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Online Games Help Push Netease.com Q2 Growth; Wireless Revenue Slows

Netease.com's (NTES) newly released financial results for its second quarter ended June 30, 2005, show the company's total revenues for the quarter increased 27.2% quarter-over-quarter and 90.2% year-over-year to US$50.4 million. However revenues from wireless value-added services and others decreased slightly from US$2.4 million (CNY20.3 million) for the preceding quarter to US$2.4 million (CNY19.7 million) for the second quarter.

Revenue from online game services grew 31.1% over the previous quarter and 146.5% year-over-year on the continued strength and leading positions of in-house developed games, Fantasy Westward Journey and Westward Journey Online II. Fantasy Westward Journey and Westward Journey Online II reported peak concurrent user numbers of approximately 710,000 and 486,000, respectively, for the second quarter of 2005.

Net profit after tax for the quarter increased 57.8% quarter-over-quarter and 147.0% year-over-year to US$29.3 million.

Commenting on the second quarter's results, acting Chief Executive Officer Ted Sun said, "With the first half of 2005 completed, it is clear that Netease is one of the leading Internet portals in China, with a heavy emphasis on its online game operation and development which continues to be the principle driver of the Company's growth. We have also shown continuous improvement on providing stronger channel content on our websites through strategic partnerships and initiatives, which are now attracting more advertising spending. We hope to achieve healthy growth in the remainder of 2005 as we role out our pipeline of massively multi-player online role-playing games ("MMORPGs") and casual games."

Netease reported total revenues of US$50.4 million for the second quarter, representing a 27.2% increase over US$39.6 million for the preceding quarter, and a 90.2% increase over US$26.5 million for the corresponding period a year ago.

Westward Journey Online II ranked as one of the top-five MMORPGs in terms of user numbers in China for the second quarter, and it achieved record peak and average concurrent users of approximately 486,000 and 198,000, respectively, for the second quarter of 2005.

Strong demand for these games can be attributed to a number of factors, including content enhancements through expansion packs released during the first quarter, the continued efforts to expand the company's distribution network (to access games and distribution of point cards) and further penetration into the market by enhanced sales and marketing efforts and online driven events.

Revenues from advertising services increased by 18.0% to US$6.5 million over the preceding quarter's US$5.5 million and 30.8% over US$4.9 million for the corresponding period a year ago. The increase was driven by several factors, including the execution of portal-related agreements with parties such as China Finance Online, the title sponsor of the Company's finance channel, and Sou Fun, the partner for the company's property channel.

Revenues from wireless value-added services and others in the second quarter of 2004 was US$4.7 million. This decrease was mainly due to the decrease in revenue earned from various SMS services as a result of intense competition and the overall decrease in popularity of such services in the wireless market in China.

The Company reported gross profit in the second quarter of US$39.5 million, representing a 29.1% increase over the previous quarter's US$30.6 million and a 99.0% increase over US$19.8 million for the corresponding period a year ago.

Total operating expenses for the quarter were US$9.7 million, representing a 11.5% decrease from the previous quarter's US$10.9 million and a 25.8% increase from US$7.7 million in the corresponding period a year ago.

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