omniture

NetEase.com Reports Second Quarter 2008 Unaudited Financial Results

2008-08-13 21:48 894

BEIJING, Aug. 14 /Xinhua-PRNewswire/ -- NetEase.com, Inc. (Nasdaq: NTES), one of China’s leading Internet and online game services providers, today announced its unaudited financial results for the quarter ended June 30, 2008.

William Ding, Chief Executive Officer and Director of NetEase stated, “We experienced a strong second quarter due to solid execution in our online gaming and advertising businesses. We believe that China’s online gaming industry is in the midst of unprecedented growth and NetEase is very well positioned to benefit from this trend. During the second quarter, our flagship game, Fantasy Westward Journey, which remains among the Top 10 in downloads, still continued to perform quite well, fueled by periodic releases of new expansion packs and successful in-game marketing activities. In addition, Westward Journey II is attracting greater user interest, and Westward Journey III is progressing well. We also successfully completed the development of Tianxia II, our first 3D item-based game, and launched open beta testing in June on schedule. By focusing on a step-by-step development approach, we were able to make continuous enhancements based on player feedback.”

Mr. Ding continued, “To leverage the opportunities provided by the 2008 Beijing Olympic Games, we have been further strengthening the content on our portal, which helped drive increased traffic to our site and achieve further growth in the number of our e-mail users during the second quarter. These efforts resulted in significant sequential growth in adverting revenue this quarter as our advertisers have increasingly recognized the value of marketing their products and services on our portal.”

Second Quarter 2008 Financial Results

Revenues

Total revenues for the second quarter of 2008 were RMB715.9 million (US$104.4 million), compared to RMB651.9 million (US$95.0 million) and RMB558.0 million (US$81.3 million) for the preceding quarter and the second quarter of 2007, respectively.

Revenues from online games were RMB595.0 million (US$86.8 million) for the second quarter of 2008, compared to RMB555.9 million (US$81.0 million) and RMB475.1 million (US$69.3 million) for the preceding quarter and the second quarter of 2007, respectively.

Revenues from advertising services were RMB103.9 million (US$15.2 million) for the second quarter of 2008, compared to RMB77.1 million (US$11.2 million) and RMB65.3 million (US$9.5 million) for the preceding quarter and the second quarter of 2007, respectively.

Revenues from wireless value-added services and others (“WVAS and others”) were RMB16.9 million (US$2.5 million) for the second quarter of 2008, compared to RMB18.9 million (US$2.8 million) and RMB17.5 million (US$2.6 million) for the preceding quarter and the second quarter of 2007, respectively.

Gross Profit

Gross profit for the second quarter of 2008 was RMB722.8 million (US$105.4 million), compared to RMB532.0 million (US$77.6 million) and RMB437.8 million (US$63.8 million) for the preceding quarter and the second quarter of 2007, respectively. The quarter-over-quarter and year-over-year increases in gross profit were primarily driven by the receipt of a business tax refund of RMB146.8 million (US$21.4 million) in June 2008 for certain excess amounts paid in previous years, which was determined as a result of application of the newly approved basis by allowing the deduction of revenues shared with co-operators before applying the business tax rate. In addition, higher demand for game and advertising services in the second quarter of 2008 contributed to the higher gross profit. The revenue from Fantasy Westward Journey continued to grow as a result of new designs and features introduced since late September 2007 and certain in-game marketing activities launched during festival occasions. Higher demand for advertising services in the second quarter of 2008 was primarily driven by increased advertising activities in connection with the Beijing Olympics.

Gross Margin

Gross profit margin for the online game business for the second quarter of 2008 was 91.2%, compared to 90.2% for each of the preceding quarter and the second quarter of 2007. The quarter-over-quarter and year-over-year increases in gross profit margin were primarily due to the higher revenue and the business tax refund received in June 2008 as explained above, partially offset by higher staff-related costs as a result of an increase in headcount and increases of other cost of revenues.

Gross profit margin for the advertising business for the second quarter of 2008 was 52.6%, compared to 45.8% and 47.2% for the preceding quarter and the second quarter of 2007, respectively. The quarter-over-quarter and year-over-year increases in gross profit margin were primarily driven by increased revenue, partially offset by higher staff-related costs as a result of an increase in headcount, higher content cost caused by price increases and increases in other cost of revenues driven by greater demand associated with the Beijing Olympics.

Gross profit margin for the WVAS and others business for the second quarter of 2008 was 28.8%, compared to the gross loss margin of 6.2% and 28.1% for the preceding quarter and the second quarter of 2007, respectively. The quarter-over-quarter and the year-over-year improvements in gross margin were mainly caused by the business tax refund received in June 2008 as explained above.

Operating Expenses

Total operating expenses for the second quarter of 2008 were RMB149.7 million (US$21.8 million), compared to RMB127.6 million (US$18.6 million) and RMB142.8 million (US$20.8 million) for the preceding quarter and the second quarter of 2007, respectively. The quarter-over-quarter increase in selling and marketing expenses was primarily driven by higher marketing cost associated with the open beta testing of Tianxia II, higher marketing cost in connection with the Beijing Olympics and higher staff-related costs as a result of increased headcount. The slight quarter-over-quarter increase in general and administration expenses was mainly due to the receipt of a non-recurring local government rent subsidy of RMB1.0 million (US$0.1 million) by one of the Company’s subsidiaries which was recorded in the first quarter of 2008. The year-over-year increase in selling and marketing expenses was primarily due to higher staff-related costs resulting from increased headcount and increased incentive payments associated with the increased revenues. The year-over-year decrease in general and administrative expenses was primarily due to a reduction of professional service fees in the second quarter of 2008. The quarter-over-quarter and year-over-year increases in research and development cost were primarily due to higher staff-related costs caused by increased headcount and new incentive payments.

Net Profit

Net profit for the second quarter of 2008 totaled RMB438.2 million (US$63.9 million), compared to RMB269.4 million (US$39.3 million) and RMB312.6 million (US$45.6 million) for the preceding quarter and the second quarter of 2007, respectively. NetEase reported basic and diluted earnings per American depositary share (“ADS”) of US$0.53 and US$0.49 for the second quarter of 2008, respectively. The Company reported basic and diluted earnings per ADS of US$0.32 and US$0.30 and US$0.37 and US$0.34 for the preceding quarter and the second quarter of 2007, respectively.

Income Taxes

Effective as of January 1, 2008, the Chinese government adopted a new income tax law which unified the enterprise income tax payable by domestic and foreign-invested enterprises at 25%. Prior to the adoption of the new law, a number of the Company’s subsidiaries and variable interest entities (“VIEs”) were entitled to various preferential tax treatments. The Company’s subsidiaries and VIEs are currently in the process of applying for the New/High Technology Enterprises ("NHTEs") tax treatment pursuant to the "Working Guidelines for Assessment of New/High Technology Enterprises" issued by the Chinese tax authorities on July 8, 2008. Accordingly, NetEase followed the applicable accounting standards and adopted the statutory rate of 25% in making tax provisions for the second quarter ended June 30, 2008, except for entities still enjoying unexpired tax holidays.

The tax charge for the second quarter of 2008 was RMB140.0 million (US$20.4 million), compared to the tax charge of RMB114.8 million (US$16.7 million) and the tax charge of RMB2.0 million (US$0.3 million) for the preceding quarter and the second quarter of 2007, respectively. The quarter-over-quarter increase in tax charge was mainly as a result of an increase in revenue recognized for the second quarter of 2008. The year-over-year increase in tax charge was mainly due to the lower effective tax rate in effect under the pre-2008 tax laws and the receipt of an investment incentive tax refund of RMB24.4 million (US$3.6 million) recorded in the second quarter of 2007. Under the pre-2008 tax laws, the Company’s effective tax rate was well below 10% in the second quarter of 2007. The Company expects to reverse any excess tax provisions in subsequent periods when its subsidiaries and VIEs in China are granted the NHTE preferential tax status, which will be expected to be partially offset by the expected reduction to deferred tax assets recorded at the lower NHTE preferred tax rates in the future quarters.

Other Information

As of June 30, 2008, the Company’s total cash and time deposit balance was RMB4.96 billion (US$722.4 million), compared to RMB4.16 billion (US$606.3 million) as of December 31, 2007. Cash flow generated from operating activities was approximately RMB513.3 million (US$74.8 million) for the second quarter of 2008, compared to RMB495.0 million (US$72.2 million) and RMB331.0 million (US$48.3 million) for the preceding quarter and the second quarter of 2007, respectively.

On July 2, 2007, the Company’s Board authorized a share repurchase program of up to US$120 million of the Company’s outstanding ADSs. As of July 1, 2008, the Company had spent in aggregate a total purchase consideration of approximately US$46.4 million (including transaction costs). The share repurchase program ended on July 1, 2008.

By July 11, 2008, the Company’s outstanding zero-coupon convertible subordinated notes due July 15, 2023 (the “Notes”) totaling US$63.4 million as of June 30, 2008 were fully converted at the request of the noteholders pursuant to a redemption notice issued by the Company to the noteholders dated June 13, 2008. In the redemption notice, the Company called for the redemption of the Notes, and noteholders might surrender their notes for conversion at any time before the close of business on July 11, 2008 at the conversion price of US$0.4815 per ordinary share.

** The United States dollar (US$) amounts disclosed in this press release

are presented solely for the convenience of the reader. Translations

of amounts from RMB into United States dollars for the convenience of

the reader were calculated at the noon buying rate of US$1.00 =

RMB6.8591 on June 30, 2008 in The City of New York for the cable

transfers of RMB as certified for customs purposes by the Federal

Reserve Bank of New York. No representation is made that the RMB

amounts could have been, or could be, converted into US$ at that rate

on June 30, 2008, or at any other certain date. The percentages stated

are calculated based on RMB.

Conference Call

NetEase’s management team will host a conference call at 9:00 pm Eastern Time on Wednesday, August 13, 2008 (Beijing/Hong Kong Time: 9:00 am, Thursday, August 14, 2008). Chief Executive Officer William Ding, Acting Chief Financial Officer Onward Choi, and Co-Chief Operating Officer Michael Tong will be on the call to discuss the quarterly results and answer questions.

Interested parties may participate in the conference call by dialing 800-240-2134 (international: 303-262-2054), 10-15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 800-405-2236 (international 303-590-3000), and entering passcode 11117399#. The replay will be available through August 28, 2008 Eastern Time.

This call is being webcast live and archived, and will be available for 12 months on NetEase’s corporate web site at http://corp.netease.com , Investor Info: Earnings Call.

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. NetEase’s online communities and personalized premium services have established a large and stable user base for the NetEase websites which are operated by its affiliates. In particular, NetEase provides online game services to Internet users through the licensing or in-house development of massively multi-player online role-playing games, including Fantasy Westward Journey, Westward Journey Online II, Westward Journey Online III, Tianxia II and Datang.

NetEase also offers online advertising on its websites which enables advertisers to reach its substantial user base. In addition, NetEase has paid listings on its search engine and web directory and classified ads services, as well as an online mall, which provides opportunities for e-commerce and traditional businesses to establish their own storefront on the Internet. NetEase also offers wireless value-added services such as news and information content, matchmaking services, music and photos from the Web which are sent over SMS, MMS, WAP, IVR and Color Ring-back Tone technologies.

Other community services which the NetEase websites offer include instant messaging, online personal ads, matchmaking, alumni clubs and community forums. NetEase is also the largest provider of free e-mail services in China. Furthermore, the NetEase websites provide various channels of content. NetEase aggregates news content on world events, sports, science and technology, and financial markets, as well as entertainment content such as cartoons, games, astrology and jokes, from over one hundred international and domestic content providers.

This press release contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks related to: the risk that NetEase will not be successful in its product diversification efforts, including its focus on item- and fee-based games and exploration of strategic licensing opportunities; the risk that the online game market will not continue to grow or that NetEase will not be able to maintain its leading position in that market, which could occur if, for example, its new online games or expansion packs and other improvements to its existing games do not become as popular as management anticipates; the ability of NetEase to effectively market its games and other services and achieve a positive return on its marketing expenditures; the risk that changes in Chinese government regulation of the online game market may limit future growth of NetEase’s revenue or cause revenue to decline; the risk that NetEase may not be able to continuously develop new and creative online services; the risk that NetEase will not be able to control its expenses in future periods; competition in NetEase’s existing and potential markets; governmental uncertainties (including possible changes in the effective tax rates applicable to NetEase and its subsidiaries and affiliates and the ability of NetEase to receive approvals of the preferential tax treatments previously available to certain of its subsidiaries and VIEs in China), general competition and price pressures in the marketplace; the risk that security, reliability and confidentiality concerns may impede broad use of the Internet and e-commerce and other services; the risk that fluctuations in the value of the Renminbi with respect to other currencies could adversely affect NetEase’s business and financial results; and other risks outlined in NetEase’s filings with the Securities and Exchange Commission. NetEase does not undertake any obligation to update this forward-looking information, except as required under applicable law.

NETEASE.COM, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, June 30, June 30,

2007 2008 2008

RMB RMB USD (Note 1)

Assets

Current assets:

Cash 2,482,820,821 2,399,140,819 349,774,871

Time deposits 1,675,813,944 2,555,926,069 372,632,863

Accounts receivable, net 166,727,514 193,788,408 28,252,745

Prepayments and other

current assets 45,143,728 51,984,984 7,578,980

Deferred tax assets 65,787,113 53,998,465 7,872,529

Total current assets 4,436,293,120 5,254,838,745 766,111,988

Non-current assets:

Non-current rental deposits 3,033,171 3,361,265 490,045

Property, equipment and

software, net 183,471,666 177,187,171 25,832,423

Prepayment for land use

right, net 26,956,800 12,692,783 1,850,503

Deferred tax assets 19,060,225 19,156,835 2,792,908

Other long-term assets 16,844,399 16,630,620 2,424,607

Total non-current assets 249,366,261 229,028,674 33,390,486

Total assets 4,685,659,381 5,483,867,419 799,502,474

Liabilities and Shareholders’

Equity

Current liabilities:

Zero-coupon convertible

subordinated notes due

July 15, 2023 641,778,908 435,086,431 63,432,000

Accounts payable 89,143,868 106,281,532 15,494,968

Salary and welfare payables 68,653,742 66,705,318 9,725,083

Taxes payable 92,438,670 179,856,649 26,221,611

Deferred revenue 354,966,697 405,937,457 59,182,321

Accrued liabilities 29,844,067 40,537,832 5,910,080

Total current liabilities 1,276,825,952 1,234,405,219 179,966,063

Long-term payable:

Other long-term payable 10,200,000 10,200,000 1,487,076

Total long-term payable 10,200,000 10,200,000 1,487,076

Total liabilities 1,287,025,952 1,244,605,219 181,453,139

Shareholders’ equity 3,398,425,631 4,239,058,030 618,019,569

Minority interests 207,798 204,170 29,766

Total liabilities and

shareholders’ equity 4,685,659,381 5,483,867,419 799,502,474

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

NETEASE.COM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Quarter Ended

June 30, March 31, June 30, June 30,

2007 2008 2008 2008

RMB RMB RMB USD (Note 1)

Revenues:

Online game

services 475,149,731 555,859,907 595,039,049 86,751,768

Advertising

services 65,328,019 77,144,002 103,937,354 15,153,206

Wireless

value-added

services and

others 17,494,877 18,919,553 16,897,198 2,463,472

Total revenues 557,972,627 651,923,462 715,873,601 104,368,446

Business taxes (21,926,013) (7,469,810) 137,081,472 19,985,344

Total net

revenues 536,046,614 644,453,652 852,955,073 124,353,790

Total cost of

revenues (98,267,119) (112,495,076) (130,164,922) (18,976,968)

Gross profit 437,779,495 531,958,576 722,790,151 105,376,822

Operating

expenses:

Selling and

marketing

expenses (49,272,271) (38,246,993) (53,403,127) (7,785,734)

General and

administrative

expenses (48,380,093) (43,143,442) (44,127,629) (6,433,443)

Research and

development

expenses (45,110,176) (46,184,577) (52,208,647) (7,611,589)

Total

operating

expenses (142,762,540) (127,575,012) (149,739,403) (21,830,766)

Operating

profit 295,016,955 404,383,564 573,050,748 83,546,056

Other income

(expenses):

Investment

income 117,317 101,650 123,534 18,010

Interest

income 28,409,895 30,873,332 31,439,986 4,583,690

Other, net (8,934,188) (51,178,963) (26,439,269) (3,854,627)

Profit before

tax 314,609,979 384,179,583 578,174,999 84,293,129

Income tax (2,013,483) (114,832,848) (140,003,786) (20,411,393)

Profit after

tax 312,596,496 269,346,735 438,171,213 63,881,736

Minority

interests -- 3,511 117 17

Net profit 312,596,496 269,350,246 438,171,330 63,881,753

Earnings per

share, basic 0.10 0.09 0.14 0.02

Earnings per

ADS, basic 2.52 2.22 3.62 0.53

Earnings per

share,

diluted 0.09 0.08 0.14 0.02

Earnings per

ADS, diluted 2.35 2.08 3.39 0.49

Weighted

average

number of

ordinary

shares

outstanding

basic 3,100,597,113 3,028,995,782 3,027,874,505 3,027,874,505

Weighted

average

number

of ADS

outstanding,

basic 124,023,885 121,159,831 121,114,980 121,114,980

Weighted

average

number of

ordinary

shares

outstanding,

diluted 3,318,874,571 3,233,744,526 3,233,701,752 3,233,701,752

Weighted

average

number

of ADS

outstanding,

diluted 132,754,983 129,349,781 129,348,070 129,348,070

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

NETEASE.COM, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Quarter Ended

June 30, March 31, June 30, June 30,

2007 2008 2008 2008

RMB RMB RMB USD (Note 1)

Cash flows from

operating

activities:

Net profit 312,596,496 269,350,246 438,171,330 63,881,753

Adjustments to

reconcile net

profit to net

cash provided

by operating

activities:

Depreciation and

amortization 24,063,948 24,085,433 23,183,012 3,379,891

Share-based

compensation

cost 27,057,772 19,282,517 20,836,332 3,037,765

Allowance/

(reversal) of

provision for

doubtful debts 2,009,537 (1,202,665) (1,419,319) (206,925)

Gain on disposal

of property,

equipment

and software (321,538) (53,816) (23,045) (3,360)

Write-off of

property,

equipment

and software -- -- 5,247 765

Unrealized

exchange losses 8,866,712 50,399,867 26,574,778 3,874,383

Share of loss by

minority

interests -- (3,511) (117) (17)

Net equity share

of loss from an

associated

company -- 386,123 487,300 71,044

Changes in

operating

assets and

liabilities:

Accounts

receivable (47,689,980) 53,521,635 (77,960,545) (11,366,002)

Prepayments

and other

current

assets (18,488,436) (5,467,334) (3,312,399) (482,921)

Deferred tax

assets 4,126,531 (6,896,626) 18,685,274 2,724,158

Deferred tax

assets -

non-current (1,389,030) (84,913) (11,697) (1,705)

Accounts

payable 31,741,208 (900,446) 16,206,953 2,362,840

Salary and

welfare

payables 5,216,308 (17,343,345) 15,394,921 2,244,452

Taxes payable (347,813) 68,672,447 18,745,532 2,732,943

Deferred

revenue (11,475,172) 40,579,198 10,391,562 1,515,004

Deferred tax

liabilities (4,089,877) -- -- --

Accrued

liabilities (829,872) 635,974 7,367,340 1,074,097

Net cash

provided by

operating

activities 331,046,794 494,960,784 513,322,459 74,838,165

Cash flows from

investing

activities:

Purchase

of property,

equipment

and

software (7,948,685) (15,418,337) (20,258,398) (2,953,507)

Proceeds

from sale

of property,

equipment

and

software 5,812 56,540 62,501 9,112

Prepayment

on land

use right (26,956,800) (822,182) -- --

Incentive

received

on land

use right -- -- 15,000,000 2,186,876

Transfer

from

restricted

cash (761,580,600) -- -- --

Net change

in time

deposits

with terms

of three

months 313,909,363 (252,686,082) (309,877,981) (45,177,644)

Placement/

rollover

of matured

time

deposits (90,542,729) (422,426,062) (201,856,509) (29,429,008)

Uplift of

matured

time

deposits 212,513,368 126,035,000 180,542,729 26,321,635

Net change

in other

assets -- (412,578) 81,783 11,923

Net cash

(used in)

investing

activities (360,600,271) (565,673,701) (336,305,875) (49,030,613)

Cash flows from

financing

activities:

Proceeds from

employees

exercising

stock

options 18,924,290 642,039 328,603 47,908

Repurchase of

company

shares (574,604,375) (76,433,652) -- --

Payment of

other long-

term payable (38,575) -- -- --

Net cash

provided

by (used in)

financing

activities (555,718,660) (75,791,613) 328,603 47,908

Effect of

exchange

rate changes

on cash held

in foreign

currencies (2,236,633) (74,851,929) (39,668,730) (5,783,372)

Net increase

(decrease)

in cash (587,508,770) (221,356,459) 137,676,457 20,072,088

Cash, beginning

of the quarter 1,507,868,910 2,482,820,821 2,261,464,362 329,702,783

Cash, end of the

quarter 920,360,140 2,261,464,362 2,399,140,819 349,774,871

Supplemental

disclosures

of cash flow

information:

Cash paid

for income

tax, net of

tax refund 16,061,871 33,512,049 117,313,562 17,103,346

Supplemental

schedule of

non-cash

investing and

financing

activities:

Treasury stock

cancellation 643,954,432 -- 76,433,652 11,143,394

Fixed asset

purchases

financed by

accounts

payable 11,520,005 9,716,130 10,529,644 1,535,135

Conversion

of

convertible

notes to

ordinary

shares -- -- 168,377,187 24,548,000

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

NETEASE.COM, INC.

UNAUDITED SEGMENT INFORMATION

Quarter Ended

June 30, March 31, June 30, June 30,

2007 2008 2008 2008

RMB RMB RMB USD (Note 1)

Revenues:

Online game services 475,149,731 555,859,907 595,039,049 86,751,768

Advertising services 65,328,019 77,144,002 103,937,354 15,153,206

Wireless value-added

services and others 17,494,877 18,919,553 16,897,198 2,463,472

Total revenues 557,972,627 651,923,462 715,873,601 104,368,446

Business taxes:

Online game services (15,679,941) (747,630) 133,155,985 19,413,040

Advertising services (5,552,882) (6,557,240) (8,834,675) (1,288,022)

Wireless value-added

services and others (693,190) (164,940) 12,760,162 1,860,326

Total business taxes (21,926,013) (7,469,810) 137,081,472 19,985,344

Net revenues:

Online game services 459,469,790 555,112,277 728,195,034 106,164,808

Advertising services 59,775,137 70,586,762 95,102,679 13,865,184

Wireless value-added

services and others 16,801,687 18,754,613 29,657,360 4,323,798

Total net revenues 536,046,614 644,453,652 852,955,073 124,353,790

Cost of revenues:

Online game services (45,151,473) (54,290,222) (63,985,689) (9,328,584)

Advertising services (31,585,837) (38,290,401) (45,063,123) (6,569,830)

Wireless value-added

services and others (21,529,809) (19,914,453) (21,116,110) (3,078,554)

Total cost of

revenues (98,267,119) (112,495,076) (130,164,922) (18,976,968)

Gross profit (loss):

Online game services 414,318,317 500,822,055 664,209,345 96,836,224

Advertising services 28,189,300 32,296,361 50,039,556 7,295,354

Wireless value-added

services and others (4,728,122) (1,159,840) 8,541,250 1,245,244

Total gross profit 437,779,495 531,958,576 722,790,151 105,376,822

Gross profit (loss)

margin:

Online game services 90.2% 90.2% 91.2% 91.2%

Advertising services 47.2% 45.8% 52.6% 52.6%

Wireless value-added

services and others (28.1%) (6.2%) 28.8% 28.8%

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

NETEASE.COM, INC.

NOTES TO UNAUDITED FINANCIAL INFORMATION

Note 1: The conversion of Renminbi (RMB) into United States dollars (USD)

is based on the noon buying rate of USD1.00 = RMB6.8591 on June

30, 2008 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: Share-based compensation cost reported in the Company's unaudited

condensed consolidated statements of operations is set out as

follows:

Quarter Ended

June 30, March 31, June 30, June 30,

2007 2008 2008 2008

RMB RMB RMB USD (Note 1)

Share-based compensation

cost included in:

Cost of revenue 4,211,757 3,147,772 3,396,419 495,170

Operating expenses

- Selling and marketing

expenses 4,088,683 2,548,679 2,675,811 390,111

- General and

administrative expenses 9,233,855 7,084,995 7,538,343 1,099,028

- Research and development

expenses 9,523,477 6,501,071 7,225,759 1,053,456

Source: NetEase.com, Inc.
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Keywords: Entertainment
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