NetEase Q4 revenue still declined but net profit surged by 33%, PC games exceeded expectations with strong performance, multiple business integrations leveraging AI with DeepSeek | Earnings report insights

In the fourth quarter of last year, NetEase's performance was mixed. Revenue failed to reverse the decline, but profit stopped falling and rebounded. Mobile games further weakened, while PC games showed unexpectedly strong growth.

On Thursday, February 20, NetEase released its financial data for the fourth quarter and the entire year of 2024.

1) Key Financial Data

Revenue: In the fourth quarter, net operating income was 26.75 billion RMB (3.7 billion USD), a year-on-year decrease of 1.3%, with analysts estimating 27.25 billion RMB. In the third quarter, it decreased by 3.9% year-on-year, and the annual revenue was 105.3 billion RMB (14.4 billion USD), an increase of approximately 1.7% compared to the previous year.

Gross Profit: In the fourth quarter, gross profit was 16.27 billion RMB, a year-on-year decline, with analysts estimating 16.69 billion RMB. In the third quarter, it decreased by 2.9% year-on-year, with an expected 16.69 billion RMB. The annual gross profit was 65.8 billion RMB, an increase of approximately 4.3% compared to the previous year.

Net Profit: In the fourth quarter, net profit was 8.92 billion RMB, a year-on-year increase of 33.6% and a quarter-on-quarter increase of 33%. In the third quarter, it decreased by 16.67% year-on-year and decreased by 4.41% quarter-on-quarter. The annual net profit was approximately 29.7 billion RMB, an increase of about 1% compared to the previous year.

Operating Expenses: In the fourth quarter, operating expenses were 8.45 billion RMB, a year-on-year decrease of 15.1% and a quarter-on-quarter decrease of 8.4%. In the third quarter, it increased by 3.3% quarter-on-quarter. The annual operating expenses were approximately 36.2 billion RMB, an increase of about 2.3% compared to the previous year.

2) Segment Business Data

Games and Related Value-Added Services: In the fourth quarter, net revenue was 21.24 billion RMB, with year-on-year and quarter-on-quarter growth of approximately 1.4%. In the third quarter, it decreased by 4.2% year-on-year and increased by 5% quarter-on-quarter. The annual revenue was 83.6 billion RMB, an increase of approximately 2.5% compared to the previous year.

Youdao: In the fourth quarter, net revenue was 1.3 billion RMB, a year-on-year decrease of approximately 13.3%. In the third quarter, it increased by 2.2% year-on-year. The annual revenue was 5.6 billion RMB, an increase of approximately 3.7% compared to the previous year.

NetEase Cloud: In the fourth quarter, net revenue was 1.9 billion RMB, a year-on-year decrease of approximately 5%. In the third quarter, it increased by 1.3% year-on-year. The annual revenue was 8 billion RMB, an increase of approximately 1.3% compared to the previous year.

Innovation and Other Businesses: In the fourth quarter, net revenue was 2.29 billion RMB, a year-on-year decrease of approximately 17.9%. In the third quarter, it decreased by 10.3% year-on-year. The annual revenue was 8.1 billion RMB, a decrease of approximately 5.8% compared to the previous year.

After the financial report was released, the U.S.-listed Chinese concept stock NetEase followed the decline of the U.S. stock market on Thursday, with its stock price falling for the second consecutive day, closing down approximately 2.6%, hitting a closing low since February 5.

Fourth Quarter Revenue Failed to Turn from Decline to Increase; Net Profit Far Exceeded Expectations Due to Sharp Reduction in Marketing Expenses

The financial report shows that NetEase's revenue in the fourth quarter fell short of expectations, but profits not only reversed the double-digit decline trend of the previous two quarters but also exceeded expectations significantly.

The revenue decline in the fourth quarter compared to the third quarter slowed significantly from nearly 4% year-on-year to 1.3%, but analysts expected a turnaround to growth, with a year-on-year increase of 0.4%. The adjusted net profit for the fourth quarter increased by 31.2% year-on-year to 9.68 billion yuan, while analysts expected only a 7.4% increase to 7.92 billion yuan, with both the second and third quarters experiencing a year-on-year decline of 13.3%.

The excellent profit performance in the fourth quarter was attributed to a significant decrease in marketing expenses. Operating expenses in the fourth quarter decreased by 15%. Dolphin Research believes that the decrease in expenses may be due to a one-time impact from NetEase's internal anti-corruption efforts, as the team underwent significant adjustments, which may temporarily affect normal marketing activities. The 80% year-on-year decline in stock-based compensation (SBC) related expenses is clear evidence of this.

Fourth Quarter PC Game Revenue Grew 56.6%, Exceeding Expectations; Mobile Game Revenue Decline Nearly Twice Expected

Due to the strong growth in PC game revenue, NetEase's core gaming business performed better than expected in the fourth quarter. After a 1% year-on-year decline in the third quarter, online game revenue in the fourth quarter increased by 5.1% year-on-year to 20.54 billion yuan, while analysts expected a growth of 3.4% to 20.21 billion yuan.

Among them, driven by "Naraka: Bladepoint" and Blizzard's Chinese server, PC game revenue increased by 56.6% year-on-year to 7.13 billion yuan, nearly doubling the growth rate of the third quarter, far ahead of analysts' expected revenue of 6.04 billion yuan and growth rate of 32.7%. Mobile games, on the other hand, failed to ease the decline and instead saw a worsening drop, with fourth-quarter revenue decreasing by 10.5% year-on-year to 13.41 billion yuan, nearly double the analysts' expected decline of 5.4% to 14.17 billion yuan.

In the fourth quarter, NetEase launched several heavyweight new games. Among them, "Marvel Duel" ignited the global market with its innovative hero shooting gameplay: it topped the Steam global bestseller list just 4 hours after its launch on December 6, attracting over 10 million registered users within 72 hours, and surpassing 20 million registered players within 12 days, currently accumulating over 40 million users.

NetEase did not launch any new mobile games in the fourth quarter, but "Yan Yun Shi Liu Sheng," which launched in January, performed well in user activity and revenue, expected to boost performance in the first quarter.

NetEase stated that the PC version of "Yan Yun Shi Liu Sheng" surpassed 3 million downloads within four days of its launch in China, and its mobile version topped the iOS download chart for about two weeks. The successful release of the mobile game drove the total number of dual-end players to exceed 15 million within two weeks.

Dolphin Research expects that NetEase's PC game growth may still outperform mobile games this year, partly due to a low base in the first half of the year, and there are new game reserves for PC games. It mentioned that Blizzard's "Overwatch" Chinese server is returning this week, and the well-received "Outlaws of the Wild" will also enter public testing in March, with "Code: Infinite" also having PC/console versions.

DeepSeek Enters Gaming Scene for the First Time

When announcing the financial report, NetEase also mentioned progress in deploying DeepSeek and AI implementation. NetEase stated that various businesses such as NetEase Youdao, NetEase Cloud Music, NetEase Smart, and the mobile game "Nirvana in Fire" announced their integration with DeepSeek, applying DeepSeek and self-developed AI technology to numerous products in fields such as education, music, enterprise services, and gamingNetEase Youdao upgraded products such as Youdao Xiaop and Youdao Dictionary by utilizing the deep reasoning capabilities of the DeepSeek-R1 model, combining AI capabilities with educational scenarios, and launched a brand new category of AI Q&A pen, SpaceOne. NetEase Cloud Music announced that its podcast generation tool developed for creators has completed the integration of DeepSeek-R1.

NetEase Fuxi's "Youling·Yisheng Zhuxiang" platform has launched the full version of DeepSeek, which has been integrated into NetEase's digital intelligence business, including integrated communication, service marketing, digital content risk control, intelligent data analysis, and intelligent development.

In the gaming field, recently, the mobile game "Nirvana in Fire" announced that on February 21, the intelligent NPC (non-player character) "Shen Qiuxu," driven by the official version of DeepSeek, will soon be launched in the mobile game "Nirvana in Fire." This marks the first time DeepSeek has entered the gaming world, the first time it has a virtual image, and the first time it has become a virtual intelligent life form