NetEase: "Naraka: Bladepoint Mobile" Set to Launch in the Second Quarter (4Q23 Earnings Call Summary)

Below is the summary of the earnings call for the fourth quarter of 2023 for NetEase.US. For an interpretation of the earnings report, please refer to " NetEase 业绩惊吓？别怕，产品周期马上来！ "

1. Review of Key Financial Information:

2. Detailed Content of the Earnings Call:

2.1. Key Points from Executive Statements:

1. Innovation and Growth at NetEase: In 2023, NetEase maintained growth across all business segments, achieving year-on-year growth in revenue and profit. NetEase expanded its game portfolio through cross-category innovation, achieving milestone success in diverse themes. Classic games like "Fantasy Westward Journey" maintained appeal through innovative activities, while new MMO games like "Justice" pushed category boundaries.

2. Player Engagement and Community Building: "Justice Mobile" attracted users by introducing new pursuits and lowering barriers, enhancing player engagement with rich challenges and achievement systems. Player engagement in choosing partners, such as collaborating with Chinese fan idols "Phoenix Legend," strengthened the connection between the game and the player community. Successful marketing efforts drove new player acquisitions, with player-led activities and friend referrals being key factors.

3. Diversified Development and New User Base:

a) NetEase successfully attracted users to niche game genres such as sports and simulation games. The basketball game "All-Star Streetball Party" became a pioneering success case, expanding the user base and showcasing success across different categories. Promoting basketball game culture by introducing renowned players and supporting sports development through charity funds.

b) "Peak Speed" successfully launched and expanded to Hong Kong, Macau, and Taiwan, attracting racing enthusiasts.

c) Innovative games like "Beyond the World" attracted female players, breaking traditions and providing a unique gaming experience. New innovations pushed the limits of game coding, increasing flexibility for creators.

The company is developing multiple new games, with "The Legend of the Condor Heroes" being a focus this year. This game is an open-world RPG adapted from a well-known Chinese martial arts novel, to be released across multiple platforms, offering a highly immersive experience and rich storyline, scheduled for a soft launch on March 28th this year. Another game, "Sixteen Sounds of Yan Yun," aims to provide an experience equivalent to console games, featuring realistic martial arts combat and a unique historical background. It is planned for release later this year.4) Senior Team and New Project: BulletFarm is a new IP team led by David Vanderhaar, who is developing a new AAA game emphasizing cooperative gameplay set in an original universe. David Vanderhaar is a renowned game developer known for his contributions to the "Call of Duty" series.

1. Youdao: NetEase's Youdao continues to drive technological innovation, upgrading the virtual teaching assistant Hi Echo and introducing AI mentors in smart learning devices. The LLM functions such as AI robots have achieved over 100% YoY growth in translation substitution costs for three consecutive quarters, demonstrating significant technological effectiveness in practical applications. Online marketing service revenue reached a record high of RMB 474.1 million.

2. Cloud Music: NetEase Cloud Music's online music business is profitable and shows strong momentum, with overall profitability improving. Revenue from alternative membership fees has been steadily increasing, mainly due to growth in subscription users and improved profitability.

3. Yanxuan: In 2023, sales growth remained stable, with specific e-commerce channel sales increasing by double digits YoY. The company continues to optimize its supply chain, improve cost efficiency, and plans to provide high-quality original products to NetEase Yanxuan customers.

4. Performance and Revenue Overview:

a) Total net revenue in 2023 was RMB 103.5 billion, a 7% YoY increase. Net revenue from games and related value-added services increased by 9% YoY, mainly driven by the launch of new games. Total revenue in the fourth quarter was RMB 27.1 billion, a 7% YoY increase. Mobile game revenue accounted for 77%, with a 10% YoY increase in revenue from games and related value-added services.

b) Mobile game revenue continues to dominate the gaming business, with the launch of new games and the sustained development of games like "Justice" and "Egg Party" being the main drivers of growth.

c) The company's focus has shifted to sustainably improving profitability, leading to a decrease in revenue from social entertainment services, but NetEase Cloud Music's gross profit margin has improved. Innovative businesses and others (including NetEase Yanxuan) continue to grow, becoming important contributors to revenue growth.

1. Revenue and Growth of Various Businesses:

a) NetEase Youdao's net revenue in 2023 reached RMB 5.4 billion, a 2% YoY increase, mainly driven by online marketing services.

b) NetEase Cloud Music's annual net revenue was RMB 7.9 billion, a 13% YoY decrease, mainly reflecting a decrease in revenue from social entertainment services. However, the gross profit margin in the fourth quarter improved to 30.3%.

c) Innovative businesses and others (including NetEase Yanxuan) had an annual net revenue of RMB 8.6 billion, a 9% YoY increase. Total revenue in the fourth quarter increased by 12.9% YoY, mainly driven by NetEase Yanxuan and some innovative businesses.

1. Gross Margin and Profitability: a) NetEase Youdao's gross margin decreased compared to the same period last year, mainly due to a decrease in revenue from smart devices and the contribution of online marketing services (with lower gross margins). b) NetEase Cloud Music's gross margin increased in the fourth quarter to 30.3%.c) NetEase Yanxuan performed well throughout 2023, with sales steadily increasing and a 57% YoY growth in Pro membership revenue.

2. Sales, marketing expenses, and R&D expenditures: a) Sales and marketing expenses in the fourth quarter increased to 15.6% (compared to 13.5% in the same period last year), mainly due to increased support for game promotion. The full-year ratio was 13.5%, similar to 2022. b) R&D expenses accounted for 16.5% in the fourth quarter (compared to 16.1% in the same period last year), remaining stable. The full-year ratio was 15.9%, similar to 2022. c) Other income in the fourth quarter decreased to RMB 8.76 billion (compared to RMB 15 billion in the previous quarter), affected by exchange rate fluctuations and the decrease in the market value of publicly traded securities. The effective tax rate was 13.8%, 3.8% for both the full year and the fourth quarter.

3. Net profit and non-GAAP income: GAAP operating net profit in the fourth quarter increased by 53% YoY to RMB 7.4 billion or USD 1 billion. Non-GAAP basic earnings per ADS were USD 1.62 or USD 0.32 per share.

4. Cash flow and financial position: The net cash position as of the end of the year was RMB 110.9 billion, an increase from the end of 2022. The board approved a dividend of USD 0.21597 per share, or USD 1.07985 per ADS. Under the USD 5 billion share repurchase plan, approximately RMB 72 million ADS were repurchased by the end of 2023, with a total cost of approximately USD 644 million.

2.1, Q&A Analyst Q&A

Q: Eternal Handheld Game Development Progress? How will the mobile version game differ from the PC version game? Expected release or launch time for the game?

A: The mobile version has been tested and everything is progressing normally. The test results in December 23 were quite good. Over the past three and a half years of PC version operation, a wealth of experience has been accumulated. Necessary modifications and optimizations are currently being made for the mobile version. Expected to be released in Q2.

Q: Latest plans for Egg Party in 24? Progress of the Infinite Project?

A: Egg Party is currently in the stage of exploring overseas markets. The Infinite Project is in normal development and is also in the process of applying for publication numbers. The team hopes to achieve financial self-sufficiency in the game market, especially in the ACG open world game field.

Q: Latest situation of overseas game plans? Any plans to expand or acquire more overseas game studios?

A: The company currently has studios in the United States, Japan, the United Kingdom, and other countries. It will establish studios in Europe, America, Japan, and South Korea in the future.

Q: The future direction of UGC in Egg Party/Party Games? How do you view competition with similar competitors in UGC? Will there be some strategic synergy established between domestic and international businesses?

A: UGC games are not easy to develop, and there are few successful companies worldwide. NetEase has its own advantages and experience but is still exploring continuously.The core fun of games remains the same regardless of where the game or the players are. Companies can apply the experience gained in making interesting games and game design from domestic and international operations to global products.

Q: What is the trend in marketing expenses this year? Is the increase in marketing expenses mainly driven by the promotion costs of "Egg Party"?

A: The company does not expect a significant increase in marketing expenses but will continue to explore the most effective return on investment (ROI) and evaluate expenditures more rigorously. The increase in marketing expenses in the fourth quarter is mainly due to the need to address competitive factors in the market.

The performance of "Egg Party" during the 2024 Spring Festival exceeded expectations, achieving the milestone of 40 million DAUs, proving that the marketing initiatives invested by the company are effective. The promotion costs of "Egg Party" are not the main reason for the increase in marketing expenses. With long-term accumulation and investment in areas such as game development, 2024 is a year of harvest for NetEase. The company will continue to leverage the experience accumulated over the past 20 years to launch more new games.

Q: What is the target release date for "Yanyun Sixteen Sounds"? Will it be a global official release? During the testing period, the game has high requirements for PC devices, will this affect the gaming experience on mobile devices and other components, and how will the game coordinate between PC and mobile? Will the macroeconomic and consumption uncertainties entering 2024 affect the long-term operation of the game? In long-term operating games like the "Journey to the West" series, have there been changes in user spending behavior and willingness to pay? What are the prospects for the gaming industry this year?

A: "Yanyun Sixteen Sounds" is a high-quality open-world RPG game based on martial arts developed over three years. The game engine is capable of adapting to different hardware platforms to ensure smooth operation on different platforms. From experience, people who love martial arts culture enjoy this game and hope that this game can be a way to promote martial arts culture to the world.

Observing player spending in different games, it is quite prudent, focusing on entertainment value. Player spending is not closely related to macroeconomic conditions but more to the quality of the game itself. As global players demand higher game quality, this drives developers to invest more effort in creating high-quality content.

Q: "The Legend of the Condor Heroes" will be launched in March, and "Yanyun" will be launched in the first half of the year. How high is the overlap of users between the two games, and how will the company coordinate the game schedules to maximize game popularity? When is the specific launch time for "Yanyun"?

A: Although "The Legend of the Condor Heroes" and "Yanyun" are both martial arts games, they have different IPs. "The Legend of the Condor Heroes" mainly targets fans of Jin Yong's martial arts novels, while "Yanyun" is based on ancient realistic themes. The two games are developed by different teams, with different visual styles, interfaces, etc., so the overlap is considered to be small. NetEase has prepared two martial arts games with different IP content to meet players' needs. As for the launch time, everything is progressing according to the correct schedule.

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