Revenue was steady, profit increased sharply year over year, and gross margin improved markedly. 23Q4 achieved revenue of RMB 27.14 billion, a year-on-year increase of 7.0%, achieved net profit of 6.58 billion yuan, a year-on-year increase of 66.5%, and achieved non-GAAP net profit of 738 million yuan, an increase of 53.4% over the previous year. Gross margin increased 9.8pp to 62.0% year over year, mainly benefiting from the increase in revenue share of self-developed games and channels. 23q4 sales expenses increased 2.1ppt/2.5ppt to 15.6% year over year, and sales expenses increased 24%/15% year over year to 4.2 billion yuan. We expect to be mainly affected by “Egg Party” and the like increasing investment in the competitive environment. The company continued to improve shareholder returns, with a dividend of $0.216 per share ($1.08/ADS) in 23Q4, approved a 36-month repurchase plan of $5 billion in November 2022, and repurchased 600,000 American depository shares in 23Q4, which cost US$56 million, an average of $94 per share.
“Egg Boy Party” maintains the lead and welcomes a new round of product cycles. 23Q4's game revenue was 19.54 billion yuan, up 11.5% year on year. Among them, mobile game revenue increased 29% year over year to 14.99 billion yuan, continuing the strong trend. The company's classic flagship games such as “Journey to the West” and “Journey to the West” continue to perform steadily. The “Against the Cold” mobile game series has attracted more than 100 million active users. Since the launch of “Egg Boy Party”, the cumulative number of registered users has reached 500 million, and the DAU surpassed 40 million during the Spring Festival. In terms of new products, we expect the company to start a new product cycle at the end of 24Q1. Key products include “Escapist” (beta on March 28), “Eternity” (obtained the mobile game version in February, and the first external test began on April 1. The company indicated at the performance conference that the launch time is around 24Q2), “16 Sounds of Yan Yun”, etc., and the remaining games such as “Mission Zero” and “Operation Apocalypse” have been approved for game versions.
Revenue from the online music business continued to grow at a high rate, and profitability increased significantly. NetEase Cloud Music's net revenue in 23Q4 was 1.99 billion yuan, down 16.4% year on year. Revenue in 2023 was 7.867 billion yuan, down 12.5% year on year, and non-IFRS net profit was 819 million yuan, turning a year-on-year loss into a profit. The gross margin for 2023/23Q4 was 26.7% and 30.3%, respectively, and the gross margin increased by 3.1 ppt month-on-month in 23Q4, mainly due to economies of scale and continuous cost optimization. 1) In terms of online music, revenue was 4.351 billion yuan in 2023, up 17.6% year on year, and subscription revenue increased 20.2% year on year; music MAU increased 16.5 million to 206 million people year on year, payment rate increased 1.2ppt to 21.4% year on year, and ARPPU increased 4.2% year on year to 6.9 yuan/month, continuing to maintain a healthy development trend and improve the core music user experience and platform commercialization efficiency. 2) In terms of social entertainment business, the company adjusted the operating strategy of the social entertainment service business to further strengthen internal control. Affected by this, the company's social entertainment service revenue fell 33.6% year on year to 3.516 billion yuan in 2023. Overall social entertainment service paid users increased 20.3% year on year to 1.603 million in 2023, and ARPPU decreased by 45.2% year on year to 178.60 yuan.
In 23Q4, Dao reversed losses, and the advertising business maintained rapid growth. Youdao 23Q4 achieved revenue of 1.48 billion yuan, an increase of 1.8% year on year, including 784 million yuan for learning services, 220 million yuan for smart hardware, and 470 million yuan for online marketing, with year-on-year changes of -2.8%/-45.3%/+96.9%, respectively. Non-standard net profit increased 123% year over year to $69 million. The sharp decline in revenue from the smart hardware business is mainly affected by the company's active optimization of low ROI channels.
The high growth in the advertising business reached a record high, mainly due to the increase in demand for accurate marketing on the company's third-party platforms. At the same time, the company has become a Tik Tok advertising agency, connecting 1 million+ high-quality overseas influencers, covering more than 2 billion users and more than 75 countries and regions.
Profit forecasting assumptions and estimates. The revenue share of the company's cloud music, Youdao and other business segments is relatively low. We believe that profitability has gradually recovered in 2024, and the impact on other major Internet businesses such as games is therefore using the overall method. We expect the company's net profit to be 338.9, 379.0 and 42.63 billion yuan respectively in 2024, with reference to related comparable companies, giving the company 18 to 20 times dynamic PE in 2024, calculated using the exchange rate RMB: HKD = 1:1.1, and the corresponding reasonable value range is 208.14~ HK$231.27 per share, maintaining the “better than the market” rating.
Risk warning: Original game development falls short of expected risk; competition such as cloud music and audio increases risk.