NetEase Reports Second Quarter 2019 Financial Results
COVID-19 and China
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NetEase, Inc. (NTES:NASDAQ), one of China's leading Internet and online game services providers, announced its unaudited financial results for the second quarter ended June 30, 2019.

Net revenues of the company were CNY 18,769.0 million (USD2,734.0 million), an increase of 15.3% compared to the second quarter of 2018. Online game services, e-commerce, advertising services and innovative businesses and others contributed 61%, 28%, 3% and 8% in the net revenues respectively. Gross profit was CNY 8,125.8 million (USD 1,183.7 million), an increase of 12.2% compared to the second quarter of 2018.

For the e-commerce sector, net revenues were CNY 5,246.9 million (USD764.3 million), an increase of 20.2% compared to the second quarter of 2018. The gross profit margin for e-commerce for the second quarter of 2019 was 10.9%, compared to 10.1% for the second quarter of 2018.

According to the report, the quarter-over-quarter and year-over-year increases in e-commerce gross profit were primarily due to the increased sales volume of NetEase Kaola (网易考拉) and NetEase Yeation (网易严选), as well as continuously improved procurement and operation processes.

These two platforms that cater to the rising middle-class consumer market in China, have been grown steady.

In the earnings conference call, NetEase emphasized the progress in operational efficiency they made in the e-commerce sector. The company has further optimized its internal structure, enhanced its warehouse and logistic operations and upgraded the supply chain management in this quarter.

NetEase Kaola has launched a trial operation for the self-built bounded warehouse in Ningbo in June. It is expected to handle millions of orders every year to improve operational efficiency. During the quarter, it has signed strategic partnership agreements with international brands such as L'Oréal and Maybelline, enabling consumers to have better access to international brands.

For NetEase Yeation, it has continued to promote supply chain by helping manufacturers to improve product design and decrease production cost. By applying an original design manufacturing (ODM) business model, NetEase Yeation partners with big manufacturers in China who are also the original producers for global brands to provide quality goods for a lower cost. 

In the Q4 2018, NetEase Yeation stumbled in criticism of its low gross profit margin of only 4.5%. The report then cited “larger-scale promotions and certain sales discounts” as the reason for its decrease.

Senior executive Liu Xiaogang (柳晓刚) of NetEase Yeation said in early 2019 that the platform gave up GMV for the moment to upgrade the quality of its good and improve the efficiency of its supply chain. Now the 10.9% gross profit margin is the best response to those doubts.

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