Game business growth slows down, NetEase Q2 revenue increased by 9.4% year-on-year, falling short of expectations, net profit increased by 12.5% year-on-year | Financial Report Insights

Affected by the slowdown in the growth of its gaming business, NetEase's overall performance in the second quarter was slightly below market expectations. Although it still maintained year-on-year growth, the quarter-on-quarter data revealed signs of weakened growth momentum. In the context of intensified industry competition and changes in the regulatory environment, whether the company can reignite its growth engine through product innovation and globalization strategies will be a key factor determining its future valuation level.

On Thursday afternoon, NetEase announced its second-quarter financial report. The core points are as follows:

Financial Performance:

• Revenue below expectations: Q2 revenue was 27.9 billion yuan, a year-on-year increase of 9.4%, lower than the expected 28.4 billion yuan;

• Profit growth slowed: Gross profit was 18.1 billion yuan, below expectations, with a year-on-year increase of 12.5%, and the gross profit margin remained at a high level of 64.9%; net profit was 8.6 billion yuan, a year-on-year increase of 27.25%, with adjusted net income per ADS from continuing operations at 14.81 yuan, estimated at 15.03 yuan;

• Cash position: Net cash was 142.1 billion yuan, with operating cash flow of 10.9 billion yuan, a quarter-on-quarter decrease of 10%;

• Shareholder returns: Announced a dividend of $0.57 per ADS, with a share repurchase plan already executed for $2 billion.

Core Business:

• Online gaming revenue was 22.8 billion yuan, a year-on-year increase of 13.7% but a quarter-on-quarter decline of 5%, showing a significant slowdown in growth momentum;
• NetEase Cloud Music revenue was 2 billion yuan, a slight year-on-year decrease of 3.5%; innovative business revenue was 1.7 billion yuan, a year-on-year drop of 17.8%.

Slowdown in Gaming Business Growth

As NetEase's core engine, gaming and related value-added services generated net revenue of 22.8 billion yuan in the second quarter, a year-on-year increase of 13.7%, but a quarter-on-quarter decline of 5%, and lower than the market expectation of 23.37 billion yuan.

More notably, the gross profit from the gaming business was 16.01 billion yuan, only slightly exceeding expectations, indicating that cost control pressures still exist.

From the performance of specific products, NetEase launched several new titles in overseas markets: "Aito" ranked second on the North American free download chart for PlayStation in May, while "All-Star Streetball Party" and "Marvel's Secret Magic" topped the iOS download charts in multiple regions.

However, the impressive download numbers have not yet fully translated into revenue contributions, a phenomenon that investors should closely monitor.

Remarkably, the peak number of simultaneous online players for "Fantasy Westward Journey" on PC exceeded 2.93 million in August, setting a new historical high. The sustained vitality of this 20-year-old IP reflects NetEase's deep expertise in product operations, but whether this momentum can be maintained remains to be observed.

Distinct Performance in Non-Gaming Business

NetEase Cloud Music reported net revenue of 2 billion yuan in the second quarter, a slight year-on-year decrease of 3.5%, with a quarter-on-quarter increase of 5.3%. The growth in online music service revenue was offset by a decline in social entertainment service revenue, reflecting structural changes in user payment habits Youdao's business performed relatively steadily, with net income of 1.4 billion yuan, a year-on-year increase of 7.2%.

Revenue from innovation and other businesses was 1.7 billion yuan, a year-on-year decline of 17.8%, mainly affected by the decline in revenue from NetEase Yanxuan and advertising services, indicating that the company still faces challenges in its diversification efforts.

Profitability Under Pressure but Cash Abundant

Gross profit was 18.1 billion yuan, a year-on-year increase of 12.5% but a quarter-on-quarter decline of 2.2%, with a gross margin maintained at a high level of 64.9%.

However, net profit attributable to shareholders was 8.6 billion yuan, a year-on-year increase of 27.25%, but a significant quarter-on-quarter decline of 16.5%, mainly affected by fluctuations in investment income and increased operating expenses.

It is worth noting that total operating expenses amounted to 9 billion yuan, a quarter-on-quarter increase of 12.5%, mainly due to increased marketing expenses in the gaming market. 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 strong, with a net cash balance of 142.1 billion yuan, an increase of 8.1% from the beginning of the year. Cash inflow from operating activities was 10.9 billion yuan, although it declined by 10% quarter-on-quarter, it still maintains a healthy level, providing ample assurance for the company's future investments and shareholder returns.

Effectiveness of Overseas New Products to be Observed

CEO Ding Lei emphasized in the financial report that the company will "continue to explore new player experiences and strengthen self-developed IP products."

Upcoming new products such as "Sea of Oblivion" and "Return to Tang", as well as the global layout of "Nirvana in Fire" mobile game and "Yanyun Sixteen Sounds", will be important tests of NetEase's innovation capabilities and internationalization strategy.

The continued expansion of Blizzard's game series in the Chinese market is also worth noting. The new expansion pack for "Hearthstone" quickly climbed to fifth place on the iOS bestseller list, and the 20th anniversary celebration of "World of Warcraft" in China announced the launch of a new exclusive server for the Chinese region in November. These developments may bring new growth points for NetEase