NetEase, Inc.
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

Good day, and welcome to the NetEase 2021 First 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 future performance of the Company and are intended to qualify for 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 its discussion.

[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 renminbi. We began the year with a record quarter exceeding RMB20 billion in revenue for the first time and net income attributable to the Company's shareholders increased 25% year-over-year to RMB4.4 billion to RMB4.4 billion. Our games business also reached a new record of RMB15 billion in net revenues, up 11% year-over-year in the first quarter, despite a high comparable base last year. In Q1, our flagship titles continued to demonstrate strong growth after nearly two decades of operation, with revenues from Fantasy Westward Journey Online and Westward Journey Online mobile, all growing at double-digit rates year-over-year. Tianxia III is another exemplary case. It is one of the rare instances where a legacy PC MMORPG game has regained growth after reaching maturity, leveraging our growing knowledge and more recent successes in both MMO and non-MMO genres, we added some casual flavors to this legacy MMORPG, giving our players a fresh feel and creating new content for users to consume and enjoy. We also crafted a mini game event at the end of last year, which quickly generated strong interest and discussions in the players circle, leading to a large inflow of returning users who rejoined the game.

[Operator:]

We'll take our first question from Alex Poon with Morgan Stanley.

[Alex Poon:]

My question is regarding the press release. We have mentioned these big titles, Harry Porter, Lord of the Rings, Diablo Immortal will be coming in the next few months -- in the coming months. So I'd like to understand about the launch schedule and details around these three big titles. Thank you very much.

[Charles Yang:]

Thank you, Alex. I'll answer your question directly in English. We do have very, very strong visibility and confidence for a rich pipeline, including highly anticipated games like Harry Potter, Lord of the Rings, Diablo Immortal and a few others that I mentioned just now. And many of these games have already obtained the license approvals already from the regulators. Most of these games will be launched in the second half of this year. In fact, two days later, on our annual gala game day, May 20 event, we will be disclosing more details on existing games as well as some of the exciting new titles. I would encourage you and the investor community to join our event online to get more details just in two days' time, so a little bit more patience, please.

[Operator:]

We'll take our next question from Jialong Shi with Nomura.

[Jialong Shi:]

Thanks. Good evening management. Thanks for taking my questions. I will ask my question first in Chinese. I will translate myself later. So, I will translate my question. In recent years there have been some independent game studios which were able to launch successful titles. Just like NetEase, these new game studios also published their games on their own instead of going through third-party publishers. So my question is, do you think in China's mobile gaming space, the competition is becoming more intense? And if that is the case, how does NetEase plan to cope with the challenges from these small but quite competitive game studios?

[William Ding:]

[Margaret Shi:]

You mean -- the companies that you mentioned have had great success in the recent years. It means that the overall environment for creativity, especially in games, is very good in China. NetEase, we have been a business for over 20 years. We will continue to innovate to thrive. And we are happy with -- for the success that the smaller gaming companies have achieved. And we will continue to rise and continue to exceed. Thank you.

[Operator:]

We'll take our next question from Thomas Chong with Jefferies.

[Thomas Chong:]

Hi, management thanks for taking my question. Can you comment about our online user strategies, in particular, subscription and live streaming, and any thoughts on the long format audio strategies?

[Charles Yang:]

Okay. Thomas, do you want to translate your question in English? Okay. Thomas, I will answer your question directly in English. Yes, there are -- as we've been mentioning in the past couple of quarters, there are plenty of possibilities in terms of product innovation in terms of monetization streams that centered around this music vertical. And we are very encouraged to see strong continued and robust growth in both subscription, live streaming, advertising and new possibilities as we continue to innovate and try out. So right now, NetEase Cloud Music, despite the fact that it's been eight years old now, it is still in its relatively early nascent stage. So, lots of possibilities. Revenue growths in the multiple formats that you mentioned have all been very strong. And specifically, you asked about long format audio. That's a very important vertical. In fact, we are a forerunner and the pioneer in this particular long format audio. Majority of our live streaming revenues actually come from long format audio. And there are more players that's been following suit and coming into this vertical. It has just proven one more time that how the potential upside of this vertical. And I think NetEase Cloud Music, just like many other product lines under the NetEase brand umbrella, will focus on unique product features powered by product innovations, targets specifically to this vibrant younger generation of music enthusiasts. With that, we are actually very confident on multiple fronts both in terms of product features as well as monetization potential. Thomas?

[Operator:]

We'll take our next question from Eddie Leung with Bank of America.

[Eddie Leung:]

So my question is actually a bit of a follow-up on the game industry. So number one, congratulations on the continuous success of Fantasy Westward Journey and Westward Journey series. But it seems to be interesting to observe that globally, no matter whether it's a successful PC mobile or console game developers, it seems to be relying, to some extent, new versions or new games on some of the old IPs technology, while if I turn some of the new companies are able to come up with big iconic IPs. So just wondering, as a leading global game company, how we think about this kind of like issue? And is there any indication when we developed our game strategy? Thank you.

[William Ding:]

[Margaret Shi:]

We do not entirely agree with your comments. We think, obviously, it's important for new companies to create new IP, new titles. But we think, more importantly, it's a long-term operation of good flagship titles. From NetEase perspective, we will continue to do what we are doing. Over the past years, we've launched a number of very great innovative industry-leading titles, including in Onmyoji, Justice and NARAKA

[Charles Yang:]

And Eddie, just to add one more point, as you can witness in the past couple of quarters, when there are fewer new game launch in a particular quarter or two, NetEase financial performance has been steady. It is, again, something we talked earlier in the past. NetEase is a very, very unique combination of continuous innovation to come up with new titles as well as the operational know-how to extend the longevity and effective monetization of the old titles. It is because of this combination that we are able to deliver very steady and gradually improving financial profile for over two decades.

[Eddie Leung:]

I guess that's very true.

[Operator:]

We'll take the next question from Alicia Yap with Citi.

[Alicia Yap:]

My question is related to the Cloud Music. So with NetEase now currently signing directly with all the three major music label, will that change the overall truck business of the content selection for user? And also will that help on driving the music subscription driving the music subscription growth, any material change on the gross margin impact? And also, can management elaborate the music strategy into the IoT partnership, any interest that you are extending the partnership with the OEM?

[William Ding:]

[Margaret Shi:]

As the streaming platform or social community for music enthusiasts, NetEase Cloud Music is actively -- have always been actively seeking partnerships with content providers or label companies in order to help them promote their music in China. That's the answer to third question. And in terms of IoT or furnishing or home furnishing, again, it's another important growth area for NetEase Cloud Music.

[Operator:]

We'll take our next question from Elsie Cheng with Goldman Sachs.

[Elsie Cheng:]

My first question is about international games. We noticed that there are a lot of exciting titles for this year. And it seems for different international markets, we actually have different genres. That's the first of the key plan to touch base with the audiences over there. So I just want to follow up a little bit more here that, when we're thinking about different international markets, do we actually have the sort of differentiated competitive strategy? And then if there are any further detailed color on how we're positioning ourselves, that would be great. And then the second question is on innovative businesses. We noticed the seasonal fluctuation in contribution to the revenue of the innovative businesses. And fourth quarter could be -- sorry, the quarter where maybe e-commerce is contributing is contributing more in the first quarter is slow. So I just wanted to understand a bit more so in terms of the growth curve of the two major lines, one is e-commerce, one is the Cloud Music, how would we describe the growth curve and where they are currently on that growth curve for these two? And in the long term, do you have any targets for them to sort of potentially become another major growth driver for the Company?

[William Ding:]

[Margaret Shi:]

Yes, we do have -- we have noticed that there are -- because there are different culture and different devices that's used by users in different parts of the world, we need very different products targeted to particular regions and countries that resonate with the user there. And we are confident we will figure this out. For example, in Japan, we have -- we already have a number of very successful titles, including Knives Out and LifeAfter. Recently, we have launched a new PC game, NARAKA

[Charles Yang:]

And Elsie, for your second question, I'll answer that directly in English. Our newer businesses, whether it's online education, online music, NetEase Yanxuan, all of them are in relative younger pace comparing to our game businesses. So by and large, we think these younger business verticals have a very promising growth trajectory. They should grow faster than my game BU in general. When you look at each quarter, however, different BUs might experience different seasonality. For instance, Q1 is a traditional peak season for game performance specifically because of the Chinese New Year where as it's a relatively low season, for instance, for e-commerce. Likewise, education also witnessed strong seasonality in the different semester courses throughout the calendar year. So all in all, don't be overly concerned about a quarterly fluctuation. But generally speaking, when you look at on the annual trend basis, for instance, innovative businesses and others line as well as -- in 2020, both lines has been growing very strong and much faster than my online game services. What we want to achieve down the road eventually is that all of our deeply incubated and cultivated verticals will have a very robust and sustainable growth. And as they continue to grow and emerge, what we want to appeal to the users is what NetEase holding common a premium product and services offerings with elevated user experience. That is the corporate DNA in common across the board. Operator, next question, please.

[Operator:]

Thank you, sir. It appears that there are no further questions at this time. I'd like to turn the call back to the management for closing remarks.

[Margaret Shi:]

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

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.