NetEase, Inc.
Q2 2022 Earnings Call Transcript

Published: 18 Aug 2022

[Operator:]

Good day, and welcome to the NetEase 2022 Second 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, 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 Safe Harbor from liability as established by the US 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 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 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 and a reconciliation of GAAP to non-GAAP financial results, please see the 2022 second quarter earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, the 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. We are very pleased to report another solid quarter with net revenues growing to RMB23.2 billion, up 13% versus the same period last year. Our online games continues to be our primary growth driver with net revenues from our games and related value-added services coming in at RMB18.1 billion for the second quarter, up 15% year-over-year. Please note, we changed our segment categorization this quarter. The expanded games and related VAS segment now includes game-related value-added services such as CC Live streaming, game-related accessories and merchandises, et cetera. We believe this revised segment categorization better reflects the performance of our well-rounded capabilities around the broadly defined game ecosystem and value chain. Players continue to gravitate to our long-lasting franchises. In the second quarter, revenue from our Fantasy Westward Journey Saga kept on growing, further impressing the industry with their strength and longevity. Through the solid foundation, we filled and continuous iterations we release every few months, this flagship saga are still among the most well-crafted games in today's market, remaining highly attractive to users even after nearly two decades of operation. Over the years, we have built complex and intricate ecosystems within the games, constituting well-balanced, comprehensive economic systems and intimate user networks. We see these games as a work of art and science and this ever evolving as we dynamically adjust the finest details. In terms of newly launched titles, we were extremely excited to see Diablo Immortal in [indiscernible] tens of millions of players dominating the iOS top download chart in multiple regions. Diablo Immortal both fantastic gameplay that relishes the authentic Diablo experience, which also featuring an MMORPG social experience, where players can share a massive world with others as they explore. We are working hard to keep it fresh and plan to continuously introduce exciting new content for Diablo Immortal in a fast-paced manner to keep players engaged. Diablo Immortal debut was also a huge opportunity for us to showcase our world-class development capabilities, leverage a Messiah, our robust self-developed game engine. Diablo Immortal underscores our proficiency in producing top-quality games on mobile devices. Over the years, our team has worked hard to recreate the Diablo sensation on mobile putting great effort into every detail of the game and overcoming countless barriers along the way. In the second quarter, Naraka

[Operator:]

Thank you. [Operator Instructions] We will take our first question from the line of Yang Bai from CICC.

[Yang Bai:]

[Foreign Language] Okay. Thank you, management. NetEase has continuously made efforts in the overseas market in recent years and has established several game developers overseas. What is our take on the pace of overseas investments in the future? Also, could you perhaps share some colors on the products in development? Thank you.

[William Ding:]

Overseas market is upgrade important for NetEase. And as everybody knows that in the past year, we've not received any license approval of [indiscernible] in China. So we have to make the strategic choice to shift some of our R&D resources to the global market, the European markets to the Japanese -- or the Asian markets. So everybody knows that we have a very strong track record in game production. We have very high R&D efficiencies, and we are now working very closely with many overseas developers to find a product that will be welcomed by the global game players. We actually do have a lot of products under development. And hopefully, you will see some of them being introduced to the market very soon. On June 2, everybody saw the success of Diablo that we – Blizzard, and I think it's been a very positive -- very, very strong release of that game. Thank you.

[Operator:]

Our next questions from the line of Thomas Chong from Jefferies.

[Thomas Chong:]

[Foreign Language] Thanks management for taking my questions. We have seen Internet companies highlighting about cost efficiencies, such as staff costs and marketing spending on the back of global macro heaviness these days. Can management share the thought about the outlook about the operating expenses in sales and marketing, R&D and G&A? Thanks.

[William Ding:]

[Foreign Language]

[Margaret Shi:]

So it's not -- the question is about cutting costs. So the question is about optimization of cost. Sometimes it throughout of development operation of our business, sometimes we do have -- we do cut costs in certain areas, but we'll also increase our investment spend in other areas. So NetEase, we will continue to optimize the way we spend the cost structure of the company. Only just because there is weakness in the macro, it doesn't necessarily mean that we have to take certain actions to address that. NetEase, we think very long-term, and we care about the sustainable long-term growth of the company. Thank you.

[Charles Yang:]

And Thomas, it's Charles. Just to add a bit more. As you can see, we've always been very committed in R&D spending over the past couple of years, our had strong headcount, total headcount also remained relatively stable because for us, we think investing into talent, investing into technology is the key competence in us creating the world-class content.

[Margaret Shi:]

Thank you, Thomas. Next question please.

[Operator:]

Okay. Thank you. We will take our next question from the line of Kenneth Fong from Credit Suisse.

[Kenneth Fong:]

[Foreign Language] Thank you management for taking my question. What's management view on the domestic regulatory landscape and expectation on the Banhao approval? With a likely lower number of Banhao approved in the future, how will this change our game strategy, including Jar app, IP investment, et cetera? Thank you.

[William Ding:]

[Foreign Language]

[Margaret Shi:]

So, I kind, of mentioned that in the earlier question, one of the reasons we have to look abroad and be more active in expanding our -- against our user base overseas because of lack of know-how in China. And secondly, it kind of tells you -- tells us that we have to value or cherish the domestic market even more, because know-how the precious resources now. So everybody how we get, we have to work, we’re putting more effort to make sure every game we develop -- launch to the market will be popular, will be welcomed by the game players in China. Thank you.

[Operator:]

Okay. Thank you. We will take our next question from the line of Lincoln Kong from Goldman Sachs. Your line is open now. Please go ahead.

[Lincoln Kong:]

[Foreign language] So my question is about two single game titles. First is on the Infinite Lagrange. So what's the reason behind this title is a popular trend in the recent months? And why we're seeing such a strong expanding MAU growth? And second is on the Naraka

[William Ding:]

[Foreign language]

[Margaret Shi:]

Sure. Thanks. The first question is on Infinite Lagrange. So our team actually has strong expertise in voting game for a very long period of time. So Infinite Lagrange has actually in operation for quite a while, we introduced a new version this year and the game player seems to have loved this new version, which means that the content was strong enough to attract a whole new – whole brand-new set of game players and that gives us confidence that we will be able to continue to expand this category. Thank you.

[William Ding:]

[Foreign Language]

[Margaret Shi:]

There are a number of large DAU product in the market are similar to NARAKA. The reason why we think NARAKA

[Operator:]

Okay. Thank you. We will take our next question from the line of Alicia Yap from Citigroup. The line is open. Please go ahead.

[Alicia Yap:]

Okay. Hi. Good evening. [Foreign Language] Good evening, management. Thanks for taking my questions. My question is related to the US ADR delisting risk. So, whether management has any comments on your plans for the primary Hong Kong leasing? And if so, what is the rough time frame that we should expect that to happen? And then if management have any latest update that you could share with us regarding discussion status between China and US and whether the ADR will indeed be delisted from the US exchange? Thank you.

[Charles Yang:]

Thank you, Alicia, it's Charles. Let me answer your question directly in English. So firstly, we are very closely monitoring the situation. As everyone knows, this is a topic or rather this is a question that's beyond the control of an individual company. It is more of a job political issue, but we remain cautiously optimistic that US and China, the two largest countries in the world and the senior leadership, will find the common ground of interest. So, we think a kind of a hard landing or decoupling between entirely the Chinese companies. There are over 200 Chinese companies listed in the US market. We really don't think a hard landing or decoupling would take place or rather be accelerated. What we could control though, is that we are making very proactive preparation in the event or in a hypothetical scenario, if that extreme situation happened then NetEase will be prepared to continue being a listed a liquid asset. As many of you know, we are in fact, the second Chinese ADR that is being dual listed in Hong Kong back in 2020, although we were -- we are currently a secondarily listed status on the Hong Kong Stock Exchange. The conversion between secondary listing to primary listing is more of a technical paperwork or in a joking way, it's more of a lawyer's work. There's no barrier or there's no roadblocks per se and the preparation work, some of them has been undergoing for a while by us. We think if the situation requires the conversion will be a very swift and smooth process.

[Alicia Yap:]

Thank you, Charles.

[Operator:]

Okay, thank you. We will take our next question from the line of Natalie Wu from Haitong International.

[Natalie Wu:]

[Foreign Language] Let me take in my first question. Thanks, management, for taking my question and congratulations for very strong quarter. My question is related with the recent World of Warcraft, mobile game rumor. Just heard that collaboration has been halted. So, I just wanted to make sure, if this is an independent effect, or should we be concerned regarding company's future relationship with Blizzard, especially after the Microsoft deal next year? And secondly, very quickly follow up with the Infinite Lagrange mobile game. I was just wondering, if the majority of the recent incremental user of booking is generated through the [indiscernible] game publisher plan initiatives? And if yes, how should we think of the related margin profile? Thank you.

[William Ding:]

[Foreign Language]

[Margaret Shi:]

Just translate the -- for the first question. So lastly -- like you said, the case on World of Warcraft is the independent one. So our relationship with Blizzard has been very good. And as you’ve seen recently, we codeveloped and copublished Diablo on well stage and achieved very positive results. Thank you.

[Charles Yang:]

Yes. Natalie, for your second question on Infinite Lagrange, the answer is -- the short answer is that, we -- from time to time, we continuously monitor and explore what we think are effective ways of user acquisition and marketing doing amongst many others is a conducive marketing channel for certain type of games, maybe not all. For Infinite Lagrange, it works for certain types of marketing spending. But all in all, when we look at overall margin profile of a game, obviously, we factor in a lot of considerations, marketing channels, marketing expense being one. But the success or rather the increasing popularity and success of Infinite Lagrange, I don't think it's only dependent on one single source of marketing channel. It played a role, but I think more importantly, the success is underscored by the continuous expansion packs in particular, the expansion pack that we released in the second quarter was particularly effective.

[Natalie Wu:]

Got it, very clear. Thank you.

[Operator:]

Okay. Thank you. We will take our next question from the line of Charlene Liu from HSBC.

[Charlene Liu:]

Thank you. [Foreign Language] Thank you, management for giving me the opportunity to ask the question. We understand that app is off to an excellent start, recording amazing download and growth billing figures. How would the management evaluate the app performance so far? And what are your expectations on the longevity of the game? Also what are the key KPIs would you be tracking mainly? Thank you very much.

[William Ding:]

[Foreign Language]

[Margaret Shi:]

Diablo has achieved very prominent results on a worldwide stage. And it's a very strong MMO game, and like we've done with our -- many of our legacy games. We will continue to issue strong content, good expansion packs to serve our global game players as well. Thank you. Thank you, next question please.

[Operator:]

We will take our next question from the line of Alex Poon from Morgan Stanley.

[Alex Poon:]

[Foreign Language] My question -- I have two questions. My first question is related to the monetization design between overseas titles and domestic titles. When Diablo was initially released, we saw some comments from US gamers saying the game design is a bit over monetization. So in future, when we design mobile games, are gamers going to get used to this kind of monetization, or we need to adjust our monetization system to be a little bit lighter? My second question is related to the performance of NARAKA

[William Ding:]

[Foreign Language]

[Margaret Shi:]

So our product is designed to provide strong user experience for all players. We are not targeting only those who pay a lot of money in the game. We want to serve all of our players of all levels, equally well. So there are many of my friends globally, who have hosted. They've had a great time, playing Diablo without having to spend much money. And it is true, there are many cultural differences, player differences in different regions around the globe, and we will endeavor to provide great experience to players in every country, every region of the world. Thank you.

[William Ding:]

[Foreign Language]

[Margaret Shi:]

Thank you. Like we mentioned in the prepared remarks, we, -- Naraka

[Operator:]

Thank you. Okay. Due to time constraint that concludes today's question-and-answer session. I will 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 or TPG Investor Relations. Have a great day. Thank you.

[Operator:]

That concludes today's conference. Thank you, everyone, for your participation.