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NetEase (NTES) Q1 Earnings Top Estimates, Revenues Rise Y/Y

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NetEase, Inc. (NTES - Free Report) reported first-quarter 2020 non-GAAP earnings per American Depositary Share (ADS) of $3.83 per share that beat the Zacks Consensus Estimate by 9.1% and increased 28.1% year over year.

Also, revenues of $2.41 billion beat the consensus mark by 4.5%.

In local currency, revenues of RMB17.1 billion increased 18.3% from the year-ago quarter, driven by steady performance of online game services and Youdou business.

Top-Line Details

Online game services net revenues (79.2% of total revenues) rose 14.1% year over year to RMB13.5 billion ($1.9 billion) driven by strength in flagship titles such as the Fantasy Westward Journey series and New Westward Journey Online II and newer titles including Life-After, Onmyoji and All About Jianghu, which maintained their popularity as users remain confined due to the pandemic.

Innovative Business and Other net revenues (17.6% of total revenues) rose 28% year over year to RMB3.0 billion ($424.1 million).

Youdao business net revenues (3.2% of total revenues) soared 139.8% year over year to RMB541.4 million ($76.5 million) driven by Youdao’s learning services and products, which grew 226.4% year over year to RMB442.1 million ($62.4 million).

NetEase, Inc. Price, Consensus and EPS Surprise

NetEase, Inc. Price, Consensus and EPS Surprise

NetEase, Inc. price-consensus-eps-surprise-chart | NetEase, Inc. Quote

Operating Details

Gross profit was up 21.2% year over year to RMB9.4 billion ($1.3 billion). Gross margin expanded 130 basis points (bps) on a year-over-year basis to 55%.

Online games services gross margin expanded 40 bps to 64.1% primarily due to increased net revenues from self-developed games including Fantasy Westward Journey 3D, Fantasy Westward Journey mobile game, Fantasy Westward Journey Online and New Westward Journey Online II, as well as certain licensed games.

Youdao gross margin of 43.5% expanded from 23.4% in the year-ago quarter driven by improved economies of scale and faculty compensation structure optimization for its learning services and products.

Innovative Business and Other gross margin of 15.8% expanded from 5.7% in the year-ago quarter primarily due to increased net revenues from NetEase Cloud Music.

Selling and marketing expenses increased 60.9% year over year to RMB1.8 billion ($263.1 million). Meanwhile, general and administrative expenses increased 12.5% year over year to RMB885.5 million ($125 million). Research and development expenses increased 5.2% year over year to RMB2.14 billion ($302.6 million).

Total operating expenses (28.7% of total revenues) increased 22.8% year over year to RMB4.8 billion ($690.8 million) due to increased marketing expenditures, higher research and development investments as well as higher staff-related costs.

Balance Sheet & Cash Flow

As of Mar 31, 2020, the company’s total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB79.3 billion (US$11.2 billion), compared with RMB74.4 billion as of Dec 31, 2019.

The board of directors approved a dividend of $1.16 per ADS for the first quarter of 2020, which is expected to be paid on Jun 23, 2020 to shareholders of record as of the close of business on Jun 12, 2020.

NetEase paid a dividend of $1.02 per ADS for the fourth quarter of 2019 on Mar 20, 2020.

Cash flow generated from operating activities was RMB6.5 billion ($918.1 million) for the first quarter of 2020, compared with RMB5.5 billion in the previous quarter.

On Feb 26, 2020, the company announced that its board of directors had approved a share repurchase program of up to $1 billion of the outstanding ADSs for a period not to exceed 12 months beginning Mar 2, 2020. As of Mar 31, 2020, approximately 1.1 million ADSs had been repurchased under this program for a total cost of $341.9 million.

Zacks Rank and Stocks to Consider

Currently, NetEase has a Zacks Rank #3 (Hold).

NVIDIA Corporation (NVDA - Free Report) , Workday Inc. (WDAY - Free Report) and Okta Inc. (OKTA - Free Report) are some better-ranked stocks in the broader computer and technology sector. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NVIDIA, Workday and Okta are set to report quarterly results on May 21, 26 and 28, respectively.

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