NetEase, Inc. (NTES) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A highlight NetEase's strong future game development, global expansion, and innovation in gaming and AI. Despite some volatility in certain games, the company shows resilience and strategic planning. Positive factors include the return of Blizzard titles in China, strong performances of existing games, and promising future launches. The Q&A reveals a generally positive sentiment from analysts, although some management responses were vague. Overall, the combination of optimistic guidance, strategic initiatives, and innovation leads to a positive sentiment, likely resulting in a stock price increase of 2% to 8%.

Key Financial Performance

Total Revenues RMB 28.4 billion, an 8% increase year-over-year. The increase was driven by strong performance across the NetEase family, particularly in games and related VAS.

Revenues from Games and Related VAS RMB 23.3 billion, up 12% year-over-year. The growth was attributed to higher net revenues from self-developed games such as Fantasy Westward Journey Online, Eggy Party, and newly launched titles like Where Winds Meet and Marvel Rivals, as well as certain licensed games.

Net Revenues from Online Games RMB 22.8 billion, up 3% quarter-over-quarter and 13% year-over-year. The quarter-over-quarter increase was due to higher net revenues from self-developed games like Fantasy Westward Journey Online and Sword of Justice, as well as certain licensed games. The year-over-year increase was driven by higher net revenue from self-developed games and newly launched titles.

Youdao Net Revenue RMB 1.6 billion, a 15% increase quarter-over-quarter and a 4% increase year-over-year. The growth was driven by smart devices and online marketing services.

NetEase Cloud Music Net Revenue RMB 2 billion, stable quarter-over-quarter but down 2% year-over-year. Revenue from membership subscriptions showed healthy growth, while revenues from social entertainment services and others stabilized quarter-over-quarter but remained lower year-over-year.

Net Revenues for Innovative Business and Others RMB 1.4 billion, down 15% quarter-over-quarter and 19% year-over-year. The sequential decline was mainly due to Yanxuan's high base during the 618 e-commerce festival, while the year-over-year decrease reflected increased intersegment transaction elimination and decreased net revenue from Yanxuan and certain other businesses.

Gross Profit RMB 18.2 billion, up 10% year-over-year. The increase was primarily driven by increased net revenue from online games.

Gross Profit Margin 64.1% for the third quarter. Gross profit margin for games and related VAS was 69.3%, up from 68.8% in the same period last year, driven by a higher mix of PC games in China. Gross profit margin for Youdao was 42.2%, down from 50.2% last year due to a decline in online marketing services. Gross profit margin for NetEase Cloud Music was 35.4%, up from 32.8% last year, driven by growth in the core online music business. Gross profit margin for innovative business and others was 43.0%, up from 37.8% last year, driven by better margins at Yanxuan and higher revenue contribution from certain innovative businesses.

Total Operating Expenses RMB 10 billion, 36% of net revenue. Selling and marketing expenses were 15.7% of total net revenue, up from 14.5% last year due to increased marketing expenditure related to online games. R&D expenses were stable at 16% of total net revenues, reflecting consistent investment in content creation and product development.

Non-GAAP Net Income Attributable to Shareholders RMB 9.5 billion, up 27% year-over-year. This reflects strong financial performance and disciplined execution.

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Operating Highlights

Destiny: Rising: A new free-to-play mobile sci-fi RPG shooter launched globally on August 28, topping iOS download charts in the US and other major markets. It also debuted in China on October 16, achieving top download rankings.

Marvel Rivals: Introduced its fourth season on September 12 with new content and features, reaching #3 on Steam's global top seller chart. Hosted grand finals at DreamHack Atlanta, showcasing global appeal.

Where Winds Meet: Launched globally on November 14 for PC and PlayStation 5, achieving 190,000 concurrent players within 2 days and securing top spots on global charts. Mobile version preregistration has commenced.

Sword of Justice: Went global on November 7 across mobile and PC platforms, topping iOS download charts in multiple regions. Features AI-powered NPCs and intelligent face creation system.

Eggy Party: Celebrated its third anniversary in July, achieving over 30 million daily active users and record-high average playtime. Introduced new gameplay modes in September, driving engagement.

Global Expansion: NetEase expanded its global reach with new game launches and participation in international gaming events like Gamescom and Tokyo Game Show 2025.

Localized Content: Games like Racing Master gained popularity overseas through localized content, particularly in Japan.

Revenue Growth: Total revenues increased 8% year-over-year to RMB 28.4 billion (USD 4 billion). Games and related VAS revenues grew 12% year-over-year.

Profit Margins: Gross profit margin for games and related VAS improved to 69.3%, driven by a higher mix of PC games in China.

AI Integration: Sword of Justice introduced AI-powered NPCs and intelligent face creation system, showcasing the use of emerging technologies in gameplay.

Franchise Development: Focus on scaling original IPs into lasting franchises and enhancing global reach.

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Risk or Challenges

Forward-looking statements: The company acknowledges that forward-looking statements are subject to risks and uncertainties, some of which are beyond its control, potentially causing actual results to differ materially from expectations.

Regulatory risks: The company mentions that risk factors affecting its business and financial results are detailed in filings with the SEC and Hong Kong Stock Exchange, indicating potential regulatory hurdles.

Revenue dependency on gaming: A significant portion of the company's revenue comes from gaming and related value-added services, making it vulnerable to market shifts, competition, and changing player preferences.

Marketing expenses: Increased marketing expenditures, particularly for online games, have raised selling and marketing expenses as a percentage of total net revenue, which could impact profitability.

Decline in innovative business revenue: Net revenues for innovative business and others decreased by 15% quarter-over-quarter and 19% year-over-year, reflecting challenges in maintaining growth in this segment.

Dependence on specific markets: The company’s performance is heavily reliant on specific markets like China, making it susceptible to regional economic and regulatory changes.

Supply chain and intersegment challenges: Intersegment transaction eliminations and supply chain issues have impacted revenue and margins in certain business segments.

Taxation and policy changes: The effective tax rate of 13% reflects exposure to taxation policies, which could change and impact financial performance.

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Guidance & Outlook

Future Game Launches and Expansions: NetEase plans to launch the mobile version of 'Where Winds Meet' soon, following its successful global release on PC and PlayStation 5. The company also highlighted the upcoming launch of 'Ananta,' which has garnered significant attention for its modern urban storytelling and high-fidelity visuals. Additionally, the global version of 'Sword of Justice' has been released, featuring AI-powered NPCs and intelligent face creation systems.

Global Expansion and Market Penetration: NetEase is focused on expanding its global presence through international gaming events like Gamescom and Tokyo Game Show. The company aims to scale its original IP into lasting franchises and elevate its global reach.

Technological Advancements in Gaming: The company is integrating AI-powered tools and emerging technologies into its games, such as the AI-powered NPCs in 'Sword of Justice' and the AIGC tool in 'Eggy Party,' to enhance gameplay experiences and community engagement.

Revenue Growth Expectations: NetEase expects continued growth in revenue driven by new game launches, international expansion, and strong performance of existing titles like 'Fantasy Westward Journey Online' and 'Eggy Party.'

Community Engagement and Player Retention: The company is focusing on live operations and regular updates to sustain high player engagement and retention across its gaming portfolio. This includes introducing new features, seasonal updates, and collaborations.

AI and Education Initiatives: Youdao, a subsidiary of NetEase, is advancing its AI-native strategy with plans for a national rollout of its platform designed to identify and support mathematically gifted students. The platform is currently being piloted in top-tier schools.

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Shareholder Return Plan

Dividend Policy: The Board of Directors has approved a dividend of USD 0.11 per share or USD 0.57 per ADS.

Share Repurchase Program: The company announced the extension of its previously approved share repurchase program of up to USD 5 billion for the company's ADS and other shares in open market or other transactions for an additional 36 months until January 9, 2029. As of September 30, 2025, approximately 22.1 million ADS has been repurchased under this program for a total cost of approximately USD 2 billion.

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Key Q&A

Q:What are the core driving factors behind the unlimited player server for Fantasy Westward Journey, and is this model replicable across other flagship titles?

A:The longevity of Fantasy Westward Journey online PC is based on a highly stable economic system and unique enriched gaming experiences. The unlimited server removed upfront time-based payment, streamlined gameplay, and offered a lighter gameplay format while preserving core designs. This model attracted both new and returning players and benefited the classic server. The company remains committed to innovation and diversified experiences to meet community demands.

Q:Can management comment on the gaming trend in China and overseas, and discuss the overseas expansion strategy?

A:NetEase has accumulated successful experiences in overseas markets, powered by strong in-house development capabilities. Successful examples include Knives Out in Japan, Marvel Rivals globally, and Where Winds Meet. NetEase is recognized for bringing authentic Chinese online games to global markets. The company plans to continue expanding globally with high-quality content and services, including recent launches like Sword of Justice and Naraka: Bladepoint.

Q:What are the reasons behind the volatility in grossing and DAU for Identity V, and what is the strategy to improve performance?

A:The volatility was influenced by competing products during summer holidays, particularly in lower-tier cities. However, the impact eased after back-to-school time, and Identity V reached historical highs in September. The team is preparing new content and marketing campaigns for the Chinese New Year cycle, focusing on diversified gameplay and large-scale side game modes.

Q:How have World of Warcraft and Hearthstone performed since returning to China, and what are the plans for sustainable growth?

A:Both games have maintained higher performance levels compared to when operations previously closed. The Titan Reforged Server for Warcraft, developed collaboratively by Chinese and U.S. teams, has been successful. Moving forward, the company plans to deepen collaboration and sustain competitive offerings in the China market.

Q:What is the monetization potential for Diablo IV considering competition in the ARPG genre?

A:Diablo IV has unique qualities and brand-new business plans in place. The company believes it will secure its market share and commercial performance in the ARPG segment after launch. StarCraft II has also achieved record-high user engagement, infusing vitality into the RGS genre.

Q:What are the details about ANANTA, its market positioning, and launch timing?

A:ANANTA was showcased at the Tokyo Game Show, receiving significant attention and being named one of the most promising upcoming titles by the Japan Game Award 2025 Future Division. The game features colorful content, innovative monetization strategies, and a focus on long-term operations. Development is on track, with testing and launches scheduled for 2026.

Q:Why has the number of new games in NetEase's pipeline decreased, and what will drive growth for the online gaming business?

A:NetEase is focusing on refining successful products and being more prudent with new projects. The company aims to ensure new products have strong market potential and believes that being focused is a core competence. Growth will be driven by high-quality flagship products and evergreen titles.

Q:Will recent organizational changes in the game department impact operations, and are more changes expected?

A:The changes are part of normal personnel turnover and have not impacted daily operations. The adjustments aim to make operations more focused and efficient, allowing teams to concentrate on creating high-quality products. Resources will be allocated to evergreen titles and innovative teams, while underperforming teams will be trimmed.

Q:How will AI be integrated into NetEase's games, and what are the future directions for new game genres?

A:NetEase has extensive experience using AI in game development and operations. AI is deployed to enhance user experience and innovation. The company will focus on high-quality flagship products and has a clear vision for future products, including potential breakthroughs in the shooting game genre.

Q:What are the development and commercial strategies for Sea of Remnants, and how does it differentiate from competitors?

A:Sea of Remnants is built on a self-developed game engine supporting PC, mobile, and console. It offers a fresh ocean experience with multi-character cultivation and unique sailing gameplay. The game aims to provide a differentiated and innovative experience in the market.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on how AI will enhance user experience, stating there was no time for detailed explanations. Additionally, they did not provide specific timelines or detailed strategies for the launch of Sea of Remnants and ANANTA, only stating that development is on track.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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NetEase's earnings call highlights strong financial performance, with significant revenue growth in gaming and improved gross margins. The company's focus on AI in gaming and global expansion strategies are positively received by analysts. Despite some revenue declines in other segments, the overall sentiment is positive due to successful game launches and strategic initiatives. The Q&A session further supports this with positive feedback on game retention and AI investments, leading to a positive stock price outlook over the next two weeks.

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The earnings call reveals strong financial performance, with a 7.4% revenue increase and a 32% rise in non-GAAP net income. Product development shows promise, particularly with successful game launches and global expansion. The Q&A highlights optimism in monetization and future game potential. Despite some concerns about long-term challenges and specific monetization details, the overall sentiment is positive, bolstered by a strong share repurchase program and improved margins. Given these factors, a positive stock price movement is expected over the next two weeks.

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NetEase, Inc. (NTES) Q3 2025 Earnings Call Transcript