NetEase overseas gaming, e-commerce businesses offset regulatory squeeze

NetEase recorded strong first quarter results with substantial year-on-year increases in net revenues and gross profit, tempering lower gaming growth at home with overseas market earnings, particularly Japan.

Driven by strong performance in online game services and e-commerce, gross profit also jumped by nearly 36% year on year to RMB 8 billion, continuing growth from the previous quarter.

Net revenues grew close to 30% year-on-year to RMB 18.36 billion ($2.74 billion), driven by increased online game service and e-commerce revenues and beating analyst estimates by a notable margin.

Online game revenue increased by more than 35% year-on-year to RMB 11.85 billion, thanks to the steady performance of legacy flagship titles such as “Fantasy Westward Journey” as well as popular overseas mobile titles such as “Knives Out” and “Night Falls: Survival.” Mobile games accounted for 72% of net revenues from online game services.

While Tencent’s game revenues took a heavy hit in the first quarter due to more stringent licensing rules, NetEase hedged regulatory risks by emphasizing overseas markets, specifically Japan and South Korea. NetEase’s “Knives Out,” for instance, was a top earner on iOS in Japan in March. The company also plans to release another mobile title in the two markets later this year.

E-commerce revenues increased 28% year-on-year to RMB 4.79 billion, primarily due to the increased sales volume on NetEase’s two platforms, Kaola and Yanxuan, as well as improved procurement and operation processes.

NetEase’s advertising revenues declined 5% year-on-year, while gross profit for the segment also decreased due to the competitive macro environment and increased expenses, the company said.

Decreased marketing expenditures in online games and e-commerce helped the company lower its operating expenses, which decreased by 1.4%. “Q1 is generally a… low season for our e-commerce business, so we have been very cautious and prudent in spending on e-commerce. Secondly, because of the overall regulatory control on the new registration license, there’s no game that’s being launched [domestically] in the first quarter,” CFO Yang Zhaoxuan explained in the earnings call.

According to CEO Ding Lei, moving forward, NetEase will be more disciplined about it spending and investments. “We are more focused on businesses that we are good at, including games and music,” he said. “We are also removing businesses that we don’t have specialties in, such as comics.”