24Q1 revenue increased 7% year over year, and adjusted profit margin increased 1 pct year over year. In 24Q1, the company achieved revenue of 26.9 billion yuan, an increase of 7% over the previous year. Revenue growth was mainly driven by the mobile game business and Dodo, partially offset by a decline in PC game revenue. In 24Q1, the company's comprehensive gross profit margin was 63%, an increase of 4 pcts over the same period last year. Among them, the gross profit margin of games and value-added services was 69.5%, an increase of 3 pcts over the previous year, mainly due to the increase in net revenue from mobile games.
In 24Q1, the company's total operating rate was 35%, an increase of 4 pcts over the same period last year. Among them, the sales rate was 15.0%, up 3 pcts year over year. The company's performance will indicate that the company's customer acquisition costs are now declining, and we will not see a significant increase in sales and marketing expenses in the future. 24Q1's non-GAAP net profit was 8.5 billion yuan, up 12% year on year; non-GAAP net profit margin was 32%, up 1 pct year on year.
Mobile game revenue increased 19%, renewing Blizzard's partnership agreement. In 24Q1, online game business revenue was 20.43 billion yuan, an increase of 10% over the previous year. Among them, mobile game revenue was 16.1 billion yuan, an increase of 19% over the previous year, mainly due to the good performance of “Egg Boy Party,” “The Fifth Personality,” and “Sudogahama.” PC gaming revenue was 4.4 billion yuan, down 15% year over year. Mainly affected by the suspension of proxy Blizzard games. The company has renewed its distribution agreement with Blizzard Entertainment to bring Blizzard games back to the Chinese market, and will also cooperate more extensively with Microsoft Games. The “Journey to the West” adjustments are expected to be completed in the first half of this year. The company stated at the performance conference that it will complete the gameplay content adjustments of the Dream Journey to the West mobile game in the first half of this year. The purpose of the adjustments is to ensure the long-term nature of the game and the player experience. The company has a rich reserve of products. In the third quarter, the company will release the open world action-adventure role-playing game “16 Sounds of Yan Yun”, and will release the “Against the Cold” mobile game in more regions.
Other notable novelties include the mobile game “Eternity,” “Seven Day World,” and “Marvel Clash.” In addition to this, the company stated that it is expected that the updated version of “Conjuring” will be released during the summer vacation.
Yudao: Revenue increased 20% year over year, and advertising revenue doubled. 2024Q1, Youdao's net revenue was 1.4 billion yuan, an increase of 20% over the previous year. Youdao achieved two quarters of profit by strategically focusing on digital content services, online marketing services, and AI-driven membership subscription services. 24Q1 Youdao's advertising service revenue was 490 million yuan, an increase of 126% over the previous year, reaching a record high. Youdao increased the application of AI technology in advertising.
Cloud Music: Profitability levels continue to rise. In 24Q1, Cloud Music's net revenue was 2 billion yuan, an increase of 4% over the previous year.
In 24Q1, Cloud Music's gross margin was 37.97%, up 15.5pct year-on-year, thanks to continued improvements in cost control. The one-time adjustment of copyright fees increased the gross profit margin by about 5 percentage points in 2024Q1.
Risk warning: policy risk; risk of delayed launch of new products; risk of intense competition in the game market.
Investment advice: Subsequent reserve products are still plentiful. The mobile game “Eternity” and “16 Sounds of Yan Yun” are expected to be launched in the second half of this year. Maintain the adjusted net profit of the company in 2024-2026 at $360/386/41.2 billion, respectively, and maintain the target price at HK$201-233. It is recommended to continue to monitor NetEase game adjustments and new game performance, and continue to maintain the “superior to the market” rating.