2025-04-15 10:03Company and Financial Overview Key Information This chapter outlines the company's VIE structure, primary risks, and HFCAA compliance, with VIEs contributing 87.2% of 2024 net revenue - The company, a Cayman Islands holding company, operates its primary online gaming, music streaming, smart learning, and internet content services in China through a VIE structure; in 2024, VIEs generated 87.2% of total net revenue and held 6.1% of consolidated total assets (excluding intercompany receivables)25 - The company anticipates not being identified as a 'Commission-Identified Issuer' by the SEC following this annual report, as the PCAOB rescinded its determination regarding inability to fully inspect Chinese and Hong Kong accounting firms on December 15, 2022, though future risks remain33287 Risk Factors The company's operations face significant risks across business, industry, corporate structure, China operations, and ADS/stock-related factors - The company's business faces multiple significant risks categorized into four main types: business and industry risks, corporate structure risks, risks of operating in China, and risks related to ADSs and shares, all of which could materially adversely affect its business, financial condition, and operating results3637394041 Information on the Company This chapter details the company's history, organizational structure, business segments, sales strategies, intellectual property, competitive landscape, and risk management, highlighting its core gaming business and VIE operations in China - The company generates revenue through four main segments: Games and Related Value-Added Services, Youdao, NetEase Cloud Music, and Innovative Businesses and Others, with gaming being the primary revenue source343 - The company operates its businesses in mainland China through subsidiaries and VIEs due to foreign investment restrictions in telecommunications, internet culture, and publishing, relying on contractual arrangements with VIEs and their nominee shareholders for core operations338 - The company possesses a comprehensive intellectual property portfolio, including copyrights, trademarks, patents, and trade secrets, with extensive registrations in China and other jurisdictions to protect its self-developed games and online products410411412 History and Development of the Company This section outlines the company's key milestones from its founding in 1997 to its dual listing and major product launches Key Company Development Milestones | Milestone | Year | | :--- | :--- | | Founded and launched free email service and www.163.com website | 1997-1998 | | Listed on Nasdaq | 2000 | | Launched first self-developed MMORPG "Fantasy Westward Journey" | 2001 | | Launched "Fantasy Westward Journey" series | 2004 | | Established Youdao | 2006 | | Launched NetEase Cloud Music | 2013 | | Launched first mobile game "Fantasy Westward Journey Mobile" | 2013 | | Launched e-commerce business "Yanxuan" | 2016 | | Youdao listed on NYSE | 2019 | | Listed on HKEX | 2020 | | NetEase Cloud Music listed on HKEX | 2021 | - The company's capital expenditures in 2022, 2023, and 2024, totaling approximately RMB 1.3 billion, RMB 2.3 billion, and RMB 2.1 billion respectively, were primarily for new office buildings in Shanghai and Hangzhou and new server purchases for business operations334 Business Overview This section details the company's four main business segments: Games, Youdao, NetEase Cloud Music, and Innovative Businesses, highlighting their core offerings and strategic focus - The company's business is divided into four major segments: Games and Related Value-Added Services, Youdao, NetEase Cloud Music, and Innovative Businesses and Others, with gaming as the core, offering over 100 self-developed and licensed mobile and PC games343 Key Self-Developed Mobile Games | Game | Type | First Release Date | | :--- | :--- | :--- | | Fantasy Westward Journey II Mobile | Turn-based MMORPG | July 2013 | | Fantasy Westward Journey Mobile | Turn-based MMORPG | March 2015 | | Westward Journey Mobile | Turn-based MMORPG | September 2015 | | Invincible | SLG | October 2015 | | A Chinese Ghost Story Mobile | Real-time MMORPG | May 2016 | | Onmyoji | CCG & RPG | September 2016 | | Knives Out | Battle Royale | November 2017 | | Identity V | Tactical Competition | April 2018 | | LifeAfter | Co-op Survival RPG | November 2018 | | Fantasy Westward Journey Web | MMORPG | June 2020 | | Eggy Party | Casual Party Mobile Game | May 2022 | | Diablo Immortal* | MMO Action RPG | June 2022 | | Ace Racer* | Racing Simulation | June 2023 | | Justice Mobile | MMORPG | June 2023 | | All-Star Streetball | Basketball | August 2023 | | Naraka: Bladepoint Mobile | Action Battle Royale | July 2024 | Key Self-Developed PC Games | Game | Type | Release/Major Update Date | | :--- | :--- | :--- | | Westward Journey 2 | 2D MMORPG | August 2002 / September 2013 | | Fantasy Westward Journey Online | 2D MMORPG | January 2004 / July 2013 | | Tian Xia III | 3D MMORPG | October 2011 | | New A Chinese Ghost Story | 2.5D MMORPG | April 2012 / September 2015 | | Justice | 3D MMORPG | June 2018 | | Naraka: Bladepoint | Action Battle Royale | July 2021 | | Once Human* | Survival/Open World/Crafting | July 2024 | | Marvel Rivals | Shooter | December 2024 | | Where Winds Meet* | Open World Action Adventure RPG | December 2024 | - Revenue from licensed games accounted for 9.5%, 4.6%, and 7.4% of total revenue in 2022, 2023, and 2024, respectively, with the company partnering with international developers like Blizzard and Microsoft to operate popular titles354358360 - Youdao has transitioned into an AI-driven solution provider focusing on learning and advertising, offering products such as learning services, AI-powered subscription services like Youdao Dictionary and Hi Echo, and smart hardware including Youdao Dictionary Pen376377379380381 Operating and Financial Review and Prospects This chapter reviews the company's three-year operating performance, financial condition, and cash flow, highlighting RMB 105.3 billion in 2024 net revenue, 62.5% overall gross margin, healthy cash flow, and key accounting estimates Key Financial Data 2022-2024 | Metric (RMB million) | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Total Net Revenues | 96,496 | 103,468 | 105,295 | | Gross Profit | 52,766 | 63,063 | 65,807 | | Operating Profit | 19,629 | 27,709 | 29,584 | | Net Profit Attributable to the Company's Shareholders | 20,338 | 29,417 | 29,698 | - As of December 31, 2024, all consolidated VIEs operated by the company held total assets of RMB 23.8 billion and total liabilities of RMB 21.9 billion583 - The company's operating and financial results are influenced by factors such as its ability to consistently deliver quality content, user base growth and engagement, proprietary technology development and application, effective cost management, and successful strategic investments and acquisitions587588589591593 Operating Results This section analyzes the company's revenue and gross margin performance across its business segments for 2023 and 2024, highlighting key drivers and expense trends Segment Revenue 2023 vs 2024 (RMB million) | Business Segment | 2023 | 2024 | YoY Change | | :--- | :--- | :--- | :--- | | Games and Related Value-Added Services | 81,565 | 83,623 | +2.5% | | Youdao | 5,389 | 5,626 | +4.4% | | NetEase Cloud Music | 7,867 | 7,950 | +1.1% | | Innovative Businesses and Others | 8,647 | 8,097 | -6.4% | | Total | 103,468 | 105,295 | +1.8% | Segment Gross Margin 2023 vs 2024 | Business Segment | 2023 | 2024 | | :--- | :--- | :--- | | Games and Related Value-Added Services | 68.2% | 68.7% | | Youdao | 51.4% | 48.9% | | NetEase Cloud Music | 26.7% | 33.7% | | Innovative Businesses and Others | 29.7% | 35.8% | | Overall Gross Margin | 60.9% | 62.5% | - Gaming business revenue grew by 2.5% in 2024, driven by strong performance from self-developed games like Identity V and Naraka: Bladepoint (PC and mobile), and certain licensed games, with self-developed game revenue increasing by 2.3% and licensed game revenue by 64.3%634635 - Research and development expenses increased by 6.3% to RMB 17.5 billion in 2024, primarily due to higher employee-related costs and outsourced game development fees652 - Investment income in 2024 significantly decreased to RMB 355 million from RMB 1.307 billion in 2023, mainly due to an increase in impairment provisions to RMB 1.3 billion and a shift from gains to losses in equity method investments655 Liquidity and Capital Resources This section details the company's cash flow activities, liquidity position, and capital resources, including restrictions on fund transfers from its VIEs and Chinese subsidiaries Cash Flow Statement Summary 2022-2024 (RMB million) | Cash Flow Item | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Net Cash Inflow from Operating Activities | 27,709 | 35,331 | 39,677 | | Net Cash (Outflow)/Inflow from Investing Activities | (7,370) | (17,043) | 17,916 | | Net Cash Outflow from Financing Activities | (10,238) | (21,467) | (27,336) | - As of December 31, 2024, the company held RMB 51.4 billion in cash and cash equivalents, RMB 78.5 billion in time deposits, and RMB 10.8 billion in short-term investments, with net cash generated from operating activities totaling RMB 39.7 billion688692 - Due to Chinese regulations, the company's mainland China subsidiaries and VIEs face restrictions on transferring certain net assets (as dividends, loans, or advances) to the company; as of December 31, 2024, restricted net assets totaled approximately RMB 14.2 billion, representing 10% of the company's consolidated net assets7041272 - In 2024, VIEs paid RMB 73.8 billion in service fees to the company's mainland China subsidiaries, and the company cumulatively injected USD 2.3 billion into its mainland China subsidiaries through intermediate holding companies713 Critical Accounting Estimates This section identifies key accounting estimates, including the average game play period for revenue recognition and impairment assessment of long-term investments, which require significant management judgment - The company identifies the estimated average game play period for paying players and the impairment assessment of long-term investments as critical accounting estimates, requiring significant management judgment and potentially materially impacting financial condition and operating results734735 - Revenue from in-game virtual items is recognized over the estimated average game play period of paying players, with this period estimated based on assumptions like player churn rates and similarities between new and existing games, subject to regular management evaluation and prospective application of changes738739740 - For long-term equity investments without public market quotations, the company regularly assesses impairment risk, estimating fair value using income or market approaches if impairment indicators exist, and recognizing impairment losses for book values exceeding fair value; in 2024, the company recognized total investment impairment losses of RMB 1 billion743745750 Directors, Senior Management and Employees This chapter details the company's board members, senior management, compensation, equity incentive plans, and employee profile, noting founder William Lei Ding as CEO and 26,028 full-time employees as of year-end 2024 - Company founder William Lei Ding serves as Director and Chief Executive Officer, with the Board of Directors also including four independent directors752753 - In 2024, the company paid total cash compensation of RMB 466.1 million (approximately USD 63.8 million) to executive officers and directors, and granted restricted share units under the 2019 Equity Incentive Plan763 - The company implemented the 2019 Equity Incentive Plan, replacing the 2009 RSU Plan which expired in 2019, to grant restricted share units and stock options for incentivizing and retaining employees, directors, and consultants767768 - As of December 31, 2024, the company had 26,028 full-time employees, a decrease from 29,128 in 2023, with R&D personnel accounting for 49.0% of the total workforce793 Major Shareholders and Related Party Transactions This chapter discloses major shareholder ownership and significant related party transactions, including the company's control over VIEs and ongoing agreements with its listed subsidiaries Youdao and NetEase Cloud Music - As of February 28, 2025, company founder, CEO, and Director William Lei Ding is the largest shareholder, beneficially owning approximately 45.8% of the company's issued shares through Shining Globe International Limited796804 - The company's primary related party transactions involve a series of contracts with VIEs (e.g., Guangzhou NetEase, Hangzhou Leihuo) and their nominee shareholders (including Mr. Ding Lei), such as cooperation agreements, shareholder voting rights trust agreements, and exclusive call option agreements, enabling effective control over VIEs and access to their economic benefits805808811815 - The company has entered into multiple related party agreements with its listed subsidiaries Youdao and NetEase Cloud Music, covering master transaction agreements, transitional services, non-competition, and intellectual property licenses with Youdao, and intellectual property licensing, advertising agency, and technical support services with NetEase Cloud Music820833 Financial Information This chapter outlines the company's legal proceedings and dividend policy, noting a settled lawsuit with Krafton and the quarterly dividend payments in 2024 - The company reached a settlement with Krafton, Inc. (formerly PUBG Corporation) regarding copyright infringement lawsuits for 'Rules of Survival' and 'Knives Out' and subsequent breach of settlement agreement litigation, with no material impact on the company's consolidated financial statements837 2024 Quarterly Dividends | Quarter | Dividend Per Share (USD) | Dividend Per ADS (USD) | | :--- | :--- | :--- | | Q1 | 0.0990 | 0.4950 | | Q2 | 0.0870 | 0.4350 | | Q3 | 0.0870 | 0.4350 | | Q4 | 0.24405 | 1.22025 | Additional Information This chapter details the company's articles of association, significant contracts, foreign exchange controls, and tax implications, including differences between Cayman Islands and US law, China's capital account restrictions, and potential PFIC risks for US investors - The company, an exempted company registered in the Cayman Islands, operates under corporate laws that significantly differ from US laws regarding mergers, shareholder lawsuits, and director indemnification, for instance, allowing statutory mergers or schemes of arrangement for reorganizations and specific provisions for minority shareholder 'squeeze-outs'868871872873 - China implements foreign exchange controls, allowing free convertibility of RMB under current accounts but restricting capital account transactions like direct investments and loans, which require approval or registration with the State Administration of Foreign Exchange (SAFE)880881 - The company faces the risk of being deemed a Chinese 'resident enterprise,' which would subject its worldwide income to a 25% enterprise income tax and potentially require a 10% withholding tax on dividends paid to non-resident enterprise shareholders890 - For US investors, the company carries the risk of being classified as a Passive Foreign Investment Company (PFIC); based on its asset and income composition, the company believes it was not a PFIC for the 2024 tax year, but this determination is uncertain, and the company does not intend to provide information necessary for US investors to make a Qualified Electing Fund (QEF) election324915927 Quantitative and Qualitative Disclosures About Market Risk This chapter discloses the company's exposure to interest rate and foreign exchange risks, noting that most revenue is RMB-denominated while some assets and liabilities are USD-denominated, and no hedging activities are undertaken - The company's market risks primarily stem from changes in interest rates and foreign exchange rates, with interest rate risk affecting interest income from bank deposits and wealth management products, and interest expense from borrowings; a 10% interest rate change would impact net interest income by RMB 492.1 million based on December 31, 2024 data948949 - The company faces significant foreign exchange risk as most revenue is RMB-denominated while some cash and debt are USD-denominated; in 2024, the company recorded a net foreign exchange gain of RMB 255.4 million and does not engage in hedging transactions to mitigate this risk950952 - As of December 31, 2024, the company had USD 1 billion in USD-denominated debt, where a 10% appreciation/depreciation of the USD against the RMB would increase/decrease its RMB value by RMB 729.9 million; concurrently, the company held USD 12.2 billion in USD-denominated cash and deposits, where a 10% appreciation/depreciation would increase/decrease their RMB value by RMB 8.9 billion953954 Controls and Procedures This chapter confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2024, as assessed by management and attested by PwC Zhong Tian LLP - The company's management assessed that its disclosure controls and procedures were effective as of December 31, 2024983 - Based on management's assessment using the COSO 'Internal Control—Integrated Framework (2013),' the company's internal control over financial reporting was effective as of December 31, 2024, a conclusion also affirmed by the audit report from independent registered public accounting firm PwC98498510281033 - During the period covered by this annual report, no changes in the company's internal control over financial reporting have occurred that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting986 Corporate Governance and Other Matters This chapter covers the company's corporate governance, including the audit committee's financial expert, code of conduct, auditor fees, share repurchase program, and cybersecurity risk management strategy Accountant Fees 2023-2024 (RMB thousand) | Fee Category | 2023 | 2024 | | :--- | :--- | :--- | | Audit Fees | 30,491 | 27,649 | | Tax Fees | 1,712 | 1,064 | | All Other Fees | 346 | 8 | | Total | 32,549 | 28,721 | - On November 17, 2022, the company announced a share repurchase program authorizing the buyback of up to USD 5 billion in ADSs and ordinary shares over 36 months; as of December 31, 2024, approximately 21.2 million ADSs had been repurchased under this plan at a total cost of approximately USD 1.9 billion995 - The company has established a cybersecurity risk management program overseen by the Board of Directors and its Audit Committee, with management forming an Information Security Committee, comprising the CEO, Head of Information Security Office, and other senior management, responsible for implementing the global information security plan1003100610071008 - As a Cayman Islands company listed on Nasdaq, the company is permitted to follow home country corporate governance practices, such as the Board of Directors adopting equity incentive plans without seeking shareholder approval, which is permissible under Cayman Islands law999 Financial Statements and Exhibits Financial Statements This chapter presents the company's audited consolidated financial statements as of December 31, 2024, prepared under US GAAP by PwC Zhong Tian LLP, including key audit matters related to revenue recognition and long-term investment impairment - Independent auditor PwC Zhong Tian LLP issued an unqualified audit opinion on the company's financial statements and internal control over financial reporting as of December 31, 2024, affirming that the financial statements fairly present the company's financial position and internal controls are effective in all material respects10321033 Consolidated Balance Sheet Summary (As of December 31, 2024) | Item (RMB million) | Amount | | :--- | :--- | | Assets | | | Cash, Deposits and Short-term Investments | 140,597 | | Total Current Assets | 153,325 | | Total Assets | 195,992 | | Liabilities and Shareholders' Equity | | | Total Current Liabilities | 49,668 | | Total Liabilities | 53,497 | | Equity Attributable to the Company's Shareholders | 138,686 | | Total Liabilities and Shareholders' Equity | 195,992 | Consolidated Statements of Operations and Comprehensive Income Summary (For the Year Ended December 31, 2024) | Item (RMB million) | Amount | | :--- | :--- | | Net Revenues | 105,295 | | Gross Profit | 65,807 | | Operating Profit | 29,584 | | Net Profit Attributable to the Company's Shareholders | 29,698 | - Critical Audit Matters identified by the auditor include: 1) the estimation of the average game play period for paying players in recognizing revenue from in-game virtual items; and 2) the impairment assessment of long-term equity investments without readily determinable fair values103910401044 Exhibits This chapter lists all exhibits accompanying the annual report, including the company's articles of association, ADS agreements, key VIE contracts, executive employment agreements, equity incentive plans, and certifications - The exhibit list includes the company's second amended and restated memorandum and articles of association1013 - The exhibits contain a series of key contracts with major VIEs (e.g., Guangzhou NetEase, Hangzhou Leihuo, Youdao Computer), including shareholder voting rights trust agreements, equity pledge agreements, exclusive call option agreements, and cooperation agreements101310151016 - Exhibits also include the company's 2019 Equity Incentive Plan, material transaction agreements with subsidiaries Youdao and NetEase Cloud Music, and certifications signed by the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act10171018