Q2 2020 NetEase Inc Earnings Call
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Thank you I'll play. So please note our discussion today will contain forward looking statements. They teach you future performance of the company I thought you tend to quantify what they call blossom liability I could double edged lucky with private Securities Litigation Reform Act.
They are not guarantees of future performance on that subject to secondly, with no certainty assumptions and all the success.
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General discussion of the this back to that could affect that even if they didn't affect actually adult isn't included in certain financial companies into Securities Exchange Commission, including he and his formal form 20-F and that was a Hong Kong Strange company does not undertake no obligation to update these forward looking information exam.
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During today's call management, but you've got judge <unk> non-GAAP financial targets for comparison purposes, only but definition of non-GAAP financial measures reconciliation of GAAP to non-GAAP financial results.
The 2022nd quarter earnings you do you see she already today I keep in mind that she's conference call. Good inhibition and he likes the presentation I'm a west Coast weekly Oh, good comfort is cool well be available on the nephews corporate website at <unk> Dot com.
Yesterday on the cool Neptune Senior management team is.
Indeed, Chief Executive Officer, Mr., Charles Young Chief Financial Officer, I will now turn the call I was lucky child, who will be prepared remarks from California.
Thank you Margaret.
Thank you everyone for participating in today's call.
Before we begin I would like to remind everyone that all concerned teachers topic I'll, let me be.
This is our very first earnings call topic for me on both NASSTRAC phone calls stock exchange.
That's a part of our shareholders. This past June.
I'm not prepared I would point queues and if that's three on that back and completed our listing on the Hong Kong stock exchange.
If you will see any reminds us of our commitment to shareholders, both domestically and overseas.
With deep responsibility to continue creating value for our growing base of global stake holders.
I'm pleased to report a solid second quarter, a mouse challenging macro backdrop.
Healthy gains across each of our friendly business line.
Once again, we saw steady performance is from our flagship hi told and franchises and rapid growth some you'll doll and that is called music.
Total legal I wouldn't that's revenue year over year on nearly 26% to really be 18.2 billion for this quarter.
Net income from continuing operation attributes about to our shareholders grew year over year, 535%.
4.5 billion.
Oh, I gains was up 21% into second quarter year over year, reaching that's revenue up.
<unk> point 8 billion driven by the impressive strength.
See titles.
Our flagship fantasy westward journey.
Westward journey feeling.
Yes, good strong performances in the second quarter.
That's true up a larger longest running game RPV, China, both game consistency I track a loyal crowd.
I didn't kill the success of our fantasy westward journey French high we introduced fantasy westward journey H five in June a more casual and like version of the legacy IP.
This New addition has talked to pay to them.
Yes.
During the user base of our.
With German French high even further.
While we continue to grow and strengthened our legacy franchises.
Many of our titles that launched in more recent years have also show remarkable success and sustainability.
Our PC game just too.
Breaking it two year anniversary, we introduced a new character in conjunction with an expansion.
Yeah, very pleased to see its popularity preparing strong gross opinion as well as record high members.
Both new and returning player.
Similarly, our X L G title Invincible sheep another quarter.
Next it's high revenue was strong user engagement being the second quarter.
Sure expertise, we have accumulated and X L. G over the past five years, we see is popular cycle is invaluable.
Carrying on some of these expertise.
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The highly anticipated SLG games in our pipeline for China and for the global markets.
Eating food titles, such as the law that the ring likes to wall I didn't spend that look rounds.
On the O.G. also shows remarkable longevity as we continue to introduce new characters.
So the English the Richard I team, we are expanding our portfolio offering you on yield you family.
Next month, we target launch bomb Yohji youre quite cold.
Simulation game that acting long anticipated by the all Muji community.
Two other news, we lump gains offsetting the making all the old you idle project.
The simulation game I'm project Wold evolve yields you well playing game.
It's more and more experience in diverse game genres, we have also tap into more diverse and larger use Uh huh.
Many of these games, but very popular among younger generation [noise] I'm, not showing great longevity as well include life posture and I tend to be five.
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Paul.
He has gained strong traction with generation you bid on we are regularly enriching the IP through a variety of initiatives, including be spokeswoman IP collaboration I'm offline activities that cater to popular base loyal users.
Recently, we launched crossover characters through our collaboration we pick pack and hold on a Japanese Armand theories, which quickly stock is trending in social media outlets.
Boxing antibiotic discussion among young generations, highlighting the dynamic nature of our game.
Moving on to license games.
Strong performance of Blizzard entertainments world of Warcraft carried on well.
Treating a record number of peak concurrent users into first half of this year.
Beyond our programs in the domestic market. We have also made multiple hathaway with our international initiatives.
I will oversee online game, that's revenues hit a new record high in the second quarter Palletized robust performances from myself I life posture in Japan.
For example, our collaboration we hope you'll go I mean, you respond I felt was a huge success. We used the game talk in the iOS Trophy trop for nearly a whole wheat.
Earlier today, we launched <unk> at Kohl's Nexgen Sandbox, and then more mobile game that acting long awaited five to use the community.
In addition to the success of our existing gains we have many exciting gain in our pipeline with upcoming cycled that include you'll get your criteria a law the publishing rights to wall I recall care Magic a week and.
Oh, all time revelation mobile game Gold Walt protocol Nightmare breaker.
Infinitely lounge.
The Apple in muscle I'm, hoping on class.
As for our education business, you'll continue to scale at a rapid pace total net revenue rose, 93% year over year, <unk> 623 million Weve positive operating cash flow again in deep water.
Worlds feeling it's what you'll dollars online courses tripled year over year, who renminbi 542 million driven by strong retention and larger scale marketing in the K 12 segment.
Which increase its growth feeling our 279% year over year.
In addition to strong contributions from junior High School absence physics, we saw more cost is growing popular in the second quarter, including High School Chinese and primary school Max.
Back to prepare for the new enrollment during the summer month.
Oh had significant the build up in servicing capabilities, increasing its total number of instructors and truth is to 179, and 2000 and 699, respectively.
As we frequently upgrade our Paul because I live in Houston.
Beauty more personalized I'm struck a five services for students with different great increasing getting Clos interaction.
During the quarter back revenues of your without learning devices reached let me be 86 million up 250% year over year.
Continued investment in product and technology innovation, we really dictionary and 2.0 pro version with more functionality as well as Japanese and Korean languages in the past June.
Product became the top selling product category of ecommerce platform during the June 18th event.
Looking ahead, we are well poised to continue you'll dolls growth trajectory.
Despite our strong technology I'm teaching capabilities.
We further amplify our marketing after two further bolster our student base for the second half of this year.
Four letter you'd called music, we continue to feed triple digit revenue growth in the second quarter year over year, we both membership and live streaming striking new high.
We're very pleased to have secured a multiyear licensing agreements with Universal music group.
This directly.
Direct partnership further strengthen letting it falls music as go to platform for high quality International music and lots of great Fab four wall for China's music industry as a whole.
We are very committed to bringing the Richard Thompson to try and user type introducing exciting global music I know you could baking independent mutations.
Second quarter, we launched numerous paid like shows for independent band, giving them more options to stream online during these uncertain time.
So in this quarter, we launched easier our car okay.
Which allows one quick renting capability for limits lists creative possibilities and see our out.
I will use it can connect two songs and common music interest I'm sure there.
When we caught him.
These bonds and easy to customize the both teachers, great we appeal to our younger users.
Additionally, our annual subscription service is now available for men do the army pop off the customer loyalty a VIP program one of the major collaboration opt to Ali Baba investment in my these cloud music last year.
We are working together to explore more possibilities for future synergies.
Turning to against yet we continue to optimize our operating efficiency in the second quarter in terms of product development supply chain and user experience.
During this quarter, we introduced a number of popular products significantly reduced inventory turnover days I'm further expanding our pro membership.
Typically represent the most call sticky users of our you mentioned brand.
A private label one of our key strategic goals is to increased brand awareness and the marketing appeal to a broader audience in China.
During the second quarter net even yen Ching exactitude coal that tool like broadcasting show in which we introduced the Yankees on product and they will all sold out in continuously [noise].
We also any city partnership she's talk live streaming and pay a wells, which last two a rapid growth in sales through live streaming platforms.
Now do you think back known for our content creation capabilities needed sleep true across our different business segments.
As we look to the second half of this year, we I'm more confident and permitted the Napa to further expanding our reach and bringing relevant exciting new products and services.
Ladies players fans and followers around the world.
Games in particular, we used the introduction of exciting new titles and our global initiatives. We are expected to meet our next wave of expansion as we continue to be with value for all of our stakeholders.
This concludes Williams remarks.
I will now provide a brief overview for our 2022nd quarter financial results.
Given the limited time on todays call I will be preventing presenting some abbreviated financial highlights.
We encourage you to lead through our press release issued earlier today for further details.
Total net revenues for the second quarter, what's the RMB 18.2 billion, all U.S.P. 2.6 billion, representing 26% increase year over year.
And that's revenues from online games that will really be 13.8 billion up 21% year over year.
The increase was primarily driven by our flagship titles, including fantasy westward journey three D Invincible and the fantasy westward journey mobile game as well it's believed the world of Warcraft.
Mobile games accounted for approximately 72% of match revenues from our online game services into second quarter.
Net revenues from you'll Dol also increased 93% year over year during the second quarter, reaching RMB 673 million, primarily due to the increase that's revenues from online caustic [noise].
Rapid increase in K 12 paid student enrollment I haven't increased sales of intelligent lighting devices.
That's revenues from innovative businesses, they're not this what remy be 3.7 billion for the quarter up second 9% year over year, mainly due to the increased contribution from 90 cloud music platform.
Overall gross margin was 53.8 defending the second Parker.
Gross margin for our online game services for the second part too was 63.8%.
Our gross margin for online games is generally stable.
Actuating quanta to Quater within the narrow band based on the revenue mix of mobile and PC as well as self developed and licensed games.
Gross margin for Guild dollar for the second quarter, two haven't punky, what's 45.2% compared to 32.9% for the second part till 2019.
Margin improvement trend was primarily attributable to greater economies of scale and continued optimization over the cost structure.
Gross margin for another PICC business, there's others was 18.5 per cent compared to 15.8 put thing and 15.5% for the preceding quarter and the second part there last year [noise].
The increase was due to primarily increased revenues from Matisse cloud music.
For the second quarter total operating expenses were written would be 5.6 million.
Our selling and marketing expenses as a percentage of mass revenue was 12.8, but fans.
Paul to all the coffee increase was mainly due to increased marketing related to new games as well as you'll go summer promotion spending which is typical indie online education space [noise].
R&D expenses were 22.4 billion, we remain committed to investing in innovative content creation I'm proud of the asylum than.
This is what you find us as a technology company.
As a percentage of mass revenue R&D expenses represent 13.2% of total revenue compared with 13.5% for the same quarter last year.
We have increased absolute dollar spent in the operating expenses, we are prudently and maintaining a disciplined level of total operating expenses for the overall topline revenue. We are very confident to spend these dollars wisely to further grow the sustainable revenue growth into that near future.
Other income was really be 1.5 billion sort of second quarter 2000, Punky, yeah, holding the increase was mainly due to gains from fair value changes of our investment coding and government incentive recognized and gets Walter.
Effective tax rate was 18.6% for the second quarter.
Non-GAAP net income from continuing operations attributes couple to our shareholders for the second parts of the year totaled.
5.2 billion, all U.S. dollar 739.7 million, representing an increase of 24% ought to all the quota and nearly 33% year over year.
Our non-GAAP diluted earnings per yes from continuing operations when need be 39.82, our U.S. dollar 5.64 for the second part to up to Palin punky.
Our cash position remains strong.
As of June 30th our total cash and cash equivalents, Corunta, Noncurrent time deposit and shop pending batsmen balance totaled.
103 billion.
Kit, we renminbi 74.4 billion as of end of last year.
In conjunction with our listing on the main bought the Hong Kong stock Exchange, we completed a global offering 197.202 million <unk> bought in the ratios, which comprised an international offering and the Hong Kong public offering and the food exercise of the over allotment.
Options gross proceeds from the global offering is for underwriting fees and offering expenses were approximately Hong Kong dollars 24.3 billion all U.S. dollar 3.1 billion.
In accordance with our dividend policy. We are pleased to report that I'll a ball has approved the dividend.
Call it 1.485 or eight yet.
Onto the share repurchase program approved by our board as of June 30 years, approximately 2.3 million 80, Yeah testing, we purchased for a total cost of less dollars 755.7 billion.
Thank you for your attention we would like now to open the call to your question.
Operator, let's go to coordinate phase.
Oh, Okay, you feel like so Asa clashes <unk> no by pressing star why I got anything keypad, yeah, you're seeing speakerphone. Please make sure your mute function and after that you're seeing that the we shall be equipment, but the benefit of all participants on today's call. If you wish to I still questions diminishment in Med D.
Pete you make it eat repeat your question English. Please ask one question per tight you feel like go off small question is showing to kill by pricing style by thinking.
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I translate my question. My first question is related to Oh, Youre progressing Japan in the last couple of years or the progress has been very.
Very great the grossing ranking has done very well.
And you show with US what's your next milestone wants to make school in Japan Mobile game market and then my second question is related to Harry Potter launch.
What's the long strategy for the game is it a global launch to get over China and overseas and if we have to think about a potential crossing.
Overseas versus China, which side would be stronger thank you very much.
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I like then for the audience for everyone. It's convenient I'll quickly translate Williams remark and apologies for the like Nichols, which just now.
Firstly regarding our objective for the Japanese market, it's a very important market for our global initiatives and we've achieved a small milestones there over the last couple of years, but we do think is huge upside potential blocked for further cultivate into the Japanese market.
For instance, we are committed to even refine well offerings more genres of games into that important my kids a week with regard to Harry Potter. This is a highly and get that play that game, we focus a lot more on the product itself on the possible use the reactions and.
He bags and their likeness of these products, whether it's a simultaneous launch, but China class Global Maki all as a different pay we don't think that's the top priority for us the good thing it back we've got the approval already so we have the flexibility.
The focus really on the product and making sure you there's not happy with the brought back when we absolutely prepared so far the progress is being very well on track.
Operator next question thinking differently.
Okay feel that take all in next question.
Alicia Yap.
Well I still but slate.
Hello, and thank you Oh, he told another <unk>, how well you know he went one a holiday don't don't want what I just should be so my first question is a chain we got into margins. So with the newly signed contract with you when Gee, how all that.
Changed your gross margin and cost profile for the new email eightys basis.
And assuming you know you may have to pay and a fun see oh attached so and also we've no more contracts and all that how should that change in comes off the potential monetization a second questions quickly on the sales and marketing I'm. So it seems side this quarter and see something.
Hi, Eric in previous quarter, So wonder if DC, one awful will be a new involved all photos myself the second half what do when he said when you need Linda I'm eager to show that that.
And you end GE sign it took us contractually tone I took a year ahead in at hand usual quickly without a joke <unk> gross margin C class I see him with us.
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Alicia and but for a quick translation of Williams remarks, we.
Added comments from my sand. So first of all William comment is that the multiple year Uh huh.
He nature these changes the or something like a new format eco direct partnership so in asset that lots really changing the margin trends or on the pieces side, but that deep pocketed you card from a direct partnership is that beyond.
Music content subscription revenues that we are now being a direct and partnership to possibly explore other formats up monetization weve a record label provider.
And that gives us more confidence that 90 of cloud music was explore and try out more interesting and innovative ways of monetization potential which in the longer term will lead to a much more healthy use experience on the platform, which.
Naturally would resolving I'm much more healthy.
Financial profile of 90, you've called music.
Well youre not come crashing specifically on selling and marketing expenses a year like in my earlier comments is represent the increased absolute dollars primarily for two reasons why is he selling and marketing after that for a new game launches in particular.
The fantasy westward journey H five game and also possibly acute through the summer promotion and mission heating up your without spending which is again a kind of oh, that's even though she them out of Ti for the overall online education industry.
I read, but if you live some different aspac this quarter.
Selling and marketing represented about 12.8% of my overall topline revenue of cost is some gaps of spending for and repeat the oh sustainable revenue growth into the coming back to owning all this percentage level represents a very who then.
And then disciplines level comparing to our historical level on the annualized basis. During the last three years, hopefully that answers on classroom literature.
Okay, yes. Thank you.
We'll take our next question is from the line off I like <unk> from JP Morgan.
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Thank you management for taking my question Ah Ah Ah Ah two questions. The first one is true photos are these shows question on music one position.
We're going to you mentioned Oh, you guys are considering to diversify the music monetization. So are you. In addition to institute accruing to subscription based among.
Nation model, one of the monetization model into your gross or Tony contemporary doing.
So that's the first question. The second question is regarding the international gaming expansion strategy.
You guys have a quite a number gaming titles, so with Oh very seamless of western IP those games I'm very suitable for a global including both domestic and international publishing so given the.
Turning to geopolitical tension between China, and the U.S., especially a what's going on between U.S. government tens or something else.
China Internet companies would you or would you reconsider your international gaming strategy and let me let me stop here.
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She's here at all that well paying jobs, so Alex I'll provide a brief a translation of Williams remarks, but the first question on the possible monetization format.
Around now these cloud music, obviously that would require some innovation as there are certain monetization palm after it's been proven.
But but what's more interesting is what I see them more innovative ways that the online music streaming industry can further explore we're very confident on back from because that's our DNA content development innovation and.
The white commitment that's on change if that we are dedicated to invest more resources and capabilities into labor content into support the independent musicians to create a mall how's the unsustainable a industry trends for China music industry.
Hi, and lodge.
Second question.
We recognize the complexity around the Koreans background of geopolitical uncertainty, but what we believe as a company developer if that high quality content, great game content. It universally appealing, but this is universal and we are committed.
True remain highly selective and and serious developing good game content not only for Chinese used to support the global audience, we deemed as long as we are committed and and focus on content.
Alan and and universally appealing content goes beyond geopolitical complexity.
Operator next question please.
Okay. We would pay our next question is something like off at email from Merrill Lynch.
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I'm sorry, two questions. The first money is about the Oh call music pieces, how do you have seen the boat to position named off the esophageal companies, but indie online music market in the long term. It seems like some of these how sub medium companies have been asking music.
We laid up reveal contents to accept passengers. So just I wonder like a up they might not be Tom competitors seem to Uh huh.
Then secondly is about steepest harmans off fuel I like to see a he gained some of them still generating threeq of last and you have you been seeing some loan so in general to 'em would like to know whether it's more two of them by appeals are most awfully close I think she's yet.
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I'll kick it off Eddie I will provide a brief translation of Williams, Rick Rick relax. Firstly on your question, we believe a short form video and music actually I'm very synergistic.
First he called however, they are fundamentally different because usually of course shot format video or frankly, it is chops, it's usually lack the minute whereby a food complete saw typically require three for many of Lyxumia. So and also jump on that.
For the fall short form video usually takes a high like part of US other particularly song and as the <unk> predominantly UGC content platform, it's highly dependent and the music or the background music, whereas the product itself doesn't it.
Hi of so much of a professional touch on the out of hand on the music platform.
It's mostly PGC all you've been professional content.
Creation.
It's a much longer formats. So.
Shop on that deal is a very very conducive channel to promote a high quality music content. However, if you I use the is a true music enthusiasts, whilst we enjoyed the food.
Length of the song of the kind of the news the car reinvented touch then you short form video can not with claims the in Hawkins and relevance of the music platform. That's how we look had the relationship of the true we do not think it is a replacement.
For say secondly, I'm the game growth really M. Remark is bad if he that's seen that the spending hobby all that structural changes is that more users are willing to pay now.
Pay for high quality content pay for Apache experience in that game that we wouldn't me as a whole the number of overall p. use as Dave on the increasing trend at the same time ballgame at least for certain long but of the games you would also note a very good.
Polarization of the spending packing some people are more like a such a kind of.
Subscriber right they spend not so much but they've been consistently whereby some use this spend.
A lot more onset some games.
And typically for these types of games that more picking them up for lack of kid on the highest quality of the game basked in game experience. So by and large we think a number of users that going to blow out who may not necessarily role at the same noticeable trend forever.
If if I look content, it's relevant and represent the highest quality of the respective genre. We have the potential to grow both the ARPU as well as a member of the use that in our I'll now what product.
Operator next question, please see telephone job [laughter].
Okay, Let's take our next question something <unk> Thomas tone from Jefferies.
Well I hope that's just go ahead.
Yes, I Bonnie togs asphalt.
Well I somehow if anybody challenge I saw what if you went gonna see sometimes in the kids eat.
Well the when he Oh sure Wonder woman a highlight that we see that sounded moment kinda album and go to the time, there that Joshi Dol logic IP licensing Ah you know TC grandfather, Yeah, we see a woman teach the IPO Jolla.
Yeah, Yeah, Oh boy still should just like I know if I'm in a way for chunks of M&A. That's I'll do it yourself a woman students are more true PPI Bowman, but overseas I haven't seen Ah Ah <unk> M&A lot you've got to be don't hold album, one way or open jeweler claims management.
And I'm, taking my question and congratulations on a very strong set top results I'm I've a question about <unk> overseas games strategies.
Given that we have IP licensing we have our strong in house up your vitamin a as well as a week at the cash proceeds coming from our Hong Kong. These thing so how would be or think about our.
Opened these strategies in terms of M&A IP licensing as well.
How's the vitamin thank you.
Oh, yeah, she's all the subsequent to June those at school visible to.
Sure.
Hi, how are the father Cody.
Cookies or life will be an IPO lose a pool and limited alpha So let me share IP right.
It's healthy diet, whether to the Chicago Bridge <unk> struggle.
It's a little onto the girls probably could it how this is true with a joke.
Mm.
Okay. Thomas I'll provide a brief translation. So we actually we are Hong Kong IPO. It doesn't really change our mentality or approach towards a content focused global initiative. We are always very active an open minded.
All that started just you mentioned actually Didnt know false ranking in terms of priorities.
And I T licensing represent a very very cricket call.
And of our global initiative, because that showcases the endorsement of our content.
The creation capabilities appreciating publishing capability at the same time South development remains the core of our competition on Monday, we are very opportunistic subsea also highly open minded and act here, particularly in January that supplementary to our coal in house R&D.
Capability.
Oh, Hey, I'll be them I should say a child Oh, you said when you got a follow up Oh, just true woman Conbio, Japan the band.
Those are for each on the golf a woman phone woman given that he and I can Ah Ah moment confidently that well be <unk> triple surely don't wait a about object, Japan digital trip Tina.
And offense Abili and trial was and my follow up question about other pay in ways show and HM.
If we tried to compare Japan versus China should we expect a China just heading towards a the Japan or level in the long one thank you.
Uh Huh, [laughter], which sounds like it would have to do is how you should see.
Ah that's what you want to each other files that are local can she anti Utah pool, how much Sixtyl, Michigan Leach. It just how you get your just to show much of that kind of I would just so go shopping or they she has also continued to show to somebody who am I talking shashi on the sick or just a trend Oh yeah.
On the younger shopping them.
HM Okay, I promise I'll provide again a translation of Williams relax. So first of all it is very common that different geography depend economy demonstrate different kind of consumer behavior, but on the longer.
Tim trend, we do things that the Chinese consumers willingness to spend and the ability to expand its on the writing train one.
For instance, once my example, or if you look back today the car of the other movie tickets in China.
He is already comparable to a movie asking about movie ticket.
Spending.
The thing.
Just a decade ago, there's a huge gap right for some of that <unk> recall is a huge gap, which means Chinese consumers are more willing to pay a entertainment as Chinese economy for that bonds as people are more willing to pay a broad format.
Entertainment to English the lifestyle, we think that's trend is it on the right.
Operator, I think in the interest of time, let us wrapped up this call.
Oh, Okay. Due to time limited that concludes today's question and answer session.
I would tend to conference back to my quick Sue for any additional closing remarks.
[noise]. Thank you once again for joining US today, if you have any further questions kits that lead to come to establish they typically like in the nation public like that.
Thank you everyone.
That concludes today's conference. Thank heavy why play a participation you may now disconnect.
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