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NetEase’s Gross Margin Expansion in the Second Quarter of 2018

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Why NetEase’s gross margin declined in Q2 2018

In this part of the series, we’ll look at NetEase’s (NTES) gross margin in the second quarter of 2018, along with a peer analysis. Its gross profit expanded 8% YoY (year-over-year) and 22% QoQ (quarter-over-quarter) to 7.2 billion yuan ($1.1 billion) in the second quarter of 2018.

Its gross margin decreased from 50% in the second quarter of 2017 to 42% and 44% in the first and second quarters of 2018, respectively. The decline was due to the higher cost of revenue. Gross margin of online gaming services decreased from 45% in the second quarter of 2018 to 38% and 40% in the first and second quarters of 2018, respectively.

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e-Commerce’s gross margin rose from 2% in the second quarter of 2017 to 3% in both the first and second quarters of 2018. The gross margin for advertising services changed from 3% in the second quarter of 2017 to 2% and 3% in the first and second quarters of 2018, respectively. The gross margin for email and others decreased from 0% in the second quarter of 2017 to -1% in both the first and second quarters of 2018.

netease 2q gm
NetEase’s operating expenses rose 47% YoY and 3% QoQ to 4.9 billion yuan ($0.7 billion) in the second quarter of 2018. Those expenses used 25% of revenue in the second quarter of 2017 compared to 33% and 30% in the first and second quarters of 2018, respectively.

Peers’ gross margins

Alibaba Group Holding (BABA) noted a significant decline in its gross margin compared to its peers, while Baidu (BIDU) managed to grow its gross margin. Tencent Holdings’ (TCEHY) gross margin decreased from 50% in the second quarter of 2017 to 47% in the second quarter of 2018.

Baidu’s gross margin rose from 49% in the second quarter of 2017 to 54% in the second quarter of 2018. Alibaba Group Holding’s gross margin declined from 65% in the quarter ended June 30, 2017, to 46% in the quarter ended June 30, 2018. JD.com’s (JD) gross margin remained at 14% during both second quarters of 2017 and 2018.

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