NetEase (Minutes): Rich game reserves, future optimization of marketing resource allocation

The following is a summary by Dolphin Research regarding$NTES-S(09999.HK) $NetEase(NTES.US) the Q2 2025 earnings call minutes. For earnings interpretation, please refer to《NetEase's Volatility? Veterans Still Have Strong Capabilities》

I. Review of Core Financial Information:

1. Cash Flow: As of June 30, 2025, the company's net cash position was approximately RMB 142.1 billion, maintaining a strong cash status compared to RMB 137 billion at the end of the previous quarter.

2. Shareholder Return Plan:

(1) The Board has approved a second-quarter dividend of $0.1140 per share, or $0.57 per ADS.

(2) Under the $5 billion share repurchase program initiated in mid-January 2023, the company has repurchased approximately 22.1 million ADS at a total cost of about $2 billion as of June 30, 2025.

3. Business Advancement Pace and Guidance:

The company is committed to building lasting success through continuous innovation and high-quality operations, paving the way for long-term growth in both domestic and global markets. It will continue to push the boundaries of player experience, expand original IPs to build enduring series, and grow with global partners.

4. Gaming Business:

▪ "MARVEL's Mystic Mayhem" plans to introduce more playable characters and expand storylines approximately every six weeks.

▪ The "Marvel Rivals" esports event looks forward to crowning its first champion at the year-end finals.

▪ "Where Winds Meet" has successfully completed overseas testing and is firmly on track for global release.

▪ "Sword of Justice Mobile" global pre-registration began in May, aiming to bring the MMORPG experience to players worldwide.

▪ "Sea of Remnants" is scheduled for release in 2026.

▪ "Destiny Rising" will be released on mobile devices on August 28.

▪ "Wild Gate" is expected to meet players in China later this year.

▪ "World of Warcraft" will launch a China-exclusive "Titan Reforged" server in November.

▪ "Diablo II: Resurrected" will return to China on August 27, with plans to launch "Diablo IV".

II. Detailed Content of the Earnings Call

2.1, Key Information from Management:

1) Business Progress

① Gaming and Related Business:

◦ New games perform well globally: Several new games such as "MARVEL's Mystic Mayhem," "FragPunk," "Once Human," and "Marvel Rivals" have performed outstandingly in global markets, quickly attracting players and entering the top download or sales charts.

◦ Continued growth of domestic core IPs: "Fantasy Westward Journey PC" reached a historical peak of 2.93 million concurrent users (PCU) in August, and "Fantasy Westward Journey Mobile" set a new revenue record.

◦ Popular games achieve repeated success: "Where Winds Meet," "Sword of Justice Mobile," "Identity V," and "Eggy Party" continue to enhance user engagement through major updates and IP collaborations, frequently entering the top of China's iOS sales charts.

◦ Blizzard games return and new projects: "World of Warcraft" announced the launch of a China-exclusive server, and "Diablo II: Resurrected" and "Diablo IV" are planned to return to the Chinese market.

◦ Rich new game reserves: Including the cross-platform ocean adventure RPG "Sea of Remnants" expected to be released in 2026, the first AAA single-player game "Blood Message," and the free mobile sci-fi RPG shooter "Destiny Rising," continuing to push the boundaries of gaming experience.

③ Youdao Business:

◦ Net revenue was RMB 1.4 billion, up 9% quarter-on-quarter and 7% year-on-year.

◦ Achieved its first second-quarter operating profit.

◦ Continues to drive product innovation through proprietary RLM (Ziyue Large Model) and launched an AI advertising optimizer.

④ Innovative Business and Other Business:

◦ Net revenue was RMB 1.7 billion, up 5% quarter-on-quarter, down 18% year-on-year.

◦ NetEase Yanxuan maintains a leading position in key categories such as home fragrance and pet food.

2) Financial Performance

① Total Revenue and Gross Margin:

◦ Total net revenue for the second quarter was RMB 27.9 billion (approximately $3.9 billion), up 9.4% year-on-year.

◦ Total gross profit was RMB 18.1 billion, up 13% year-on-year.

◦ Total gross margin was 64.7%.

② Gaming and Related Business:

◦ Total net revenue from gaming and related value-added services was RMB 22.8 billion, up 14% year-on-year.

◦ Online gaming net revenue was RMB 22.1 billion, down 6% quarter-on-quarter, up 15% year-on-year.

◦ Gross margin was 70.2%, with quarter-on-quarter improvement mainly due to an increased proportion of self-developed game net revenue.

③ Youdao Business:

◦ Youdao net revenue was RMB 1.4 billion, up 7% year-on-year, 9% quarter-on-quarter.

◦ Gross margin was 43%, with a decline mainly due to increased contribution from online marketing services revenue.

④ NetEase Cloud Music:

◦ NetEase Cloud Music net revenue was RMB 2 billion, down 4% year-on-year.

◦ Gross margin was 36.1%, mainly benefiting from strong monetization of core online music business and ongoing cost optimization.

⑤ Innovative Business and Other Business:

◦ Innovative business and other business net revenue was RMB 1.7 billion, down 18% year-on-year.

◦ Gross margin was 42.3%.

⑥ Operating Expenses:

◦ Total operating expenses for the second quarter were RMB 9 billion, accounting for 32% of net revenue.

◦ Sales and marketing expenses accounted for 12.8% of total net revenue.

◦ R&D expenses as a percentage of total net revenue remained stable year-on-year at 15.6%.

◦ The effective tax rate for the second quarter was 14.7%.

⑦ Net Profit and Dividends:

◦ Non-GAAP net profit attributable to shareholders for the second quarter totaled RMB 9.5 billion (approximately $1.3 billion), up 22% year-on-year.

◦ Non-GAAP basic earnings per ADS for the quarter were $2.08.

◦ The Board has approved a second-quarter dividend of $11.4 per share, or $0.57 per ADS.

⑧ Share Repurchase:

◦ Under the current $5 billion share repurchase program initiated in mid-January 2023, the company has repurchased approximately 22.1 million ADS at a total cost of about $2 billion as of June 30, 2025.

2.2, Q&A Analyst Questions and Answers

Q: How does management evaluate the early success and future potential of "Where Winds Meet" in terms of monetization performance?

A: "Where Winds Meet" has performed steadily, with active players and monetization exceeding our initial expectations. Its long-term performance is quite stable, showing great potential for sustainable success. The game uniquely combines high-quality content with a purely cosmetic monetization strategy, not affecting the character development process, and is expected to have a healthy and lasting monetization cycle. The company is confident in the future of "Where Winds Meet" and will continue to invest in and even increase content development.

Q: What drove the revenue rebound of "Once Human"? Does the game have the potential to become an evergreen game? What is its user and revenue distribution in China and overseas?

A: The revenue rebound of "Once Human" was mainly due tothe major update of the annual 2.0 version launched in early July, with new scenes and a new profession system widely praised, pushing the game to fourth place on the Steam global sales chart. Additionally, the PvP derivative game "RaidZone" launched at the end of July also enhanced gameplay intensity. The company expects that through continuous updates and building an ecosystem around "custom servers," the product has long-term sustainable development potential. User distribution is approximately 50% in China and 50% in international markets, with revenue distribution being 2:3 between China and the rest of the world.

Q: Can management share more information on the quarter-on-quarter performance of Blizzard games in the Chinese market, and whether all potential old and new players have been covered?

A: Blizzard products, as high-quality games, have surpassed pre-server closure levels in various metrics after a year of operation return in the Chinese market. This is mainly due to local online and offline operational investments. As cooperation with the Blizzard development team deepens, mutual trust and collaboration are increasing. The company believes that by implementing more improvements that align with the tastes and habits of local Chinese players, there is a good opportunity to attract more new players and re-engage those who have not yet returned.

Q: What is your view on the overall competitive landscape of the current shooting game industry?

A: Shooting games are a very large category,and also a highly competitive red ocean market. Players have very high expectations for the quality of this type of game, requiring high-quality art production and deep gameplay innovation. This sets significant entry barriers for the industry. NetEase will continue to invest in the shooting game category and is confident in continuously launching competitive products in this large-scale market in the future.

Q: Regarding "Marvel Rivals," how do you evaluate the effectiveness of the new strategy after the launch of the third season? What new gameplay, skins, or characters will be focused on in the future to regain game momentum?

A: After the launch of the third season of "Marvel Rivals,"daily active users (DAU) and revenue have shown an upward and stable trend.This indicates that the new seasonal content updates and strategies are effective. Looking ahead, the company will continue to introduce more new gameplay mechanisms, new heroes, and popular costumes according to the new seasonal update rhythm to further drive game growth.

Q: Can management share feedback from the first test of "Sea of Remnants" in June, and evaluate its potential market and lifecycle?

A: "Sea of Remnants" is a very important product for us,and we have high confidence in its potential to become a top successful game. The game is planned to be launched next year.Detailed information about this game, including specific feedback from the first test, monetization model, and potential market and lifecycle evaluation, will be announced by the company in due course. Please stay tuned for product updates.

Q: Can management share recent developments and reasons for the resurgence of evergreen games "Fantasy Westward Journey PC" and "Eggy Party"?

A: "Fantasy Westward Journey PC" has seen a resurgence and stable improvement in various metrics after a year of continuous optimization. The newly launched unlimited server has been well-received, setting a new record of 2.93 million concurrent users (PCU) in early August. The company believes that through continuous innovation, the game will continue to grow in the foreseeable future. "Eggy Party," as a UGC platform game, has mastered the operational methodology. Future efforts will continue to encourage high-quality UGC content and increase marketing efforts, aiming to become a household name game in China, associated with the "family party game" concept.

Q: Regarding "Code: ANANTA," what is its development status? When is it expected to be released? How does the company view its competitive landscape among similar games?

A: "Code: ANANTA" is currently in the mass production stage, continuously enhancing the core experience and preparing a long-term content pipeline. In the face of competition, the company focuses more on creating excellent game quality to achieve differentiation from existing market products.New content and progress are expected to be announced during the Tokyo Game Show in late September, please stay tuned for product news.

Q: Can management share the company's marketing and operational strategies for old and new games, and expectations for sales and marketing expenses?

A: The company is well aware of when and where to make precise marketing investments and when to avoid unnecessary expenses.Looking ahead, marketing efforts will significantly enhance their precision and effectiveness. The company will continue to optimize the allocation of marketing resources to ensure that every investment can maximize market impact and conversion efficiency, thereby further improving overall operational efficiency and product market performance.

Q: Regarding AI technology, has the company seen any acceleration in empowering games? Do existing bottlenecks still exist? How does the company plan to apply AI to existing games? And when can we expect some truly AI-native games?

A: AI multimodal technology is developing rapidly, with new models emerging one after another. The company has invested significant resources to embrace AI, applying it to game development and operations, and using AI for comprehensive training. AI will play an increasingly important role in the future,and the company looks forward to the possibility of AI-designed "AI-native games" one day.Currently, the industry is developing rapidly, and potential bottlenecks are constantly evolving with technological progress.

Q: What are the important directions or game types for the company's overseas expansion in the future?

A: Global distribution capability is crucial for the company. Through a series of products such as "Marvel Rivals," "Once Human," "Identity V," and "Knives Out," the company has accumulated a wealth of practical experience in different markets such as North America, South America, and Japan, understanding the characteristics of each market. Looking ahead to the next few years, global operations will continue to grow, mainly driven by more important new games. The company firmly believes that global growth will be a very important task.

Q: Can management share the current performance of "MARVEL Mystic Mayhem" in overseas markets? Additionally, is there any update on the expected launch time of the domestic version? What are the company's expectations or specific goals for this game in the future?

A: "MARVEL Mystic Mayhem" was officially launched in overseas markets on June 26. With its unique art style and innovative design, the game has received multiple recommendations and editorial interviews from Google and the App Store. The update at the end of July was also well-received by players. At the same time, the company acknowledges facing some challenges in the long-term growth of the game and is working hard to find development solutions to keep it vibrant in the long run.There is currently no update on the launch time of the domestic version and specific future goals.

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