NetEase enters a low point

Author | Huang Yu

Editor | Wang Xiaojun

After a prosperous 2023, 2024 is not looking good for NetEase.

On February 20, NetEase released its financial report showing that in the fourth quarter of last year, NetEase's revenue decreased by 1.4% year-on-year to 26.7 billion yuan, while net profit attributable to shareholders increased by 33% year-on-year to 8.8 billion yuan; for the entire year, NetEase achieved total revenue of 105.3 billion yuan, a slight increase of 1.7% year-on-year, and net profit attributable to shareholders increased by 1% year-on-year to 29.7 billion yuan.

Clearly, facing pressure for revenue growth, NetEase managed to barely reverse the potential negative profit growth for the year by significantly cutting costs and increasing efficiency in the fourth quarter.

According to the financial report data, in the fourth quarter of last year, NetEase's total operating expenses were 8.5 billion yuan, a decrease of 15.1% year-on-year. NetEase stated that this data decreased both quarter-on-quarter and year-on-year, mainly due to a reduction in marketing expenses for games and related value-added services.

In the fourth quarter of last year, NetEase's sales and marketing expenses were only 2.82 billion yuan, a decrease of 1.41 billion yuan compared to the same period in 2023.

In fact, the fourth quarter of 2023 was a quarter of significant growth in NetEase's sales and marketing expenses. As the year-end approached, in order to counter the aggressive Tencent party game "Yuanmeng Zhixing," Ding Lei "spent heavily," with NetEase's sales and marketing expenses reaching 4.23 billion yuan in the fourth quarter of 2023, an increase of approximately 18.5% quarter-on-quarter and 24% year-on-year.

NetEase's "Egg Party" withstood the impact of "Yuanmeng Zhixing," but its own momentum has also clearly weakened.

During the conference call in the third quarter of last year, Ding Lei specifically mentioned this matter: "Egg Party is still our product with the most daily active users at present. Although it has encountered some challenges in commercialization, this is a process of accumulating experience." Up to now, NetEase's financial report has not highlighted "Yuanmeng Zhixing" as a performance highlight.

As "Yuanmeng Zhixing" drops off the list of blockbuster games, merely cutting costs and increasing efficiency cannot support NetEase's future; it must create new blockbuster games.

It is important to note that although NetEase currently has four major segments: games, Youdao, NetEase Cloud, and innovation and other businesses, games remain the pillar and the most closely watched business segment by the outside world.

In recent years, the revenue from games and related value-added services has remained stable at around 80%. This revenue structure did not show significant changes last year.

Data shows that in the fourth quarter of last year, NetEase's revenue from games and related value-added services was approximately 21.2 billion yuan, a year-on-year increase of 1.4%, accounting for 79.4% of total revenue; for the entire year, NetEase's revenue from games and related value-added services was 83.6 billion yuan, a year-on-year increase of 2.5%, accounting for approximately 79.4% of total revenue.

NetEase's game revenue growth performance is weak, especially the revenue from mobile games. If it weren't for Blizzard's return driving growth in PC game revenue, last year's game revenue could have been even worse NetEase's financial report indicates that in 2024, net income from mobile games will account for approximately 72.7% of net income from online games, down from 75.2% in 2023. The change in the revenue mix is primarily due to the increase in net income from PC games brought by titles like "Naraka: Bladepoint" and agency games.

It is reported that thanks to the outstanding performance of the PC game "Naraka: Bladepoint" and agency Blizzard games such as "World of Warcraft" and "Hearthstone," NetEase's PC game revenue achieved a year-on-year growth of 57% in the fourth quarter.

In 2025, NetEase's revenue from mobile games may still face pressure.

Analysts at CMB International expect NetEase's game revenue to grow by 10% year-on-year in 2025, with PC games likely to see revenue growth exceeding 30% driven by new games like "Marvel Duel." The contributions of "Marvel Duel" and "Yanyun Shiliusheng" to PC game revenue in 2025 are expected to reach 16% and 4%, respectively, while mobile games are expected to remain stable.

To break through the current growth bottleneck in gaming, NetEase must make greater changes.

In fact, NetEase has already taken action.

At the end of last year, news emerged about adjustments in multiple game studios of NetEase Games both domestically and internationally, with the NetEase Tianxia Division being split into three independent divisions: the Eggy Division (representing the project "Eggy Party"), the Wilderness Division (representing the project "Wilderness Action"), and the Tianxia Division.

During the conference call following the financial report release, when asked about the reasons for these adjustments, NetEase founder and CEO Lei Ding did not deny them.

At the same time, Lei Ding stated that when allocating R&D resources and investments across different studios, NetEase places great importance on the future model, quality, and production efficiency of games, making appropriate adjustments accordingly. If some projects are found to be unsuitable for market demand upon future launch, the company will decisively hit the brakes. For projects with high quality and efficiency, resources will be increased.

"So everything depends on whether the quality of the product itself can meet future user expectations. Developing a game takes a long time, often requiring three years or even longer, so at the project initiation stage, after the project is established, and during the development process, we need to continuously adapt to future market demands, increasing resources where necessary and stopping where needed. This is our principle."

The financial report shows that NetEase will launch more global and diversified new products in the future to further enrich its product matrix.

As the halo of billion-dollar revenue fades, this veteran internet company stands at a crossroads of transformation, needing to implement stronger reform measures to maintain its position as a major player