking Matchmaking Matricide (See MURDER.) Kecal marriage broker whose plans are foiled by a pair of lovers. [Czech Opera: Smetana The Bartered Bride in Osborne Opera, 32] Levi, Dolly , alumni clubs, personal home pages and community forums. NetEase is also the largest provider of free e-mail services in China. Furthermore, the NetEase Web sites provide 21 channels of content. NetEase sources news content on world events, sports, science and technology, and financial markets as well as entertainment content such as cartoons Many of the cartoons used in this database were obtained from The Cartoon Bank, Dobbs Ferry, NY, which has a huge selection of cartoons on every subject (visit www.cartoonbank.com). , games, astrology astrology, form of divination based on the theory that the movements of the celestial bodies—the stars, the planets, the sun, and the moon—influence human affairs and determine the course of events. and jokes from over one hundred international and domestic content providers. NetEase offers online advertising on its Web sites as well as paid listings on its search engine, web directory and classified ads services, and an online mall mall: see shopping center. (World-Wide Web) mall - A collection of World-Wide Web documents featuring commercial products and services, usually served by one particualr Internet access provider. , which provides opportunities for e-commerce e-commerce, commerce conducted over the Internet, most often via the World Wide Web. E-commerce can apply to purchases made through the Web or to business-to-business activities such as inventory transfers. and traditional businesses to establish their own storefront on the Internet. NetEase also offers wireless value-added services such as news and information content sent over short-messaging services, MMS (Multimedia Messaging Service) An enhanced transmission service that enables graphics, video clips and sound files to be transmitted via cellphones. Developed as part of the 3GPP project, MMS phones are generally backward compatible with SMS and EMS. and WAP (1) (Wireless Access Point) See access point. (2) (Wireless Application Protocol) A standard for providing cellular phones, pagers and other handheld devices with secure access to e-mail and text-based Web pages. technologies, and online game services through three massively multi-player online role-playing game role-playing game n. A game in which players assume the roles of characters and act out fantastical adventures, the outcomes of which are partially determined by chance, as by the roll of dice. titles, Westward Journey Online 2.0, Fantasy Westward Journey and PristonTale 2.0. (Note A) The Company's "total revenues" as reported in its financial statements for the quarter ended June 30, 2003 (prior to the adoption of FIN fin, organ of locomotion characteristic of fish and consisting of thin tissue supported by cartilaginous or bony rays. In some fish, e.g., the eel, a single fin extends from the back, around the tail, and along the ventral surface. 46 and consolidation of the VIEs) is equivalent to the Company's "total net revenues" as reported in its financial statements for the quarters ended March 31 and June 30, 2004 (after the adoption of FIN46 and consolidation of the VIEs prospectively). Both "total revenues" in 2003 and "total net revenues" in 2004 represent gross revenue receivable from final customers net of business tax payable by the VIEs. For details, please refer to Note 3 to the Unaudited Consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: Statements of Operations included in this press release. This press release contains statements of a forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. nature. These statements are made under the "safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. " provisions of the U.S. Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. You can identify these forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. by terminology The terminology used in the computer and telecommunications field adds tremendous confusion not only for the lay person, but for the technicians themselves. What many do not realize is that terms are made up by anybody and everybody in a nonchalant, casual manner without any regard or 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 NetEase will be unable to compete effectively in the wireless value-added services market in China and that its share of that market will continue to decline despite strategic initiatives designed to stabilize and enhance revenue in this area; the risk of further changes in Chinese government Ever since Republic of China founded in January 1st, 1912, China has had several regional and national governments. List
conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. the policies of the mobile operators in China that limit future growth of NetEase's wireless value-added services revenue or causes such revenue to decline; the risk that NetEase may be compelled to expend ex·pend tr.v. ex·pend·ed, ex·pend·ing, ex·pends 1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend. 2. additional resources to promote its wireless value-added services which could further negatively impact its gross margins from those services; the risk that the current popularity of SMS in China will not continue for whatever reason, including SMS being superseded by other technologies for which NetEase is unable to offer attractive products and services; 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 do not become as popular as management anticipates; the risk that NetEase may not be able to continuously develop new and creative online services; the risk that the Internet advertising Delivering ads to Internet users via Web sites, e-mail, ad-supported software and Internet-enabled cellphones. Also called an "ad network," Internet advertising organizations act as a middleman between the advertiser and the Web sites and software publishers that display the ads. market in China will not continue to grow and will remain subject to intense competition; the risk that NetEase will not be able to control its expenses in future periods; the impact of the outbreak outbreak see epidemic. of severe acute respiratory syndrome Severe Acute Respiratory Syndrome (SARS) Definition Severe acute respiratory syndrome (SARS) is the first emergent and highly transmissible viral disease to appear during the twenty-first century. , or SARS, in China and risks related to any possible recurrence recurrence /re·cur·rence/ (-ker´ens) the return of symptoms after a remission.recur´rent re·cur·rence n. 1. of SARS or another public health problem in China; the risk that the trading price Trading price The price at which a security is currently selling. of NetEase's American Depositary Shares may decrease for a variety of reasons, some of which may be beyond the control of management; competition in NetEase's existing and potential markets; governmental uncertainties, general competition and price pressures in the marketplace; uncertainty as to future profitability; the risk that security, reliability and confidentiality Restrictions on the accessibility and dissemination of information. Confidentiality is one of the six fundamental components of information security (see Parkerian Hexad). concerns may impede im·pede tr.v. im·ped·ed, im·ped·ing, im·pedes To retard or obstruct the progress of. See Synonyms at hinder1. [Latin imped broad use of the Internet and e-commerce and other services; and other risks outlined in NetEase's filings with the Securities and Exchange Commission, including its registration statements on Form F-1 and Form F-3, as amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. . NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.
NETEASE.COM, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
December 31, June 30, June 30,
2003 2004 2004
-------------- -------------- ------------
RMB RMB (Note 2) USD (Note 1)
Assets
Current assets:
Cash 1,356,069,544 1,701,262,501 205,550,891
Held-to-maturity
investments 332,093,546 248,743,281 30,053,800
Accounts receivable, net - 78,228,436 9,451,760
Prepayments and other
current assets 19,749,369 41,596,185 5,025,757
Due from related parties,
net (Note 3) 15,182,589 9,000,000 1,087,403
Deferred tax assets 9,669,543 4,834,771 584,149
-------------- -------------- ------------
Total current assets 1,732,764,591 2,083,665,174 251,753,760
Non-current rental deposit 1,430,544 1,869,070 225,826
Property, equipment and
software, net 40,410,264 60,846,415 7,351,620
Deferred assets 12,086,693 8,166,586 986,708
-------------- -------------- ------------
Total assets 1,786,692,092 2,154,547,245 260,317,914
============== ============== ============
Liabilities and
Shareholders' Equity
Current liabilities:
Accounts payable 10,738,090 19,791,216 2,391,225
Salary and welfare payable 17,405,624 24,537,737 2,964,712
Taxes payable 15,976,342 43,550,206 5,261,847
Deferred revenue - 101,473,355 12,260,271
Due to related parties,
net (Note 3) 21,947,411 - -
Accrued liabilities 11,698,761 19,930,054 2,408,000
-------------- -------------- ------------
Total current
liabilities 77,766,228 209,282,568 25,286,055
-------------- -------------- ------------
Long-term payable: 827,901,449 839,296,497 101,405,952
-------------- -------------- ------------
Total liabilities 905,667,677 1,048,579,065 126,692,007
-------------- -------------- ------------
Shareholders' equity:
Ordinary shares,
US$0.0001 par value:
1,000,300,000,000 shares
authorized, 3,128,958,189
shares issued and outstanding
as of December 31, 2003,
and 3,166,679,789
shares issued and
outstanding as of
June 30, 2004 2,589,756 2,620,946 316,669
Additional paid-in capital 993,254,740 1,015,935,019 122,747,870
Statutory reserve 33,699,834 33,699,834 4,071,700
Deferred compensation (69,175) (41,505) (5,015)
Translation adjustments 210,838 210,838 25,475
Retained profit
(Accumulated deficit) (148,661,578) 53,543,048 6,469,208
-------------- -------------- ------------
Total shareholders' equity 881,024,415 1,105,968,180 133,625,907
-------------- -------------- ------------
Total liabilities and
shareholders' equity 1,786,692,092 2,154,547,245 260,317,914
============== ============== ============
Note 1: The conversion of Renminbi (RMB) into United States
dollars (USD) is based on the noon buying rate of USD1.00 = RMB8.2766
on June 30, 2004 in The City of New York for cable transfers of
Renminbi as certified for customs purposes by the Federal Reserve Bank
of New York.
Note 2: On January 17, 2003, the Financial Accounting Standards
Board issued FASB Interpretation No. 46: Consolidation of Variable
Interest Entities, an interpretation of ARB 51 ("FIN 46"), which was
subsequently amended by a revised interpretation ("FIN 46-R").
According to the requirements of FIN 46 and FIN 46-R, the Company has
evaluated its relationship with two previously unconsolidated related
companies, Guangzhou NetEase Computer System Co., Ltd. ("Guangzhou
NetEase") and Guangyitong Advertising Co., Ltd. ("Guangyitong
Advertising"), as well as Guangzhou Ling Yi Electronic Technology
Limited ("Guangzhou Ling Yi"). Guangzhou NetEase, Guangyitong
Advertising and Guangzhou Ling Yi are concluded as variable interest
entities ("VIE") of the Company. And the Company is concluded to be
the primary beneficiary of these three VIEs. The Company adopted the
provisions of FIN 46 and consolidated Guangzhou NetEase and
Guangyitong Advertising on a prospective basis from January 1, 2004
and Guangzhou Ling Yi from May 2004. Adoption of FIN 46 did not
significantly affect the Company's financial statements.
Note 3: Upon the adoption of FIN 46 and consolidation of Guangzhou
NetEase and Guangyitong Advertising, amounts due from/to these two
related parties have been eliminated in the consolidated financial
statements of the Company. The major effect of consolidation of these
companies on the Company's consolidated financial statements was the
recognition of the VIEs' accounts receivable, deferred revenue and tax
payable and others, and a corresponding elimination of the due to and
due from related parties balances. The net effect on shareholders'
equity was nil. The following figures represent the due to and due
from related parties balances as of December 31, 2003, and the
corresponding balances of accounts receivable, deferred revenue and
tax payable and others on the balance sheet of the VIEs as of that
date:
December 31, 2003
-------------------
(Unaudited)
RMB
Due from related parties, net 15,182,589
Due to related parties, net (21,947,411)
-------------------
Amount due to related parties, net (6,764,822)
===================
Represented by:
Accounts receivable, net 71,826,810
Deferred revenue (57,727,133)
Tax payable and others, net (20,864,499)
-------------------
Amount due to related parties, net (6,764,822)
===================
NETEASE.COM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended
------------------------------
June 30, March 31,
2003 2004
-------------- --------------
RMB RMB (Note 2)
Revenues:
Online game services 36,233,479 111,389,272
Wireless value-added and other
fee-based premium services 79,109,673 62,004,416
Advertising services 20,823,784 34,484,069
-------------- --------------
Total Revenues 136,166,936 207,877,757
Business taxes (Note 3) (6,807,862) (11,304,182)
-------------- --------------
Total net revenues 129,359,074 196,573,575
Total cost of revenues (21,887,103) (38,205,194)
-------------- --------------
Gross profit 107,471,971 158,368,381
-------------- --------------
Operating expenses:
Selling and marketing expenses (10,986,398) (21,226,018)
General and administrative expenses (14,473,839) (22,128,436)
Research and development expenses (4,126,390) (7,202,306)
-------------- --------------
Total operating expenses (29,586,627) (50,556,760)
-------------- --------------
Operating profit 77,885,344 107,811,621
Other income (expenses):
Investment income - 1,363,507
Interest income 1,908,473 3,782,606
Interest expense - (931,171)
Other, net 154,828 1,800
-------------- --------------
Profit before tax 79,948,645 112,028,363
Income tax (4,161,744) (8,116,327)
-------------- --------------
Net profit 75,786,901 103,912,036
============== ==============
Earnings per share, basic 0.02 0.03
============== --------------
Earnings per ADS, basic 2.42 3.32
============== --------------
Earnings per share, diluted 0.02 0.03
============== ==============
Earnings per ADS, diluted 2.32 3.18
============== ==============
Weighted average number of ordinary
shares outstanding, basic 3,133,838,801 3,132,850,697
============== ==============
Weighted average number of ADS
outstanding, basic 31,338,388 31,328,507
============== ==============
Weighted average number of ordinary
shares outstanding, diluted 3,268,550,744 3,265,989,154
============== ==============
Weighted average number of ADS
outstanding, diluted 32,685,507 32,659,892
============== ==============
Quarter Ended
-----------------------------
June 30, June 30,
2004 2004
-------------- --------------
RMB (Note 2) USD (Note 1)
Revenues:
Online game services 139,458,471 16,849,729
Wireless value-added and other fee-
based premium services 38,826,085 4,691,067
Advertising services 40,853,119 4,935,978
-------------- --------------
Total Revenues 219,137,675 26,476,774
Business taxes (Note 3) (12,410,057) (1,499,414)
-------------- --------------
Total net revenues 206,727,618 24,977,360
Total cost of revenues (42,473,916) (5,131,807)
-------------- --------------
Gross profit 164,253,702 19,845,553
-------------- --------------
Operating expenses:
Selling and marketing expenses (29,621,319) (3,578,924)
General and administrative expenses (25,597,031) (3,092,699)
Research and development expenses
(8,426,551) (1,018,117)
-------------- --------------
Total operating expenses (63,644,901) (7,689,740)
-------------- --------------
Operating profit 100,608,801 12,155,813
Other income (expenses):
Investment income 553,552 66,882
Interest income 4,837,105 584,431
Interest expense (1,034,531) (124,995)
Other, net 551,000 66,573
-------------- --------------
Profit before tax 105,515,927 12,748,704
Income tax (7,223,334) (872,742)
-------------- --------------
Net profit 98,292,593 11,875,962
============== ==============
Earnings per share, basic 0.03 0.01
-------------- --------------
Earnings per ADS, basic 3.12 0.38
-------------- --------------
Earnings per share, diluted 0.03 0.01
============== ==============
Earnings per ADS, diluted 3.01 0.36
============== ==============
Weighted average number of ordinary
shares outstanding, basic 3,154,377,163 3,154,377,163
============== ==============
Weighted average number of ADS
outstanding, basic 31,543,772 31,543,772
============== ==============
Weighted average number of ordinary
shares outstanding, diluted 3,262,188,729 3,262,188,729
============== ==============
Weighted average number of ADS
outstanding, diluted 32,621,887 32,621,887
============== ==============
Note 1: The conversion of Renminbi (RMB) into United States
dollars (USD) is based on the noon buying rate of USD1.00 = RMB8.2766
June 30, 2004 in The City of New York for cable transfers of Renminbi
as certified for customs purposes by the Federal Reserve Bank of New
York.
Note 2: On January 17, 2003, the Financial Accounting Standards
Board issued FASB Interpretation No. 46: Consolidation of Variable
Interest Entities, an interpretation of ARB 51 ("FIN 46"), which was
subsequently amended by a revised interpretation ("FIN 46-R").
According to the requirements of FIN 46 and FIN 46-R, the Company has
evaluated its relationship with two previously unconsolidated related
companies, Guangzhou NetEase Computer System Co., Ltd. ("Guangzhou
NetEase") and Guangyitong Advertising Co., Ltd. ("Guangyitong
Advertising"), as well as Guangzhou Ling Yi Electronic Technology
Limited ("Guangzhou Ling Yi"). Guangzhou NetEase, Guangyitong
Advertising and Guangzhou Ling Yi are concluded as variable interest
entities ("VIEs") of the Company. And the Company is concluded to be
the primary beneficiary of these three VIEs. The Company adopted the
provisions of FIN 46 and consolidated Guangzhou NetEase and
Guangyitong Advertising on a prospective basis from January 1, 2004
and Guangzhou Ling Yi from May 2004. Adoption of FIN 46 did not
significantly affect the Company's financial statements.
Note 3: The Company adopted the provisions of FIN 46 and
consolidated its VIEs on a prospective basis in the Company's
consolidated financial statements. The VIEs effectively function as
pass-through entities used by the Company and its subsidiaries in
providing services to the final customers. Under the series of
agreements entered with the VIEs, substantially all of the revenue of
the VIEs, net of the applicable business tax payable by the VIEs, are
passed to the Company and its subsidiaries in form of technology and
consulting service revenues. Prior to the consolidation of the VIEs in
accordance with FIN 46, revenues in the Company's financial statements
represented revenues received by the Company and its subsidiaries from
Guangzhou NetEase and Guangzhou Advertising, net of applicable
business tax payable (Note i) by these entities. The business tax
presented in the Company's financial statements represented business
tax payable by the Company and its subsidiaries on their technology
and consulting service revenues received from Guangzhou NetEase and
Guangyitong Advertising. After the consolidation of the VIEs in
accordance with FIN 46, revenues in the Company's financial statements
represent revenues generated from the final customers by the VIEs,
before deducting any applicable business tax payable by the VIEs which
is now presented under a separate line item after revenues. The
business tax payable (Note ii) by the Company and its subsidiaries on
intra-group revenues from the VIEs is recorded under cost of revenue
as it is considered a cost in providing the services by the
consolidated group.
Note i: The business tax payable by Guangzhou NetEase and
Guangyitong Advertising, which was netted against revenues in the
Company's financial statements for the quarter ended June 30, 2003
which did not consolidate Guangzhou NetEase and Guangyitong
Advertising amounted to Rmb7,474,699, segmentally analyzed as below:
Quarter Ended
June 30, 2003
-----------------
(Unaudited)
RMB
Business tax:
Online game services (2,108,834)
Wireless value-added and other fee-based
premium services (3,431,415)
Advertising services (1,934,450)
-----------------
(7,474,699)
=================
Note ii: In addition, the business tax payable by the Company and
its subsidiaries on intra-group revenues from the VIEs for the
quarters ended March 31 and June 30, 2004 amounted to Rmb9,751,797 and
Rmb9,904,939 respectively, segmentally analyzed as below:
Quarter Ended
------------------------
March 31, June 30,
2004 2004
------------ -----------
(Unaudited) (Unaudited)
RMB RMB
Business tax:
Online game services (5,263,143) (6,589,413)
Wireless value-added and other fee-based
premium services (3,083,225) (1,619,412)
Advertising services (1,405,429) (1,696,114)
------------ -----------
(9,751,797) (9,904,939)
============ ===========
NETEASE.COM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
June 30, March 31,
2003 2004
------------ --------------
RMB RMB (Note 2)
Cash flows from operating activities:
Net profit 75,786,901 103,912,036
Adjustments for:
Depreciation 4,250,299 5,744,954
Share compensation cost 27,964 13,835
Provision for doubtful debts 1,057,604 1,594,981
Amortization of issuance cost of
convertible bonds - 1,959,637
Increase in accounts receivable - (7,136,881)
Increase in prepayments and other
current assets (2,458,428) (4,109,527)
Decrease in due from/to related parties 5,168,596 -
(Increase) Decrease in deferred tax
assets (3,887,280) 2,398,047
Increase (Decrease) in accounts payable
and
other liabilities 6,738,886 21,765,133
Increase (Decrease) in deferred revenue (8,250) 21,950,272
Increase (Decrease) in salary and
welfare
payable (1,879,019) (2,296,687)
------------ --------------
Net cash provided by operating
activities 84,797,273 145,795,800
------------ --------------
Cash flows from investing activities
(Increase) Decrease in held-to-maturity
investments - 165,830,133
Purchase of property, equipment
and software (2,866,891) (12,078,529)
Increase in due from related parties - -
(Increase) Decrease in non-current
deposit (166,136) (541,362)
------------ --------------
Net cash (used in) provided by investing
activities (3,033,027) 153,210,242
------------ --------------
Cash flows from financing activities:
Proceed from employee exercising
stock options 8,542,745 9,422,157
Increase in long-term payable 316,315 30,000
------------ --------------
Net cash provided by financing
activities 8,859,060 9,452,157
------------ --------------
Effect of exchange rate changes on cash - -
------------ --------------
Net increase in cash 90,623,306 308,458,198
Less: Increase in restricted cash (4,861) -
Cash, beginning of the quarter 638,087,620 1,371,859,983
------------ --------------
Cash, end of the quarter 728,706,065 1,680,318,181
============ ==============
Supplemental disclosures of cash flow
information:
Cash paid during the quarter for income
taxes 5,006,781 7,610,124
============ ==============
Supplemental schedule of non-cash
investing and financing activities:
Compensation costs, arising from
transfer of ordinary shares and
issuance of stock
options in the Company to senior
management personnel and some
non-employees of the Company 27,964 13,835
============ ==============
Quarter Ended
June 30, June 30,
2004 2004
-------------- ------------
RMB (Note 2) USD (Note 1)
Cash flows from operating activities:
Net profit 98,292,593 11,875,962
Adjustments for:
Depreciation 6,741,197 814,489
Share compensation cost 13,835 1,672
Provision for doubtful debts 80,172 9,687
Amortization of issuance cost of
convertible bonds 1,960,470 236,869
Increase in accounts receivable (939,898) (113,561)
Increase in prepayments and other
current assets (16,341,206) (1,974,386)
Decrease in due from/to related parties - -
(Increase) Decrease in deferred tax
assets 2,436,725 294,411
Increase (Decrease) in accounts payable
and
other liabilities (1,126,442) (136,100)
Increase (Decrease) in deferred revenue 21,795,950 2,633,442
Increase (Decrease) in salary and
welfare
payable 4,654,979 562,427
-------------- ------------
Net cash provided by operating
activities 117,568,375 14,204,912
-------------- ------------
Cash flows from investing activities
(Increase) Decrease in held-to-maturity
investments (82,479,868) (9,965,429)
Purchase of property, equipment
and software (18,895,253) (2,282,973)
Increase in due from related parties (9,000,000) (1,087,403)
(Increase) Decrease in non-current
deposit 227,876 27,533
-------------- ------------
Net cash (used in) provided by investing
activities (110,147,245) (13,308,272)
-------------- ------------
Cash flows from financing activities:
Proceed from employee exercising
stock options 13,289,313 1,605,649
Increase in long-term payable 233,877 28,258
-------------- ------------
Net cash provided by financing
activities 13,523,190 1,633,907
-------------- ------------
Effect of exchange rate changes on cash - -
-------------- ------------
Net increase in cash 20,944,320 2,530,547
Less: Increase in restricted cash - -
Cash, beginning of the quarter 1,680,318,181 203,020,344
-------------- ------------
Cash, end of the quarter 1,701,262,501 205,550,891
============== ============
Supplemental disclosures of cash flow
information:
Cash paid during the quarter for income
taxes 6,202,125 749,357
============== ============
Supplemental schedule of non-cash
investing and financing activities:
Compensation costs, arising from
transfer of ordinary shares and
issuance of stock
options in the Company to senior
management personnel and some
non-employees of the Company 13,835 1,672
============== ============
Note 1: The conversion of Renminbi (RMB) into United States
dollars (USD) is based on the noon buying rate of USD1.00 = RMB8.2766
June 30, 2004 in The City of New York for cable transfers of Renminbi
as certified for customs purposes by the Federal Reserve Bank of New
York.
Note 2: On January 17, 2003, the Financial Accounting Standards
Board issued FASB Interpretation No. 46: Consolidation of Variable
Interest Entities, an interpretation of ARB 51 ("FIN 46"), which was
subsequently amended by a revised interpretation ("FIN 46-R").
According to the requirements of FIN 46 and FIN 46-R, the Company has
evaluated its relationship with two previously unconsolidated related
companies Guangzhou NetEase Computer System Co., Ltd. ("Guangzhou
NetEase") and Guangyitong Advertising Co., Ltd. ("Guangyitong
Advertising"), as well as Guangzhou Ling Yi Electronic Technology
Limited ("Guangzhou Ling Yi"). Guangzhou NetEase, Guangyitong
Advertising and Guangzhou Ling Yi are concluded as variable interest
entities ("VIEs") of the Company. And the Company is concluded to be
the primary beneficiary of these three VIEs. The Company adopted the
provisions of FIN 46 and consolidated Guangzhou NetEase and
Guangyitong Advertising on a prospective basis from January 1, 2004
and Guangzhou Ling Yi from May 2004. Adoption of FIN 46 did not
significantly affect the Company's financial statements.
NETEASE.COM INC.
UNAUDITED SEGMENT INFORMATION
Quarter Ended
-----------------------------
June 30, March 31,
2003 2004
------------ ------------
RMB RMB (Note 2)
Revenues:
Online game services 36,233,479 111,389,272
Wireless value-added and other fee-
based premium services 79,109,673 62,004,416
Advertising services 20,823,784 34,484,069
------------ ------------
Total revenues 136,166,936 207,877,757
------------ ------------
Business taxes: (Note 3)
Online game services (1,811,674) (6,126,410)
Wireless value-added and other fee-
based premium services (3,955,484) (2,246,626)
Advertising services (1,040,704) (2,931,146)
------------ ------------
Total business taxes (6,807,862) (11,304,182)
------------ ------------
Net revenues:
Online game services 34,421,805 105,262,862
Wireless value-added and other
fee-based premium services 75,154,189 59,757,790
Advertising services 19,783,080 31,552,923
------------ ------------
Total net revenues 129,359,074 196,573,575
------------ ------------
Cost of revenues:
Online game services (4,012,240) (15,100,851)
Wireless value-added and other fee-
based premium services (11,837,810) (11,593,504)
Advertising services (6,037,053) (11,510,839)
------------ ------------
Total cost of revenues (21,887,103) (38,205,194)
------------ ------------
Gross profit:
Online game services 30,409,565 90,162,011
Wireless value-added and other fee-
based premium services 63,316,379 48,164,286
Advertising services 13,746,027 20,042,084
------------ ------------
Total gross profit 107,471,971 158,368,381
============ ============
Quarter Ended
--------------------------
June 30, June 30,
2004 2004
------------ -----------
RMB (Note 2) USD (Note 1)
Revenues:
Online game services 139,458,471 16,849,729
Wireless value-added and other fee-based
premium services 38,826,085 4,691,067
Advertising services 40,853,119 4,935,978
------------ -----------
Total revenues 219,137,675 26,476,774
------------ -----------
Business taxes: (Note 3)
Online game services (7,670,216) (926,735)
Wireless value-added and other fee-based
premium services (1,267,326) (153,122)
Advertising services (3,472,515) (419,557)
------------ -----------
Total business taxes (12,410,057) (1,499,414)
------------ -----------
Net revenues:
Online game services 131,788,255 15,922,994
Wireless value-added and other fee-based
premium services 37,558,759 4,537,945
Advertising services 37,380,604 4,516,421
------------ -----------
Total net revenues 206,727,618 24,977,360
------------ -----------
Cost of revenues:
Online game services (17,254,129) (2,084,687)
Wireless value-added and other fee-based
premium services (11,637,344) (1,406,054)
Advertising services (13,582,443) (1,641,066)
------------ -----------
Total cost of revenues (42,473,916) (5,131,807)
------------ -----------
Gross profit:
Online game services 114,534,126 13,838,307
Wireless value-added and other fee-based
premium services 25,921,415 3,131,891
Advertising services 23,798,161 2,875,355
------------ -----------
Total gross profit 164,253,702 19,845,553
============ ===========
Note 1: The conversion of Renminbi (RMB) into United States
dollars (USD) is based on the noon buying rate of USD1.00 = RMB8.2766
June 30, 2004 in The City of New York for cable transfers of Renminbi
as certified for customs purposes by the Federal Reserve Bank of New
York.
Note 2: On January 17, 2003, the Financial Accounting Standards
Board issued FASB Interpretation No. 46: Consolidation of Variable
Interest Entities, an interpretation of ARB 51 ("FIN 46"), which was
subsequently amended by a revised interpretation ("FIN 46-R").
According to the requirements of FIN 46 and FIN 46-R, the Company has
evaluated its relationship with two previously unconsolidated related
companies Guangzhou NetEase Computer System Co., Ltd. ("Guangzhou
NetEase") and Guangyitong Advertising Co., Ltd. ("Guangyitong
Advertising"), as well as Guangzhou Ling Yi Electronic Technology
Limited. ("Guangzhou Ling Yi"). Guangzhou NetEase, Guangyitong
Advertising and Guangzhou Ling Yi are concluded as variable interest
entities ("VIEs") of the Company. And the Company is concluded to be
the primary beneficiary of these three VIEs. The Company adopted the
provisions of FIN 46 and consolidated Guangzhou NetEase and
Guangyitong Advertising on a prospective basis from January 1, 2004
and Guangzhou Ling Yi from May 2004. Adoption of FIN 46 did not
significantly affect the Company's financial statements.
Note 3: The Company adopted the provisions of FIN 46 and
consolidated its VIEs on a prospective basis in the Company's
consolidated financial statements. The VIEs effectively function as
pass-through entities used by the Company and its subsidiaries in
providing services to the final customers. Under the series of
agreements entered with the VIEs, substantially all of the revenue of
the VIEs, net of the applicable business tax payable by the VIEs, are
passed to the Company and its subsidiaries in form of technology and
consulting service revenues. Prior to the consolidation of the VIEs in
accordance with FIN 46, revenues in the Company's financial statements
represented revenues received by the Company and its subsidiaries from
Guangzhou NetEase and Guangzhou Advertising, net of applicable
business tax payable (Note i) by these entities. The business tax
presented in the Company's financial statements represented business
tax payable by the Company and its subsidiaries on their technology
and consulting service revenues received from Guangzhou NetEase and
Guangyitong Advertising. After the consolidation of the VIEs in
accordance with FIN 46, revenues in the Company's financial statements
represent revenues generated from the final customers by the VIEs,
before deducting any applicable business tax payable by the VIEs which
is now presented under a separate line item after revenues. The
business tax payable(Note ii) by the Company and its subsidiaries on
intra-group revenues from the VIEs is recorded under cost of revenue
as it is considered a cost in providing the services by the
consolidated group.
Note i: The business tax payable by Guangzhou NetEase and
Guangyitong Advertising, which was netted against revenues in the
Company's financial statements for the quarter ended June 30, 2003
which did not consolidate the VIEs amounted to Rmb7,474,699,
segmentally analyzed as below:
Quarter Ended
June 30, 2003
-----------------
(Unaudited)
RMB
Business tax:
Online game services (2,108,834)
Wireless value-added and other fee-based
premium services (3,431,415)
Advertising services (1,934,450)
-----------------
(7,474,699)
=================
Note ii: In addition, the business tax payable by the Company and
its subsidiaries on intra-group revenues from the VIEs for the
quarters ended March 31 and June 30, 2004 amounted to Rmb9,751,797 and
Rmb9,904,939 respectively, segmentally analyzed as below:
Quarter Ended
------------------------
March 31, June 30,
2004 2004
------------ -----------
(Unaudited) (Unaudited)
RMB RMB
Business tax:
Online game services (5,263,143) (6,589,413)
Wireless value-added and other fee-based
premium services (3,083,225) (1,619,412)
Advertising services (1,405,429) (1,696,114)
------------ -----------
(9,751,797) (9,904,939)
============ ===========
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