On August 22, NetEase released its financial report for the second quarter of 2024. NetEase's net revenue for Q2 was 25.5 billion yuan, a year-on-year increase of 6%, and the net profit attributable to the company's shareholders was 6.8 billion yuan, a year-on-year decrease of 17%, mainly affected by the fluctuation of exchange gains and losses.

After the release of the financial report, NetEase's US stocks fell by more than 10% at one point, and as of the time of writing, the stock fell by 9.35%, trading at $83.94 per share, with a total market value of $54.12 billion.

Dolphin Investment Research analysis believes that NetEase's second quarter performance was not very satisfactory, with both revenue and profit falling short of expectations to varying degrees. The main expectation gap was in mobile games, as the overall gaming industry was poor in the second quarter, and NetEase's main games "Party Egg" and "Against the Cold" both experienced a cooling down. However, Dolphin Investment Research believes that, judging from the latest changes in game revenue, "Against the Cold" has already shown signs of recovery in July, and "Eternal Return" has performed at the forefront of the industry since its launch.

Advertisement

In addition, Dolphin Investment Research pointed out that although NetEase's net profit for the second quarter decreased by a significant amount year-on-year, this included the impact of the decline in exchange gains and losses and investment gains and losses. "Looking at the core operating profit under GAAP, the second quarter increased by 15% year-on-year, which is still normal."

According to the financial report, NetEase's exchange loss for the second quarter of 2024 was 240 million yuan, compared to an exchange gain of 1.46 billion yuan in the same period last year. NetEase stated in the financial report that the year-on-year and quarter-on-quarter decrease in other income was mainly due to the recognition of a net exchange loss in the second quarter of 2024, while the previous quarter and the same period last year were both net exchange gains.

After the release of the financial report, NetEase CEO William Ding and the company's management attended the earnings call to answer investors' concerns about the return of Blizzard's domestic service and the implementation of AI. At the call, NetEase executives revealed that the player data for the return of "World of Warcraft" exceeded expectations, and the game continues to attract the return of old players and the addition of new players, with a new-to-old player ratio of 4:6. Other Blizzard games will also return one after another, and NetEase has reached a consensus with Blizzard that there will be more in-depth cooperation in the future to bring players a better experience. It has been confirmed that "Hearthstone" will officially return on September 25.

Regarding how AI can be more deeply applied in games, NetEase executives disclosed at the earnings call that AI technology has increased work efficiency in key areas by 90%. NetEase has already applied AI in various professional fields such as game planning, programming, art, and copywriting, and has also included the assessment of AI application in new recruitment.

In terms of specific business, NetEase's games and related value-added services remain the largest source of revenue, with a net income of 20.1 billion yuan, a year-on-year increase of 6.7%. In this quarter, net income from online games accounted for approximately 96.1% of the net income of this division, and net income from mobile games accounted for about 76.4% of the net income from online games.

The gross margin for games and related value-added services in the second quarter was 70%, compared to 69.5% in the previous quarter and 67.4% in the same period last year. NetEase stated that the increase in gross margin quarter-on-quarter and year-on-year was mainly due to changes in the product mix.

In terms of specific games, NetEase mentioned that "Party Egg" has set a new high, with a global cumulative number of registered users exceeding 600 million and the number of creators exceeding 40 million; "Conqueror's Blade" and "Eternal Return" have set new highs for daily active users (DAU) on the PC platform. In terms of subsequent support, the mobile game "Eternal Return" performed well, ranking third on the domestic iOS bestseller list after its launch. According to the global mobile game revenue growth list released by SensorTower for July 2024, "Eternal Return" ranked 7th on the global revenue growth list.In other business areas, in the second quarter, NetEase Youdao's net revenue was 1.3 billion yuan, a year-on-year increase of 9.5%; Cloud Music's net revenue was 2 billion yuan, a year-on-year increase of 4.7%; the net revenue of innovative and other businesses was 2.1 billion yuan, remaining flat year-on-year.

In the second quarter, NetEase's gross profit was 16 billion yuan, a year-on-year increase of 11.6%. The total operating expenses were 9 billion yuan, a year-on-year increase of 8.9%, mainly due to increased investment in research and development and marketing expenditures for games and related value-added services. In the second quarter, NetEase's research and development investment was 4.5 billion yuan, with an R&D intensity of approximately 17%.

In the financial report, NetEase stated that the company is further achieving cost reduction and efficiency improvement in the game business through AI, exploring the "AIGC+UGC" model. Data provided by NetEase shows that various gameplays enhanced by AI in "The Moonlit Sword" broke through 10 billion total playbacks on Douyin for the PC and mobile versions in June. The "AI teammate" feature of "Eternal Return" surpassed 500 million views on the Douyin platform, and at the same time, "Egg Party" launched features such as the "Almighty Generator" and "Story Animation Editor".