NetEase recently delivered significant gross-margin expansion in the second quarter of 2026 as revenue grew while revenue-sharing and product costs declined.
Net revenue increased 7.9% year-over-year to RMB30.1 billion, or approximately $4.4 billion. Gross profit increased substantially faster, rising 17.5% to RMB21.2 billion, or approximately $3.1 billion.
Based on the reported figures, consolidated gross margin increased to approximately 70.5% from 64.7% a year earlier, an expansion of roughly 580 basis points.
The margin improvement occurred as cost of revenue declined to RMB8.9 billion from RMB9.8 billion even though revenue increased by more than RMB2 billion. NetEase attributed the year-over-year cost reduction primarily to lower revenue-sharing and product costs.
Games remained the biggest driver.
Games and related value-added services revenue increased 9.7% to RMB25 billion, or $3.7 billion. Games gross profit rose to RMB19.05 billion from RMB16.01 billion, implying segment gross margin of approximately 76.1%, compared with about 70.2% a year earlier.
Higher revenue from self-developed titles including the Fantasy Westward Journey franchise and Where Winds Meet contributed to the year-over-year games growth.
Youdao revenue increased 3.5% to $216.2 million, while NetEase Cloud Music revenue remained approximately flat at $291.4 million.
Despite the gross-margin improvement, shareholder net income declined to RMB7 billion, or about $1 billion, from RMB8.6 billion a year earlier.
The effective tax rate increased sharply to 25.5% from 14.7%. NetEase also cited declines in the fair value of equity investments and impairment provisions as factors affecting other income and expenses.
Operating expenses increased only 1.5% year-over-year to $1.3 billion, with higher R&D spending accounting for much of the increase.
KEY QUOTES:
“Our robust performance in the first half of 2026 reflects players’ growing enthusiasm for both our newly launched and established games.”
William Ding, CEO and Director of NetEase
