NetEase Q4 growth capped by seasonal lull, but margins improve

NetEase delivered a quarter in which margins improved even as headline profit fell.

On February 11, the company reported fourth-quarter 2025 results that showed stronger operating profitability but weaker GAAP net income, as shifts in revenue mix lifted gross margin while investment valuation and foreign exchange effects weighed on the bottom line.

Total net revenues rose 3% year-on-year to RMB 27.5 billion (USD 3.9 billion), according to the company’s earnings release and investor presentation. Gross margin increased to 64.2% from 60.8% a year earlier. Operating profit rose 6.4% to RMB 8.3 billion (USD 1.2 billion), lifting operating margin to 30.2%.

The headline figures moved in the opposite direction. Net income attributable to shareholders fell 28.8% year-on-year to RMB 6.2 billion (USD 868 million). Diluted net income per ADS (American depositary share) declined to RMB 9.66 (USD 1.35) from RMB 13.67 (USD 1.91) a year earlier.

NetEase attributed the weaker GAAP result largely to non-operating factors. It said quarter-on-quarter and year-on-year decreases in other income and expenses were mainly driven by fair value changes in equity investments and higher exchange losses in the fourth quarter.

Games remained the driver as seasonal effects shaped results

Games and related value-added services generated RMB 22 billion (USD 3.1 billion) in the fourth quarter, up 3.4% year-on-year but down 5.8% sequentially.

NetEase said the sequential decline reflected a prior quarter that benefited from a “high level of diversified events for the summer period.” The year-on-year growth, it said, was driven by higher revenue from self-developed titles, including Fantasy Westward Journey Online, and newer launches such as Where Winds Meet and Marvel Rivals.

The quarter-to-quarter drop does not necessarily signal weaker demand. It does, however, show how closely performance tracks the timing of live operations content, seasonal engagement, and release timing.

Margin expansion reflected lower royalties and revenue sharing

The margin improvement was most visible in the cost of revenues, which declined year-on-year. NetEase attributed the drop primarily to lower royalties for licensed games and reduced revenue sharing expenses. That distinction is important because royalties and revenue sharing are structural costs in the gaming business. Licensed titles require payments to IP holders, and distribution partners typically take a cut of sales.

A decline in those costs alongside relatively stable games revenue suggests a higher contribution from self-developed titles, where NetEase retains more revenue per RMB earned. It may also indicate that higher-royalty titles that boosted revenue in the prior year did not recur at the same level.

The resulting expansion in gross margin reflects not only expense discipline, but also a shift in revenue mix. Whether that shift proves durable will depend on the 2026 release slate. If upcoming launches rely more on proprietary franchises, margins could remain elevated. If growth depends more heavily on licensed content, royalty obligations could rise again.

Marketing remains a variable. Total operating expenses were RMB 9.4 billion (USD 1.3 billion). NetEase said differences from both the prior quarter and the same period a year earlier were primarily due to changes in marketing spending for online games.

This creates a tradeoff. A more favorable revenue mix can lift gross margin, but supporting new launches and sustaining engagement in live service franchises often requires sustained marketing investment. If revenue growth remains modest, higher marketing intensity could constrain operating leverage.

Non-games segments made incremental progress

Outside games, other segments showed incremental gains but were not large enough to materially alter NetEase’s overall profile.

Youdao recorded revenue of RMB 1.6 billion (USD 224 million), up 16.8% year-on-year. In investor materials, NetEase described Youdao as advancing an “AI-native” strategy, with growth driven by learning services, online marketing services, and continued demand for smart devices such as tutoring pens.

At its current scale, however, even double-digit growth contributes only modestly to consolidated performance unless it translates into sustained profitability and cash flow. The company did not provide segment-level profitability details in its summary materials.

NetEase Cloud Music posted revenue of RMB 2 billion (USD 280 million), up 4.7% year-on-year and broadly stable sequentially. Management cited catalog expansion, in-house music production, and product upgrades aimed at improving user discovery and listening experience.

The figures point to steady execution rather than a breakout quarter. In a competitive music streaming market, where NetEase competes with peers such as Tencent Music Entertainment, stability may be a realistic objective. Even so, the segment remains a secondary driver of overall growth.

The “innovative businesses and others” segment generated RMB 2 billion, down 10.5% year on year but up 42.4% from the prior quarter. NetEase said the annual decline was due to higher inter-segment eliminations, while the sequential increase was driven by Yanxuan, advertising services, and other businesses within the segment.

Given the volatility and the impact of accounting adjustments, the segment provides limited visibility into underlying demand. It remains a diversification initiative rather than a core driver of earnings.

AI and pipeline shape the forward narrative

On the earnings call, management said artificial intelligence is embedded across development workflows, spanning design, programming, art, and quality assurance. It characterized artificial intelligence as both a productivity tool and a source of gameplay innovation.

“AI does lower the barriers on entry of game development,” said William Ding, founder and CEO of NetEase. “However, it has also significantly raised the success threshold for top-tier games.”

Executives also highlighted a global pipeline that includes continued testing for Sea of Remnants, with an official launch targeted for the third quarter of 2026, alongside ongoing development of other titles and seasonal updates for established franchises.

Taken together, the quarter reflects improved operating economics rather than accelerated growth. Lower royalties and revenue sharing costs supported margin expansion, while fair value changes in equity investments and exchange losses reduced GAAP net income.

The balance sheet remains a stabilizing factor. NetEase ended the year with net cash of RMB 163.5 billion (USD 22.9 billion). It declared a quarterly dividend of USD 1.16 per ADS and disclosed that it had repurchased 22.1 million ADS for approximately USD 2 billion under its USD 5 billion buyback program as of December.

The company has not provided quantitative guidance. For investors, the near-term focus is likely to center on whether games revenue regains momentum as event-driven activity normalizes, whether marketing spending translates into durable engagement, and whether the 2026 pipeline converts improved unit economics into stronger topline growth.

NetEase shares listed on Nasdaq fell on the day of the earnings release, closing at approximately USD 118.5 on February 11 after opening near USD 121.55, down about 4%. The stock touched an intraday high of roughly USD 125 earlier in the session. At the closing price, shares were trading about 25% below the 52-week high of approximately USD 158.69, suggesting that margin improvement alone has not restored investor confidence.

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