NetEase, Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Feb 2022

[Operator:]

Good day, and welcome to the NetEase 2021 Fourth Quarter And Full Year 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, ma’am.

[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 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 announcement and filings on the 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 also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures as a reconciliation of GAAP to non-GAAP financial results, please see the 2021 fourth quarter and the full 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 corporate website at ir.netease.com. Joining us today on the 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 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 based on RMB. 2021 was an eventful year for NetEase for online games, we introduced a number of prolific games, breaking new record and various categories for Youdao. We quickly and successfully restructured our business in lines of the new regulations in the online education industry and Youdao is now ready for its next phase of from. And for our Cloud Music business, we are extremely pleased to have completed a initial public offering on Hong Kong Stock Exchange in December, we look forward to growing this business further with augmented content and features to create and bring more quality music to our users. For online games, we finished the year with a strong project revenues came in at RMB17.4 billion representing 30% year-over-year growth. Our flagship titles continue to demonstrate strong year-over-year growth after two decades of operations. We continue to supply our loyal and sustainable base of users is continual content updates revenues from our Fantasy Westward Journey and Westward Journey Online saga continue to grow remarkably at double digit rates year-over-year. Further strengthening their positions as China’s biggest and MMO titles. In terms of our new game launched during the year Naraka

[Operator:]

Thank you. We’ll take our first question from Jialong Shi with Nomura.

[Jialong Shi:]

Good evening management. Thanks for taking my questions. Congratulations on the solid quarter. My question is about game pipeline. Just wonder if management can provide an update on, on the latest game pipeline for this year and how many of the new games have already received license and will be released this year for one of the new games, the upload model, which has already received the license in China. Can management provide an update on its launch timeline? Thank you.

[William Ding:]

Sure. We are aiming to launch Diablo in the first half of this year and obviously for Diablo, we already have the, the license approval. We are going to launch it in, in China as well as globally. Additionally, we’re also going to release an issue introduce the overseas versions of Harry Potter. Thank you.

[Operator:]

Thank you. We’ll take our next question from Kenneth Fong with Credit Suisse.

[Kenneth Fong:]

Thank you management for taking my questions and Congrats for another solid set of result Harry Potter uses a surge of Harry Potter

[William Ding:]

As you know, NetEase we have lots of experience in running our games for a long period of time. And some of the examples are at the and Onmyoji. And for Harry Potter, this is a types of games that’s about consuming content. And so that longevity is very much linked to how much content is available to the game players. So we’ll continue to deliver those exciting content, to keep our users engaged. In terms of overseas version we, we are aiming to you in, in the middle of the year. Thank you.

[Kenneth Fong:]

Thank you.

[Operator:]

Thank You. We’ll take our next question from Alicia Yap with Citi.

[Alicia Yap:]

Hi, thank you. So last two questions. One is regarding the metaverse so can management, share with us what you think about metaverse would you consider adding some metaverse elements into existing games or launching another versions of some of the assisting game in the metaverse setting? The second question is related to Cloud Music. Can you comment on the pricing trend for the subscription and also overall subscription growth target and the margin trend for the business? Thank you.

[Charles Yang:]

For metaverse, our understanding is that metaverse, is that integration between the virtual and a reality and for NetEase, as we have many, many years of operating MMORPG games and for, MMORPG games, there’s very heavy social elements, and there’s a very sophisticated economic system. And in some, in certain ways you can regard it as a model or prototype for metaverse. And so we’ll continue, in that way. And secondly based on our existing technology, we’ll also, we’ll also be exploring possible new games for metaverse. Thank you. Okay. Firstly we, that the Cloud Music will continue to grow through comprehensive content offering. And one of that is to, is for us to continue to produce high quality, an exclusive content, and much of it will be self-produced by ourselves in-house and I believe, and we believe that everything will be able to deliver to the Chinese consumers a lot of the high quality Chinese pop music for them. And this is the, so content strategy is our one of the main focus for our growth and expansion. Thank you.

[Operator:]

We’ll take our next question from Natalie Wu with Haitong International.

[Natalie Wu:]

I will translate myself briefly. So thanks for taking my question and congratulations on a very solid quarter. This like the upcoming 2022 will be through, for year considering all those quality names in your pipeline. So my question is regarding the headcount plan for, for this year, just wondering which business line has the most talent incremental plan and regarding the global expansion what which certain regions are the most are the major target markets that you are going to put the most efforts on. Thank you.

[Charles Yang:]

In terms of headcount plan, I think our focus this year will be on global talents as you can, as we’re mentioned in our prepared remarks last year, we managed to attract many of the top talents globally, and it will continue to invest in this area. So very soon probably be see more of the global talent joining NetEase. In terms of the, the hiring plans in China, there should be no change from previous years. Thank you.

[Operator:]

We’ll go next to Thomas Chong with Jefferies.

[Thomas Chong:]

Thanks management for taking my questions. Can we discuss about the upcoming new games to be developed in multiple devices like console, PC and mobile in order to target the global audience in different regions? And my second question is about our core competence in developing a high quality high dose on a consistent basis like Harry Potter and Naraka. Thank you

[William Ding:]

Okay, thank you. So Thomas, the first question in terms of new types of games. So in addition to mobile games, console will also be an important area for us. So, any media you think you can imagine play games on is an area that we want to explore that is where we want to create game content for. In terms of regional focus, both China and overseas and international markets are very important to us, overseas is going to be the next new focus. And in terms, your second question on our core competence, and I think over the last two decades, you can see that NetEase is a company that’s very focused and very dedicated in content creation. And secondly, is that we value our talents. And thirdly is that, we are very much high quality driven. So, we are now, when we think about creating games, we’re not thinking about just in China, but also looking at, we are also taking a global vision. We want to be able to serve the global markets as well. And then all in all, we think that talent is perhaps the most important thing for our sustainable growth. We want to continue to attract and retain talents share our passion in game creation. Thank you.

[Thomas Chong:]

Thank you.

[Operator:]

We’ll take our next question from Alex Poon from Morgan Stanley.

[Alex Poon:]

Thanks for management for taking my question. I have two questions. First question its related to our legacy titles. Recently macro environment has not been very good and consumption advertising has not been doing well. And does this weaker macro environment affect our legacy titles, especially those high paying users. And also there have been some daily limits on the loots box, some games does this change affect our growth of our legacy titles? The second question is related to the status of Lord of Rings and the rob blocks like platform that we discussed before in December. Is there any chance that these two games will come out in Asia in first half? Thank you very much.

[William Ding:]

So Alex for your first question, is that the, from what we are seeing our legacy titles are actually growing very well throughout last year. And I think you, what you mentioned about the price draw, yes actually has very little impact on us, because we’ve been very conservative in terms of how we monetize, and for games like FWJ if you remember, is actually a time based type of game. So a second question, Lord of Rings, we to release that game in, in Hong Kong, Macau and Taiwan. And for your third question we are going to have – we are actually developing some of the UGC oriented game. And then so some of them will be introduced to the players.

[Alex Poon:]

Thank you very much.

[Operator:]

Moving next to .

[Unidentified Analyst:]

Thanks management for taking my question, and congrats on your great performance. My question is how should we expect the impact of activation acquired by Microsoft, on their cooperation with NetEase especially for the past range of license games and your cooperation on Diablo and for the more the potential IP license? Thank you.

[William Ding:]

Yes. So both Microsoft and Activision Blizzard actually have been very close partnership with NetEase over the past years, and we’ve been able – we’ve been operating Minecraft in conjunction with Microsoft and we’ve delivered very good strong results. And we congratulate Microsoft, our Activision Blizzard for coming together. Microsoft is one of the largest gaming platforms in the world with while Activision Blizzard is one of the best game creators in the world. And then we believe that that their partnership will create great synergy and they will create positive impact on the gaming just three. And in China NetEase, have a close relationship with both of them. And we believe that in the partnership between Microsoft and Activision Blizzard will also yield strong, positive impact for us in China too. And from our perspective would also love to explore more possibilities of working with Microsoft. Thank you.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. I’ll take our next question from Guanran Wang with CITIC.

[Guanran Wang:]

Hello. Can you hear? Yes. Under the current situation of the, the master gaming industry, we have observed that many gaming companies have also taught their publics or optimized the resource allocation. I would like to ask under the calendar dramatic and oversee market environment, how that is well developed are these structure key game categories, strategy of resource allocation and the feature pipeline feature?

[William Ding:]

So you have been a while since we saw new license approval for NetEase, we are already a game content creator, and we’ve been preparing for the overseas market for a long time. For the past couple of years, you’ve seen some highly successful games in Japan, and you’ve seen us being able to attract some of the biggest global talents to NetEase. We are committed in investing in a global markets. Hopefully in the next two to three years, you’ll see some huge blockbuster titles being produced by NetEase in the global – on the global stage, whether it’s self-developed by us or it’s in a partnership with some of our partner friends. Over the last 20 years, we have accumulated tons of experience in game development in terms of marketing operations, in terms of R&D engines and all of those years, that will give us that strong edge in creating globally successful game. Thank you.

[Operator:]

That will conclude our question-and-answer at this time. I’d like to join the call back over to management for additional – any additional or closing remarks.

[Margaret Shi:]

Thank you again for joining us today. If you have any further questions, please feel free to contact us directly or TPG investor relations. Thank you. Have a great day.

[William Ding:]

Thank you, everyone

[Operator:]

That will conclude today’s call. We appreciate your participation.