CLOUD MUSIC's Q3 revenue growth of 11.6% met expectations, with a steady performance in the gaming business. Although CLOUD MUSIC's revenue declined, gross profit improved. | Earnings Report

After the Hong Kong stock market closed on November 16th, NetEase released its unaudited financial results for the third quarter ended September 30, 2023. The key points of the performance are as follows:

• Revenue reached RMB 27.3 billion, in line with expectations, with a year-on-year growth of 11.6%.
• Total operating expenses amounted to RMB 9.4 billion (USD 1.3 billion), representing a year-on-year increase of 4.5%.
• Gross profit reached RMB 17 billion (USD 2.3 billion), with a year-on-year growth of 23.4%.
• Net profit attributable to the company's shareholders was RMB 7.8 billion (USD 1.1 billion). The non-GAAP net profit attributable to the company's shareholders from continuing operations was RMB 8.6 billion (USD 1.2 billion).
• Basic earnings per share were USD 0.33 (basic earnings per ADS were USD 1.67). The non-GAAP basic earnings per share from continuing operations were USD 0.37 (non-GAAP basic earnings per ADS were USD 1.84).

In terms of business segments, during the reporting period:

• Net revenue from games and related value-added services reached RMB 21.8 billion (USD 3 billion), representing a year-on-year increase of 16.5%.
• Net revenue from Youdao reached RMB 1.5 billion (USD 210.9 million), representing a year-on-year increase of 9.7%.
• Net revenue from Cloud Music reached RMB 2 billion (USD 270.4 million), representing a year-on-year decrease of 16.3%.
• Net revenue from innovation and other businesses reached RMB 2 billion (USD 271.2 million), showing a slight increase year-on-year.

NetEase stated that it invested RMB 4.3 billion in research and development during the quarter, with a research and development intensity of 16%, higher than the industry average. In the first three quarters of this year, NetEase's cumulative investment in research and development has exceeded RMB 12 billion, continuing to accelerate the application of AI self-developed large-scale models and other technologies in the fields of education, entertainment, and industry.

NetEase announced that the dividend for the third quarter of 2023 will be USD 0.0990 per share (USD 0.4950 per American Depositary Share), which will be paid to registered ordinary shareholders and American Depositary Shareholders after the market closes on December 1, 2023.

In the earnings report, NetEase CEO William Ding said:

Our strong and increasingly diverse game product portfolio delivered excellent performance in the third quarter, with overall net revenue reaching RMB 27.3 billion, a nearly 12% year-on-year increase.

Our flagship games such as the "Fantasy Westward Journey" series continue to be beloved by players. Our recently launched high-quality new games, such as "Speedy Master," "Nishuihan" mobile game, and "All-Star Street Basketball Party," have also quickly gained widespread acclaim. The popularity of these diversified new releases demonstrates our outstanding research and development capabilities, expands our influence in the casual game market, and broadens the boundaries of traditional MMO games, bringing players an unprecedented new gaming experience. In the vast family of NetEase, both the Cloud Music and Youdao businesses have maintained good development and have been outputting innovative content in their respective fields. Looking ahead, we will continue to pour our passion into producing products and content, injecting vitality into the market, creating high-quality experiences, and generating value for our users and company.

In addition, NetEase announced today that Mr. Yang Zhaoxuan, the Chief Financial Officer, has submitted his resignation to the Board of Directors due to personal reasons and will no longer hold the position starting from November 30, 2023. He will explore other career development opportunities. Until June 30, 2024, Mr. Yang will continue to serve as a company advisor to ensure a smooth transition during the process of finding a successor.

After the release of the earnings report, NetEase's pre-market trading on the US stock market fell by 3.2%.

Stable Gaming Business with Increased Gross Margin

The earnings report shows that NetEase's net revenue from gaming and related value-added services in the third quarter was 21.8 billion yuan, a year-on-year increase of 16.5% and a quarter-on-quarter increase of 15.9%. The gross profit was 15.03 billion yuan, a year-on-year increase of 23.7%, with a gross margin of 69.0%, a year-on-year increase of 4 percentage points.

Among them, revenue from online games accounted for 93.7% of the revenue of this segment, with both quarter-on-quarter and year-on-year increases. Net revenue from mobile games accounted for approximately 77.6% of the net revenue from online games, compared to 73.6% in the previous quarter and 68.6% in the same period last year.

NetEase stated that the quarter-on-quarter increase in gross profit from gaming and related value-added services was mainly due to the increase in revenue from newly launched games such as "Nishuihan" mobile game and "Peak Speed". The year-on-year increase was mainly due to the increase in revenue from online games, such as "Egg Party" and some new games, as well as the reduction in copyright fees due to the termination of several licensed games.

The quarter-on-quarter increase in gross margin was mainly due to changes in the revenue mix of self-developed, co-developed, and licensed games, as well as changes in the contribution of different revenue sources. The year-on-year increase was mainly due to the increased contribution of net revenue from NetEase's self-developed games.

NetEase stated that in the third quarter of this year, the mobile game "Nishuihan" achieved strong revenue and user growth, with a registered player base exceeding 50 million.

NetEase's first self-developed basketball game, "All-Star Streetball Party," topped the Chinese iOS bestseller list at the end of October. Classic flagship game products such as the "Fantasy Westward Journey" series are still favored by players, and other popular games such as "Egg Party," "Identity V," and "Re: Zero - Infinite Bonds" continue to be popular. Various highly anticipated new games are being developed in an orderly manner, and several exciting new products will be released in 2024.

Decline in Cloud Music Revenue with Significant Increase in Gross Profit

During the reporting period, NetEase Cloud Music's revenue was 1.973 billion yuan, a year-on-year decrease of 16% and a slight increase of 1.3% quarter-on-quarter. The gross profit was 537 million yuan, a year-on-year increase of 60.8% and a quarter-on-quarter increase of 2.1%. The gross margin was 27.2%, a year-on-year increase of 13 percentage points and a slight increase of 0.2 percentage points quarter-on-quarter. NetEase stated in its earnings report that the MoM and YoY growth of gross profit for its music streaming service, Cloud Music, was mainly driven by the increase in subscription revenue and continuous improvement in cost control, consistent with the previous quarterly report.

In addition, Cloud Music continues to enhance its monetization capabilities in its membership business, with music content as the core, in order to improve profitability. Cloud Music focuses on building a music community and providing high-quality service experiences, while continuously launching rich content and innovative features.