Brandi Piacente – The Piacente Group, Investor Relations Onward Choi – Chief Financial Officer William Ding – Chief Executive Officer

Eddie Leung – Merrill Lynch Alicia Yap – Citigroup Jialong Shi – Nomura Securities Fan Liu – Goldman Sachs Natalie Wu – CICC Tian Hou – T.H. Capital Hillman Chan – Macquarie

Good day everyone and welcome to the NetEase Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Brandi Piacente. Please go ahead.

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, a reconciliation of GAAP to non-GAAP financial results, please see the third quarter 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. Before I begin, please note that, for the purposes of these discussions, all percentages are based on Renminbi. Our ability to look towards the future has enabled us to build a dedicated community of followers who counts on the quality and innovations of our products and services. With our top of the line gains and products we further this growth in the third quarter demonstrating improvements across each of our business lines. Our total net revenues increased by 38.1% year-over-year led by our online game services segment which grew 26% followed by 23.8% revenue growth in advertising services, and 107.2% growth in our e-mail, e-commerce and other segment. Our mobile games continue to be among the industry's most popular games. In the third quarter we introduced new chart topping games attracting a multitude of players. Onmyoji, our latest 3D mobile experience became an instant success. Throughout its release in early September, this exciting new game quickly surpassed our expectations and was rated as one of the top grossing in China's IOS app store for both the iPhone and iPad. The popularity of our Fantasy Westward Journey II, and Westward Journey online mobile games and the mobile versions of New Ghost also persisted in the third quarter. Other mobile games launched in the third quarter included Tianxia III mobile, Over Ocean, and Audition mobile. These games were followed by the launch of XIT, a stunning new ARG in October and we are planning to bring additional original titles in the near-term to our growing mobile portfolio of over 100 games with titles including, Heroes of Tang Dynasty Mobile, Demons Seals Mobile, Land of Glory. Our PC client games also deliver a steady performance in the third quarter. We continue to introduce new content and expansion packs for our leading games including Fantasy Westward Journey Online which was formally named Fantasy Westward Journey II, New Westward Journey Online II, New Westward Journey Online III, Heroes of Tang Dynasty Zero, Revelations, and New Ghost. To further the lifespan of our most popular titles we also launched a new expansion packs for Kung Fu Master II and Demon Seals recently. And plan to launch new expansion packs in the upcoming months for games including Tianxia III and Heroes of Tang Dynasty Zero. Blizzard Entertainment's and Hearthstone: Heroes of Warcraft, with this new adventure, One Night in Karazhan, continue to gain favorite among Chinese audiences in the third quarter, demonstrating their universal strength of this world renowned friends. Similarly, the latest expansion pack for Blizzard WorldWar Legends has got considerable attentions from players in China surpassing our expectations since its September first released in Mainland China. Our competitive edge among the expanding internet technology industry remains strong as we work to develop new and improved products. More and more users are looking into length their online activities and connect with each other, and we are driving to introduce innovative content and gameplay that improves this interconnectivity. In some of the ways we can achieve this goal is through enhanced interactive communications for mobile users and by introducing the word show and augmented mental reality interfaces that further grow our community and improve player's experiences. Turning to our advertising services business; resource sequential and year-over-year revenue increases in the third quarter was the automobile internet service and telecommunications services as our top performing verticals. There remains considerable opportunities with this business and we are creating attractive options to our advertising partners with our industry leading mobile news app diversify mobile products, as well as high profile events such as the 2016 Summer Olympics. Additionally, our Kaola.com e-commerce offering continues to grow at a healthy pace. While our primary from focus is direct merchandise sales, we also look to maximizing the value of complimentary strategies that extend the ratio of this platforms. NetEase has a rich history of innovations in grow. We believe that there remains significant opportunities for our company with exciting developments in the Internet services marketplace where we hold considerable experience with a track record of leaderships and competitive R&D capabilities. As we continue to grow our business we remain focused on bringing our users premium products and services that capture the imagination and keep them connected. This concludes William's comments. I will now provide a review of our third quarter 2016 financial results. I will primarily focus on the discussions of margins and expense fluctuations along with net profits. Gross profit for the third quarter of 2016 was RMB5.3 billion or $799.8 million, compared to RMB5.3 billion and RMB3.8 billion for the preceding quarter and the third quarter of 2015, respectively. The year-over-year increase in online games gross profit was primarily driven by increased revenue contributions from mobile games such as the Westward Journey Online mobile games. The mobile versions of New Ghost and Blizzard Entertainment's Overwatch and Warcraft. The year-over-year and quarter-over-quarter increases in advertising services gross profit were primarily attributable to strong demand from advertisers and our monetization efforts for the mobile applications, primarily our mobile news app. The year-over-year and quarter-over-quarter increases in e-mail, e-commerce and orders gross profit was primarily due to increased revenue contributions from our e-commerce business. Our gross profit margins for the online games business for the third quarter of 2016 was 65% compared to 66.2% and 67.9% for the preceding quarter and the third quarter of 2015 respectively. The year-over-year decrease in gross profit margin was mainly to increased revenue contributions from mobile games and licensed games which have relatively low gross profit margins as a percentage of our total online games revenues. The quarter-over-quarter decrease in gross profit margin was mainly due to increase in revenue contributions from licensed games. Our gross profit margins for the advertising services business for the third quarter of 2016 was 65.3% compared to 65.5% and 67.6% for the preceding quarter and the third quarter of 2015 respectively. The year-over-year decrease in gross profit margin was mainly due to higher stuff related costs and content purchase costs. Our gross profit margins for the e-mail, e-commerce and others business for the third quarter of 2016 was 33.5% compared to 33.8% and 0.1% for the preceding quarter and the third quarter of 2015 respectively. The year-over-year increase in gross profit margin was primarily attributable to the business developments and a gross profit margin improvement of NetEase's certain e-commerce businesses. Our total operating expenses for the third quarter of 2016 were RMB2.5 billion or $372.9 million, compared to RMB2.2 billion and RMB1.8 billion for the preceding quarter and the third quarter of 2015 respectively. The year-over-year and quarter-over-quarter increases in operating expenses were mainly due to higher staff-related costs resulting from an increase in headcounts, average compensation, research and development investments, and selling and marketing expenses. We recorded a net income tax charge of RMB427.2 million or $64.1 million for the third quarters of 2016, compared to RMB262.7 million and RMB399.2 million for the preceding quarter and the third quarters of 2015 respectively. The effective tax rate for the third quarter of 2016 was 13.3% compared to 8.6% and 17.1% for the preceding quarter and the third quarter of 2015 respectively. The year-over-year and quarter-over-quarter changes in effective tax rate was mainly due to the fact that certain of our subsidiaries were approved as Key Software Enterprises in the second quarter of 2016 and subject to a preferential tax rate of 10% for 2015. We recognized the related tax credits in second and third quarters of 2016. The effective tax rate represents certain estimates as to the tax obligations and benefits applicable to it in each quarter. Net income attributable to the company's shareholders for the third quarter of 2016 totaled RMB2.7 billion or $410.9 million, compared to RMB2.7 billion and RMB1.9 billion for the preceding quarter and the third quarter of 2015 respectively. Non-GAAP net income attributable to the company's shareholders for the third quarter of 2016 totaled RMB3 billion or $452.5 million, compared to RMB3.2 billion and RMB2.1 billion for the preceding quarter and the third quarter of 2015 respectively. During the third quarter of 2016, we had a net foreign exchange gain of RMB14.8 million or $2.2 million, compared to net foreign exchange gains of RMB77.3 million or RMB66.5 million for the preceding quarter and the third quarter of 2015 respectively. The net foreign exchange gains were mainly due to unrealized exchange gains and losses arising from our U.S. dollar denominated bank deposits and softer loan balances. As the exchange rate of the U.S. dollar against RMB fluctuated over the periods. We reported basic and diluted earnings per ADS of $3.13 and US$3.11, respectively, for the third quarter of 2016. This compares with basic and diluted earnings per ADS of $3.11 and $3.09, respectively, for the preceding quarter. And basic and diluted earnings per ADS of $2.15 and $2.13, respectively, for the third quarter of 2015. Non-GAAP basic and diluted earnings per ADS were $3.45 and $3.42 respectively for the third quarter of 2016. This compares with non-GAAP, basic and diluted earnings per ADS of $3.68 and $3.66, respectively, in the preceding quarter, and non-GAAP basic and diluted earnings per ADS of $2.34 and $2.32, respectively, for the third quarter of 2015. As of September 30, 2016, our total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB32.1 billion or $4.8 billion, compared to RMB26.8 billion as of December 31, 2015. Cash flow generated from operating activities was RMB3.7 billion or $559.3 million for the third quarter of 2016, compared to RMB3.3 billion and RMB2.2 billion for the preceding quarter and the third quarter of 2015 respectively. Our growth and success allows us to continue returning capital to our shareholders. As such, our Board of Directors has approved a dividend of $0.76 per ADS for the third quarter of 2016. The dividend is expected to be paid on December 2, 2016 to shareholders of record as of the close of business on November 25, 2016. Also as you may recall, on September 1, 2015, we announced that our Board of Directors approved the new share repurchase program of upto $500 million of our outstanding ADS for a period not to exceed twelve months. As of August 21, 2016, the last day to repurchase shares under this program; we had repurchase approximately $1.5 ADS for approximately $253 million under this program. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

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

Good morning. Just two quick questions; the first one is on the mobile game revenue -- if I calculate correctly since there was a small decline sequentially in the third quarter for the segment, and we know that we launched that new game in September which is pretty successful. So just wondering why there was a small decline in the revenues in the quarter sequentially? And then secondly, just wondering what's the decrease in income in the third quarter? Thank you.

[Foreign Language]

So Eddie, with regard to your first question -- so basically, although we appreciate the fact that we have launched the new games like Onmyoji in early September like the second or third on the IOS platform, but the full platform launch only happened until towards the end of September like September 22, including the android platforms. So basically you would appreciate that the full impact of those games contributions wouldn't be there apparent in third quarters. And there would also be certain deferred revenue that we have to account for such that the revenue would be amortizing the upcoming periods. And with regard to William's projections and estimates about how our gaming -- mobile games business would be performing in the upcoming quarters and the period ahead, we are still quite competitive on this front because that's is very strong on this innovation front and also we have also got a very strong strength in terms of exploring about how to do it much better, especially in the mobile games arena. So we are looking forward that we can think uptake our leading positions in the China market in terms of the mobile games development. So this basically would be the reasons to explain your first question. As a with regard to your second question, at least that you would see that there has been a an increase in terms of the investment income in the third quarter of 2016 versus the last quarter, there has been a loss because if you recall, we have also made a kind of an investment impairment provisions in the second quarters and this explains why the number has returned to a positive numbers in the third quarter.

Thank you very much.

Next we'll go to Alicia Yap with Citi.

Good morning, William and Onward. Thanks for taking my questions. My question is related to your new game Onmyoji and so I wanted you to help us understand where are the incremental new users of Onmyoji come from, and also, based on your tracking and your big data, what is the percentage of overlaps of Onmyoji gamers to your existing games. If there are some overlaps there, which games are most affected or cannibalized by Onmyoji? Is that the Fantasy or the Westward Journey? And then lastly, related to Onmyoji as well, with the October and November tracking, Onmyoji is now surpassing Fantasy mobile. Does that mean that we will experience some sequential decline for Fantasy revenues or Onmyoji actually helped to expand the entire gaming revenue's pie that we should not worry about Fantasy? Thank you.

[Foreign Language]

So basically with regard to -- it's about the performance on our Onmyoji launch, basically we consider that this game by itself is a globally popular and popular content, especially touching on the second generation stuff. And so we have also been seen that we have a recorded quite a lot of successes on a worldwide basis; say for example, in the Australian, we keep up in the top five positions and whereas we can also share more data about our performance in other offices, markets like U.K. and U.S. off which we also believe that we have been performing very well so far. And on the other hand we do see that Onmyoji by itself is a game with a storyline that can take into the for all the Chinese audiences on a global basis and apart from pushing -- putting the games in the China market and some other overseas markets we are also looking across to explore and also into Japanese market as well. And as always we believe that this game has got a very high popularity amongst the Chinese audiences and in the past, one to two months times of its launch in the market -- we have been receiving very well and high -- received by users and also got high recognition by the players as well.

[Foreign Language]

So another point that we now would like to reiterate is that, there is no need to be too much concerned about the launch of Onmyoji with a negative impact, cannibalized the existing games for our legacy game IPs like the Offensive Western Journeys or Western Journey online and Evening Ghost because of the new products that we are designing, we would incorporate different and unique user experiences within that such that all the products that we launched in the markets will be complementary by themselves rather than cannibalizing one another.

Next we'll move to Jialong Shi with Nomura Securities.

Good morning, management. Thanks for taking my questions. I have two questions there. For your two legacy mobile blockbusters; Westward Journey and Westward Journey II; their ranking only after fluctuated Q3 specially, WWJII. I just wonder how do use the traffic for those titles and how long do you think are the life cycle for these two titles may potentially last? And also for Onmyoji, just wonder when you will you bring it Japan? And are you working with Japanese population or you will operate that game by yourself in Japan? And I have a follow-up on e-commerce.

[Foreign Language]

So basically with regard to your questions about the gaming fronts, first of all, William highlighted that with regard to the user traffic in the third quarters, in fact we are still quite happy and confident to see that the active user base has been going up rather than what you see by referring to top charts by seeing the ranking it has been volatile for some time. And another thing that we would like to reiterate is that -- that should be the only one company on a worldwide basis we process the strength and abilities to operate the gaming businesses on a very long lasting manner. This can be revealed from the fact that we have been doing very good on the PC front and we also got the confidence that we can extend this capabilities and abilities to the mobile gaming fronts as well. And we are also in anticipation that in the upcoming five to ten years' time, we would not be able to go out very good qualities game products and 2D markets that receive the highest user satisfactions that we are expecting. And on your second -- the expected launch of Onmyoji's in the Japanese market, so far no designated timeframe but in the meantime we made some more observations on how it has been doing in other overseas markets like Australia and New Zealand. But so far we have also been receiving very favorable and positive feedback from those areas as well.

Next we'll move to Fan Liu with Goldman Sachs.

Hi, thank you for taking my question. So my question is very quick; just about the revenue contribution for your mobile games; how much is from IOS platform and how much is from NGO platform? And also could you please give us an update of Overwatch?

[Foreign Language]

So we'll get back to you on the part about the Overwatch performance lately. First of all, the Company has been very satisfied with its performance so far. And one of the latest initiative stuff we've been doing so far, doing promotions at the Internet Cafe's where we have been encouraging some new users to try out the games without buying the CD, so they can -- this would also be a very effective way for us to develop new group of users to participate in trying out these games. And on the other hand, we are also looking forward in terms of the future developments off the Overwatch games. We will try to translate into a more useful type of games on a global basis. And with regard to your questions about the revenue contributions from our mobile games on the IOS internet platforms; still up to the end of the third quarters, more than half of these contributions would still be coming from the IOS fronts.

Thank you.

Next we have Tian Hou with T.H. Capital.

Hi William, and Onward. I have a question related to your e-commerce, particularly the brand -- the in-house brand -- I experienced some -- have some good experience of the Asian product. And I also noticed some of my friend's also Asian products. So I wonder what's your market position, will propositions for this part of the business with the relationship with the other part of e-commerce? [Foreign Language]

[Foreign Language]

So basically William has made a very comprehensive introductions and highlights about our positioning and our visions about how we would like to -- the Yanxuan business. Basically all products that we are offerings on the Yanxuan platforms would be of the highest product design and manufacturing standards, and we are also engaging with some high qualities and proprietary product and also Japan factories in doing the production process. And as the name of our product lines implies, we would be strictly selecting the best products for offerings to our targeted audience and customers. And our market positioning would be embracing free directions. First, a very competitive and good pricing. And second, offering the highest qualities of products we are delivering to our customers, and the highest customer service. And one of the highlights that we have been doing so far is that we are offering a 30 days goods return policy without any reasons that no other peers in the space has been doing. And we are the only one that are offering this kind of incentive to our customers. And in terms of the product categories that we are currently covering, this would be including something like the household type of items, the stationery items, the kitchen stuffs, and up to now we have about 500 SKU in place and we are also very encouraged with the fact that the goods return rate has been very low, as low as 0.67% so far which reflects that our customers are really very satisfied with the products and the services we are offering so far. And of course, this has also got a very huge and immense wishes of running this platforms and we would like to make a very well-planned technologies and products by -- and delivers those products to our targeted customers. And we also believe that this would only be just one thing that we are positioning ourselves as 90s product line but this would be something that we will be proud to say from the country to try to perspective, this will be a very good platform that we are servicing the customers by offering them with the best products with very good pricing, quality and service. And all along, all the products that we are currently offering would be some of the highest and strictest industry standards like SCS and BWE Certifications. So all the customers who are using our products can have the full satisfactions and happiness.

Next we'll move Natalie Wu with CICC.

Hi, good morning. Thanks for taking my questions. First, congratulations on launching another huge mobile game after your legacy. My question is regarding your mobile games business; can management share with us what's the secret of Netease launching these games? And what do you expect regarding the lifecycle on Onmyoji. Is it kind of hide out that can surprise us on Onmyoji. So besides, what do you expect the mobile game industry entire landscape or become several years later. Also short-term speaking, if my calculation is correct, your legacy mobile game, SWJ and WWJ revenue experienced some kind of decline in the third quarter. So just wondering if it's just a signal fluctuations or something else? [Foreign Language]

[Foreign Language]

So when we look back in the past 15 years plus on NetEase business operations, NetEase thus in fact got in a very good and in depth understanding about the PC gaming market and also a very good knowledge about the recession developments fronts. And we do see that, SWJ and WJs has been growing very nicely in the past 15 years owing to the fact that we have a very strong story game IP with good story lines and good qualities of the contents and user experiences that we are offering to our targeted audiences. And even back in 2009 since the launch off the iPhone4 to the markets, the company has also taking a very proactive initiatives to look into how this kind of changes will turn the market difference in the years ahead. And in fact, we have also been setting up over -- more than tens of mobile studios in order to do the explorations, innovations, and research on some new games, especially on the mobile front and definitely Onmyoji is one of those coming from those studios and we are also having the confidence that when there would be lots of more similar games to come in the future periods. And for all the games that we are carelessly developing and launchings to the market, we are targeting to the game users for games like the Onmyoji, that's originally based on some Japanese stuff that we are quite happy to see that, this has also got a very good receptions from the market. And we would give an continuous hours efforts to do our explorations, innovations for those very original stuff in the market.

[Foreign Language]

So another point that William would like to supplement is that, in last year we have do another new initiatives about how we are marketing and promoting our existing games and one example would our Ghost game titles that we are in collaboration with another TV shows in Chinese which is called Wei Bin Yi Xiao Hen. This cross promotion efforts has also proved to be very successful. And also very effective in terms of offering the overall user base and since the start of the TV shows, since they August 22, we have been seeing that the user number -- the user base of the New Ghost mobile has been rising up where nicely to a few posts, to the previous levels, and we are also seeing that this game by itself has also received a very high user satisfaction. And this has also been reflected from the fact that the ranking in top rising charts in the IOS China app store for the New Ghost mobile games has also been rising very nicely since then. And so we would just like to highlight and conclude that the VNA of net -- we are very good at doing the innovations and expression type of stuff and not only on the gaming for us and for stuff like our new e-commerce initiatives like the Yanxuan we would like to try to explore a new way that we can position ourselves and to deliver some good stuff to our targeted audiences and for businesses like Yanxuan, again we are targeting on good pricing, good qualities, and also good service. And this is all the way that we've been doing all along.

We'll take our final question from Hillman Chan with Macquarie.

Good morning, and thank you for taking my question. I have a question regarding the e-commerce business. I noticed that on our platform, we are retrieving some of the high ticket items, also RU Pay is one of payment assets -- and maybe some slowdown coming in the third quarter and fourth quarter. Just wondering to have more color on our strategy and pullout business? And quickly Kaola, notice that the inventory was somewhat flat quarter-over-quarter; would that be due to lower third quarter seasonality or something else? And how should we think about how we look for the fourth quarter color in the future?

[Foreign Language]

So basically whether we are talking about Duobao or Kaola, basically this would be different types of e-commerce selling models that we have been a security, sounding more of those steps we have been security for some post on the color fronts, this would be forcing more on the opposite merchandize sales for items like cosmetics types of stuff and also women's accessories and this would somehow be complementary to our Yanxuan business model. And for the television, this is of course -- we have also been in collaborations with other world famous and renowned brands like the Cosco where we have been procuring items like this curling appliance, and also we are in collaborator with SaSa, a cosmetic company in Hong Kong and also another one like the E-Mart in Korea and also Kaola in Japan. And basically whether we are talking about the -- so basically we are just touching on the different type e-commerce business model.

Okay, thank you.

This concludes our question-and-answer session. Now I will turn the call back over to management for additional or closing remarks.

Thank you everyone for joining us today. If you have further questions, please feel free to contact Juliet Yang, NetEase's IR Manager based in Hangzhou or us at the Investor Relations. Thank you and have a wonderful day.

Everyone, that does conclude our conference call. We do thank you all for your participation. You may now disconnect.