Earnings Transcript for NTES - Q4 Fiscal Year 2024

Operator: Good day and welcome to the NetEase 2024 Fourth Quarter and Fiscal Year 2024 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 certain comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the fourth quarter 2024 and 2024 fiscal year 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 William's behalf.

Bill Pang: Thank you, Brandi and thank you everyone for participating in today's call. Before we begin, I will remind everyone that all percentages are based on RMB. At NetEase, we are dedicated to innovation and strive for continuous breakthroughs across our businesses. While 2023 was a year of expanding our portfolio across various game genres, 2024 was about pushing boundaries with both innovation and accelerating our brand awareness in the global market. These strategic steps reinforce our foundation for sustainable long-term growth. By the end of year, our total net revenue reached RMB105.3 billion, with RMB83.6 billion from games and related value ad services, both marking new record highs. Notably, this marks the 22nd consecutive year of revenue growth from our online games operations. The successful launch of new blocks of titles in the fourth quarter, advanced each of our growth drivers, innovation, diversification, and globalization. By redefining gameplay and setting new industry standards for premium quality, we have created tremendous player enthusiasm. Our games captured attention across genres, within and beyond the traditional gaming community and on both domestic and global scale. Let's start today by reviewing our new games performance, then we'll take a look at our broader portfolio and pipeline. Marvel Rivals, our fast-paced Superhero shooting game spark massive excitement across global markets following its launch. It claimed the number one spot on Steam's top seller chart within four hours of its release, attracting over 10 million players in its first 72 hours and 20 million players in the first two phases. With over 40 million players accumulated so far. Marvel Rivals is redefining the Hero shooter experience through its unique lifestyle, innovative combat system and ever-changing battlefields. Its key team of ability and a dynamic layer of immersive interactions among players, while recreating iconic Marvel moments with our fresh take that adds a new dimension to the Marvel universe. During the Season 1 update, Marvel Rivals once again topped Steam's top seller and most-played charts. Our collaboration with Marvel Comics also bought Marvel Rivals to live for comic fans through our Infinity comic series of Marvel Unlimited. The synergy not only amplified the game's momentum but also bridge the world of gaming and other media forms, captivating audience beyond the gaming community and solidifying Marvel Rivals as a corporate phenomenon. With more superheroes and exciting events on the horizon, Marvel Rivals will continue to evolve. We are thrilled to be even more new experiences to the game that keeps players engage and inspire. At the end of December, we launched our highly anticipated open-world action adventure RPG, Where Winds Meet. Within four days of its PC launch in China, the game has amounted 3 million downloads and topped the iOS download chart for around two weeks following its mobile launch. The booming mobile version drove total players across PC and mobile to over 10 million within a week and over 50 million after two weeks. Rooted in the rich crafted world with deep historical backdrop, Where Winds Meet innovatively introduced the Chinese martial arts in the open-world exploration experience. On top of that, we pioneered a mode that caters to both single player and multiplayer preferences, which reinterpret our [indiscernible] story in a brand-new way. Players can immerse themselves in the interline conflict of Asian cities like [indiscernible], witness characters contrasting fate during historical changes and develop social network with other people along the journey. Building on the single player experience, the game seamlessly integrates challenges that encourage social exchange, while continuously refining the experiences, we aim to create a compelling blend of solar and multiple elements, offering players a diverse way to experience the world with community high price, we expect the audience of Where Winds Meet to continue expand over time with the game becoming another flagship evergreen title. Our plans to build on the game's initial success are underway. We are currently working to bring Where Winds Meet to console platforms and introduce the Saga to players in more regions. In addition to our new game launches, the return of Blizzard game to China has been highly successful, with a strong momentum throughout the fourth quarter. The return of or World of Warcraft has consistently spared tremendous enthusiasm from the community, supported by our diverse localized events that are driving the franchise to new highs. Shortly after Hearthstone's return, we quickly reorganized the highly anticipated Hearthstone go series in China. The events set new records, drawing in over 10,000 fans in person and more than 10 million players gather to watch online. Just yesterday, Overwatch 2 made its return to China, reigniting player excitement as present portfolio gradually returns to Chinese markets. We are further strengthening our partnership with Blizzard, exploring localization opportunities and bring more exciting content for China's robust game community. Whether developing or operating title, we are always committed to innovation and operational excellence, we apply this across our portfolio and continue to see the results of our dedication reflected in our new and legacy franchises. With operations across decades, our beloved legacy franchises continue to set new records and advance fans serving players with enduring popularity. Turning to Westward Journey, continues to bring players fresh experiences through well-timed events and new content in the fourth quarter. The firewall expansion pack featuring the iconic transformation abilities of Monty King Sifu introduced all new skills and some on this. Meanwhile, the swing festival event plan turn around the year of snake, brought the community of vibrant new year atmosphere. For Fantasy Westward Journey in mobile, we continue to infuse new content into the game, which gained heightened popularity throughout the year led to the record high revenue for 2024, nearly a decade after its launch. Westward Journey Online II also achieve record high annual revenue, driven by enriched gameplay and activities, as well as refresh the gaming experience powered by new servers. Players flock to the in-game ceremony for account benefit [indiscernible] and explore new maps and missions set into driving Asian cities of [indiscernible]. Stepping into 2025. We also introduced our major new annual server update for Westward Journey Online mobile. We continue to updates with the sharing system. It generated a significant new community interest and further strengthens balance among players, while keeping long-term fans coming back for more. Identity V is another testament to our long-term operational success with our established titles. After second consecutive new quarterly records in the first three quarters both in terms of player numbers and revenues, Identity V achieved record high revenue in 2024. In the fourth quarter, we sustained intense player activity with our comprehensive operational strategy, which players love. For example, in November, we launched across branding campaign with Persona 5 Royal, introducing the beloved [indiscernible] of heart to our game. Fans appear in group for the crossover event driving Identity V to number two position on the iOS top revenue chart. Naraka

Operator: Thank you. [Operator Instructions] Your first question comes from Yang Bai with CICC.

Yang Bai: [Foreign Language] As a continuing trend, could management share more color on it’s data test achievement, current preparations for launching and post-launch operational priorities, what’s the company's perspective on competition within the shooter game market segment? Thank you.

William Ding: [Foreign Language] Okay. I'll do the English translation. The AI-power [ph] has come the large-scale testing, both domestically and oversees market, which feedback met our expectations. Players gave high appraisal to our innovative gameplay and system design and provided a lot of valuable advices as well. After months of iteration, we're now ready to launch. After launch, as always it will continue to monitor player feedback, updates, better levels, provide new characters and crackdown cheating behaviors, building a healthy gaming environment for the players. Currently, I say, there are multiple well-performing shooting titles in the shooting genres -- shooting is big genre which our R&D teams had truly experience. This actually reinforce our confidence in our game no matter the control feelings, the system design for the fewer narratives, including it's a very unique style. Everything is this unique signature and will be appealing to existing and new players, we do have confidence that the game will be successful. Thank you. Operator, next question.

Operator: Your next question comes from Yang Liu with Morgan Stanley.

Yang Liu: [Foreign Language] I will translate my question. First, I congratulate the positive feedback from the gamers on Where Winds Meet and we see quite positive metrics or retention DAU, et cetera, but also we hear a lot of feedback to expect the company to improve the cosmetics and also the multi-play game play in the game. So, I would to like ask what is the next stage monetization strategy for this title? And where could we see improvement? And also, I would like to ask about the overseas launch plan for this title, where and what market? Thank you.

William Ding: [Foreign Language] Okay. Thank you, William. I will do translation. Where Winds Meet, thank you for your question. Where Winds Meet is why the client since its launch, demonstrating a solid performance with robust metrics. The inclusion of both single player and a multi-player mode has created a diverse demand of players. And the monetization strategy centered around cosmetics was widely welcomed. Furthermore, our content ecosystem featuring casual and low-pressure gaming experience lays the healthy foundation for long-term operation. In the future, we will continue to focus on infusing new content, our maps to enrich our open world, creating diversified quality, costumes, crafting various interesting and innovative single player and multi-player experience for single player and multi-player game plays for gamers. And we'll -- from time to time, we will talk to players face-to-face, collect their feedback to keep modifying, keep polishing our game. Regarding your question on the overseas plan, we notice that Where Winds Meet's wide appraisal of its unique open-world style and the unique interpretation of [indiscernible] content, which actually gained us wide attention and anticipation from overseas audience as well. Currently, we have started working on the overseas version. We hope we could present that to oversee players within 2025. Thank you. Thank you for your question. Operator, next question please.

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

Ritchie Sun: Thank you management for taking my question. I have two, but the first one is about Marvel Rivals. Regarding the 40 million users, can you share more about the paying propensity paying ratio? And what is the next growth strategy that we're looking at? Will we expand the marketing or e-sports or even connectivity with the Marvel movies to further expand our user base? Thank you.

Bill Pang: Thank you for your question. Marvel Rivals, especially after Season 1, has gained wide appraisal from worldwide players. And this is a product we're going to keep investing both on development and marketing. And we do believe this product, we're going to keep operating, keep enhancing, keep investing for 10 years and beyond. To your question, yes, the team does have plans for eSports, and we're going to announce our eSports plans, hope to have this eSports plan to further enhance the overall gaming ecosystem. And to your question, yes, we're going to do a lot of crossover events and promotions with other media in the future. And this is a key product we'll keep investing. Thank you for your attention. Operator, next question, please.

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

Alicia Yap: Hi. Thank you. [Foreign Language] So my question is related to Overwatch, given the games relaunching China yesterday. So what are the company's current expectations for the game? And how will NetEase strike a balance between Marvel Rivals and Overwatch? Thank you.

William Ding: [Foreign Language] Thank you for your question. Regarding our expectations for Overwatch, it's similar to those for World of Warcraft and Hearthstone. We aim not only to just restore the operation as is, we aim to really revitalizing the product and reaching new highs. We are encouraged to see that from the day one we launched yesterday from the data, from the user feedback, we are happy to see that we are on that trend. Both Marvel Rivals and Overwatch are excellent superhero shooters in this category and both well design and supported by outstanding development teams. We will each strive to meet diversified demand of our respective player community. We believe the market is large enough to accommodate two excellent games in the market. Thank you. Operator, next question please.

Operator: Next question is from Ritchie Sun with HSBC.

Ritchie Sun: [Foreign Language] Thank you management for taking my question again. Can you discuss how does the user and growth trend look like for World of Warcraft and Hearthstone after a strong initial boots from the pent-up demand? And after this normalization, what is the next step to improve the longevity of these titles? Thank you.

William Ding: [Foreign Language] Thank you for your question. Your six months profits to return to World of Warcraft and Hearthstone are still performing far better than any other title in the history. Of course, as you mentioned, that during the launch time, it's not uncommon that things will normalize and -- compared to the release time. We have closely collaborated with our partners at Blizzard to plan upcoming content plan. And we believe we will reignite players' engagement. And in the long-term, we have established a strong trust with Blizzard development team and are committed to addressing the feedback from Chinese players to provide -- to improve their gaming experience in the local way. Thank you for your question. Operator, next question, please.

Operator: Next question is from Lincoln Kong with Goldman Sachs.

Lincoln Kong: [Foreign Language] So, thank you management for taking my question. So, my first question is about our overseas market. After the Marvel Rivals' success and also some of the adjustment of our overseas studios, how should we think about our future expansion strategy in overseas market? So, we follow more direction as some Marvel Rivals and Fragpunk, those are self-developed games. How should we think about our advantage in the overseas market? The second question is about the AI and the game. So, after the success of DeepSeek and a huge influence cost dropping, how would NetEase integrate our AI versus our current game portfolio as well as our future pipeline? Could management share with us more around the gameplay innovation, a user's interaction or production efficiency or cost discipline any aspects related to AI. Thanks.

William Ding: [Foreign Language]

Bill Pang: Okay. I will do the translation. So to your question, the user demand, their preference in oversea market are not the same as the user demand preference in China market, we realize that. And we actually pay a lot of attention to support our overseas studios. To support the creators in the overseas market to be creative -- to create content to meet the local demand in the overseas market. So as commitment to support the really high-quality studios and really master creators to create a very creative game for oversea market, that is our strategy. There's no change on that. Yeah. So that's the answer to the first question. And the second question, regarding AI. AI is and will significantly increase the efficiency in the R&D process in the development pipeline. There's no doubt about that. We have been doing that and we're going to do that in the future. And also, there are many, many other applications of AI in gaming. For example, games, it could help the users to better engage with the content, better understand the content that our onboarding on content for new gamers, and we're exploring that in massive way as well. And we believe AI for the R&D process, the creative process of gaming industry is going to make huge positive contributions. We are very positive about that. Thank you for your question. Operator, next question, please.

Operator: Next question is from [indiscernible] Zeng with Bank of America.

Unidentified Analyst: [Foreign Language] Thanks management for taking my question. My first question is regarding the game of [indiscernible] which got game approval previously, should we expect it to be launched in 2025? And giving the competitive of ACD game, so how do we think about its positioning and the depreciation here? Secondly, one follow-up on the sales and marketing expense, which had a meaningful reduction in Q4, so I want to know the driver and whether we change the sales and marketing strategy? And going forward, how should we look at the sales and marketing trend in 2025? Thank you.

William Ding: [Foreign Language] So, I will translate the first question first. Okay. Yes. So, we have completed an offline test for [indiscernible] this January. And the feedback is honestly quite positive. The development is undergoing in a very smooth way on track and the team is growing in the order demand as well. For competition, we believe competition is a good thing. And it actually reflects that the market, there's interest in the market in this genre of games, and there's unmet demand there. As long as we meet the clear expectations, we're confident that we can deliver outstanding products. Currently, we are focusing on refining our content to keep developing the product. And we plan to invite more players for testing when we are ready. Thank you. So, regarding the market spending decrease in Q4. As you know, we keep innovating our market engine and exploring higher efficient ways and tools and systems to operating -- to do the marketing offering. And this actually is a reflect of our improved efficiency in terms of marketing operation. Thank you, operator. Next question, please. For the time being, we probably have time for one more question, please.

Operator: Thank you. The next question comes from Felix Liu with UBS.

Felix Liu: [Foreign Language] Let me translate myself. Thank you management for taking my question. My question is on the news of recent organizational changes. We noted there have been quite a few changes within both of our domestic and overseas studios. Could management share the reason and consideration behind these changes? And how should we think about your mid- and long-term investment plan for new games? Thank you.

William Ding: [Foreign Language]

Bill Pang: Yeah. Okay. I will do the do the translation. When we allocate resources among different products across different studios, no matter domestically or including our overseas studios. We pay a lot of attention a lot of key attributes, for example, the quality of the work. And it's work going to meet the future demand of players when the work is releasing market years later as well as the production efficiency of the work, everything. So if some projects we can foresee that when the product face market years later, it's likely not to be of players. We will not -- we'll very firmly -- we then use word press the break. And if some product -- if they're really high quality, meeting the future market demand, actually, we're going to double down. So it's all about the product itself, the quality, the development, efficiency, is it going to meet the ever-growing user expectation because game development is a long cycle, it’s a three-year, four-year, five-year cycle. When we charge a project, we have some assumptions. And doing that development process, we'll keep monitoring to see if the product is going to be able to meet the future demand and to do resource allocation adjustment. That's a normal course of game development elements. We have been doing that for a long time in that that way. Thank you for your question.

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 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.

William Ding: Thank you.