NetEase, Inc.
Q3 2021 Earnings Call Transcript

Published: 16 Nov 2021

[Operator:]

Good day and welcome to the NetEase 2021 Third Quarter 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 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 a certain risks and uncertainties, assumptions, and other factors. Some of this 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 business and the financial results is included in certain filings of the Company with the Securities and Exchange Commission, including its annual report on , and the announcements and the findings on a website of 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 discuss certain non-GAAP financial measures for comparison purposes only. For definition of non-GAAP financial measure -- as a reconciliation of GAAP to non-GAAP financial results, please see the 2021 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 corporate website at ir.netease.com. Joining us today on the call from NetEase 's 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 remarks on behalf of William.

[Charles Yang:]

Thank you, Margret. 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 an exciting one for NetEase. We launched a number of top ranking games, bringing our game revenues to a new record of RMB $15.9 billion. Our other business segments also grew robustly, supporting our total net revenues growth of around 19% year-over-year, reaching $22.2 billion RMB. For online games, our flagship title continues to demonstrate strong growth up to nearly 2 decades of operation. Revenues from Fantasy Westward Journey Online and Westward Journey Online, both grew at double-digit rates year-over-year in the third quarter. The mobile versions of these 2 legacy saga shows resilient year-over-year growth as well. Adding to our strong portfolio of PC games, our new hit games, NARAKA

[Operator:]

Thank you. . We will now take our question from Alex Poon, from Morgan Stanley. Please go ahead.

[Alex Poon:]

, My question is -- first of all, congratulations on very strong results and gain pipeline. My question is regarding Harry Porter overseas release schedule. Do we have more specific timeline for different regions for release next year? How's the progress of content localization and community localization, etc.? How's -- do we have a revenue expectation for overseas? How is it compared with China revenue? Thank you very much.

[Charles Yang:]

Thank you, Alex. Let me answer your question directly in English. We have a strong pipeline and Harry Potter is one of them. And right now, we're subject to obviously the progress of localization. We intend to launch Harry Potter to some overseas market, as early as first half of next year. And given the huge fan base of the Harry Potter IPO worldwide and particularly encouraged by the very strong performance of Harry Potter in China. We are hopeful that, this game would become a worldwide sensation. The publishing right is a commercial arrangement between NetEase and time wanted for some of the markets, NetEase will be in charge of publishing, well by, majority of the overseas market publishing will belong to

[Alex Poon:]

Charles, thank you.

[Operator:]

Thank you. I will take our next question from Alicia Yap, from Citi. Please, go ahead.

[Alicia Yap:]

Thank you. Thank you, Management. My question is related to NetEase Cloud Music. So how do you see the overall competitive landscape and also the time spent dilution from the short video platform? Do you worry is the leading short video platform like Douyin, that could enter more aggressively in the online music content that could actually pose some threat to Cloud Music overtime and also affect the user time spend on Cloud Music. Thank you.

[William Ding:]

[Alicia Yap:]

We do observe that, at least in the short-term, short-format video -- though all the general video format has taken some of the user time spent. That not only knew that, but also in games, in other forms of entertainment. But what's the major difference between music and the video is that music creates that resonance between users. It creates an immersive experience for users. So videos, if you put one -- after you watch one video, you probably don't want to watch it again. But for music, you tend to want to listen to it over and over again if it's a piece of music that you love. The second question on competitive -- on potential new competitors, new entrance to the market, our view is that this is a very open market. We very much welcome others to join and help those independent musicians in China to realize their dreams. Thank you.

[Operator:]

We will now take our next question from Natalie Wu from Haitong International. Please go ahead.

[Natalie Wu:]

Thank you. Thank you for taking my question and congratulations on a better short quarter. So my question is regarding NARAKA BLADEPOINT. Just want to get an update of the Cobby bank digital Youdao's revenue contribution versus in-game purchase revenue contribution at the point of 6 million copies worldwide. And also for each part, how should we understand the deferral treatment in terms of the revenue recognition? Also, if management can share with us some thoughts on the longevity of these games, that would be great. Thank you.

[Charles Yang:]

Natalie, in the interest of time, I'll answer that question directly in English. Firstly, on your question on revenue recognition. So both for the copy of sales, as well as the team app purchase, we adopt the revenue deferral treatment over an expected life spend. So this is consistent with our revenue recognition treatment of other PC and mobile games. Obviously, with the games being launched a few months back, now the more -- and the gross billions will come more and more from the in-app purchases, which we are very confident that NARAKA

[Natalie Wu:]

Yes, very clear. Thank you, Charles.

[Operator:]

We can now take our next question from Kenneth Fong from Credit Suisse. Please go ahead.

[Kenneth Fong:]

. Thank you management for taking my question. I have a question on the NetEase Cloud Music. Note that we have obtained full corporate rights authorization from Emperor Entertainment recently, and also the big 3. So how should we think about the pace of signing up new copyrights and impact and benefits on our content costs and the margin going forward? Thank you.

[William Ding:]

[Margaret Shi:]

Over the last few years, the masses in China have not been perfect, which is why the industry players in music industry have been paying a much more expensive price to the label companies than anywhere else in the world. As everybody has seen, on July the 24 and authorities have base guidelines to certain companies and asked them to give up exclusive rights. So I think overall, we would like to see is that -- where we would like to see is to be able to pay a fair price to the label companies across the world. And now we have -- we are confident under the right -- under the right direction from our authorities that the Chinese type music industry will continue to converge into the same -- in the right direction. At secondly, we seen that every music Company in China, should be really be focusing on helping independent musicians to create good music, to create future relates and positive messages. As a socially responsible Company, NetEase Cloud Music has been making those preparation. And that is our agenda and is our goal. Thank you.

[Kenneth Fong:]

Shi, Thank you.

[Operator:]

Steve and I will take our next question from Thomas Chong, from Jefferies. Please go ahead.

[Thomas Chong:]

Thanks, management, for taking my questions and congratulations on a very strong set of results. My question is about our M&A strategies as well as the use of cash. In addition, can management share about the cost in terms of the trend in operating expenses? Thank you.

[Charles Yang:]

Thank you Thomas. I will answer your question directly in English. So firstly, for our M&A strategy, NetEase has always been a very -- we're always very focused in our core pillars of businesses, games, Online, music, on online education, private label brand yen share. So our business development will be concentrated in our major verticals. And we obviously prefer and for the past two decades or so, we've been growing organically, but we also remain highly active to explore opportunistic opportunities to deploy M&A to further supplement our growth. That's always been our consistent approach towards M&A. In terms of the cash proceeds used, again, we invest most of the cash into ourselves, into our talent acquisition and retention, into our content creation, and it takes patience and it takes commitment. For instance, a major title of next blockbuster game can easily take a few years. We speak budgets to develop. I think this is also one of our competitive edge that has a major gain -- a powerhouse that we can afford, and we can be determined to focus on what we are really good at and what we really want to create. OpEx trend is, I think, NetEase has been listed for over 21 years and we always had a very consistent approach into expense management. We focus greatly on our return, given our strong cash balance sheet, we are not shy to spend money. However, we never burn cash for the sake of spending money. Whenever we spend money in terms of selling, marketing into R&D, it is ultimately ROI -driven, that we want to make sure that the money we spent today may not necessarily give us the top-line return within the same quarter, but we will be handsomely rewarded. As such, we expect that we maintain a prudent, yet healthy level of selling marketing. On the R&D front, we are committed to spend more. That is also encouraged by the authorities, and I think that is also what a long-term sustainable technology Company should do. Thomas, that's the answer to your question.

[Thomas Chong:]

Thank you, and congratulations on a strong quarter again.

[Charles Yang:]

Thank you Thomas.

[Operator:]

We'll now take our next question from Eddie Leung, from Bank of America. Please go ahead.

[Eddie Leung:]

I will do the translation myself. I have a follow-up question on your pipeline for the overseas game market. We understand that a good gain should be public across our different regions. But there are also our cultural and differences. So just wondering the size are working with overseas due deals. If you were tiny studios will also be involved at in our game projects, be signed as specifically for the overseas markets? Thank you.

[William Ding:]

[Margaret Shi:]

It also comes from Japan. So our China-based team, they have most -- their main focus is on the Chinese-themed games that they know well. The Chinese speaking countries. But secondly, we also -- we have been putting a lot of energy and resources in games that coveted for the global launch. For those games, when they think about the game play, the world view and all the details in a global manner. And all those types of games are typically joint-developed by our China-based teams and some of our overseas games. For example, Montreal and certainly we also have games that are being developed solely by the overseas teams who will be working on games that you buy -- that buy them and are targeted in the markets that they know the most And so altogether, we hope to introduce to the global audience more and more exciting games to play. Thank you.

[Eddie Leung:]

Thank you.

[Operator:]

We will now take our next question from Jialong Shi from Nomura Securities. Please go ahead.

[Jialong Shi:]

William, Charles, Margaret, and I will translate myself. My question is about metaverse which is a very hot new area these days, and lots of companies are planning to invest heavily in this field. Can management share with us your vision on metaverse and what are the potential growth opportunities it may bring to the online gaming industry. And what are your strategies to tap this opportunity? Thank you.

[William Ding:]

[Margaret Shi:]

Okay. Yes. So is indeed, the New everywhere today. But then on a hand, I think nobody has actually had time experience in what it is. But we are technology totally ready. We know how to accumulate the relevant know-how, the relevant skill-sets, when that day comes. So I think when that day eventually comes, we will probably be one of the fastest in the methods by the state. Thank you Delo.

[Operator:]

At this time, I would like to turn the conference back to Margaret Shi for any additional or closing remarks.

[Margaret Shi:]

Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly on TPG Investor Relations. Have a great day. Thank you.