NetEase, Inc.

Good day, and welcome to the NetEase third 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, 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 third quarter 2025 earnings 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 Deng, chief executive officer, Mr. Drew Peng Hu, executive vice president, and Mr. Bill Peng, 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 welcome everyone to today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. The third quarter marked continued momentum and strong execution across our NetEase family. By uniting creativity with exceptional operations, we created more meaningful connections with players. driven by our diverse portfolio of games, that expanded our global reach and reignited our player enthusiasm for key franchises. Total revenues increased 8% year over year, reaching RMB $28.4 billion in the third quarter. And revenues from our games and related BS grew 12% in the third quarter, compared with the same here last year. Innovative creativity and long-term operation remain the defining force behind NetEase's ongoing player engagement and global expansion. Whether for new launches or established titles, our teams are dedicated to delivering unexpected gaming experiences and responsive live services that are winning over players worldwide. This strategic creative approach continues to gain traction overseas, amplifying the influence and excitement of multiple games in the third quarter. including our new releases. Destiny Rising, our new free-to-play mobile sci-fi RPG shooter, quickly topped iOS download charts in the United States and other major Western markets following its global launch on August 28. The game has received widespread acclaim, securing leading positions on iOS download charts across nearly 100 markets worldwide. Featuring Destiny's iconic, powerful gameplay across diverse modes set a new timeline. The game has earned positive feedback from long-time fans while gaining traction within the broader shooter game community. The excitement continued in China, where Destiny Rising debuted on October 16th and immediately topped the iOS downloading chart, drawing in players nationwide to experience the thrilling shooting action at their fingertips. Marvel Rivals continues to captivate superhero shooter fan base around the world. Kicking off its fourth season on September 12th, the game introduced a wealth of refreshing new content, features, special events, and team-ups. Following the update, it reached number three on Steam's global top-seller chart. The new map, Heart of Heaven, transferred players to the Asian East while the debut of Angela and eagerly anticipated Vanguard spurred excitement across the player community. Additionally, inspired by Marvel Animation's Marvel Zombies, a limited-time PvE zombie mode was released, featuring challenging bosses, zombie Namor, and Queen of Death, just in time for Halloween. Beyond the game, Marvel Rivals Ignite celebrated its grand finals at DreamHack Atlanta, held in collaboration with ESL FACEIT Group. Elite players from around the world showcase their exceptional skills and strategies, drawing massive engagement both on-site and online, and reflecting Marvel Rivals' growing appeal. As we continue to enrich our global portfolio through diverse partnerships, our original titles are also gaining increasing momentum worldwide. Delivering a distinctive survival open world experience to players globally, Once Human launched engaging updates in the third quarter, agonizing its growing global community. On October 30, the game introduced a major new scenario centered on the capture and customization of deviations, alongside a significant refresh of the PvP experience that provides more intense combat options. The highly anticipated collaboration event with a global heat game, Powerwall, also went live on the same day, bringing popular applause to a dedicated in-game island, which further evacuated the player community. We recently shared some of our upcoming international expansion plans at worldwide gaming events like Gamescom and the Tokyo Game Show 2025, generating even more excitement in the community with engaging player interactions. we exhibited Where Wings Meet Gamescom 2025, showcasing our creative ambition in cultural storytelling and next-generation Wuxia world building. In China, Where Wings Meet continues to captivate Wuxia fans with its narrative-rich setting, authentic Chinese martial arts themes, and innovative gameplay that combines single and multi-permanent. Each newly unveiled district not only engages our existing fans, but also attracts new players. Driving continued growth in both revenue and monthly active users to new highs in the third quarter. On November 14th, we brought Where Wings Meet's Eastern Sea and Open World featuring dynamic combat to the global market on both PC and PlayStation 5. Within just two days, we achieved a peak of 190,000 concurrent players, securing the number five spot among the most played games and number four position for top seller globally on Steam. Additionally, it became one of the top ten best sellers across the United States, Germany, France, and several other regions on PlayStation. This underscores the widespread appeal of our captivating Wuxia universe to an even broader audience. To further enhance community engagement, the mobile version has commenced preregistration and is set to launch soon. Our highly anticipated title, Ananta, also garnered significant attention at the talker game show. Players showed enthusiasm for in-depth game trailers and engaging hands-on play testing. They were drawn in by the game's imaginative action design, high fidelity visuals, and modern urban storytelling. Steady in a dynamic and immersive city environment, Ananta blends high-energy action with open-world freedom, offering players an experience that goes well beyond conventional gameplay. We are pleased to see mounting excitement and anticipation among this title, including recognition from the Japan Game Awards 2025 Future Division, where it was named as one of the most promising upcoming games. Our groundbreaking MMO Sword of Justice went global across mobile and PC platform on November 7, topping the iOS download chart in multiple regions. The intentional release included AI-powered NPCs and an intelligent face creation system. We showcased this at the Tokyo Game Show in September, highlighting how emerging technologies are reshaping gameplay experiences. Sword of Justice also continue to engage domestic players in the third quarter, which is ever-evolving gameplay and rich content. With the global version now live, Swords of Justice is bringing its immersive world and cutting-edge AI enhancement to a broader international audience. On top of the new releases we have brought to the international stage, our established games are also gaining steam in multiple regions worldwide. Our realistic car simulation game, Racing Master, has continued to gain popularity overseas through localized content, making it highly resonate with players in Japan since it launched there last year. Player engagement spiked in August during its anniversary celebration with carefully designed in-game content, boosting the game's performance in Japan. Exciting esports events, like the Racing Master 2025 Legend Cup Finals, held in Bangkok in August. It brought passionate racers and fans from across Asia together, uniting Racing Monster's distinctive global community. As firm believers in live operations, we stay closely attuned to players' involving expectations across every title, and our domestic games continue to deliver strong performances. Each game update presents new opportunities to entertain engage, and grow our communities. This approach continues to resonate with players, driving steady growth across our domestic portfolio for both new titles and games that have been around for decades. Fantasy Westward Journey Online, one of our longest-running flagship titles at 22 years and counting, amplifies our dedication to sustain high-quality operations. The game is built around an inclusive ecosystem that allows players of all types to find enjoyment. We continue to inject fresh vitality through new features and mechanics. In July, we launched our innovative unlimited server, which offers classic gameplay under a popular modern model that eliminates the entry barrier of upfront time-based payments. This generated substantial enthusiasm from long-time fans and newcomers alike, significantly boosting player engagement. As a result, it has achieved four successive record-picking concurrent player counts since the third quarter, reaching a height of 3.58 million in early November. Fantasy Westworld Journey Mobile also continues to evolve as we regularly introduce new features that players love. To meet players' demands, we launched our new casual server which is designed for fun and streamlined play. It offers Fantasy Westworld Journey Mobile's signature gameplay in a lighter format, featuring simple progression, low threshold, and intuitive controls. With the surge of new and returning players, monthly active users reach a two-year high in September. Another long-beloved MMO, Tianxia, continues to engage its community with deeply resonating updates. In October, we concluded close beta testing for Tianxia 2 Classic. This version recreates the game's iconic art style and slower-paced gameplay, allowing players to experience its distinctive Chinese cultural essence. Meanwhile, the existing Tianxia client will undergo a complete upgrade, with player progression seamlessly shared with Tianxia Wanxiang, the brand-new cross-platform client powered by Messiah, our flagship in-house engine. The upgrade will both enhance graphic quality and expand access for players across PC and mobile platforms, allowing them to experience the Tianxia universe everywhere. Identity V's fan base maintained a high engagement level in the third quarter, supported by our steady cadence of seasonal updates and partnerships. New characters released along with each season update, including Hunter of Curious, and the survival of lanternists in the third quarter infused a new energy into Identity V's distinctive role, reinforcing Identity V as a top destination for asymmetric gameplay fans. In addition, the game's collaboration with the Palace Museum classic on September 25th added a majestic rooftop of the Forbidden City to Identity V's manner, adding a new layer of cultural depth. Aggie Party also experienced robust growth with a third anniversary celebration in July, sparking renewed enthusiasm across the player community. Daily active users exceeded 13 million, and average play time hit record high, driving historical engagement level. Two new gameplay modes quickly followed in September. Spooky Treasure Squad presents an intense extraction experience, and Crazy Farm introduces a casual and social farming simulator. Both were highly praised and practically a way of returning users during the National Day holiday. Meanwhile, we continue to evolve Aggie Party's AI-powered EGC tool to make mass design faster, easier, and more enjoyable. We believe that together, these innovations are keeping Aggie Party fresh and its community inspired. Thanks to this ongoing effort, we saw Aggie Party's performance recover to historical peak level in both daily active user and average play time, which we expect will pave the way for smooth development in the coming years. Another example of our player-first philosophy and commitment to innovative high-quality content is Onmyoji, one of China's earliest and most iconic anime-style games. On September 10, we launched its ninth anniversary celebration, featuring rich new content and gameplay updates shaped by player feedback. The highlight was a new character, Yuki Gozen, whose beautifully crafted CG trailer gained widespread attention on social media from both longtime fans and the broader anime community. It was broadly highlighted for its innovative use of stereoscopic screen and 2D animation text to create a naked-eye 3D visual effect. With strong community support, OMUIGI quickly entered China's top 10 iOS crossing chart, demonstrating the vitality of this enduring IP and the strength of our long-term operations. Our commitment to engaging players and continuous innovation is also evident in Aka PlayPoint. In the third quarter, we rolled out new heroes and exciting collaborations, such as Armor Hero in September, and a time-limited return of near in October. Naraka Bay Point Esports present is also growing. The 2025 Naraka Bay Point Pro League NBPL Autumn Season marked its first professional league since being selected for the 2026 IHINI Goya Asian Games, culminating its rolling finals in October. Now in its fourth year, NBPL has become the cornerstone of Naraka's esports ecosystem and China's top professional league for the title, driving increasing social media engagement across major platforms. We continue to expand our domestic portfolio with new, light-hearted experiences that appeal to a wider range of audiences. 零售大冒險, our MMO featuring magical, heartwarming creatures inspired by Chinese fairy tales, has built a dedicated fan base since its launch in August. Designed with a portrait interface for easy one-handed play, the game combines the joy of capturing and nurturing creatures with strategic turn-based combat and building a homeland for them to thrive in. Backed by our players and supported by world-class partners and global teams, we're building enduring collaborations that keep expanding what's possible in gaming. Blizzard titles continue to elevate the gaming experience for Chinese players. World of Warcraft rolled out updates across both classic and modern servers during the third quarter, sustaining strong engagement among longtime fans and newcomers alike. To further enhance localized experience, the game just launched a highly anticipated China-exclusive Python reforged server this week. Blending the nostalgia of classic expansions with modern gameplay elements, The new server fulfills players' long-awaited expectations and has reignited excitement across the World of Warcraft community. Overwatch 2 has also recently introduced a new Chinese hero, Wu Yang, further deepening the game's diverse roster of characters. Meanwhile, Hearthstone celebrated its 11th anniversary, amassing over 100 million registered players in China. A series of special anniversary events drove enthusiastic participation from both loyal fans and newcomers to the game. The Diablo franchise also continued to capture attention. Diablo II Resurrected, the legendary remaster of the installment that helped define the franchise, returned to China on August 27. The newest season, released in October, pushed the game's daily active player base to record high. In parallel, Diablo IV, the latest blockbuster bringing the series' signature dark aesthetic to a new height, will launch in China on December 12. Furthermore, the genre-defining real-time strategy game StarCraft II also returned on October 28, triggering excitement among fans. Minecraft China Edition, the localized version of the globally popular sandbox game, reached 1.25 million concurrent players on August 17, an impressive milestone in its eighth year of operation. Committed to nurturing its EGC ecosystem, the game continues to enhance creation tools and expand exposure for community creators, now supporting over 300,000 creators. By delivering enriched, locally tailored experiences, Minecraft China Edition has fostered a highly engaged and loyal player community. Beyond above titles, other globally renowned franchises in our portfolio also continue to thrive in China, engaging vast creative community and expanding local ecosystems. Along with our expanding global presence and evolving development capabilities, our domestic community continues to thrive. Regardless of geographies, We'll continue to put players first and work closely with our partners to deliver memorable, high-quality experiences across our beloved franchises and existing new titles still yet to come. Turning to Youdao. Youdao continued to solidly execute its AI-native strategy in the third quarter, with healthy development of both its education and advertising businesses. For learning services, Yu Dao Ling Shi grew gross billing by over 40% year over year in the third quarter. Notably, it partnered with the Yao Mathematical Science Center of the Tsinghua University, providing technical support to a platform which is designed to identify and support mathematically gifted students. The platform is currently being piloted in top tier schools with a national rollout plan following further refinements. Yu Dao's online marketing services achieved robot growth in the third quarter. As we advance the use of AI across multiple advertising processes, we further enhance our expertise in programmatic advertising and influencer marketing campaigns, elevating the efficiency and effectiveness of advertising. For smart devices, we continue to enrich our offerings with technology upgrades. In the third quarter, we launched a new tutoring plan, U.S. Space X, which features a series of intelligent capabilities, such as precise scanning for long-form and multi-graphic problems, to help students learn more effectively. Turning to Yanxuan, the business continues to perform well across major e-commerce platforms, led by steady development in its core categories, such as pet food, home scents, and home goods, propelling technology-driven innovations Yanshan's product launches have consistently stood out in the market. Its new pet food products use a refined production process, making it smoother and easier for pests to digest, earning it widespread praise for addressing common digestive issues. Across the NetEase family of businesses, we continue to build on a foundation of creativity, quality, and disciplined execution. Looking ahead, we're focused on advancing our development capabilities and global reach, scaling our original IP into lasting franchises, and elevating every experience we deliver. Guided by innovation and the trust of our communities, we're shaping a future defined by meaningful growth and enduring impact. That concludes William's comments. I will now provide a brief review of our 2025 third quarter financial results. Given the limited time of today's call, I will be presenting abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. As a reminder, all items are as otherwise stated. Total net revenue for the third quarter will only be $28.4 billion, or $4 billion. representing an 8% increase year-over-year. Total net revenue for mobile games and related VAs will only be $23.3 billion, up 12% year-over-year. Specifically, net revenues from online games will only be $22.8 billion, up 3% quarter-over-quarter and 13% year-over-year. The quarter-over-quarter increase in online games net revenue was due to higher net revenues from self-developed games such as Fantasy Westworld Journey Online and Sword of Justice, as well as certain licensed games. The year-over-year increase was attributable to higher net revenue from self-developed games such as Fantasy Westworld Journey Online, Aggie Party, and newly launched Wild Wings Meet and Marvel Rivals, as well as certain licensed games. Yield of net revenue reached only $1.6 billion, representing a 15% increase quarter-over-quarter. driven by growth in smart devices and online marketing services. Year over year, revenue rose by 4%, attributed to a higher contribution from online marketing services. NetEase.com Music's net revenue will only be $2 billion, stable quarter over quarter, but down 2% year over year. Notably, revenue from membership subscriptions continue to show healthy growth, both sequentially and year over year. Revenue from social entertainment services and others though still lower compared with the same period last year, stabilized quarter-over-quarter. Net revenues for innovative business and others were RMB 1.4 billion, down 15% quarter-over-quarter and 19% year-over-year. The sequential decline was mainly driven by Yanshan due to its high base during the 618 e-commerce festival. The year-over-year decrease reflected an increase in certain inter-segment transaction elimination and, to a lesser extent, decreased net revenue from Yanshuan and certain other businesses. Gross profit for third quarter of 2025 was RMB 18.2 billion, up 10% year-over-year, primarily driven by increased net revenue from online games. This quarter, our total gross profit margin was 64.1%, looking at our third quarter margin in more detail. Cross-profit margin was 69.3% for games and related BS, compared with 68.8% in the same period of last year. The improvement was mainly driven by a higher mix of PC games in China, which typically have higher margins. Our cross-profit margin for Youdao was 42.2%, compared with 50.2% in the same period last year. The decrease was mainly due to the declined cross-profit margin of online marketing services. Gross profit margin for 90s calm music was 35.4% in the third quarter versus 32.8% in the same period a year ago. The margin improvement was primarily driven by steady growth in our core online music business with lower contributions from social entertainment and other lower margin services. For innovative business and others, gross profit margin was 43.0 percent, compared with 37.8 percent in the third quarter of 2024. Despite the impact of inter-segment elimination mentioned earlier, the improvement was mainly driven by better margins at Yanshuan and the higher revenue contribution from certain innovative business with relatively stronger margins. The total operating expenses for the third quarter was RMB 10 billion, or 36 percent of net revenues Taking a closer look at our cost composition, our sales and marketing expenses as a percentage of total net revenue, or 15.7%, compared with 14.5% for the same period last year, primarily due to increased market expenditure related to online games. Our R&D expenses maintained stable at 16% of total net revenues in the third quarter, compared with 16.9% for the same period last year. reflecting our consistent investment in content creation and product development. The effective tax rate was 13% for the third quarter. As a reminder, the effective tax rate is presented on a cruel basis in accordance with applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the third quarter totaled RMB 9.5 billion, or 1.3 billion US dollars, up 27% year-over-year. Non-GAAP basic earning per ADS for the quarter was $2.09 US dollars, or $0.42 US dollars per share. Additionally, our cash position remains robust, with net cash of approximately RMB 153.2 billion as of September 30, 2025, compared with RMB 142.1 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 US dollars per share, or 57 cents US dollars per ADS. The company announced today that its previously approved share repurchase program of up to 5 billion US dollars for the company's ADS and other shares in open market or other transactions will be extended for an additional 36 months until January 9, 2029. As of September 30, 2025, approximately 22.1 million ADS has been repurchased under this program 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.