NetEase (NTES) Reports Q4 Revenue of $3.8B, EPS of $1.58

NetEase, Inc. (NASDAQ: NTES), one of China's leading internet and online game services providers, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2021.

Fourth Quarter 2021 Financial Highlights

• Net revenues were RMB24.4 billion (US$3.8 billion), an increase of 23.3% compared with the fourth quarter of 2020.
  • Online game services net revenues were RMB17.4 billion (US$2.7 billion), an increase of 29.8% compared with the fourth quarter of 2020.
  • Youdao net revenues were RMB1.3 billion (US$209.3 million), an increase of 20.5% compared with the fourth quarter of 2020.
  • Cloud Music net revenues were RMB1.9 billion (US$296.5 million), an increase of 23.9% compared with the fourth quarter of 2020. [1]
  • Innovative businesses and others net revenues were RMB3.8 billion (US$588.9 million), an increase of 0.6% compared with the fourth quarter of 2020.
• Gross profit was RMB12.9 billion (US$2.0 billion), an increase of 30.1% compared with the fourth quarter of 2020.
• Total operating expenses were RMB8.3 billion (US$1.3 billion), an increase of 20.2% compared with the fourth quarter of 2020.
• Net income attributable to the Company's shareholders was RMB5.7 billion (US$893.5 million). Non-GAAP net income attributable to the Company's shareholders was RMB6.6 billion (US$1.0 billion). [2]
• Basic net income per share was US$0.27 (US$1.36 per ADS). Non-GAAP basic net income per share was US$0.32 (US$1.58 per ADS). [2]

Fourth Quarter 2021 and Early 2022 Operational Highlights

• New hit titles amassed immediate player popularity including:
  • Naraka: Bladepoint, which continually hit record-high users and was named a "Top Seller" on Steam's Best of 2021 games list. A new Bruce Lee-themed crossover addition also invigorated the global player community.
  • Harry Potter: Magic Awakened, with captivating content updates that drove the game ranking to a leading position on China's iOS download chart and grossing chart multiple times.
  • The Showbiz: Dream Chaser, which ranked No. 1 on China's iOS download chart after its December 2021 debut.
• Extended the reach of leading franchise titles including both the Fantasy Westward Journey and Westward Journey Online series.
• Continued the advancement of upcoming games pipeline such as console and mobile versions of Naraka: Bladepoint, Diablo® Immortal™ and Ghost World Chronicle, as well as the roll-out of Harry Potter: Magic Awakened and Dead by Daylight Mobile -NetEase in international markets.
• Achieved continuing operating cash inflow from Youdao for the fourth quarter of 2021, while advancing its learning services and smart devices.
• Successfully completed the initial public offering and listing of Cloud Village Inc. (HKEX: 9899, "Cloud Village") on The Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange") in December 2021. Increased Cloud Music's MAUs of online music services around 1% from 2020 to 2021. Continued to nurture independent artists, serving more than 400,000 independent musicians by the end of 2021 through Cloud Music platforms.

"2021 was a fruitful year with exciting new titles and steady development that propelled growth across our business. We closed the year with total net revenues of RMB24.4 billion in the fourth quarter, up 23.3% year-over-year," said Mr. William Ding, CEO and Director of NetEase. "While our flagship titles remain strong, we also introduced a number of highly successful games, including Naraka: Bladepoint and Harry Potter: Magic Awakened. These new titles further strengthen our portfolio and demonstrate our ability to develop world-class IP. For 2022, we are very excited to introduce more new games to broader demographics, paving the way for solid growth.

"Having completed Cloud Village's IPO, we will continue to improve our music platforms' infrastructure and offerings to enrich our users' experience. In 2022 we plan to further cultivate our core interests and enhance content within each of our verticals," Mr. Ding concluded.

Fourth Quarter 2021 Financial Results

Net Revenues

Net revenues for the fourth quarter of 2021 were RMB24,373.6 million (US$3,824.7 million), compared with RMB22,190.7 million and RMB19,761.7 million for the preceding quarter and the fourth quarter of 2020, respectively.

Net revenues from online game services were RMB17,397.5 million (US$2,730.1 million) for the fourth quarter of 2021, compared with RMB15,899.1 million and RMB13,400.2 million for the preceding quarter and the fourth quarter of 2020, respectively. Net revenues from mobile games accounted for approximately 68.3% of net revenues from online game services for the fourth quarter of 2021, compared with 69.2% and 72.4% for the preceding quarter and the fourth quarter of 2020, respectively.

Net revenues from Youdao were RMB1,333.8 million (US$209.3 million) for the fourth quarter of 2021, compared with RMB1,387.3 million and RMB1,106.8 million for the preceding quarter and the fourth quarter of 2020, respectively.

Net revenues from Cloud Music were RMB1,889.3 million (US$296.5 million) for the fourth quarter of 2021, compared with RMB1,924.7 million and RMB1,524.5 million for the preceding quarter and the fourth quarter of 2020, respectively.

Net revenues from innovative businesses and others were RMB3,753.0 million (US$588.9 million) for the fourth quarter of 2021, compared with RMB2,979.7 million and RMB3,730.3 million for the preceding quarter and the fourth quarter of 2020, respectively.

Gross Profit

Gross profit for the fourth quarter of 2021 was RMB12,917.8 million (US$2,027.1 million), compared with RMB11,810.8 million and RMB9,927.8 million for the preceding quarter and the fourth quarter of 2020, respectively.

The quarter-over-quarter and year-over-year increases in online game services gross profit were primarily due to increased net revenues from new games such as Naraka: Bladepoint and Harry Potter: Magic Awakened.

The quarter-over-quarter decrease in Youdao gross profit was primarily due to decreased net revenues from its after-school tutoring services for academic subjects under China's compulsory education system (the "Academic AST Business") which were included in its learning services. The year-over-year increase was primarily due to business development from its learning services.

The quarter-over-quarter increase in Cloud Music gross profit was primarily due to improved cost control. The year-over-year increase was primarily due to the increased net revenues from its social entertainment services and others as well as improved cost control.

The quarter-over-quarter increase in innovative businesses and others gross profit was primarily due to increased gross profit from advertising services and Yanxuan.

Gross Profit Margin

Gross profit margin for online game services for the fourth quarter of 2021 was 64.1%, compared with 64.5% and 63.1% for the preceding quarter and the fourth quarter of 2020, respectively. Gross profit margin for online game services generally fluctuates within a narrow band based on the revenue mix of mobile and PC games, as well as NetEase's self-developed and licensed games.

Gross profit margin for Youdao for the fourth quarter of 2021 was 50.7%, compared with 56.6% and 47.5% for the preceding quarter and the fourth quarter of 2020, respectively. The quarter-over-quarter and year-over-year fluctuations were mainly due to the development and changes of its Academic AST Business.

Gross profit margin for Cloud Music for the fourth quarter of 2021 was 4.1%, compared with 2.2% and negative gross profit margin of 7.1% for the preceding quarter and the fourth quarter of 2020, respectively. The quarter-over-quarter and year-over-year improvements were mainly due to the factors enumerated above.

Gross profit margin for innovative businesses and others for the fourth quarter of 2021 was 26.8%, compared with 24.2% and 28.2% for the preceding quarter and the fourth quarter of 2020, respectively. The quarter-over-quarter increase was primarily due to increased gross profit margin from advertising services.

Operating Expenses

Total operating expenses for the fourth quarter of 2021 were RMB8,309.6 million (US$1,304.0 million), compared with RMB8,035.6 million and RMB6,915.8 million for the preceding quarter and the fourth quarter of 2020, respectively. The quarter-over-quarter and year-over-year increases were mainly due to increased marketing expenditures related to online game services, higher staff-related costs and research and development investments, partially offset by decreased marketing expenditures related to Youdao.

Other Income/ (Expenses)

Other income/ (expenses) consisted of investment (loss)/ income, interest income, exchange (losses)/ gains and others. The quarter-over-quarter increase in net other income was mainly due to higher investment income arising from fair value changes of equity investments, partially offset by higher unrealized exchange losses arising from the Company's U.S. dollar-denominated bank deposits and loans balances as the exchange rate of the U.S. dollar against the RMB fluctuated over the periods. The year-over-year increase in net other income was mainly due to higher investment income arising from fair value changes of equity investments and reduced unrealized exchange losses.

Income Taxes

The Company recorded a net income tax charge of RMB934.0 million (US$146.6 million) for the fourth quarter of 2021, compared with RMB807.6 million and RMB552.7 million for the preceding quarter and the fourth quarter of 2020, respectively. The effective tax rate for the fourth quarter of 2021 was 14.2%, compared with 19.6% and 37.2% for the preceding quarter and the fourth quarter of 2020, respectively. The effective tax rate represents certain estimates by the Company regarding the tax obligations and benefits applicable to it in each quarter.

Net Income and Non-GAAP Net Income

Net income attributable to the Company's shareholders for the fourth quarter of 2021 totaled RMB5,694.2 million (US$893.5 million), compared with RMB3,181.8 million and RMB975.7 million for the preceding quarter and the fourth quarter of 2020, respectively.

Non-GAAP net income attributable to the Company's shareholders for the fourth quarter of 2021 totaled RMB6,595.6 million (US$1,035.0 million), compared with RMB3,857.8 million and RMB1,597.9 million for the preceding quarter and the fourth quarter of 2020, respectively.

NetEase reported basic net income of US$0.27 per share (US$1.36 per ADS) for the fourth quarter of 2021, compared with US$0.15 per share (US$0.75 per ADS) and US$0.05 (US$0.23 per ADS) for the preceding quarter and the fourth quarter of 2020, respectively.

NetEase reported non-GAAP basic net income of US$0.32 per share (US$1.58 per ADS) for the fourth quarter of 2021, compared with US$0.18 per share (US$0.91 per ADS) and US$0.08 per share (US$0.37 per ADS) for the preceding quarter and the fourth quarter of 2020, respectively.

Fiscal Year 2021 Financial Results

Net Revenues

Net revenues for fiscal year 2021 were RMB87,606.0 million (US$13,747.3 million), compared with RMB73,667.1 million for fiscal year 2020.

Net revenues from online game services were RMB62,806.5 million (US$9,855.7 million) for fiscal year 2021, compared with RMB54,608.7 million for fiscal year 2020. Net revenues from mobile games accounted for approximately 70.4% of net revenues from online game services for fiscal year 2021, compared with 71.9% for fiscal year 2020.

Net revenues from Youdao were RMB5,354.4 million (US$840.2 million) for fiscal year 2021, compared with RMB3,167.5 million for fiscal year 2020.

Net revenues from Cloud Music were RMB6,997.6 million (US$1,098.1 million) for fiscal year 2021, compared with RMB4,895.7 million for fiscal year 2020.

Net revenues from innovative businesses and others were RMB12,447.6 million (US$1,953.3 million) for fiscal year 2021, compared with RMB10,995.2 million for fiscal year 2020.

Gross Profit

Gross profit for fiscal year 2021 was RMB46,970.8 million (US$7,370.7 million), compared with RMB38,983.4 million for fiscal year 2020.

The year-over-year increase in online game services gross profit was primarily due to increased net revenues resulting from the launch of new games during the year such as Revelation mobile game, Naraka: Bladepoint and Harry Potter: Magic Awakened, as well as from certain existing games such as the Fantasy Westward Journey series and Sky.

The year-over-year increase in Youdao gross profit was primarily attributable to increased gross profit from its learning services.

The year-over-year increase in Cloud Music gross profit was primarily attributable to increased net revenues as well as improved cost control.

The slight year-over-year decrease in innovative businesses and others gross profit was primarily due to decreased gross profit from advertising business.

Operating Expenses

Total operating expenses for fiscal year 2021 were RMB30,553.7 million (US$4,794.5 million), compared with RMB24,445.0 million for fiscal year 2020. The year-over-year increase was primarily due to increased marketing expenditures especially related to online game services, as well as higher research and development investments and staff-related costs.

Other Income/ (Expenses)

Other income/ (expenses) consisted of investment income, interest income, exchange losses and others. The year-over-year increase in net other income was mainly due to a reduction in unrealized exchange losses recorded as well as higher investment income arising from fair value changes of equity investments.

Income Taxes

The Company recorded a net income tax charge of RMB4,128.3 million (US$647.8 million) for fiscal year 2021, compared with RMB3,041.8 million for fiscal year 2020. The effective tax rate was 19.6% for fiscal year 2021, compared with 19.8% for fiscal year 2020. The slightly lower effective tax rate for fiscal year 2021 was mainly due to reduced unrealized exchange losses.

Net Income and Non-GAAP Net Income

Net income attributable to the Company's shareholders for fiscal year 2021 totaled RMB16,856.8 million (US$2,645.2 million), compared with RMB12,062.8 million for fiscal year 2020.

Non-GAAP net income attributable to the Company's shareholders for fiscal year 2021 totaled RMB19,761.9 million (US$3,101.1 million), compared with RMB14,706.0 million for fiscal year 2020.

NetEase reported basic net income of US$0.80 per share (US$3.98 per ADS) for fiscal year 2021, compared with US$0.57 per share (US$2.86 per ADS) for fiscal year 2020.

NetEase reported non-GAAP basic net income of US$0.93 per share (US$4.66 per ADS) for fiscal year 2021, compared with US$0.70 per share (US$3.49 per ADS) for fiscal year 2020.

Quarterly Dividend

The board of directors has approved a dividend of US$0.0810 per share (US$0.4050 per ADS) for the fourth quarter of 2021, to holders of ordinary shares and holders of ADSs as of the close of business on March 11, 2022, Beijing/Hong Kong Time and New York Time, respectively, payable in U.S. dollars. For holders of ordinary shares, in order to qualify for the dividend, all valid documents for the transfer of shares accompanied by the relevant share certificates must be lodged for registration with the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong no later than 4:30 p.m. on March 11, 2022 (Beijing/ Hong Kong Time). The payment date is expected to be on March 22, 2022 for holders of ordinary shares and on or around March 25, 2022 for holders of ADSs.

NetEase paid a dividend of US$0.0450 per share (US$0.2250 per ADS) for the third quarter of 2021 in December 2021.

Currently, the Company's policy is to set quarterly dividends at an amount equivalent to approximately 20%-30% of the Company's anticipated net income after tax in each fiscal quarter. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of NetEase's board of directors and will be based upon the Company's operations and earnings, cash flow, financial condition and other relevant factors.

Other Information

As of December 31, 2021, the Company's total cash and cash equivalents, current and non-current time deposits and short-term investments balance totaled RMB103.4 billion (US$16.2 billion), compared with RMB100.1 billion as of December 31, 2020. Cash flow generated from operating activities was RMB24.9 billion (US$3.9 billion) for fiscal year 2021, compared to RMB24.9 billion for fiscal year 2020.

Update on Youdao's Disposal of Academic After-School Tutoring Business

Youdao has ceased offering after-school tutoring services for academic subjects under China's compulsory education system and completed the disposal of this business.

Change in Segment Reporting

Effective in the fourth quarter of 2021, the Company changed its segment disclosure to separately report the results of its Cloud Music business, generated from its majority-controlled subsidiary Cloud Village which completed its initial public offering and listing on the Hong Kong Stock Exchange in December 2021. As a result, the Company now reports segments as online game services, Youdao, Cloud Music and innovative businesses and others. This change in segment reporting aligns with the manner, in which the Company's chief operating decision maker ("CODM") currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. The Company retrospectively revised prior period segment information to conform to current periods presentation.

Share Repurchase / Purchase Program

On February 25, 2021, the Company announced that its board of directors had approved a share repurchase program of up to US$2.0 billion of the Company's outstanding ADSs and ordinary shares in open market transactions for a period not to exceed 24 months beginning on March 2, 2021. On August 31, 2021, the Company announced that its board of directors had approved an amendment to such program to increase the total authorized repurchase amount to US$3.0 billion. As of December 31, 2021, approximately 18.5 million ADSs had been repurchased under this program for a total cost of US$1.8 billion.

On August 31, 2021, the Company announced that its board of directors had approved a share purchase program of up to US$50.0 million of Youdao's outstanding ADSs for a period not to exceed 36 months beginning on September 2, 2021. Under the terms of this program, NetEase may purchase Youdao's ADSs in open-market transactions on the New York Stock Exchange. As of December 31, 2021, approximately 0.6 million ADSs had been purchased under this program for a total cost of US$8.2 million.

The extent to which NetEase repurchases its ADSs and its ordinary shares or purchases Youdao's ADSs will depend upon a variety of factors, including market conditions. These programs may be suspended or discontinued at any time.

** The United States dollar (US$) amounts disclosed in this announcement are presented solely for the convenience of the reader. The percentages stated are calculated based on RMB.

Conference Call

NetEase's management team will host a teleconference call with simultaneous webcast at 7:00 a.m. New York Time on Thursday, February 24, 2022 (Beijing/Hong Kong Time: 8:00 p.m., Thursday, February 24, 2022). NetEase's management will be on the call to discuss the quarterly results and answer questions.

Interested parties may participate in the conference call by dialing 1-646-828-8073 and providing conference ID: 6712767, 15 minutes prior to the initiation of the call. A replay of the call will be available by dialing 1-719-457-0820 and entering passcode 6712767#. The replay will be available through March 9, 2022.

This call will be webcast live and the replay will be available for 12 months. Both will be available on NetEase's Investor Relations website at http://ir.netease.com/.

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