NetEase, Inc.

Good day and welcome to the NetEase fourth quarter and full year 2025 earnings conference call. Today's conference is being recorded. At this time, I'd 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, which should not be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the fourth quarter and full year 2025 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 on the call today from Netties' senior management are Mr. William Ding, Chief Executive Officer, Mr. Hu Jiepeng, Executive Vice President, and Mr. Bill Pang, Vice President of Corporate Development. And I will now turn the call over to Bill, who will read the prepared remarks on William's behalf.

Thank you, Randy, 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. In 2025, our total annual net revenue reached RMB $112.6 billion, with RMB $92.1 billion from games and value-add services. These metrics represent another milestone for our company. reflecting 23 consecutive years of online games operation revenue growth since we started the business a quarter of a century ago. In our 25 years in the gaming business, our pursuit has always been trying to provide extraordinary player experiences. And we have never stopped investing in continuous exploration of creativity and pushing technical boundaries. In our early years, our proprietary 2D game engine made Fantasy Westworld Journey Online the benchmark of its time. When we moved to mobile in the early 2010s, our flagship in-house engines enabled us to deliver low-latency, high-performance experiences on smaller, pocket-sized screens. This new capability was instrumental in unleashing the full potential of iconic titles such as Knives Out and Diablo Immortal on mobile devices. as we continue refining these engines to support AAA-quality cross-platform experiences. They have laid the indispensable foundation for the success of our recent global sensations, like where wings meet. In conjunction with the evolution of our in-house proprietary game engines, we also build our full-stack toolchain that empowers our team to innovate at scale. Join our DNA as an internet company We continually scale new technologies that can improve the game development process. We study emerging technological trends, determining if they can be harnessed to enhance our game development and develop proprietary solutions to incorporate the most impactful ones into our production pipeline. This longstanding practice has enabled us to integrate companies' new technologies. substantially boosting productivity over the years. Back in 2017, we saw that artificial intelligence would have transformative impact on our industry. Because AI research is closer to academic science than traditional technology, we set up two dedicated research labs, NetEase Fuxi Lab and NetEase Game AI Lab, to study AI and explore its real-time real-world applications in gaming. These teams have made exceptional strides over the years in both research and practice, winning dozens of AI algorithm competitions, publishing hundreds of papers, and securing hundreds of patents. We're now far beyond the experimental phase, and the culmination of this work is the full integration of our AI technology into the game development process, with AI playing an important role across our portfolio. AIGC has accelerated quickly in recent years. We have been monitoring the progress closely and making substantial effort to embed it into our production pipelines. Importantly, we don't see AI as a replacement for human creativity. We see it as a force multiplier, one that can bring paradigm shifting to the game development process when used responsively. It can elevate creative work and introduce real change in how games are built. As a new technology with core attributes that are fundamentally different from traditional technologies, such as its probabilistic nature, AI presents unique challenges. Figuring out how to harness it, how to fit it into the sophisticated game software engineering process, and how to turn probabilistic AI output into reliable, high-quality components is far from easy. There are very few precedents in the industry of game making. Fortunately, With our many years of game making experiences, we have deep expertise in building production tool chains, along with data and asset library spanning hundreds of games. Most importantly, we have over 10,000 top tier developers, which put us in a strong position to approach these challenges programmatically. Over the past three years, our engineers have worked closely with our designers to explore how to unleash the power of AI. while building clear guards. At the same time, we focus on how to use AI to take on the tedious, repetitive, non-creative task without getting in the way of human creativity. After many iterations, we believe we have established robust human oversight and feedback loop in place, and AI has become a highly effective part of our game development process. We're pleased to report that we have comprehensively integrated AI across our internal workflows, encompassing design, programming, arch, and QA. This integration is not limited to a few lead teams. It is broadly accessible to developers and NIDs, driving meaningful efficiency across the board. In programming, our self-developed tool, CodeMaker, has evolved from a single AI-powered code completion tool providing agent-level services. Our internal data shows qualitatively shifted in developer habits. We have moved from using AI to complete a line of software code to leveraging AI to solve a complete development task. In art and animation, AI is easily accelerating the early stage exploration process with our in-house tools, DreamMaker and Benching, turning creative ideas into deliverable outputs in minutes. our AI animation technologies, including multi-camera motion capture, facial motion capture, and generative AI-driven animation tools, have significantly reduced the production cost and time required for character movement and expression animation workflows, while substantially expanding our animation asset libraries and empowering artists to deliver richer and more expressive virtual characters and worlds. Furthermore, in quality assurance, We utilize AI to model more than 1 million diverse player behaviors to ensure stability in increasingly complex game worlds. This augments traditional time-consuming manual testing with data-driven validation, providing us with greater mathematical confidence in game balance and stability before public launch. Young efficiency, the ultimate goal is gameplay innovation. We have unlocked massive new interactive experiences for our players that were previously out of reach. And we still remain at relatively early stage in exploring all the possibilities. Our exploration of AI-driven interactive characters began early with Sword of Justice, which pioneered one of the industry's earliest commercial implementation of intelligent MPC systems powered by large language models. in live game environments. This laid important technological groundwork for expanding AI-driven capture ecosystem. In Where Wings Meet, we have deployed over 10,000 AI-powered NPCs that engage players with natural language, realistic voices, and potential for unexpected story outcomes, creating a level of vivid interaction that was previously impossible. Most importantly, These AI-powered NPCs are not static crest-givers. They reflect the shadow of real human existence. Some may be struggling with poverty and resorting to petty theft in a village. If a player has the patience to follow them, they could discover soft stories like the hardship of adult life. These NPCs may not always be brilliant or lucky, but they're living their lives within their own reality, mirroring our own world. This level of detail creates a world that was not just a sandbox, but a living society. This is the essence of the open world we're building, places where every interaction feels authentic, unpredictable, and deeply immersive. This not only provides players with more depth and in-game experiences, but it also helps to address the challenge that players consuming content much faster than developers can create it. We're also seeing AI act as a powerful personalized co-pilot and ecosystem multiplier. In the Ark of Bay Point mobile game, the voice AI teammate system represents a major inflection point. AI that doesn't just follow, it cooperates. As co-pilot teammates, AI provides customized interactive assistance to help players to learn the role of the game, making the complex high skill-based gameplay more accessible to much broader audience and significantly increase newcomer retention. Meanwhile, the crew mode in the Sword of Justice empowers players to direct their own short videos with simple AI workflows, attracting millions of players who have created tens of millions of UGC works. Meanwhile, integrating these tools into Aggie Party toolchain has empowered 15 million creators to transform a single game into a self-evolving platform driven by collective creativity of its players. Beyond enhancing our existing portfolio, we're also exploring new frontiers in AI-native gameplay. Moving beyond fixed preset logic, we're trying to utilize AI as a core engine to dynamically construct the in-game world and tailor real-time elements like missions, events, and other content to individual players' unique behaviors. unlocking infinite potential through deep customization. Underpinning this work is our experiment in AI-native production pipelines that leverage integrated toolchains to streamline workflow and significantly accelerate our innovation cycle. 2045 has been a year in which our long-term vision for AI has reached a critical point. We're no longer just talking about the potential for AI. We're seeing the results in the form of enhanced productivity, deeper player engagement, and expanded creative boundaries. We're on the threshold of a paradigm shift, and we believe we are well positioned to serve as the epicenter of industry-defining innovations. We have built a very solid technological foundation, the proprietary engine, the full-stack toolchains, which already internalized artificial intelligence capabilities, including AIGC capabilities. And we have seen early results from AI-powered gameplay. What we have achieved in the first 25 years of our game business was unimaginable when we started. We're at the dawn of a new time in our industry where productivity can be much more enhanced and creativity can be much more amplified. As we look ahead, We believe AI will fundamentally empower our creators to transcend the traditional development limits and reshape how interactive entertainment is created and experienced in the years to come. We think this is going to be the best time of industry. With that, I would like to walk through several recent operational highlights, starting with our global expansion achievement. Bill Winsmith. has gained strong global traction through a staged cross-platform launch, surpassing 80 million cumulative players and marking the meaningful milestone in our global expansion. Rooted in Eastern aesthetic and Wuxian storytelling, the game demonstrates how authentic cultural content can resonate with players worldwide. Following its global launch, it ranked number two on Steam's global topseller chart, won PlayStation's November Player's Choice Award, and top iOS download chart across more than 60 regions. Ongoing live service updates resulted in sustained strong engagement globally and domestically, with the title delivering its highest monthly revenue and daily active user on record in China in December, reinforcing its long-term momentum. Meanwhile, Sword of Justice successfully expanded internationally in November, introducing its next-generation MMO experience to more audience. Topping download charts in multiple key Asian regions. This title is another example that illustrates how AI integrated production pipeline now directly elevate gameplay in large-scale online worlds, delivering richer responsiveness, deeper interactivity, and more immersive player experiences globally. Domestically, player engagement remains strong. supported by innovative live events and culturally-grounded content that continues to deepen community resonance. Marvel Rivals, our superhero team-based PVP shooter, continues to build strong global momentum. The title earned broad industry recognition, including being named one of Time's Best Video Games of 2025, winning the Grand Award at PlayStation Partner Awards 2025, and ranking Steam's Platinum Tier of Best of 2025. Continuous seasonal updates and new character releases have sustained strong player engagement, with Season 6 featuring Deadpool propelling the game to number two globally and number one in multiple markets, including the United States and Canada. A rapidly expanding international player community is further reinforcing the long-term durability of this growing franchise. Looking ahead, we continue to strengthen our pipeline to support the next wave of global growth. Sea of Venements began technical testing across China and selected global market earlier this month, featuring a distinctive art style and richly imagined open world. This ambitious original title aims to deliver a deeply immersive exploration experience with extensive player freedom, where every naval journey feels unique. Development is also progressing steady on Atlanta. or highly anticipated urban open world title. Building our available insight from previous testing, the team is diligently refining core systems and contents to meet high expectations from our global community. Shifting to our domestic portfolio, our longstanding franchises continue to demonstrate strong vitality supported by continuous content innovation and deeply engaged player communities. These titles remain a testament of our ability to operate a large-scale live service ecosystem over decades. Now in this 23rd year of operation, Fantasy Westworld Journey Online delivered record high annual revenue in 2025, driven by historical peak revenue in the fourth quarter. Its ecosystem continues to evolve through innovative content design to meet diverse player needs while preserving the classic mechanics cherished by long-term fans. The unlimited server, which has streamlined accessible gameplay, has been particularly effective at reuniting player enthusiasm. Fantasy Westward Journey Mobile also maintains strong momentum, delivering record high annual revenue in 2025. Diversified server models and ongoing content initiatives reinforce its leadership position within the MMO category. Beyond these legacy franchises, several established titles continue to deliver stable engagement and underscore the breadth of our diversified portfolio. Identity V is strengthening its global esports ecosystem through major competitive events and ongoing content updates. Aggie Party maintains strong player engagement, supported by expanding gameplay modes and continuing investments in this fast-growing UGC ecosystem. Infinite borders continue to drive long-term retention through innovative gameplay updates and specialized server models that deepen strategic complexity. Naraka PlayPoint is expanding its global community and esports presence, highlighted by the successfully hosting the J-Cup World Championship and active content roadmap updates designed to sustain long-term player engagement. Beyond the games we develop in-house, we also continue to expand our ecosystem through strategy partnerships. Blizzard titles have proven to sustain engagement for the past year, achieving a record high revenue in China and reaffirming our long-term commitment to the market. The launch of World of Warcraft's China-exclusive Titan Reforged server on November 14th sparked strong excitement among domestic players and interest from international influencers. While StarCraft II once again saw enthusiastic support from Chinese players and set a new record in beta active users in China. Through close collaboration with our partners and a shared commitment to putting players first, we remain focused on delivering high quality experiences while strengthening our long-term global gaming ecosystem. We're also committed to delivering exceptional user experiences across our other business lines. Udall continued to advance its AI-native strategy in 2025, driving healthy business development and achieving its first-ever net cash inflow from operating activities. Its learning services segment delivered robust growth through ongoing iterations of its tutoring features, while online marketing services applied to improve advertisement effectiveness, and streamlines advertising production. Smart devices segment was supported by ongoing popularity of UDAO tutoring plan products. That is how music continued to advance the high-quality development of its ecosystem. Platform enriched its differentiated music catalog through both copyright collaborations and our in-house music production. While introducing new features and experience upgrades, that enhanced music discovery and listening. In 2025, the platform delivered steady year-over-year growth in both its active user base and overall engagement. Yuen Chuan continues to strengthen its position as a private label brand known for premium quality products across its key categories, supported by an expanded product lineup and enhancement to key hero products. In closing, The result and operational milestones we have discussed highlight a clear trajectory. That is, it's not merely adapting to the AI era. We're advancing it through industrial application of technologies we have been building for years. Our large-scale integration of AI is a natural extension of our long-standing strategy and leadership in technological innovation by embedding AI into the core of our production pipelines and product design. from the living, breathing world of our games to intelligent productivity tools of UDAO and the personalized discovery algorithm of NetEase Cloud Music. We are exploring and shaping what's possible to future user experiences across a range of scenarios. Looking ahead, we remain focused on advancing technology and creative innovation to drive sustained growth. We view AI not as a replacement but a powerful amplifier of human ingenuity, enabling us to deliver to our users worldwide what was previously out of reach. By staying at the epic center of this technical paradigm shift, we're uniquely positioned to unlock unprecedented long-term value for our users, creators, and all of our stakeholders. That concludes William's comments. I will now provide a brief review of our 2025 annual result with a focus on the fourth quarter. Given the limited time of today's call, I'll be presenting some financial highlights in a streamlined manner. 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. Our total net revenue for 2025 will be RMB 112.6 billion. or $16.1 billion, representing a 7% increase year-over-year. For the fourth quarter, total revenues were RMB $27.5 billion, or $3.9 billion. In 2025, net revenues from games and related services reached RMB $92.1 billion, up 10% from 2024. In the fourth quarter, net revenues grew 3% year-over-year to RMB $22 billion, specifically Net revenues from online games for RMB 89.6 billion for the full year, up 11% from 2024. In the fourth quarter, online game net revenues increased 4% year-to-year to RMB 21.3 billion. The quarter-over-quarter decrease in online games net revenue reflected the fact that the prior quarter benefited from the seasonal trends of more events triggering the summer holidays. The year-over-year growth in the fourth quarter was attributable to higher net revenues from self-developed games, such as FNAF Journey Online and the newly launched games like Where Wings Meet and Marvel Rivals. Udon's net revenues from 2035 increased approximately 5% year-over-year to RMB $5.9 billion. In the fourth quarter, net revenues rose 17% year-over-year to RMB $1.6 billion, and were broadly stable quarter-over-quarter. The year-over-year increase in the fourth quarter was due to increased net revenues from UDOT's online marketing services and learning services. Netease College Music net revenue decreased 2% year-over-year to RMB 7.8 billion for the full year. In the fourth quarter, net revenues were RMB 2 billion, representing a 5% year-over-year increase and remaining broadly stable quarter-over-quarter. The year-over-year growth in the fourth quarter was driven by continued healthy growth in membership subscriptions. Revenue from social entertainment services and others, however, remained lower compared with the same period of last year. Net revenues from innovative business and others totaled around 6.8 billion for the full year. In the fourth quarter, net revenues were around 2 billion, representing a 10% decrease year-over-year, while increasing 42% quarter-over-quarter. The year-over-year decrease reflected an increase in certain inter-segment transaction eliminations. The quarter-over-quarter increase was led by increased net revenues from Yanshuan, advertising services, and several other businesses included within that segment. For the year, our total gross profit margin was 64.3%. In the fourth quarter, our gross profit margin increased year-over-year to 64.2% from 60.8% in the year before. Looking ahead at the fourth quarter margins in more detail, gross profit margin was $70.5 billion for our games at Reliquid VS, compared with 66.7% the same period of last year. The improvement reflects changes in product mix, including a lower proportion of net revenues from license gain, which generally have lower margins than our self-developed titles. Our gross profit margin for Youdao was 45.1%, compared with 47.8% in the same period of last year. The decrease was primarily driven by a higher net revenue contribution from online marketing services, which has lower gross profit margin. Gross profit margin for NetEase Calm Music or 34.7% in the fourth quarter versus 31.9% in the same year a year ago, primarily driven by steady growth in this core online music business. For innovative business and others, gross profit margin was 39.6% compared with 37.8% in the fourth quarter of 2024. The improvement was primarily driven by margin expansion in certain innovative business within the segment. along with the impact of certain inter-segment elimination. Our total operating expenses for the fourth quarter were RMB $9.4 billion, or 34% of our net revenues. Taking a closer look at our cost composition, our selling and marketing expenses accounted for 14.1% of the total net revenue in the fourth quarter. For the full year 2025, the ratio was 13%. remaining broadly in line with prior year. Our R&D expenses remain stable at 16.1% of total net revenues in the fourth quarter. For the full year 2025, the ratio was 15.7%, broadly in line with 2024, reflecting our continued and consistent investment into content creation and product developments. The effective tax rate was 14.8% for the full year and 16.4% for the fourth quarter. As a reminder, the effective tax rate is presented on an accrual basis, and the tax credit varies across each of our entities at different time periods, depending on our policies and our operations. Our non-GAAP net income attributable to shareholders for the fourth quarter totaled RMB 7.1 billion, or 1 billion U.S. dollars, down 27% year-over-year. Non-GAAP basic earnings per ADS for the quarter was $1.58 U.S. dollar, or 32 cents U.S. dollar per share. For the full year, non-GAAP net income attributable to shareholders was up 11% to RMB 37.3 billion, or 5.3 billion U.S. dollars, which is $8.38 U.S. dollar per ADS, or $1.68 per share. Additionally, our cash position remains strong. As of year end, our net cash position was about RMB 163.5 billion, 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 the dividends of 23.2 cents U.S. dollar per share, or $1.16 U.S. dollar per ADS. Lastly, our current 5 billion U.S. dollar share repurchase program. We had repurchased approximately 22.1 million ADS at the end of December 31, 2025, for a total cost of approximately 2 billion U.S. dollars. Thank you for your attention. We would now like to open the call to your questions. Operator, please.