Chinese internet and online games giant NetEase reported distinctly slower revenue growth in the third quarter, though the company’s online games revenue continued to increase at a steady rate.

Why it matters: NetEase has been trying to reposition itself in China’s internet landscape in recent months, selling its cross-border e-commerce platform Kaola to Alibaba and stepping up its push for a larger share of China’s online music market with NetEase Cloud Music.

  • NetEase sold Kaola to Alibaba for approximately $2 billion in September.
  • NetEase Cloud Music secured a $700 million investment from Alibaba and Yunfeng Capital at around the same time.

Details: Net revenues for the third quarter increased 11.2% year on year to $2.05 billion, significantly slower than the 35.1% annual growth seen in the same quarter last year.

  • Gross profit for the third quarter rose 8.9% to $1.10 billion, a distinct deceleration from the 26.9% year on year growth seen the same quarter in 2018 as revenue from advertising services fell as a result of the challenging macro environment, according to the company.
  • Gross profit margin dropped to 63.8% compared with 65.1% in the same period last year, mainly due to higher contribution from mobile games with lower margins.
  • NetEase’s net revenue from online games rose 11.5% year on year to $1.61 billion, driven primarily by increases in revenue from established mobile titles such as “Life-After,” “Invincible,” and “Identity V.”
  • The bulk of online games revenue continued to come from mobile games, which accounted for 71.0% of the total in the third quarter.
  • Overseas gaming revenue accounted for around 10% of the company’s total gaming revenue, CFO Yang Zhaoxuan said during the earnings call.
  • Net revenues from innovative businesses and others, which now includes NetEase’s domestic e-commerce platform Yanxuan, stayed flat at $385 million.
  • Net revenue from NetEase’s education unit Youdao nearly doubled year on year to $48 million.

Context: Youdao listed on the New York Stock Exchange on Oct. 25, offering 5.6 million American depositary shares (ADS) priced at $17 each for a total net raise of $213 million, according to the company’s third quarter results.

  • Founded in 2006, Youdao’s products are categorized into online education platforms such as a massive open online course (MOOC) app for university students, as well as learning tools, which include Youdao Dictionary and Youdao Translation.

NetEase education unit Youdao looks to raise $116 million in US IPO

Correction: This article has been corrected to remove a comparison of Netease’s revenue to analyst estimates, which did not take into account Kaola’s sale to Alibaba.  An earlier version of this story incorrectly stated that the company missed revenue expectations by a significant margin.

Tony Xu

Tony Xu is Shanghai-based tech reporter. Connect with him via e-mail: tony.xu@technode.com

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