Q3 2019 Earnings Call

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The 19th.

This conference call today's conference is being recorded.

I would like to conclude.

Ritchie <unk>.

Now please.

Please go ahead.

Thank you operator. Please note the discussion today will contain forward looking statements relating to the future performance of the company and I couldn't be qualified for the safe Harbor. Some liability I think operation by the U.S. Private Securities Litigation Reform Act.

They are not guarantees of future performance and are subject to certain risks and uncertainties assumptions and other factors. Some of these to me up beyond a couple of control could cause actual results could differ materially from those mentioned it today tragedy and this discussion.

General discussion off every sector.

Let me just misunderstandings myself included in such a body company the Securities Exchange Commission, including its I never thought Oh form 20-F, the company does not undertake no obligation to update its forward looking information.

Except as required cycle [noise].

[noise] during today's call management will discuss certain non-GAAP financial measure for comparison purposes only.

Definition of non-GAAP financial measures reconciliation of GAAP to non-GAAP financial results. Please see the 2019, so cool, Jeff and everything else news release issued earlier today. That's a reminder, didnt come with it seemed colder. In addition, the investor presentation and a webcast replay up itself that's cool fully available.

Let's see copper website at <unk>.

He's dot com joining us today on the coal from the East Senior management.

Mr. William thing Chief Executive Officer, Mr., Charles Yes, Chief Financial Officer, I'll, now turn the call or what's your child long lead was prepared remarks, I'll deal with them [noise].

Thank you Madrid, and thank you everyone for participating in today's call before we begin I would like to remind everyone that all consented just based on bromine b.

Firstly to assist better understanding and analysis of our coffee resolved I would like to remind everyone that based on that change chasing these walker, including the sale of called <unk> and <unk> and why I see lifting up you'll Dol, we will now be reporting segment or talk as online games.

You'll doll and interactive businesses and mothers, which includes now yeah engine Ninetys cloud music thinks a mass media SIFI live streaming and others.

A lot financial results have been Deconsolidated unsolicited as discontinued operations.

This applies to the current quarter as well as the historical.

Our acute periods.

This culture, our total mass revenue represents both year over year and quarter over quarter growth.

You can also refer to your without earnings release for more details about its quality resolved.

I will now reach the prepared remarks on behalf of William.

We have had quite an eventful said Walker with a number of strategic moves made across all of this line.

Those move allow us to re aligning our resources and sharpened our strange in areas, where we see the most potential fly with sustainable long term growth.

During this quarter, we continues to grow our online games business. We started performances from existing high told and said they extended our overseas prices.

We are pleased to have achieved another quarter of strong financial performance, which total net revenues, increasing by 11% and non-GAAP net income from continuing operations increased by 74% year over year.

Well games, our online games revenue continues to exceed Renminbi 10 billion for the six consecutive quarter driven primarily by the steady performance of the long bromine Typos thing I will gain portfolio.

Our flagship fantasy westward journey theory, and westward journey theories continue to perform strongly.

That's true up the longest and largest Romney game Ickes in China.

Those gains continue to attract and loyal crowd.

Fantasy westward journey online achieved another record high quality of gross billing since it's a fabulous in 2316 years ago Wow. The mobile version also reached its highest culture of gross billing in the last two years.

For the Westwood journeys series, we introduced a brand new dragging character in conjunction with an expansion packing August so both the PC and mobile games, which quickly gained popularity weaving frame.

Westward journey online also peaked in gross billings this quarter, reaching the highest level we've seen since 2015.

Other games launched the more recent years also enjoying an impressive popularity with Heidi active call use a basis.

Invincible had another quarter of record revenue, we continued grossing active users.

In October we say fourth year anniversary Ing thinks about reached number two on China's audio last top grossing charge.

Oh Gee also celebrated its fifth anniversary this quarter and top China's iOS grossing child for the third time this year in September .

In addition, other games in our portfolio, including our new gold theory identified all about sounds cool, which previously known as C.L.X. I'm like posture also enjoying a sizeable and steady run rate we their respective large spaces loyal fans.

Two weeks ago, we launched an updated version of life after.

The update came with an overhaul of the game introducing a series of new themes I know that she's gameplay, leading to a strong growth in the number of active users and gross billings.

These games spend different genres hockey escaping user profiles and last a long time horizon.

This call, we achieve sustainable revenue base for our existing portfolio of games and the continuously ask more and more game titles to these expanding game portfolio.

The fans that these gains have accumulated over the years under reach up there in sterling happened each of them into valuable IP, giving rise to the possibility of Marvin renditions upbeat popular character and storyline.

Most recently in October we launched Shane Glenn Swat Dragon upon the cloud a Chinese bio term based and then Milwaukee G, which topped the iOS downloads chops soon after its launch.

And for room, and blade, a new and minimal RPG. We just launched last Friday is also trending well. This game is designed to target female game players and was featured body I'll ask capstone.

Our joint venture with Blizzard Entertainment has also had a good quality.

In line with our successful Tango partnership operation they that wall to wall crop. The main lane China. The popular franchise continues to provide new breeding game experiences to players across the world.

August 27, Moxy official launch in China, I believe the world of Warcraft classic inventive revitalization of while at the world renowned and minimal RPG.

Calling on enough to Algea other generation of old play Oh I'm in treating you play years alike. This latest release increased both revenue contribution and total number of subscribers for the game.

In terms of overseas revenues, we delivered a record culture.

We now have to blockbuster games in Japan knives out and I didn't mean to five both self wage gains top position on Japan's elas growth in China.

Like Foster our newly released is also renting up well in Japan.

We used the success that's nice out we gained access and deeper understanding of uses in Japan in terms of their interest social behavior and preferences in style he's tactics and game slate.

We passed the success, we experienced knowledge onto the design of other now these games enhancing our ability to deliver popular titles to Japanese users.

I didn't get to five top Japan's Iowa Broking trial for the first time in September while nice out remains a household name in Japan amongst the famous.

Further support our games grossing Japan and stimulate play a enthusiasts them. We hosted knives knowledge championship. Our first ever E Sports Championship tournament in Japan from May to August with more than 500000 play is participating.

In terms of our pipeline of games. We are pleased to have received a license for asked WJ three D, which is currently undergoing the final round of beta testing and is scheduled for launch in December .

In addition, we're excited to announce trends could release, Harry Potter Magic awake, and cocking featuring a blend of strategic role play elements that device players, we experienced a magical wizarding world.

Oh the gains included in our lineup includes Ami Oh Gee, the cocking my whole Super Wall, Onmyoji Yo Kai Kornya D.V. I could.

Ghost Wold protocol Diablo immortal and Paul came on class.

Wow, how existing gains I expect it to sustain our online games revenue at a high level you a bounce in the pipeline titles represent opportunities to further fuel that revenue gross for our online games.

Now coming to our education business.

We have completed your dollars public listing on the New York stock Exchange in October .

This marks our first ever carve out IPO under the Matisse umbrella and the beginning of a new journey for you'll Dol to lead our afterwards he rapidly we should not using the way that people learn and received education.

Following the IPO Ninetys remains your dollars majority shareholder and we'll continue to support your dollars future girls, that's propels down mission to empower the people in China on their life long learning journey.

Over the past 13 years Yodle has become a strong contender <unk> online education space, we clear advantages in international native pad drilling content offerings.

The international disrupted many industries in the world, but so far it has had a minimal impact on the education space in China.

This offers tremendous opportunity where your without.

That's right off the Joel you without senior management team, it's comprised mostly of computer science graduate and doctoral rigs from top universities, who are best suited to lead the transformation in the online lending space enabled by the application of technologies.

Most yodle and Medisoft fully committed to investing in technology and content creation in order to bring to our users more effective and knowledge of driven education experience.

Moving on to innovative businesses and others.

But that is cloud music, we continue to deliver a highly differentiated music product. We used the mission to house tens of thousands of talented Chinese independent musicians create indigenous campaign that resonates with Chinese listen this.

We strive to provide I would use as we said most into mid interactive on high quality music experience.

As we continue to amass more and more what we call clouds villagers. We know we are on track.

Now these cloud music continues the rent topics monetization efforts.

Reaching new record high revenues in the third party.

Revenue growth has been strong across the boarding subscription advertising and live streaming leading to continued improvement in our financials.

We entered into a definitive agreements with Alibaba and meaningful so approximately U.S. dollar 700 million in September .

With our new strategic partners, we are able to explore more email fitted forms of monetization for this highly engaging music platform.

But you mentioned the focus continues to be about operating efficiency.

During the third quarter, we continue to optimize our supply chain management to do reduce our inventory and the deepening our relationships with choice manufacturing partners.

We calculate manufacturing partners actually I understand the consumer metrics and provide them was back of visibility and ultimately asset sales figures.

Well I Didnt have you mentioned, we'll continue to focus more on quality control and bringing high quality products to our consumer.

In September we completed the sale of our cross border ecommerce business Carlyle and we are pleased to have found a strategic fit for Colorado, We think Ali popeye's extensive ecosystem.

In summary, we had a basic water being more focused and realizing value for each of our call business areas.

We have every confidence in the future prospects, okay sectors, we choose to be and we have developed and we'll continue to strengthen our distinct product offerings in each of these markets.

We will persist in our pursuit of excellence across all of our business lying underneath the values is always remain at the heart of our business strategy.

As we advance each of our businesses and create value.

We are always looking for ways to increase returns to our shareholders.

This quarter in addition to our regular dividend representing a 30% payout ratio. We will also be distributing a special dividend of U.S. dollar 3.45 per ATM Watson in consideration of the sale of call out business.

As always we appreciate and value with a long tim's apart from our shift holidays, and we are always devoted to maximizing the interest of our shareholders.

This concludes Williams calming.

I will now provide a brief review of our third quarter 2019 financial results.

Given the limits its time on todays call I will be presenting some abbreviated financial highlights.

We encourage you to read through our press release issued earlier today for further details.

Our total net revenues for the third quarter, what Remy. He was 14.6 billion all U.S. dollar 2 billion, representing a year over year increase of approximately 11%.

And again, let me remind everyone that revenue has taken into consideration that we have deconsolidated call are resolved in the carbon caught here as well as that historical comparative periods.

Net revenues from online game services, what renminbi 11.5 billion up 11% year over year, Yeah, it'll be a increase was primarily driven by like pop to which was launched at the end of last year as well as continued strong performances from Invincible and.

If I.

Mobile games accounted for approximately 71% of net revenues from our online games in the third quarter.

And that's revenues from Yotel nearly doubled year over year forgive me be 346 million, primarily due to increased net revenues from your without premium costs is driven by higher tapes student enrollment and average selling price.

And that's revenues from innovative business isn't others, what Remy B 2.8 billion up 4% year over year due to mainly this increased monetization from cloud music, partially offset by decreased revenue from an online advertising businesses due to macro environment.

Overall gross margin was 53.8% in the third quarter.

Gross margin for our online game services for this call to was 63.8 cents.

Our gross margin for online games is generally stable fluctuating parts into parts that we think the narrow band based on the revenue mix of mobile PC as well as self develop and licensed games.

You'll without gross margin was 25.8%.

The improvement from Punky, 3.3% in the prior year period due to increased match revenues from your without premium causes and down from 32.9% in the previous quantify.

Gross margin for innovative businesses and now this for the quarter was 15.2% compared to 15.5% and 17% for the previous quanta and prior year period, respectively.

Yeah, well, but yet decrease was primarily due to decreased net revenues from advertising services.

For the third quarter total operating expenses were renminbi 4.5 billion.

Our selling and marketing expenses as a percentage of our net revenue was 11.1 cents compared with 8.9% in the second quarter.

He called till the quality increase was mainly due to increased marketing expenditures related to online game services as well as its summer promotion of you'll Dol, which is typical indie online education space.

R&D expenses remained steady at around 2.2 billion renminbi.

We remain committed to investing in content creation and product development, which is watts defined as a technology company.

non-GAAP net income from continuing operations attributable to our shareholders for that so lots of 2019 totaled renminbi 4.7 billion. All U.S. dollar 661 million, representing an increase of 21% quarter over quarter and 74% yeah.

Oh the yeah.

Our non-GAAP diluted earnings per eight yes from continuing operations, what Renminbi 36.31, Paul you X dollars five plain old age for the fifth call too.

Our cash position remains strong as of September Thirtyth years, our total cash and cash equivalents current than Noncurrent time deposits and short term investment islands totaled renminbi 61.4 billion compared with Renminbi 49.7 billion adds up to year end.

Last year.

As William mentioned in his remarks, we after leads to report that our board of directors have approved that dividend of U.S. dollar 7.59 Crazy yes.

This includes a regular quarterly dividend of U.S. dollar full 0.1 cooperative, yes equivalent to approximately 30% of our net income attributable to the shareholder plus a special dividend of U.S. dollar 3.45 per 80, yes.

Thank you for your attention we would like now to open the call to your questions.

Operator. Please go ahead to the Q anyway.

Thank you.

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Today's call you Didnt ask your question Chinese Please let me repeat your question English please.

One question each time, if you have no question, let me join the queue again.

Well take couple of quick question Matt.

Well I see your line is open. Please go ahead.

Hi, good morning, Thanks for taking my question.

Question on the upcoming cabinet J.C.D. I, just wondering if management can give us some color you all expectations are that gain and do we need to worry that game that could have that possibility ops cannibalizing. Your current app that Jay mobile calls, saying if.

That FWJ slate D could be the next the ship game. Thank you.

Okay and can actually I'll translate that question for William I Love and naturally wouldn't the wouldn't teach you actually quite you Ah Ah moment Fenty by Oh wait you tell them and they don't find Sandeep and Yoshimura. She bought me why it sounds nowadays how long finds.

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I'll provide a brief a translation of Williams response, I feel JD three D. is currently scheduled to launch into for top December .

And where we are quite excited about this game because this game represent the accumulation of old, but encaje law of RMB experience both from the PC version as well as the mobile version of that I feel Jane and we kind of should to be.

Users and be Investor community that you're going to see a lot of in of achieves a innovation in this game. So this gain is we are hoping that this game attract many enthusiast bands above the westward journey French highs and we given all these gains by.

In college the ballot by 90 days a week, we are not overly concerned about any in kind of kind of live nation tool that existing FWJ PCN FWJ mobile.

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Thank you Alex I'll provide a brief translation Williams comment Oh for the audience Firstly on music or so being shot yes, we are very actively exploring different opt opportunities in terms of monetization batch.

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Be reflected in the upcoming caucuses as we continue to explore strengthening existing monetization channels as well as to the apply some innovative.

Brainstorming on new features for extended social aspect et cetera that we mentioned previously in terms of cost can show not easy as a whole not only has now. These music. We are very proved and I'm practical in terms of cost control we think.

That you are there to differentiate our music business.

From the can pet competition, we are going to further strengthen a self production UGC independent musicians as a differentiate us come can answer is out we do not see Andy material increase in terms of music content acquisition cost.

Overall, we're very confident about the prospect of monetization, which will lead the path to profitability or we do not have any definitive timetable for breaking even all IP, all but I think as long as we progress on track.

Was the mission and those how those those boasts world's Tom just naturally to your second question on the overseas games strategy. So as the as you have mentioned Weve being also quite active in exploring overseas opportunities the various oh, let's see them fast.

And then instead, we made in those studios I'm, mostly valuing their R&D expertise, which we we think can supplement to our in house R&D capability equally I would now these are a deep expertise is something that attract those business partners who took.

But rates we size.

Today, we have achieved a small milestone in Japanese Mccain and we're hopeful that we use a more new game launches on the global stage.

Step by step we are also going to have a more promising future in sums up the U.S. and European less than my kids.

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Thank you very much picking my question. My first question just a follow up on behalf of trade Tweedy mobile and shouldn't be a final beta testing for enjoy do we have to send somebody percentish of participants coming from those come into play multiple Ajay.

And also could you share authorization from the beta testing as well.

And then Mike and other question you saw on D. muscle suitable you shame on the defendants status and launch timetable and other games genres for <unk> under defend them and anticipate its please think of having lunch.

A lot on types or when I go Jay time, do you could make a model that make I keep that didn't help me out what you want to get laid out okay. Okay. Oh. Thank you were killed them for your first question FWJ three D. As you know we've stopped it is it.

Casting as early as in the summer so far the testing results, it's been very promising a which leads to our confidence in launching this game or in the first half of next month.

And for your second question on novel IP as we have reveals the overall partnership with novel and our main Swankiest game. They they will be multiple games, that's going to be developed fine that east fall Mabile IP and Marvel sequel Wall is.

Lineup then.

I think a novel Super well as well on track from from a development perspective, So this game, which could be expected or in the near term obviously for Chinese My kids and this is all opt all subject to the ER license approval Ah, but ER several of them.

Mabile games are kinda king boasts the Chinese market as well as international market.

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A couple of questions related to the overseas business, So first or what do you still overseas games revenue as a percentage, although total game revenue.

Second ammonia Oh walking pipe lights wish Wonder if you see quick financial photo overseas market next year.

It is a how do you see to competitive landscapes forward to oversee scheme to move out of them and especially I noticed that there's a lot of Chinese can do better but also very active you know publishing overseas. Thank you.

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So I cant kindness to translate Williams response, and also to add a few more color income. So the oldest these game revenue.

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[laughter] me about 10% of our overall game revenues and we see great potential thing in terms of further enhancing both the absolute dollar Oh by overseas game revenue as well as this percentage ratio to your second question into.

Himself game specific product line maps for the various international My kids.

Apologies for your understanding that we would not be able to elaborate the details here, but there is a solid plan, where we say that we are confident to increase the overseas games revenue as well as the percentage it is actually but not they did supported by a very extensive.

Study of the overseas market as well as to how a product lineups.

Well I said part of the question intensified competitive landscape. So the oldest these marketing I think that's a good question because when we are launching our products to the overseas market, we realize that thing in more developed markets like Japan and U.S. uses.

Actually I lost most sophisticated the only way between press to retain to attract he's uses agents through product innovation and game quality that is something that maddie. This crowd at the outlook competitiveness and ways that confidence I think it represents actually.

A very very I'm optimistic outside of the older on that he's games in the markets beyond China.

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On email I don't know how to go here to take it to figure that you take that they'll talk you do get to high until they've done a decent doom along even I'd actually down [laughter] like Chicago, how should it until Monday, the yield clueless many sounds Washington now when she went to the funny shops [noise] I have two questions. The first question is about the online gaming business. So I was just wondering why.

And company well officially announce a b upcoming new mobile game, Harry Potter and also I was wondering what somebody they did two in Q3 to help helped at the two legacy titles FWJ and adopt WWJ to to achieve record high growth, saying Q3, respectively. My.

Second question is about the online music business [noise].

We heard from some media got China's regulator is likely in launching a investigation into the license in practice between a record levels and the music streaming companies. So I was wondering if management can provide some colors on this ongoing investigation and Oh, specifically, Oh, what potential 10.

It is busy investigation, they bring to the music streaming industry and that relate it to that well a potential impacts. These changes may have on net is a pop music business. Thank you.

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I see so I. Thank you John I'll, how it translates yeah Williams a response Cody audience, firstly, given that we have a bomb to line up.

For the game pipeline will end is actually encouraging people to try not to focus too much on individual titles, whether it is the existing and I've lived Jay WWJ all the upcoming I, probably would just really all Harry Potter all of these a high quality games that we self developed and we have very confident.

About the.

Elements longevity.

And so.

And we have a lot more than just those couple of names that we quoted.

For the past some like yes, FWJ unpopular WJ both have ER.

Delivered a record crop to.

Simulated mostly by expansion pack in the summer.

Harry Potter is also scheduled for launch we don't have a concrete timetable yet, but it shouldn't be a plan for next year.

Your second question Gallo along the music. We've also learned from the media abolish potential regulatory investigations and curious into that I wouldn't general attitude is bad for any sort of industry gross a conducive environment from the play.

From the regulate too.

Ultimately longer term beneficial to serious been lonesome players.

Our mission ultimately is to ensure that the industry as well as the passion that Chinese on like music users benefited from a healthy and Diversifies gross of the industry overall, we think an appropriate and.

Conducive environment, it's going to be long term beneficial to all the players in this sector.

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That one I want to demand kind all the other two way within Oleanna with the other one here for quite a single to switch you sit around to sound seen William them entirely I said Chusovitina. So you always see Oh of course, now with GE than the kind of how would your while he said if I'm in a point.

I would try something myself I'm I'm asking on behalf of Alex Yao. So my question is the first place related to a PC games are we know what is some of our top PC games, such as a wearable craft classic kind of fantasy westward journey actually perform as he is very receipt in so can management talk about the PC game bucket.

Outlook in next few years kind of whats out to keep growth areas. A second question is predicted to some of the new innovative trends can management talk about a nice strategy and he's a new innovative trends such as a five GE and a club gaming. Thank you.

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Okay. Thank you.

Then I would translate a Williams a response and also add onto your first question are you. All your second question a William come into that so that's a great question that the industry's been noticing. These are new features crystal ball, a william thinks that they use a recognized.

<unk> of game titles, so any sort of come King is ultimately attracted to the comp and less so on the different screens all media.

So I ultimately it is the best quality content for the differ in factor of users that big Cage, who is the when a cloud gaming as well as five G. R. D sounds great features to supplement to this content creation industry.

Whether they are going to be a mainstream feature or whether that's going to be disruptive to the overall user experiences.

Those are all good questions to palms. It ends to to be further observed over wrong, we think as long as they come tending industry, whether its education, whether its music whether its games ultimately come candidates the king the Wang who has the capability.

Developing the highest quality content would always be the ultimate we know for your first question on the PC games, we have recorded a great cost savings himself PC games of our portfolio, we've seen both FWJ WWJ P.C.

As well as a wild classic.

We're delivering quite strong I've talked to resolve overall, we think obviously, we can speak for the entire industry, but as for US we're fairly confident about the steady performance of our PC games into 2000 and hunting.

Thank you.

Next we have almost Cho from Jefferies. Your line is open. Please go ahead.

[laughter] management or or taking my questions.

Aki crashes.

First question.

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Hi, I'm going forward I'm going to expand our headcount.

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Okay.

Thank you.

I'll translate Williams Remods firstly, he thinks that the shot read deal industry in general is actually a positive catalyst to China online music industry, because as you can see all the present pacing up shop format video.

Well as live streaming required if I'm, sorry for the music element, which actually helps to promote music popularity.

Well now these cloud music specifically, we now have over 80000 Chinese independent musicians, that's being nurturing our platform and this figure is growing.

We think a CHMP format deal is a very conducive way to promote good music based on our data and use the statistics, we have not seen shot format video ads, a distraction or competition for use of screen time and not the.

We think ultimately use they traffic is attracted I good music Chinese and global I like currently cloud music. We now have almost all the good music up in last couple of decades, those other call asset that attracts users and quickly before we wrap up this call.

So your second question on the Opex trends.

Oh R&D you have com is the steadily increasing.

In fact over wrought by the end of the fifth costs here, especially after the some recruiting season, our headcount has represented a slight increase.

Comparing to last quarter as well as to the last year and I think this is a strong factual avid bins Mitch dismissed many grown that market rumors of so called massive layoffs about 90 days.

Thank you.

Okay.

Thank you I'll now, but Mike.

I would management.

Oh closing remarks.

Thank you once again for joining US today, if you have any further questions feel free to come to somebody else you can see much innovation have a great day.

That concludes today's conference thank everyone for your participation.

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