NetEase Inc. (NASDAQ:NTES) is having a rough Thursday. The Chinese internet and gaming giant reported second-quarter results that were a bit of a mixed bag: revenue came in ahead of what Wall Street was expecting, but adjusted earnings missed the mark. Investors didn't love the combination, and the stock was trading down 4.63% at $121.36 as of publication time.
Let's dig into the numbers. NetEase reported revenue of $4.44 billion, or 30.1 billion Chinese yuan, for the quarter, up 7.9% year over year. That topped the analyst estimate of $4.30 billion. But adjusted earnings came in at $1.77 per ADS, missing the $2.28 estimate. The culprit? Investment losses. Despite solid revenue growth, those losses put a dent in the bottom line.
Gaming Drives the Bus
The core gaming business continues to be the main growth driver. Revenue from games and related value-added services rose 9.7% to $3.7 billion, and the segment's gross margin expanded nicely to 76.13% from 70.22% a year earlier. That's a healthy improvement.
Other segments had a more mixed quarter. Youdao, the education tech arm, saw revenue increase 3.5% to $216.2 million, with gross margin improving to 48.87% from 42.99%. NetEase Cloud Music revenue was roughly flat at $291.4 million, but its gross margin ticked up to 37.43% from 36.06%. Innovative businesses and other operations saw revenue fall 3.5% to $241.6 million, though gross margin improved to 43.39% from 42.32%.
On the balance sheet, NetEase is sitting pretty. The company held $24.7 billion in net cash as of June 30 and generated $1.5 billion in operating cash flow during the quarter. That's a lot of dry powder for future investments.
Games, Games, Games
CEO William Ding attributed the gaming momentum to original titles, regular content updates, and disciplined live operations in both China and overseas. And the numbers back him up. Sword of Justice topped 10 million active players on the launch day of a major June update. Eggy Party surpassed 700 million registered users and maintained more than 100 million monthly active users. Those are big numbers.
NetEase also expanded Where Winds Meet through an Xbox launch, and content updates helped the game reach the top three on Steam's global best-seller chart. Meanwhile, Blizzard titles continued to perform well in China. Overwatch increased active users during its 10th anniversary, and Diablo 4 improved user activity and retention through localized content and events.
On the music front, NetEase Cloud Music renewed its partnership with Universal Music Group and added more Korean and Chinese labels, soundtracks, and variety-show music. That should help keep the content pipeline fresh.
New Titles and AI Ambitions
Looking ahead, NetEase is developing new titles, including Senta and Blunt Message. Management said the Blunt Message trailer generated about 40 million views globally following Summer Game Fest. The company is also preparing a global rollout of Sea of Relevance.
Beyond gaming, NetEase is expanding its use of artificial intelligence. Youdao launched its Confucius 4 model and improved translation inference speed by about 80%. It also expanded AI-powered learning services and subscriptions. Ding said NetEase plans to continue integrating advanced technology into product development and operations as it expands globally.
So, what's the takeaway? NetEase's core gaming business is firing on all cylinders, and the company has plenty of cash to fund its ambitions. But the investment losses are a reminder that even the best operators can get caught off guard by market swings. Investors will be watching to see if the company can keep the momentum going while managing those risks.
