NetEase's second-quarter performance delivered a mixed picture: revenue and its core gaming business surpassed market expectations, yet adjusted profit came in notably below forecasts.
In the second quarter of 2026, NetEase generated net revenue of RMB 30.11 billion, up 7.9% year-over-year and ahead of the Bloomberg consensus estimate of RMB 29.45 billion. However, adjusted earnings per American Depositary Share from continuing operations stood at RMB 12.02, significantly trailing the market's projected RMB 15.59. Gross profit reached RMB 21.22 billion, also exceeding the anticipated RMB 19.75 billion.
The core business maintained steady momentum. Online game services contributed net revenue of RMB 25.02 billion, a 9.7% increase from the prior year and above the estimated RMB 24.28 billion. Innovation and other business segments posted RMB 1.64 billion in net revenue, largely in line with expectations. Following the earnings release, NetEase's US-listed shares dropped over 6% in pre-market trading.
Revenue and gross profit beat, but profit faces headwinds
From an operational standpoint, NetEase continued its steady growth trajectory in the second quarter. For the first half of the year, the company reported net revenue of RMB 60.7 billion, up 7.0% year-over-year.
Gross profit was a standout metric. Second-quarter gross profit climbed 17.5% to RMB 21.22 billion, surpassing the market estimate of RMB 19.75 billion. Within this, online game services delivered gross profit of RMB 19.05 billion, comfortably above the projected RMB 17.55 billion.
First-half gross profit reached RMB 42.4 billion, a 16.2% increase, with gross margins improving steadily, driven by lower revenue-sharing costs and reduced product expenses. A higher proportion of self-developed games also helped optimize the cost structure.
However, profit did not move in tandem with gross profit. Net profit attributable to shareholders was RMB 7.0 billion in the second quarter, declining both quarter-over-quarter and year-over-year. First-half net profit came in at RMB 17.7 billion, down approximately 6.6% from RMB 18.9 billion in the same period last year.
Gaming remains resilient, flagship titles keep fueling growth
Games and related value-added services continue to serve as NetEase's primary growth engine.
Second-quarter online game services net revenue of RMB 25.02 billion, up 9.7% year-over-year, accounted for roughly 83% of total company revenue and exceeded the market forecast of RMB 24.28 billion. For the first half, this segment generated RMB 50.7 billion in revenue, an 8.3% increase.
Growth was underpinned by several long-running self-developed titles. The Fantasy Westward Journey series maintained stable performance through consistent content updates. Where Winds Meet continued its strong showing in the domestic market while expanding into North America and Europe via new content operations. Titles like Eggy Party, Identity V, and Justice Online Mobile sustained user engagement through community management and regular content refreshes.
Profitability in gaming also impressed. First-half operating costs for games and related services fell to RMB 12.5 billion from RMB 14.3 billion a year earlier, while gross profit rose to RMB 38.3 billion from RMB 32.6 billion. The gross margin improved from 69.5% to approximately 75.4%.
Second-quarter online game services gross profit of RMB 19.05 billion, higher than the RMB 17.55 billion market estimate, underscores improving earnings quality in the gaming business.
On the pipeline front, Lost Sea launched in China in July, while titles such as Infinity and Gui Tang remain in active development. As new releases enter the commercialization phase, they are expected to provide additional support for future gaming growth.
Youdao and Cloud Music show modest gains, AI push continues
Youdao posted second-quarter net revenue of RMB 1.5 billion, up 3.5% year-over-year and roughly 8.8% sequentially, driven primarily by learning services revenue.
AI remains a strategic priority for Youdao. During the quarter, the company unveiled its "Confucius 4" large language model and strengthened its AI agent capabilities, advancing products toward autonomously executing complex learning and office tasks. First-half Youdao revenue reached RMB 2.8 billion, up 3.6%, with growth from learning services and online marketing partially offset by a decline in smart hardware sales.
NetEase Cloud Music generated approximately RMB 2.0 billion in net revenue for the second quarter, roughly flat year-over-year. First-half revenue totaled RMB 4.0 billion, up 3.4%, driven mainly by membership subscriptions, with online music services revenue steadily improving. First-half gross profit for Cloud Music reached RMB 1.47 billion, up from RMB 1.39 billion a year earlier, reflecting a slight improvement in profitability.
Innovation and other businesses recorded second-quarter net revenue of RMB 1.64 billion, broadly matching market expectations. Overall, Youdao and Cloud Music delivered relatively moderate growth, contributing less to the group's overall revenue expansion compared to the gaming segment.
Investment losses and higher tax rates weigh on profit
The pressure on NetEase's bottom line stems not from core operations but rather from investment volatility and an increased tax burden.
In the second quarter, the "other income/expenses" line recorded a loss of approximately RMB 2.95 billion, impacted by declines in the fair value of equity investments and impairment provisions. In contrast, the same period last year contributed a positive RMB 330 million, creating a negative swing of over RMB 3 billion year-over-year.
Cumulative investment losses for the first half approached RMB 2.95 billion, compared to a positive contribution of RMB 1.02 billion in the prior-year period.
Higher taxes further eroded profits. The effective tax rate in the second quarter reached 25.5%, notably above the 14.7% recorded a year earlier. For the first half, the effective tax rate rose to 21.7% from 15.0%.
First-half income tax expenses increased to RMB 5.0 billion from RMB 3.5 billion in the prior year, a jump of over 40%. The company noted that the tax rate change reflects its periodic assessment of applicable tax obligations and rights, but the shift has already had a clear dampening effect on final net profit.
This explains the divergence where NetEase beat on revenue and gross profit yet missed on earnings per share.
R&D investment rises, cash reserves remain robust
NetEase continues to sustain high levels of R&D and marketing spending. First-half operating expenses totaled RMB 17.7 billion, up 3.9% year-over-year.
R&D expenses increased from RMB 8.74 billion to RMB 9.13 billion, while sales and marketing costs rose from RMB 6.27 billion to RMB 7.12 billion, reflecting ongoing investment in new product development and global expansion efforts. Meanwhile, general and administrative expenses fell from RMB 2.01 billion to RMB 1.44 billion, indicating improved cost control at the headquarters level.
Cash flow remains solid. Second-quarter net cash provided by operating activities was approximately RMB 10.0 billion, bringing the first-half total to roughly RMB 23.7 billion.
As of June 30, 2026, NetEase's net cash balance reached RMB 167.5 billion, up from RMB 163.5 billion at the start of the year. This ample cash reserve provides strong support for continued R&D, product investment, and shareholder returns.
Buybacks and dividends continue, Hong Kong dual primary listing completed
On the shareholder return front, NetEase has pressed ahead with both buybacks and dividends.
During the reporting period, the company repurchased approximately 14.04 million ordinary shares on the Nasdaq for a total of about USD 324 million. As of the end of June, cumulative repurchases under the current program totaled approximately USD 2.3 billion, with the plan's validity extended to January 2029.
Regarding dividends, the board approved a second-quarter 2026 dividend of USD 0.096 per ordinary share, equivalent to USD 0.480 per American Depositary Share, with payment expected in September. First-half 2026 cumulative dividends reached USD 0.240 per ordinary share, roughly on par with USD 0.249 in the same period last year.
Additionally, on June 30, NetEase's listing status on the Hong Kong Stock Exchange was officially upgraded from a secondary listing to a dual primary listing, marking a deeper commitment to the Hong Kong capital markets.
Overall, the defining characteristic of NetEase's second-quarter results is that revenue and gaming outperformed expectations while profit was weighed down by non-operating factors. From an operational perspective, gaming revenue and gross profit both came in well above market forecasts, with continued gross margin improvement underscoring the strength of its core foundation.
However, widening investment losses, a higher tax rate, and the adjusted profit shortfall explain the pre-market stock decline of over 6% following the earnings announcement. Looking ahead, as new titles like Lost Sea roll out and Where Winds Meet continues its overseas push, the key question for NetEase is whether it can convert its robust gaming profitability into tangible net profit growth.
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