NetEase Q2 Revenue Rises 8% YoY to RMB 30.1 Billion, Adjusted EPS of RMB 12.02 Misses Expectations | Earnings Review

NetEase’s second-quarter results presented a mixed picture: revenue and core gaming business both exceeded market expectations, but adjusted profit fell significantly short.

In the second quarter of 2026, NetEase reported net revenue of RMB 30.11 billion, a year-on-year increase of 7.9%, surpassing the Bloomberg consensus estimate of RMB 29.45 billion; adjusted net income from continuing operations per ADS was RMB 12.02, markedly lower than the market expectation of RMB 15.59. Gross profit reached RMB 21.22 billion, also higher than the market estimate of RMB 19.75 billion.

Core business performance remained solid. Net revenue from online game services totaled RMB 25.02 billion, up 9.7% year-on-year and above the market estimate of RMB 24.28 billion; net revenue from innovation initiatives and others stood at RMB 1.64 billion, broadly in line with expectations. Following the earnings announcement, NetEase’s US-listed shares dropped more than 6% in pre-market trading.

Revenue and Gross Profit Beat Expectations, While Profit Faces Pressure

From an operational perspective, NetEase continued its steady growth trajectory in the second quarter. In the first half of the year, the company achieved net revenue of RMB 60.7 billion, a 7.0% year-on-year increase.

Gross profit performance was particularly outstanding. Second-quarter gross profit reached RMB 21.22 billion, up 17.5% year-on-year and higher than the market estimate of RMB 19.75 billion; among this, gross profit from online game services was RMB 19.05 billion, also significantly exceeding the market estimate of RMB 17.55 billion.

Gross profit for the first half of the year reached RMB 42.4 billion, up 16.2% year-on-year, with gross margin continuing to improve, mainly driven by a decrease in revenue sharing and product costs. The increased proportion of self-developed products in the gaming business further optimized the cost structure.

However, profit did not grow in tandem with gross profit. Net profit attributable to shareholders of the company in the second quarter was RMB 7.0 billion, declining both year-on-year and quarter-on-quarter; net profit for the first half was RMB 17.7 billion, a decrease of approximately 6.6% compared to RMB 18.9 billion in the same period last year.

Core Gaming Business Remains Robust, Key Products Continue to Drive Growth

Games and related value-added services remain NetEase’s core growth engine.

Net revenue from online game services in the second quarter was RMB 25.02 billion, a 9.7% year-on-year increase, accounting for about 83% of total revenue and exceeding the market estimate of RMB 24.28 billion; revenue from this segment in the first half reached RMB 50.7 billion, up 8.3% year-on-year.

Growth was primarily driven by several long-running self-developed titles. The "Fantasy Westward Journey" series maintained stable performance through continuous content updates; "Where Winds Meet" continued its strong performance in the domestic market and further expanded into North American and European markets through new content operations; while products such as "Eggy Party," "Identity V," and "Justice Online Mobile" continued to maintain user stickiness through community operations and content updates.

In terms of profitability, the gaming business also performed remarkably. In the first half of the year, the cost of revenue for games and related value-added services decreased from RMB 14.3 billion in the same period last year to RMB 12.5 billion, while gross profit increased from RMB 32.6 billion to RMB 38.3 billion, with gross margin rising from 69.5% to approximately 75.4%.

Gross profit from online game services in the second quarter reached RMB 19.05 billion, higher than the market estimate of RMB 17.55 billion, further indicating that the profitability quality of the gaming business is improving.

Regarding the new product pipeline, "Sea of Forgotten" was launched in the Chinese market in July, while products such as "Project Mugen" and "Return to Tang" are still under orderly development. As new products gradually enter the monetization phase, they are expected to support future growth in the gaming business.

Youdao and Cloud Music Show Moderate Growth, AI Layout Continues to Advance

Youdao reported net revenue of RMB 1.5 billion in the second quarter, a 3.5% year-on-year increase and an approximately 8.8% quarter-on-quarter increase, mainly driven by growth in learning service revenue.

AI remains a key strategic direction for Youdao. During the quarter, Youdao launched the "Ziyue 4" (Confucius 4) large language model and further strengthened its AI Agent capabilities, driving products to evolve towards autonomously executing complex learning and office tasks. In the first half of the year, Youdao’s net revenue was RMB 2.8 billion, up 3.6% year-on-year, with growth contributed by learning services and online marketing services, partially offset by a decline in smart hardware revenue.

NetEase Cloud Music reported net revenue of approximately RMB 2.0 billion in the second quarter, basically flat year-on-year; revenue in the first half was RMB 4.0 billion, up 3.4% year-on-year. Growth was mainly driven by membership subscriptions, with online music service revenue maintaining steady improvement. Gross profit for Cloud Music in the first half reached RMB 1.47 billion, higher than RMB 1.39 billion in the same period last year, showing a slight improvement in profitability.

Net revenue from innovation initiatives and others in the second quarter was RMB 1.64 billion, broadly in line with market expectations. Overall, growth for Youdao and Cloud Music was relatively moderate, and their contribution to the group’s overall revenue growth rate remains weaker than that of the gaming business.

Investment Losses and Rising Tax Rate Become Two Major Drags on Profit

The pressure on NetEase’s profit side stemmed mainly not from its core business, but from fluctuations in investments and a rise in the tax rate.

The "other income/expenses" item recorded a loss of approximately RMB 2.95 billion in the second quarter, mainly affected by a decrease in the fair value of equity investments and provision for impairment losses, whereas the same item contributed a positive gain of approximately RMB 330 million in the same period last year, resulting in a year-on-year negative impact of over RMB 3 billion.

Cumulative investment losses in the first half also approached RMB 2.95 billion, compared to a gain of approximately RMB 1.02 billion from the same item in the same period last year.

Rising tax burden further eroded profits. The effective tax rate in the second quarter reached 25.5%, significantly higher than 14.7% in the same period last year; the effective tax rate in the first half also rose from 15.0% to 21.7%.

Income tax expenses in the first half increased from RMB 3.5 billion in the same period last year to RMB 5.0 billion, an increase of over 40%. The company stated that the change in tax rate reflected phased estimates of the group’s applicable tax obligations and rights, but this change has already significantly dragged down final net profit.

This explains why NetEase saw a divergence where "revenue and gross profit exceeded expectations, but earnings per share missed expectations."

Increased R&D Spending, Cash Reserves Remain Ample

NetEase continues to maintain high levels of R&D and marketing investment. Operating expenses in the first half totaled RMB 17.7 billion, a 3.9% year-on-year increase.

Among these, R&D expenses increased from RMB 8.74 billion to RMB 9.13 billion, and sales and marketing expenses increased from RMB 6.27 billion to RMB 7.12 billion, reflecting the company’s continued efforts to intensify new product development and global promotion. Meanwhile, general and administrative expenses decreased from RMB 2.01 billion to RMB 1.44 billion, indicating improved cost control at the headquarters level.

Cash flow remains robust. Net cash inflow from operating activities in the second quarter was approximately RMB 10.0 billion, totaling approximately RMB 23.7 billion for the first half.

As of June 30, 2026, NetEase’s net cash balance reached RMB 167.5 billion, further increasing from RMB 163.5 billion at the beginning of the year. Ample cash reserves provide strong support for the company’s continuous R&D, product investment, and shareholder returns.

Share Buybacks and Dividends Continue, HK Listing Upgraded to "Dual Primary Listing"

In terms of shareholder returns, NetEase continues to advance share buybacks and dividend distributions.

During the reporting period, the company cumulatively repurchased approximately 14.04 million ordinary shares on Nasdaq, paying a total of approximately USD 324 million. As of the end of June, the cumulative amount repurchased under the existing buyback plan was approximately USD 2.3 billion, and the validity period of the buyback plan has been extended to January 2029.

Regarding dividends, the Board of Directors approved a dividend of USD 0.096 per ordinary share for the second quarter of 2026, corresponding to USD 0.480 per American Depositary Share, expected to be paid in September. Cumulative dividends for the first half of 2026 amounted to USD 0.240 per ordinary share, basically equivalent to USD 0.249 in the same period last year.

Additionally, on June 30, NetEase’s listing status on the Hong Kong Stock Exchange was officially upgraded from a secondary listing to a "dual primary listing," marking a further deepening of the company’s layout in the Hong Kong capital market.

Overall, the core characteristic of NetEase’s Q2 performance is that "revenue and gaming business exceeded expectations, but profit was dragged down by non-operating factors." From the perspective of core business, gaming revenue and gross profit were both significantly higher than market expectations, and gaming gross margin continued to improve, with the core foundation remaining solid.

However, expanding investment losses, rising tax rates, and adjusted profit missing expectations explain the market reaction of a pre-market drop of over 6% in share price after the earnings release. Going forward, as new products such as "Sea of Forgotten" are gradually launched, and products like "Where Winds Meet" continue to advance in overseas markets, whether NetEase can further translate its strong gaming profitability into net profit growth will become the key focus of market attention.