NTES (Trans): GPM lifted to 70.5%; new titles' reception needs work

Below is Dolphin Research's Trans of NetEase FY26 Q2 earnings call

I. Key takeaways

1. Shareholder returns

Dividend: The BOD approved a Q2 dividend of $0.48 per ADS, equivalent to approx. $0.096 per ordinary share. The transcript misstated 'per share $9.6 or $0.48 per ADS'; based on 1 ADS = 5 shares, the per-share figure should be $0.096.

Buyback: Under the ongoing $5 bn repurchase program, NetEase had bought back approx. 24.8 mn ADS as of Jun 30, 2026, for about $2.3 bn. Around 46% of the authorization has been used.

2. Revenue

Total: Q2 revenue was RMB 30.1 bn ($4.4 bn). 1H revenue was RMB 60.7 bn ($8.9 bn), +7% YoY.

Games: Q2 games and related VAS revenue was RMB 25.0 bn, +10% YoY. Within that, online games revenue was RMB 24.5 bn, +10% YoY and -2% QoQ.The QoQ dip was mainly due to modest declines in several self-developed and licensed titles, while YoY growth was led by self-developed games (management highlighted the Westward Journey franchise and 'Where Winds Meet'; the former was misrecognized in the transcript). In 1H, online games revenue reached RMB 49.5 bn, +9% YoY.The transcript shows 1H games and related VAS at RMB 15.7 bn, +8% YoY, which is clearly inconsistent with the RMB 49.5 bn for online games and likely a transcription error.

Other segments: Youdao Q2 revenue was RMB 1.5 bn, +9% QoQ and +3% YoY, driven by learning services. 1H revenue was RMB 2.8 bn, +4% YoY.Cloud Music Q2 revenue was RMB 2.0 bn, roughly flat QoQ and YoY; 1H revenue was RMB 4.0 bn, +3% YoY. Innovative biz and others Q2 revenue was RMB 1.6 bn, +6% QoQ and -4% YoY, with QoQ growth from e-commerce and YoY decline due to a slight pullback in e-commerce revenue; 1H revenue was RMB 3.2 bn.

Guidance: No quantitative revenue or profit guidance was provided for next quarter or the full year.

3. GPM

Consolidated: Q2 GPM was 70.5%, vs. 64.7% a year ago. The transcript shows '9%' for 1H GPM, which is obviously incomplete and unusable.

Games and related: 76.1%, vs. 70.2% a year ago, driven mainly by lower platform revenue-sharing costs.

Youdao: 48.9%, vs. 43.6% a year ago, mainly from margin improvement in learning services.

Cloud Music: 37.4%, vs. 36.1% a year ago, supported by lower channel rates and ongoing cost structure optimization.

Innovative biz and others: 43.4%, vs. 42.3% a year ago, thanks to a higher contribution from higher-margin sub-businesses.

4. Opex and tax rate

Total opex: Q2 operating expenses were RMB 9.1 bn, equal to 30% of total revenue.

Breakdown: S&M ratio was 12.2% (12.8% a year ago). 1H was 11.7%, broadly flat YoY.G&A ratio was 2.7% (3.8% a year ago). 1H was 2.4% (3.5% a year ago).R&D ratio was 15.6% a year ago; 1H was 15.0%, broadly flat YoY. This quarter's transcript shows '4%', likely a missing digit with an intended ~14% level.

Tax rate: Effective tax rate was 21.7% for 1H and 25.5% for Q2, reported on an accrual basis. Tax incentives vary by entity with applicable policies and timing.

5. Profit and cash

Profit: Q2 non-GAAP net income attributable to shareholders was RMB 7.7 bn ($1.1 bn). The YoY decline was primarily due to investment losses.Non-GAAP basic EPS was $1.78 per ADS, or $0.36 per ordinary share.

1H: Non-GAAP net income attributable to shareholders fell 8% YoY to RMB 19.0 bn ($2.8 bn). That equals $4.38 per ADS, or $0.88 per share.

Cash: Net cash was RMB 167.5 bn as of Jun 30, 2026, vs. RMB 153.5 bn at end-2025.

II. Details from the call

2.1 Management highlights

1) New title Sea of Remnants (name misrecognized in the transcript; refers to an original IP ocean open-world title launched domestically in Jul) Built on a proprietary engine, it mixes a distinct art style with a seafaring fantasy open world. Gameplay blends extraction and rogue-like progression, making each adventure different.Across-islands exploration features numerous NPCs whose interactions and evolving storylines support the world-building. Brand/content tie-ins have broadened reach and the content ecosystem.A global version is in preparation.

2) Long-cycle self-developed IP iteration (I)

'Justice Online': Jun saw the anniversary mega version 'New World', upgrading the open-world experience end-to-end. Visuals were enhanced, cultivation systems streamlined, and in-game economy optimized, with a highly immersive new area added to expand exploration.DAUs topped 10 mn on launch day, and concurrent users hit a two-year high.

'Identity V': A new PVE mode launched in Jun (transcript shows cryptic nodes), offering a lighter experience beyond core PVP. Season 44 arrived in Jul with new characters/skins and events, plus a fresh collaboration with 'Paper Bride' that drove discussions on live-streaming and social platforms.

3) Long-cycle self-developed IP iteration (II)

'NARAKA: BLADEPOINT': Q2 connected the PC and mobile ecosystems, allowing seamless progression under one account across devices. Community connectivity was also strengthened.The 5th-anniversary celebration kicked off in Jul with a major update that added land and underwater battlefields and a new underwater combat system. This refreshed core gameplay and boosted cross-platform engagement.

4) 'Eggy Party' and its UGC ecosystem

Cumulative registered users reached a new milestone of 700 mn, with MAU steady above 100 mn. The 4th anniversary in Jun delivered another wave of player activity.

Summer momentum continued: it ranked near the top of China's iOS download charts, peaking at No. 3 on the grossing chart. Summer DAU peaks hit multi-year highs.

UGC is the core moat: creation tools improved and the creator base expanded, with cumulative creator incentives reaching a new RMB 200 mn milestone. The editor was recently upgraded and integrated with multiple AI models, lowering the bar for creation and debugging.Positioning is evolving from a single party game to a broader content platform.

5) Westward Journey franchise

'Fantasy Westward Journey' (PC): Classic servers and unlimited servers advanced in parallel, and new summer expansion content further lifted engagement.

'Fantasy Westward Journey' (mobile; name misrecognized in transcript): Momentum remained record-strong, alongside in-game economy optimization and regular updates. This quarter introduced a new gear progression system and extraction-style gameplay, adding new growth paths and strategic depth; the 'Summer Treasure Pavilion' in Jul expanded skin/item supply and drove strong monetization.

Westward Journey Returns (name misrecognized in the transcript, referring to the 'Returns' line under the franchise): The Origin server launched as a key incremental driver in Q2. It preserved hallmark IP experiences while adding a portrait UI and lighter gameplay, lowering the barrier to play anytime, anywhere.

6) 'Infinite Borders' (Rate of Kings)

Category leadership in SLG was reinforced through innovations tailored to community demands, with a new social-deduction mode (transcript shows Infinite Borders Q) receiving positive feedback.A collaboration with 'Minecraft' (China edition) broadened reach to a wider and younger user base. Ahead of the 11th anniversary, special high-profile servers went live and a series of teaser events reignited community enthusiasm.

7) 'Where Winds Meet'

Overseas: Since global launch last year, growth has remained healthy with continued expansion of the player base in Q2. Steam positive rating stayed above 87%.It successfully landed on Xbox in Jun, expanding coverage. Following a major update, it repeatedly ranked Top 3 on Steam's global bestseller list.

Domestic: Important map areas, including Hangzhou, were added this quarter. The Hunter expansion was particularly popular, pushing the game to No. 3 on China's iOS grossing chart.The combination of local culture, new narrative styles, and immersive exploration drove YoY revenue growth, with MAU at an all-time high.

8) 'Marvel Rivals'

In Jun, a new 18v18 mode launched (transcript shows Queenland Shenlong Arena), along with new heroes, maps, and events to broaden gameplay diversity.Summer events rolled out a wide range of popular character skins, lifting the game to No. 2 on global grossing charts and No. 1 in several markets including the U.S.

Offline extensions: Announcements and interactive activities were unveiled at San Diego Comic-Con in late Jul. A mid-season finals event in Los Angeles bolstered the esports ecosystem and long-term operations.

9) Pipeline

Ananta: A high-freedom urban open-world RPG. Development is on track, with the team polishing the experience; player expectations are high, and more updates will follow.Blood Message: The live gameplay demo at Summer Game Fest received positive overseas feedback, with the trailer reaching about 40 mn global views. Visual fidelity, narrative style, and cinematic combat earned praise.

10) Licensed titles

'World of Warcraft' and 'Hearthstone' maintained long-term community vitality through steady updates and localized operations.

'Overwatch' celebrated its 10th anniversary this quarter, with exclusive content, rewards, and events significantly boosting active users.

'Diablo' delivered stable growth in active users and player retention in Q2 via exclusive localized content, lifestyle-themed events, and newly launched China-mythology skins.

11) Youdao: AI and learning services

Released the next-gen LLM 'Ziyue 4', with significantly enhanced abilities in visual math and physics reasoning, particularly complex chart comprehension, while lowering inference cost. The translation model adopted an efficient acceleration mechanism, improving inference speed by approx. 80%.AI Agent capabilities advanced toward autonomous execution of complex real-world tasks, beyond simple Q&A invocations. Learning services continued healthy growth, with AI grading for English essays, smart recommendations, and an AI college application advisor improving user satisfaction and retention; AI-driven subscriptions also remained strong.

12) Youdao: Ads and smart hardware

Online marketing efficiency kept improving, with the newly launched 2nd-gen AI ad optimizer streamlining and automating workflows. It also tapped into emerging demand from apps and short dramas, steadily improving customer acquisition and retention.Smart hardware maintained a strong position led by dictionary pens. In Jun, the new model expanded its lexicon to 80 mn entries and supported all-subject photo-based Q&A; during 6.18, it ranked No.1 by unit sales in its category on JD and Tmall for the 7th consecutive year.

13) NetEase Cloud Music

Users: The DAU/MAU ratio stayed above 30% in 1H, rising both YoY and QoQ. Per-capita daily mobile listening time kept increasing, and penetration of community content consumption and interactions improved noticeably.

Membership: With an expanded base, retention and renewal rates improved YoY and QoQ. Member benefits around content, features, identity privileges, and offline-related perks were further refined to support sustained subscriber growth.

Content: Renewed with major labels such as Universal Music early in the year, and added more overseas/domestic labels, film/TV OSTs, and variety show music to strengthen favored genres. Meanwhile, it promoted Chinese original music, with self-produced releases like 'December 31' widely acclaimed.

Product: Innovation focused on music discovery and consumption experience. Features such as AI 'inspiration playlists' better match diverse discovery preferences, and subscription-based membership is improving core music monetization.

14) Yanxuan (private-label e-commerce)

In Q2, it maintained leading positions across core categories on major e-commerce platforms.

New products in pet food, home textiles, and home goods performed well, contributing to healthy growth. The fresh-cooked steaming line launched last year (differentiated steaming process + fresh-meat recipes) sustained solid sales and won recognition from leading industry institutions.

2.2 Q&A

Q: How is Sea of Remnants performing and what are expectations for next quarter? What went well, and what adjustments will be made to improve?

A: After the China launch, we received a large volume of user feedback, including a fair amount of criticism. Reviewing all feedback, our conclusion is that we took bold steps with the art style and rogue-like mechanics to offer a novel open-world experience, but we did not lower the early learning curve enough, which affected initial user experience to some extent. We have fully taken this on board.At the same time, the team has built a deep reserve of high-quality content, the foundation for sustainable long-term operations and community health. Following early feedback, high-frequency content updates and experience optimizations have raised recognition of the core mechanics and content quality among players; discussions have shifted back to content and operations. Overall sentiment and satisfaction continue to improve.

Looking ahead, we will keep serving our core players well and continue to optimize around pain points they report. We will also streamline early-game content so the innovative mechanics can be more broadly and easily adopted and enjoyed by more players. We are confident in the title's long-term potential.

Q: How is development progressing on Ananta? With multiple competitors targeting urban open-world, how will you differentiate and address further competition?

A: Development is on track, and the team is currently polishing the experience. We will share the latest updates at Gamescom next week.On competition, we believe Ananta has unique advantages as an urban open-world experience, stemming from its distinctive tone, scenes, and gameplay design. Ultimately, high-quality content, a unique narrative tone, and innovative gameplay and systems are the keys to success.

Q: Over the past 1–2 years, you reduced the number of new titles and focused resources on key products, while new title Marvel Rivals is performing strongly. With a leaner new-pipeline and a higher base of existing titles, what will drive growth going forward? What are the main growth drivers and operating strategy?

A: First, we will not hesitate to invest in truly high-quality products. We will continue to build premium titles, provided we have a clear vision and can deliver top-tier quality.Second, with AI as an amplifier, we believe we can speed up development while enhancing player experience. Leveraging AI tools, we are confident we can deliver more high-quality titles than most peers and provide premium experiences to players.

Q: What is the commercialization potential and launch timing for the two titles currently in testing (names misrecognized in the transcript)?

A: Both are undergoing intensive polishing. One of them is at a stage we believe can meet user needs, and we will arrange launch at that point.As developers, we think player experience is everything; delivering a great experience is the foundation of commercial success.

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