Earnings Transcript for NTES - Q4 Fiscal Year 2022

Operator: Good day and welcome to the NetEase 2022 Fourth Quarter and Yearend Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Margaret Shi, IR Director of NetEase. Please go ahead.

Margaret Shi: Thank you, operator. Please note the discussion today will contain forward-looking statements relating to 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 the 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 announcement of the 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 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 2022 fourth quarter and full year earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, on the 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 senior management team is Mr. William Ding, Chief Executive Officer; and Mr. Charles Yang, Chief Financial Officer as well as other members of the senior management team. I will now turn the call over to Charles, who will read the prepared remarks 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 calculated based on RMB. 2022 marked another year of solid growth for NetEase. Healthy development in each of our core businesses paved the way for meaningful financial gains. We achieved another record high net revenues of RMB96.5 billion for the full year, up 10% year-over-year with games and related value added services coming in at RMB74.6 billion for 2020 also up 10% year-over-year. This demonstrates NetEase's unique ability to deliver solid and sustainable growths throughout different macro cycles with time proven track record. In the fourth quarter, players continues to show their strong passion for our legacy titles, including Fantasy Westward Journey Online and the Westward Journey Online series. With our consistent rollout of content updates, these games has been staying at the forefront of the market for almost two decades acclaimed for their robust ecosystem and depths in game design. Adding to their success, we will soon introduce Westward Journey Returns, a more casual and light version of the Legacy IP. This game is designed to retain the essence of the franchise and has sparked a resurgence of interest amongst older fans, giving them an opportunity to relive cherished memories. With this new addition, we anticipate a further expansion of our user base of the Westward Journey Online franchise. Our new game Eggy Party game market in China by storm in the fourth quarter. The game was initially launched in May of last year and the number of daily active users has been continuously growing after a few months of operation and fine tuning. During the Chinese New Year, Eggy Party further grew its user base exponentially through word of mouse and scaled new height to the number three position in China's iOS growth in China. Its daily active users have now exceeded 30 million, making it the largest game in NetEase's history in terms of user scale. Adding to the dynamic and interactive gaming experiences that we produced inhouse, Eggy Party distinguishes itself from other party games through the unique contribution of user generated content. Players of Eggy Party are encouraged to take advantage of a diverse toolset available in editor mode to design and publish new level on the platform. As a result, player engagement with user generated content had further enriched the content spectrum on top of our in-house PGC content. This set up creates a virtuous cycle that continually adds fresh content to the platform and enhances player engagement and loyalty. With a goal of cultivating a striving and self-sustaining ecosystem with long lasting potential, we will continue to provide these players with tools and incentives to inspire and empower them to generate even more content. While Eggy Party represents a huge breakthrough for us in terms of our efforts to expanding to casual games, we have been steadily building up our capabilities through many great games over the past few years. For example, our award-winning adventure mobile game Sky, which was launched in 2019, also delivered a strong performance in the fourth quarter. Sky offers players a heartwarming game play experience and have established a dynamic and passionate fan community. With a cool Halloween update during the quarter, Sky also surged to the top position on China's iOS top growth chart. While experiencing significant progress in casual games, we have also maintained our strong preference in the hard-core genre. This is evidenced by the sustained popularity of our key titles such as Invincible and the mobile version of New Ghost. Now let's move on to our pipeline. 2023 is exciting. We are set to expand our reach even further with a host of new titles. We have already received license approvals in China for a number of exciting titles such as Justice mobile games, Racing Master and Badlanders. Starting with the Justice mobile game, it complements the success of the PC version and aimed to be rolled out later this year. The mobile version will recreate the vivid world of the Song Dynasty on mobile devices with cutting-edge game technologies such as real-time ray tracing for amazing graphics that bring in-game scenes to life. With the extensive support of a highly skilled and experienced development team, Justice mobile game boasts a wealth of exciting and engaging content that players can enjoy for a sustained lifecycle. Equally importantly, as a next generation MMO, this game represents a major evolution beyond the conventional norms of player interaction within the MMO genre, offering a truly unique gaming experience. We think the captivating and immersive open world experiences we have created with Justice mobile game will continue to raise the bar for both MMOs and the broader mobile game industry. Second, the launch of Racing Master is also on track. As our second car racing game, Racing Master boasts a triple A quality racing stimulation. Players can expect an authentic racing experience with dynamic car handling and performance. With a range of over 100 licensed vehicles from renowned car brands globally, players can fully immerse themselves in the thrilling world of racing and experience it like never before. As for Badlanders, it is our next generation looter shooting mobile game, featuring a brand new escape mechanism and exciting looting experience on the battlefield. We will go through rounds of testing and hope we can bring this game to live soon. On the international front, we are preparing the highly anticipated global launch of our Harry Potter Magic Awakened. Our team is making dedicated efforts to continue enhancing and refining its gameplay and user experience, ensuring that our global players will live the amazing wizardry life on both mobile and PC. At the same time, we are also working on the series of expansion tags that will be ready to go, so that our global players will always have plenty of engaging content. Looking beyond these launches, we continue to enhance our robust pipeline and are actively working on a variety of exciting new game titles, including Naraka

Operator: [Operator instructions] Your first question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap: [Foreign language] Can management comment on the domestic gaming landscape? So with domestic aims approval process normalizing, we will not reallocate more resources to domestic game development or we'll put more resource in content that is targeted specifically towards Chinese gamer? Or will you actually still retain your strategy of putting more resource into the overseas games development? Thank you.

William Ding: The process of license has started normalized, which is very good news for us. So I think in the past we've always had the same focus on both China market and the global market. So there's no real change in direction. We'll continue to place the equal emphasis on both the China market and the global market. Thank you.

Operator: Thank you. Your next question comes from Yang Bai from CICC. Please go ahead.

Yang Bai: Can you comment on the competitive landscape in the oversee gaming market? What are the current advantages and the gaps between NetEase's oversee game and other oversee leading game companies and also NetEase has continued to make much progress in oversee markets those year. What kind of synergies can be created between domestic and overseas? Are there any products under development to share with us? Thank you.

William Ding: We are observing currently that overseas games are actually very different, but the Western game players, they prefer PC games and the console game. For them the mobile games are more of the casual types. For the Japanese market, we think the players will accept both, both PC games and the mobile games. For China market, it is obviously they are more inclined to play mobile games. So in terms of content creation, PC games and mobile games are very different in design and in developing. So it is a challenge, but I'm very confident that NetEase will find a solution to create games that appeal to both the China market and the international audience. Thank you.

Operator: Thank you. Your next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.

Lincoln Kong: So, my question is about the Justice mobile. So, we're testing this game having gotten the approval. So, can management provide an update in terms of the development and progress and the launching time for Justice mobile? And how does this game sort of compare with the PC version? And we also have seen this game sort of impact us with so much [indiscernible]. Thank you.

William Ding: Thank you. So yes, we got the license approval in January, and we're going through the final phase of testing now, and hopefully we'll be able to introduce the game to you in the third half of this year. In terms of our mobile game version, I think we are more focused on the game experience in terms that we are trying to make a different, trying to create game that appeals to different type of gamers, whether it's RPG gamer and a RPG gamer. And we think we've achieved lots of breakthroughs on top of a traditional MMO RPG user experience through advanced technologies such as AI and the aim is to create more personalized experience for our gaming users. And I think that this is a game that is built on our 20 years of experience MMO, and on top of that, we have delivered more innovative experience. So, I think it's a very exciting game for our gamers. Thank you.

Operator: The next question is from Natalie Wu with Haitong International. Please go ahead.

Natalie Wu: --> Eggy Party [Author

William Ding: Yeah, so Eggy Party is one of the very successful games we recently launched and this is the type of game that you have fun with, with your friends and family. So, we think, what you worry about probably will not happen because we learn from our mistake. So, we hope this is a game that will continue to bring joy to our gamers. We will dedicate more resources on to the game to ensure a longevity of that game. When we talk about longevity, we need at least 10 years, games like FWJ, has been running for more than two decades. So, we hope to replicate the similar types of longevity when in all of our games. Thanks.

Operator: Thank you. Your next question comes from Alex Poon with Morgan Stanley. Please go ahead.

Alex Poon: Thanks, management for taking my question. My first question is related to Naraka

William Ding: So our Naraka

Charles Yang: Right, Alex. And, and to your second question on the margin outlook, the next two to three years, our game margin will remain relatively stable. You are right that for our overseas studios, they are in an investment phase and likely the games developed by our overseas seize game studios will only come into the market in 2025 and beyond. However, we do have a very strong and sizable existing portfolio of games that provides a very, very strong support to cash flow, to profitability, to the margins. And for our subsidiaries like Cloud Music, Youdao, they have already demonstrated a clear trend of narrowing down the losses. We are very confident give them another six to eight quarter, both businesses are very, very optimistic to be self-sustainable and breaking even. So all in all, I think in the next two to three years, our margins will be steady and slightly improving with positive surprises coming in 2025 beyond, which will then primarily be filled by the commercial launch of our overseas games that's currently in the development phase.

Operator: Thank you. Your next question comes from Felix Liu with UBS. Please go ahead.

Felix Liu: Okay. Let me translate myself. Thank you management for taking my question. You mentioned the improved regulation outlook in China about game license. We're definitely happy to see that. outside of the license gain that you already mentioned. If we look into second half this year and maybe 2024, could you give us some spoilers the big titles or big genre that you have a good pipeline for? Thank you.

William Ding: Okay. I'm sure this year and next year and many years ahead, we will continue to see more games to be launched, new games to be launched from NetEase. The subject innovation is perpetual and we will continue to focus on innovating our game play and our game quality. And you've seen we -- and we are confident, we'll continue to be able to deliver strong blockbuster games to the market years after year. Last year, we had amazing blockbuster America Play Point [ph]. This year we have Eggy Party. So those are breakthroughs that was been equally successful in the work type at Barbecue Games and we are equally successful in the casual games that you play with family and friends. So, I'm very confident you'll continue to see new exciting, innovative games coming from different genre out of NetEase. Thank you.

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

Margaret Shi: Thank you again for joining us today. If you have any further questions, please feel free to contact us directly or financial communications. Have a great day. Thank you.

Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. Marked only minor, even though these are grave errors.