--- title: "NTES: Profitable Through the Lull; Franchise Quality Still Rising" type: "Topics" locale: "en" url: "https://longbridge.com/en/topics/41001605.md" description: "$NetEase(NTES.US) released its Q1 2026 results after the Hong Kong close on May 21 (Beijing time). Results were above expectations, with the upside driven by game revenue, GPM, and tight opex discipline. Details: 1) Game revenue beat conservative Street expectations. Q1 game revenue (ex-CC Live) was RMB 25.1bn (+7% YoY), above consensus. The Street had modeled sub-5% growth given no new titles this quarter and a high base last year..." datetime: "2026-05-21T15:18:49.000Z" locales: - [en](https://longbridge.com/en/topics/41001605.md) - [zh-CN](https://longbridge.com/zh-CN/topics/41001605.md) - [zh-HK](https://longbridge.com/zh-HK/topics/41001605.md) author: "[Dolphin Research](https://longbridge.com/en/news/dolphin.md)" --- # NTES: Profitable Through the Lull; Franchise Quality Still Rising $NetEase(NTES.US) released its Q1 FY2026 results after the Hong Kong close on May 21 Beijing time. Headline results beat, with the upside driven by games revenue, GPM, and tight opex control. In detail: See below. **1\. Games revenue beat 'conservative' street expectations**: Q1 games revenue (ex-CC Live) was RMB 25.1bn, up 7% YoY and above consensus. The market had expected a softer print given no new titles this quarter and a tough base last year, with many modeling sub-5% growth. In practice, NetEase delivered 7% growth on strength from 'Fantasy Westward Journey' PC 'Changyou' servers, the overseas roll-out of 'Where Winds Meet', and operations recovery for 'Identity V' and 'Eggy Party'. Also, last quarter’s 22% YoY growth in deferred revenue already pointed to support for Q1 revenue. **2\. Deferred revenue stayed robust:** deferred revenue rose 22% YoY at quarter-end, beating the 17% expected by institutions. Dolphin Research estimates gross billings rose 18% QoQ, not as strong as the exceptional Q1 last year but ahead of typical seasonal patterns. **Dolphin Research expects high-base pressure to persist into Q2–Q3, but heavy mobile launches in 2H should help,** including Q3’s 'Sea of Oblivion' (street est. full-year billings across platforms of RMB 3–5bn) and 'Infinity' in late Q4 or early next year (street est. RMB 10bn). These could support sequential acceleration in game revenue. **3\. GPM saw a sharp uplift:** the biggest highlight, in our view. Q1 GPM reached 69.4%, up over 500bps YoY and QoQ, largely driven by games and live streaming. Games-related GPM improved to 75%, up 6ppt YoY. Drivers included a higher mix from self-developed, high-margin PC titles and lower channel costs as the company steers users to official web top-ups and benefits from lower app store take rates, a long-anticipated margin lever. **4\. Staff costs were materially optimized:** opex was tightly managed in Q1; R&D grew slowly, and S&M—given YoY base effects—declined QoQ in line with seasonality, while G&A fell 33% YoY. G&A has been shrinking for two years from a low base, and the further drop suggests significant headcount optimization or pay adjustments in Q1. SBC also points to this: despite NetEase’s share price being ~10% higher YoY, SBC nearly halved YoY. Media reported sizable cuts to outsourced teams in Mar, and this optimization may not be fully reflected in Q1; watch the call for details. Core operating profit was RMB 12.7bn, up 21% YoY, with margin up 5ppt YoY. Adj. net profit (adding investment gains/losses and FX, and primarily excluding SBC) was roughly flat YoY, as lower investment gains (PDD and Alibaba declined in Q1) and FX losses on overseas revenue offset operating upside. **5\. Buybacks increased, but overall shareholder returns remain average:** the company plans a cash dividend of $0.144 per share ($0.72 per ADS), totaling $460mn with a ~30% payout, broadly stable. Buybacks were $127mn in Q1, already above all of last year; management typically paces repurchases with market cap moves, and $2.9bn remains authorized (three-year window). Annualizing Q1 dividends and buybacks implies ~$2.35bn of shareholder returns for the year, about 3.3% of the ~$70bn market cap intraday, which is not high. **6\. Key financial metrics at a glance** **Dolphin Research View** Despite a lull in new launches, this print stood out not only because expectations were conservative but also due to the marked improvement in games GPM. This showcases the earnings power that leading studios with multiple evergreen IPs can unlock. The implications are: (1) amid an industry-wide push for lower channel fees, top studios have greater bargaining room. (2) With a portfolio built over years, user stickiness is stronger, making it easier to steer users to official downloads and payments, leaving less revenue to external channels. (3) Self-developed evergreen IPs also save on external licensing costs; for example, titles based on Marvel or the prior Harry Potter franchise required large royalties. **In Q1, with the resurgence of NetEase’s top evergreen IP 'Fantasy Westward Journey' on PC, the profit potential materially surfaced.** For NetEase, the PC side carries no heavy channel costs and relies on self-owned IP, keeping marginal costs very low. Pure development costs are mainly staff compensation booked in R&D, front-loaded with lower ongoing needs thereafter, so a large share of billings drops to profit. That said, GPM will not extrapolate linearly. As new mobile titles scale in 2H, channel shares will eat into margins, though over a longer cycle, the trend should be upward with volatility. **NetEase’s 520 game showcase yesterday featured fewer new titles vs. prior years and focused more on secondary development of evergreen franchises, which may disappoint some.** But the 'Changyou' servers of Fantasy Westward Journey validate the playbook: keep the core gameplay, layer in new content styles and monetization aligned with current user tastes, and potentially reignite an evergreen title’s second spring. **That does not mean new titles do not matter.** New genres and themes help reach new cohorts and fill category gaps. Since the lull began last 2H, the stock has struggled to re-rate, and delays to 'Sea of Oblivion' and 'Infinity' last quarter further tested market patience. At this point, 'Sea of Oblivion' is likely still set for Q3 (summer break, pre–back-to-school), but whether 'Infinity' launches this year is uncertain; the 520 event gave no firm update. **Conservatively, Q2 still faces pressure, Q3 eases as the base normalizes, and the true new-release cycle approaches from Q4 onward.** From now to Q4, evergreen titles provide a floor, but the valuation re-rating may take time. Typically, the market turns constructive 1–2 months ahead of a major public beta. **At a ~$70bn market cap vs. the street’s FY2026 adj. profit estimate of ~RMB 40bn, ~12x P/E looks near a sentiment trough, suggesting a window to build into the next product cycle.** Separately, the process for a dual-primary listing adjustment and stepwise Southbound inclusion is underway; any progress this year could serve as a near-term catalyst. **Detailed Analysis** **1\. Games beat conservative expectations** Q1 games and VAS revenue was RMB 25.7bn, with core games at RMB 25.1bn, up 7% YoY. With no new launches in the quarter, growth was driven by legacy titles. Deferred revenue rose 22% YoY in Q1 but slowed QoQ. Gross billings are estimated up 18% QoQ, less than last year’s 28% but better than historical seasonal averages; YoY growth slowed to 2% on the tough base. **To return to healthy growth, new titles are needed.** **(1) Mobile: Q2 remains a lull; heavy launches arrive in 2H.** The lack of tentpoles keeps mobile billings under pressure. Q1 saw incremental contribution from three Q4 launches, but none were priority projects. Among evergreen titles, 'Eggy Party' rebounded late last year on content updates and events, driving slight YoY billings growth. 'Identity V' stabilized in Q1 after prior pressure from competitors like 'Paranormal Squad', though still below last year’s high base. 'Fantasy Westward Journey' benefited from renewed PC 'Changyou' server buzz, while 'Where Winds Meet' maintained high stickiness on product quality. Other evergreens such as 'Justice' Mobile continued to trend down. ![图表, 折线图描述已自动生成](https://pub.pbkrs.com/uploads/2026/926c4c2562041dd8330112c818f499d7?x-oss-process=style/lg) ![图表, 直方图描述已自动生成](https://pub.pbkrs.com/uploads/2026/8d3f8ce8312a265143b65ed750ec5247?x-oss-process=style/lg) ![图表, 折线图描述已自动生成](https://pub.pbkrs.com/uploads/2026/81b6ca4f0c32aeadd25726980bdf0d3c?x-oss-process=style/lg) Looking to Q2 and the full year, Dolphin Research expects: (1) Q2 still faces a tough base with no major new launches; only the PC early access of life-sim 'Star Painter: Sunny Day' went live in late Apr, so evergreen titles must carry the load. (2) 2H should improve sequentially, with 'Sea of Oblivion' in Q3 and 'Infinity' by late Q4 or next year. The company places high emphasis on both; street FY1 billings expectations are RMB 3–5bn and RMB 10bn, respectively. For 'Infinity', a modern-city anime open-world game, expectations have tempered after subpar debuts from 'Honor of Kings: World' and 'Different Circle'. Given likely late-2026 timing, its full-year revenue contribution could be limited; near term, focus remains on 'Sea of Oblivion' and globalizing legacy titles. 'Sea of Oblivion' mixes Age-of-Sail naval combat, open-world exploration, and extractions, developed by the 'Identity V' team Joker Studio. Early-year tests met expectations; watch the call for more updates. **(2) PC/console: strength in evergreen and recent titles:** performance likely remained solid in Q1, though growth moderated on the rising base. 'Fantasy Westward Journey' (concurrent users hit a record 3.9mn in Mar) and 'Where Winds Meet' should have offset softness in 'NARAKA: Bladepoint'. For other Marvel titles, 'Marvel Rivals' saw a clear rebound in S6 early this year vs. the prior two seasons, but S7 from Mar was average, while the broader Marvel slate was stable. ![图表中度可信度描述已自动生成](https://pub.pbkrs.com/uploads/2026/34046e1a6afb390590f7336b1ccb13d4?x-oss-process=style/lg) ![图形用户界面, 文本描述已自动生成](https://pub.pbkrs.com/uploads/2026/9308e9e424183923bcf7b66a4038411b?x-oss-process=style/lg) **2\. Non-core segments face varying pressures** Non-gaming segments underperformed and missed expectations. Structurally, both industry shifts and competitiveness pose medium- to long-term challenges. Youdao’s education revenue grew only 4% despite a low base, still dragged by a faster decline in learning devices. Ads and online courses (Youdao Lingshi for K-12, Little Turing for quality education, and AI tools under the Ziyue LLM) also slowed notably. Cloud Music growth recovered from a low base with GPM improving to 37%. Other innovations fell 5% as Yanxuan continued to contract amid e-commerce competition. Note: Non-core segments are not Dolphin Research’s primary coverage; please refer to the charts for details. ![图表, 折线图描述已自动生成](https://pub.pbkrs.com/uploads/2026/85fbda77986fa79870520fd534b87c0c?x-oss-process=style/lg) **3\. GPM is the highlight; opex belt tightened again** GAAP operating profit (ex investment gains, interest, FX and other non-core items) was RMB 12.6bn, up 21% despite a tough base. OP margin rose 5ppt QoQ to 41% as both COGS and opex shrank materially. By line item, total COGS and G&A fell YoY, while S&M rose sharply YoY on a very low base from last year’s anti-corruption phase and no new launches then. Although there were no new titles this quarter, evergreen operations still required normal promotion. ![图表, 条形图描述已自动生成](https://pub.pbkrs.com/uploads/2026/3aea7ba7721b47d11efb53f8c36f55a3?x-oss-process=style/lg) Q1 GPM reached 69.4%, up over 500bps YoY and QoQ, driven mainly by games and live streaming. Games-related GPM rose to 75%, up 6ppt YoY, helped by a higher mix of self-developed, high-margin PC titles and lower channel costs (more web top-ups; reduced app store take rates). Non-GAAP net profit was RMB 7.2bn. Because only SBC is excluded from GAAP net income, investment losses from holdings in PDD and Alibaba and FX losses on offshore revenue were included; even so, stronger cost/expense discipline drove an above-consensus adj. net result. ![图表, 直方图描述已自动生成](https://pub.pbkrs.com/uploads/2026/e30bf808148f353e50e4c2e0d8d90776?x-oss-process=style/lg) **4\. Bigger buybacks, but shareholder returns still average** Net cash was RMB 167.5bn ($23.4bn) at Q1-end, up RMB 4bn vs. Q4. The company plans a $0.144 per-share dividend ($0.72 per ADS), totaling $460mn with a ~30% payout, broadly steady; buybacks were $127mn in Q1 (chart shows cash outflow), exceeding all of last year, with $2.9bn remaining authorized over three years. Annualizing Q1 distributions implies ~$2.35bn in full-year shareholder returns, ~3% of the $74bn market cap at yesterday’s close, which is not high. ![图表描述已自动生成](https://pub.pbkrs.com/uploads/2026/394f1d7bf360aef7355b3ef5889b225a?x-oss-process=style/lg) **Dolphin Research on NetEase: archive** **Earnings season (past year)** Feb 11, 2026 earnings call notes: [NetEase (Trans): 'Sea of Oblivion' shifted to Q3; 'Infinity' still in polishing](https://longbridge.cn/topics/38668755?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=540d97d2-5585-464e-821b-5ea1b71f9ebd) Feb 11, 2026 earnings quick take: [NetEase: the 'pig farm' still needs patience](https://longbridge.cn/topics/38663549?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=2ee390fd-d78f-4a40-9123-071bdc97bb53) Nov 20, 2025 earnings call notes: [NetEase (Trans): focusing resources on high-conviction products](https://longbridge.cn/topics/36573956?channel=t36573956&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN) Nov 20, 2025 earnings quick take: [NetEase: the last kneel before the 'pig cycle'?](https://longbridge.cn/topics/36561986?channel=t36561986&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN) Aug 14, 2025 earnings call notes: [NetEase (Trans): rich pipeline; will keep optimizing marketing allocation](https://longbridge.cn/topics/32980248?channel=t32980248&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN) Aug 14, 2025 earnings quick take: [NetEase 'bouncing around'? Veterans still have hard skills](https://longbridge.cn/topics/32977019?channel=t32977019&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN) **Risk disclosure and disclaimer:** [**Dolphin Research Disclaimer and General Disclosure**](https://support.longbridge.global/topics/misc/dolphin-disclaimer) ### Related Stocks - [AAPL.US](https://longbridge.com/en/quote/AAPL.US.md) - [PDD.US](https://longbridge.com/en/quote/PDD.US.md) - [09999.HK](https://longbridge.com/en/quote/09999.HK.md) - [NTES.US](https://longbridge.com/en/quote/NTES.US.md) - [09899.HK](https://longbridge.com/en/quote/09899.HK.md)