NetEase, Inc.

Good day, and welcome to the NetEase 2024 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandy Piacenti. 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 from 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 forwarding 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 third 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 NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase's senior management are Mr. William Ding, 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 behalf of William.

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 are based on RMB. At NetEase, we're constantly evolving to ensure the delivery of superior content through innovation across our NetEase family of businesses. During the quarter, we further strengthened our foundation for sustainable long-term growth and achieved total net revenue of RMB 26.2 billion. In our gaming division, our popular titles gained even more traction, while newer releases successfully expanded our player community. Total online game net revenue reached around RMB 20 billion. PC games, in particular, registered robust growth, with net revenue up around 29% year-over-year, and 30% quarter-over-quarter. Several of our games celebrated adversaries in the third quarter, prompting some of our beloved established titles to set brand new records and reach new milestones. These achievements highlight our strengths in long-term game operations and how we continue to drive game longevity. With operations across our legacy franchises, Fantasy Westward Journey and Westward Journey Online continue to thrill players with enduring popularity. In the third quarter, we brought players a new chapter in Fantasy Westward Journey Mobile, set in the Churcher Kingdom. Here, new characters and summon beasts offer diverse tactical choices, while a new boss brings more compact challenges, infusing the game with fresh vitality. Additionally, Once World Journey Online 2 achieved record high quarterly revenue with excitement generated from its anniversary expansion pack. Players eagerly explored new content and joined carnival events in Xi'an immersing themselves in the grandeur of the Tang Dynasty's Asian capital. This blend of fresh in-game experiences and real-world facilities captured our community's imagination. deepening their connection to the game and driving remarkable engagement. Identity V reached record high revenues for the third consecutive quarter. The game also saw unprecedented DAUs and record high global concurrent online players in Q3. These milestone achievements reflect the success of our comprehensive operational strategy to maximize engagement and player stickiness. Our multi-faceted entertainment approach blended trendsetting art design, captivating storyline, rusting the IP co-branding events, and the dynamic esports competitions for a wholly immersed brand experience. This holistic strategy not only enhanced player engagement, but also established Identity V as a premier competitive platform, offering players around the world an arena to embrace challenges and enjoy fresh content. Naraka PlayPoint also celebrated its third anniversary in the third quarter, making another milestone for this unique action-driven PVP game. Designed to meet the robust and under-addressed demands for action-based competitive play, Naraka PlayPoint continued to lead innovation in this genre. With recent introduction of new heroes, maps, and mechanics, the anniversary update's rich content sparked fresh excitement within the player community, driving concurrent players to a new peak. Following the success, co-branding events featuring popular IP, like the Lost Tomb and the Tomb Raider, further amplified enthusiasm. All these activities collectively contributed to record high revenue in Q3. Following its success on PCN console, we extended Naraka Bladepoint's reach, launching Naraka Bladepoint Mobile domestically in July to widespread market clients. The mobile game ranked number three on the iOS top-grossing chart shortly after its release. With its seasonal update in September, Naraka Bladepoint Mobile returned to the fourth position on the iOS top-grossing chart, and it was featured as an App Store Editor's Choice during the summer. In our newer releases, Justice Mobile celebrated its first anniversary at the end of June. As a title that pushed the boundaries of traditional MMOs and established a large user base, Justice Mobile continues to drive innovation in more areas. Building on the success of AI-driven NPCs, which created immense player interest with lifelike interactions, players can now access tools to create their own AI companions to explore the vast Wu Xia world. With overwhelming player enthusiasm, Justice Mobile now accommodates over 8 million intelligence entities, giving each player a unique and personalized journey, and redefining what's possible in mobile MMOs. Similarly, we are forcing players' creativity in IT Party to enhance the features that empower creators to explore innovative ideas and receive rewards for their creations. We were thrilled to see a surge in community engagement, with many new creators dedicating themselves as full-time map creators. Beyond UGC content, we elevated EkiParty with inspiring cultural material from external collaborators. In the third quarter, We strategically partnered with the People's Literature Publishing House, bringing the rich catalog of original works to Aggie Party and encouraging players to explore a world enriched by science and literature. For recent Mazda's first anniversary, we launched an exciting annual update, introducing legendary car models, including the Lamborghini Reventon and the Mazda RX-7. bringing players even more dedicated and responsive driving experiences. The update also features several highly acclaimed new maps, each offering a unique racing experience, from the renowned pivoting track like Haranasan to an exotic Gold Rush journey set in the desert of Colorado Plateau. Through our dedicated operational efforts, Racing Master sustained strong popularity with our player community. solidifying its market position in the racing genre. As we continue to diversify our portfolio across various genres, we paved the way to extend the success of our established titles into new regions. In August, we brought Racing Master to Japan, where it quickly topped the App Store and Google Play Free chart and stayed in the top seven of the iOS downloading chart. highlighting its appeal to local players. In addition to reaching master, we are gearing up to expand several of our games' international footprint. Justice Mobile will be hitting the Hong Kong, Macau, and Taiwan market in November, while Dunn City Dynasty is preparing for a global release. On top of our expansion plans for these titles, we are advancing our robust game pipeline with plans to release several highly anticipated titles in coming months. Our eagerly awaited open-world action-adventure RPG, Where Wings Meet, is on track for domestic release in December. This gameplay is designed to meet diversified player demands, offering both single-player and multiplayer modes across PC and mobile platforms. With top-notch graphics utilizing retreasing technology, Where Wings Meet is gaining increasing attention from the gaming community as we get closer to the launch date. The superhero team-based PVP shooter game Marvel Rivals is slated for global release on December 6. As part of the Marvel Rivals global launch campaign, Marvel just announced a special season on November 11 in collaboration with multiple popular titles, including Fortnite, Marvel Puzzle Quest, Future Fight, and Marvel Snap, creating a Marvel Rivals theme this season for fans worldwide and promising a fantastic celebration across games. We're also excited about FragPunk, a fast-paced five versus five hero shooter game. Close beta testing in October attracted over one million applicants, and with its distinctive card mechanics and a vibrant carnival-inspired art design, ranking as the top trending upcoming game in Steam's free-to-play section. Building on this momentum, FrankPunk's first testing phase in China will begin this December, aiming to capture the interest of an even broader audience and further showcase its unique appeal. We are also planning to Start a round of regional offline technical tests soon for our eagerly anticipated open world adventure title, Project Mugen. After another year of intense development and refinement, Project Mugen is ready to captivate ACG fans with a fresh urban exploration experience. Next up, we are thrilled to announce our latest product, Marvel Mystic Mayhem, set in the heart in the Marvel Universe. In this team-based tactical RPG, players will join forces with beloved superheroes as they clash with the sinister force of Super-Villain Nightmare and bear witness to the inner fears of the iconic heroes and villains throughout their journey. In November, we started closed beta testing for Destiny Rising, the first mobile game in the Destiny franchise. rooted in the intriguing Destiny universe. Destiny Rising will offer a brand new adventure set in the alternative timeline. Featuring a wide area of characters and various game modes, Destiny Rising introduces new ways to play Destiny. Beyond our in-house development games, the return of Blizzard games in China has been met with unprecedented enthusiasm from the gaming community. To ensure we meet expectations, we stay closely attuned to the voice of Chinese players. This commitment has rekindled the loyalty of longtime fans eager to return to Azeroth and also captivated new players eager to embark on epic adventures. We are seeing strong player engagement following their relaunch. World of Warcraft saw a 50% increase in data active players as compared to the level before the shutdown, while Hearthstone achieved over 150% growth. Our partnership with Blizzard built on mutual trust and respect and supported by a dedicated fan community has delivered results far exceeding expectations from both sides. Whether self-developed or in partnership, we always strive to bring players new, exciting gaming experiences. We're executing this strategy at a very high level, bringing more games and content to the domestic market while expanding our global reach. Now let's move to Youda. During the third quarter, we significantly improved our profitability with income from operations exceeding 100 million RMB. This marks our first profitable third quarter and set a new record for quarterly operating profit, a testament to our commitment to high-quality growth. For digital content services, we have remained committed to enhancing the product experience. The Youdao Lingxu Intelligent Learning System expanded its knowledge category to nearly 40,000 videos across four difficulty levels. providing comprehensive coverage of essential topics throughout students' learning journey. Additionally, Udall literature introduced AI-powered writing enhancement to help students level up their written work, resulting in an increased user engagement. We also maintained strong growth momentum in AI-driven supervision services, fueled by our AI-powered tool. which enhanced functionality and user appeal. For Yu Dao Dictionary, we launched simultaneous interpretation powered by our large language model, Ziyun. It achieved over 4 million users in the debit quarter, boasting exceptional accuracy and fluency. Hi-Echo has also gained increasing popularity. A leading AI application ranking chart in China, shows High Echo as one of the most popular domestic apps, highlighting its high user number and retention rate. Online marketing services saw rapid growth as well. Our expansion into new sectors and advanced data applications to optimize app performance led to revenue from real-time API doubling year over year. Additionally, key opinion leader advertising was a key growth engine for revenue in Q3, with outbound advertising demand surging in several sectors. The smart devices segment saw solid year-over-year growth, showcasing our commitment to product innovation. With the launch of the X7 Pro, the latest iteration of our flagship digital dictionary pen, we introduced the industry's first learning device capable of offline large language model translation. The X7 Pro also boasts robust accuracy better than online AMT. Overall, customer feedback on our new products and their innovative upgrades has been excellent. This year's product launches, mainly the X7 and X7 Pro, were key in driving Q3's over 50% year-over-year net revenue growth for our digital dictionary pen series. Turning to NetEase Call Music. During the third quarter, we continue to propel our quality development across our music-centric ecosystem, broadening our subscriber base and leading to healthy revenue growth momentum for online music. To further enrich our content ecosystem, we continuously expand our music offerings to meet diverse audience demand, especially trending interest from younger generation. We reintroduced our partnership We reinforced our partnership with various music labels in the third quarter, building on earlier collaboration with Kakao Entertainment and JYP Entertainment. We reintroduced music from CJ E&M during the third quarter, enhancing our K-pop library with popular original soundtracks from Korean dramas and performance show tracks. We're also amplifying the impact of our in-house music, fostering a unique and differentiated content ecosystem. Multiple in-house tracks have gone viral in our community and beyond. For example, our duet version of Daher, which blends Cantonese and French with a chill vibe, inspired a large number of UGC content featuring on the track. Other popular sounds, each with a unique style, are also gaining significant popularity. We continue strengthening our music focus motivation capabilities, providing distinctive features that unleash creativity and express individuality. The AI-powered tool that we recently launched allows users to recreate sounds with their own voices. We also offer a tool for members to customize their music playing interface with their chosen background and minor players, catering to users' personalized interests. The increasing accessibility to individual expression through customization and content creation continues to drive engagement on our platform. In branding membership privileges for our subscribers, our collaboration with popular IP provides exclusive skins and decorations that our members love, prompting robust user engagement and boosting commercialization potential. Taking a look at Yanxuan, we continue to strengthen its brand equity within private label consumer market. We achieved notable growth in GMV across key categories by consistently and successfully introducing product and expanding sales through our omni-channel strategy. In the third quarter, sales of pet products and household cleaning items grow by double digits year-over-year. Notably, to further strengthen our competitiveness in the pet food sector, we established a dedicated factory in partnership with a leading pet food manufacturer. This collaboration significantly improved our ability to deliver high-quality pet food on a larger scale, reinforcing Yanshan's position in this fast-growing category. Innovation is the heart of our NetEase family of businesses and the core components of our competitive edge, along with deep gaming operating capabilities and a commitment to quality and user experience. We'll continue to bring our community impactful games, products, and services that create value for our loyal community and meaningful returns to our shareholders. That concludes William's comments. I will now provide a brief review of our 2024 third quarter financial results. Given the limited time on today's call, I'll present 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 third quarter will amount to $26.2 billion, or $3.7 billion, representing a 3% increase quarter-over-quarter. Meanwhile, current contract liabilities will amount to $15.5 billion, up 14% quarter-over-quarter. Total net revenues from our games and related VAS will amount to $20.9 billion, up 4% quarter-over-quarter. Net revenues from online games will only be $20.2 billion, up 5% quarter over quarter. This growth was primarily driven by increased revenue contributions from key PC games, such as World of Warcraft and the Naraka Playpoint, as well as mobile games like Identity V and the recent launch of Naraka Playpoint Mobile. 29.2% of our total online games revenue, representing an increase of 30% quarter-over-quarter and an increase of 29% year-over-year. On year-over-year basis, total net revenues from games and VES declined by 4%, mainly due to adjustments in our CC live streaming service. These changes, in turn, enhanced our margin profile, and contributed to long-term business sustainability. Excluding the impact of this adjustment, our online games revenue remained relatively stable on a year-over-year basis, with 1% decrease. U.S. net revenue, or RMB, 1.6 billion, a year-over-year increase of 2%, primarily due to the increased revenue contribution from UDOT's online marketing services, and a 19% quarter-over-quarter increase, driven mainly by higher net revenues from the sales of smart devices and learning services. NetEase Cloud Music's net revenue will only be $2 billion, a 1% increase compared to the same period last year, primarily due to higher net revenue from membership subscriptions and a 2% quarter-over-quarter decline due to a decline in net revenues from Neti Cloud Music's social entertainment services. Net revenue for innovative businesses and others will only be $1.8 billion, a 10% decrease compared with the same quarter of 2023, mainly due to the decrease of advertising revenues of our news-related products and several other businesses, including within the segment. and a 14% quarter-over-quarter decrease due to the effect of seasonality on Yanxuan's sales. The total gross profit margin was 62.9% in the third quarter, compared with 62.2% for the same period in 2023. Looking at our third quarter margin in more detail, gross profit margin was 68.8% for our games and related VES, compared with 69% in the same period last year. The year-over-year decrease was mainly attributable to changes in product mix. The gross profit margin for Youdao was 50.2%, compared with 55.9% in the same period last year. The year-over-year decrease was primarily due to the decrease in revenues from learning services. Gross profit margin for NetEase Calm Music reached 32.8% versus 27.2% 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 businesses and others, gross profit margin was 37.8% compared with 27.3% in the third quarter of 2023. The year-over-year increase was mainly due to increased gross profit margin from several other businesses included within the segment. Total operating expenses for the third quarter were on the 9.3 billion, or 35.6% of our net revenues. Taking a closer look at our cost composition, Our selling and marketing expenses as a percentage of total net revenue were 14.5%, compared with 13.1% in the same quarter last year. The increase was primarily due to higher marketing expenditures associated with online game services for new game launches. Our R&D expenses as a percentage of total net revenue were 16.9% in the third quarter, compared with 15.9% for the same period last year. We remain committed to investing into content creation and product development to 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 the longer term. The effective tax rate was 16.1% for the third quarter. As a reminder, the effective tax rate is presented on an accrual basis, depending on the applicable policies and our operations. Our non-GAAP net income attributable to shareholders for third quarter totaled 7.5 billion, or 1.1 billion US dollars. Non-GAAP basic earnings per ADS for third quarter were $1.67 US dollars, or 33 cents US dollars per share. our cash position remains robust with net cash of approximately RMB 120 billion as of September 30th, 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 8.7 cents US dollars per share or $0.43.5 per ADS for the third quarter. Lastly, we continued to conduct our share buyback during the third quarter. We repurchased shares in the amount of $543 million, marking a 98% increase from the previous quarter. Under our current $5 billion share repurchase program, which started in mid-January last year, we have repurchased approximately 18 million ADS as of September 30, 2024, for a total cost of approximately $1.6 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please.