Summary of Key Points
NetEase's financial report for the second quarter of 2026 presents a contrast of increasing revenue and declining profits: Revenue reached 30.1 billion yuan, a year-on-year increase of 7.9%, exceeding expectations, but net profit fell by 18.6% to 7 billion yuan. This contrast is due to investments (losses on stocks of Pinduoduo and Alibaba, resulting in a floating loss of 2.95 billion yuan) and exchange rate losses (440 million yuan). Excluding these factors, core operating profit increased by 33%. Gaming remains the main business, with revenue growing by 9.7% to 25 billion yuan; AI is being widely utilized in gaming, Youdao, and Cloud Music services. However, a 12% decrease in deferred revenue indicates a shortage of new games, which may affect future performance. The company has substantial cash reserves of 167.5 billion yuan, indicating financial stability.
1. Increasing Revenue, Declining Profits: Both Caused by Investments and Exchange Rate Losses
NetEase's revenue growth in the second quarter exceeded expectations, but net profit decreased due to two unexpected losses:
- Investment Losses of Nearly 3 Billion Yuan: Stocks held by NetEase, such as Pinduoduo and Alibaba, fell by more than 20% during the quarter, resulting in a floating loss of 2.95 billion yuan (this was a profit in the same period last year).
- Exchange Rate Losses of 440 Million Yuan: Fluctuations in the RMB exchange rate led to financial losses when converting currencies.
These two factors combined for a total loss of 3.4 billion yuan, which eroded profits. If these non-core business losses are excluded, core operating profit increased by 33%, indicating that NetEase's core businesses (such as gaming and Youdao) are performing well.
2. Gaming Remains the Cash Cow: Established Games Stabilize, New Games Perform Well, with AI Boosting Growth
The gaming business accounts for 83% of revenue and is NetEase's most profitable segment:
- Established Games Continue to Perform: Classic IPs like "Dream Journey" continue to generate stable income.
- New Games Show Promise: Self-developed games like "Yanyun Sixteen Sounds" have driven growth.
- AI Enhances Performance:
- "Egg Baby Party" uses AI models to lower the barrier for player creativity, attracting over 700 million registered users and more than 100 million monthly active users globally.
- The mobile version of "Against the Current Cold" added thousands of AI NPCs that can interact with players, attracting tens of millions of players on the first day and setting a new online record in nearly two years.
Management plans to continue using AI to accelerate game development and improve the player experience.
3. AI Goes Beyond Gaming: Youdao and Cloud Music Also Benefit from Its Use
AI is not limited to gaming; NetEase's other businesses are also generating revenue through AI:
- NetEase Youdao: AI-driven learning services saw revenue increase by 21% to 800 million yuan, with AI subscriptions (such as AI tutoring and translation) generating 100 million yuan in sales.
- NetEase Cloud Music: Launched an AI songwriting feature that generates songs based on user inputs, and uses its own AI models to create "AI-inspired playlists" and "AI mood tuners" to recommend or adjust music according to users' moods, attracting new users.
Although these businesses have slower growth than gaming, AI has become a new driver of revenue growth.
4. Decline in Deferred Revenue by 12%: A Concern for Future Performance? Lack of New Games is the Key Factor
Deferred revenue refers to money received in advance but not yet recognized as income (e.g., prepaid game monthly subscriptions or course fees). Changes in deferred revenue can reflect future performance trends:
The 12% decrease in deferred revenue compared to the previous quarter indicates a more significant shift than usual. There are two main reasons for this: the impact on Cloud Music business and a lack of new games. Few major new games were released in the second half of the year, which may lead to fewer prepayments from users, potentially affecting future quarters' revenue. Analysts believe this could limit the potential for stock price increases.
5. Solid Cash Reserves: Enough Money to Stay Confident
Despite declining profits, NetEase has a strong financial foundation:
As of the end of June, net cash (cash + time deposits - loans) amounted to 167.5 billion yuan, with 10 billion yuan in cash flow from operating activities during the second quarter. This means that even if there are investment losses or business fluctuations in the future, NetEase has sufficient funds to cope and has strong risk resistance.
Conclusion
NetEase's performance in the second quarter can be summarized as follows: Core businesses (gaming and AI-related services) are performing well, but investments and exchange rate losses have dragged down profits. The decline in deferred revenue indicates a shortage of new games, which is a concern for future performance. However, the company's substantial cash reserves provide room for adjustment. The focus now lies on whether new games will be launched in the second half of the year and how much additional growth AI can bring to various businesses.