Core views
On May 25, NetEase announced unaudited financial results for the first quarter of 2023. The company's first-quarter revenue was 25 billion yuan, up 6.3% year on year; of this, game revenue was 201 billion yuan, up 16% year on year; Youdao's revenue was 1.2 billion yuan, down 3% year on year; Cloud Music's revenue was 2 billion yuan, down 5% year on year; Guimu's net profit was 6.8 billion yuan, up 54% year on year. The increase in games exceeding expectations in the first quarter mainly came from “Egg Party”, and old games such as “Journey to the West” and “The Fifth Person” grew strongly. Cloud Music's gross profit is as high as 22%, and is expected to be profitable within the year.
Brief review
Games increased month-on-month in the first quarter. Q2-Q3 focused on the launch of “Against the Cold Water” in China and “Harry Potter” overseas: net revenue from games and related value-added services in the first quarter was 201 billion yuan (yoy +16%, qoq +5%). Of this, mobile game revenue was 13.4 billion yuan (yoy +17%):
“Egg Party” maintained strong growth in the first quarter, reaching the top of the iOS download list in China. It has over 30 million daily active players, and has already attracted millions of players to participate in map co-creation. Old games such as “Journey to the West” and “The Fifth Person” are growing strongly. The “Against Water Cold” mobile game will be publicly tested on all platforms on June 30. As an MMORPG game in the company's dominant category, after long-term refinement and AIGC efficiency, it is expected to set a benchmark for the industry. “Harry Potter: The Magical Awakening” is expected to be released overseas in the summer; various new domestic products such as “Amazing Pioneer”, “Peak Speed”, and “Eternity” mobile games are being prepared for release. Mobile game revenue was 5.2 billion yuan (yoy -10%), and the decline was mainly due to Blizzard Games ceasing operations in the first quarter.
Cloud Music's gross margin reached a record high: Cloud Music's revenue was 2 billion yuan, a decrease of 5% over the previous year. The decline was mainly due to a decline in revenue from the live streaming business. In the quarter, Neiyun Music reached a partnership with China Mobile Video Ring, upgraded the Dolby Atmos Zone experience, covered more IoT terminals, etc.; gross margin increased sharply to 22.4%, compared to 12.2% in the same period last year, and operating efficiency improved significantly. Promoting the implementation of the AIGC education scenario: NetEase Youdao's net revenue is 1.2 billion yuan (yoy -3%), and the rapid iteration of functions such as the “AI Speaking Teacher” developed based on the self-developed model “Ziyue” will take the lead in implementing AIGC technology in the domestic education scene.
AI helped improve the efficiency of some key digital content production processes by 90%, and self-developed technology was applied at an accelerated pace in the fields of education and entertainment. NetEase invested 3.7 billion yuan in R&D in the first quarter, an increase of 10% over the previous year. It continued to promote the integration of AI technology into digital content production to improve quality and efficiency. At present, NetEase's self-developed AI technology has been applied to the whole process of game industrialization, and AI technology has increased work efficiency in key areas by up to 90%. It covers many aspects such as AI speech generation, AI original picture generation, AI video capture, AI model generation, etc. With the self-developed AI face model generation tool “iPHOTO2Avatar”, both 2D original design and 3D face models can be quickly industrialized; with the self-developed AI video motion capture tool “aixPose”, it is possible to extract the movements of characters in the video and migrate them to virtual characters with one click, greatly improving the efficiency of the traditional production process.
Profit forecast: Due to better-than-expected revenue in the first quarter, Egg Party's performance exceeded expectations, raising revenue for the full year of 2023 to 106.1 billion yuan (yoy +10%); net profit is expected to be 22.8 billion yuan (yoy +15%), maintaining the buying rating.