Earnings Transcript for NTES - Q3 Fiscal Year 2023

Operator: Good day, and welcome to the NetEase 2023 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Margaret Shi, Senior IR Director of NetEase. Please go ahead, ma'am.

Margaret Shi: 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 in 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 the announcements and filings on the website of the Hong Kong Stock Exchange. The company does not undertake any obligation to update its forward-looking information except as required by law. During today's call, management will 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 2023 third 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 a call from NetEase Senior Management is Mr. William Ding, Chief Executive Officer; and Mr. Charles Yang, Chief Financial Officer. I will now turn the call over to Charles, who will read the prepared remark on behalf of William.

Charles Yang: Thank you, Margaret, 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. The third quarter was another period marked by outstanding results. Our beloved legacy titles and new hit games are strengthening our reach throughout the gaming world. Our total net revenues were RMB27.3 billion for the third quarter up nearly 12% year-over-year and our net income attributable to shareholders rose to RMB7.8 billion increasing by 17% year-over-year. Our time-honored flagship franchises have maintained robust popularity. Notably, we brought players updates for the Fantasy Westward Journey Saga in the third quarter with a brand-new storyline and captivating activities which once again breathed new life into the saga and drove year-over-year revenue growth for more than 20-year old epic title. In addition to our well-established games, we are actively expanding our portfolio by consistently launching and cultivating long-lasting franchises across more genres. We have strengthened our leadership in MMOs by pushing the boundaries of industry standards. We have also expanded our presence in broader game categories and demographics with innovative content, gameplay, and monetization models. We can see this in during popularity of the games that we have introduced in recent years such as Eggy Party, Naraka

Operator: [Operator Instructions]. Our first question comes from Ritchie Sun with HSBC. Please go ahead.

Ritchie Sun: [Foreign Language]. I will translate these questions myself. Thank you, management, for taking my questions. I have a question about the competitive landscape for Party games. Does management think it's a winner takes all market or can you have two players? And we noticed that Eggy Party has strong user base and UGC content already, given that there are more potential competition from other platforms, what would NetEase further do to sustain the leadership? Thank you.

William Ding: [Foreign Language]. Just a translation for William. So, we think it's absolutely normal to have a competition. So, from that perspective, we will continue to drive innovation and provide good services to our users, and that's how we lead the market. So, we have full confidence in keep placing our users in the Party game genre. Thank you. Next question, please.

Operator: Our next question comes from Yang Bai with CICC. Please go ahead.

Yang Bai: [Foreign Language]. My question is about the flagship games. Could management share more details with us about how do the flagship game such as [indiscernible] and Racing Master game? Thank you.

William Ding: [Foreign Language]. So, I want to say, that the most important thing for a game is innovation and continue to provide high-quality content for our users and it is important for us to focus on the long-term longevity of our games and never make any short-term decisions. So, based on our 20 years of operational experience, we think that a long-term goal is key. Thank you. Next question, please.

Operator: Our next question comes from Felix Liu with UBS. Please go ahead.

Felix Liu: [Foreign Language]. Let me translate myself. Thank you, management, for taking my question, and congratulations on the strong third quarter results. My question is on the pipeline. In among the three your games already have done how including Studio, Where Winds Meet, and Project Zero? How's the R&D progress for these games? And when do you think these games can come to market? And for the other games that are still waiting for Banhao, such as Naraka Mobile and Project Mugen. Does management have any color on their R&D progress? Thank you.

William Ding: [Foreign Language]. Thank you. Just a quick translate for William. Yes, so for each of our games, it's always after very careful adjustments, moderation before we are ready to release them to the market. And so, games such as studio, we are still, we're in the final stage of preparation and hopefully we'll get them released to the market no later than the second quarter of next year. Thank you. Next question, please.

Operator: Our next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong : [Foreign Language]. Thanks, management for taking my questions. My question is about overseas strategies. Given that we have demonstrate very good sets of result in the domestic market with a very solid pipeline. How should we think about our overseas expansion in the coming years as well as our investment strategies? Thank you.

William Ding: [Foreign Language]. So, on the global market, we will continue our strategy of high-quality focused direction, and we'll continue to look for partners who share the same mentality, share the same passion for games as we do and continue to invest in good teams to produce and create great content for users all around the globe. Thank you. Next question, please.

Operator: Our next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.

Lincoln Kong: [Foreign Language]. So, thank you, Mitchell, for taking my questions. So, we have seen this year our successful title from Eggy Party and Justice Mobile, which is a bit different from traditional legacy games, have a very big user base and DAU. So, when we think about the future upcoming launching games, especially for next year where Weemings and Xiaodao [ph], should we expect some of the similar type of features and anything we can sort of copy from past success? When should we expect the next success of Justice Mobile?

William Ding: [Foreign Language]. Thank you. Let me do the translation. So, the large DAU games is definitely a very important direction for us. We'll continue to find the key takeaways from the games that have succeeded in order for us to produce more games of this type. But at the same time, it's also very important to create high-quality games of a particular niche category to meet the different requirements and preference of different type of users. For example, this year, we launched a basketball game, racing car games. So, these are good examples of top-performing games of each of their respective categories. So, within that ease, we have lot games who teams who specialize in large DAU games and our teams that focus on particular niche. So that we have various different teams with NetEase and we encourage them to show do to apply their unique edges and unique experience. Thank you. Next question, please.

Operator: Our next question comes from Ritchie Sun with HSBC. Please go ahead.

Ritchie Sun: [Foreign Language]. So, the Dunk City Dynasty has quite successful despite launching without Android App Store. Although it could have higher channel costs, Android can also bringing more users potentially, which can sustain the game longevity. So how does management assess the ROI of not using Android store? And what type of titles would absorb a single launch strategy in the future? Thank you.

William Ding: [Foreign Language]. Thank you. So, for games that we are targeting towards a massive user base, the Party games, games that are targeted for all ages, for these types of games, the distribution platforms are more effective in reaching out more users. But for games such as Basketball game, it requires a specific group, a specific community of game players. So, we can find these players through various different platforms and channels. So, in order for us to bring them onto to NetEase platform and to operate this game for a long period of time, in order for us to get to know these users a little bit better and then to continue to perform different situations to give better service and experience to our platform users. We also want to add that, for Android platform users, they can also download our games through our own website and TapTap and various other channels. Thank you. Next question, please.

Operator: Our next question comes from Alex Poon with Morgan Stanley. Please go ahead.

Alex Poon: [Foreign Language]. Congratulations on a very strong quarter. My question is related to AIGC. And can AIGC for our future game updates, and expansion packs be much more frequent than the current three months to six months, becoming on a monthly basis or even weekly basis, and such that the longevity and gaming user stickiness monetization can go, can get better? Thank you, very much.

William Ding: [Foreign Language]. Yes. We agree that AI is extremely helpful in increasing, enhancing the R&D efficiency, particularly in areas of game designs, storyline design, mission designs, and art et cetera. So almost every year, we can, every month, we can see another upgrade in terms of R&D efficiency. But while the productivity is increasing, but the pace of us pushing out expansion packs is not completely dependent on that. We need our users to enjoy our content fully. So, the pace and frequency has already now expansion packs is still very much dependent on the preference of our gamers. So, we want to run each of our game for a long period of time. So, with the increased efficiency, we can provide higher quality content within the same amount of time frame. Thank you. Next question, please.

Unidentified Analyst: [Foreign Language]. My second question is about Naraka

William Ding: [Foreign Language]. So, for Naraka

Operator: Our last question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap: [Foreign Language]. My question is related on Justice Mobile. So, in addition to the new user for those existing NetEase gamers, where do these gamers come from? Which NetEase game had they were playing before and which non-NetEase game that these players used to play before Justice? Is the paying ratio and also, the ARPU for Justice much higher than the other NetEase game? Thank you.

William Ding: [Foreign Language]. So, for Justice Mobile, based on our stats about roughly a third of our users have never played NetEase games before and this game has mostly come from other large DAU products around the market, which means that this is actually a very friendly among many other types of users. In fact, I mean, this year, some of the other games that we launched, such as the Basketball game and the Racing Master, they also enjoyed many a large portion of gamers who have never played NetEase games before. So, in terms of the paying ratio, and monetization of Justice Mobile. So, for Justice Mobile, we have actually we opted a more a lighter monetization model. And because of that, the ARPU is relatively lower with a much higher pay-in ratio. So, we purposely chose this monetization model so that we can create a more healthy, and balanced in-game environment, giving our game players less pressure in terms of paying to give them a long-term enjoyable environment in which they can enjoy their games. Thank you. Yes. So, I think that's all the questions we have for today. Operator?

Operator: Thank you. That concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

Margaret Shi: Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly at Piacente Financial Communications. Have a great day. Thank you.