NetEase, Inc. (NTES) reported a slight dip in revenue for its fiscal third quarter, with a 3.9% year-on-year decline to $3.73 billion (26.2 billion Chinese yuan). However, the Chinese gaming giant surpassed analysts’ expectations, posting a revenue of $3.73 billion compared to the predicted $3.65 billion. Furthermore, NetEase’s adjusted earnings per ADS (American Depositary Share) of $1.67 exceeded the analyst consensus of $1.61. The positive earnings announcement resulted in a stock surge in premarket trading.
While NetEase’s overall revenue declined, its different business segments saw varied performance. Revenue from games and related value-added services decreased by 4.2% year over year to $3.0 billion, with a corresponding decrease in gross margin by 20 basis points (bps) to 68.8%. This decrease was attributed to changes in the product mix. Youdao, Inc. (DAO), NetEase’s online education arm, saw revenue climb 2.2% year-over-year to $224.1 million, but experienced a 570 bps drop in gross margin to 50.2% due to reduced revenue from its learning services. Meanwhile, Cloud Music, NetEase’s music streaming platform, reported a 1.3% increase in revenue to $284.9 million, with a 560 bps expansion in gross margin to 32.8%. Revenue from innovative businesses and other services decreased 10.3% year over year to $252.8 million, but the gross margin increased by 1,050 bps to 37.8% due to improved margins from several businesses within this segment.
NetEase’s financial strength is evident, with $17.1 billion in cash and equivalents and $1.5 billion in operating cash flow as of September 30, 2024. The company also declared a dividend of $0.4350 per ADS for the third quarter of 2024.
Beyond financial performance, NetEase is making strides in its gaming portfolio. The company launched new titles and expanded existing games into new regions, bolstering its presence across various gaming genres. The mobile version of “Naraka: Bladepoint”, released in July, quickly gained popularity and reached the No. 4 spot on the iOS grossing chart after a September update, fueled by high demand for action-based PvP games. “Racing Master” topped both the App Store and Google Play free-to-play charts in Japan following its August launch. The return of “World of Warcraft” and “Hearthstone” to the Chinese market reignited player enthusiasm, with “World of Warcraft” seeing a 50% boost in daily active players compared to pre-shutdown levels and “Hearthstone” experiencing over 150% growth in player activity. NetEase continued to maintain the popularity of its key games like “Identity V” and “Naraka: Bladepoint”, showcasing its operational expertise in the online gaming sector. The company further expanded its portfolio by announcing new titles like “Destiny: Rising” and “MARVEL Mystic Mayhem.” Upcoming releases such as “Marvel Rivals” and “Where Winds Meet” are scheduled for a December debut.
Youdao achieved a significant milestone by recording its first-ever operating profit for a third quarter, marking a turnaround from a loss in the same period last year. NetEase Cloud Music continued its growth trajectory, expanding its subscriber base and maintaining healthy revenue momentum within its music-focused ecosystem.
Despite these positive developments, NetEase faces challenges. The company’s stock has plunged 18% year-to-date, reflecting the broader sell-off in U.S.-listed Chinese stocks. This downturn is attributed to factors like the lackluster performance of the fiscal stimulus and Donald Trump’s presidential victory, which raises concerns about potential tariffs on Chinese goods.
Adding to the complexities, NetEase Games General Manager Xiang Lang, esports head Jin Yuchen, and other staff members were arrested on charges of bribery and money laundering. NetEase issued a statement confirming that it addressed two cases of suspected misconduct involving a small number of employees within its domestic Chinese market operations.
Despite these challenges, NetEase’s premarket stock jump indicates a positive outlook. The company’s focus on new game launches, expansion into international markets, and growth in its non-gaming segments suggest a promising future. However, navigating the uncertain economic landscape and regulatory scrutiny in China will be crucial for NetEase to sustain its success.
