NetEase, Inc.

Good day and welcome to the NetEase First Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Helen Wu. Please go ahead.

Thank you, Operator. Please note that today's discussion will contain forelooking statements related 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 Security 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 those risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and in this discussion. A general discussion of the risk factors that could affect NetEase business and financial is included in certain findings of the company with the Securities and Exchange Commission, including its annual report on Form 20F and the announcement and findings on the Hong Kong Stock Exchange website. The company does not take any obligations to update its forward-looking statements, except as required by the 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 reconsolidation of GAAP to non-GAAP financial results, please see the first quarter 2025 earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast to replay this conference call will be available on the NetEase corporate website at ir.netease.com. Join us on the call from NetEase Senior Management, Mr. William Dean, Chief Executive Officer, and Mr. Bill Penn, Vice President of the Corporate Development. I will now turn the call over to Bill, who will read the prepared remarks on William's behalf.

Thank you, Helen, 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. We started 2025 with strong momentum. Innovative content and exceptional operations continue to underpin our growth. As we further globalize and diversify our expanding game portfolio, our total net revenue increased 10% year over year. Alongside the success of our new titles, our flagship titles continue to captivate players throughout the first quarter, reaching new record highs after decades of operations. This combination of new hits and longtime fan favorite drove our total revenue from gaming and services up by 12% year-over-year to RMB 24.0 billion. Several new titles have recently debuted globally, and more players around the world are embracing our games than ever before. We now have a rich and growing global portfolio of games that spans a range of diverse genres. reinforcing our competitive edge in the dynamic gaming landscape with innovations that elevate our offerings and the industry as a whole. Starting with Small Revivals, its successful launch last December marked a major milestone in our portfolio and a meaningful step forward in our globalization journey. Backed by critically acclaimed gaming experience and dedicated live operations, it has continued to build strong momentum among players worldwide. In the first quarter, their engagement remained high, and the launch of Season 2 in April brought renewed excitement. Seemed around Hellfire Gala, a once-a-year celebration of mutant culture and identity, the seasonal update introduced a new map, a new hero, and fresh team-ups. welcoming both veteran players and newcomers to the living island. Following the update, Marvel Rivals reclaimed its number one position on Steam's global top-seller chart. To deepen our connection with the player community, we are moving to a two-month season cadence starting with Season 3, while keeping the momentum high by introducing a new hero each month. With continuous development and iteration, we are committed to delivering a distinctive and evolving gaming experience to players worldwide. Next is FragPunk, our fast-paced five versus five tactical shooter game that has energized global fans with a sleek shooting experience, innovative shot cards, and bold art expression. Within just three days of its PC launch in March, the game achieved over 110,000 peak concurrent players and became number six on Steam's global top-seller chart. Building on this momentum, we launched chapter two of season one on April 29th with over 70 brand new shark cards, along with updated heroes and maps. With the update, FragPunks also debuted on consoles, making the game available to an even broader player base. As we continue pushing the boundaries of the shooter experience with systematic innovation and upgrades, we're also growing the game's community and hope to make FragPunk one of our latest titles. We also just launched the much anticipated Once Human mobile edition on April 24th. It quickly gained global attention, claiming the top spot on iOS download chart in more than 160 regions. The optimized handheld experience is highly valued by mobile players as we retain the depth of PC version while featuring cross-platform play, progression, and rewards. Meanwhile, the mobile launch generated even more community enthusiasm across platforms, driving the game to number five spot on Steam's top seller chart. Across PC and mobile, our open-world PVP and PVE phenomenon is reaching more users. Where Wings Meet has continued to draw players into its immersive world since its breakout domestic launch in December. Its ability to blend subtle storytelling, a richly layered historical setting, and high fidelity graphics has made Where Wings Meet a game changer in the open world wuxia genre. We added more fresh content on March 28, introducing Hexi, a brand new district set against a stunning desert landscape and attracting a growth of new players. By the end of March, more than 30 million players had joined the community, and player engagement continues to be high, reinforcing the game's long-term potential. We are excited to build on this success and reach more players, with plans to launch the game in more regions across PC, mobile, and console platforms later this year. These titles also demonstrated robust performances, driven by strategically tailored experiences for local communities. The return of each title in 2024 reignited player enthusiasm, driving engagement to historical highs. This was especially evident by Overwatch, which broke new records of peak concurrent players upon its relaunch on February 19th. A brand new stadium mode was launched in China this April, alongside its global release. In addition, momentum has been ongoing for World of Warcraft and Hearthstone, also which saw consistent popularity during Chinese New Year, with targeted in-game events and localized designs. Notably, World of Warcraft achieved a leading sales through live commerce on social media, providing fans with an entertaining experience in a fresh way. Hearthstone came up with culturally resonant content, such as alternative art cards or signature cards inspired by Chinese painting and World of Warcraft's Suzhou embroidery-inspired mounts. These creative designs rejuvenated the long-beloved IPs by infusing fresh elements that resonate with players, engaging both longtime fans and new players. In addition, Diablo 3 entered technical testing in April, paving the way for its re-entry into the Chinese market. Together, these successes demonstrate the stress of our operating capabilities and the close collaboration with our partners. Looking ahead, we are excited to bring players even more intriguing content, created and delivered with care by passionate teams and collaborators. As we celebrate the success of our new and returned titles, our established 90s games continue to play a vital role in our portfolio. Our long-standing, beloved titles serve as foundational pillars and steady source of revenue with alluring content updates and continuous gameplay enhancements that deliver timeless appeal. The Fantasy Westward Journey franchise is a prime example After decades of operations, it continues to be one of China's most influential brands. In the first quarter, we celebrated Fantasy Westward Journey Mobile's 10th anniversary with a range of new content updates, including a crossover with the renowned animation IP Digimon. The update sparked player engagement, signaling a remarkable beginning for its next decade. Westward Journey Online 2 Another cherished classic also maintained healthy traction in the first quarter with festive Chinese New Year events and the interactive live streaming that reignited player passion. Another example is our iconic asymmetric battle arena game, Identity V. First introduced to global market in 2018, the player base greatly expanded in the first quarter. achieving a new quarterly high on top of its record-breaking momentum in 2024. The excitement extended into April, with registered players surpassing 400 million globally during Identity V's seventh anniversary celebration. Similarly, our action-based battle royale game, Naraka Playpoint, has built a strong global player base since 2021. The game saw new record revenue in the first quarter with our updated PvE content. Players can now team up and have fun for medieval villains side by side, adding another layer of play through strategy, skill building, and collaboration. Both Identity V, Asian Games version, and Naraka Big Point have also been named as the official esports events for the 2026 IHE Nagoya Asian Games. Each is the first title in this genre to be included in the Asian Games, marking another breakthrough for domestically developed games on the international stage. Moreover, this veteran title's ability to reach new milestones highlight the strengths of our long-term operations, premium content, crossover events, and our increasing strengths in esports operations. Moving to Aggie Party. The game further solidified its leadership in the party game genre, with robust sequential growth in the first quarter. Excitement lit up Aggie Island on Chinese New Year's Eve, featuring vibrant line-ups of performances. Players jumped into the New Year celebrations, enjoying live entertainment, joining in activities with friends, and creating a night to remember. The addition of the beloved Chinese animation IP, Calabash Brothers, added another layer of festivity, with Aggie Party attracting over 100 million players and new monthly players reaching a record high. As for groundbreaking MMO game, Justice Mobile, it continues to raise the bar for innovation. In March, we introduced Starry Dreamland, a virtual amusement park in the heart of the Wuxia-inspired world. Packed with familiar attractions and activities that resonate with the younger generation, this new setting quickly became a hit. Just as mobile, it's also pushing technology boundaries. We continue to elevate the gaming experience, adding enhanced interaction with AI-powered NPCs and improve the lighting effect through cutting-edge graphic technology. We have also made a lot easier and more fun for players to get creative. With our upgraded creation system, players can produce their own video clips using in-game animations, complete with custom script, character motions, and voiceovers. It's a powerful tool that opens the door to a whole new level of creative expression. Justice Mobile's strong momentum has expanded to more regions since its launch in Hong Kong, Macau, and Taiwan last November, as has our leading basketball game, Dunk City Dynasty. Currently, Dunk City Dynasty is targeting expansion to more regions across Western Market and Southeast Asia in May. Similarly, Racing Master has secured a solid position in Japan, Korea, and Southeast Asia. It's a game topping the iOS download chart across multiple regions with each geographic launch. These solid operational metrics are a great indicator of what we can expect in other markets when we bring these titles to more regions. As we work to build on the success of our existing games and introducing them to more players around the world, we have a range of exciting upcoming titles on the way. The new titles in our pipeline will continue to push the envelope of creativity and interaction, elevating our portfolio and the overall gaming experience we bring to our gaming communities. Marvel Mystic Mayhem. Our super-hero team-based tactical RPG is currently preparing for its official worldwide launch. The close beta test 2.0 conducted in March sparked massive passion within the community, where we gathered valuable feedback from players to aid in the final touches. With more details to be announced shortly, we eagerly anticipate introducing players to these exciting confrontations on a global scale. Some of our other titles under development include Destiny Rising, our epic sci-fi RPG shooter game featuring a new adventure set in the alternative Destiny timeline. This one is currently in active development and progressing as planned. Annata, our highly anticipated metropolitical RPG, is also deep in development. The game draws on our years of experience in the gaming industry to deliver innovative gameplay shaped by deep player insights. As across our portfolio and pipeline, we're reaching more players through a wider range of genres and expanding our global footprint. We're launching new titles and building on the momentum of our existing hits with updates players love. all while delivering new, inspiring experiences that resonate with fans around the world. By continuing to reimagine what's possible in gaming, we help advance the industry as a whole. Our commitment to quality and innovation shapes each area of our business. Looking now at your DAO, with a relentless focus on technology-driven innovation integrated into the user experience, and a disciplined effort to foster long-term sustainability. UDOT achieved record-high first quarter operating profit, maintaining the profitability momentum of previous quarters. Earnings services revenue declined in Q1 as we continued to prioritize core services with strong long-term potential. By focusing on high-demand subjects, we advanced quality operations and further strengthened profitability. As a part of this effort, our online intelligent learning platform upgraded its college entrance planning system to deliver more seamless and personalized guidance based on individual needs, driving exceptional user engagement and loyalty. By prioritizing AI technology in the development of our products and services, we have seen strong user reception and robust growth in AI subscription sales. Our existing applications continue to evolve, with our dictionary and translation services now delivering industry-leading accuracy and a smooth user experience, powered by our proprietary large language model, Confucius. This model innovatively integrates multiple models and leverage online direct preference optimization during training, which enhances its ability to generate responses that are aligned with users' preferences. This elevated experience has driven increasing engagement in our AI translation services. Yudong's online marketing services remained focused on high-quality growth. In the first quarter, sales from overseas grew sharply, driven by strengthened collaboration with overseas partners and KOLs. We also boosted operational efficiency through advanced technologies. For example, we launched Yodam Magic Box, a video creation tool that simplifies the production of high-quality advertising videos through intuitive inputs, making ad content creation easier and more time efficient. Our smart devices segment maintains healthy year-over-year growth. Building our leading position in China's dictionary pen market, we continue to bring new innovations to the industry. In the first quarter, we launched U-DOT Space One, a next generation device equipped with a larger screen than dictionary pens and the ability to answer students' open-ended questions in real time, much like a human tutor. Powered by advanced large language models, U-DOT Space One can accurately interpret images, respond with natural voice interactions, and deliver highly accurate answers across a wide range of school grade levels. As our online businesses continue to explore avenues for delivering meaningful experiences in entertainment and learning, the NetEase family remains committed to enriching people's lifestyle and product with services that consistently impress our users with exceptional quality. Take Yanchuan as an example. A strong commitment to quality and innovation drove another quarter of healthy performance across our core product categories. In the first quarter, our pet products and household cleaning items remained top sellers within their category on major e-commerce platforms. Particularly, the signature products maintained strong momentum, while new releases such as our car scents cup and limited edition New Year bathroom fragrances saw strong consumer demand. We were especially delighted that in March, one of our cat food products, specially formulated to support healthy fur, received the 2025 Pet Orange Dot Award, a notable recognition from the pet industry. Additionally, ESG initiatives are ongoing priorities for NetEase. Earlier today, we published our sixth annual ESG report, outlining our progress towards sustainable growth, transparency, and social responsibility. We believe that technology can both empower and inspire. Through AI-driven innovations, we're redefining entertainment experiences while modernizing traditional industries for safer, more efficient production. Our business growth reflects the trust our users place in us, further motivating our efforts to serve our communities. While our business has limited environmental impact due to its predominantly online nature, we continue to enhance our carbon reduction efforts across data centers and office campuses to strengthen operational resilience. In 2024, By prioritizing energy saving measures within our operations, we successfully achieved a 16% reduction in greenhouse gas emissions compared to the previous year. Leading ESG rating organizations have also recognized our progress in sustainability. Notably, MSCI upgraded us from A to AA in this latest assessment, designating NetEase as a leader among 237 companies in the global media and entertainment sector. S&P Global included us in this 2025 sustainability yearbook, and sustainability has rated us as a low-risk company for the six consecutive years. Each of these honors speak to the dedication and ESG standard we uphold across our company. As we look to the months ahead, We are encouraged by the global momentum we have established and the breadth of opportunities across our increasingly diversified game portfolio and broader NetEase family of businesses. With a robust pipeline of new releases, continued global expansion, and ongoing enhancement to our most iconic franchises, we are well positioned to sustain our growth and deepen our connection with players worldwide, creating more value for players partners, and shareholders. That concludes William's comment. I will now provide a brief review of our 2025 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 will be $28.8 billion. or 4.0 billion U.S. dollars, representing a 7.4% increase year-over-year. Meanwhile, current contract liabilities will only be 17.7 billion, up 16% quarter-over-quarter. Total net revenue from our games and related VAS will only be 24.0 billion, up 12% year-over-year. Net revenues from online games were on the $23.5 billion, up 14% quarter-over-quarter and 15% year-over-year. This growth was primarily driven by increased revenue contributions from key PC games, such as newly launched titles, Will Wings Meet, and Marvel Rivals, as well as established mobile games like Identity V. Specifically, Net revenues for our PC games accounted for approximately 34% of our total online games revenue, representing an increase of 13% quarter-over-quarter and an increase of 85% year-over-year. The adults' net revenue will only be $1.3 billion, representing declines of 7% year-over-year and 3% quarter-over-quarter. This was primarily due to strategic structural improvement in the learning services segment, which is increasingly focused on high-demand subjects. NetEase Cloud Music net revenue will only be $1.9 billion, declining 8% from same period last year and 1% from previous quarter. This was primarily due to decreased revenue from social entertainment services. Net revenue for innovative businesses and others will only be $1.6 billion. decreasing by 17% year-over-year and 29% quarter-over-quarter. The decline was mainly due to decreased net revenue from Yanchuan, advertising services, and certain other businesses in this segment. Gross profit for the first quarter of 2025 was RMB 18.5 billion, up 9% year-over-year and 14% quarter-over-quarter. This was primarily driven by increased net revenues from online games, as mentioned above. Our total gross profit margin was 64.1%, compared with 63.4% for the same period in 2024. Specifically, in more detail, gross profit margin for games and related VAS was 68.8%, compared with 69.5% in the same period last year. The change was primarily due to fluctuations in product mix. The operating expense for the first quarter was RMB 8.0 billion, or 28% 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 9.4%, compared with 15.0% for the same period last year. mainly due to decreased spending on gaming promotions during the quarter. Our R&D expenses as a percentage of total net revenues remain stable year-over-year at 15.2% in the first quarter, compared with 15.5% for the same period last year. We remain committed to investing in content creation and product development. The effective tax rate was 15.3% for the first quarter, As a reminder, the effective tax rate is presented on an accrual basis, depending on applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the first quarter totaled RMB 11.2 billion, or 1.5 billion U.S. dollars, up 32% year-over-year. Non-GAAP basic earning per ADS for the quarter was $2.44 U.S. dollars, or 49 cents US dollar per share. Additionally, our cash position remains robust, with net cash of approximately RMB 137.0 billion as of March 31st, 2025, compared with RMB 131.5 billion at the end of 2024. In accordance with our dividend policy, we are pleased to report that our board of directors has approved a dividend of 13.5 cents U.S. dollars per share, or 67.5 cents U.S. dollar per ADS. Lastly, under our current 5 billion U.S. dollar share repurchase program, which started in mid-January of 2023, we had repurchased approximately 21.6 million ADS as of March 31, 2025, for a total cost of approximately 1.9 billion U.S. dollars. Thank you for your attention. We would now like to open the call to your classrooms. Operator, please.