China’s tech giant NetEase has lost momentum in gaming, its most profitable sector.
NetEase shares dropped 6% when the market opened on May 17, US Eastern Time, after releasing its first quarter earnings after the market closed on May 16. The shares decreased to $250 from $266 the day before. Its diluted earnings per ADS, $0.91, missed analysts’ expectation of $1.99.
The company reported RMB 752 million net income for the first quarter ended on March 31, 81% down compared with RMB 3.9 billion for the same period last year. The decrease was mainly due to diminishing revenues from online game services, the company’s biggest source of income. Revenues from the sector were RMB 8.8 billion, 18.4% decrease compared with the first quarter of 2017. Revenues in gaming made up 62% of NetEase’s total revenues.
Despite shrinking profits, revenues from NetEase increased 3.9 percent compared with the first quarter of 2017, reaching RMB 14.2 billion. The increase was led by the e-commerce sector, the total revenue of which was RMB 3.7 billion, due to the rapid expansion of Kaola.com, which focused on cross-border e-commerce, and Yanxuan, which claims to adopt the original design manufacturer model.
Charles Yang, Chief Financial Officer at NetEase, admitted in the conference call that revenues from the company’s flagship mobile game Onmyoji and the mobile version of New Ghost “have come down from its peak a year ago”, although there remains “a substantial revenue generation on a stand-alone basis”. The decreased revenues from Onmyoji were partially offset by Knives Out (the company’s PUBG clone on mobile), launched in November, and Chu Liu Xiang, in February. Knives Out also achieved overseas success, especially in Japan, but Yang admitted “revenues for this quarter is still at a low single digit”.
Onmyoji, a mobile PvP (Player vs Player) and PvE (Player vs Environment) strategy game launched in September 2016 and quickly became the world’s top grossing game in October. However, in the earnings of fourth quarter 2017, the game, as well as the mobile version of New Ghost, had already been experiencing a decline. In the last quarter of 2017, gaming revenues were RMB 8 billions, a 10.7% decrease compared with the fourth quarter of 2016.
“We are committed to executing on our game diversification strategy, and we are becoming more adept at reaching non-MMORPG [massive multiplayer online role-playing games] users. As we work to expand our award-winning portfolio of online games, we expect our marketing costs will normalize going forward, compared with our marketing expenses in the first quarter of 2018. For 2018, we will work to ensure that each of our business lines continues to thrive, and we remain focused on creating additional value for all of our stakeholders,” concluded William Ding, founder and Chief Executive Officer of NetEase.