Affected by slowing gaming business growth, NetEase's second-quarter overall performance fell slightly below market expectations. While maintaining year-over-year growth, quarter-over-quarter data exposed signs of weakening growth momentum. Against the backdrop of intensifying industry competition and changing regulatory environment, whether the company can reignite its growth engine through product innovation and globalization strategy will be a key factor determining its future valuation levels.
NetEase released its second-quarter earnings report on Thursday afternoon. Key highlights include:
Financial Performance:
Revenue below expectations: Q2 revenue of 27.9 billion yuan, up 9.4% year-over-year, below the expected 28.4 billion yuan; Profit growth decelerated: Gross profit of 18.1 billion yuan missed expectations, up 12.5% year-over-year, with gross margin maintained at a relatively high level of 64.9%; Net profit of 8.6 billion yuan, up 27.25% year-over-year, adjusted net income per ADS from continuing operations of 14.81 yuan, versus estimate of 15.03 yuan;
Cash position: Net cash of 142.1 billion yuan, operating cash flow of 10.9 billion yuan, down 10% quarter-over-quarter Shareholder returns: Announced dividend of $0.57 per ADS, share buyback program has executed $2 billion
Core Business Segments:
Online gaming revenue of 22.8 billion yuan, up 13.7% year-over-year but down 5% quarter-over-quarter, with growth momentum clearly slowing NetEase Cloud Music revenue of 2.0 billion yuan, down 3.5% year-over-year; Innovative businesses revenue of 1.7 billion yuan, down 17.8% year-over-year
Gaming Business Growth Deceleration
Gaming and related value-added services, as NetEase's core engine, generated net revenue of 22.8 billion yuan in the second quarter, up 13.7% year-over-year but down 5% quarter-over-quarter, falling short of market expectations of 23.37 billion yuan.
More notably, gaming business gross profit of 16.01 billion yuan only slightly exceeded expectations, indicating cost control pressures remain.
In terms of specific product performance, NetEase launched multiple new titles in overseas markets: "Flooded" topped the PlayStation May free game download chart at second place in North America, while "All-Star Street Ball Party" and "Marvel Snap" topped iOS download charts in multiple regions.
However, impressive download performance has not yet fully translated into revenue contributions, a phenomenon worthy of close investor attention.
Remarkably, "Fantasy Westward Journey" PC version reached a historical high of 2.93 million peak concurrent players in August. The continued vitality of this 20-year-old IP demonstrates NetEase's deep expertise in product operations, but whether this momentum can be sustained remains to be observed.
Non-Gaming Business Performance Shows Clear Differentiation
NetEase Cloud Music recorded net revenue of 2.0 billion yuan in the second quarter, down 3.5% year-over-year but up 5.3% quarter-over-quarter. Growth in online music services revenue was offset by declining social entertainment services revenue, reflecting structural changes in user payment habits.
Youdao business performed relatively steadily with net revenue of 1.4 billion yuan, up 7.2% year-over-year.
Innovation and other businesses revenue of 1.7 billion yuan fell 17.8% year-over-year, mainly affected by declining revenue from NetEase Yanxuan, advertising services and other businesses, indicating the company still faces challenges in diversification efforts.
Profitability Under Pressure but Cash Position Remains Strong
Gross profit of 18.1 billion yuan rose 12.5% year-over-year but declined 2.2% quarter-over-quarter, with gross margin maintained at the relatively high level of 64.9%.
However, net profit attributable to shareholders of 8.6 billion yuan increased 27.25% year-over-year but dropped significantly 16.5% quarter-over-quarter, mainly due to investment income fluctuations and increased operating expenses.
Notably, total operating expenses of 9.0 billion yuan increased 12.5% quarter-over-quarter, primarily due to increased gaming marketing expenditures. This phenomenon indicates that in an increasingly competitive environment, NetEase needs to invest more resources to maintain its market position.
The company's cash position remains robust with net cash balance of 142.1 billion yuan, up 8.1% from the beginning of the year. Operating cash inflow of 10.9 billion yuan, though down 10% quarter-over-quarter, maintains healthy levels, providing sufficient support for the company's future investments and shareholder returns.
Overseas New Products' Effectiveness Awaits Observation
CEO William Ding emphasized in the earnings report that the company will "continue exploring new player experiences and strengthening self-developed IP products."
Upcoming new titles including "The Forgotten Sea" and "Return to Tang Dynasty," as well as the global rollout of "Justice" mobile game and "Where Winds Meet," will serve as important tests of NetEase's innovation capabilities and internationalization strategy.
The continued expansion of Blizzard series games in the Chinese market also deserves attention. "Hearthstone's" new expansion pack quickly climbed to fifth place on the iOS bestseller chart, and "World of Warcraft's" 20th anniversary celebration announced the launch of new China-exclusive servers in November. These developments could potentially bring new growth drivers for NetEase.
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