NetEase, Inc.

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 forward-looking information except as required by law. Today's discussion management will also discuss certain non-GAAP financial measures for certain comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the fourth quarter 2024 and 2024 fiscal year 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 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 William's behalf.

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. At NetEase, we're dedicated to innovation and strive for continuous breakthroughs across our businesses. While 2023 was a year of expanding our portfolio across various game genres, 2024 was about pushing boundaries with bold innovation and accelerating our brand awareness in the global market. These strategic steps reinforce our foundation for sustainable long-term growth. By the end of the year, our total net revenue reached RMB 105.3 billion, with RMB $83.6 billion from games and related services, both marking new record highs. Notably, this marks the 22nd consecutive year of revenue growth from our online games operations. The successful launch of new browser titles in the fourth quarter advanced each of our growth drivers, innovation, diversification, and globalization. By redefining gameplay and setting new industry standards for premium quality, we have created tremendous player enthusiasm. Our games captured attention across genres, within and beyond the traditional gaming community, and on both domestic and global scale. Let's start today by reviewing our new game's performance. Then we'll take a look at our broader portfolio and pipeline. Marvel Rivals. Our fast-paced superhero shooting game sparked massive excitement across global market following its launch. It claimed the number one spot on Steam's top-seller chart within four hours of its release, attracting over 10 million players in its first 72 hours and 20 million players in its first 12 days. With over 40 million players accumulated so far, Marvel Rivals is redefining the hero shooter experience through its unique art style, innovative combat system, and ever-changing battlefields. Its key team-up ability adds a dynamic layer of immersive interactions among players while recreating iconic Marvel moments with our fresh take that adds a new dimension to the Marvel Universe. During the Season 1 update, our rivals once again topped Steam's top-seller and most played charts. Our collaboration with Marvel Comics also brought Marvel Rivals to life for comic fans through an Infinity comic series on Marvel Unlimited. The synergy not only amplified the game's momentum, but also bridged the world of gaming and other media forms, captivating audiences beyond the gaming community and solidifying Marvel Rivals as a cultural phenomenon. With more superheroes and exciting events on the horizon, Marvel Rivals will continue to evolve. we are thrilled to bring even more new experiences to the game that keeps players engaged and inspired. At the end of December, we launched our highly anticipated open-world action-adventure RPG, Where Wings Meet. Within four days of its PC launch in China, the game has amassed 3 million downloads and topped the iOS download chart for around two weeks following its mobile launch. The booming mobile version drove total players across PC and mobile to over 10 million within a week and over 15 million up to two weeks. Rooted in a richly crafted world with deep historical backdrop, Wear Wings Made innovatively introduced the Chinese martial arts into open world exploration experience. On top of that, we pioneered a mode that caters to both single player and multiplayer preferences. which reinterprets Wuxia's story in a brand new way. Players can immerse themselves in the intertwined conflict of ancient cities like Kaifeng, witness characters' contrasting fate during historical changes, and develop social network with other people along the journey. Building on the single-player experience, the game seamlessly integrates challenges that encourage social exchange, while continuously refining the experiences We aim to create a compelling blend of solo and multiplayer elements, offering players a diverse way to experience the world. With community at high praise, we expect the audience of Where Wings Meet to continue to expand over time, with the game becoming another flagship evergreen title. Our plans to build on the game's initial success are underway. We are currently working to bring Where Wings Meet to console platforms and introduce the saga to players in more regions. In addition to our new game launches, the return of Blizzard Games to China has been highly successful, with a strong momentum throughout the fourth quarter. The return of World of Warcraft has consistently sparked tremendous enthusiasm from the community, supported by our diverse localized events that are driving the franchise to new highs. Shortly after Hearthstone's return, we quickly reorganized the highly anticipated Hearthstone GO series in China. The event set new records, drawing in over 10,000 fans in person, and more than 10 million players gathered to watch online. Just yesterday, Overwatch 2 made its return to China, reigniting player excitement. As Blizzard's portfolio gradually returns to the Chinese market, we are further strengthening our partnership with Blizzard, exploring vocalization opportunities, and bringing more exciting content to China's robust game community. Whether developing or operating a title, we're always committed to innovation and operational excellence. We apply this across our portfolio and continue to see the result of our dedication reflected in our new and legacy franchises. With operations across decades, our beloved legacy franchises continue to set new records and amass fans, thrilling players with enduring popularity. Fantasy Westworld Journey continue to bring players fresh experiences through well-timed events and new content in the fourth quarter. The expansion pack, featuring the iconic transformation abilities of Monkey King Sun Wukong, introduced all new skills and summon-based . Meanwhile, the Spring Festival event, planned around the Year of Snake, brought the community a vibrant New Year atmosphere. For Fantasy Westworld Journey Mobile, we continue to infuse new content into the game, which gained heightened popularity throughout the year and led to record high revenue for 2024, nearly a decade after its launch. First World Journey Online 2 also achieved record high annual revenue, driven by enriched gameplay and activities, as well as refreshed gaming experience powered by new servers. Players flocked to the in-game ceremony for Town Dynasty Empire Taizong, and explore new maps and missions set in to thriving Asian cities of Luoyang. Stepping into 2025, we also introduced our major new annual server update for Westward Journey Online Mobile. We accompanied the update with a dual community sharing system. It generated significant new community interest and further strengthened bonds among players while keeping long-term fans coming back for more. Identify is another testament to our long-term operational success with our established titles. After setting consecutive new quarterly records in the first three quarters, both in terms of player numbers and revenues, Identify achieved record-high revenue in 2024. In the fourth quarter, we sustained intense player activity with our comprehensive operational strategy, which players love. For example, in November, we launched a cross-branding campaign with Persona 5 Royal, introducing the beloved Phantom Seeds of Heart to our game. Fans appeared in droves for the crossover event, driving Identity V to number two position on the iOS top-grossing chart. Naraka PlayPoint franchise also continues to impress with action-based comeback community. With the December update, Naraka PlayPoint partner with CD Projekt Red for a special crossover on The Witcher 3 Wild Hunt, introducing four beloved characters through new costumes and in-game events. Most recently, our January collaboration with King of Fighters brought iconic KOF characters Asina and Mai Shiranui into the game, bringing a high level of player interest. Naraka PlayPoint Mobile has also been growing its player base since its launch in the third quarter, and surpassed 50 million players in December. For Aggie Party, we continue to nurture its dynamic EGC ecosystem. The community is highly connected, feeling a great supply and demand for content creation. The platform consistently adds diverse game modes to build on its rich content offerings. allowing players to enjoy relaxing and heartwarming moments with their Aggie buddies. So far, we have successfully introduced several popular game modes, including MOBA, asymmetric battle arena, werewolf, pet keeping, and farm management. Each captivated a large audience within the Aggie Party community. Our innovative MMO, Justice Mobile, maintained its large and active player base in the fourth quarter. In late December, Justice Mobile hosted a groundbreaking virtual concert for its cross-year celebration, immersing players in festivities and inviting them to participate in an interactive feast. The event created a truly unforgettable audio-visual experience by merging cutting-edge technology with Asian art. Beyond conventional concerts, All players would join as their in-game characters, embarking on an exploratory journey through various immersive scenes. The concert ignited considerable buzz among players, attracting over 3 million concurrent viewers online. The robust community engagement and related scene content updates propelled Justice Mobile to number two on the iOS Top Crossing chart shortly after the event. Since its launch in July, Once Human has cultivated a dedicated survival player fan base around the world. And we continue to build on this. The new PVP and PVE scenario we introduced in the fourth quarter sparked a player surge. The spike in total concurrent user drove Once Human to rank on Steam's top 10 most played chart and to number three on Steam's top seller chart. Anticipation on the much awaited mobile version is also mounting. We now have over 10 million pre-registrations as we finalize the game's mobile version for its global launch in this April. With the addition of a mobile version, we expect to attract even more fans worldwide. Adding to our ever-expanding and increasing diverse portfolio, we have a great lineup of new titles in our pipeline, with several key games planned to hit key markets in the coming months. The global launch for FrankPunk, our fast-paced five versus five tactical shooter game, is set to begin on March 6. We expect the game to become a dynamic force in the shooting experiences for fans worldwide, featuring an innovative free card system with shifting combat dynamics and a colorful punk art style. Through meticulous game development, FrankPunk is set to disrupt the traditional shooting experience with all-new rule-breaking gameplay that we think players will love. Next up is Destiny Rising, which successfully concluded its first closed beta test in December. The community's broad enthusiasm won Destiny Rising Pocket Gamers' annual Most Anticipated Game Award. Using the medical insight we gained from early tests in target regions, we are currently working to make the game even better. Our goal is to bring this fresh shooting adventure set in an alternative Destiny timeline to our players around the globe. Lastly, I'd like to highlight our superhero team-based tactical RPG Marvel Mystic Mayhem. It just finished closed beta cross-country testing in January with a unique art style, rich cast of characters, and varied and rewarding gameplay that thrilled the community. Sweeping positive player feedback gives us confidence that players will love Mystic Mayhem's experience as they fight with beloved Marvel characters across various bizarre dreamlands. As many of you know, we have been steadily expanding into new game categories over recent years. Diversifying our portfolio has allowed us to carve a path beyond the traditional MMO game that defined our early journey in the gaming industry. Along the way, we have achieved significant milestones and gained invaluable insights into genres that were once new to us. Each successful vertical we entered reinforces our ability to craft impactful games across diverse categories. Moreover, our diversified game portfolio has strengthened our global presence, enabled our games to reach and resonate with audiences worldwide. As we expand our game offerings, upholding superior quality and stay agile in our operational iterations, we're confident that we can continue captivating global audience with new innovative titles and grow our international reach. Now let's move to Yeodao. With its continued focus on technology-driven innovation and profitability enhancement, Yeodao's operational profit increased by over 10% year over year in the fourth quarter, and it achieved its first-ever annual operating profit in 2024. In the fourth quarter, learning services revenue declined as we further focused on long-term growth, balancing revenue, and profitability. By prioritizing high-demand courses, we achieved healthy development and reinforced profitability. Notably, YeoDarling's flagship course featuring tiered learning videos and AI-powered support, continues to thrive. With strong engagement and loyalty, it achieved a retention rate of over 70% in the fourth quarter. Recently, we launched Confucius01, China's leading step-by-step reasoning model for education. As a 14B lightweight model, it supports deployment on consumer-grade GPUs and delivers detailed problem-solving processes. With its high accuracy and robust reasoning capabilities, Confucius 01 has been seamlessly integrated into our AI learning assistant, Mr. P, AI Tutor, earning excellent user feedback and surpassing 100 million users. UDAO's online marketing services has also continued to advance. Domestic performance-based advertising reached record-breaking revenue, led by gaming and the AI tool sector. Internationally, We recently established an official partnership with Google, laying a solid foundation for further expansion. We have also sharpened our technology edge in overseas KOL marketing. By developing an evaluation model, we can precisely match KOL selection with specific demand, driving high conversion rates. Our smart devices segment maintains healthy growth. Our flagship U.D.O.D dictionary pen solidifies its leading position in the double 11 online shopping festival, dominating the top position in this category on JD and Tmall's sales chart for five consecutive years. Building on this success, we launched Yu Dao Dictionary Pen A7 Pro in January, featuring higher performance to further fuel growth ongoing. Turning to NetEase Comp Music. NetEase Comp Music continue to drive quality development across its music-centric ecosystem, nurturing its unique community and distinctive content offerings. We continue reinforcing our signature music consumption experiences while expanding consumption scenarios and brand awareness. We launched and iterated several innovative features to improve users' joy and interface with music and music-inspired content in Q4. For example, our new feature, Lyric Book, allows users to highlight their favorite lyrics, create a personalized lyric collection, and share that unique lyric book with others. Additionally, Lightbulb enhanced users' music discovery journey, offering recommendations that flow naturally with each user's distinctive taste. These functions were highly popular with music fans and increased user engagement. Building our compelling consumption experiences, we continue diversifying music consumption scenarios. For example, co-branding activities in collaboration with our game division help expand our existing audience. While introduced and enhanced music-inspired social interaction features in games, further extended our brand's presence. Expanding our music library also allows us to keep bringing users diverse range of licensed and original music. In Q4, we deepened our partnership with Kakao Entertainment and strengthened our Chinese music collection this January by collaborating with renowned artist Li Jian, bringing his full discography back to our platform, including many beloved classics. On the in-house music side, we step up our effort as well. Several tracks gained widespread recognition in Q4, including the hit Follow. We're also growing our copyright collaboration with popular artists. January, Hua Chenyu's digital album, Tipping Point, debuted on our platform, selling over 1 million copies within 24 hours. In Q4, we celebrated the 10th anniversary of our independent musician platform with special events highlighting our musicians' journeys, helping to deepen the connection between the artists and fans. As of December, our platform boasted over 770,000 registered artists, making it one of China's top platforms for independent musicians. As we continue to improve our music-focused monetization, subscription-based membership remained an important driver of online music revenue growth. To further optimize our premium offering, we enhanced our content appeal, introduced cutting edge features, added membership privileges for subscribers, and refined our strategy. This effort boosted subscriber growth and deepened engagement, laying solid foundation for more sustainable growth. Finally. Let's look at Yanxuan. Yanxuan continues to focus on key categories and drive growth through best-selling products. In 2024, core categories like pet products and home cleaning recorded solid growth, reinforcing their market leadership. Meanwhile, other key categories keep gaining popularity through its star products. Our Zhongguo Da'e down jackets, known for exceptional quality and strategic marketing, remained a standout performer in the fourth quarter, breaking into top five positions for mass wear on Tmall's sales chart. Across our NetEase family of businesses, we pursue innovation that advances our company and the industries we serve. We are extending this to our global aspiration for our games as we further diversify our portfolio and bring beloved titles to fans worldwide in 2025 and beyond. We believe this initiative will fuel lasting value creation across our business and for our players, partners, and shareholders alike. This concludes William's comments. I will now provide a brief review of our 2024 with a focus on the fourth quarter. Given the limited time of today's call, I will 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 RMB unless otherwise stated. Our total net revenue for 2024 will RMB $105.3 billion, or $14.4 billion, representing a 2% increase year over year. For the fourth quarter, total revenue will RMB $26.7 billion, or $3.7 $3.7 billion. For 2024, net revenue from games and related VES will arm the $83.6 billion, up 3% from 2023 and up 2% year-over-year in Q4 to arm the $21.2 billion. Specifically, net revenues from online games will arm the $80.4 billion, up 6% from 2023 and up 5% year-over-year in Q4 to RMB $20.5 billion. Through 2024, our PC client games delivered strong performances, achieving 17% year-over-year growth with an impressive 57% increase in Q4. The Q4 growth was primarily driven by titles such as Naraka Bladepoint, Westworld Journey Online 2, and several licensed titles. While the positive momentum in PC games has shifted our revenue mix, mobile games remain a significant part of our business. In the fourth quarter, they accounted for approximately 65% of our total net revenue from online games and operations, online game operations. And for the full year, it made up about 73%. U.S. net revenue for 2024 was up about 4% for the year to only $5.6 billion. primarily due to revenue growth from online marketing services. They declined 9.5% year-over-year in the fourth quarter to RMB $1.3 billion, primarily due to the decline in learning services revenue as we focus on the business that serve our long-term growth objective with better profitability. NetEase.com Music's net revenue will up a little over 1% at RMB $8 billion for the full year and RMB 1.9 billion in the fourth quarter, a 5% decrease year over year. As discussed in previous quarters, the decline reflects lower revenue from social entertainment service, which aligns with our refined focus on sustainably improving profitability. Net revenue for innovative business and others will only be 8.1 billion for the year and only be 2.3 billion for the quarter. down 6% and 17% respectively year-over-year. The decline was mainly due to decreased , advertising services, and some other innovative businesses. For the year, our total gross profit margin was 62.5%. In the fourth quarter, our gross profit margin slightly decreased year-over-year to 60.8%. Looking at our fourth quarter margin in more detail, Gross profit margin was 66.7% for games and related BAS, compared with 69.5% in the same period last year. The decrease was primarily attributable to higher proportion of net revenue from licensed games, which carry a lower margin than our self-developed titles. Our gross profit margin for yield-out was 47.8%, compared with 49.9% in the same period last year. The decrease was mainly due to reduced revenue contribution from learning services. Gross profit margin for NetEase Calm Music was 31.9% in the fourth quarter, versus 30.3% in the same period a year ago. The margin improvements primarily resulted from increased revenue from membership subscriptions and continued cost management improvements. For innovative business and others, gross profit 37.8% compared with 34.4% in the first quarter of 2023. The increase was primarily a result of margin improvement in venture. The operating expenses for the fourth quarter were RMB $8.5 billion, or 32% of our total net. Taking a closer look at our cost composition, our selling and marketing expenses as a percentage of total net revenue was 10.5% for the first quarter, compared with 15.6% for the same year last year, mainly due to decreased spending on gaming promotions during the quarter. On a full year basis, selling and marketing expenses accounted for 13.4% of net revenue, relatively stable with 13.5% in 2023. Our R&D expenses as a percentage of total net revenue also remain stable year-over-year at 16.7% in the first quarter, compared with 16.5% for the same period last year. On a full-year basis, R&D expenses accounted for 66.6% of net revenue, up slightly from 15.9% in 2023. We remain committed to investing into constant creation and product development. we're also seeing leverage in our R&D investment longer term. The effective tax rate was 15.3% for the full year and 13.4% for the fourth quarter. As a reminder, the effective tax rate is presented on a cruel basis, and the tax credit deferred for each of our entities at different time periods, depending on applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the fourth quarter totaled R&D 9.7 billion or 1.3 billion U.S. dollars, up 31% year-over-year. Non-GAAP basis earning per ADS for the quarter was $2.09 U.S. dollars, or 42 cents U.S. dollars per share. For the full year, non-GAAP net income attributable to shareholders was up 3% to RMB's 33.5 billion, or 4.6 billion U.S. dollars, which is $7.17 U.S. dollars per ADS or $1.43 U.S. dollar per share. Additionally, our cash position remains strong. As of year end, our net cash position was about RMB 131.5 billion, 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 24.4 U.S. dollar per share, or $1.22 U.S. dollars per ADS for the fourth quarter. Lastly, under our current $5 billion U.S. dollar share repurchase program starting in mid-January last year, we had repurchased approximately 21.2 million ADS as of December 31, 2024, for a total cost of approximately $1.9 billion U.S. dollars. Thank you for your attention. We will right now open the call to your questions. Operator, please.