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Online Games Are Netease's Main Revenue Driver

For the fourth quarter ended December 31, 2004, Netease.com (NTES) reported total net revenues of US$31.6 million, a 9.7% increase over total net revenues of US$28.8 million for the preceding quarter and a 55.1% increase over total revenues of US$20.4 million for the corresponding period in 2003.

The main revenue driver for the fourth quarter was online game services which grew to CNY196.8 million (US$23.8 million), a 22.6% increase over CNY160.5 million (US$19.4 million) for the third quarter. Performance of Netease's two self-developed titles, Westward Journey Online Version 2.0 and Fantasy Westward Journey Online, was strong during the quarter, as highlighted by record average concurrent user numbers of 159,000 and 146,000, respectively, for the fourth quarter in 2004. The peak concurrent users for Westward Journey Online Version 2.0 and Fantasy Westward Journey reached approximately 349,000 and 356,000, respectively, during the fourth quarter of 2004. Westward Journey Online Version 2.0 and Fantasy Westward Journey experienced quarter over quarter revenue growth rates of 15.2% and 33.2% in the fourth quarter, respectively, primarily due to the successful launching of new expansion packs and, to a lesser extent, the seasonal effect of the National Day holiday in China and the Christmas holiday period during which users had more time to play such games.

Net revenues from advertising services for the fourth quarter were CNY40.9 million (US$4.9 million), representing a 12.4% decrease from the preceding quarter's CNY46.7 million (US$5.6 million). The decrease in net revenues in this quarter when compared with the third quarter was partly due to seasonality impact, as certain advertisers decreased their spending on promotions and marketing during the winter season. The decrease was also partly due to the fact that certain of Netease's major advertisers spent a major portion of their annual marketing budget in the third quarter of 2004 during the summer holiday and the Olympics period and, accordingly, their advertising spending decreased in the fourth quarter.

Net revenues from wireless value-added and other fee-based premium services for the fourth quarter were CNY24.0 million (US$2.9 million), representing a 23.5% decrease from the preceding quarter's CNY31.4 million (US$3.8 million). Strong competition in this sector, the general decrease in popularity of pure SMS products and the ongoing implementation of the mobile operators' new billing platforms across China continued to adversely impact results.

Netease achieved gross profit in the fourth quarter of CNY207.4 million (US$25.1 million), representing a 9.3% increase over the previous quarter's CNY189.8 million (US$22.9 million) and a 52.2% increase over CNY136.2 million (US$16.5 million) for the corresponding period a year ago.

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