The gaming business cools down, NetEase's Q4 revenue and profit both fall short of expectations | Earnings report insights

NetEase delivered a mixed report card in the final battle of 2025. Although the company claimed to have reshaped the game development process using AI technology and maintained the vitality of long-term products, the core financial data shows that NetEase's fourth-quarter revenue and profit both fell short of Wall Street's high expectations.

On February 11, NetEase announced its financial report, revealing that its fourth-quarter net revenue was 27.5 billion yuan (approximately 3.9 billion USD), a year-on-year increase of 3.0%, but below analysts' expectations of 28.79 billion yuan. Among these, the net income from games and related value-added services, which is the company's "cash cow," was 22 billion yuan, although it grew by 3.4% year-on-year, it also did not meet the market expectation of 23.42 billion yuan. The net profit from continuing operations (Non-GAAP) was 7.1 billion yuan, with earnings per ADS of 10.95 yuan, far below the market expectation of 14.07 yuan.

The main reason for the significant profit shortfall was the surge in expenses. In the fourth quarter, NetEase's total operating expenses reached 9.4 billion yuan, a year-on-year increase of 10.9%, mainly due to increased marketing expenses related to online games. Although gross profit grew by 8.7% year-on-year to 17.7 billion yuan, and the gross margin improved due to a decrease in royalties and channel costs, this benefit was eroded by high promotional costs, leading to pressure on the final net profit.

However, NetEase still maintained a robust shareholder return. The board approved a dividend of 1.16 USD per ADS for the fourth quarter. At the same time, the company announced that its 5 billion USD stock repurchase plan would be extended to January 2029, having repurchased approximately 22.1 million ADS at a cost of 2 billion USD by the end of 2025. NetEase CEO Ding Lei emphasized that AI has become a foundational capability for the company's development and operations and will continue to drive global expansion.

Core Gaming Business: New Products Show Contribution, but Overall Below Expectations

As the foundation of NetEase, games and related value-added services generated revenue of 22 billion yuan this quarter, accounting for a staggering 80% of total revenue. Although this represents a year-on-year growth of 3.4%, this growth rate appears somewhat weak in the eyes of the market, and the absolute revenue value shows a significant decline from the previous quarter's 23.3 billion yuan (the quarter-on-quarter decline was mainly affected by seasonal factors and the high base from last summer's peak season).

From the product structure perspective, established flagship titles like "Fantasy Westward Journey" and "Identity V" continue to demonstrate strong vitality, supporting the performance base. At the same time, the launch of new games "Yanyun Sixteen Sounds" and "Marvel Showdown" provided incremental revenue growth. **The return of Blizzard's series of games to the Chinese market has performed steadily, not only setting a new annual revenue record but also further consolidating NetEase's user stickiness on the PC side **

However, the net revenue of 21.97 billion yuan from online games is far below analysts' expectations of 23.42 billion yuan, indicating that the monetization ability of new games or the revenue stability of old games has not fully met the market's optimistic expectations. Ding Lei mentioned in the financial report that AI has been fully integrated into the entire game development process, improving production efficiency, which may be a key variable for controlling R&D costs and enhancing product cycles in the future.

Profitability Analysis: Gross Margin Improvement Unable to Offset Soaring Expenses

A notable feature of this quarter's financial report is "gross profit up, net profit down."

From the gross profit perspective, NetEase performed reasonably well. The gross profit for the fourth quarter was 17.7 billion yuan, a year-on-year increase of 8.7%, and the gross margin improved from 61% in the same period last year to around 64%. This is mainly attributed to the optimization of the cost structure in the gaming business: on one hand, the proportion of revenue from self-developed games has increased (especially from "Fantasy Westward Journey" and new games), and on the other hand, the costs of licensed game royalties and channel revenue sharing have decreased.

However, the significant increase in operating expenses has greatly weakened profitability. Total operating expenses surged by 10.9% year-on-year to 9.4 billion yuan, with sales and marketing expenses being the main driver. This typically means that in the fiercely competitive gaming market, NetEase has had to increase its spending on user acquisition to maintain the popularity of old games and promote new games (such as the global promotion of "Marvel Duel"). This "high investment for growth" model, in the context of revenue falling short of expectations, directly led to a Non-GAAP earnings per share of only 10.95 yuan, a significant gap from the market expectation of 14.07 yuan.

Diversified Business: Youdao Exceeds Expectations, Innovative Business Under Pressure

Outside of gaming, NetEase's other business segments showed a mixed performance.

Youdao became the highlight of this quarter. Net revenue reached 1.6 billion yuan, a year-on-year increase of 16.8%, not only exceeding the market expectation of 1.45 billion yuan but also achieving a gross profit of 705 million yuan, better than the expected 648 million yuan. This indicates that Youdao's commercialization path in online marketing services and learning services remains smooth, with strong growth momentum.

Cloud Music performed steadily but lacked surprises. Net revenue was 2 billion yuan, a year-on-year increase of 4.7%, slightly below the expected 1.99 billion yuan. However, its gross profit control was acceptable, and although it was slightly below expectations, it still maintained basic profitability.

Innovative and other businesses are facing challenges. Net revenue was 2 billion yuan, a year-on-year decrease of 10.4%. Although this figure was higher than analysts' expectations of 1.89 billion yuan (indicating that analysts had lower expectations), the double-digit year-on-year decline reflects the contraction of selected e-commerce and other value-added services under the impact of divesting non-core businesses or the consumer environment

2025 Annual Summary: AI and Globalization Remain Key Words

In the fiscal year 2025, NetEase's total revenue reached 112.6 billion yuan, a year-on-year increase of approximately 6.9%; Non-GAAP net profit attributable to the parent company was 37.3 billion yuan, a year-on-year increase of 11.3%. Although the annual data continues to show growth, the "loss of momentum" in the fourth quarter has raised alarms in the market.

Ding Lei emphasized "AI-driven" and "globalization" in his remarks on the financial report. He stated that AI technology has extended from art and design to programming and quality assurance, aiming to launch AI-native gameplay in flagship products through a high-yield scalable production model. In terms of globalization, the overseas performance of "Marvel Showdown" and "The Sixteen Sounds of Yan Yun" is highly anticipated. For investors, the next focus will be whether the high marketing expenditure can translate into tangible revenue growth in 2026, and when the story of AI reducing costs and increasing efficiency can be more intuitively reflected in the profit and loss statement.