Beijing time on February 24 before the US stock market, NetEase (NTES;09999. HK) released its fourth quarter 2021 financial results. NetEase Call Minutes: Overseas Markets, Overseas Talents, and Collaboration with Overseas Teams
Different from the previous crane tail, this time NetEase led the chinese stock earnings season, presumably because it is more satisfied with its own report card.
1) Total revenue in the fourth quarter was RMB24.4 billion, an increase of 23% year-on-year, which was basically in line with market expectations. The popularity of the two masterpieces of the mobile game end game continues, of which the end game "Forever Doom" continues to exceed expectations.
2) Operating profit of 4.6 billion yuan, an increase of 53% year-on-year, slightly higher than the market expectation of 4.3 billion yuan. On the one hand, the gross profit margin due to the decline brought about by the high copyright share of popular games is lower than market expectations; on the other hand, the research and development rates that have continued to rise in the first three quarters have also begun to ease this quarter.
3) Steady buybacks: The company continued to repurchase 5 million American Depositary Shares in the fourth quarter at a cost of approximately $500 million. By the end of 2021, the Company had repurchased a total of 18.5 million American Depositary Shares, totaling $1.8 billion.
In addition, the Youdao repurchase program announced at the end of August, by the end of last year, had purchased 600,000 American depositary shares, spending a total of $8.2 million.
4) Sufficient cash bullets: At the end of the year, the company's book cash (including cash and cash equivalents, short-term investments, time deposits, etc.) was 97.5 billion yuan. Net cash inflow from operating activities was $6.4 billion, up 33% sequentially.
5) Fourth quarter dividend of $0.081 per share (ADS $0.4050 per share) with a dividend ratio of 30% of net profit after tax ($0.27 per share).
A quick look at a few issues of concern to the market:
1. How did the new tour flow perform this quarter? The game pipeline of the future?
In the fourth quarter, it achieved game revenue of 17.4 billion yuan, an increase of 29.8% year-on-year, of which the end game "Forever Doom" was excellent and continued to exceed market expectations. At the end of last year, the company announced at the investor conference that "Forever Destroyed" has sold 6 million sets worldwide, even according to the minimum price of 98 yuan / set of download revenue, it has exceeded 600 million. What's more, additional in-app purchase revenue (sales of items such as skin chests) has accelerated to catch up with download revenue.
In addition, the performance of mobile games is also clearly out of the anti-market trend, with a year-on-year increase of 23% in the fourth quarter, significantly leading the industry by 2%. According to third-party data, the annual flow of Harry Potter in 2021 is close to 2.1 billion, and the latest month's turnover ranks in the TOP3 of NetEase's products.
Follow-up game pipeline: "Forever Doom" console and mobile game version, "Diablo: Immortal" and "Ghost of a Woman", in addition to the launch of "Harry Potter: Magical Awakening" and "Dead by Daylight" mobile games in overseas regions in the first half of this year. Under the suspension of the version number, the reserve amount has also been affected.
2. After the exclusive copyright of music is loosened, will the development of cloud music benefit?
The fourth quarter performance is the first report card after the listing of Cloud Music (2021.11), and the overall performance is very general, which may be related to the fading of the industry growth dividend and the intensification of competition. For peers, the cloud music base was lower, but this quarter revenue increased 23% year-over-year and declined sequentially.
In addition, the gross profit margin that lagged behind its peers improved slightly from 2% to 4% in the quarter, but it still remained at a low level, compared with Tencent Music's 30%, and the gap that needed to be caught up was relatively large.
Therefore, overall, Cloud Music has not yet tasted the sweetness of the cancellation of exclusive copyrights.
3. Other businesses, such as Dao education?
The education business is the regulatory focus this year, so it's hard to have a good day. In the last quarter, the company was already seeking a positive transformation, announcing that it would completely close the compulsory education business by the end of 2021. Judging from the fourth quarter performance, without the K12 boutique course, the income has naturally been cut a lot. After the decline in the proportion of service revenue, it also affected youdao's gross profit margin level.
The only benefit is that without the aggressive money-burning K12 course business, marketing expenses have been saved. Youdao's sales expense ratio in the fourth quarter has fallen to 32% from 85% in 2020.
Longbridge Dolphin Jun believes:
The four seasons report itself is not the focus, in fact, as in the third quarter, NetEase's recent game flow performance has long been obvious to all, so the market expectations are also quite sufficient, in the miserable and miserable other Chinese companies continue to have stock prices ups and downs in the fourth quarter, NetEase's shareholders should be more calm.
(1) In the short term: NetEase is not a platform economy company, so in the current regulatory environment, the possibility of being knifed is not high. However, the continuous non-issuance of the version number is still the biggest factor hindering the short-term reversal of NetEase's stock price.
During the cold winter of the version number, the head stock game will indeed eat some dividends from the increase in market concentration, but it will disrupt its own pipeline.
Because it is not known when to open the version number (although the version office claims that the application for approval has been carried out, but according to dolphin jun research, most of the industry has made the expectation of not issuing a version number in 2022, and almost all new travel plans are for overseas), the head manufacturer may slow down the online pace of the reserve new tour in hand.
In the in-depth "NetEase: Pig Factory's Super "Pig Cycle" I Dolphin Investment Research" in the middle of last year, it was clearly stated that we are optimistic about netease logic at the moment, which is the new product cycle that has been waiting for 3 years. If there is no version number landing this year, then the short-term disturbance caused by the version number supervision to NetEase's stock price will slightly exceed our previous expectations, and the management may therefore consider slowing down the global release pace of "Dark", such as postponing it to the second half of the year, or adjusting actions such as overseas issuance.
(2) The optimistic logic in the medium and long term is still from NetEase's rich experience in going to sea, the creativity of game content and the bargaining power of the entire content side in the industrial chain. From the reduction of the share ratio of channels such as Apple and Google to the acquisition of Blizzard by Microsoft at a high premium at sunset, the value of content is gradually being mined and revalued. In addition, under the development trend of the future metaverse, high-quality content parties will also play an important role and influence in it.
Detailed interpretation of this quarter's earnings report
First, online games: still in the hot period of the new game
Online game revenue in the fourth quarter was RMB17.4 billion, up 29.8% year-on-year and exceeding market expectations of 28%. The exceeding expectations mainly comes from the end game part, the market generally expects to be about 35%, and the actual end game revenue increased by 46% year-on-year, which is still the popularity of the global release of "Forever Doom" in August. (There is no inertial decay trend in the number of Doom players on Steam.) In addition, Harry Potter has also played a higher supporting role in the overall performance growth.
In this quarter's newly released games "Absolute Interpretation", "Funny Stickman", "Marvel Showdown", Dolphin Jun believes that its performance is not good. Therefore, the subsequent growth of the revenue side needs to be supported by more content updates or new games on the line.
"Forever Doom" is a NetEase exclusive game, so the gross profit margin is lower than that of self-research, while some games such as "Harry Potter" and "The Lord of the Rings" have IP blessings themselves, and the higher copyright sharing cost also has some impact on the gross profit margin. Overall, the gross margin of online games in the fourth quarter continued to decline slightly to 64.1% sequentially, although the decline was lower than market expectations.
In the fourth quarter of the version number continued to be suspended, whether it is the current revenue recognition or the flow situation, NetEase's performance is much better than that of its peers, which further increases the market share.
In the fourth quarter, the overall industry growth rate fell to 1.5%, and from the estimated net increase in the current quarter from the deferred revenue, NetEase's turnover increased by 14% year-on-year, of course, Harry Potter and "Forever Doom" are the main driving forces.
According to Sensor Tower's data, Dolphin Jun calculated that the flow of Harry Potter in the fourth quarter was close to 2.1 billion yuan, which was basically in line with the forecast of 2 billion yuan given in our third quarterly report review. But in the first two months of 2022, the popularity of "Harry Potter" has slowed down a little faster, and it has now dropped to the level of "Journey to the West". Judging from Dolphin Jun's own experience, the sharp drop in harry pottery has a lot to do with the speed of product updates and the poor feedback of several operational activities.
According to the situation in January, it is expected that the annual turnover of the national service may be around 3 billion, lower than the 4 billion we previously expected. Therefore, in addition to the content update of the product itself to be accelerated, the promotion rhythm of the global distribution of Harry Potter overseas clothing and "Diablo" is becoming more and more important for the performance support in 2022.
However, Dolphin Jun still believes that from the perspective of competition, the long-term stagnation of the version number is conducive to the further concentration of the share of the head stock game, and at the same time, for the large manufacturers with relatively rich reserves and sufficient cash flow, the overall advantages outweigh the disadvantages.
Second, Youdao education: after the supervision period, actively complete the transformation
The impact of education double reduction supervision has been reflected in the financial report of the previous quarter, and the company also announced that it will gradually close the K9 boutique course business before the end of the year. Therefore, the revenue side will be cut off a part (the third quarter of dolphin Jun estimated to account for about 40%), but the aggressive marketing will be significantly reduced, which is conducive to the improvement of youdao and netease's overall profitability.
In the fourth quarter, the overall revenue of Youdao business was 1.334 billion yuan, an increase of 20.5% year-on-year. K12 business is mainly online course service revenue, so its gross profit margin is relatively high, after the closure of these businesses, Youdao's business structure has changed greatly, and the proportion of revenue from intelligent learning hardware has increased, which will reduce the overall gross profit margin level.
Third, cloud music and other innovative businesses: the signs of improvement are not obvious
Other innovative businesses such as cloud music (original disclosure caliber) in the fourth quarter achieved a total revenue of 5.642 billion yuan, an increase of 7.4% year-on-year. Among them, for the first time in the NetEase financial report, the revenue of cloud music was disclosed, which was 1.889 billion yuan in the quarter, an increase of 23% year-on-year, and the growth performance was not good at a low base. In 2021, the monthly activity of cloud music increased by only 1% year-on-year, and by the end of the year, the number of independent musicians exceeded 400,000.
In terms of gross profit margin, the innovation business (including cloud music) increased significantly from the previous quarter, and from the perspective of splitting, cloud music increased by 2 percentage points month-on-month, and more improvements came from other businesses. The company explains the reasons behind it as follows:
1) The revenue of social entertainment services has grown rapidly (live broadcast), and the cost control of cloud music itself.
2) The proportion of advertising revenue in other businesses increased, and the gross profit margin of NetEase's strictly selected self-operated products improved.
Finally, from the third-party data, whether it is the size of users or the length of activity, Cloud Music lags behind significantly, and it has not obviously obtained dividends after the collapse of Tencent Music's copyright monopoly.
Fourth, operating expenses: began to contract
On the whole, NetEase's operating expenses are basically stable, partly due to specific product differences and changes in business structure, and there are small changes, and there is no need to worry too much.
It is worth mentioning that in the fourth quarter, NetEase's operating rates have declined month-on-month, especially in research and development investment. Since last year, due to the industry's increased attention to the quality of games, in order to compete for talents, the game industry has ushered in a wave of salary increases, which is reflected in the statements of listed game companies, that is, the research and development rate has risen sharply.
However, in this quarter, NetEase's R & D investment not only declined, but also decreased in the proportion of revenue. Dolphin Jun believes that the high prosperity of the industry in the first half of the year, the high salary competition for talents regardless of cost, and the cold winter of juvenile game supervision and version number in the second half of the year are two completely different extreme phenomena. For game companies, the adjustment cost is very high, and even many small and medium-sized game companies will have cash flow breaks, poor management and closures.
The head company, although the capital is abundant, but out of the assessment of future risks, it will also choose to tighten its clothes and food first, and save its strength after this winter. Therefore, in 2022, when the version number supervision is moving towards foggy, it is expected that game companies such as NetEase will continue to be cautious in operating expenses as in this quarter to improve operational efficiency.