NetEase 1Q26 First Take. Q1 results beat, with upside vs. Street driven by game revenue, GPM, and tight opex control.

(1) Game revenue beat. The market had expected sub-5% growth given no new launches this quarter and a tough base last year, but NetEase delivered 7% growth. Drivers included the 'Fantasy Westward Journey' PC 'Changyou' servers, the overseas rollout of 'Where Winds Meet', and operational recovery in 'Identity V' and 'Eggy Party'.

Deferred revenue at Q1-end rose 22% YoY, topping the 17% widely modeled by the Street. By Dolphin Research estimates, gross billings grew 18% QoQ; while short of last year's exceptional Q1 surge, it outperformed typical seasonal patterns.

Q2 will still face a high base. From H2, the mobile pipeline adds heavyweight launches, with '遗忘之海' in Q3 (Sell-side est. full-year all-platform billings of RMB 3–5bn) and '无限大' in late Q4 or early next year (Sell-side est. RMB 10bn), which should support sequential acceleration in game revenue.

(2) GPM expanded sharply, the quarter's biggest highlight in our view. Q1 GPM reached 69.4%, up over 500bps YoY and QoQ, driven by games and live streaming. Game-related GPM rose to 75%, up 600bps YoY.

Key drivers included a higher mix from self-developed, high-margin PC titles this quarter and lower channel fees, aided by steering users to top up on the official website and lower rev-share rates at app stores like Apple. This aligns with the margin expansion logic the market has been anticipating.

(3) Personnel expense optimization. Opex was tightly managed in Q1, with R&D growing slowly, and S&M down QoQ on normal seasonality. G&A fell 33% YoY.

G&A has been shrinking for two years; from an already lean base, the further step-down suggests meaningful headcount optimization or comp adjustments in Q1. SBC tells a similar story: despite NetEase's share price being up ~10% YoY, SBC expense nearly halved YoY.

News also surfaced at quarter-end of significant cuts to outsourced teams. These savings likely were not fully reflected in Q1, and details warrant attention on the call.

(4) Buybacks up; overall shareholder returns are modest. The quarter's declared dividend is $0.144 per share ($0.72 per ADS), totaling $460mn, a 30% payout, roughly stable. NetEase repurchased $127mn in Q1, already above the total for last year; management typically paces buybacks with market cap swings, and $2.9bn remains authorized (three-year term).

Annualizing Q1 dividends plus buybacks implies ~$2.35bn in full-year shareholder returns, about 3%–4% of the $74bn market cap as of yesterday's close, which is not high. $NTES-S(09999.HK) $NetEase(NTES.US)