text | Red Diamond Finance Li Ping
editor | Watson
01 "Increasing revenue without increasing profits" has another hidden meaning
On May 24, NetEase announced its first quarter financial report for 2022.
's financial report shows that NetEase's net income in the first quarter was 23.56 billion yuan, a year-on-year increase of 14.8%; the net profit attributable to the company's shareholders was 4.394 billion yuan, compared with 4.439 billion yuan in the same period last year, a slight decrease of 1.0% year-on-year. In terms of
business, the game business achieved operating income of 17.3 billion yuan, a year-on-year increase of 15.3%, and the revenue accounted for 73.3%; Youdao net income was 1.2 billion yuan, a 10.4% decrease from 2021; cloud music net income was 2.1 billion yuan, a year-on-year increase of 38.6%; net income from innovative businesses and others ( NetEase carefully selected , advertising) was 3 billion yuan, a year-on-year increase of 16.1%.
It is not difficult to see that, in addition to NetEase Youdao, which was affected by the double reduction policy, NetEase games , music and innovative business revenue have maintained positive growth, especially the basic game business performance is relatively stable. In this regard, NetEase CEO and Chairman of the Board Ding Lei also stated in the financial report that NetEase's flagship games and many new game products continue to stimulate the enthusiasm of the player community. It is the steady growth of online game services that promoted NetEase's first quarter. Healthy growth.
Benefited from the stable performance of the game business and the significant improvement in the profitability of the cloud music business, NetEase's comprehensive gross profit margin in the first quarter was 54.49%, an increase of 0.6 percentage points year-on-year and a month-on-month increase of 1.49 percentage points. Affected by this, NetEase's gross profit in the first quarter reached 12.8 billion yuan, a year-on-year increase of 16.1%.
Specifically, the gross profit margin of NetEase's online game services was 65.1%, an increase of 0.5 percentage points from the same period last year (64.6%); Youdao's gross profit margin was 53.1%, a decrease of 4.2 percentage points from the same period last year (57.3%). However, it increased by 2.4 percentage points from the fourth quarter of last year (50.7%); the gross profit margin of Cloud Music was 12.2%, compared with -3.1% in the same period last year, mainly due to the growth in revenue from membership subscriptions and social entertainment services and the overall improvement of cost control; The gross profit margin of innovation and other businesses was 23.3%, a slight decrease of 0.8 percentage points year-on-year.
In addition to maintaining stable gross profit margin, NetEase's performance in cost control is also remarkable. In the first quarter, NetEase's operating expenses were 7.3 billion yuan, a year-on-year increase of 8.1% and a month-on-month decrease of 12%; the operating expense rate was 31.11%, a year-on-year decrease of 2 percentage points.
Due to the increase in gross profit margin and the decline in expense ratio, NetEase's operating profit in the first quarter reached 5.5 billion yuan, a year-on-year increase of 28.8%, and the operating profit margin reached 23.38%, a year-on-year increase of 2.5 percentage points.
However, due to the impact of investment losses and exchange losses, NetEase's net profit in the first quarter declined slightly year-on-year. Specifically, NetEase's net investment income in the first quarter was -549 million yuan, compared with 695 million yuan in the same period last year; exchange losses were 98 million yuan, compared with 279 million yuan in the same period last year.
It is not difficult to see that NetEase's first-quarter performance "increased revenue but not profit" has another hidden reason. The decline in non-operating income is a main reason. Judging from the year-on-year growth rate of operating profit, NetEase's business performance in the first quarter was significantly better than market expectations. It is for this reason that NetEase's stock price rose for several consecutive trading days after the financial report was released.
However, from the perspective of revenue structure, the proportion of game business in NetEase's total revenue continues to show an upward trend, which has also caused the outside world to worry about NetEase's over-reliance on the game business. In terms of business, only the game business among NetEase's "troika" is profitable. NetEase Youdao, NetEase Cloud Music are still in the red, with losses of 125 million yuan and 151 million yuan respectively.
02 Internal and external worries of the basic market
NetEase, which was founded in 1997, has now gone through 25 years of development. After experiencing changes in its main business from portals to mailboxes to games, NetEase has begun to expand into e-commerce, music, information flow, advertising, education and other fields in recent years.
But from the outside, "games" have always been NetEase's most obvious label, with its revenue accounting for more than 70%. Before 2014, games accounted for more than 80% of NetEase. Since 2019, with the growth of new businesses such as e-commerce, online music, and online education, NetEase's game business has been on a downward trend as a whole, with its revenue share once falling to 67.81% in the fourth quarter of 2020.
However, with the sale of NetEase Kaola and the difficulties in NetEase Youdao's business, the proportion of gaming business in NetEase's revenue has increased again. In the first quarter of 2022, the game business accounted for 73.33%, setting a new high since 2021. This shows that NetEase's diversification strategy has not met expectations.
It should be said that it is not easy for NetEase's game business to maintain double-digit growth despite being deeply troubled by the suspension of the game version number . This is mainly due to the strong performance of its popular games. Since last year, NetEase's " eternal " and "Harry Potter: Magic Awakening" have continued to be popular among users. "Absolute Deduction", which was launched in December 2021, also topped the iOS download list after its launch. In addition, the performance of classic games such as NetEase's " Fantasy Westward Journey " PC version and " Westward Journey 2" are also relatively stable.
However, from the perspective of the industry as a whole, the short-term uncertainties in the game industry are still very large. Gamma Data 's "Game Industry Report from January to March 2022" shows that the actual sales revenue of China's game market in the first quarter was 79.474 billion yuan, a year-on-year increase of only 3.17%; among the leading companies, Tencent reported game revenue in the first quarter The revenue was basically the same year-on-year, with local market revenue of 33 billion yuan, a year-on-year decrease of 1%; the revenue of top 10 game companies such as Century Huatong, Perfect World and Sohu Changyou all declined.
At present, the reason why NetEase's game business performance is better than the industry average is mainly due to the company's large number of games and strong product vitality. However, after the game version was restarted again in April this year, there were no NetEase products among the first batch of 45 versions. In addition, on May 20, NetEase released a total of 40 products at the press conference, which was significantly reduced from 60 products in the same period last year.
From the perspective of the industry competition landscape, as the second-ranked game manufacturer in China, NetEase has a clear gap with the industry leader Tencent in terms of traffic channels and research and development. To this end, NetEase has increased its investment in overseas game markets in recent years. Especially after games such as "Onmyoji " and "Knives Out " successively opened overseas markets, NetEase has paid more and more attention to the overseas expansion of games. In a conference call after the release of the first quarter report, Ding Lei once said that currently more than 80% of NetEase's R&D resources are invested in China, and the overseas proportion is more than ten percent, and he hopes to expand to 40% to 50% in the future.
However, NetEase games currently have an obvious problem of uneven regional development in terms of overseas market expansion. Annual report data shows that in 2021, the three regions of Japan, the United States, and China's Hong Kong, Macao and Taiwan contributed more than 90% of NetEase's overseas independent issuance revenue. Among them, Japan's contribution was as high as 75.5%, and the overall contribution of other regions was less than 10%. .
In addition, after experiencing the peak of the epidemic, overseas game business consumption is also declining. Sensor Tower released a 2022 Q1 global mobile application market report showing that in the first quarter of this year, the global mobile game market revenue was approximately US$21 billion, down 7% year-on-year. This is obviously not good news for NetEase, which is focusing on overseas markets. .
03 The second growth curve is hard to find
In addition to the basic game market, NetEase has focused on e-commerce, transactions, entertainment and other fields in recent years. With the sale of NetEase Kaola and the decline of NetEase Yanxuan, NetEase finally established a business layout with the troika of games, education and music working together.
The education sector once became the focus of NetEase's strategic development, and NetEase Youdao's revenue has also increased from 456 million yuan in 2017 to 3.168 billion yuan in 2020. Since 2021, K12 education has been severely impacted by the double reduction policy, and NetEase Youdao's high-speed revenue growth has also come to an abrupt halt.
The financial report shows that NetEase Youdao achieved net income of 1.201 billion yuan in the first quarter, which was 1.334 billion yuan and 1.339 billion yuan in the previous quarter and the same period last year respectively. After the termination of the K9 subject training business, NetEase Youdao's revenue fell by about 10% month-on-month and year-on-year.
In terms of business, Youdao Learning Services’ net income was 826 million yuan, a year-on-year increase of 36.1%, which was a 17.3% decrease compared with the same period last year including K9 subject training caliber net income; smart equipment net income was 253 million yuan, a year-on-year increase of 25.4% %; net revenue from online marketing services was 121 million yuan, a year-on-year decrease of 12.7%, which was due to the reduction of advertising budgets of some advertisers.
text | Red Diamond Finance Li Ping
editor | Watson
01 "Increasing revenue without increasing profits" has another hidden meaning
On May 24, NetEase announced its first quarter financial report for 2022.
's financial report shows that NetEase's net income in the first quarter was 23.56 billion yuan, a year-on-year increase of 14.8%; the net profit attributable to the company's shareholders was 4.394 billion yuan, compared with 4.439 billion yuan in the same period last year, a slight decrease of 1.0% year-on-year. In terms of
business, the game business achieved operating income of 17.3 billion yuan, a year-on-year increase of 15.3%, and the revenue accounted for 73.3%; Youdao net income was 1.2 billion yuan, a 10.4% decrease from 2021; cloud music net income was 2.1 billion yuan, a year-on-year increase of 38.6%; net income from innovative businesses and others ( NetEase carefully selected , advertising) was 3 billion yuan, a year-on-year increase of 16.1%.
It is not difficult to see that, in addition to NetEase Youdao, which was affected by the double reduction policy, NetEase games , music and innovative business revenue have maintained positive growth, especially the basic game business performance is relatively stable. In this regard, NetEase CEO and Chairman of the Board Ding Lei also stated in the financial report that NetEase's flagship games and many new game products continue to stimulate the enthusiasm of the player community. It is the steady growth of online game services that promoted NetEase's first quarter. Healthy growth.
Benefited from the stable performance of the game business and the significant improvement in the profitability of the cloud music business, NetEase's comprehensive gross profit margin in the first quarter was 54.49%, an increase of 0.6 percentage points year-on-year and a month-on-month increase of 1.49 percentage points. Affected by this, NetEase's gross profit in the first quarter reached 12.8 billion yuan, a year-on-year increase of 16.1%.
Specifically, the gross profit margin of NetEase's online game services was 65.1%, an increase of 0.5 percentage points from the same period last year (64.6%); Youdao's gross profit margin was 53.1%, a decrease of 4.2 percentage points from the same period last year (57.3%). However, it increased by 2.4 percentage points from the fourth quarter of last year (50.7%); the gross profit margin of Cloud Music was 12.2%, compared with -3.1% in the same period last year, mainly due to the growth in revenue from membership subscriptions and social entertainment services and the overall improvement of cost control; The gross profit margin of innovation and other businesses was 23.3%, a slight decrease of 0.8 percentage points year-on-year.
In addition to maintaining stable gross profit margin, NetEase's performance in cost control is also remarkable. In the first quarter, NetEase's operating expenses were 7.3 billion yuan, a year-on-year increase of 8.1% and a month-on-month decrease of 12%; the operating expense rate was 31.11%, a year-on-year decrease of 2 percentage points.
Due to the increase in gross profit margin and the decline in expense ratio, NetEase's operating profit in the first quarter reached 5.5 billion yuan, a year-on-year increase of 28.8%, and the operating profit margin reached 23.38%, a year-on-year increase of 2.5 percentage points.
However, due to the impact of investment losses and exchange losses, NetEase's net profit in the first quarter declined slightly year-on-year. Specifically, NetEase's net investment income in the first quarter was -549 million yuan, compared with 695 million yuan in the same period last year; exchange losses were 98 million yuan, compared with 279 million yuan in the same period last year.
It is not difficult to see that NetEase's first-quarter performance "increased revenue but not profit" has another hidden reason. The decline in non-operating income is a main reason. Judging from the year-on-year growth rate of operating profit, NetEase's business performance in the first quarter was significantly better than market expectations. It is for this reason that NetEase's stock price rose for several consecutive trading days after the financial report was released.
However, from the perspective of revenue structure, the proportion of game business in NetEase's total revenue continues to show an upward trend, which has also caused the outside world to worry about NetEase's over-reliance on the game business. In terms of business, only the game business among NetEase's "troika" is profitable. NetEase Youdao, NetEase Cloud Music are still in the red, with losses of 125 million yuan and 151 million yuan respectively.
02 Internal and external worries of the basic market
NetEase, which was founded in 1997, has now gone through 25 years of development. After experiencing changes in its main business from portals to mailboxes to games, NetEase has begun to expand into e-commerce, music, information flow, advertising, education and other fields in recent years.
But from the outside, "games" have always been NetEase's most obvious label, with its revenue accounting for more than 70%. Before 2014, games accounted for more than 80% of NetEase. Since 2019, with the growth of new businesses such as e-commerce, online music, and online education, NetEase's game business has been on a downward trend as a whole, with its revenue share once falling to 67.81% in the fourth quarter of 2020.
However, with the sale of NetEase Kaola and the difficulties in NetEase Youdao's business, the proportion of gaming business in NetEase's revenue has increased again. In the first quarter of 2022, the game business accounted for 73.33%, setting a new high since 2021. This shows that NetEase's diversification strategy has not met expectations.
It should be said that it is not easy for NetEase's game business to maintain double-digit growth despite being deeply troubled by the suspension of the game version number . This is mainly due to the strong performance of its popular games. Since last year, NetEase's " eternal " and "Harry Potter: Magic Awakening" have continued to be popular among users. "Absolute Deduction", which was launched in December 2021, also topped the iOS download list after its launch. In addition, the performance of classic games such as NetEase's " Fantasy Westward Journey " PC version and " Westward Journey 2" are also relatively stable.
However, from the perspective of the industry as a whole, the short-term uncertainties in the game industry are still very large. Gamma Data 's "Game Industry Report from January to March 2022" shows that the actual sales revenue of China's game market in the first quarter was 79.474 billion yuan, a year-on-year increase of only 3.17%; among the leading companies, Tencent reported game revenue in the first quarter The revenue was basically the same year-on-year, with local market revenue of 33 billion yuan, a year-on-year decrease of 1%; the revenue of top 10 game companies such as Century Huatong, Perfect World and Sohu Changyou all declined.
At present, the reason why NetEase's game business performance is better than the industry average is mainly due to the company's large number of games and strong product vitality. However, after the game version was restarted again in April this year, there were no NetEase products among the first batch of 45 versions. In addition, on May 20, NetEase released a total of 40 products at the press conference, which was significantly reduced from 60 products in the same period last year.
From the perspective of the industry competition landscape, as the second-ranked game manufacturer in China, NetEase has a clear gap with the industry leader Tencent in terms of traffic channels and research and development. To this end, NetEase has increased its investment in overseas game markets in recent years. Especially after games such as "Onmyoji " and "Knives Out " successively opened overseas markets, NetEase has paid more and more attention to the overseas expansion of games. In a conference call after the release of the first quarter report, Ding Lei once said that currently more than 80% of NetEase's R&D resources are invested in China, and the overseas proportion is more than ten percent, and he hopes to expand to 40% to 50% in the future.
However, NetEase games currently have an obvious problem of uneven regional development in terms of overseas market expansion. Annual report data shows that in 2021, the three regions of Japan, the United States, and China's Hong Kong, Macao and Taiwan contributed more than 90% of NetEase's overseas independent issuance revenue. Among them, Japan's contribution was as high as 75.5%, and the overall contribution of other regions was less than 10%. .
In addition, after experiencing the peak of the epidemic, overseas game business consumption is also declining. Sensor Tower released a 2022 Q1 global mobile application market report showing that in the first quarter of this year, the global mobile game market revenue was approximately US$21 billion, down 7% year-on-year. This is obviously not good news for NetEase, which is focusing on overseas markets. .
03 The second growth curve is hard to find
In addition to the basic game market, NetEase has focused on e-commerce, transactions, entertainment and other fields in recent years. With the sale of NetEase Kaola and the decline of NetEase Yanxuan, NetEase finally established a business layout with the troika of games, education and music working together.
The education sector once became the focus of NetEase's strategic development, and NetEase Youdao's revenue has also increased from 456 million yuan in 2017 to 3.168 billion yuan in 2020. Since 2021, K12 education has been severely impacted by the double reduction policy, and NetEase Youdao's high-speed revenue growth has also come to an abrupt halt.
The financial report shows that NetEase Youdao achieved net income of 1.201 billion yuan in the first quarter, which was 1.334 billion yuan and 1.339 billion yuan in the previous quarter and the same period last year respectively. After the termination of the K9 subject training business, NetEase Youdao's revenue fell by about 10% month-on-month and year-on-year.
In terms of business, Youdao Learning Services’ net income was 826 million yuan, a year-on-year increase of 36.1%, which was a 17.3% decrease compared with the same period last year including K9 subject training caliber net income; smart equipment net income was 253 million yuan, a year-on-year increase of 25.4% %; net revenue from online marketing services was 121 million yuan, a year-on-year decrease of 12.7%, which was due to the reduction of advertising budgets of some advertisers.In terms of
gross profit margin, NetEase Youdao's gross profit margin in the first quarter was 53.5%, an increase of 1.1 percentage points from the same period last year (52.4%). Among them, the gross profit margin of learning services is 63.9%; the gross profit margin of smart equipment is 33.7%; the gross profit margin of online marketing services is 23.7%.
It is not difficult to see that although NetEase Youdao's revenue has declined by about 10%, there has been no "cliff-like" decline, and the gross profit margin level has also been relatively stable. However, due to high expenses during the period, NetEase Youdao's net loss in the first quarter was 125 million yuan, a year-on-year loss reduction of 69.7%.
In the short term, the prospects of the online education industry are still unclear. There is still great uncertainty about whether Youdao can turn losses into profits. It is difficult to support NetEase's "second curve" mission.
In addition to NetEase Youdao, NetEase Cloud Music, which was successfully listed in Hong Kong last year, is also a business that NetEase has invested in in recent years. The financial report shows that NetEase Cloud Music's net revenue in the first quarter was 2.1 billion yuan, a year-on-year increase of 38.6%; the gross profit margin was 12.2%, a significant increase from the same period last year (-3.1%); the adjusted net loss was 150 million yuan, and the loss narrowed 46.6% year-on-year. %.
The improvement in NetEase Cloud Music's profitability is mainly due to the growth in revenue from membership subscriptions and social entertainment services and the overall improvement in cost control. In the first quarter, the number of monthly paying users of online music services reached 36.74 million, a year-on-year increase of more than 51%, and the online music service payment rate increased to 20.2%; operating costs were 1.815 billion yuan, a year-on-year increase of 17.5%, and the cost increase was significantly smaller than the revenue increase.
But like NetEase Youdao, NetEase Cloud Music was still in a state of reducing losses rather than turning losses around in the first quarter. In addition, although the number of online music users is growing rapidly, it is mostly attracted by promotional activities. Judging from the "monthly revenue per paying user" data, the monthly paying user revenue of NetEase Cloud Music's online music service is only 6.4 yuan, compared with 7.1 yuan in the same period last year. It is not difficult to see from this that the growth of cloud music paying users is obviously "puffy".
On the other hand, NetEase’s social entertainment services and other businesses’ monthly revenue per paying user was 329.8 yuan, a year-on-year decrease of 40.39%, mainly affected by the live broadcast reward policy. The decline in the ARPPU value of paying users means that NetEase Cloud needs to devote more energy to exploring user payment potential in the future.
In addition, in order to make up for the shortcomings in music copyright, NetEase Cloud Music has increased investment in procurement, which will bring cost pressure to the company. The first quarter report shows that as of the end of March 2022, NetEase Cloud Music content library music reached 90 million songs, an increase of nearly 50% from the 60 million songs disclosed at the time of listing. Affected by this, NetEase Cloud Music content service costs increased from 1.4 billion yuan to 1.6 billion yuan in the first quarter.
However, compared with Tencent Music, NetEase Cloud Music still has a big gap in the size of its music library. After reaping the benefits of the policy of canceling exclusive copyrights, NetEase Cloud Music still needs to pay a lot of effort and cost to catch up with Tencent Music. Just like in the game business, Tencent is still a big mountain that NetEase cannot avoid in the music field.
04 Conclusion
Although in recent years there have been constant criticisms of NetEase for its Buddhist roots, lack of ambition, poor new business progress, and over-reliance on the game business, one fact we cannot ignore is that NetEase is quite popular in the capital market. trustworthy.
For example, at a time when the market value of most listed Internet companies is frequently cut in half, with many falling by more than 90%, NetEase's stock price performance is particularly outstanding. As of the latest trading day, NetEase's market value is still as high as US$68.3 billion, making it the strongest among all Internet companies.
Behind this is NetEase's business acumen and the craftsmanship rare in Internet companies. On the one hand, it firmly grasps the cash cow industry of online games and deeply cultivates it. On the other hand, it has always maintained strong competitiveness through the meticulous refinement of its products, which makes it firmly ranked among the most profitable Internet companies in China.
Perhaps in the mind of NetEase founder Ding Lei, scale has never been the core pursuit of the company. Profit and financial security are his primary considerations. If it is not a more certain opportunity, he will not easily invest heavily in taking risks. Although this choice will not make NetEase a giant comparable to , Alibaba, , and Tencent, it will not lead to big ups and downs. This is not an acceptable choice for investors.
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