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Earnings Transcript for NTES - Q2 Fiscal Year 2024

Operator: Good day, and welcome to the NetEase 2024 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandi Piacente. Please go ahead.
Brandi Piacente: 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 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 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 NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase’s senior management are Mr. William Ding, Chief Executive Officer; and Mr. Bill Pang, the Vice President of Corporate Development. I will now turn the call over to Bill, who will read the prepared remark on William’s behalf.
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 we talk about here are based on RMB. Established games, exceptional content, innovation and robust community ecosystems are central to our ongoing growth as we expand our reach domestically and abroad. In the second quarter, we pushed each of these drivers, growing our total revenue to RMB25.5 billion, with our drive for innovation and leading R&D capabilities, we launched morphy (ph) title second quarter, enhancing our appeal to broad audience across diverse game genres. At the same time, we are expanding our brand and international reach, unlocking more avenues for growth. Now looking at some of our game's performance in more detail. Once Human, [Foreign Language], a multiplayer open world survival game set in the post-apocalyptic world, attained over 230,000 peak concurrent users on Steam shortly after its launch and ranked among the top five most played games in the world on Steam in July. The innovative creator design blends supernatural transformations with everyday items, such as the highly popular boss monster, providing players with an incredibly fresh and bizarre refined experiences. As a high quality survival game, it combines multiple layers of objectives to pursue, including exciting open-world exploration, monster fights and house crafting. Shortly after an update in August, One Human ranked number one on Steam's top seller chart in 12 countries and regions, amassing over 10 million worldwide downloads. We also launched our highly anticipated battle royale title, Naraka
Operator: Thank you. [Operator Instructions] Your first question comes from Alicia Yap with Citigroup. Please go ahead.
Alicia Yap: Hello. Thank you. [Foreign Language] [Interpreted] My question is related to Naraka
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Okay. So as a brand new action type of genre of mobile game, we are very happy with the current retention rate. To answer your question, to give you more colors, now not only we can see a very stable core user base has been already formed, which is a very important and very successful and there are other very satisfying indicators as well. For example, the female players percentage on mobile is much higher than on PC. And among all players play the mobile version, 70% of them have never played the PC version before. And close to half of them are actually new to NetEase. They're new NetEase games players. So all these are very satisfying. And for now, our focus is to keep optimizing the game, making sure the game is as perfect as possible and focusing on domestic market first. And one opportunity services (ph) will consider launching the game in other markets. Operator, next question please.
Operator: Thank you. Your next question comes from Jialong Shi with Nomura. Please go ahead.
Jialong Shi: [Foreign Language] [Interpreted] So I will translate my questions. I'll have a few questions about the legacy PC version of FWJ. So for all these adjustments NetEase has down to PC FWJ since this year, what is the purpose that you want to achieve through these adjustments? When do you expect to achieve this targeted purpose? If these adjustments have anything to do with the instruction from the game regulators? Also, I would like to understand the financial impact from these adjustments on PC FWJ? We know that the price of the virtual currencies for TC FWJ declined in first half this year. Just wonder whether this decline in prices of virtual currency has any correlation with against gross billings? When do you expect the gross billings for PC FWJ to fully recover?
William Ding: [Foreign Language]
Bill Pang: [Interpreted] I'll do the translation. First of all, thank you for your interest and understanding more details of financial journey. But I would also like to emphasize that NetEase is now a much more grown up mature company. We have multiple games. We have very healthy portfolio of games. We have Naraka
Operator: Thank you. Your next question comes from Ritchie Sun with HSBC. Please go ahead.
Ritchie Sun: [Foreign Language] [Interpreted] Thank you, management for taking my questions. First of all, regarding Identity V, we have seen the grossing rank are surprising the expectation of the market. What have we done to successfully drive the revenue growth of this game and how does management assess the potential for the asymmetrical battle genre and whether there are competition? Second of all, regarding Justice Mobile, the game has launched a new season. We see the grossing rank in July, surging to top 10, but it has declined since in August. What are the key reasons behind? Is it because the mix response was a new season or more competition impacts from Naraka
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Okay. I will translate this two -- for the answer of these two questions. First, regarding your question to Identify V. Identify V is a game that's been their operation for more than six years. And during these six years, we have been keep exploring and publishing the game, making sure the game is the quality and experience, playing the game is better and better every day. That's a continuous effort the team has put into developing and operating the game for the past six years, that's a non-stop effort. And of course, we are happy to see that in Q2. We saw some great result and we want to say that, that result is the reflection of the continuous effort and also a reflection of NetEase's capability of running the game in the long-term better -- keeping the longevity of the game. And in the meantime, making the game [Technical Difficulty] day by day. And actually not only Identify V, we're keeping doing this for all our games and we hope someday you can see similar great success of our other games as well. And to your second question regarding Justice Mobile. First of all, the new season of Justice Mobile features in mass amount of new content, re-engage a large pro players back to the game, which is very helpful. Currently, the game has stepped into a stable operation phase. Compared to other real time MMO titles, the game has demonstrated very strong stability on overall players' activeness. From this -- our priority now is to maintain the players' activeness as well as the diversity of the ecosystem. We remain committed to provide a fair gaming experiences, enable a casual environment without too much burden on players and continuously value their opinions aiming to build an evergreen MMO on the mobile platform that people have never seen before. Operator, next question please.
Operator: Thank you. Your next question comes from Yang Bai with CICC. Please go ahead.
Yang Bai: [Foreign Language] [Interpreted] Hi, management. Thank you for taking my questions. I have two questions related to our game based business. First, we observed that the company has a diverse portfolio of products achieving high DAU such as Naraka and Eggy Party. How should we think about our strategy to differentiate and outperform in this highly competitive high DAU game market? My second question is about our overseas game business. How should we track the development trend of our overseas game business in the future? And could management share more color about the release timeline of new titles in overseas market? Thank you.
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Yeah. So first, regarding your question on the high DAU product matrix. As a matter of fact, we don't -- internally we don't specifically define this again the high DAU game, that game is not. We actually don't look at game product from this lens, because our fundamental belief is that, as far as we can make a high quality, fun enough game, players will come. So high DAU is not a spectrum of per design, it's a result reflection of your high quality fun to play game. As you know that over the years, we have been keep trying, keep exploring different type of game, different genres. We started from MMO, but now we extend into sports, we extend into PVP game, we extend into shooting games. We are trying with our expertise to develop, to explore on multiple genre, multiple fronts, what kind of fun and high quality game we can provide to the players, that will guide us and that's our focus. And regarding the global market, as you can see, we are perfectly happy with the result of Once Human, which is a reflection of our capability to design and develop game, not only Chinese players, like, but the game does have a resonance among the global gamers community, that's a very good sign. And echo to the previous point, we are still keep exploring multiple genres and it will take more time for us to explore our style of games suitable for the global market. It will take some time, but from the early result, we do have confidence to do that.
Yang Bai: Thank you.
Bill Pang: Operator, next question, please.
Operator: Thank you. Your next question comes from Lei Zhang with Bank of America. Please go ahead.
Lei Zhang: [Foreign Language]
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Okay. I'll do this -- the translation. First of all, the team is very busy adding more content, fun to play content to the game as we speak. As a matter of fact, to your question, whether or not the PC version and mobile version will be launched the same time. Actually, in our eyes that is not the most important question. It's either same time or apart from each other about a month or so. It doesn't really matter. What really matters is to, can we provide a game that is fun to play in the long-term to our players. We also emphasize that, Where Winds Meet is not a single player game. It's an open world game that we plan to run for multiple years. And the content side is -- the size of content is much more than a traditional expectation on the single player game. And one other point I want to point out is that, there will be differences between the PC version and the mobile version because the platform differences. And to make it fun to play both on PC and mobile, a lot of changes and optimization work need to be done. Please be more patient, give us some time to publish the game. The plan on record now is to release the game within this year. Thank you. Operator, next question please.
Operator: Thank you. Your next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.
Lincoln Kong: [Foreign Language] [Interpreted] So thank you, management for taking my question. My question is about Eggy Party. From some third-party data, we see some grossing pressure in the past few months for this game. So can management share the reason behind it and how should we ensure the longer term operation of this game? And regarding to the broader leisure category, no matter party games, idle games, what's our company's R&D strategy and direction here we can share? Thank you.
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Okay. I'll do the translation. So yes, you're right. Eggy Party is one of the biggest game of NetEase in terms of the user base. And from our end, we do see that the ratio between the revenue versus user numbers is relatively low compared to other games. But we also -- we want you to be rest assured that no need to be too worried about this one. We're actively exploring how to change this, because again we want to emphasize again, the most important fact is, it's a game fun to play. It's -- our users like the game or not. So far from what do we see, the users are like the game -- they like the game very much. They are actively participating game every day. And that give us a ground that we can over time to explore a balance, a new way to balance the size of users and the level of revenue, please to be rest assured, we're exploring that and we will figure that out. Thank you. And operator, next question?
Operator: Thank you. Your next question comes from Felix Liu with UBS. Please go ahead.
Felix Liu: [Foreign Language] [Interpreted] Thank you, management for taking my questions. My question is on your upcoming pipeline. So can management share for the remaining 2024 and looking into 2025, what are the key pipeline that we should watch out for? And more specifically, I noticed that you recently got [indiscernible] to Marvel series, Marvel Rivals and Marvel Snap. What are your expectation on their domestic launch? And also, you showcased a new game called FragPunk in Xbox showcase. Any comment on that one? Thank you.
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Yeah. You're right. Not only we received approval for Marvel Snap, which is card game, Marvel Rivals, which is the hero shooter game, but also we are working on other new generation titles like you mentioned the FragPunk, which is the PC shooter game, which we just started testing in the overseas market as well as the -- as we mentioned in script that we're going to have Hearthstone launch in next month as well. One thing we want to point out is, all these special games, they are not our traditional type of game. They are competitive games. And every single one of them are actually from high production quality competitive games. We have high hope and confidence about this special game. And as we said, the game start -- the special game will start to launch from latest months to next year and we hope they can be a successful special games. Thank you. And operator, next question please.
Operator: Thank you. Your next question comes from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong: [Foreign Language] [Interpreted] Thanks management for taking my question. My first question is about AI. Can management share about how AI enhance our game production and work efficiencies? And my second question is about the trend in operating expenses. How should we think about the trend in R&D expense? And should we expect it to step up because of AI? For marketing expenses, how should we think about the spending over the next few quarters? Thank you.
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Okay. Let me do the translation. First of all, NetEase has actually been actively embracing AI for a long time. And AI technology has been widely applied throughout our game development process and works from all disciplines like design or programming, every discipline. And for example, in some of the boring work, used to be labor intensive boring works, in some of the areas, AI replacement rate has already 90% or so. And that actually will free up people development people, so they can be focused on to explore more fun gameplay, really creative part of game development instead of the labor intensive part. And regarding the R&D -- impact on the R&D cost, AI will free some of the human resources from the labor work, but we'll reinvest into this development resources, our exploration of gameplay and the creative part. So the R&D spending should stay in the reasonable range for long-term. Thank you. And operator, we probably have time for one more question, please.
Operator: Thank you. Your final question comes from Lei Zhang with Bank of America. Please go ahead.
Lei Zhang: [Foreign Language] [Interpreted] Thanks for the follow-up opportunity. My question is regarding World of Warcraft. Any feedback regarding the new user and the old user and how to say the revenue contribution? And can you share with us the timeline for the other game to come back? And any future cooperation with Blizzard down the road? Thank you.
William Ding: [Foreign Language]
Bill Pang: [Interpreted] Okay. Thank you. I will do the translation. Thank you for your question. Since the return of World of Warcraft, actually, the players have been very actively returning to the game, as all metrics are actually exceeding our expectations. The split actually between the new players and existing players before server shutdown is about four to six, which demonstrate that the game not only attracting old players back, but has the capability of capturing new players as well. And regarding the impact on the financial side, for sure, it will increase the PC revenue. And talking about other games will unfold the class and on this unfolding return of other Blizzard games. We're happy to see we have built up close relationship and reach consensus, which each Blizzard product team, because we strongly believe the return is not only just reporting the service, it should be far beyond that. It should be -- we get fully prepared to ensure even better experiences to other players than before. And upon this returning of Blizzard games, the development teams from Blizzard side and maybe NetEase ThunderFire has directly built up very deep cooperation and trust on the point to point teamwork base, which laying the foundation of deep mutual trust and future possibilities for deep cooperations in the future. Thank you.
Operator: Thank you. That concludes the question-and0answer session. I would now 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 any further questions, please feel free to contact us directly, and we hope you have a great day. Thank you so much.