Brandi Piacente - Investor Relations Onward Choi - Acting Chief Financial Officer William Ding - Chief Executive Officer Juliet Yang - Investor Relations Manager

Eddie Leung - Merrill Lynch Natalie Wu - CICC Fan Liu - Goldman Sachs Jialong Shi - Nomura Hillman Chan - Macquarie Thomas Chong - BOC International

Ladies and gentlemen we apologize for that slight interruption in today’s conference. Good day again and welcome to the NetEase Fourth Quarter and Full Year 2016 Earnings Conference Call. Today’s conference is being recorded. And at this time I would like to turn the conference over to Ms. Brandi Piacente. Please go ahead ma’am.

Thank you, operator. Please note, the discussion today will contain forward-looking statements relating to future performance of the Company and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its Annual Report on Form 20-F. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures, and a reconciliation of GAAP to non-GAAP financial results, please see the fourth quarter and fiscal year 2016 financial results news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the NetEase corporate website at ir.netease.com. I will now turn the call over to Mr. Onward Choi, Acting Chief Financial Officer, who will read the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Thank you. Brandi. I would like to remind you that for the purposes of these discussions, all percentages are based on Renminbi. Before we discussed the financials, I will provide some opening remarks from William. Good morning and thank you all for joining us on today's call. As one of the largest mobile game markets in the world there is a massive appetite for premium game content throughout China. NetEase has been serving to growing online populations for the past two decades and now it is a great honor to be one of the leading publishers in the mobile market where we strive to introduce premium game contents to entertain and inspire our growing community. These are the efforts that have supported our growth across our business. In 2016 our total net revenues grew by 67.7% for the year and 53.1% in the fourth quarter compared to the same quarter in 2015. For the fourth quarter we saw year-over-year net revenue increases of 62.8% from our online games segment. 9.2% from advertising services segment, and 38.2% from our e-mail, e-commerce and others segment. It is no surprise that our returns growth has been led by our accomplishments in the mobile market. In 2016, we introduced more than 40 new mobile games titles, including a number of chart toppers it is through considerable focus and investments in R&D that enables NetEase to bring highly desirable games to Chinese and the global players. Our hit game Onmyoji has been widely embraced since its introduction in early September. It was named one of the top ten outstanding games of 2016 in China's IOS app store. We are very pleased with this game's early success and we see exciting opportunities to extend its popularity worldwide. In December, we began to release Onmyoji internationally, beginning with Southeast Asia where it has been welcome by a new wave of prayers. We expect to further broaden its reach with plans to bring Onmyoji to additional markets including Japan, Canada, Europe and the United States later this year. Some of our other games that deliver excellent of promises in the fourth quarter included our self-developed mobile games Tianxia III mobile and OverOcean, as well as HIT, extending new licensed ARPG. The mobile additions of Westward Journey Online, Fantasy Westward Journey and New Ghost also continue to be among our most popular games. We recently released Demon Seals and Heroes of Tang Dynasty mobile both of which were well received. Other new mobile titles plan for near term introduction include Westward Journey Rage, which is an exciting ARPG additions of our legacy game that celebrates the 15th anniversary of this title. And a new innovative RPG called Treasure Hunter. We will continue to build our mobile and diverse mobile portfolio where that remains ample opportunities for future growth. With over 100 mobile games we plan to build on this momentum by introducing more mobile versions of our legacy titles as well as new self-develop and licensed mobile games. We also had some strong showings from some of our PC-client games in the fourth quarter, including our flagship game Fantasy Westward Journey Online. Our PC-client games continue to perform steadily and we've released several new expansion packs during the fourth quarter, Kung Fu Master II, Demon Seals, Tianxia III, Heroes of Tang Dynasty Zero and New Ghost to name a few. New expansion packs for Fantasy Westward Journey Online and Revelation were also recently released, and in the coming months we plan to introduce a new expansion pack for a New Westward Journey Online II. Blizzard Entertainment's Overwatch, World of Warcraft, with its latest expansion pack Legion, and Hearthstone with its latest expansion pack Mean Streets of Gadgetzan also remained popular among loyal players in China eager for new content, and attractive new players. Overwatch also established a new sales record in the category of buy-to-play PC-client games in mainland China, with more than five million copies sold by the end of December since its late May release. Furthermore, we are currently working to bring to Chinese players both PC and mobile versions of the highly anticipated, globally acclaimed game, Minecraft. As more and more people gravitate towards a mobile lifestyle there has been a dramatic shape in the way that overall data is consume and evolving advertising climate is a clear by product of these changes with mobile internet becoming one of China's primary advertising platforms. As a comprehensive internet company NetEase is well suited for this trend and our advertising services business continues to enjoy steady growth. Automobile, internet services, and financial services where our top performing advertising verticals in the fourth quarter supported by our industry leading Mobile News App, as well as high-profile events such as the 2016 NetEase Annual Economist Summit and the 2016 NetEase Annual Attitude Award Ceremony. Additionally, our e-commerce business continues to thrive both Kaola.com and Yanxuan demonstrate a strong growth in the fourth quarter. This business is still in its development stage, and we believe there is substantial opportunity here as this platforms mature. We have a great do to look forward to in 2017. We have always taken pride in providing innovative and outstanding products and services that reflects the needs of the exciting and ever changing internet community. As we move through the year ahead, we will continue to populate China's internet market with excellent mobile and PC games and online resources that support our growth and create values for all of our stakeholders. This concludes William’s comments. I will now provide a review of our fourth quarter and fiscal year 2016 financial results. I will primarily focus on the discussions of margins and expense fluctuations along with net profit. Our gross profit for the fourth quarter of 2016 was RMB6.5 billion or US$930.9 million, compared to RMB5.3 billion and RMB4.2 billion for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year increase in online games gross profit was primarily driven by increased revenue contributions from our mobile games such as Onmyoji and the mobile versions of New Ghost as well as Blizzard Entertainment's Overwatch, World of Warcraft. The quarter-over-quarter increase in online game gross profit was primarily driven by increased revenue contribution from mobile games such as Onmyoji and the mobile versions of New Ghost. The year-over-year and quarter-over-quarter increases in advertising services gross profit where primarily attributable to our monetization efforts for our mobile applications primarily our Mobile News App. The year-over-year increase in e-mail, e-commerce and others gross profit was primarily due to increased revenue contributions from e-commerce business, such as Kaola.com. The quarter-over-quarter decrease in e-mail, e-commerce and others gross profit was primarily due to decreased revenue contributions from certain e-commerce businesses with relatively higher gross profit margins. The gross profit margins for our online games business in the fourth quarter was 60.7%, compared to 65% and 67.2% for the preceding quarter and the fourth quarter of 2015, respectively. The quarter-over-quarter decrease in gross profit margin was mainly due to the one-off recognition of certain royalty expenses related to licensed games in the fourth quarter of 2016, as well as increased revenue contribution from mobile games. The year-over-year decrease in gross profit margin was mainly due to increase revenue contributions from mobile games and license games, which have relatively lower gross profit margins as a percentage of our total online games revenues. Gross profit margin for our advertising services business for the fourth quarter of 2016 was 66.5%, compared to 65.3% and 68.1% for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year decrease in gross profit margin was mainly due to higher staff-related costs. Gross profit margin for the e-mail, e-commerce and others business for the fourth quarter of 2016 was 23.4%, compared to 33.5% and 6% for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year and quarter-over-quarter changes in gross profit margin were primarily attributable to changes in our e-commerce business mix. Total operating expenses for the fourth quarter of 2016 were RMB2.6 billion or US$374 million, compared to RMB2.5 billion and RMB1.8 billion for the preceding quarter and the fourth quarter of 2015, respectively. The year-over-year increase in operating expenses was mainly due to higher staff-related costs resulting from an increase in headcount, average compensations, research and development investments and selling and marketing expenses. The quarter-over-quarter increase in operating expenses was mainly due to higher staff-related costs and research and development investments, which was partially offset by decreased selling and marketing expenses. We’ve recorded a net income tax charge of RMB882 million or US$127 million for the fourth quarter of 2016, this compares to RMB427.2 million and RMB513.8 million for the preceding quarter and the fourth quarter of 2015, respectively. The effective tax rate for the fourth quarter of 2016 was 19.2%, compared to 13.3% and 19.2% for the preceding quarter and the fourth quarter of 2015, respectively. The quarter-over-quarter change in the effective tax rate was mainly due to the fact that certain of our subsidiaries were approved as Key Software Enterprises in 2016 and subject to a preferential tax rate of 10% for 2015. We recognized certain related tax credits in the third quarter of 2016. Net income attributable to the Company's shareholders for the fourth quarter of 2016 totaled RMB3.7 billion or US$530.5 million, this compared to RMB2.7 billion and RMB2.2 billion for the preceding quarter and the fourth quarter of 2015, respectively. Non-GAAP net income attributable to the Company's shareholders for the fourth quarter of 2016 totaled RMB4 billion or US$569.9 million, this compared to RMB3 billion and RMB2.4 billion for the preceding quarter and the fourth quarter of 2015, respectively. During the fourth quarter of 2016, we had a net foreign exchange gain of RMB90.5 million or US$13 million, this compared to net foreign exchange gains of RMB14.8 million and RMB66.3 million for the preceding quarter and the fourth quarter of 2015, respectively. These gains were mainly due to unrealized exchange gains and losses arising from our U.S. dollar-denominated bank deposits and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods. We’ve reported basic and diluted earnings per ADS of US$4.04 and US$4.01, respectively, for the fourth quarter of 2016. This compares to basic and diluted earnings per ADS of US$3.01 and US$2.99, respectively, for the preceding quarter, and US$2.37 and US$2.35, respectively, for the fourth quarter of 2015. Non-GAAP basic and diluted earnings per ADS were US$4.34 and US$4.3, respectively, for the fourth quarter of 2016, this compares to non-GAAP basic and diluted earnings per ADS of US$3.31 and US$3.29, respectively, for the preceding quarter, and US$2.58 and US$2.56, respectively, for the fourth quarter of 2015. Turning to our fiscal year 2016 financial results; our gross profit for the year was RMB21.7 billion or US$3.1 billion, compared to RMB13.4 billion for the preceding fiscal year. The increase in online game services gross profit in 2016 was primarily attributable to increase the revenue contribution from our self-developed mobile games such as the Westward Journey Online and Fantasy Westward Journey mobile games, Onmyoji and the mobile versions of New Ghost, as well as licensed games such as Blizzard Entertainment's Overwatch. The increase in advertising services gross profit in 2016 was due to the monetization efforts for our mobile applications, primarily our Mobile News App. The top performing advertising verticals in fiscal year 2016 were automobile, internet services and telecommunication services. The increase in e-mail, e-commerce and others gross profit in 2016 was primarily due to business development and gross profit margin improvement of certain e-commerce businesses. Our total operating expenses for fiscal year 2016 were RMB9 billion or US$1.3 billion, compared to RMB6.1 billion for the preceding fiscal year. The increase in operating expenses in 2016 was primarily due to increased selling and marketing expenses, higher research and development investments and higher staff-related costs resulting from an increase in headcount and average compensation. We’ve recorded a net income tax charge of RMB2.1 billion or US$302.8 million and RMB1.3 billion for fiscal years 2016 and 2015, respectively. The effective tax rate was 15.1% for fiscal year 2016, compared to 15.7% for fiscal year 2015. Our net income attributable to the Company's shareholders for fiscal year 2016 totaled RMB11.6 billion or US$1.7 billion, this compared to RMB6.7 billion for the preceding fiscal year. Non-GAAP net income attributable to the Company's shareholders for fiscal year 2016 totaled RMB12.9 billion or US$1.9 billion, compared to RMB7.4 billion for fiscal year 2015. We had a net foreign exchange gain of RMB146.5 million or US$21.1 million for fiscal year 2016, compared to RMB133.8 million for fiscal year 2015. The net foreign exchange gains were mainly due to unrealized exchange gains arising from our U.S. dollar-denominated bank deposit and short-term loan balances as the exchange rate of the U.S. dollar against the RMB fluctuated over these periods. Our basic and diluted earnings per ADS for fiscal year 2016 were US$12.73 and US$12.63, respectively. This compares to basic and diluted earnings per ADS of US$7.38 and US$7.34, respectively, for fiscal year 2015. Our non-GAAP basic and diluted earnings per ADS for fiscal year 2016 were US$14.11 and US$14, respectively. This compares to non-GAAP basic and diluted earnings per ADS of US$8.13 and US$8.08, respectively, for fiscal year 2015. As of December 31, 2016, our cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB36.9 billion or US$5.3 billion, compared to RMB26.8 billion as of December 31, 2015. Additionally, our cash flow generated from operating activities was RMB15.5 billion or US$2.2 billion for fiscal year 2016, compared to RMB8.1 billion for the preceding fiscal year. We remain committed to returning values to our shareholders and I’m pleased to announce that our Board of Directors approved a dividend of US$1.01 per ADS for the fourth quarter of 2016, which is expected to be paid on March 10, 2017 to shareholders of record as of the close of business on March 3, 2015. Additionally using our working capital we repurchased approximately 1.5 million ADSs for approximately US$205.3 million under our previous share repurchase program that expire August 31, 2105. To continue this trend our Board approved a new 12 month share repurchase program beginning on the November 15, 2016 for up to US$1 billion. As of December 31, 2016 no ADS where repurchase under this program. Thank you for your attentions. We would now like to open the call to your questions. Operator please go ahead.

Thank you, sir. [Operator Instructions] We'll take our first question from Eddie Leung with Merrill Lynch.

Good morning. Congratulations on a very good quarter. Two questions on your mobile game business, the first one is more housekeeping, could you give us some color on the contribution of mobile games within your online game revenue segment? And then the second question is about the gross margins, the size - the mix shifts to licensing games as far as our mobile games, I’m just wondering within mobile games are we seeing a change in gross margins as well. And if so, what would be the reason? Thanks.

So first of all maybe regarding your first questions about the mobile contributions for the game businesses up to the end of the fourth quarter it has come up to 64% and with regards to the gross margins for the licensing ending mobile I believe that it has also came to a relatively stable levels, but of course if you compare to the overall gross margins for the gaming segments, the decrease was mainly due to the higher contributions being coming from the mobile games and also the license games.

Thank you.

And we'll go next to Natalie Wu with CICC.

Hi good morning William, Onward, Juliet, and Brandi congratulations sound on a very strong quarter and thanks for taking my question. Two questions from me, the first one is can management update us the recent development of Minecraft, including launch date, monetization method, expectation and also how to collaborate Minecraft with education? And the second one is that can William show some color with us regarding the international expansion plan in the future.

[Foreign Language]

[Foreign Language]

So with regard to your first question about Minecraft developments, so basically William highlighted that historically there would be two games that got the highest revenue on the global basis. The number one would be Tetris and the second one would be the Minecraft, and basically for the launch date for our own Minecraft game titles we’re expected to launch it by July this year. And this would be a very good diversions and different from the prevailing international versions that are currently in place. And with regard to your second question about the international expansion plans and this is - we have already got the plans to launch the Onmyoji versions on the 21 of February and earlier than we have already launched the games in some other areas like Taiwan, Hong Kong and also New Zealand that got the number one ranking on those app store chart on those places. And coming alone, we are also expected to launch the versions of the Onmyoji, by May this year. And at all times, we believe that is NetEase by cumulating with over 15 to 16 years of game development, experiences with the fact that we have also got a very strong capabilities to self-develop the games, and we also expected that there will be more games to come to launch in the periods to come. And basically this would be our current about the international expansions.

And we’ll take our next question from Fan Liu with Goldman Sachs.

Morning William, Onward and Juliet, thanks for attending my question. Could you please share with us what are your invitation from a legacy titles such as FWJ and WJ all this year, we know that you tend to add more game content and also launch more promotion campaign follow titles, so which is now maybe you can add some colors on this front. And then I have a follow-up question.

[Foreign Language]

Apologize me interruption. We are experiencing again an interruption in the conference. And Ms. Liu you would just one moment we want to restate your question. Let me put everybody on hold for just a moment. I’ll let know this since we have speakers back on. [Technical Difficulties]

Hi Fan Liu.

Hi. Can hear me?

Yeah. Could you just repeat your question please, there’s some technical difficulties.

Sure. Of course. So my question is that could you please show that’s what’s your expectations from a legacy titles such as FWJ and WJ all this year. So we know that you plan to add more game contents in act of this year from this legacy title, so just I want to know maybe you can add some colors on this launch. And then I have a follow-up question?

[Foreign Language]

[Foreign Language]

So basically, sorry, Fan maybe you just get me to recap in English very quickly. So basically with regard to the expectations about the Company’s on two games WJ and also FWJ basically with a very long history. So game developments in the past 10 plus years we do have very strong capabilities to deliver the highest qualities and premium game to our players, and no matter we are talking about the PC and mobile games. We definitely what we able to deliver more new and innovative contents to our part of the players and as well as to serve our fans with the highest quality and enabling them to experience the best ever contents that they can from those games. And the early of the year we have also been implementing some try out on the AR technologies and going forward we would also be planning to incorporate this kind of features to our existing games like the WJ and also the FWJ.

Thank you. So my question, yeah, thank you. My second question is about we know that the e-commerce, e-mail others so quarter-on-quarter decline on gross margin this quarter, so may I know the reason behind that. Is that possible to have maybe around your breakdown between this and also platform been this, is possible?

[Foreign Language]

Okay. So Fan maybe I will take this question. So, basically this is quite obvious that in the past products there has been the probably the revenue coming from the e-mail, e-commerce and others segments. Just as what we have also highlighted in the press release because there are certain e-commerce businesses that has also been scaling down in the past quarters of which they what processed are relatively higher gross margins and that’s why you will see that there has been a decrease in terms of the gross margins in the fourth quarter. And in terms of the overall makeup of this segment just as what we have also previously highlighted I would say that a high portions of it would be coming from our e-commerce businesses like the Kaola.com and also Yanxuan.

And we’ll take our next question from Jialong Shi with Nomura.

Hi, good morning. Thanks for taking my questions. Congratulations on a very solid quarter. I have two quick questions. First is about we noticed there is the one of royalty expense book into our cost cut sales in Q4. So I just wonder which game if this royalty expense for is that a new game or it is related to some gaming - some existing games. And also I just wonder for Kaola and Yanxuan both business have been quite strong growth in the past quarters. If we look at the next few quarters you expect to see that growth rate for Kaola and Yanxuan to slow down because of that rising base effect, and also what is that trend for the margins of Kaola and Yanxuan over the next year. I would translate the questions myself. [Foreign Language]

[Foreign Language]

So maybe I just recap your second question about how we will pass the Kaola and Yanxuan development especially in 2017. So basically for both the Kaola and also the Yanxuan platforms they are both very important to us as an e-commerce businesses and for Kaola basically we are doing a huge and large volumes of purchases from overseas by ourselves, and which in the way we can ensure the authenticities of the goods and at the same time we are also offering a very good pricing to our customers who are purchasing from our Kaola.com platforms. And in 2017 in terms of this growth expectation we do anticipate that the growth rate would be much faster than last year, which is 2016. And also another point that we would like to reiterate is that the Kaola.com e-commerce platform is very unique by itself from all the other platforms doing similar businesses. And as for the Yanxuan businesses, basically we're adapting to a ODM models and we are pioneering with some very establish we known in large factories are producing still quality goods to our customers, and we are also making good use of this platform to deliver the highest values to our customers, especially China customers who are buying those stuff. And in a way that they can have a very good experience from those fine experiences. And going back to your previous question is about the one-off recognitions of the relative expenses. This is related to some of our existing licensing teams and that it has also come to the timing that we have to it at a one-time treatment.

We’ll take your next question from Hillman Chan with Macquarie.

Congratulations to the teams on a very strong quarter. I have two questions. First one is that regarding our overseas expansion I let say Onmyoji, could you also share more games in the pipeline that you want to bring into the overseas market. And these overseas markets what is our strategy to package the game that we publishing on our home or we partnering with some local distributors [Foreign Language].

[Foreign Language]

So basically with regard to our overseas expansion plans apart from a very good success that we have already made for Onmyoji there are definitely some other games that we are also making good progress things like the VR games which is called the Twilight Pioneers and the other one which is the - in Chinese which is the strategy [ph] and we have also been rolling the overseas versions as well. And we believe that in three to five years’ time based on our efforts by expanding our footprint in overseas markets, we do definitely got a much better developments on that front.

And also on the VR/AR game pipeline, could use share more colors for this year or next year and when do you see the VR/AR market would pick up more meaningfully in China and how do you see the barrier and how it size well, right now, people just requiring your VR/AR that you’ll see the pipeline. [Foreign Language]

[Foreign Language]

So with regard to the company’s strategies on the VR and AR front NetEase is definitely very serious and taking a leading role in terms of its developments and the potential game throw out in the market. And earlier this year in 2017 we have also been embedded some AR features within our Onmyoji games which also got a very good feedback from the market. And in fact another games which is - which can become considered as our first VR games which is called a Twilight Pioneers that we have to roll out on the Google platforms that have also been currently very good feedback so far.

We’ll take your next question from Thomas Chong with BOC International. Mr. Chong your line is open; please check your mute button on your phone.

Hi William, Onward, Juliet thanks for taking my question. I have a question about Onmyoji is about how should we think about the January performance versus the month of December, because we see that from marketing promotions for the games for other peers, so obviously month-on-month trend in January [Foreign Language].

So I believe that for now, because we would be focusing more on the yearend performances so far and so we would perhaps give more colors perhaps as a later stage.

Thanks Onward. May I have another follow-up question is about the online advertising trend. If any color about the sentiment this year and how we think about the growth rate in this year. [Foreign Language]

[Foreign Language]

So there would be two parts of the responses that William would like to highlight. So with regard to the advertising services trend, so basically, the simple answer to it is that we are still expecting that there would be a good growth in 2017, owing to the fact that we have quite a comprehensive mobile applications in place apart from the mobile news applications, we have our own stock and also the Cloud Music stuff and all of those would be able to generate a meaningful and good traffic stands off which we can also enjoy it could grow in 2017. And another point that William would like to highlight it would be with regard to how we view about the overall performances on the Onmyoji, because NetEase has been a companies that has been a very good capabilities of developing its own game and things like - games like the FWJ, WJ online have already been in the operations for 15 years, and they are still doing very successfully somehow this would be attributed this to our strength in order to develop some very new and premium content that can also fit the expectations of our targeted games and players, and in three to five years times we do see that not only just the Onmyoji is there would be perhaps some more great titles to put into the market that can also be doing a very good in the coming businesses. And at the same time, we are also expecting that the Onmyoji well within the would be following this similar trend that we have seen from the FWJ and WJ online that would also be a very long lasting game titles.

[Foreign Language]

Okay. So another supplement that William would also like to highlight it with regards to how the performances of Onmyoji’s in general was, is that the overall spending, I think assumptions that’s also been rising in the January this year.

And ladies and gentlemen that is all the time we have for questions today. I’d like to turn the call back over to management for any closing remarks.

Thanks everybody for joining us. If you have further questions, you can feel free to contact us or Juliet Yang and Hangzhou for the investor relations. Thank you so much.

Ladies and gentlemen, that does conclude today’s conference. We appreciate your participation.