NetEase, Inc.

Good day, and welcome to the NetEase second quarter 2025 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 and including its annual report on Form 20F and in announcements and filings on the Hong Kong Stock Exchange's website. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2025 second quarter earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Netties corporate website at ir.netties.com. Joining us today on the call from Netties' senior management are Mr. William 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 William's behalf. Bill?

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. During the second quarter, we advanced each of our businesses through the development of high quality and innovative offerings. Total revenues increased 9% year over year, driven by our diverse portfolio of gains. We saw strong player engagement in our established franchises and released new titles that expanded our reach across genres and geographies. Building on our first quarter year-on-year growth momentum, revenue from our games and related VAS rose 14% in the second quarter compared to the same year last year. As we expand our expertise across more genres, we now offer a diverse range of gaming experiences to players around the world, which we believe lays a solid foundation for our global expansion. In the second quarter, we launched several new global titles, while also extending the reach of our well-known domestic franchises. Looking first at our newest releases, our superhero team-based tactical RPG Marvel Mystic Mayhem launched on June 25. The game quickly garnered a passionate group of players eager to collect iconic superheroes and supervillains to battle the nightmare dimension. Its player base quickly surpassed 1 million, with the game topping the iOS download chart in multiple regions and ranking number two in the US. To further the community's excitement, we plan to introduce more playable characters and expand the storyline approximately every six weeks. The global release of our tactical shooter game Frank Punk on Xbox and PlayStation quickly gained traction after its April 29 debut. In May, it reached number two spot on PlayStation's North America free-to-play download chart. Originally launched on PC in March, Fragpunk has been winning over players with its groundbreaking shark car system. Now, with the signature blend of strategy and high-octone shooting experience available on console, it continues to build momentum. Our commitment to growing existing hits has also brought fresh energy to games already resonating with players. Once Human commemorated its annual version 2.0, Stream Veil, with a major content update and a series of exciting announcements. Players were introduced to Endless Dream, a new nightmare-themed PvE scenario that takes them through multiple layers of dreamscapes, offering a fresh take on the apocalyptic world. A new class system was also unveiled, featuring three classes, Chef, the Garner, and Beastmaster at the first play. each bringing unique abilities to support diverse play styles. This 2.0 update gained massive popularity, propelling the game to number four on Steam's global top-seller chart. We also rolled out a new PvP spin-off of Once Human on July 30th called Rayzone, which amplifies the thrill of the game's survival open-world experience. with unrestricted combat, allowing attacks anytime, anywhere. This innovation targets our broader PvP audience through more intense and liberated battles. In June, we began testing a new custom server, allowing private servers and the customizable seasonal settings that encourage creativity and diversity, giving players even more autonomy. For Marvel Rivals, We launched Season 3 on July 11th, introducing Fenix as a new playable hero, alongside a slate of exciting events and team-ups. Set in Klingon, where now Stargate spreads, players join forces and unleash unique skills to save the world. With fast-paced open combat and the fan-favorite Fenix joining the rooster, The game quickly climbed to number one on Steam's top-seller chart in the US, and subsequently reached number two globally following their Summer Party event. Beyond in-game updates, we're also deepening community engagement through more offline events. At San Diego Comic-Con, an exclusive behind-the-scenes look at the hero creation process generated tremendous excitement among fans. In May, We also kicked off our Marvel Rivals Ignite esports tournament, with mid-season finals successfully held at our Guangzhou campus recently. Passionate players from around the world have come to compete, and we look forward to crowning the first champion with our finals at the end of the year. With our domestic IP, we continue to extend our player communities and prepare for global expansion. Players of our Wuxiang-themed open-world RPG, Where Wings Meet, continue to be impressed by our steady stream of high-quality content. In the second quarter, we launched a new Hexi-themed update featuring the exotic desert landscape of Dunhuang. The storyline, centered on the unyielding spirit of both generals and ordinary citizens during the period of unrest, resonated deeply with players. By restoring Asian press codes in-game in collaboration with Zunhua Art Academy, we brought emotional stories to life with stunning visual effect, further fueling player enthusiasm. By the end of July, it has amassed over 40 million total players, while the release of the summer version propelled it to number five on China's iOS top-grossing chart. Furthermore, we are thrilled to have successfully concluded the latest round of oversea testing on PC and PlayStation 5 at the end of July, placing us firmly on track for its global launch. Sword of Justice, previously known as Justice Mobile, marked its second anniversary with a surge in players. We launched a massive update, introducing new gameplay features, expanded areas and a wide selection of new costumes, propelling the title to number three on China's iOS top-grossing chart. Global pre-registration opened in May, and we look forward to bringing this groundbreaking MMORPG experience to more players worldwide. Dung City Dynasty also met global players on May 22, where it reached number one on iOS download chart in multiple regions and number two in the US. As we enhance the global appeal of our games, our established franchises continue to keep players highly engaged, highlighting the strengths of our operations and content updates that stand the test of time. In May, Fantasy Westward Journey Online drew in strong interest from the player community with its How to Train Your Dragon collaboration, bringing the movie's iconic costumes and dragon mounts into the game. The momentum continued with the launch of the innovative Unlimited server in July. More notably, this evergreen title reached a new all-time high peak in concurrent players in August, surpassing 2.93 million, an impressive milestone after 22 years of operation. Our long-term commitment to innovation and maintaining a healthy in-game ecosystem continues to pay off. Similarly, Fantasy Westward Journey Mobile launched a new faction, Pan Si Dong, which generated strong participation and introduced a vertical screen mode to expand accessibility across play scenarios. Delivering fresh content and elevating player experiences remains central to the game's enduring success. Its revenue posted another record high in the second quarter. The Once World Journey franchise struck an emotional chord with players by launching a series of activities themed around the beloved romantic legend Bai Shouzhuang, featuring themed gameplay, costumes, and crossovers with the theme song, all tied to the 2025 Year of Snake. Once World Journey Online 2 continues to fuel excitement through its annual PVP finals and content updates, while Once World Journey Mobile saw strong participation from both loyal and returning players through the launch of a new server. Knives Out continues to showcase our long-term operational capabilities, maintaining its status as a household game in Japan through dedicated content updates and culturally resonant collaborations. This quarter's crossover with Jujutsu Kaisen the hit Japanese manga that captivated global audiences, was met with strong player enthusiasm and propelled the game to number three on Japan's LS Top Crossing chart. Identity V once again broke its quarterly revenue record in the second quarter, supported by an enthusiastic fan base. On July 3rd, Identity V teamed up with Paper Bright a popular Chinese horror mystery puzzle game, to introduce a chilling wedding-themed world featuring immersive maps and new costumes. The crossover drove the game to number seven on China's iOS top-bossing chart. Momentum continued in August, when the crossover, with fragrance beyond Journey's End, generated significant enthusiasm and propelled it to number four on China's IOS top crossing chart. For Aggie Party's third anniversary on June 27, we introduced a festive in-game update that transformed Aggie Island with candies, cakes, and toys, adding new maps and equipment to deepen strategic gameplay. A wave of anniversary activities, along with the highlighted Highly anticipated crossover with Dongdong Shift sparked a strong player excitement and lifted Eggie Party to number five on China's iOS top grossing chart on July 11th. The Naraka Playpoint franchise also hit another milestone. Its PC game entered its fourth year with brand new extraction mode and iconic IP crossovers, including Bruce Lee and the degenerated drawing Jiang Hu. The mobile game also introduced enhancements to its extraction-based survival feature with dynamic weather and new mechanics. The update eagerly ignited the player base and pushed the title to number six on China's iOS top-crossing chart. After a year of close collaboration, Blizzard titles continue to captivate players in China. On July 15, World of Warcraft and its community celebrated the game's 20th anniversary of operation in China, unveiling plans to launch a China-exclusive Titan Reforged server in November. This announcement reignited enthusiasm among local players and attracted significant attention from broader global community. Meanwhile, Hearthstone launched its latest expansion, The Lost City of Angora on July 9th, featuring a brand new pet system. This new adventure invites players to embark on the quest set for The Lost City, with 145 collectible cards and a new keyword, Kindred, to empower their decks. Shorted after the update, the game climbed to number five on China's iOS top-bossing chart. In April, Overwatch launched its new Stadia mode, which has been very popular with players. And in June, they introduced its 17th season, featuring a series of updates to power up the game experiences. At Bilibili World 2035, its collaboration with Porsche sparked more fun excitement, featuring a special in-game skin of the iconic Porsche model. We are also thrilled to announce that Diablo II Resurrected will be returning to China on August 27, with plans for launch of Diablo IV underway. This will enhance the classic franchise for a dedicated fan base. Innovation remains at the core of how we build and operate games. We bring the same creative ambition and operational rigor to every new title and development. Several exciting new games are in the pipeline, each powered by creative gameplay, bold designs, and cutting edge technology. These titles reflect our commitment to pushing the boundaries of gaming experiences and will position us to expand our player community and further fuel our long-term growth. Sea of Venements, our upcoming cross-platform ocean adventure RPG, received encouraging feedback from its first testing at the end of June. The game invites players into an exciting open world exploration where they uncover the truth behind a forgotten identity through exhilarating naval combats and turn-based battles. Players recruit a crew of allies, build ships, and interact with characters, adding strategic depth as players shape the fate of the surrounding world based on each decision they make. Currently, we're actively refining the game for its release in 2026. In June, we're excited to unveil plans for Blood Message, our first triple-A single-player title. This cinematic, story-driven action-adventure will be available on PC and consoles, inviting players to step into the heart of Zuho's uprising as a nameless messenger and his young son. With immersive third-person gameplay and powered by cutting-edge technology, Black Message is designed to deliver an epic blockbuster experience for players worldwide. Planet Party Time, our cross-platform game blending social simulation and party gameplay, has undergone a series of tests to further refine the experiences ahead of its official launch. Players can express their creativity on a cosmic journey where they can design, build, and cultivate their own planets while enjoying over 120 exciting mini-games with friends. Destiny Rising, a new free-to-play mobile sci-fi RPG shooter that delivers players to a new alternative timeline of Destiny's universe, will launch on August 28 across mobile devices. In addition, we plan to launch several license titles in China. Most recently, on July 24, we launched Super Vibe, an innovative, competitive multiplayer game on PC that provides a unique blend of mobile, battle royale, and hero shooter elements. And we expect Wild Gate, a PVP multiplayer shooter game that blends tactical ship-to-ship combat with fast-paced first-person action to meet players in China later this year. The development for ANATA, our highly anticipated urban-themed open world title, is also well underway. Across our portfolio, we remain focused on building lasting success through continuous innovation and high-quality operations that keeps our games relevant and exciting for players. From evergreen franchises that keep breaking records to bold new titles shaping the next generation of gameplay, we are committed to delivering distinctive experiences that players love. As we continue rising the bar of the engagement and creativity, we are paving the way for long-term growth domestically and worldwide. Turning to our other businesses, in Q2, You've now executed its AI-native strategy effectively across both its learning and advertising businesses, delivering its first, second quarter operating profit. For learning services, Youdao Linchi continues to drive product innovation with our proprietary LLM, Confucius, while we continue to iterate other AI applications, such as Mr. T, AI Tutor. gaining increasing user traction. In online marketing services, our newly launched AI Advertising Placement Optimizer, an end-to-end AI-driven agendic solution covering demand analysis, strategy formation, data analytics, and iteration optimization, achieving capabilities that previously relied on human expertise. Leveraging our LLM Confucius, we now offer comprehensive AI-empowered advertisement services, spanning creative ad production, placement, and post-campaign analysis. NetEase.com Music remains committed to driving quality development across its core music ecosystem. To build on our unique content offerings, we continue to expand our catalog of copyrighted content while strengthening our original music library. During the second quarter, we expanded collaborations with Korean music labels and renowned Chinese artists, while generating strong traction with several in-house tracks, such as . We also continue to innovate our product features and optimize our music-centric community to deliver even better music experiences for our users. For example, our innovative music playing feature, Magic Like Player, which is designed to recreate the immersed feel of a live concert enhanced with landscape orientation support, received widespread acclaim from music lovers. We're constantly advancing our music-centric motivation and further expanding our subscriber base, resulting in healthy growth in subscription-based membership revenues. Turning to Yanshuan, we continue to maintain our leading position in key categories. For example, Yanshuan homestand, such as bathroom frequency and car refreshers has been widely recognized by consumers, securing a solid market position with leading sales. Other iconic products, such as pet food, also maintain a stable market position. Across our NetEase family of businesses, we are focused on innovation and refining our product and content to deliver long-term value for users and stakeholders, looking ahead We will continue to push the boundaries of player experiences, scaling original IP to build lasting franchises, and growing alongside with collaborative global partners to reinforce our position as a creator of high-impact, genre-defining games. That concludes William's comments. I will now provide a brief review of our 2025 second quarter financial results, given the limited time on today's call. I'll be presenting abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. As a reminder, all amounts are in RMB unless otherwise stated. Total net revenue for the second quarter will RMB 27.9 billion, or 3.9 billion US dollars, representing a 9.4% increase year-over-year. Total net revenue from our games and related VAS will only be $22.8 billion, up 14% year-over-year. Specifically, net revenues from online games will only be $22.1 billion, a quarter-over-quarter decrease of 6% and a year-over-year increase of 15%. The sequential decline was primarily attributable to decreased revenue following the Chinese New Year push. while the year-over-year growth was mainly driven by increased revenue contribution from newly launched titles, such as Will Wings Meet and Marvel Rivals, as well as established games like Identity V. The adult net revenue was on the $1.4 billion of 7% year-over-year and 9% quarter-over-quarter. This growth was primarily driven by the enhanced utilization of AI technology to boost our learning services and online marketing services. NetEase Club Music net revenue was only $2 billion, up 6% from previous quarter, while declining 4% from the same period last year. Notably, revenues from online music services maintained healthy development both quarter over quarter and year over year. Net revenue from Innovative businesses and others were RMB 1.7 billion, up 5% from previous quarter, while declining 18% year-over-year. The quarter-over-quarter growth was primarily driven by Yanshuan, while the year-over-year decline was mainly due to decreased net revenue from Yanshuan, advertising services, and certain other businesses in this segment. Gross profit for the second quarter of 2025 was RMB 18.1 billion, up 13% year-over-year. This was primarily driven by increased net revenue from online games, as previously mentioned. This quarter, our total gross profit margin was 64.7%, looking at our second quarter margin in more detail. Gross profit margin was 70.2% for our games and related BS. compared with 70% in the same period last year, and 68.8% in the last quarter. The quarter-over-quarter improvement was mainly from higher proportion of net revenues from our self-developed game, which carry a higher margin than licensed game. Our gross profit margin for Yudao was 43%, compared with 48.2% in the same period last year. The decrease was mainly due to the increased revenue contribution from online marketing services with relatively lower gross profit margin. Gross profit margin for 98 Cloud Music was 36.1% in the second quarter versus 32.1% in the same period a year ago. The margin improvement primarily resulted from strong monetization of our core online music business and ongoing cost of optimization. For innovative business and others, gross profit margin was 42.3%, compared with 34% in the second quarter of 2024. Total operating expenses for the second quarter were on the 9 billion, or 32% 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 12.8%, compared with 13.7% for the same period last year, mainly due to increased revenue contribution from games and VAS over the past year. Our R&D expenses as a percentage of total net revenue remained stable year-over-year at 15.6% in the second quarter, compared with 15.2% for the last quarter. We remain committed to invest into content creation and product development. The effective tax rate was 14.7% for the second quarter. As a reminder, the effective tax rate is presented on an accrual basis, depending on operable policies and our operations. Our non-GAAP net income attributable to shareholders for the second quarter totaled RMB $9.5 billion. for 1.3 billion U.S. dollars, up 22% year-over-year. Non-GAAP basic earnings per ADS for the quarter was $2.08 U.S. dollars, or $0.42 U.S. dollars per share. Additionally, our cash position remains robust, with net cash of approximately RMB 142.1 billion as of June 30, 2025, compared with RMB 137 billion at the end of last quarter. In accordance with our dividend policy, we are pleased to report that our board of directors has approved a dividend of 11.4 cents U.S. dollar per share, or 57 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 22.1 million ADS as of June 30, 2025. for a total cost of approximately $2 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please.