Tencent's "One Line" by Fang Fang
NetEase (NASDAQ:NTES) today announced the company's unaudited financial results for the first quarter ended March 31, 2018. According to statistics, Netease first quarter net income was RMB 14.17 billion (US$2.260 billion), an increase of 3.9% year-on-year; net profit was RMB 752 million ($120 million), down 69.2% year-on-year.
This is Netease's second consecutive quarter of net profit Lulu. As early as Q4 2017, the net profit was 1.286 billion yuan (US$198 million), and its year-on-year decline was 65.1%.
The core reason that led to the decline of profit in the two quarters, almost all referred to the decline of self-developed mobile game “Onmyoji”.
In Q4 2017, NetEase reduced its profits and even attributed it to “declined revenue contribution from self-developed mobile games such as “Onmyoji””, which directly led to a decrease in the gross profit of Netease’s online game services year-on-year and quarter-on-quarter.
In this quarter's earnings report, Netease once again stated that the "growth" of online game service gross profit was mainly due to the decline in the revenue contribution from mobile games such as "Yinyang Division" and "Ghost Story". Although NetEase emphasized that the decline in the contribution of self-developed mobile games was partially offset by the increase in the income of Wildland Action and Chu Liuxiang, the decline in Netease's own mobile game is still difficult to reverse.
Not only that, NetEase's operating expenses continued to be high at the time of the weak business. According to the financial report, NetEase's operating expenses for the first quarter of 2018 were 4.747 billion yuan (US$757 million), which was 4.318 billion yuan and 7.712 billion yuan respectively in the previous quarter and the same period of last year, a year-on-year increase of 75.04%.
This is due to the increase in marketing expenses, R&D expenditures, and personnel costs associated with NetEase's game business. Over the past few months, NetEase has attracted more players through non-MMORPG-type games such as Fifth Personality and Wilderness Action, which to a certain extent have kept its marketing and other expenses high.
As of May 16, U.S. closed at 266 U.S. dollars, compared with 377.263 U.S. dollars, the highest point ever reached on December 21 last year. In less than six months, the stock price has fallen by 29.4%.
Game revenue continues to decline, with total revenue decreasing
In addition to its weak profitability, NetEase also saw a quarter-on-quarter decline in revenue after its highest revenue of 14.688 billion yuan ($2.245 billion) in the previous quarter. Revenue was 14.173 billion yuan (US$2.26 billion). The chain fell by about 3%. The year-on-year increase was only 3.9%.
The reason is due to the weakness of the game business. According to the financial report, online game service revenue decreased by 18.4% year-on-year, which is the most decline in various businesses. It is worth mentioning that the business revenue is 8.761 billion yuan (about 1.397 billion US dollars), accounting for nearly 62% of the total revenue.
As the main business of NetEase, the dual downside of the game business, which has suffered revenue and gross profit, is causing NetEase to continue to pressure.
In Q1 2017, online game service revenues also declined by 10.7%, which was RMB8.004 billion (US$1.230 billion), but benefited from low gross margin e-commerce business recorded RMB 4.654 billion (RMB 715 million). (US$), up 175.2% year-on-year, and when the gaming business hits a crisis, the revenue has reached the highest value in history.
However, in the quarter, e-commerce business revenue recorded only 3.732 billion yuan (about 595 million U.S. dollars), although it increased by 101.0% year-on-year, but compared to the previous quarter's sharp decline, it did not make it last quarter, At the time of game revenue decline, it became the savior of NetEase's financial report.
It is worth mentioning that in terms of business ratio, e-commerce revenue accounted for 26.33% in the quarter, down from 31.86% in the previous quarter, while game revenue accounted for 54.79 in the previous quarter. % climbed to 61.81%.
It can be seen that NetEase's dependence on game business is not reduced. Its e-commerce business has entered a period of steady development.
What will be the next quarter's earnings?
However, NetEase is not without bright spots in the past two quarters.
NetEase stated in its financial report that the commercialization of “Wildlands Action” and “Terminator 2: Judgment Day” has progressed smoothly, mainly through the sale of in-game virtual products to realize its realization; “Wildland Action” has performed well in overseas markets, especially In the Japanese game market ranking has been among the best.
In addition, the "Chu Liu Xiang," which was launched in January, and "The Fifth Personality" and "The Poem of the Shadow," which were released in April, are the new killers that NetEase has come up with this year. Among them, the financial report shows that "the fifth personality" is Netease's first asymmetric competitive mobile game, in the first week of release, more than 10 million active users.
According to a report released by App Annie, April Wilderness once again reached the top of Japan's download list; while in China's download list, Fifth Personality unexpectedly topped, while in the top ten, Netease only had one Tencent, its competitor, is up to 7 models.
However, although there are certain bright spots in business, it is not easy to rely on new tours. Tencent's launch of this year's "Survival for the Jedi: Stimulus Battlefield" has already drastically diverted users of the Wilderness Action. This makes the next step commercialization of Wilderness Action may not be as smooth as the financial statement.
In terms of game revenue, from the results of April this year, Fantasy Westward Journey produced in 2015 is still the highest-earning game in Netease. In App Annie's report, the Top10 list with the highest game revenue in the world, Fantasy Westward Journey ranked fourth, and this year's ninth release of Chu Liu Xiang, Wildland Action was not on the list.
In contrast, Tencent’s list of global game revenues not only relied on “Glory to the Kings” but also reached the top of the list. The total number of finalist games for distribution or participation in distribution reached four.
It can be seen that the contribution of the new tour, such as the Fifth Personality, at the commercial level remains to be seen. Previously released "Wildland Action" and "My World" did not seem to contribute too much to NetEase at the financial level.
For the current problems in Netease games, Ding Lei believes that Netease has always been committed to the diversified layout of the game. "In the expansion of the game product line, we expect that the future market expenses will tend to ease." However, whether it is possible to increase revenue while controlling expenditures is still a huge challenge for NetEase, which has experienced problems in its main business for two consecutive quarters.