NetEase: Gaming business slumped in 4Q17, e-commerce grew strongly but dragged down profits

Gaming business revenue declines, e-commerce business saves the day

According to the financial report for the fourth quarter of 2017 released by NetEase, the rapid growth in revenue from e-commerce businesses such as NetEase Kaola and Yanxuan reversed the downward trend in revenue from the gaming business, enabling total revenue to increase by 39% year-on-year to RMB 14.6 billion.

The decline in popularity of old games has led to a decline in revenue, but new games have brought a glimmer of hope

NetEase's game business revenue in the fourth quarter was 8 billion yuan. Since the peak of game revenue in 1Q17 last year, which benefited from the strong revenue of Onmyoji and Journey to the West series games, the overall game business revenue has been declining for three consecutive quarters.

Although the gaming business was adversely affected by the decline in revenue from products such as Onmyoji and Journey to the West series, NetEase's recently launched MMORPG game "Chu Liuxiang", which features a high degree of freedom and customization, has been warmly welcomed by users and ranked high on Apple's bestseller list, which has somewhat restored the market's confidence in NetEase games.

The once popular battle royale games "Wild Action" and "Terminator 2" have accumulated 100 million and 80 million registered users respectively, but their contribution to revenue is relatively average. Currently, the main monetization method for these two games is the sale of skins and other props, which has not yet significantly boosted revenue.

The two "genuine" chicken-eating games recently launched by Tencent are bound to pose a threat to NetEase's chicken-eating game, which makes people worry about the future of NetEase's chicken-eating game.

E-commerce business revenue increased by 174% year-on-year, and promotions in the fourth quarter led to a decline in profit margins

NetEase's e-commerce business continued to grow rapidly in the fourth quarter, with revenue increasing by 174% year-on-year to RMB 4.65 billion. However, due to the year-end Double 11, Black Friday, and Double 12 promotions, the gross profit margin declined from 12.5% ​​in the same period last year to 7.4%.

NetEase's e-commerce business is mainly cross-border e-commerce business. In this field, NetEase Kaola currently ranks first and has the fastest growth rate. NetEase believes that cross-border e-commerce still has a lot of room for growth in the future because Chinese users have huge consumption potential for overseas products. In 2016, Chinese people spent more than 1 trillion yuan overseas, while NetEase currently only spent 10 billion yuan. NetEase Yanxuan relies on the advantages of Made in China and cooperates with manufacturers to design products to meet the consumption upgrade needs of Chinese users.

NetEase's media business maintains steady growth, with a complete product matrix

NetEase's online media business revenue maintained steady growth, with advertising revenue, the main monetization method, increasing by 11% year-on-year to RMB 737 million. Gross profit margin continued to improve, reaching 68% in the fourth quarter, a relatively high level in the past two years.

Currently, NetEase’s media business includes NetEase News, Cloud Music, Open Courses, and Youdao series products. These products have good user reputation, but have not become national applications.

In addition to the above three businesses, NetEase Mail and other businesses grew 55% year-on-year to 1.21 billion yuan, but due to the incubation of more new businesses, the gross profit margin dropped to -3%.

NetEase's other businesses mainly include email services, online video live streaming services, and NetEase financial services.

Gaming and e-commerce businesses dragged down fourth quarter earnings

In terms of profitability, as the proportion of e-commerce business increased, gross profit margin declined. At the same time, the promotion and logistics costs of e-commerce business also increased rapidly in the fourth quarter, causing the proportion of marketing costs to revenue to increase from 10% in the same period last year to 16%. Ultimately, NetEase's overall net profit was only 1.3 billion yuan, a significant decline compared to the past, which was really terrible.

NetEase believes that the rapid increase in marketing expenses in the fourth quarter is mainly due to the marketing of games and the increase in expenses brought by the growth of e-commerce business. At the same time, the one-time copyright fee of NetEase Cloud Music also had a negative impact. The company believes that this trend will not continue, but the company will continue to increase investment in R&D expenses.

via: 199IT Financial Report Data Center