NetEase, Inc.

Good day and welcome to the NetEase 2024 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandy Piacente. Please go ahead.

Thank you, Operator. Please note that today's discussion will contain forward-looking statements relating to the future performance of the company and are intended to qualify for the safe harbor for liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20F. and in announcements and filings on the website of the Hong Kong Stock Exchange. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2024 second quarter earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Netties corporate website at ir.netties.com. Joining us today on the call from Netties' senior management are Mr. William Dink, chief executive officer, and Mr. Bill Pang, the vice president of corporate development. I will now turn the call over to Bill, who will read the prepared remarks on William's behalf.

Thank you, Brandy, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages we talk about here are based on RMB. Established games, exceptional content, innovation, and robust community ecosystems are central to our ongoing growth as we expand our reach domestically and abroad. In the second quarter, we pushed each of these drivers, growing our total revenue to RMB 25.5 billion. With our drive for innovation and leading R&D capabilities, we launched a multi-title second quarter, enhancing our appeal to a broader audience across diverse game genres. At the same time, we are extending our brand and international reach, unlocking more avenues for growth. Now looking at some of our game's performance in more detail. Once human, ,, A multiplayer open-world survival game set in the post-apocalyptic world attained over 230,000 peak concurrent users on Steam shortly after its launch and ranked among the top five most played games in the world on Steam in July. The innovative creator design blends supernatural transformations with everyday items, such as the highly popular boss monster, providing players with incredibly fresh and bizarrely fun experiences. As a high-quality survival game, it combines multiple layers of objectives to pursue, including exciting open-world exploration, monster fights, and house crafting. Shortly after an update in August, Once Human ranked number one on Steam's top seller chart in 12 countries and regions, amassing over 10 million worldwide downloads. We also launched our highly anticipated Battle Royale title, Naraka PlayPoint Mobile in late July, featuring a fast-paced and dynamically focused combat experience. Powered by NetEase Fuxi leading technologies, Naraka PlayPoint Mobile introduced a co-pilot AI system, which enabled players to team up with AI allies on instant vocal interactions and immersive battle experiences. Videos featuring co-pilot teammates has been really popular and has spread widely across social media. Upon its release, the game immediately climbed to the number three position on the iOS boxing chart and maintained our number one position on the iOS free download chart for a week. The new mobile version boosted overall franchise excitement, pushing PC and console DAUs to new highs and setting a record of 380,000 concurrent users on Steam during the game's third anniversary. While we bring players new titles with exciting experiences in the diversified genres, content enhancement and innovative gameplay continue to infuse vitality into our flagship portfolio. Our Fantasy Westward Journey and Westward Journey Online franchises are testament to the longevity and the popularity of our legacy titles. In the second quarter, we launched a brand new expansion pack for Fantasy Westward Journey Mobile, adding new content and fresh gameplay that, once again, drove a record high quarterly revenue. Westward Journey Online Mobile also attracted both long-time fans and new players by reintroducing classic gameplays that was widely praised on the PC version in the early days. We also brought innovation to Infinite Borders, Shreds of Tribune, our flagship Three Kingdoms theme SLG title. In April, we launched a new update that infused the concept of four seasons to influence players' activity with unique enhancements or challenges. For example, spring is ideal for planting, summer focuses on training troops, autumn leverages harvest for strategic deployments, and winter is best for recovery or surprise attacks. By introducing seasonality into strategic planning, players can experience realistic Asian battles and develop more comprehensive tactics. Along with rich rewards offered during the summer campaign in May, Infinity Border's DAU hit a three-year high in the second quarter. Identity V, 第五人格, continued to propel collaborations with renowned IP around the world, winning immense popularity in July. It hits the number four position on China's IOS top-crossing chart. And in August, it ranked number two on the IOS top-crossing chart in Japan and number three in China. The momentum resulted in record-high DAUs in August and record revenue in the second quarter, surpassing last quarter's high. Turning to Aggie Party, Danzai Pi 3. The heat game continues to deliver heartwarming experiences to our large player community. In June, we hosted a ball-themed second anniversary event, presenting players with various stages to perform dances, fly, or play rhythm games in the festive atmosphere. Beyond gaming, Aggie Party is pioneering the development of the UGC ecosystem. Our self-developed editor continuously introduces new features, like new skills and creature skins. We're also expanding the scope and impact of the UGC system by partnering with leading Chinese universities to offer coding courses and college competitions based on our UGC editor. Justice Mobile also achieved exciting success with rich updates that were launched for its first anniversary in late June, featuring brand new content, fresh categories, skins, and game plays across PVE, PVP, and PVX areas. Cating to the demands of different type of players, Justice Mobile attracted enthusiastic new players and brought existing players back, driving it to the number three position on the iOS top-grossing chart in June. With our innovative seasonal update mechanism, Justice Mobile advanced the MMO genre, attracting a large user base and showcasing its robots' potential to become an evergreen game. With a concentration on innovation, We are growing our presence across different genres and platforms worldwide with a strong game pipeline. In June, we completed a new round of testing for Where Wings Meet, ,, an open world action adventure RPG title, and received great feedback from a large group of players. During the testing period, the number of reservations increased significantly. We currently plan to launch the game on PC and mobile this year. And our first phase of cross-platform testing will start on August 28. Marvel Rivals, Man Wei Zhengfeng, the six versus six superhero team-based PVP shooter, announced its console plan during Sony's State of Play in May and showcased a new cinematic trailer at Marvel Games' panel at San Diego Comic-Con in late July. The panel revealed exclusive behind-the-scenes creation stories along with beloved characters Jeff and Thor joining the closed beta test. Widely praised during the testing on both PC and consoles, Marvel Rebels proceeded to have a stunning showcase at Gamescom in Cologne this week, where it is accessible at both Microsoft Xbox and NetEase Games booths, and announced its release date for December 6. In June, we announced FragPunk, a fast-paced 5 versus 5 hero shooter game. Xbox Game Showcase 2024. Featuring innovative card mechanics and unique carnival punk style, the game has already gained meaningful attention overseas. Its first closed beta test in North America on Steam ended in early July, cumulatively attracting over 2,000 influencers to stream and try out the game. With extensive acclaim, it became the third most trending game on Steam. FragPunk is scheduled to be released in 2025. To further enhance our strong portfolio, build on our robust, foundational R&D expertise, we also look forward to delivering more diverse content and games to players worldwide through global partnerships. Since World of Warcraft returned in June, player response has been overwhelming. People were immensely excited to return to Azeroth. praising the enduring charm of the game's classic scenes and crafts, and re-establishing their ties within the local community. We look forward to the August 27th launch of World of Warcraft, The World Within, with the simultaneous release of this upcoming version in China and all other regions worldwide. On top of this, Hearthstone announced its return on September 25th, and to celebrate, Old cards from 2023 will be available for free, and more engaging China-only events can be expected. Recently, Dunk City Dynasty officially partnered with NBA and secured an official NBA license in China. Legendary players like Dirk Nowoski and Brad Miller joined the game in July, sparking great excitement. and our first anniversary in August, beloved star players Tracy McGrady joined the game, further elevating players' enthusiasm. The game plans to introduce 30 NBA teams with unique basketball culture items, such as jerseys and courts, bringing historic basketball moments to life. Basketball transcends borders and cultures, uniting fans worldwide. We look forward to delivering more collaborative content in the future and will continue to promote and celebrate classical culture. Marvel Snap, developed by Second Data and featuring a revolutionary game experience within the Marvel universe, is slated for launch in Chinese market on August 29. Combining innovative deck building strategies and card battle tactics into each exciting game, The well-established title is highly accessible to beginners, yet quite challenging to masters. Following its close beta test in China in June, synergy with movie Deadpool and Wolverine in late July created another hype wave among local fans. With each of our games, we aim to bring innovative, lasting experiences to players that fuel our growth and invigorate players worldwide. By extending our reach across genres and platforms, more players are being introduced to the NetEase experience, both domestically and internationally. Going forward, we will continue to leverage our rich R&D capabilities, key games in different genres, worldwide partnerships, and two decades of operating experience to advance our game portfolio and drive the next wave of gaming trends. Turning to Youdao, in the second quarter, Youdao continued to prioritize digital content services, online marketing services, and AI-driven subscription services. As a result, it achieved historical high operational cash flow and significantly narrowed its operational loss. Our digital content services achieved healthy revenue growth, fueled by our AI-powered products. The recent update to our intelligent learning platform, Youdao Lingshi, provide students with university admission consultation services, including recommendations on which college to apply to, application strategies, and personalized study plan tailored to each student's unique capabilities and personality. Cope with our highly regarded personalized learning program. This service's renewals continue to reach new highs in the second quarter. The robust growth of our AI-driven subscription services reflect our steadfast commitment to investing in technology. The recent update of High Echo, our digital human language coaching app, featuring a children's character that engages with students on a range of topics and kids' mini games, has generated great enthusiasm among young learners. As we continue to iterate our products and expand offerings, our AI-driven subscription services have experienced six consecutive quarters of rapid sales expansion, with approximately 200% year-over-year growth in the second quarter. Fueled by multiple drivers, online marketing services' strong growth momentum continued in the second quarter. While our real-time API services expanded our user base across more industries, our KNL-led advertising services continued to grow both in China and abroad. Notably, our oversea advertising services sales have accelerated with our enhanced international KRL database amid growing export demand. For smart devices, our dictionary pen maintained its leading market position and ranked number one in the sales category on major e-commerce platforms in China for five years in a row. Recently, we launched Udall Dictionary Pen X7, which featured Mr. P and capability, along with translation services powered by our large language model. This new product won broad recognition soon after release. Turning to NetEase Cloud Music. Cloud Music continues to propel quality development across its music-centric ecosystem, further cultivating its unique community and enhancing its music-centric manipulation. To further nurture our content ecosystem, we continually expand our music offerings to meet diverse audience demand. During the second quarter, we advanced our cooperation with various music labels and steadily extended partnerships with popular musicians, singers, and groups. In particular, we amplified our offering in signature music genres by adding content from well-known rappers, rock bands, and J-pop artists. We also remain deeply committed to supporting independent artists and continue to enhance our comprehensive support for these artists throughout their journey in the music industry. To further invigorate our unique community with high-quality music experiences, we recently upgraded our app, introducing more personalized recommendation functionality, overall framework enhancements, and an improved content distribution strategy. while also optimizing features like daily recommendations and private DJ. Alongside improving the music listening experience, we strive to foster connections and resonance with our music-inspired community. To enhance the value of our iconic comment section, we implemented several upgrades to make this section more intriguing for users to explore across more scenarios. For example, We display selected comments on the minor players while users listen to music, and invite users to explore comments on a wide array of music on our innovatively designed moment square section, all of which led to elevated user engagement. Turning to Yanxuan, during the second quarter, Yanxuan continued to launch new products and lead sales across various online categories. During the 6-18 festival, our past food secured top three positions in several vertical category sales chart on major e-commerce platforms. House cleaning products were also top ranked on several platforms following the launch of new series featuring an Asian Chinese tale. These product successes highlight our strong R&D capabilities and commitment to innovation. And that is, Innovation and forward momentum are at the heart of everything we do, across our games, music, education, and lifestyle brand businesses. We are committed to creating a rich ecosystem that brings users exceptional experiences and stakeholders increasing value as we continue to grow and expand our reach worldwide. That concludes William's comments. I will now provide a brief review of our 2024 second quarter financial result. Given the limited time on today's call, I'll be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. As a reminder, all amounts are in RMB unless otherwise stated. Total net revenue for the second quarter for RMB 25.5 billion, or 3.5 billion US dollars. representing a 6% increase year-over-year. Total net revenue from our games and related BAS were RMB 20.1 billion, up 7% year-over-year. The additional growth was primarily due to increased revenue contribution from mobile games, such as Identity V and Justice Mobile. Net revenues from our mobile games accounted for approximately 76.4% of our total net revenue from online game operations. Udall's net revenue will only be $1.3 billion, a year-over-year increase of 10%, primarily due to the increased revenue contribution from Udall's online marketing services. NetEase Pro Music net revenue will only be $2 billion, a 5% increase compared to the same period last year. primarily due to the increased net revenue from membership subscriptions. Net revenue for innovative business and others was $2.1 billion, a slight increase compared with the same quarter of 2023, mainly due to increased revenue contribution from Yanshuan and some of our innovative businesses. Our total gross profit margin was 62.9% in the second quarter. compared with 59.9% for the same period in 2023. Looking at our second quarter margins in more detail, gross profit margin was 70% for games and related VAS, compared with 67.4% in the same period last year. The increase was primarily due to changes in product mix. Our gross profit margin for use-out was 48.2%. compared with 47% of same period last year. The increase was mainly due to improvement of gross profit margin from the online marketing services. Gross profit margin for Cloud Music reached 32.1% versus 27% in the same period last year. The margin improvement primarily resulted from increased net revenue from membership subscriptions and continued cost optimization measures. For innovative business and others, gross profit margin was 34%, compared with 29.5% in the second quarter of 2023. The increase was primarily due to the changes in product mix within the segments. The total operating expense for the second quarter will arm be $9 billion, or 35.5% of our net revenue. Taking a closer look at our cost composition, Our selling and marketing expenses as a percentage of total net revenue was 13.7%, which is relatively flat with the same period last year. Our R&D expenses as a percentage of total net revenue was 17.5% in the second quarter, compared with 16.3% for the same period last year. We remain committed to investing in content creation and product development that keep our product and content at the forefront of the industry. We believe that our investment in R&D will remain a key catalyst for future growth over a longer term. The effective tax rate was 16% for the second quarter. As a reminder, the effective tax rate is presented on an accrual basis, depending on our people's policies and our operations. Our non-GAAP net income attributable to shareholders for the second quarter totaled RMB 7.8 billion, or 1.1 billion U.S. dollars. Non-GAAP basic earnings per ADS for the second quarter were $1.67 U.S. dollars, or 33 cents U.S. dollars per share. Additionally, our net cash totaled RMB 116.1 billion as of June 30, 2024. compared with RMB 110.9 billion at the end of 2023. In accordance with our dividend policy, we are pleased to report that our board of directors has approved dividends of 8.7 cents U.S. dollars per share, or 43.5 cents U.S. dollar per ADS for the second quarter. Lastly, our current five $5 billion share repurchase program, which started in mid-January last year. Under this program, we have repurchased approximately 12 million ADSs as of June 30, 2024, for a total cost of approximately $1.1 billion. Thank you for your attention. We'd like now to open the call to your questions.