Earnings Transcript for NTES - Q3 Fiscal Year 2024

Operator: Good day, and welcome to the NetEase 2024 Third 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 my ability 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 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 NetEase's corporate website at ir.netease.com. Joining us today on the call from NetEase's senior management are Mr. William Ding, Chief Executive Officer; Mr. Bill Pang, the Vice President of Corporate Development. I will now turn the call over to Bill, who will read the prepared remarks on behalf of William.

William Ding: 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. At NetEase, we are constantly evolving to ensure the delivery of superior content through innovation across our NetEase family of businesses. During the quarter, we further strengthened our foundation for sustainable long-term growth and achieved total net revenue of RMB26.2 billion. In our Gaming division, our popular titles gained even more traction while newer releases successfully expanded our player community. Total online games net revenue reached around RMB20 billion. PC games, in particular, registered robust growth with net revenue up around 29% year-over-year and 30% quarter-over-quarter. Several of our games celebrated anniversaries in the third quarter, prompting some of our beloved established titles to set brand new records and reach new milestones. These achievements highlight our strength in long-term game operations and how we continue to drive game longevity. With operations across our legacy franchises, Fantasy Westward Journey and the Westward Journey Online continue to through players with the enduring popularity. In the third quarter, we brought players a new chapter in Fantasy Westward Journey Mobile, setting the structured Kingdom. Here, new characters and someone offer diverse technical choices. While new boss brings more compact challenges, infusing the game with fresh vitality. Additionally, Westward Journey Online II achieved record high quarterly revenue with excitement generated from its anniversary expansion path. Players eagerly export new content and joined carnival events in Xi'an immersing themselves in the [indiscernible] Asian capital. This blend of fresh in-game experiences and real-world festivities captured our communities imagination, deepening their connection to the game and driving remarkable engagement. Identity V reached record high revenues for the third consecutive quarter. The game also saw unprecedented DAUs and record high global concurrent online players in Q3. This milestone achievement reflects the success of our comprehensive operational strategy to maximize engagement and player stickiness. Our multifaceted entertainment approach, blended, translating our design, captivating story line, lessened IP core branding events and the dynamic eSports competitions for wholly immersed brand experience. This holistic strategy not only enhanced player engagement, but also establish Identity V as a premier competitive platform, offering players around the world arena to embrace challenges and enjoy fresh content. NARAKA

Bill Pang: I will now provide a brief review of our 2024 third quarter financial results. Given the limited time on today's call, I will present some abbreviated financial highlights. 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. Total net revenue for the third quarter were RMB26.2 billion or $3.7 billion representing a 3% increase quarter-over-quarter. Meanwhile, current contract liabilities were RMB15.5 billion, up 14% quarter-over-quarter. Total net revenues from our games and related VAS were RMB20.9 billion, up 4% quarter-over-quarter. Specifically, net revenues from online games were RMB20.2 billion, up 5% quarter-over-quarter. This growth was primarily driven by increased revenue contributions from key PC games, such as World of Warcraft and the Naraka

Operator: Thank you. [Operator Instructions]. Your first question comes from Lincoln Kong with Goldman Sachs. Lincoln Kong, your line is open.

Lincoln Kong: [Foreign Language]. Thank you for taking my question. So my first question is about Where Winds Meet. So what's the latest launch schedule for this gaming PC and mobile version? Based on last time feedback, there are some user pay around the positioning of this game, how to better integrate the single player model versus the multiplayer one? And how to design the monetization here. So any of the update or programs of this game lately. Thank you.

William Ding: [Foreign Language]. Okay. Yes, I will do the translation. First of all, Where Winds Meet, PC is slated to launch by the end of December. And the mobile will be slightly later than that, but the gap won't be too long. And now we're doing a final stage optimization to make sure that the game could be played on as many devices as possible. That's our goal now. And regarding your question about the positioning of the game, the core game play is positioned to provide high-quality open world exploration and also cash or social experiences in the open background kind of world. We're aiming at engaging players who are looking for high fidelity immersive experience, open world exploration as well as relaxing casual social game play. About the single player versus multiplayer mode, we hope in every single each of our expansions, players could start with single-player content to enjoy that content first and over time, smoothly translate into multiplayer mode and enjoy social gaming with a period between expansion path. That's the plan. In terms of monetization, we'll focus on a tier-based cosmetic offerings, alongside with other lighter monetization models like better cost. But we want to make sure that our game could alleviate the pressures from complicated -- traditional complicated cultivation and monetization, forcing a healthier social ecosystem and relaxed social environment where players can immerse themselves with light effort to match up with other players and lower barriers for the all players to return to game. We aim to achieve a better operational performance in the long-term. That's our goal. Thank you for your question.

Lincoln Kong: [Foreign Language]. Thank you. So my second question is about Justice Mobile and Eggy Party. So based on some third-party data, it seems the games have some pressure in terms of the grossing trend recently. Could management elaborate how they are seeing internally for these two games in terms of their operational strategy, especially in what direction. Could we expect to extend the life cycle of these two games? Thank you.

William Ding: [Foreign Language]. Yes. So allow us to track the Justice Mobile part first. As you know, during Q3, we finished the celebration of the first anniversary of the game. And players show very good stickiness to the game and players coming back, actually, the rate of player coming back exceeded our expectations. What we are trying to do here is to balance the commercialization and user experience as well in the long run. We're pretty sure that what we have achieved is that while making sure the players have enough fun game, and we can do the commercialization exploration in the meantime to satisfy big players. Looking at the future, what we're going to keep doing is keep enriching the content of the game, provide multi-tier of content and pursuing for the players. And in the meantime, explore innovative commercializations to make sure the game has a long-term housing environment. That's a part of the Justice Mobile. [Foreign Language]. Okay. So for the question about Eggy Party. Now one thing you can be sure that we are still doing a big effort and keep investing into building more content for the game. So again, we have -- we are very confident for the Eggy Party in the long-term run. It's actually one of the highest DAU products of NetEase in the history. And as you noted from other sources of data, commercialization, we run into some short-term challenges However, we take that as a great opportunity to accumulate experiences in how to develop a key relevant franchise. We strongly believe this franchise is a very unique offering in the market. And our focus the long-term content operation. We believe in the long-term, while we're doing more content, will provide more opportunities for commercialization in the future. Thank you.

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

Xueqing Zhang: [Foreign Language]. Thanks management for taking my questions. I have two questions, and I will address one by one. My first question about [indiscernible] strategy. How is your current situation with the overseas first-party studios, we have seen that Once Human has performed well since this year. Could management share more specific details and what's our plan for globalizations of domestic studio game? Thank you.

William Ding: [Foreign Language]. So thank you for your question. As you can tell that we are having two legs in our -- when we go after the global market. One leg is we have oversea first-party, making games in the region in Western market, in Japan for the Western and Japan market. In the meantime, the second leg is that we have our studios -- domestic studios making game for global to release not only in China but in Europe market, North American market and Japanese market as well. You're right that Once Human was the game we released early summer this year and performance really well. And looking forward, immediately, we have two titles. One is Marvel Rivals in December and the other one is FragPunk in early next year that we're going to release towards the global market. Both of these are shooter-based PVP game on PC and console. We believe our domestic studios will be capable of producing more and more products suitable for global market. Actually, this is not our first wave of success in global market outside of China market. You probably recorded our lifestyles and add, actually work fairly well in Japan market and gain a lot of claim there. And looking forward, we have confidence that our domestic studies and our overseas studios will be able to produce more and more worldwide suitable content. Thank you.

Xueqing Zhang: [Foreign Language]. My second question is about the flagship evergreen games. How do the first games such as [indiscernible] joining mobile remains strong? How are the gross billings in recent months? Thank you.

William Ding: [Foreign Language]. Yes. So actually, and that is, we have quite a selection of franchises that has more than 10 years old. Like Fantasy Journey, Westward Journey Online, the world, even our license title World of Warcraft. We will keep doing -- what we'll keep doing is continuously add new game play, try new things, new fun staff and content into the game. We believe the core of game business is for innovation to keep providing fun, innovative new content to the players. And in every single game, we'll keep doing that, and that's something you can be assured of. Thank you.

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

Ritchie Sun: [Foreign Language]. First of all, for Marvel rivals, can management contrast the potential of this title against other PVP shooting titles in the market? And how long would it take for the game to ramp up to its full potential? And what metrics should we monitor to track its progress?

William Ding: [Foreign Language]. Yes. So for your question about Marvel Rivals. Marvel Rivals is a new generation superhero based team-based competitive shooting game. It actually has very unique game experiences, and we hope it could open the new track in this big genre. And the product actually facilitated large scale PCN console post-beta tests in north [indiscernible], in the overseas market. The performance data was excellent. Steam positive review rate was close to 95%. The player's feedback are very positive. And in the meantime, it also ranked seven on a steam wish list now. We do have confidence that we're doing the time we have before launch, we'll keep optimizing the product cheap option of product. One product -- when the product is released on December 6 globally on PC and console, it could be operate aspect of pro experience to the users. We hope this one could provide an unique experience to the players worldwide. Thank you.

Ritchie Sun: [Foreign Language]. Thank you. I have a second question is about Blizzard. The reception of the relaunch of World of Warcraft and Hearthstone in China is much better than expected. So what have we done differently than the past to drive such results? And would this mean the annual revenue contribution from Blizzard in the future will be higher than in 2022? And when will Overwatch return to China? Thank you.

William Ding: [Foreign Language]. Yes. So the -- we have done quite many things on both marketing as well as product is a modified effort approach to operate with the product. World of Warcraft is in for some power. However, a multiple, multiple cross-branding collaborations with other brands we brought that into an even bigger impact in the society, and that help us to attract a lot of new players to the game as well. For Hearthstone, you probably heard that we announced the returning of Hearthstone at ChinaJoy, and that became one of the most exciting things during ChinaJoy time. And also the return of -- on the sports side, the golden league the impact on the [indiscernible] involvement that's all helped. And also will be innovative in how to spread out the brand message and how to interact with the players. For example, social media is something we have done more innovatively compared to the past. The videos on social media has been -- the click of the video on social media video has more than 10 billion times now. And also, none of this could be realized without a deep collaboration, deep trust and deep collaboration with Blizzard. Now both on the product and marketing side, we have very big working relationship now. And we believe with the innovations we're doing here in China, focusing on how to present more locally appreciated product and service to the Chinese players. We can maintain and the players also showed us the level of activeness and level of payment intention is really high. And we are very confident that it will have a very good result in the long run. That's for World of Warcraft and Hearthstone. For Overwatch, we don't have anything specific to disclose now regarding the launch date. But Overwatch is going to be the next product -- next reserve product we launch in China. Thank you.

Operator: Your next question comes from Felix Liu with UBS.

Felix Liu: [Foreign Language]. Thank you management for taking my question. My question is on your pipeline. You mentioned some titles earlier in the call, but could you provide more details on the game genre and the expected launch time for the key titles in 2025. Additionally, I would like to ask a question on Project Mugen game, what is the latest status of the game and expected launch time?

William Ding: [Foreign Language]. Yes. So let's talk about the FragPunk and Project Mugen. FragPunk, as we mentioned that we're going to have a test within this year in December. And based on the test result, we'll decide want to launch this game officially. That's for FragPunk. And for Project Mugen, as we mentioned that we're going to have the first offline test within this year. And we do have high expectations for Project Mugen, not only because we invested a tremendous amount of R&D resources into this product, but also our expectation is this game is not going to be only another open world ACG game. It will carry NetEase's thinking about future ACG game. And based on our 20 years' experience, knowledge of the Chinese game -- of the gamers and observational gamers, we got lot of thinking into what the future of this type of game should be and that will be reflected in the game. We do have high expectations there.

Felix Liu: [Foreign Language]. Thank you management. My follow-up question is on the latest trends on Fantasy Westward Journey PC. Its operational trends as well as cash growth in trend? And what are the user feedbacks to our changes made in the first half? Thank you.

William Ding: [Foreign Language]. Yes, thank you for your question on Fantasy Westward Journey PC. Fantasy Westward Journey PC now all the performance metrics are very stable. As a matter of fact, August was the highest revenue months in this year for this game. And now after the adjustment the DAU is stable. Not only stabilized, but keep improving now. And we released a series of adjusted content from August to October time. And the player feedback regarding this new content is a very welcoming attitude. And in the meantime, we're going to release new expansion pack by the end of this year and more optimization and refresh content to maintain the final play of the game and maintain the stableness of the game operation. Thank you. Operator, given the time limit, we probably have time for one more question.

Operator: Thank you. Your next question comes from Alicia Yap with Citigroup.

Alicia Yap: [Foreign Language]. Thanks for taking my question. Could management share with us your thoughts and on the performance of Naraka

William Ding: [Foreign Language]. Yes. To answer your question, we actually have accumulated 50 million new users across the four months of operation. And one thing we learned is that even both the PC and mobile are competitive action-based competitive games. The PC gamers and the mobile gamers their needs and demands are, to some extent, different. The mobile gamers, the demand are more diversified. They are hardcore competitive players. There are social type players. There are also players enjoy collecting the cosmetic stuffs. So what we do is that we embrace -- we understand and we embrace the difference in the gamers' needs, and we provide different content, differentiated content to both PC and mobile version. And for example, the -- we might provide more new content that are not available on PC, but for mobile players only to provide new gameplays, new content, everything. And the game actually is very -- in a very healthy status and very stabilized, very stable, very healthy status, and we have long-term confidence in this product. Thank you.

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

Brandi Piacente: Thank you again for joining us today. If you have any further questions, please feel free to contact the IR team at NetEase. Have a great day. Thank you.