NetEase, Inc. (NTES) Earnings

Management highlights

Games Business • Core portfolio performance: Established titles delivered sustained strong engagement. *Sword of Justice*'s major anniversary update hit 10 million active players on launch day and reached a two-year concurrent user high. *Antiparty (Aggie Party)* reached 700 million registered users, with monthly active users holding above 100 million, and evolved from a party game to a broader user-generated content (UGC) platform with over RMB 200 million in total creator rewards to date. The *Naraka PlayPoint* franchise unified PC and mobile cross-device ecosystems, while *Infinite Borders* reinforced its leading SLG position via new gameplay and collaborations. • New domestic launches: *Sea of Remnants* launched in China in July 2026, an in-house engine original IP open-world ocean fantasy game combining naval combat, extraction gameplay, and roguelike progression, with global rollout planned. *Wingsmith* expanded its domestic player base with new region expansions, reaching number 3 on China's iOS top-grossing chart, achieving record monthly active users and year-over-year Q2 revenue growth. • Global expansion progress: *Wingsmith* maintained positive Steam reviews above 87% after its global launch, and successfully launched on Xbox in June 2026, repeatedly ranking top 3 on Steam's global top-seller chart after major updates. *Marvel Rivals* grew its global user base via seasonal content updates, competitive ecosystem building, and real-world fan activations including San Diego Comic-Con 2026. Blizzard partner titles performed well in China, with Overwatch's 10th anniversary events driving significant active user growth and Diablo 4 posting solid growth in active users and retention via localized content. • New title pipeline: Urban open-world RPG *Ananta (Lenta)* is progressing steadily toward launch, and *Blood Message* received positive global audience feedback at Summer Game Fest, with its trailer generating 40 million global views. Youdao • Advanced its AI-native strategy, launching the new Confucius 4 large language model with improved reasoning capabilities for complex visual, math, and physics problems at lower inference cost, and upgraded its translation model with 80% faster inference speed. • AI-powered learning features (AI essay grading, AI quiz recommendations, AI college admission advisors) drove strong user satisfaction and retention, with AI subscriptions maintaining strong growth momentum. The Yu Dao Dictionary Pen X7 maintained its leading market position, ranking first in category sales on JD.com and Tmall for the seventh consecutive year during the June 18 shopping festival. NetEase Cloud Music • Grew daily active users and maintained a DAU/MAU ratio above 30% in the first half of 2026, with growth in both year-over-year and sequential comparisons. Average daily listening time and community content penetration increased, while membership retention and renewal rates improved reflecting stronger user loyalty. • Renewed partnerships with major labels including Universal Music Group, expanded its copyrighted and original Chinese music library, and launched AI-powered features such as AI-inspired playlists to improve music discovery, driving ongoing membership growth. Yanxuan (E-commerce) • Held leading category positions across major e-commerce platforms in Q2, with new products in pet food, home scents, and home goods delivering healthy growth. The differentiated freshly steamed pet food line maintained strong sales and earned industry recognition.

Guidance

No explicit numerical upward, downward, or maintained revenue/earnings guidance was provided during the call. Management framed its long-term strategic guidance as follows: • NetEase will continue increasing investment in high-quality premium game content, while leveraging AI capabilities to accelerate development speed and improve player experiences, enabling the company to deliver more high-quality products than industry peers. • The company will maintain its strategy of focusing resources on a smaller pipeline of key high-quality titles rather than increasing the volume of new launches. • Management expressed confidence in the long-term operational potential of recently launched titles such as *Sea of Remnants* following experience optimizations, and confirmed it will share progress on upcoming titles as development advances, with *Ananta* set to be showcased at Gamescom shortly after the call.

Segment performance

1. Games and Related Value-Added Services: Q2 2026 net revenue was RMB 25 billion, growing 10% year-over-year. It contributed 83.1% of total Q2 revenue. Gross profit margin reached 76.1% in Q2, up from 70.2% in the year-ago quarter, driven by lower platform revenue sharing costs. First half 2026 net revenue was RMB 50.7 billion, up 8% year-over-year. Within this segment, online games generated Q2 net revenue of RMB 24.5 billion, up 10% year-over-year and down 2% quarter-over-quarter. 2. Youdao: Q2 2026 net revenue was RMB 1.5 billion, up 9% quarter-over-quarter and 3% year-over-year, contributing 5% of total Q2 revenue. First half 2026 net revenue was RMB 2.8 billion, up 4% year-over-year. Gross profit margin hit 48.9% in Q2, up from 43.0% year-over-year, driven by improved margins from its learning services segment. 3. NetEase Cloud Music: Q2 2026 net revenue was RMB 2 billion, broadly stable both quarter-over-quarter and year-over-year, contributing 6.6% of total Q2 revenue. First half 2026 net revenue was RMB 4.0 billion, up 3% year-over-year. Gross profit margin was 37.4% in Q2, up from 36.1% year-over-year, driven by lower channel fee rates and ongoing cost structure optimization. 4. Innovative Business and Others: Q2 2026 net revenue was RMB 1.6 billion, up 6% quarter-over-quarter and down 4% year-over-year, contributing 5.3% of total Q2 revenue. First half 2026 net revenue was RMB 3.2 billion. Gross profit margin was 43.4% in Q2, up from 42.3% year-over-year, driven by higher contributions from higher-margin businesses within the segment.

Risks & headwinds

• Forward-looking statements are explicitly noted to be subject to risks and uncertainties that could cause actual results to differ materially from expectations, with general risk factors disclosed in the company's SEC Form 20F filings and Hong Kong Stock Exchange announcements. The company does not undertake to update forward-looking information except as required by law. • *Sea of Remnants* faced initial user experience issues from an insufficiently lowered early learning curve, which negatively impacted initial player retention and sentiment, requiring post-launch optimization. • The urban open-world game genre faces growing competitive pressure, with multiple competing titles targeting the segment, requiring clear differentiation for new launches to succeed. • Non-GAAP net income in Q2 2026 saw a year-over-year decline driven by investment losses, creating downward pressure on overall profitability.

Analyst Q&A

• Q: Analysts asked for the latest performance of *Sea of Remnants*, its expected revenue (gross flow) performance for next quarter, which aspects are performing well, and what adjustments are planned to improve performance. /

  A: Management confirmed that after launch, the game received notable user criticism, primarily because the bold new visual style and innovative roguelike open-world gameplay had a too steep early learning curve that hurt initial player experience. Following post-launch content updates and experience optimizations, user recognition of the game's core gameplay and quality has grown, and overall sentiment and satisfaction are improving continuously. Going forward, the team will continue optimizing experience pain points, streamline existing content to make innovative mechanics more accessible, and management expressed confidence in the game's long-term operation.

• Q: An analyst asked for an update on *Ananta*'s development progress, and what differentiation strategy NetEase will use to stand out from other competing urban open-world titles. /

  A: Management confirmed *Ananta* development is progressing smoothly, and the latest development progress will be unveiled at the upcoming Gamescom event. The game has distinctive strengths relative to competitors, stemming from its unique tone, theme, gameplay, and content that deliver a fresh experience different from existing open-world products on the market. NetEase believes high-quality content, unique narrative identity, innovative gameplay, and thoughtful balanced monetization are the core factors for product success in this competitive segment.

• Q: An analyst asked what NetEase's primary growth driver and operating strategy will be moving forward, after the company proactively reduced the number of new game launches to focus resources on key titles, and with the existing portfolio already at a high baseline. /

  A: Management reaffirmed that NetEase will continue to increase, rather than reduce, investment in high-quality premium game content, and will maintain its focus on delivering a smaller pipeline of top-tier products rather than expanding the volume of new launches. The company will leverage AI capabilities as an amplifier to accelerate development speed and improve player experiences. Management is confident that this strategy will allow NetEase to build more high-quality products than most industry peers, supporting sustained long-term growth.

• Q: An analyst asked about the monetization potential and expected launch timing for the two in-test games *Beneath the Mist* and *Tamas Shadowview*. /

  A: Management stated that both games are still in the process of intensive product refinement. The company will only launch the games once refinement reaches a stage that delivers a satisfactory experience for players. As a game developer, NetEase prioritizes delivering a strong player experience as the prerequisite for strong commercial performance, so no specific launch timeline was provided.