NetEase's Q3 2025: Contradictions Emerge on Game Strategy, Overseas Expansion, and AI Integration

Date of Call: None provided

Financials Results

• Revenue: RMB 28.4 billion (USD 4.0B), up 8% YOY; games & related: RMB 23.3B, up 12% YOY; net revenues from all games RMB 22.8B, up 3% QoQ and 13% YOY.
• EPS: Non-GAAP basic EPS USD 2.9 per ADS (USD 0.42 per share); non-GAAP net income RMB 9.5 billion, up 27% YOY.
• Gross Margin: Total gross margin 64.1%; gross profit RMB 18.2B, up 10% YOY. Games-related margin 69.3% vs 68.8% prior year; NetEase Cloud Music margin 35.4% vs 32.8% prior year; innovative businesses & others margin 43.0% vs 37.8% prior year; another segment margin 42.2% vs 50.2% prior year (decline mainly due to online marketing services).
• Operating Margin: Total operating expenses RMB 10.0B (36% of net revenues). Selling & marketing 15.7% of revenue vs 14.5% prior year; R&D 16.0% of revenue vs 16.9% prior year; effective tax rate 13%.

Business Commentary:

* Revenue Growth and Strategic Business Focus: - NetEase reported total net revenue of RMB 28.4 billion for Q3 2025, representing an 8% increase year-over-year. - Total net revenue from games and related VS grew 12% in the third quarter compared with the same period last year. - The growth was driven by the strategic focus on expanding the global reach of NetEase's direct portfolio of games, innovative content, and long-term operations.

• Gaming Success and International Expansion:
• New game releases, such as a free-to-play mobile game, quickly rose in global markets and achieved leading positions on app stores.
• Existing titles, like "Rivals of Aetherblade," maintained strong performance and introduced new content, reaching #3 on Steam's global top seller chart.
• The success in international markets was attributed to NetEase's strong development capabilities and the introduction of authentically Chinese online games to a global audience.

• Financial and Operational Efficiency:
• Non-GAAP net income for the third quarter rose by 27% year-over-year, with net cash holding at approximately RMB 153.2 billion.
• The gross profit margin for games and related businesses increased to 69.3%, driven by the higher mix of PC games in China.

• Efficiency improvements were enhanced by focusing on high-margin PC games and increasing the effectiveness of advertising processes.

• AI Integration and Innovative Gaming Experiences:

• NetEase continues to integrate AI in game development and operation, with AI-powered MMCs and intelligent face creation systems enhancing gameplay experiences.
• New titles like "Ataxa" and "Sword of Justice" are expected to elevate the gaming experience with high-fidelity visuals and immersive environments.
• The use of AI is aimed at reshaping gameplay experiences and expanding global appeal while helping to maintain the company's competitive edge.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted: "Total revenues increased 8% year-over-year reaching RMB 28.4 billion"; "non-GAAP net income ... RMB 9.5 billion, up 27% year-over-year"; and cash of ~RMB 153.2 billion (up from RMB 142.1 billion last quarter), alongside product momentum and global expansion plans.

Q&A:

• Question from Xueqing Zhang (CICC): Can you explain the core drivers behind the unlimited server (Aerogreen) model, the user profile (ratio of returning vs new players), and whether this model is replicable across other flagship titles?
  Response: Unlimited server removes upfront time-based payments and streamlines gameplay to lower entry barriers, attracting both returning and new players and feeding engagement back to classic servers; management plans to continue long-term development and offer varied experiences within flagship titles.

• Question from Thomas Chong (Jefferies): How do you see demand trends in China and overseas, and what is the overseas expansion strategy?
  Response: NetEase has accumulated overseas experience with successful launches (notably in Japan and other markets) and intends to leverage in-house development strengths to bring more authentic Chinese online games to global players with confidence.

• Question from Ritchie Sun (HSBC): What explains recent volatility in Identity V's grossing and DAU and what are the plans to improve performance; and comments on World of Warcraft, Hearthstone, and the upcoming ARPG amid tough comps?
  Response: Summer competition caused temporary softness, but metrics improved after back-to-school; the team is preparing major content and marketing (Chinese New Year cycle) to drive engagement, while WoW/Hearthstone operations will continue with deeper collaboration and new initiatives for ARPG commercialization.

• Question from Alicis a Yap (Citigroup): What was the user feedback from the recent showcase (Tokyo Game Show) and what are the market positioning/differentiation and timing for next tests and 2026 launch?
  Response: The title received strong social-media feedback and recognition (Japan Game Award future division); development is on track with testing and launches proceeding as scheduled and further updates expected this year.

• Question from Jialong Shi (Nomura): Media suggests fewer new games in the pipeline—what is your strategy for launching new titles and what will drive online gaming growth if fewer new launches occur?
  Response: Company strategy is to focus resources on a smaller number of high‑conviction products and refine successful titles prudently rather than broadly releasing many lower‑confidence games.

• Question from Felix Liu (UBS): Will recent organizational changes in the games department impact near‑term operations and should we expect more changes?
  Response: Adjustments are part of normal turnover and aim to improve focus and efficiency; management says there is no impact to current game operations and resources will be reallocated toward evergreen and high‑potential titles.

• Question from Lincoln Kong (Goldman Sachs): How will AI create opportunities across existing and new games, and given the focus on quality, which genres will you prioritize (e.g., shooting games)?
  Response: AI is a major strategic investment used across development and operations to enhance user experience and efficiency; the company will concentrate resources on high‑quality flagship products rather than broad genre expansion, leveraging AI as a competitive advantage.

• Question from Yang Liu (Morgan Stanley): Can you share R&D status, expected launch timing, commercial strategy and competitive positioning for the new title (C of remnant)?
  Response: The title is a priority built on NetEase's in‑house engine for PC and mobile, designed as a fresh multi‑character cultivation experience with naval/ocean elements; team has clear design decisions and is focused on delivering a differentiated commercial product.

Contradiction Point 1

Game Development Strategy and Focus

It reflects a shift in the company's strategy regarding the prioritization of new game launches and the focus on quality over quantity, which could impact investor expectations and market perception.

Why the decline in new game launches compared to prior years? What's the strategy for growth in the online gaming business? - Jialong Shi (Nomura)

20251120-2025 Q3: NetEase is focused on success products, refining existing titles, and carefully considering new ones. We prioritize quality and confidence over quantity. - Unknown Executive

What is your overseas expansion strategy, including geographical focus, genre, product investment, and competition landscape? - Alex Poon (Morgan Stanley)

2020Q3: NetEase is dedicated to focusing on overseas strategy. Future focus includes major markets like Japan, Europe, and global launches. Investments in global titles are part of the plan, such as Harry Potter, SLG, and ACG games. - William Ding

Contradiction Point 2

Overseas Game Expansion Strategy

It highlights a change in the company's approach to overseas game expansion, potentially affecting its global market penetration and competitive positioning.

What's the demand trend for NetEase's games in China and overseas? What is the overseas expansion strategy? - Thomas Chong (Jefferies)

20251120-2025 Q3: NetEase has successfully operated in overseas markets, showcasing popular games in Japan and globally. We are the only company bringing purely Chinese authentic online games to global markets. Our success in Japan with popular titles like Revelations Online and Fate/Grand Order demonstrates our ability to cater to overseas markets. - Unknown Executive

What is your strategy for overseas game expansion, including geography, genres, product investments, and competitive landscape? - Alex Poon (Morgan Stanley)

2020Q3: Future focus includes major markets like Japan, Europe, and global launches. Investments in global titles are part of the plan, such as Harry Potter, SLG, and ACG games. - William Ding

Contradiction Point 3

AI Integration in Games

It highlights a shift in the company's emphasis on AI integration in games, which is crucial for game development, operations, and user experience.

How does AI impact existing and new games, and what are the future focus areas for game genres? - Lincoln Kong (Goldman Sachs)

20251120-2025 Q3: AI is crucial in game development and operation at NetEase, with significant experience compared to peers. AI is deployed to enhance user experience. - Unknown Executive

How has AI impacted game operations? What is the future of AI-native games? What are the key overseas expansion strategies? - Lincoln Kong (Goldman Sachs)

2025Q2: AI is vital to game development and operations. NetEase is focused on leveraging AI in tool chains and game design. - Lei Ding(CEO)

Contradiction Point 4

Overseas Expansion Strategy

It reflects differing perspectives on the company's strategy for expanding its games in overseas markets, which is essential for growth and market penetration.

What's the demand trend for NetEase's games in China and overseas? Can you discuss the overseas expansion strategy? - Thomas Chong (Jefferies)

20251120-2025 Q3: NetEase has successfully operated in overseas markets, showcasing popular games in Japan and globally. We are the only company bringing purely Chinese authentic online games to global markets. Our success in Japan with popular titles like Revelations Online and Fate/Grand Order demonstrates our ability to cater to overseas markets. - Unknown Executive

How has AI accelerated game operations? What is the outlook for AI-native game development? What are the key overseas expansion strategies? - Lincoln Kong (Goldman Sachs)

2025Q2: The global market is a priority, with plans to expand operations in North America, South America, and Japan, supported by new game releases. - Lei Ding(CEO)

Contradiction Point 5

AI in Game Development

It highlights NetEase's stance on the role of AI in game development, which is essential for innovation and competitiveness in the gaming industry.

How is AI impacting current and new games, and where are the future game genre priorities? - Lincoln Kong (Goldman Sachs)

20251120-2025 Q3: AI is crucial in game development and operation at NetEase, with significant experience compared to peers. AI is deployed to enhance user experience. - Unknown Executive

How might AI impact game development, promotion, and expansion strategies? - Alicia Yap (Citigroup)

2025Q1: AI has been crucial in game development for five years. It's not specific to a single company and its adoption is expected to continue industry-wide. AI is essential for innovation and efficiency across various businesses. - William Ding(CEO)