Earnings Transcript for NTES - Q1 Fiscal Year 2024

Operator: Good day, and welcome to the NetEase 2024 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandi Piacente, President of Piacente Financial Communications. Please go ahead.

Brandi Piacente: Thank you, operator. Please note the discussion today 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 20-F and in announcements and filings on the website of the Hong Kong Stock Exchange. The company does not undertake any obligation to update this forward-looking information, except as required by law. 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 2024 First 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 NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase's senior management team 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 behalf of William.

Bill Pang: Thank you, Brandi, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. 2024 is off to a solid start as we continue growing our NetEase's family of businesses. Our net revenue for the first quarter of 2024 rose to RMB 26.9 billion, accelerating year-over-year, led by our outstanding and increasingly diversified game portfolio, which we're actively extending to players around the world. Leveraging our long-standing advantage in MMORPGs, we continue to innovate new gameplay, foster creativity and explore emerging technologies to persistently expand the boundary of this genre. Our numerous established long-term game franchisees continued an overall high-level popularity with their loyal user base, demonstrating ongoing sustainability. We consistently infuse new innovative content and embrace appealing inherited culture into the games, crafting immersive world for players to engage in. Fantasy Westward Journey Mobile recently celebrated its anniversary at historic Daming Palace National Heritage Park, in Chang'an, the former Capital City of Tang Dynasty, the very setting of our game. As part of the celebration, we unveil thrilling new content and further enhanced popular Autocast gameplay, bringing players reached a variety of entertainment options. With the long-lasting affection from our gaming community, Fantasy Westward Journey Mobile achieved another record high quarterly revenue, 9 years upgrades launch. Meanwhile, we rolled out a new Sim update for Westward Journey Online to celebrate the year of Dragon, featuring the traditional Tongliang Dragon Dance as part of the New Year celebrations. Our ongoing commitment to refreshing these epic titles continues to captivate new players and retain our loyal following. In addition to our achievement in the traditional MMO landscape, we are continually breaking new ground with games we put out, innovating and elevating this genre. For example, Justice Mobile has become a nationwide sensation. The game has joined a wide spectrum of audiences, especially younger generation were new to MMO genre. Our innovative seasonal mechanism and balanced the game experiences like caters to different individual practices are the interest of the pillar of our success. Beyond innovation in game play and mechanics, we are committed to refining and perfecting the game. In the first quarter, Justice Mobile made a name for itself as the first MMO mobile game to implement both retreating and real-time global emulation on iPhone. The dedicated integration of this technology, included in our game update has provided players a more immersive experiences and taken the visuals to new highs. With its success in domestic market, we are preparing to introduce Justice Mobile to new regions and expand this high-quality Eastern Sim Venture games reach cross even broader audiences. In addition to our achievement in MMO this quarter, we continue to make breakthroughs in an extensive area of game genres, such as SLG, asymmetric battle arenas, party games and innovative Martial arts battle height titles. We have consistently introduced new gameplay elements into Infinite Borders, one of China's most popular SLGs. Entering its last year, Infinite Borders continue to capture the interest of younger players and achieved a 3-year revenue high in the first quarter. Meanwhile, Identity V, our iconic domestic asymmetric battle arena game, celebrated its 6th anniversary with record-breaking revenue in the first quarter, a record high DAU in May. This milestone highlights the game's driving ecosystem fueled by higher quality content, successful e-sport event and well-designed IP collaborations. NARAKA

Operator: [Operator Instructions] Your first question comes from Felix Liu with UBS.

Felix Liu: Congratulations on the good first quarter results. My question is on your highly anticipated NARAKA

Bill Pang: Okay. I will help translate. First of all, the test actually reflect the high anticipation from players group, and we can feel the enthusiasm from players. And also during the testing process is actually validated for the [ Technical problem ] of some of the missions we put into the game. And we collect enough data for us to do next round continuous operation for the game. Overall, this time actually boosted the confidence level of the team and for [Technical problem] until the game is launched. And regarding the launching time window so far as to the summer [indiscernible].

Operator: Your next question comes from Lei Zhang with Bank of America.

Lei Zhang: Congrats on your strong results. My question regarding your newly launched game Condor Heroes [indiscernible] and any near-term upgrade we take and how should we look at the game and [indiscernible]?

Bill Pang: The stage 1 result of [indiscernible] was not very satisfying to our big expectation. Now, with the new person in charge and the core team, we are doing actively doing the modification work, focusing on a couple of aspects like the fun factor, making the game fun to play as the, for example, the social factor as well as some of our style. We're doing all sorts of modifications as we speak. And we believe with our experience and expertise in MMORPG genre, we can make it fun to play. And the expected time for the updated game to be pushed out is during the summer vacation time.

Operator: Your next question comes from Lincoln Kong with Goldman Sachs.

Lincoln Kong: My first question is about way we miss. So we have seen on the PC version has been doing the final testing and is set to launch in July. So, how should we think about the outlook for this thing? Will it be co-published [indiscernible] market? And what's your plan there? And also related to that, what about where we may miss the mobile version? How is the development stage and what sort of the target launch timeline there? So, second question is about our future game pipeline, especially beyond 2025. So, when we think about next year or even after, what are the areas in general we are currently preparing? So, any updates including such like Project [indiscernible] other type of game? Any color from there? And what about the overseas market? Anything we should expect for this year or next year in terms of the high market and titles?

Bill Pang: Okay. First of all, thank you for your question. As you know, for where wins made, the PC, we have announced the launching time and everything is ready. The team is busy preparing for the launch. And for mobile, the development, everything actually already done, we're doing some testing and optimization. As you can imagine, this game is a little bit heavy to run on mobile devices, a lot of optimization work needs to be done, and we're busy in doing that. Mobile version release time of mobile version will be slightly later than the PC version. Now too much, slightly. This is an open-world game, and we believe it has potential in the overseas market as well, and we will do marketing and promote the game in overseas market as well. For your next question, regarding the product pipeline beyond 2025, we will disclose our pipeline via our normal was like putting out news and via event when the time is right. Thank you for your attention.

Operator: Your next question comes from Ritchie Sun with HSBC.

Ritchie Sun: First of all, regarding [indiscernible] PC, it is a stable and strong game franchise for NetEase, but the twist paid in the game recently received mixed infuser feedback. I would just also notice there are adjustments after 20th of May, could management discuss the strategy to handle the pushback from users? And when do you expect the game performance to stabilize? In addition, I noticed there are more games having adjustments on the in-game trading mechanisms recently, could management explain the rationale behind this?

Bill Pang: Yes, I'll do the translation for this one. Yes, financial journey, as you know, has been one of our classic MMORPG games for more than 20 years. And, during the 20 years' time of operation is beloved by massive user base. And one of the reasons that is always beloved is that we always focus on the long term, making sure the game is long-term front to play and players enjoy stay in the game. Recently, we are doing some adjustment, but for the same reason to adjust some of the systems with the logic, everything with the goal of making it more fun to play in the long term, satisfying our users' demand. And that adjustment is still being done, and we expect it will be done within the first half of this year. And one thing is that you don't need to worry too much about this short-term fluctuation brought by this short-term adjustment because the goal are totally aligned between us and our gamer base. It's for the longevity of the game. And we do wish for the goal that the game will be in long-term, be loved, continuously beloved by the players. And in the meantime, our development team are actually holding a very humble attitude, open to listen to all feedback from our game communities. So, to make the game more creative and more fun to play, putting more credit on fun things in the game. One thing you don't need to worry that the whole company and the development team taking this very seriously is our focus, and we expect to have a fun version to play when we finish this period of adjustment. Okay. So, as William said, the recent adjustment for the summer versus system is short term as well. It's also served for the same goal because a long time, we want the players to have more fun in playing our games.

Operator: Your next question comes from Xueqing Zhang with CICC.

Xueqing Zhang: My first one is about Yanxuan shooting games. We have noted that the company has been focusing on Yaxuan shooting game general in multiple games such as [indiscernible] and many others in development. How do you think about the competition [indiscernible] of this genre and what's our strategy? My second question is about your overseas studios. Could the management share with us the latest development on the overseas game studios and when do you expect the overseas studios to start launching games?

Bill Pang: Okay, I will do this translation. First of all, regarding your question about shooting game genre, you're right, shooting is actually a big genre in the whole game industry, both domestically and globally. In our past, shooting was not our strong genre, but we focus very much on how to conquer this genre. That's why starting from several years ago, we started to deploy product development into this genre. And that's why you see we start to have product coming out starting from this year. We hope we can achieve a certain level of success in this big genre. And also, in the meantime, shooting is a very welcoming one, very popular one in overseas gaming market as well. And we hope we can achieve a certain level of achievement as well. Hoping by pushing out a bunch of high-quality shooting games, we can fill our determination into broadening our genre-base and get into more genres and the global market as well. About your second question about overseas studios. The fact is that there are many products been busily developed as we speak. But developing a new game takes many years, 2 years, 3 years, even longer. At this moment, we don't have a plan and release date that we can share with you regarding the product out of our overseas studios. But, as we said, we are actively developing products there. In the meantime, one further comment on the global market is that for our China domestic studios, we are also actively working on titles towards global market as well. As you have seen that Racing Master has achieved a certain level of success in Greater China region and Identity V has been successful in Japan. Knives out has been successful in Japan. We hope you can feel that we have enough resources, determination and attitude to achieve overseas market.

Operator: Your next question comes from Thomas Chong with Jefferies.

Thomas Chong: My question is about the operating expenses. Can management comment about how we should think about the OpEx trend in particular for SMM, given that we have a weak pipeline coming up?

Bill Pang: You won't see a big increase in our sales and marketing expenses, we're actually already very sophisticated, very experienced in marketing operations, and we're actually getting more and more experience in that field. Actually, our customer acquisition cost is going down now. So, in short, you won't see big increase in sales and marketing expenses in the future.

Operator: Your next question comes from Jialong Shi with Nomura.

Jialong Shi: So my question is about the gamer spending in NetEase's game. There are a lot of charters nowadays about so-called consumption downgrade in China. So, again, such a macro context, just wondering if management noticed any change in the in-game spending pattern of your gamers. What is the trend for the [indiscernible] MMO titles?

Bill Pang: To answer your question, we haven't observed any meaningful downgrade in gamer expanding in our game, because the value we're providing to our consumers via game is more like emotional value. Players spend certain money to have some fun, enjoy some time relaxed here. It is still very different from the day-to-day shopping for data users or other consumer model for physical product. We believe, the consumers, they acknowledge the emotional value we provide. And again, we haven't seen any downgrade there.

Operator: Your next question comes from Alex Poon with Morgan Stanley.

Chun Poon: My question is related to our capital returns. Last year, we paid roughly USD 2.3 billion in 2023. How should we think about the pace in 2024 in future?

Bill Pang: To answer your question, for the repurchase and dividends, we're actually carrying out the activity based on our own pace. You probably noticed that in the past quarter, we're doing repurchase with our own rhythm, and we're going to continue doing that with our own rhythm and paying out dividends as we have been used to doing in the past.

Operator: Your next question comes from Daniel Chen with JPMorgan.

Qi Chen: First of all, congrats on a really strong first quarter gaming revenue. And my question is on we recently got a new license for Eggy Party new game. It's a much real game. So, any information, any update to share on this game? Also, how should we think about the long-term strategic outlook for the whole Eggy Party ecosystem?

Bill Pang: Thank you for your question. You're right that the [indiscernible] game based on the Eggy Party IP, and it took us some time to develop it, and we're going to roll that out soon. And regarding your question about Eggy Party as ecosystem, yes, Eggy Party is a very lovely, adorable IP and players feel relaxed and feel casual when engaging with IP. We truly wish we can do more creative things with the IP and building more fun experience and having everyone enjoying this party game genre. And we have a lot of work to do, and we're very much looking forward to that.

Operator: And that concludes the question-and-answer session. I would like to turn the conference back over to Brandi Piacente for any additional or closing comments.

Brandi Piacente: Thank you once again for joining us today. If you have further questions, please feel free to contact us at Piacente Financial Communications or the company. Have a great day.