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PostsNetEase: How is the adjustment of old games going, and what new game reserves are there in the future? (2Q24 conference call minutes)
The following is a summary of NetEase's second quarter 2024 earnings conference call. For an interpretation of the financial report, please refer to " NetEase: Once a favorite, now a neglected choice, has the "pig factory" really become a poor student? 》
1. Review of Core Financial Information:
2. Detailed Content of the Earnings Conference Call
2.1. Key Points from Executive Statements:
- Business Progress
① Gaming and Related Businesses
a. "Once Human" reached 230,000 simultaneous online users after launch, with global downloads exceeding 10 million.
b. "Justice" mobile game ranked third on the iOS bestseller list, driving PC and console DAU to a new high of 380,000.
c. The mobile version of "Fantasy Westward Journey" launched a new expansion pack, driving quarterly revenue to a record high.
d. "Wildfire" introduced seasonal updates, reaching a new high in DAU in three years.
e. "Identity V" achieved top rankings on the iOS bestseller lists in China and Japan through cooperation with globally renowned IPs.
f. "Eggy Party" further increased user engagement through anniversary events and the development of a UGC ecosystem.
g. The mobile version of "Justice" released a one-year anniversary update, attracting a large number of new players and ranking third on the iOS bestseller list in June.
② NetEase Cloud Music
a. NetEase Cloud Music's net revenue was 2 billion RMB, a 5% year-on-year growth, mainly driven by an increase in subscription revenue.
b. Continued enhancement of the music content ecosystem through collaborations with various music labels, expanding partnerships with popular musicians, singers, and groups.
c. Enhanced personalized recommendation features and optimized content distribution strategies to improve user experience and engagement.
d. Implemented upgrades to the comment section to enhance user interaction, especially in popular comments and the "Moment Square" section.
③ Youdao Business
a. Youdao's net revenue was 1.3 billion RMB, a 10% year-on-year growth, mainly driven by the growth of online marketing services.
b. AI-driven subscription services achieved rapid growth for the sixth consecutive quarter, with a 20% year-on-year growth in the second quarter.
c. Launched "Youdao Translator" with AI capabilities and translation services, widely recognized in the market.
d. The dictionary pen has ranked first in sales categories on major e-commerce platforms in China for five consecutive years, further solidifying its market position ④ Innovative Business and Other Businesses
a. NetEase continued to launch new products in the second quarter, leading sales in multiple online categories.
b. During the 618 Shopping Festival, instant products and household cleaning products ranked top in multiple vertical categories, demonstrating strong research and innovation capabilities.
- Financial Performance
① Total Revenue and Gross Margin a. NetEase's total net revenue in the second quarter was RMB 25.5 billion, a year-on-year increase of 6%. b. The total gross margin was 62.9%, an increase of 3 percentage points year-on-year.
② Gaming and Related Businesses a. Revenue from gaming and related businesses was RMB 20.1 billion, a year-on-year increase of 7%. b. Mobile game revenue accounted for 76.4% of total online game operating revenue. c. The gross margin for the gaming business was 70%, an increase of 2.6 percentage points year-on-year.
③ Youdao Business a. Youdao's net revenue was RMB 1.3 billion, a year-on-year increase of 10%. b. Youdao's gross margin was 48.2%, an increase of 1.2 percentage points year-on-year.
④ NetEase Cloud Music a. NetEase Cloud Music's net revenue was RMB 2 billion, a year-on-year increase of 5%. b. NetEase Cloud Music's gross margin was 32.1%, an increase of 5 percentage points year-on-year.
⑤ Innovative Business and Other Businesses a. Net revenue from innovative business and other businesses was RMB 2.1 billion, a year-on-year increase. b. The gross margin for this segment was 34%, an increase of 4.5 percentage points year-on-year.
⑥ Operating Expenses a. Total operating expenses in the second quarter were RMB 9 billion, accounting for 35.5% of net revenue. b. Sales and marketing expenses accounted for 13.7% of net revenue, remaining relatively stable. c. Research and development expenses accounted for 17.5% of net revenue, an increase of 1.2 percentage points year-on-year.
⑦ Net Profit and Dividends a. Net non-GAAP income attributable to shareholders in the second quarter was RMB 7.8 billion, with a non-GAAP basic earnings per ADS of $1.67. b. The Board approved a second-quarter dividend of $0.087 per share, $0.435 per ADS. c. As of June 30, 2024, the total net cash was RMB 116.1 billion.
⑧ Stock Repurchase a. Since the launch of the $5 billion stock repurchase plan last year, approximately 12 million ADS have been repurchased at a total cost of around $1.1 billion.
2.2 Analyst Q&A
Q: Are you satisfied with the performance of the mobile version of "Naraka" since its release? Can you provide detailed information on the user composition and profiles, such as the proportion of users who have never played the PC version, and the proportion of users who are first exposed to NetEase games? Additionally, do you have any comments on the overseas release timing of "Endless of God" in different markets?
A: We are currently very satisfied with the performance of the mobile version of "Naraka," especially in terms of retention rate. In addition to forming a very stable core user group, there are other satisfactory indicators. For example, the proportion of female players in the mobile version is significantly higher than in the PC version. Moreover, 70% of mobile players have never played the PC version, and almost half of the players are new users who are first exposed to NetEase games Currently, our focus is on optimizing games and first focusing on the domestic market. In the future, we will consider the release in overseas markets at the appropriate time.
Q: Regarding "Fantasy Westward Journey," what are the goals of all the adjustments NetEase has made since this year? When is it expected to achieve these goals? Are these adjustments related to the instructions of game regulatory agencies? What is the financial impact of these adjustments? Is the decrease in virtual currency prices correlated with the overall revenue growth? When is the overall revenue of "Fantasy Westward Journey" expected to further accelerate?
A: Thank you for your interest in "Fantasy Westward Journey" and its financial performance. NetEase, as a mature company, has a portfolio of multiple games and a healthy game portfolio. Among them, "Fantasy Westward Journey," as one of our flagships, has been in operation for over 20 years. In order to maintain the freshness of the game and the interest of players, we regularly upgrade and adjust the gameplay of the game. These adjustments are aimed at enhancing the quality of the game and player experience.
The adjustments to "Fantasy Westward Journey" are not made due to regulatory instructions, but to ensure that the game can continue to attract players. While these adjustments may bring some fluctuations or impacts in the short term, this is usually temporary and will soon pass. There is indeed a certain correlation between the changes in virtual currency prices and overall revenue growth, but this is just one influencing factor. We expect that through these continuous adjustments and optimizations, the revenue of "Fantasy Westward Journey" will further accelerate in the future.
Q: The revenue growth of "Identity V" exceeded market expectations. How did NetEase drive the revenue growth of this game? How does the management evaluate the potential of asymmetric combat type games and whether there is competition?
A: The success of "Identity V" is mainly due to the team's continuous efforts over the past 6 years and the continuous improvement of the game. We have been exploring and refining this game to ensure its quality and player experience continue to improve. This continuous improvement and optimization helped us achieve revenue growth in the second quarter that exceeded expectations. This also demonstrates NetEase's strong ability in long-term operation and maintaining the vitality of games. NetEase is very optimistic about the potential of asymmetric combat type games and believes that despite fierce market competition, our long-term strategy and continuous optimization will give us an advantage in this field.
Q: After the launch of a new season for the mobile version of "Justice," the revenue ranking rose to the top 10 in July, but declined in August. What are the main reasons for this? How does the management plan to improve the game's sustainability?
A: The launch of the new season for the mobile version of "Justice" did bring a lot of new content, attracting a large number of players to return, which led to the rise in revenue ranking in July. However, the revenue decline in August is mainly because the game has entered a relatively stable operational stage, which is a common phenomenon in real-time MMO games. The current focus of management is on maintaining player activity and a diverse game ecosystem. By providing a fair gaming experience, avoiding players feeling overly burdened, and continuously valuing player feedback, we are committed to building a mobile platform MMO game that is constantly growing and has lasting appeal Q: The company has a diverse portfolio of game products in a highly competitive market, such as "Eternal Requiem" and "Egg Party". How does the management view the company's strategy to stand out in the market?
A: We do not categorize games as high-yield or low-yield, but focus on creating high-quality, fun games. We believe that as long as the game is good enough, players will naturally be attracted. Therefore, DAU (Daily Active Users) is not our ultimate goal in game design, but a result of high-quality games. Over the years, we have been continuously trying and exploring different types of games, expanding from MMOs to sports, PDP games, shooting games, and other areas, using our expertise to consistently provide players with interesting high-quality games.
Q: What are the management's expectations for the development trends of overseas game business and the release schedule of new games in overseas markets?
A: We are very satisfied with the performance of "Once Human" in the global market, which demonstrates our ability to design and develop games not only for Chinese players. The game has been widely recognized in the global player community, which is a positive signal. We will continue to explore multiple game genres, and although this may take some time, based on early results, we are confident in launching more games in the global market.
Q: Will "Yanyun" be launched simultaneously on PC and mobile, and you plan to conduct a dual-end test on 8.28, what is the current progress?
A: For "Yanyun", we believe that whether the launch time is synchronized with the mobile version is not the most critical issue. We are more concerned about whether the product itself can provide lasting fun for users to experience in the long term. We plan to operate "Yan Yun Sixteen Sounds" as an open-world online game for many years. There are differences in the gaming experience between mobile and PC, and we hope players can patiently wait. According to current plans, we expect "Yan Yun Sixteen Sounds" to be launched this year.
Q: "Eggy Party" has faced some revenue pressure in the past few months, can the management share the reasons behind this? How to ensure the long-term operation of this game?
A: Indeed, "Eggy Party" is one of our largest games in terms of user base, but in terms of revenue-to-user ratio, it is relatively low, especially compared to other games. However, we hope everyone does not worry too much about this. We are actively exploring how to balance user numbers and revenue levels while ensuring the fun and popularity of the game. So far, user engagement with this game has been high, providing us with a foundation to further increase revenue. We will continue to explore and find solutions to ensure the long-term operation of the game.
Q: Regarding a broader range of casual games, whether it's party games or idle games, what is the company's R&D strategy and direction?
A: For casual games, our R&D strategy still focuses on creating fun and user-friendly game experiences. We will flexibly adjust our development direction based on market and player feedback to ensure that games can attract and retain players while gradually increasing revenue. We believe that as long as the game itself is interesting enough, users will naturally be willing to invest time and resources, thereby achieving success in the casual game market
Q: Can the management share the key product lines for the remaining time of 2024 and the outlook for 2025? Especially regarding the expected release of "Marvel Showdown" and "Marvel Heroes"?
A: We have obtained the authorization for the card game "Marvel Rivals" and the shooting game "Marvel Ultimate Reversal". The expected release of these games in China is scheduled to be gradually rolled out in the coming months. We are confident in these games as they not only have strong IP support but have also been carefully developed and optimized to provide players with a high-quality gaming experience. We hope they will be successful in the domestic market and become important product lines for the second half of 2024 and 2025.
Additionally, "Hearthstone" is planning to launch new content on September 25th, and we are also looking forward to the release of the game "Fragpunk" (in collaboration with Xbox). The company has high expectations and confidence in these new products. They are different from traditional games, mainly focusing on competitive gaming.
Of particular note, our game "Marvel Ultimate Reversal" is planned to be released at the end of the month. This game has already proven its high quality overseas, and we also hope it will be successful in the Chinese market.
Q: Can the management share how AI enhances game production and market efficiency?
A: NetEase has widely applied AI technology in game development. AI is used in multiple areas from design to programming, especially in tasks that require a large amount of labor. By using AI, we have achieved a replacement rate of about 90% in these areas, significantly improving efficiency. Furthermore, the application of AI frees up human resources, allowing our team to focus more on exploring creative and interesting gameplay, thus enhancing overall production efficiency.
Q: With the impact of AI, how will the trend of R&D expenses change? And how do we view marketing expense outlays for the next few quarters?
A: Although AI helps optimize costs, we will reinvest the saved resources into further development work. Therefore, despite AI contributing to cost optimization, R&D expenses are expected to remain within a reasonable range in the long term without significant reduction. As for marketing expenses, we will adjust expenditures reasonably over the next few quarters based on market demand and new product release plans to effectively drive market growth.
Q: How have new and old users responded since the return of "World of Warcraft"? What is the impact on revenue?
A: Since the return of "World of Warcraft", player engagement has been very high, with all key metrics exceeding expectations. The ratio of new players to old players is approximately 4:6, indicating that the game has successfully attracted a large number of returning players as well as the ability to attract new players. Financially, this return undoubtedly increased revenue on the PC side, making a positive contribution to overall financial performance.
Q: What are the plans for the return of other games? Will there be more collaborations with other partners in the future?
A: In the return plans of other games, NetEase has maintained a close cooperative relationship with each business product team. We believe that the return is not just about restoring services, but providing a better player experience than ever before. Through deep cooperation and mutual trust with Blizzard's development team, we have laid a solid foundation for possible further cooperation in the future.
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