Core views
NetEase released the 23Q4 performance report: The company's revenue was 27.1 billion yuan (yoy +7%), gross profit was 16.8 billion yuan (yoy +27%), and the operating profit margin was 25.3%, lower than the agreed forecast of 26.8%, mainly due to the increase in marketing expenses in Q4. Non-GAAP net profit was $7.4 billion (non-GAAP net margin was 27.2%). In the short term, revenue performance is under pressure, and financial performance falls short of Bloomberg's agreed expectations, but in 2024, the company's game business may have surpassed expectations: 1) “Egg Boy” has steady sales, and according to Sensor Tower data, China's iOS distribution currently leads “Yuanmeng Star”; 2) The “Eternity” mobile game has received a version number, and the launch process is worth looking forward to; 3) The company has rich pipeline reserves in 24, and products such as “Yan Yun” and “Eagle” may have impressive performance.
Brief review
The company's revenue growth is steady, and the performance falls short of Bloomberg's agreed expectations
NetEase 23Q4's revenue was 27.1 billion yuan (yoy +7%), lower than Bloomberg's agreed forecast (28.2 billion yuan); gross profit was 16.8 billion yuan (yoy +27%), corresponding gross profit of 62%, slightly higher than the agreed estimate of 61.4%, mainly due to the relatively large number of self-developed games in Q4, which led to less IP segmentation and lower combined channel costs. The operating margin was 25.3%, lower than the agreed forecast of 26.8%, mainly due to the increase in marketing expenses in Q4. Q4 The company's GAAP net profit was $6.6 billion (GAAP net margin was 24.3%) and non-GAAP net profit was $7.4 billion (non-GAAP net margin was 27.2%).
By business, gaming and value-added revenue was 20.9 billion yuan (yoy +9.6%); gross margin was 69.5%, and the year-on-year increase was mainly due to an increase in Q4 self-developed game revenue; Youdao's revenue of 1.5 billion yuan (yoy +1.8%); gross margin was 49.9%. The year-on-year decline was mainly due to a decrease in revenue contributions from learning services and a decline in smart hardware gross profit. Cloud Music's revenue was 2 billion yuan (yoy -16.4%); gross margin was 30.3%. The year-on-month increase was mainly due to increased membership subscription revenue and cost control. Innovative business and other revenue was 2.8 billion yuan (yoy +12.9%); gross margin was 34.4%. The year-on-year increase was due to careful selection and increased advertising margin.
Short-term performance is under pressure, and the game business may exceed expectations in the future
In the short term, the Q4 revenue performance was in agreement with Bloomberg's expectations, but the game business may still have highlights in '24. 1) Steady egg party turnover data: According to Sensor Tower data, the net sales volume of “Egg Party” is already ahead of “Yuanmeng Star” in the iOS region of China, and there was a certain amount of explosion during the Spring Festival, which may catalyze the company's 24Q1 game revenue growth. 2) The “Eternity” mobile game may have outstanding performance: “Eternity” performed well on the PC. This mobile game also had outstanding performance. The company has already obtained the game's version number, and the mobile game launch process is expected to accelerate. 3) 24Y's potential pipeline is worth looking forward to; the company has a rich pipeline of follow-up games, including “Conjuring”, “Yan Yun”, etc.
Risk warning:
1) The risk that the company's overall revenue and adjusted net profit fall short of market expectations; the risk of a decline in operating profit due to a sharp increase in the company's marketing expenses; the risk that the revenue of the business and cloud music business will fall under pressure; 2) the risk that the mobile game business version falls short of expectations; the risk that the game business pipeline will fall short of expectations; the risk that the flow performance of new games will fall short of market expectations; 3) The risk of increased competition in the industry, the risk of rising purchasing costs, the risk of shrinking game trial production scale, policy for games The risk of stricter regulations, and the risk of rising game production and distribution costs.