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Edited Transcript of NTES earnings conference call or presentation 21-Feb-19 1:00am GMT

Q4 2018 NetEase Inc Earnings Call

Beijing Feb 21, 2019 (Thomson StreetEvents) -- Edited Transcript of NetEase Inc earnings conference call or presentation Thursday, February 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lei Ding

NetEase, Inc. - Founder, CEO & Director

* Margaret Shi

* Zhaoxuan Yang

NetEase, Inc. - CFO

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Conference Call Participants

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* Alex C. Yao

JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research

* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Chun Man Poon

Morgan Stanley, Research Division - Equity Analyst

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Thomas Chong

Crédit Suisse AG, Research Division - Regional Head of Internet

* Yue Wu

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the NetEase Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to IR Director, Margaret Shi. Please go ahead.

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Margaret Shi, [2]

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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 this discussion. A general discussion of the risk factors that could affect NetEase's business and the financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F. 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 2018 fourth quarter and the full year financial results 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's corporate website at ir.netease.com.

Joining us today on the call from NetEase's senior management is William Ding, Chief Executive Officer; Mr. Charles Yang, Chief Financial Officer; and Mr. Hilton Hui, Co-President of NetEase Games. I will now turn the call over to Mr. Yang, who will read the prepared remarks on behalf of Mr. Ding.

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Zhaoxuan Yang, NetEase, Inc. - CFO [3]

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Thank you, Margaret. Happy Chinese New Year, 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. With that said, I will deliver opening remarks on William's behalf.

2018 was an exciting year for us. We ended the year with record total annual net revenues of CNY 67 billion, a 24% increase from 2017. Our strong performance was driven by a diverse portfolio of online games as well as healthy growth in our e-commerce, advertising services and other Internet product and service offerings.

Our online games business remains the core of our strategy. The fourth quarter marked our third consecutive quarter exceeding CNY 10 billion in online games net revenues. In the fourth quarter, our online games revenue reached CNY 11 billion, a 38% increase compared with the same period last year.

Our continued success in online games is underpinned by our commitment and vision to having a positive impact on the online games industry, our ability to deliver best-in-class quality games with an emphasis on in-house R&D and native IP empowered by our unique corporate culture and the right training mechanisms and infrastructure to nurture talents, all of which we have spent over 2 decades investing in.

2018 was a fruitful year for us in terms of our online games genre diversification initiatives. In addition to our legacy titles that span decades of popularity, we are continuously adding new titles and creating new IP that we hope will garner the same longevity. Throughout 2018, we launched a number of highly successful games covering a wide spectrum of categories with chart-topping titles such as Chu Liu Xiang, Identity V, QwQ, Justice, Butterfly Sword, Ancient Nocturne and in the fourth quarter, Night Falls: Survival.

Night Falls: Survival has been a top performer on China's iOS download chart since its release in November. This is a cooperative survival role-playing game, game set against a doomsday background, where players rebuild their living habitat and restore civilization with other survivors after the apocalypse. It has attracted a large fan base with a high degree of innovation that combines MMORPG, sandbox and shooting game play features all-in-one game. Night Falls: Survival has stayed consistently at the top of China's iOS grossing chart, ranking #3 in terms of total grossing games for the month of November and December according to App Annie. This game is now also available in Hong Kong, Macau and Taiwan.

While we continue to dominate the MMO genre, many of our new titles are in brand-new categories that we have either recently entered or pioneered. Our ability to break into new territories has helped us capture users that reach beyond our traditional MMO game players. As a result, our user base has grown rapidly, spanning across different emerging demographics, including younger, more casual and more female users.

Turning to our legacy titles. The market is still in awe of the longevity of our flagship franchises. After over -- for 15 years of operation on PC and more than 3 years on mobile, our epic Fantasy Westward Journey and Westward Journey Online sagas are still growing. We continue to supply this large and sustainable user base with interesting content. In the fourth quarter, we launched content updates for our Fantasy Westward Journey and New Westward Journey Online series on both PC-client and mobile platforms. Tianxia III also celebrated its 10-year anniversary with a new expansion pack at the end of November, delivering encouraging sequential quarterly revenue growth in the fourth quarter.

Some of the titles we launched in more recent years such as Onmyoji have also entered a steady stage of operation. Through the introduction of new content, Onmyoji climbed back to the #1 spot on the iOS grossing chart twice in the fourth quarter, 2 years after it first became a market sensation in 2016.

Invincible, an SLG game we launched over 3 years ago, has been growing steadily year-over-year, both in terms of revenue and user numbers since its launch.

Other titles such as Onmyoji Arena, a multiplayer online battle arena game which we released in early 2018 has also begun to show similar healthy trends.

2018 was also a milestone year for our international expansion. Net revenues from our international games accounted for more than 10% of our total game net revenues for 2 consecutive quarters now.

In Japan, Knives Out has become a household name among young gamers. It has remained one of Japan's leading grossing games since March 2018. It has also been ranked as China's top grossing mobile game in overseas markets for 5 consecutive months from August to December 2018 according to Sensor Tower.

During 2018 as well as in recent months, we brought a number of other distinctive new titles to Asian markets, including Rules of Survival, Identity V and QwQ, each of which opened doors for us in their respective markets.

Going global offers an excellent opportunity for us to promote Chinese culture as well as our original IP and best-in-class production quality in markets worldwide. We see huge potential to further build our brand and bring our games to players outside of China, particularly in mainstream Western markets. For example, we plan to bring our popular hit Night Falls: Survival to Japan and the U.S. in the first half of 2019.

We are now working with other world-renowned game developers not only to bring their flagship titles to China but also help transform some of their most important titles into mobile games. Most significantly, we renewed our 11-year partnership with Blizzard Entertainment in Mainland China, extending our publishing agreements until January 2023. And as we previously announced, we are codeveloping the highly anticipated new mobile game, Diablo Immortal, with Blizzard.

Our world-class R&D capabilities, particularly in the mobile arena, afford us an excellent opportunity to appeal to a global audience. We plan to continue to invest in global talent and IP to further this momentum. For example, we recently closed a deal with Codemasters, a U.K. game studio, and made minority investments in Quantic Dream, a French game studio, as well as Second Dinner, the U.S. studio founded by ex-Blizzard veterans.

We have a number of strong titles in our pipeline, including Fantasy Westward Journey 3D, Xuanyuan Sword, Ages of Isle and Pokémon Quest, just to name a few. We will continue to introduce thrilling new games that maintain the high level of integrity, innovation and excellence upon which our users rely.

Our ability to create unique content has been a driving force in NetEase's success over the last 20 years. This is historically prevalent across our offerings, including online games, NetEase news and NetEase e-mail services. For our next phase of investment, we again look for areas where our content creation abilities can stand out, succeed and have strong profit growth potential.

E-commerce, online education and music are 3 sectors that fit these criteria and will be the focus of our next phase of strategic growth.

For Kaola, we are increasingly encouraged by the government's favorable policies towards cross-border e-commerce. Raising the cross-border duty-free quota per transaction and raising the duty-free annual quota per individual incentivized customers to buy more products across a wider range of categories.

We are continuously collaborating with more international brands to raise these companies' brand profiles in China. For example, Abbott, a global maternity and baby products manufacturer, is one of our more recent partners. Through our strategic agreement, Kaola will be one of the first to sell Abbott's high-end baby formula in China. In the fourth quarter, we also held a NetEase Kaola super brands day event, whereby participating brands were allotted targeted promotional resources on our platform. Many of the internationally renowned brands experienced rapid sales growth based on Kaola's support, including British high street brand, KEDDO; American sports equipment brand, Under Armour; well-known European organic baby food brand, Little Freddie; and U.S. baby food brand, Mead Johnson.

For Yanxuan, we continue to enhance the efficiency of our supply chain, establishing new workflow processes in order to work more closely with quality designers and train our premier supplier to ensure high-caliber product design and craftsmanship.

In December 2018 and January 2019, we opened our very first brick-and-mortar Yanxuan store and our flagship Kaola store, respectively. These pilot stores offer customers an integrated online-to-offline shopping experience, where customers can see and try our product in person, enjoying greater convenience. Located in Hangzhou's busiest business district, the stores generated strong interest and demand from tourists and visitors to Hangzhou, proving to be an effective marketing tool as we work to further scale our e-commerce offerings.

In addition, education is a large and important area of focus for us. Our influence and reach in the online education arena grew substantially in 2018. We have great confidence in the continued growth of this space, and we believe our strong background in Internet and AI technology provides us with an advantage in delivering a superb user experience in online education.

In 2018, gross billing from Youdao online courses more than doubled from the prior year, making this vertical the largest contributor for Youdao. We introduced a dual teacher mode to provide a better studying experience, in which students are equipped with 1 lecturer and 1 assistant counselor for each online session course. This teaching mode proved to be popular with users, yielding higher renewal rates for some of our K-12 courses. While our online education offerings currently cover both K-12 education and higher education, we expect our K-12 offerings to be a bigger growth driver going forward.

In 2018 and early 2019, we launched several educational apps supported by AI technology, all tailored towards K-12 users, making studying more personalized and targeted. These apps include: Youdao Mathematics; Youdao Verbal English; Youdao Homework, which contain after-school tutorials for children; Youdao Reading, which helps children develop positive reading habit; and Youdao Children's Dictionary. We believe, like with all our businesses, our dedication to ensuring a positive user experience and creating differentiated and unique content is what will set us apart and allow us to succeed in the online education space in the longer run.

For music, we are receiving more recognition for NetEase Cloud Music, especially among the critical younger generation demographic. With over 600 million users, our NetEase Cloud Music was China's most downloaded free music app on iOS in the fourth quarter according to App Annie.

China's digital music market is thriving, and we continue to provide our growing community with a differentiated and personalized user experience. In 2018, the number of paying subscribers more than doubled from the prior year, and the sales of digital albums on our NetEase Cloud Music platform experienced robust growth year-over-year. We completed a round of financing for NetEase Cloud Music in November 2018 and brought in complementary business resources and stakeholders to help ensure a healthy growth outlook for our online music platform.

As we move through the year, online games will remain the backbone of our operations, both domestically and overseas. We are proud of our in-house production capabilities, and we are excited to take our products abroad and win over global players with our innovative and proprietary content. At the same time, we will take an even more focused and concentrated approach with our investments in nongames segments, namely e-commerce, online education and music. Our relentless drive to create premium content has paved the way for our success, and our investments in carefully chosen new areas will allow us to stand the test of time in China's rapidly evolving Internet industry. This will continue to be the foundation for our next exciting stage of growth.

This concludes William's remarks. I will now provide a brief review of our fourth quarter and full year 2018 financial results.

Given the limited time on today's call, I will be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details.

We finished the year with a new revenue record both on an annual basis and on a quarterly basis. Net revenues for the year were CNY 67.2 billion or USD 9.8 billion, representing a 24% increase year-over-year. Net revenues for the fourth quarter of 2018 came in at CNY 19.8 billion or USD 2.9 billion, representing a 36% increase year-over-year and an 18% increase quarter-over-quarter.

Net revenues from online games grew for the fourth consecutive quarter, reaching CNY 11 billion, representing a 6% increase quarter-over-quarter and 38% year-over-year. The sequential increase was driven by the launch of Night Falls: Survival and Ancient Nocturne, and the yearly increase was primarily driven by the launch of Knives Out, Chu Liu Xiang and Identity V.

Mobile games account for approximately 70% of net revenues from our online games in the fourth quarter and for the 2018 full year.

Our e-commerce business continued to demonstrate robust growth in 2018 with total net revenues increasing by 65% year-over-year to CNY 19.2 billion. For the fourth quarter, net revenues from e-commerce were up 50% quarter-over-quarter and 44% year-over-year to CNY 6.7 billion.

Net revenues from our advertising services business were also up by 4% year-over-year in 2018, yielding CNY 2.5 billion for the full year. For the fourth quarter, net revenues from advertising services were CNY 761 million, representing a growth of 18% quarter-over-quarter and 3% year-over-year. The top-performing verticals were automobile, real estate and Internet services sectors.

Total net revenues from our innovative businesses and others segments were CNY 5.2 billion for the year, an increase of 40% year-over-year. Net revenues from innovative businesses and others were CNY 1.4 billion for the fourth quarter of 2018, which was relatively flat quarter-over-quarter and up 14% year-over-year.

As you may have noticed, we renamed our e-mail and others segment to innovative businesses and others. With our heightened focus on developing key incubated businesses, we believe this name better reflects the nature of this segment's revenue composition. The main components within this segment have not dramatically changed and as a reminder, include live video streaming, Cloud Music, online education and certain other cloud application services among others.

Gross margin was 38.6% in the fourth quarter compared with 44.8% in the preceding quarter and 39.3% a year ago.

Gross margin for our online game services for the fourth quarter of 2018 was 62.8%, which is largely stable. As a reminder, our gross margin for games typically fluctuates quarter-to-quarter within a narrow band, based on the revenue mix of mobile, PC self-developed and licensed games.

Gross margin for our e-commerce segment was 4.5% in the fourth quarter of 2018. The quarter-over-quarter and year-over-year decreases were due to larger-scale e-commerce promotions and discounts during the promotional season. On a full year basis, gross margin for this segment was 8.0% compared to 10.3% last year.

During the fourth quarter, we incurred CNY 5.4 billion in operating expenses. The year-over-year increase was mainly due to increased R&D mostly related to online games as well as increased shipping and handling costs related to the growing scale of our e-commerce business. The increasing in R&D is a testament to our commitment to investing in best-class R&D infrastructure, talent and products. While we continue to grow, we take a disciplined view of our spending, staying within a well-controlled range.

Selling and marketing expenses as a percentage of net revenues consistently came down from the first quarter of 2018, coming in at 12.1% in the fourth quarter compared with 14% in the previous quarter and 16.4% in the fourth quarter of 2017. E-commerce-related shipping and handling costs as a percentage of e-commerce net revenues was 8.6% in the fourth quarter. On a full year basis, shipping and handling costs as a percentage of revenue -- e-commerce revenue was 8.7% in 2018 compared to 10.1% last year.

Operating income for the fourth quarter of 2018 increased by 57% year-over-year to CNY 2.2 billion. The effective tax rate for the fourth quarter of 2018 were 34% compared to 34% and 18% for the preceding quarter and the fourth quarter of 2017, respectively.

Our effective tax rate was 28% for the full year 2018 compared to 17% for 2017. The year-over-year increases in the effective tax rate for the fourth quarter and for the full year were due to higher operating losses incurred by some of our non-games businesses.

As we have discussed on our prior calls, due to the increase in the scale of some of our loss-making business units, we expect the effective tax rate to increase further in 2019.

Non-GAAP net income attributable to our shareholders for the fourth quarter of 2018 totaled CNY 2.4 billion or USD 343 million, representing an increase of 4% quarter-over-quarter and 26% year-over-year.

Non-GAAP net income attributable to our shareholders for the full year 2018 totaled CNY 8.7 billion or USD 1.3 billion compared to CNY 12.8 billion in 2017.

Our non-GAAP diluted earnings per ADS were CNY [18.32] (corrected by company after the call) or USD 2.66 for the fourth quarter of 2018. Non-GAAP diluted earnings per ADS were CNY 66.68 or USD 9.70 for the full year 2018.

Our cash position remains strong. As of December 31, 2018, our total cash and cash equivalents, current and noncurrent time deposits and short-term investment balance totaled CNY 50.1 billion compared with CNY 43.2 billion as of December 31, 2017. For the fourth quarter of 2018, we plan to pay a dividend of CNY 0.48 per ADS, representing 25% of the net income attributable to our shareholders.

As of November 15, 2018, under our share repurchase program for up to USD 2 billion, we had repurchased approximately 4.6 million ADSs for approximately USD 1.2 billion. On November 14, 2018, our board announced the approval of a new share repurchase program for up to USD 1 billion of our outstanding ADS for the next 12 months beginning on November 16, 2018. No shares were repurchased under this new plan as of December 31, 2018.

Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Thomas Chong with Credit Suisse.

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Thomas Chong, Crédit Suisse AG, Research Division - Regional Head of Internet [2]

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My first question is about our investment approach on e-commerce, education and music business. I just want to get a sense why we choose 2019 to be the year to step up the investments across these areas? Are we seeing any new trend or industry trend that we see there's a lot of potential? And given the fact that the tax rates are maybe higher on the losses, how should we think about the earnings growth or the margin trend that we should expect? And my second question is about the gaming regulations, in particular, the suspension for the new license applications. Just want to see any color on that. And my final question is about our e-commerce business. Can management talk about any view on our synergies to be expected with our strategic partner, if there's any?

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Zhaoxuan Yang, NetEase, Inc. - CFO [3]

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Thanks, Thomas. I will translate your question one by one for William. (foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [4]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [5]

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(foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [6]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [7]

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Thomas, the first question. William would like to first remind that it has been years for NetEase to be exploring into e-commerce, online education, music. For instance, for our online education in particular for Youdao, we have almost a decade of experience nurturing into this vertical. Now we are seeing the increased sophistication of AI technology as well as a much higher level of user acceptance to education format online. That's why we think with a huge potential market as well as the readiness and maturity of this market, it is time for us to be very focused in making a bigger impact in online education. Music and games are, in essence, content-driven businesses, and we are confident of our content creation differentiation capability. For e-commerce, again for both Kaola and Yanxuan, we've been investing for years. And this is definitely an area that NetEase is going to continue to invest. (foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [8]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [9]

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For your second question on any update on gaming regulation. We also noticed there are market news and rumors yesterday talking about large game suspensions. We would like to say that we do not see that. Some provincial and local regulators have modified the format of material submissions, but we do not interpret that as a shutdown of new game approvals.

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [10]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [11]

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For e-commerce, first of all, we do not make comment or response to any ungrounded market rumors. But as a mentality, NetEase is always very open-minded to embrace stakeholders, strategic partners, business partners, that can bring synergy and win-win to our e-commerce segment as well as many of our other segments.

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Operator [12]

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(Operator Instructions) We'll go next to Eddie Leung with Merrill Lynch.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [13]

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Just actually a very quick question on the gross margin of your e-commerce business. I remember, you guys, especially, for example, like Charles mentioned, that there would be a -- hopefully a target on stabilizing the gross margins of the e-commerce business. So just wondering if you could provide some outlook on that front given the fourth quarter fluctuation in gross margin.

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Zhaoxuan Yang, NetEase, Inc. - CFO [14]

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(foreign language) Thank you, Eddie. I will take your question directly. For our e-commerce, as you have noticed that for Q4, gross margin was lower than prior quarters as well as Q4 of last year. But at the same time, I hope that you can also notice that a substantial improvement in us lowering our inventory, which means in Q4, we have engaged in larger-scale promotional events to optimize our inventory structure. Going forward in 2019 and forward, it is always a very prudent strategy for NetEase to balance top line GMV revenue growth as well as a margin profile. For now, we expect that the overall e-commerce segment in 2019 and forward can still have a very robust top line growth, at the same time, with a relatively stable GP margin over the full year. But of course, quarter-over-quarter, there might be fluctuations that is just typical to e-commerce seasonality.

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Operator [15]

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We'll go next to Alicia Yap with Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [16]

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Wanted to ask, could management comment how many titles that NetEase has submitted while still waiting for approval? And if let's say, China license continues to hold up longer, if the new games is ready, will NetEase actually decide to launch those new games to overseas markets first even though China markets are not yet ready to launch? Follow-up on this, Charles, your questions on the -- I mean, your answer on the gross margin for e-commerce, you say stable for the full year. Do you mean this 8% on 2018 will be the trend for 2019 and going forward?

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Zhaoxuan Yang, NetEase, Inc. - CFO [17]

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Okay. Alicia, I'll take your second -- I will translate your first question, and I will take your second question directly. (foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [18]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [19]

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So Alicia, first part of your question. We have over 10 titles that have already been submitted in the approval pipeline. And as to your second part of the game related question. Yes, for overseas market, it is not restricted by the approval -- by the domestic approval. So there are games, for instance, that we have already started testing and trial in overseas markets. For us, we see that as 2 pillars of further growing our game segment in 2019. And for your second question, our e-commerce margin. Yes, for us, we always strive to seek a disciplined balance between top line growth and margin profile. It is also our intention to maintain e-commerce gross profit margin in the neighborhood similar to 2018 full year, that is in the high single-digit area. But of course, this is not an easy battle, and it requires a lot of effort and hard work from our business unit.

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Operator [20]

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(Operator Instructions) We'll go next to Natalie Wu with CICC.

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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [21]

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Firstly, very quickly. Can you give us some color on the region breakdown for your overseas game revenue? Because it's been shown in a couple of last quarters. And also the margin profiles there, any difference versus the domestic market? And secondly, you mentioned about the online education endeavor. Also, the Youdao's revenue has been double last year. I'm just wondering, can you share with us any color on the contribution from the K-12 business versus the higher education? And under which line do you recognize that revenue? And also, in the future, just wondering, will Youdao be the major business unit for your online education endeavor? Or if there would be any synergy with other business lines, should we anticipate or -- is this just to operate independently for Youdao?

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Zhaoxuan Yang, NetEase, Inc. - CFO [22]

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Okay. Thanks, Natalie. I'll translate the questions. (foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [23]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [24]

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(foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [25]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [26]

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(foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [27]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [28]

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Okay. So Natalie, I'll provide a brief and summarized translation for the answers. Firstly, for the overseas games contribution, for now, it is mainly coming from Japan, contributed by Knives Out's performance. And I just mentioned in the earnings call, our next focus is to further tap into mainstream Western markets, hopefully, by more and more titles. In terms of margin profile, it's largely the same between domestic games and offshore games. But of course, in domestic games, given the scale, we do enjoy better economy of scale. So margins are slightly higher, but there is really no significant differences between the games, whether it's overseas or in domestic market. For online education, William has provided a detailed explanation just now in Mandarin. So to summarize, first of all, Youdao has now over a decade of operation cumulating a sizable user base. We first started as a study tool, Youdao Dictionary, and there is a high degree of overlap with the current focused K-12 online courses in terms of users. In addition, given that NetEase is a controlling shareholder of Youdao, there's also significant overlaps between the users of our e-mail services, music, for instance, with online courses, whether being student themselves or parents of those students. And we do see a kind of a coordinated effort in promoting online education by utilizing resources from our matrix of products. And more recently, driven by the AI technology, Youdao has also been introducing AI-empowered hardwares, which is also being very well received in the market. So all in all, for our online education endeavor, we will be mainly focused on online education, which will mitigate and avoid many concerns around offline education that the market is being concerned about.

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Operator [29]

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And we'll go next to Alex Poon with Morgan Stanley.

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Chun Man Poon, Morgan Stanley, Research Division - Equity Analyst [30]

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I have questions regarding game business. In the last 2 quarters, you mentioned RMB 10 billion is the online game revenue run rate. And this quarter, you have surpassed CNY 11 billion. So can we say CNY 11 billion is your new base, new benchmark we can be -- we can reference to, especially you have a very strong pipeline in the coming year? And the second question regarding games is on the user acquisition side, we are seeing a lot of promotion in short video platforms to get for game business. Do you see this channel as a lower user acquisition cost for game business structurally that this can improve your overall game return in future? And lastly, can you talk a little bit about Diablo Immortal's status? And also, Eclipse Isle is missing in the pipeline in your press release. I'm wondering why is that not in your press release.

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Zhaoxuan Yang, NetEase, Inc. - CFO [31]

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Sorry, Alex, which game that you are referring to that's missing?

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Chun Man Poon, Morgan Stanley, Research Division - Equity Analyst [32]

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That's (foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [33]

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Okay. Thanks, Alex. I'll translate your questions to William. (foreign language)

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [34]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [35]

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Okay. So Alex, I will answer your question. Firstly, as you know, we do not provide guidance, revenue or profit. So -- but as a general trend, like I have commented in last quarters, that we are very confident about the solid foundation of our game revenues going forward. I think it is encouraging to see that we have delivered 3 quarters that is standing above CNY 10 billion. We are extremely happy to see that the number has surpassed CNY 11 billion. But like I said, it is a solid foundation and the future incremental increase will be supported by our continuous effort of launching new and successful games in the pipeline. For your question on user acquisition. NetEase, given our scale and track record in operating online games, we have a diversified source of new user acquisitions, among which short video live streaming is becoming an increasingly important source of new user acquisitions. Whether the cost is lower, it all depends. But on an average blended basis, it does seem short video is a very cost-competitive and cost-efficient manner for us to acquire new users. Diablo Immortal, we are a co-developer of that game together with Blizzard. As to the exact launch timetable, I would encourage markets to direct the question directly to Activision Blizzard. And from a co-developer's perspective, the game development is pretty much ready. Of course, there's always space for us to optimize and enhance, but it is not any concern that game development side will cause any potential delay. As your last bit of questions specific about our pipelines, we did announce several exciting new games in our earnings release in the pipeline. As you know, that we have over 50 studios on our NetEase Games platform and there are numerous new games of different stages in our R&D and potential launch pipeline. And we are very, very confident about the robust game pipeline for 2019.

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Operator [36]

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We'll go next to Alex Yao with JPMorgan.

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Alex C. Yao, JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research [37]

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(foreign language) I have a couple of questions on music. First of all, how do you think about the competition in China's online music industry? And then secondly, regarding monetization. What are our strategies to improve the music monetization, including both the pure music streaming operation? And potentially, would you be considering adding the live broadcasting feature to your music streaming service to improve the monetization?

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Lei Ding, NetEase, Inc. - Founder, CEO & Director [38]

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(foreign language)

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Zhaoxuan Yang, NetEase, Inc. - CFO [39]

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Alex, I will -- for the benefit of everyone in the call, I will provide summarized translations for William's answer. So first of all, about our position in competitive landscape, we recognize the fact that we are, relatively speaking, a latecomer into online music segment. However, we are highly convinced that China's online music market has huge potential. And after years of competition, it appears now that TME and NetEase Cloud Music are the 2 clear leaders. And as a latecomer, we are a little bit disadvantaged in terms of copyright, et cetera. However, as a latecomer, especially with the deep insight in trying to understand the users' needs, we do have differentiated advantages as well comparing to competitors, especially in terms of user experience and providing trends that represent innovation, which links also very relevantly to how to think about potential monetization. It is actually, for the whole industry, it is in a trial mode, whether it is by paying users, advertising, live streaming or even potentially some other new and innovative format, it is all possible. Some of the formats of innovation or monetization have already been proven either by us or by our competitors. But we fundamentally believe there will also be other very interesting format that we can potentially think about music, music user monetization. Because after all, we think this huge market potential is underpinned by music content, and we believe after these many years of development, online music, this whole format is becoming now a new habit that is highly receptive by Chinese Internet users. And uniquely, as a unique differentiation to many other types or formats, music content is a content that can be enjoyed repeatedly, either in different variations, by different singers, in different settings. And also, there's no language boundary. So all in all, we think NetEase Cloud Music will remain as a pioneer and an innovative leader in terms of providing differentiated music content to our users.

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Operator [40]

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At this time, I will hand the call back over to Margaret Shi for any additional or closing remarks.

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Margaret Shi, [41]

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

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Zhaoxuan Yang, NetEase, Inc. - CFO [42]

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Thank you, everyone.

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Operator [43]

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That does conclude today's conference. We thank you for your participation.