NTES: The 'Pig Farm' Must Still Tough It Out---

$NTES-S(09999.HK) $NetEase(NTES.US) released its Q4 2025 results after the HK close on Feb 11 Beijing time. Headline numbers missed consensus, with mobile games the main drag. While the market had already priced in part of the slowdown in in-game billings, there is no need to turn more bearish on a mid-to-long-term view. For the near term, clear guidance on the new product cycle from the earnings call is critical.

In detail. Key points below.

1. Prolonged new-title gap continued to weigh on revenue: Q4 game revenue was RMB 21.3bn, up 3.5% YoY, well below expectations. The market likely extrapolated linearly and looked for only a slight decel vs. Q3. But as the base rose, the boost from Blizzard PC titles faded notably in Q4, while mobile remained in a new-release vacuum. Without a legacy title suddenly breaking out, growth was bound to slow QoQ.

Dolphin Research sees legacy titles failing to fully hold the line. PC did better, helped by incremental contributions from 'Where Winds Meet' and 'Fantasy Westward Journey' Classic. On mobile, 'Identity V' continued to face competition, billings declined in 'Justice' and 'NARAKA: BLADEPOINT', and although 'Where Winds Meet' Mobile performed well around its anniversary in late Dec, it started too late to offset the gap. The rebound in 'Eggy Party' also skewed to Dec and could not close the shortfall in time.

2. Deferred revenue offered fresh hope: Similar to Q3, beneath weak reported revenue, deferred revenue again surprised to the upside. Q4 deferred revenue rose 34% YoY, slightly ahead of even the more bullish houses (+32%). This points to strong anniversary billings for 'Where Winds Meet' Mobile at year-end and a rebound in 'Eggy Party', which should provide some upside support to Q1 revenue.

3. Tight cost control: Core profitability improved in Q4, with OP margin for the main biz at 30%, expanding ~100bps YoY and ~200bps QoQ. With revenue under pressure, margin gains largely came from spending discipline. In absolute terms, COGS, R&D and G&A all fell YoY. S&M rose sharply YoY due to a low base last year (anti-corruption actions and few launches) and some necessary marketing for new titles this quarter.

Still, core OP missed by RMB 400mn due to the revenue shortfall. Adj. net income (net profit plus SBC) fell sharply YoY, which looks like a bomb at first glance but mainly reflects mark-to-market swings on the PDD stake.

4. Non-game segments stable: Outside games, Youdao education and Cloud Music were steady with no major surprises. New initiatives led by Yanxuan rose seasonally but continue to shrink on a trend basis.

5. Shareholder return still not enough to backstop valuation: Payout this quarter was still mainly via dividends. Management said buybacks typically occur when valuation is clearly depressed or during market panic. Q4 dividend planned at ~RMB 5.0bn, implying a payout ratio of 80%+, consistent with the usual year-end special dividend.

This brings full-year shareholder returns (actual buybacks plus planned dividends) to $2.0bn (RMB 14.1bn), or 40% of adj. attributable net income. On the current RMB 78.2bn market cap, the 2.5% yield is not high and does not serve as an effective floor.

6. Key financial metrics at a glance

Dolphin Research View

NetEase has corrected meaningfully, at one point trading near its historical trough multiples (13–14x P/E on 2026E vs. its usual 16–18x range). The pullback reflects slowing billings in several key titles (Identity V, Justice Mobile), rumors of higher VAT for games, and sentiment hit from Genie. The latter two concerns look overdone near term, yet the rebound over the past two days has been tepid. We think investors are waiting for clearer guidance on the 2026 new product cycle from this earnings call, including launch schedule and billings targets.

Back to the mid-to-long-term question: how should we think about the productivity boom from AI and its real impact on game companies?

Before Genie 3, the market largely viewed AI as a powerful assistive tool to speed development and spark creativity, with little direct substitution. When Genie 3 appeared, investors extrapolated to a near worst-case, promptly pricing in long-term risks. In the bear case, Genie 3 lowers production barriers, floods the market with supply, and intensifies competition. In our initial take (link), Dolphin Research argued Genie 3 is still far from independently delivering a commercially viable, enjoyable game.

Combining that with NetEase’s playbook over the past year—reviving legacy titles to bridge the mobile-content vacuum—an abundant supply will likely be mixed in quality. After the shakeout at the consumer end, companies with strong IP and live-ops capability should stand out for higher new-hit success rates and more predictable legacy billings.

Tencent and NetEase pivoted from broad matrices to a premium-title strategy two years ago. Though driven more by license-issue normalization than by foresight into AI-driven productivity, the shift has worked, and continued development on evergreen titles is expanding billings at higher ROI. Therefore, even if AI amplifies supply and competition, leaders’ advantages could widen under AI enablement. Pricing extreme scenarios in the short term is not rational, and in China, content supply remains subject to game-license approvals, where total issuance has been rising only gradually under control.

Detailed Analysis

1. Prolonged new-title gap continued to weigh on revenue

Q4 game and VAS revenue was RMB 22.0bn, with core game revenue at RMB 21.3bn (+3.5% YoY). With no major new mobile titles launched, growth relied on PC as legacy mobile titles decelerated post-summer ('Justice', 'NARAKA') and faced competition ('Identity V').

Deferred revenue rose 34% YoY in Q4 and even grew 5% QoQ in a seasonally soft quarter, better than usual, driven by 'Where Winds Meet' Mobile’s strong anniversary and the rebound in 'Eggy Party'. Dolphin Research estimates current-period billings grew ~10%. Given a high base last year, the decel vs. Q3 is natural.

(1) Mobile still running on legacy live-ops: A lack of new launches kept mobile under pressure. Q4 debuts were small-scale, including domestic 'Destiny: Galaxies' and overseas 'unVeil The World' and 'Justice'. They were not enough to offset post-summer declines in key legacy titles like 'Justice', 'NARAKA' and 'Identity V'. 'Eggy Party' trended down in Q4 but stabilized as heat rebounded in Dec, and 'Where Winds Meet' Mobile saw strong Dec billings on its anniversary, with limited immediate revenue recognition.

Looking to Q1 and the full year, the mobile pipeline remains thin in Q1, so pressure should persist. From Q2, heavyweights like 'Sea of Memories' and 'Infinity' are expected to arrive. Watch for updates on progress and launch timing on the call.

Management places high emphasis on these two titles, with the market looking for first-year billings of ~RMB 5bn/~RMB 10bn, respectively. Some investors doubt whether 'Infinity' can launch this year. If a 2026 launch window is confirmed, near-term expectations should lift meaningfully.

(2) Blizzard boost in PC largely played out: PC likely held up, with 'Fantasy Westward Journey' Classic driving higher engagement and billings, and 'Where Winds Meet' Intl exceeding expectations with sustained heat and strong word-of-mouth overseas. Domestic engagement also improved with content updates. These offsets helped cushion the decline in 'NARAKA' (likely pressured by rival shooter 'Delta Force').

Into 2026, NetEase is gradually entering a new product cycle. More clarity on exact launch timing will need to come from management updates.

2. Non-game segments steady

Compared with the disappointing games segment, Youdao and Cloud Music looked relatively stable this quarter. Youdao revenue rose 17% in Q4, driven by ads and online courses (Youdao Lingshi for secondary-school subjects, Little Turing for quality education, and AI tools under the Ziyue LLM), while learning devices fell sharply amid intense competition.

Cloud Music returned to growth (off a lower base) and was stable QoQ, focusing on efficiency and cost control. Other innovative biz fell 10% due to e-comm competition, with Yanxuan still in a contraction trend. Note: these sub-segments are not our primary coverage; please refer to the charts for detail.

3. Profit protected by strict cost control amid top-line pressure

Q4 GAAP OP for core operations (ex investment gains, interest, FX, etc.) was RMB 8.3bn, with growth slowing to 6% YoY, but margin improved to 30% QoQ, indicating tight spend as revenue lagged.

By line item, total COGS, R&D and G&A all declined YoY. S&M rose sharply YoY from an abnormally low base (anti-corruption and few launches a year ago), and normal marketing was needed for new launches and live-ops this quarter.

Blended GPM was stable QoQ and up nearly 400bps YoY on a higher mix of self-developed games. Non-GAAP net income was RMB 7.2bn; since only SBC was adjusted out, the quarter also included investment losses on the PDD stake, driving a larger-than-expected miss. Core OP of RMB 8.3bn was just ~RMB 400mn below consensus, with the shortfall mainly from the top line.

4. As-expected special dividend, still not enough to backstop

At end-Q4, net cash was RMB 163.5bn ($23.4bn), up $1.9bn vs. Q3. As usual, a sizable year-end special dividend was declared (nearly double Q3), while buybacks remained limited. Full-year buybacks plus planned dividends total $2.0bn (RMB 14.1bn), implying a 2.5% shareholder return yield on a current RMB 79.0bn market cap.

Dolphin Research on 'NetEase' — archive

Earnings season (last 12 months)

Nov 20, 2025 call recap: NetEase (Trans): Focusing resources on high-conviction titles

Nov 20, 2025 earnings take: NetEase: Last kneel before the 'hog cycle'?

Aug 14, 2025 call recap: NetEase (Trans): Rich pipeline; will keep optimizing marketing allocation

Aug 14, 2025 earnings take: NetEase’s swings? Veterans still have hard power

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