NetEase, Inc.

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

Thank you, Operator. Please note the discussion today will contain forward-looking statements relating to the future performance of the company and are intended to qualify for the safe harbor from liabilities. 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 20-F and in announcements and filings on the website of the Hong Kong Stock Exchange. The company does not undertake any obligation to update the score 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 first 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 Nettie's Senior Management Team are Mr. William Ding, Chief Executive Officer, and Mr. Bill Pang, Vice President of Corporate Development. I will now turn the call over to Bill, who will read the prepared remarks on behalf of William.

Thank you, Brandi, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. 2024 is off to a solid start as we continue growing our NetEase family of businesses. Our net revenue for the first quarter of 2024 rose to RMB 26.9 billion, accelerating year over year, led by our outstanding and increasingly diversified game portfolio, which we're actively extending to players around the world. Leveraging our longstanding advantage in MMORPGs, we continue to innovate new gameplay, foster creativity, and explore emerging technologies to persistently expand the boundary of this genre. Our numerous established long-term game franchises continue an overall high-level popularity with their loyal user base, demonstrating ongoing sustainability. We consistently infuse new innovative content and embrace appealing inherited culture into the games, crafting immersive worlds for players to engage in. Fantasy Westworld Journey Mobile recently celebrated its anniversary at the historic Daming Palace National Heritage Site Park in Xi'an, the former capital city of Tang Dynasty, the very setting of our game. As part of the celebration, we unveiled thrilling new content and further enhanced popular auto-chess gameplay, bringing players a rich variety of entertainment options. With a long-lasting affection from our gamer community, Fantasy Wars for Journey Mobile achieved another record high quarterly revenue, nine years after its launch. Meanwhile, we rolled out a new themed update for Wars for Journey Online to celebrate the Year of Dragon, featuring the traditional Tong Liang dragon dance as part of the New Year celebrations. Our ongoing commitment to refreshing these epic titles continues to captivate new players and retain our loyal following. In addition to our achievement in the traditional MMO landscape, We are continually breaking new ground with games we put out, innovating and elevating this genre. For example, Justice Mobile has become a nationwide sensation. The game has joined a wide spectrum of audiences, especially younger generation who are new to MMO genre. Our innovative seasonal mechanism and balanced gaming experiences that caters to different individual practices and interests are the pillar of our success. Beyond innovation in gameplay and mechanics, we are committed to refining and perfecting the game. In the first quarter, Chassis Mobile made a name for itself as the first MMO mobile game to implement both ray tracing and real-time global illumination on iPhone. The dedicated integration of this technology included in our game update has provided players a more immersive experience and taken the visuals to new heights. With its success in domestic market, we are preparing to introduce Justice Mobile to new regions and expand this high quality Eastern themed adventure games reach across even broader audiences. In addition to our achievements in MMO this quarter, we continue to make breakthroughs in an extensive area of game genres, such as SLG, asymmetric battle arenas, party games, and innovative martial art battle royale titles. We have consistently introduced new gameplay elements into Infinite Borders, one of China's most popular SLGs. Entering its ninth year, Infinite Borders continued to capture the interest of younger players and achieved a three-year revenue high in the first quarter. Meanwhile, Identity V, our iconic domestic asymmetric battle arena game, celebrated its sixth anniversary with record-breaking revenue in the first quarter and record-high DAU in May. This milestone highlights the game's thriving ecosystem, fueled by high-quality content, successful esports events, and well-designed IP collaborations. Naraka PlayPoint has also amassed a robust player community and has been thriving since we transitioned the game to a free-to-play model. With the latest seasonal update, the game broke its online record on Steam, attracting over 370,000 concurrent players. Following the success, of the initial test in April, Naraka PlayPoint Mobile was met with overwhelming players' enthusiasm. An additional 10 million players engaged in two weeks, bringing the accumulated pre-registration to over 25 million. As for Aggie Party, after nearly two years of operations, Aggie Party has become a household name in the party game genre in China. The game has achieved over 40 million DAUs, and we continue to enrich our content offering and strengthen our UGC ecosystem. In the first quarter, Aggie Party expanded its thematic diversity by recreating the Forbidden City's grandeur within the Aggie Party world. With an area of captivating Asian Dynasty characters and elements to choose from, players eagerly embraced this update. Aggie Party will bring Disney's Zootopia into the game, which we announced through an in-game firework show during the Chinese New Year. To further support creation and enrich our UGC ecosystem, we launched an app called Learn Programming with Aggie Party, offering players engaging and practical coding tutorial within Aggie Party, making it easier and more enjoyable to create in the game. In addition to these key titles, this significant breakthrough we made last year in genres like racing and sports brought new attention to previously overlooked genres in China, turning our foray into these genres into blockbuster games. We owe this remarkable achievement to our team's incredible dedication and talent. Fueled by profound passion for their craft, unparalleled insights into their domains, and unwavering commitment to the long-term R&D process, they have been the driving force behind our success as we bring new games and genres to the forefront. The racing fan community in China has embraced Racing Master as we continue to provide players with engaging content, including brand new cars, racing tracks, and gameplay experiences. Our seasonal update in April brought players even more challenges to conquer, with the addition of the Red Bull Ring racing track, known for its technically demanding terrain and hosting of multiple historical world level events. Racing Master's strong performance on the iOS download and browsing chart further highlights its player popularity. In addition to domestic success, Racing Master also hit new records in other regions. Following the April seasonal update, Racing Master once again ranked number one on the iOS browsing chart in Taiwan and rose to number one in Macau and number two in Hong Kong. Dunk City Dynasty continued to dominate the basketball mobile market in China. Powered by its innovative design, the game craftily translated complex basketball maneuvers onto small screens. And its casual competition mechanism allowed flexibility and innovative gameplay. While introducing our renowned CBA players to the player rosters, we expanded player option to include prominent basketball players, superstars, like Kawhi Leonard and Jason Tatum. In addition to continually enriching its content, we creatively introduced a PvE game mode with the February Season Update and presented players with the chance to experience the journey of legendary players evolving into superstars, level by level. We also extended this thrilling, possible game to more communities. Upon its launch, Dunk City Dynasty topped the iOS download chart in Taiwan, Hong Kong, and Macau. It also ranked number one in Taiwan and number two in Hong Kong on the iOS crossing chart, following its local introduction in local market in April. Expanding on our cross-genre success, we continue to impress the market with new hit titles in 2024. Our female-oriented love simulation game, 世界之外, soared to the top of the download chart following its January release, and reached number three position on China's iOS crossing chart following the release of a highly anticipated new content update in March. With skillfully crafted narratives that evoke emotional resonance and engaging content that captivate and thrill the devoted and new players, Shi Jie Zhi Wan has emerged as one of the highly popular games among the growing female player community in China. Throughout our genre innovation journey, we have gathered invaluable insights and know-how, establishing a robust foundation to continue pushing boundaries and create games cherished by players from all walks of life, no matter what their backgrounds, preferences, or interests. In addition to the launch plan of Naraka PlayPoint Mobile we just mentioned, we are actively preparing for the July launch of our new open-world action RPG game. action-adventure RPG game, Where Wings Meet, starting in domestic market as the first step. Integrating Chinese martial art with the open-world genre, this game pioneers a mode catering to both single-player and multiplayer experiences. Aiming for AAA equality of quality, it is expected to illustrate top performance of Chinese martial art game to our audience, with a pending global launch This title is geared to entertain a broader audience with the game's rich ecosystem. Furthermore, we're currently working on several additional exciting titles for global markets. We're particularly excited about the domestic or overseas launch of Once Human in the third quarter. Once Human is a multiplayer open-world survival game set in the strange and post-apocalyptic future. players can unite with friends to fight monster enemies, uncover secret plots, compete for resources, and build their own territory. Additionally, we are gearing up to introduce Ashfall, a wasteland-themed shooting MMORPG, and Marvel Rivals, a superhero team-based PVP shooting game, to our player communities in the near future. As we continue to strengthen our R&D capabilities, We also place high value on partnerships with developers worldwide. Our overarching goal is to bring more gaming experiences to a broader audience, both domestically and internationally. During our annual May 20 event, we are thrilled to update our plan to publish in China Shadow Legends, a widely popular Western fantasy sim card game and one of the best-selling RPG games in the US. In addition, we are thrilled to bring Marvel Snap to the Chinese market, a highly acclaimed CCG game that won the Best Mobile Game at the Game Award and Best Strategy Game at IGN. Furthermore, we are pleased to announce a renewed agreement with Blizzard Entertainment in April to bring beloved titles back to China sequentially beginning this summer, along with a deeper relationship and strategic partnership with Microsoft Gaming based on the shared desire to bring new gaming experiences to players across platforms and markets. From our MMORPG rules to our exploration of other genres, we continuously introduce new content for legacy titles and create new titles of existing culture trends. Through our constantly evolving R&D capabilities and expanding external partnerships, you can count on plenty of exciting new content from NetEase in the near future. Turning to Youdao, in the first quarter, Youdao achieved a healthy development and growth as we strategically prioritized our digital content services, online marketing services, and AI-driven subscription services, marking Youdao's first-ever consecutive quarter of positive net income. In our learning services segment, our digital content services experienced a strong year-over-year net revenue growth of 11%. We continue to enhance our learning system and advance the way we offer our content. Recent updates to our intelligent learning platform by Youdao Lingshi introduced a tiered learning program that tailors teaching approaches and schedules based on different learning processes. Our online marketing services continue on its robust growth track, with a record-breaking net revenue of over 120% growth year over year. reflecting a strong performance of real-time API and rapid expansion of comprehensive advertising services through domestic key opinion leader. Our investment and dedication to AI technology also brought rapid sales growth from our AI-driven subscription services across a range of applications. Notably, High Echo stands out as a representative example of AIGC technology applied in the domestic education sector. And it was highlighted in a report published by a third-party research firm for industry-wide recognition. Regarding the smart device segment, we remain confident in the long-term outlook. Underpinned by our commitment to product innovation, our Yudao dictionary pen S6 Pro launched this quarter, in the first quarter, garnered enthusiasm among consumers. Now let's move to Cloud Music. During the first quarter, Crown Music remained steadfast in prioritizing the core music business, including a recent comprehensive product upgrade to the NetEase Crown Music app aimed at cultivating a vibrant music-centric ecosystem and fostering a long-term thriving community. revenue growth from subscription-based membership accelerated in the first quarter compared to the annual grace rate of last year. This upward trend was largely attributed to an expanding subscriber base, marking a two-year high in quarterly net ads, along with a largely stable R pool. Growth in subscriptions reflect the strength of our continually enhanced music-centric offering, where we have added expensive content, innovative features, and broad membership privileges, as well as a strong program with external partners. To further our commitment to enriching our music libraries through both licensed music and original music, in the first quarter, we entered into agreement with several popular Chinese stars and expanded our music category in key genres like hip-hop and rock. Meanwhile, we are actively broadening our collection of foreign language music. Recently, we entered into licensing agreement with leading South Korean labels, including JYP Entertainment and Kakao Entertainment, and expanded our portfolio with premium K-pop content. Beyond music content licensing, many of our in-house produced and promoted music works have been highly successful. In the first quarter, our self and co-produced sounds were featured across the country at various high-profile TV performance shows and galas, including the CCTV Spring Festival Gala, Henan TV's Lantern Festival Gala, and Beijing TV's New Year Eve Gala. With an increasingly enriched content ecosystem, we are focused on exploring and advancing our music-oriented monetization initiatives. In addition to enhance the premium content offerings, innovations in product features, membership privileges, and marketing activities are driving growth in subscriber and revenue. For instance, we entered into a co-branding initiative with a popular toy brand, Farmer Ball, offering fashionable IP-themed music players. The response from young users not only resulted in an increase in membership, subscription, and upgrade, but also opened up more monetization opportunities. We also introduced a new interpersonal feature called Besties Space, which has bolstered user interaction and social engagement, attracting new members and enhancing user activity levels and stickiness. Turning to Yanxuan, since first quarter, we have continued to introduce popular products to consumers. Various product categories, such as pet products, household cleaning products, and office furniture, achieved strong sales growth, securing leading positions in sales on several e-commerce platforms. Notably, a recent launch of an ergonomic chair achieved extensive popularity among younger generations, ranking number one on sales chart across major domestic e-commerce platforms. This success can be attributed to our dedication to Yansha's technology-driven product R&D since its inception. The AI technology we have incorporated into product iteration and function enhancement in recent years has improved our capabilities in consistently delivering multi-leading products. Moving forward, we remain committed to leveraging technology to offer consumer premium products. Lastly, we released our 2023 ESG report in late April, marking our fifth annual report. The report showcased our commitment, practice, and progress in key ESG areas. Our business longevity makes it all more crucial to operate responsively and sustainably. We believe it is a gift to be able to give to our communities, especially when it relates to important social issues, such as education inequality, desire to recovery, workplace equality, diversity, and green and low-carbon development. We are grateful to have a highly diverse and professional board that is increasingly engaged in these issues, including business ethics and cybersecurity. We're actively exploring ways to make our operation greener, including using more green energy and employing energy saving approaches. In 2023, our greenhouse gas emissions from operation decreased by 11% compared to 2022. We're committed to promoting diversity, equity, and inclusion, and have again been included in Bloomberg's Gender Equity Index in 2023. Our efforts are recognized by reputable ESG rating agencies globally, where we maintain an A rating from MSCI and remain a low-rate company according to Analytics' latest evaluation. Moreover, we are proud to have been recognized by Forbes as one of the world's best employers for the sixth consecutive year, and also by Time magazine as one of the world's best companies. Across our NetEase family of businesses, we remain committed to innovation and moving the industry we serve forward. Profiting products and high-quality content that create value for our users and stakeholders will continue to guide us as we extend our global reach. That concludes William's comments. I will now provide a brief review of our 2024 first quarter financial results. 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. Total net revenue for the first quarter was RMB 26.9 billion, or 3.7 billion U.S. dollars, representing a 7.2% increase year-over-year. Total net revenue for our games and related VAs were RMB 21.5 billion, up 7% year-over-year. The additional growth was primarily due to increased revenue contribution from newly launched games, such as Justice Mobile, and the sustainably developed titles, like Eggie Party. Net revenue from our mobile games accounted for approximately 79% of our total net revenue from online game operations. Yudong's net revenue, or RMB, 1.4 billion, a year-over-year increase of 19.7%, primarily due to increased revenue contribution from UDOT's online marketing services. That is called music net revenue, or RMB 2 billion, a 3.6% 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, or RMB 2 billion, of 6.1% year-over-year, mainly due to increased revenue contribution from Yanshuan and some other of our innovative businesses. Our total gross profit margin was 63.4% in the first quarter, compared with 59.5% for the same period in 2023. Looking at our first quarter margin in more detail, gross profit margin was 69.5% for our games and related VAS. compared with 66.7% in the same period last year. The increase was primarily due to change of revenue contributions from different platforms and a higher proportion of net revenues contributed by 90 self-developed games. Our gross profit margin for Yudao was 49%, compared with 51.7% in the same period last year. The decrease was primarily due to the higher revenue portion from its online marketing services with a lower gross profit margin profile compared to its other products and services. Gross profit margin for called music reached 38% versus 22.4% in the same period last year. The margin improvement primarily resulted from the increased net revenue from membership subscriptions, continued cost optimization measures, and the one-off adjustments of certain copyright costs. The adjustment of certain copyright costs mentioned above increased the gross profit margin in the first quarter of 2024 by around 5 percentage points. For innovative business and others, gross profit margin was 33.4% compared with 25.4% in the first quarter of 2023. The increase was primarily due to margin improvement in Yanshan and several other businesses included in the segment. Total operating expenses for the first quarter were RMB 9.4 billion, or 35% of our net revenue. Taking a closer look at our cost composition, our selling and marketing expenses as a percentage of total revenue were 15%, compared with 11.6% for the same period last year, mainly due to increased spending on gaming promotions during the quarter. Our R&D expenses as a percent of total net revenue remain stable year-over-year at 15.5% in the first quarter, compared with 15% for the same period last year. We remain committed to investing into content creation and product development. We also see leverage in our R&D investments long-term. The effective tax rate was 16% for the first quarter. As a reminder, the effective tax rate is presented on the accrual basis. depending on applicable policies and our operations. Our non-GAAP net income attribute to shareholders for the first quarter totaled RMB 8.5 billion, or 1.2 billion U.S. dollars, up 12.5 percent year-over-year. Non-GAAP basic earning per ADS from continuing operations for the quarter was $1.84 U.S. dollars, or 37 cents U.S. dollars per share. Additionally, our cash position remained robust with net cash of approximately RMB 113.4 billion as of March 31st, 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 a dividend of 9.9 cents U.S. dollar per share or $0.495 per ADS. Lastly, under our current $5 billion share repurchase program, which started in mid-January last year, we have repurchased approximately 8.9 million ADSs as of March 31, 2024, for a total cost of approximately $811 million. Thank you for your attention. We would now like to open the call to your questions. Operator, please.