NetEase (NASDAQ:NTES) shares dropped more than 5% in U.S. premarket trading on Thursday after the Chinese gaming and internet group reported second-quarter earnings that fell substantially short of analyst forecasts, outweighing better-than-expected revenue growth.
The company posted earnings per share of RMB12.02, well below the consensus estimate of RMB15.54. Revenue provided a more positive signal, increasing 7.9% year on year to RMB30.11 billion and beating analysts’ expectations of RMB29.48 billion.
Gaming revenue grows nearly 10%
NetEase’s core games and related value-added services division remained the main driver of growth, generating net revenue of RMB25.0 billion during the quarter.
That represented an increase of 9.7% from the corresponding period last year, reinforcing the importance of gaming to the group’s overall financial performance.
Youdao also delivered growth, with net revenue increasing 3.5% year on year to RMB1.5 billion.
Performance elsewhere was more subdued. NetEase Cloud Music generated approximately RMB2.0 billion in net revenue, broadly unchanged from a year earlier.
Revenue from innovative businesses and other operations declined 3.5% to RMB1.6 billion.
Higher costs put pressure on NetEase profitability
Operating expenses increased during the second quarter, contributing to the weaker-than-expected earnings performance.
Total operating expenses reached RMB9.1 billion, compared with RMB8.6 billion in the previous quarter and RMB9.0 billion in the corresponding period last year.
NetEase attributed the sequential increase to higher marketing expenditure, employee-related costs and research and development investment.
On a year-on-year basis, the increase was primarily driven by greater R&D spending as the company continued investing in its products and technology.
Earnings miss drives negative market reaction
While NetEase’s revenue beat and continued growth in gaming demonstrated resilience across its core operations, investors focused more heavily on the substantial shortfall in earnings.
The contrast between 7.9% revenue growth and an EPS figure significantly below consensus suggests rising expenses are limiting the extent to which stronger sales translate into bottom-line growth.
With gaming revenue continuing to expand and Youdao also delivering modest growth, NetEase retains momentum across important parts of its portfolio. However, Thursday’s share-price decline indicates investors will be watching closely for evidence that the company can manage higher operating costs while maintaining investment in research, development and marketing.
NetEase stock price
