NetEase, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good day and welcome to the NetEase 2020 Fourth Quarter and Full Year’s 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 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.

[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 closed 2020 with a solid set of results in the fourth quarter centered around content creation and user experience. Each of our key business segments showed impressive resilience and delivered sustainable growth during the year. We generated total net revenue of RMB 73.7 billion for the whole year up 24% year-over-year and RMB 19.8 billion in net revenues for the fourth quarter up 26% year-over-year. 2020 was a challenging year for many businesses around the world. It was not a time to standalone and survive, but the time to work together and thrive. While Collins Dictionary has declared the word lockdown as the word of the year, we believe the word breakthrough also defined for life and career of many in the past year. We are grateful for the initiatives our employees take to care for the impacted to respond quickly and act responsibly to help both of our company and the broader community overcome these hurdles. In doing so, we are proud to have weathered the obstacles growing each of our businesses in a meaningful way supporting our business partners to stay safe and strong and generating sustainable returns to our stakeholders.

[Operator:]

We will take our first question from the line of Jialong Shi from Nomura. Your line is open. Please proceed.

[Jialong Shi:]

Thanks. Good evening, management. Thanks for taking my question. Let me ask my question first in Chinese. How much of native's Android version of mobile game revenue is contributed by third-party app stores? For this part of revenue what is the average revenue share charged by third-party Android channels? We heard from media one of NetEase online gaming peers was trying to negotiate for a lower revenue share paid to the third-party app stores. Just wonder, if NetEase has also started to talk with your channel partners about this revenue share. And if you did how's the progress so far?

[William Ding:]

[Margaret Shi:]

I'll help translating. The China has probably obviously the highest revenue sharing ratio among all the market around the world, up to as high as 50%. It's true a few of our native games enjoys a more favorable sharing around 30% such as FWJ. And so we think the way we are seeing in China right now is unhealthy and it's probably unsustainable because it's about 20% higher than how much Apple is charging the content providers. And we see, we'd like to see with the Chinese Apple partners to be more in sync with our international – with the international peers to be charging the content providers a more reasonable rate. And we want to work very closely with our channel partners to create a healthy environment for the gaming industry.

[Charles Yang:]

And Jialong to supplement your earlier part of the question. On our channel split on the ballpark roughly half of our game revenues were generated through iOS which again is only a very, very few game content providers in China can have such a high percentage contribution from iOS channels roughly one-third is coming from Android channels and the remainder coming from our official channels. That's a ballpark split of the channel split.

[Jialong Shi:]

Thanks for the color.

[Margaret Shi:]

Thank you.

[Charles Yang:]

Okay. Operator, the next question, please.

[Operator:]

Okay. We will take our next question from the line of Alex Poon from Morgan Stanley. The line is open. Please go ahead.

[Alex Poon:]

I'll translate myself. Back in 2019 we had a revenue target -- overseas revenue target of 30%. In the following three to five years and because of COVID-19 the growth especially outside of China has accelerated a lot. And so, wondering if there is any change to this target – revenue mix target. Would it come earlier than expected? And then secondly is I want -- I hope to get some thoughts around casual games versus hardcore games outside of China. What's – which one do you think would be better to achieve the growth and the ROIs compared to the China market?

[Unidentified Company Representative:]

2021 will definitely be an important year for NetEase in terms of internationalization. We have a number of games we're making such as Harry Potter and Infinite Lagrange which are expected to be launched during the year and we hope to see fruitful results from those games. Thank you. Thank you Alex.

[A –Charles Yang:]

And Alex on your second question -- second part of the question on our strategy of thinking of overseas game introduction. We are not betting on our future on one or two genres, but rather we think with our stronger and getting more diversified R&D capability we want to see multiple genres of games being introduced to different geographies and different users. So shooting game like Knives Out has been proven successful in Japan. SLG games like Infinite Lagrange and The Lord of the Rings we are confident that we can leverage our domestic success into the international market as well as games like Harry Porter which is a more casual card RPG game and others. So I think what we want to do is to have multiple genres targeting multiple geographies and catering to multiple user needs. That is our overall direction for internationalization.

[Margaret Shi:]

Thank you Alex. Next question.

[Operator:]

We will take our next question from the line of Alicia Yap from Citi.

[Alicia Yap:]

Hi, yeah, thank you. Thank you, management for taking my questions. My question is related to the overall growth driver for the Cloud Music for 2021 was that growth mainly driven by the subscription revenue ramp or to be driven by the online advertising revenue or even the live streaming could be growing faster? And then a small related questions on the one billion video content investment initiative recently could management share the rationale behind? And do you expect this initiative to actually revise the online advertising revenue or even further push the NetEase media business growth? Thank you.

[William Ding:]

[Margaret Shi:]

Yes. I'll help translating. So Alicia, you're right. The three main forms of monetization for music is membership advertising and live streaming. And one of the key focuses for music going forward will continue to be about creating our own content, helping independent musicians to create original content on our platforms. So in that sense memberships will definitely be one of the key drivers to our monetization growth. In terms of radio, what was noticed is that music is about listening. But what we've noticed in the industry in China and globally is that the consumers' habits have evolved from the listening to watching, which is why short-form video platforms have become extremely popular in the recent years. So when we think about making short to mid-form video we want to leverage our existing know-how. For example, we're interested in making short to mid-form video centered around games, or centered around knowledge. So we have this -- we actually have one project within NetEase called NetEase Information World . So we -- during the Chinese New Year we realized -- we noticed that the play time on our videos have actually increased 1 to 2 times compared to previously. So going forward, we'll continue to work hard on creating content on short to medium -- mid-form video content is centered around our key businesses, games, music, et cetera. Thank you.

[Alicia Yap:]

Thank you.

[Margaret Shi:]

Thank you, Alicia. Next question, please.

[Operator:]

We will take our next question from the line of Alex Yao from JPMorgan.

[Alex Yao:]

So my question is regarding your view on the PC gaming market. How do you think about the future outlook for this market in both domestic China market, as well as the rest of the world? And then how do you position yourself in such industry? Do you still allocate new R&D resource in the PC gaming development, or you just want to strategically maintain the current PC portfolio? Thank you.

[William Ding:]

[Margaret Shi:]

Yes. The outcome from both William and our -- the mastermind behind many key titles in NetEase. So, yes, that's something that we do care very much about PC, because of unique specifications that the PC games can have and the user experience that PC games can deliver to our gamers that we'll probably continue down this road. So on one hand we'll continue to maintain our existing titles on PCs and we'll continue to develop new PC titles too. In May, we're actually going to launch a game called which has actually the license is a very unique and creative PC game. And also around the middle of the year we are going to create -- we are going to probably going to launch another PC game called . And this is a competitive -- and it's made by the standards. And William wanted to add that in addition to our self-developed games we actually run lots of very, very popular PC game from Blizzard such as Overwatch, World of Warcraft, StarCraft to name a few. So we'll probably have the richest collection of PC games in China. And so PC will continue to be an important part of our game strategy. Thank you. Next question, please.

[Operator:]

We will take our next question from the line of Thomas Chong from Jefferies. Your line is open.

[Thomas Chong:]

Thanks management for taking my questions. And the first question is regarding overseas game operations. Will we consider accelerating the pace through the use of M&A or in-house development? And then my follow-up -- another question is about the regulations. Can management share about their thoughts regarding the regulatory environment in online games live streaming and music? Thank you.

[William Ding:]

[Margaret Shi:]

In terms of the overseas expansion, we're interested in both and talked about these self-developing games and also through M&A. In terms of the self-development side, there's a number of things -- there's number of ways we can do it. For example, Harry Potter, this is leveraging the use of a very famous UK IP and using our own internal R&D to develop things for the global markets. On M&A side, yes, we are obviously very interested in achieving greater success through collaborations with different partners around the world. We've actually -- we've always been active in -- invested in good content globally. Thank you.

[Charles Yang:]

And Thomas on your second question asking for the regulatory environment for game broadcasting and music. Well, in general we see that this is becoming more and more popular format of entertainment. So e-sports has been now qualified at the Asian Games and there are rumors that it can even potentially be eligible for Olympic Games. It is a kind of sports for the young people. So game live streaming is important. NetEase CC live streaming is building on our unique edge of self-created game content and it is developed -- it's also been growing quite healthy and sustainably. Music obviously is becoming an increasingly important entertainment content and it is not only restricted to the enjoyment of our ears by listening, but just as William previously mentioned, watching is becoming even more popular and trendy format of enjoying music as a format of entertainment content. So, we think, everything takes on it's -- a progressive way of developing. But in general, the regulatory environment is also more and more encouraging for innovation and catering to the user preferences and behavior in general. So we are very confident and we have our own plans of investing ourselves into these areas.

[Operator:]

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

[Kenneth Fong:]

I will translate myself. I want to ask about the pace and is there approximately timing of the launch of the few key IP including Diablo, Immortal, Pokémon as well as Harry Potter? Would that be like spread across different quarters to avoid competition, or we will just launch it right when they are ready? Thank you.

[Charles Yang:]

Thank you, Kenneth. For our pipeline, first of all, we are very confident and excited about our lineups for 2021, including just now William and Junxiong just introduced a couple of exciting PC games. On the mobile side, as you have all noticed, Harry Porter, Diablo, Immortal and Pokémon now all have already received their license approvals. And all these games are developed with the intention for a global launch. So now that we have got the approval for the China part, as to the exact timing point of these game launches, we do not rush our producers and our studios. If we are confident that these high-quality games are developed and designed for a long-anticipated longevity, then we are not overly concerned about whether launching this game in this particular month or the next. But all in all, I think, we have more confidence, now given that the license approval has been obtained, that many of these highly anticipated games will be introduced to the gamer community within this year, some might be potentially as early as the first half of this year.

[Kenneth Fong:]

Thank you, very much.

[Operator:]

Due to time constraint, that concludes today's questions-and-answer session. At this time, 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.

[Charles Yang:]

Thank you everyone.

[Operator:]

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