As a leading enterprise in the game field, in the first half of 2022, NetEase (9999. HK) achieved good performance, achieving a net income of 46.715 billion yuan, a year-on-year increase of 13.82%, and an operating profit of 10.453 billion yuan, a year-on-year increase of 30.12%.
As its competitors, during the same period, Tencent Holdings' revenue was 269.505 billion yuan, a year-on-year increase of -1.48%; its operating profit was 67.284 billion yuan, a year-on-year increase of -38.14%. NetEase's revenue scale is lower than that of its competitors, but the growth rate is significantly higher.
In the first half of 2022, NetEase's new game "Diablo: Immortal" landed on the global market and topped the IOS download list in many places; The old games "Fantasy Westward Journey" and "Journey to the West" still maintain their vitality, NetEase Youdao has achieved positive operating cash flow, and Cloud Music has also achieved a significant reduction in losses, but its performance is not perfect.
Going to sea + end-to-hand cooperation
Affected by policies and performance-driven factors, in order to ensure the stability of performance and seek increment, major game manufacturers have deployed overseas markets. According to the open source securities research report, from 2020 to 2022, NetEase has successively established Grasshopper, Sakura, and Nagoshi studios in Japan, and the core personnel include "Hitman 7" producer Tsuyoshi Suda, the original "Resident Evil 2" producer Gez Fry, "Like a Dragon" series producers Minoru Koshihiro and Daisuke Sato, and "Eye of Judgment" producer Ichitakeshi Hosokawa, the lineup is luxurious.
At the same time, NetEase also established NetEase Montreal, Jackalop Games, and Jarof Sparks studios in Canada and the United States, and also introduced former senior 3D animators from Ubisoft and founding members of Xbox.
At the same time of layout, NetEase's game products also have good performance in overseas markets. According to Sensor Tower data, NetEase is the only domestic company to enter the top ten Japanese publishers by revenue in 2021; According to APP ANNIE's May 2022 manufacturer's overseas data in Japan, the company's "Wilderness Action" ranked first in domestic game revenue, and "The Fifth Personality" also entered the top five best-selling lists in July.
According to West China Securities Research Report, in early June, "Diablo: Immortal" was launched, quickly topped the IOS mobile game download list in the United States, the United Kingdom, Germany, South Korea, Japan and other markets, and as of July 28, 2022, its overseas market revenue exceeded 100 million US dollars.
Since the second quarter of 2022, NetEase has adjusted the statistical caliber of data, renamed the "online game service division" to "games and related value-added services", and adjusted some of the game-related or affiliated businesses from "innovation and other businesses" to "game services and related value-added services", of which the core business is NetEase CC live broadcast service, and its business essence is to provide a content live broadcast platform based on game live broadcasting.
According to Choice data, in the second quarter of 2022, NetEase CC live streaming service revenue was 1.306 billion yuan, a year-on-year increase of 4.80%, accounting for 7.20% of the revenue of "games and related value-added services" in the current period. From this point of view, compared with the online game business, NetEase CC live broadcast service has little impact on the division, and the online game business is the top priority.
In the first half of 2022, the revenue of online game business was 34.115 billion yuan, a year-on-year increase of 15.60%, while the growth rate of NetEase's net income was 13.82%, and the growth of game business was an important reason for the high growth rate of the company's net income.
From the perspective of game types, from the first quarter of 2021 to the second quarter of 2022, mobile game revenue was 10.907 billion yuan, 10.475 billion yuan, 11.002 billion yuan, 11.883 billion yuan, 11.561 billion yuan and 11.127 billion yuan respectively, accounting for 72.80%, 72.10%, 69.20%, 68.30%, 66.90% and 66.10% of the online game revenue in the current period.
Through observation, it is not difficult to find that since 2022, NetEase mobile game revenue has declined, although its popular mobile games "The Fifth Personality", "Endless Lagrange", "Wilderness Action", "Journey to the West", "Fantasy Westward Journey" and so on have good popularity at home and abroad, but mobile game revenue has declined for two consecutive quarters.
Moreover, the flow of NetEase's popular games is also polarized. According to West China Securities Research Report, as of June 2022, "Fantasy Westward Journey" is still the mobile game with the highest contribution to the company's turnover, much higher than the second place "Endless Lagrange", which also lays hidden dangers for the continuous growth of NetEase's online game revenue.
A little optimistic is that the classic end-to-end turnover game "Diablo Immortal" was launched in early June and achieved a good turnover; The mobile games "Eternal Calamity", "Against the Cold Water", "Qian Nu Ghost Hidden World" will be launched soon, and "Harry Potter: Magic Awakening" will also be launched in overseas markets. According to TAPTAP data, as of August 3, 2022, the number of pre-downloaded pre-downloads of the mobile game "Against the Cold" was 450,000, and the pre-download volume of "Eternal Calamity" was 2.26 million, and NetEase mobile game revenue is expected to return to growth.
Compared with the decline in mobile game revenue, NetEase end-game has grown steadily. According to the financial reports of each period, from the first quarter of 2021 to the second quarter of 2022, its end-game revenue was 4.075 billion yuan, 4.054 billion yuan, 4.897 billion yuan, 5.515 billion yuan, 5.720 billion yuan and 5.707 billion yuan respectively.
It should be noted that in recent years, the domestic end-to-end travel market has continued to be sluggish. In 2021, Perfect World's end-game revenue was 2.370 billion yuan, a year-on-year increase of -10.20%; Giant's online end-game revenue was 878 million yuan, a year-on-year increase of -7.77%. In contrast, it is not easy for NetEase to have such a reality.
According to West China Securities Research Report, the main reason for the increase in NetEase end-game revenue is the increase in the proportion of overseas business and the steady growth of the flow of "Eternal Calamity", which has set a new record for the sales of domestic buyout games, and as of June 13, 2022, the global sales of "Eternal Calamity" games exceeded 10 million copies.
Thanks to the game's overseas strategy, in the "vacuum period" of the release of novice games, overseas markets as an "increment" largely fill the impact of the "vacuum period" on the company's overall performance, and the product portfolio of the two top "end-to-hand" also smooths the revenue fluctuations caused by the game life cycle.
economies of scale
As another piece of the puzzle of NetEase's product matrix, Cloud Music was listed on the Hong Kong Stock Exchange in December 2021. In the first half of 2021, cloud music's revenue was 3.184 billion yuan and operating loss was -701 million yuan; in the first half of 2022, it achieved revenue of 4.259 billion yuan, a year-on-year increase of 33.77%, and an operating loss of -301 million yuan, a year-on-year increase of 57.08%.
What is quite striking is that cloud music does not achieve a turnaround in performance through cost control. According to the financial report data of each period, in the first half of 2022, its sales and marketing expenses were 326 million yuan, a year-on-year increase of 110.30%, and its research and development expenses were 482 million yuan, a year-on-year increase of 14.56%.
The fundamental reason for NetEase Cloud Music's improved performance is that the end of the exclusive copyright model has helped it solve the problem of "core music library", reduce operating costs, drive the growth of monthly paying users, and generate economies of scale.
The cost of content services, that is, the cost of music copyright, has been at a high level for a long time as the largest component of cloud music operating costs. According to the financial report data of each period, from 2018 to 2021, the cost of cloud music content services was 2.853 billion yuan, 4.787 billion yuan and 5.961 billion yuan respectively, accounting for 123.06%, 97.79% and 85.18% of the current operating income.
In the first half of 2022, the cost of cloud music content services was 3.3 billion yuan, accounting for 77.49% of the current operating income, and the growth rate of operating income of 33.77% was superimposed on it, and its operating loss amount contracted significantly.
Specific to the business level, in the first half of 2022, NetEase Cloud Music online music service revenue was 1.784 billion yuan, a year-on-year increase of 11.18%, of which membership subscription service revenue was 1.465 billion yuan, a year-on-year increase of 37.56%. In other words, the contribution of advertising service-related businesses to online music service revenue has decreased significantly, and membership subscription services have entered a healthy development.
As of the first half of 2022, the number of monthly paying users of cloud music was 37.61 million, much higher than 26.13 million in the first half of 2021 and 28.94 million at the end of 2021. On a slight disadvantage, the monthly revenue per paying user of cloud music fell slightly from 6.70 yuan in 2021 to 6.50 yuan.
As another business segment of NetEase Cloud Music, "Social Entertainment Services and Others" has also achieved good growth, with revenue of 2.475 billion yuan in the same period, a year-on-year increase of 56.71%, and the number of monthly paying users has also increased from 680,000 at the end of 2021 to 1.24 million.
However, the change in the number of monthly active users of online music services has inevitably raised concerns about the continuous improvement of cloud music performance. As of the first half of 2022, the number of monthly active users of cloud music online music services was 182 million, down from 182 million at the end of 2021 and 185 million in the first half of 2021.
According to business logic, paying users are likely to be monthly active users, in the case of paying user conversion rate to maintain a certain situation, the growth of monthly active users means the growth of paying users, and once the growth of monthly active users is stagnant, it can only stimulate performance by improving the conversion rate of paid users, but the conversion rate of paid users is capped, so the problem of stagnant growth of monthly active users of NetEase Cloud Music Online Music Service deserves continuous attention.
Youdao transformation, strict selection and stability
Affected by the "double reduction" policy, the income of NetEase Youdao branch has declined significantly. In the first half of 2022, Youdao's revenue was 2.156 billion yuan, a year-on-year increase of -18.10%, and the gross profit margin also decreased from 54.80% in the same period of the previous year to 48.60%.
From the breakdown of business data, the decline in Youdao's revenue is clearer. According to Oriental Securities Research Report, in the second quarter of 2022, Youdao achieved revenue of 956 million yuan, a year-on-year increase of -26.07%, affected by macro headwinds and seasonal differences after double reduction, high school course income decreased by 50% year-on-year, and adult course income decreased by 40% year-on-year.
However, compared with the sharp decline in training business revenue, the sales of Youdao smart hardware products performed well. According to data from Tianfeng Securities, in the second quarter of 2022, Youdao intelligent hardware revenue was 240 million yuan, a year-on-year increase of 16.30%; as of the end of the first half of 2022, the cumulative sales of Youdao dictionary pens exceeded 3 million, and the growth of smart hardware hedged the impact of "double reduction" on the company's performance to some extent. As the last business division of NetEase, the "innovation and other businesses" based on strict selection are moderate, with revenue of 3.518 billion yuan in the first half of 2022, a year-on-year increase of 5.22%, and it is not easy to stabilize performance under the impact of the original e-commerce giants and Douyin and Kuaishou live broadcasting.
This article is from Securities Market Weekly