NetEase’s net profit dropped by 40% last year due to repeated game version approvals

Author/Curiosity Daily

On February 22, NetEase announced its fourth quarter financial report as of December 31, 2018. Although its two pillar businesses, gaming and e-commerce, have experienced growth in revenue, their comprehensive gross profit margin is still declining.

NetEase’s revenue in the fourth quarter of 2018 was approximately 19.8 billion yuan (approximately US$2.89 billion), a year-on-year increase of 35.6%, slightly lower than market expectations of US$2.945 billion; the comprehensive gross profit margin for the same period was 38.6%, a decrease of 17.5% from the previous quarter.

NetEase’s net income in 2018 was 67.156 billion yuan, a year-on-year increase of 24%. Net profit was RMB 6.152 billion, a year-on-year decrease of 42.5%. NetEase explained that the decline was mainly due to investment in game research and development, expansion of e-commerce business and investment in innovative services such as NetEase Cloud Music.

The more direct impact on NetEase's revenue and profits should be the sudden tightening and suspension of game version approval last year. Last year, game media Game Grape compiled the game license acquisition status of 14 large game companies from January 1, 2017 to March 28, 2018. It was found that only two companies have obtained more than 100 game version numbers-Tencent Games and NetEase Games.

But in fact, NetEase is under the same policy pressure as large and small game manufacturers across the country. As the world's largest game market, China's game version approval work has been stalled for 268 days since March 2018. It wasn’t until late December last year that the ban was finally announced. Affected by this, the entire mobile game market grew at only 15% in 2018.

In 2018, NetEase’s online game service net revenue was 40.19 billion yuan, compared with 36.282 billion yuan in 2017. In the fourth quarter, due to the impact of version number approval, the game business’s share of total net revenue shrank to 55.53%. In the first two quarters, it accounted for more than 60%.

Even though the version number approval was restored a few months ago, only one NetEase game, "War of Spring and Autumn", has received a version number.

The worse news is that new game license applications may be suspended again. According to Caijing, less than a month after the reopening of the platform, the former State Administration of Press, Publication, Radio, Film and Television suspended the submission of information by game companies, and it has not yet restarted. The reason is that there were too many games to be reviewed in the backlog. Affected by this, game companies will continue to be under pressure.

NetEase founder and CEO Ding Lei said at an analyst meeting, "Currently, NetEase has about 40 games that have applied for licenses in China. Overseas games will not be affected by the game regulatory system. Many of our games have been released and tested overseas, but this has little to do with the version number policy. ”

However, NetEase’s third quarter 2018 financial report showed that overseas game revenue only accounted for 10% of net game revenue. NetEase is strengthening cooperation with international game studios, including jointly developing mobile games with the British Codemasters studio, and investing in French studio Quantic Dream, American studio Second Dinner, etc. NetEase has also extended its 11-year cooperation with Blizzard Entertainment in China. Many of Blizzard’s products will be renewed until January 2023.

NetEase’s second largest revenue pillar is its e-commerce business. In the fourth quarter of 2018, e-commerce business revenue was approximately 6.7 billion yuan (approximately US$970 million), a year-on-year increase of 43.5%, accounting for 33% of NetEase’s overall revenue. However, the gross profit margin of NetEase's e-commerce business is very low. It is at the bottom of NetEase's various businesses, only 4.5%, compared with 10% in the previous quarter and 7.4% in the same period last year, which are declining year-on-year.

On February 19, 2019, according to Caijing, NetEase Kaola will merge with Amazon’s China overseas purchase business. The negotiations lasted for several months and were initiated and promoted by NetEase Kaola. The two parties may adopt a share exchange method. This is one of the few radical investment strategies of NetEase. NetEase Kaola hopes to use Amazon's global supplier resources and cross-border logistics system to rapidly expand the market.

Yang Zhaoxuan talked about this matter at the analyst meeting. "As for the cross-border e-commerce business, we don't want to comment on some rumors here, but NetEase has always been conducting business expansion with an open mind and looking for strategic business partners." ”

Via Curiosity Daily