Management: "Believes in the ability to operate in the long run" (NetEase 4Q22 earnings conference call minutes)
Below is the summary of the Netease.US 4Q22 earnings call, for financial analysis please refer to Netease: Despite game licenses scarcity, Can 'Party Treats' accelerate the new cycle?.
I. Management Remarks
Overall: 2022 was another year of robust growth where we saw healthy and steady improvements across all of our core business segments. Our total net revenue for the year was RMB 96.5 billion, reflecting Netease's resilience and operational efficiency across different macro cycles.
1. Games and Related Value-Added Services
(1) In 2022, the net revenue from games and related value-added services was RMB 74.6 billion, up 10% YoY.
(2) In the fourth quarter, "legacy" games continue to show strong user attraction -- both the "Fantasy Westward Journey" and "Westward Journey" series maintained high user stickiness. We continuously release new content updates to keep this IP fresh and prospering for over 20 years. Later on, "Westward Journey Returns" will be released, with this new game member, we expect to further expand its user base.
(3) Our new game, "Party Treats" swept China's gaming market in Q4. The game was first released in May 2022 and the number of daily active users has been increasing consistently. During the Lunar New Year, "Party Treats" reached new heights, ranking third on the Chinese iOS downloading charts, with more than 13 million daily active users, making it the largest game user base in media history.
In addition to our internal production and interactive game experience, "Party Treats" distinguishes itself from other party-type games with unique user-generated content contribution. We encourage players to utilize various features within the editing mode by designing and publishing new levels on the platform. Players' participation in user-generated content further enriches content, creating a virtuous cycle that continuously adds fresh content to the platform and increases player engagement and loyalty. To cultivate a sustainable and self-sustaining ecosystem with lasting potential, we will continue to provide tools and incentive mechanisms to these players to encourage and empower them to generate more content.
(4) Our award-winning adventure mobile game, "Sky: Children of the Light," launched in 2019, also performed very well in Q4. It provides players with a warm-hearted gaming experience and has built a vibrant and fan-centric community. In this quarter, Sky also soared to first place in China iOS system downloads.
(5) While making significant progress in casual gaming, we also maintain a strong presence in the hardcore gaming sector. This is evident through the continuous popularity of our key games, such as "Diablo Immortal" and the mobile version of "New Ghost." (6) The new game expansion in 2023 is exciting. We will further expand our coverage through a series of new games. We have obtained licenses for some exciting games in China, such as the Justice mobile game, Racing Master, and Bad Landers.
For example, Justice, as a complement to the PC version's success, is scheduled to launch later this year. The mobile version will reproduce the vibrant world of song and dance dynasty on mobile devices, providing an amazing gaming experience using advanced gaming technology. Equally important, as the next generation of MMO, this game represents a significant evolution beyond the traditional player interaction norms in MMOs, offering a truly unique gaming experience. We believe that the fascinating and immersive open-world experience we create through the Justice mobile game will continue to raise the bar for MMOs and the broader mobile gaming industry.
Racing Master, our second racing game, is also coming soon. With AAA-level racing experience, players can expect a realistic racing experience with dynamic car handling and performance. With licensed cars from over 100 well-known global car brands, players can fully immerse themselves in an exciting racing world and experience unprecedented worlds.
Bad Landers is our next-generation shooting mobile game, with a new evasion mechanism and exciting battlefield experience. We will carry out several rounds of testing, hoping to push the game to market as soon as possible.
(7) Overseas, we are preparing to launch the highly anticipated "Harry Potter: Magic Awakened" globally. Our team is committed to continuing to enhance and improve its gameplay and user experience to ensure that our global players can have an amazing magical life on their phones and PCs. We are also developing a series of upcoming expansion packs so that our global players can always have a lot of attractive content.
In addition to these, we will continue to strengthen our robust pipeline and actively develop a variety of exciting new games. The benefits of these pipelines are making solid progress and showing enormous potential in Q4.
(8) We have also made further progress in our global asset expansion. For example, we are delighted to welcome Canada's Skybox lab to join us. Skybox lab has an impressive track record in game development and has contributed to some of the industry's most famous series games, such as "Halo Infinite," "Minecraft," and so on.
Earlier this month, we also announced the establishment of Spliced, a new global game studio. Driven by passionate industry masters from different backgrounds, Spliced has participated in the development of major game series, including "Grand Theft Auto" and "Call of Duty," among others. 2. Education Business (Youdao)
(1) Youdao achieved a record net revenue of RMB 1.5 billion in Q4, with the first positive revenue of RMB 25 million. This impressive result proves that our continuous efforts are effective - providing cutting-edge updates for our intelligent devices and enhancing our learning services.
(2) Youdao's intelligent device net revenue in Q3 reached RMB 407 million, a year-on-year increase of 28%. Its contribution mainly came from new products, including the Youdao Dictionary Pen P5 and the Adult Learning Tablet X10.
(3) Our STEM course service performed well in Q4. We have cooperated with Minecraft Education Edition to successfully launch an online learning software - Youdao Literature. Its impressive subscription and renewal rates have earned high praise from learners and parents.
In addition, we have strengthened our Golden Course supply by introducing the champion course led by world Go champion Ke Jie. Our champion course is a comprehensive learning path that covers from beginner to advanced levels and reaches its peak at the champion level. This new product has achieved great success, with an increase of more than 50% in total revenue in Q4 and a significant retention rate.
Looking ahead, we will continue to focus on technological innovation and use our cutting-edge technology to ensure the long-term success of our intelligent devices and learning services.
3. Cloud Music Business
(1) Our main operating trends and financial performance were good in Q4 -
The annual MAU was 189.4 million, a year-on-year increase of 4%; the annual DAU/MAU ratio was 20.2%.
The total revenue increased by 29% year-on-year.
The Q4 gross margin was 17.8%, and the full-year gross margin was 14.4%.
(2) We continue to expand and diversify our copyright libraries - including Modern Sky, China Record Corporation, Fenghua Qiu Shi, Lianhua Group, and SM Entertainment. Record sales witnessed impressive growth in Q4, demonstrating high-quality audience bases, deep user engagement, and willingness to pay among users on our cloud music platform.
We are committed to fostering an inspirational environment that encourages and empowers musicians to create. As of the end of 2022, the number of registered independent artists on our platform has exceeded 600,000. Our in-house music studio has also made solid progress, promoting a batch of popular songs.
4. Strict Selection Business
In Q4, we launched more popular products through diversified channels, increasing our pet supplies, home cleaning products, and home furniture. We will continue to focus on original design and provide consumers with enjoyable lifestyle choices.
5. Summary
We are honored to have achieved different degrees of success in ESG and gender equality.
In 2022, we continue to perform strongly in each business line and make new progress in each major vertical field of operation. With our global ambition, our wide range of products and services are reaching a wider audience. As we have established a solid foundation throughout our business, we believe that we are in a favorable position to achieve more success both domestically and internationally.
Q&A with Dolphin Analyst
Q1: With the normalization of the domestic game approval process, will NetEase reallocate more resources to the development of domestic games or invest more in developing new games specifically for overseas players?
A1: Based on the past few months, the issuance of domestic game licenses has become more normalized, which is great news for us. NetEase has always attached equal importance to the domestic and overseas markets, so there is no situation where we have to change our strategy after the (license approval) opening. We originally treated both equally.
Q2: How does the management view the competition, opportunities and challenges presented by the global gaming market? What are our strengths and weaknesses? Can coordination with domestic operations occur during the internationalization process?
A2: In fact, the status of overseas games and Chinese games seem to be quite different from our current perspective. European and American players place great emphasis on the PC games, with a more leisurely view towards mobile games. Japan and Korea believe that both mobile and PC games are acceptable. In China, many player users tend to play mobile games.
Therefore, our content positioning is also different. The content positioning of PC games and mobile games is also different, so you cannot say that there are no differences. However, I believe that NetEase can find a solution path, and I am also confident that in the future we will definitely be able to develop games that are acceptable to both domestic and international players.
Q3: Can you share with us the development progress of the mobile game The Yin Yang Master compared to that of the PC game, and is there any difference in content?
A3: The Yin Yang Master mobile game received its license in January, and we are currently making final preparations before the launch. It is expected to meet with you soon in the first half of the year. Compared with the full PC game, our mobile game places more emphasis on the game experience of players and takes into account various types of players, including single and multi-player. In the entire content development process, we have broken through many traditional boundaries and applied the most advanced technology to content creation. We also emphasize more individuality in the game.
After summarizing the experience of NetEase's large-scale MMO games over the past 20 years, we have put forward many new ideas for the next generation of MMOs and implemented them in the game. We believe that it will bring a very different experience to all players, so stay tuned.
Q4: How do you view the success of Egg Party? Is this type of success replicable and can we expect a similar decline in revenue after release?
A4: Egg Party is a very successful casual game for the whole family, and has achieved significant results in the past few months. I believe that the problem you are worried about will not happen in the future, because we will not make the same mistakes we have made in the past. We hope that the game will bring users a happy and joyful family-friendly experience. We will invest more research and development and operations into the long-term development of games. This long-term entails at least a decade, and I believe we have the ability to do this - just like we have the ability to sustain the game Dreaming of Journey for 20 years. I also believe we can achieve this in terms of Eggshell.
Q5: About the performance of Eternal Rhapsody on console platforms and the timing of subsequent updates?
A5: After we released Eternal Rhapsody on Xbox last June, we saw a large number of players trying our game, and we received a lot of feedback.
Over the next few months, we have been working on optimizing the novice experience for new players, especially overseas players. Together with our user research team in Montreal, Canada, we have conducted various tests and adjustments. We have already seen more obvious tuning in the data, which will be a great help to us when we launch new games on the PS platform this year. We are also progressing smoothly in the mobile game market and will optimize our game play and performance based on the specific characteristics of mobile games.
There are currently some tests, and I believe that the experience that it brings to mobile devices will also be able to restore the core fun of close combat fighting in Eternal Rhapsody.
Q6: How do you consider the profit outlook for the group in 23-24?
A6: Regarding the profit outlook, I think that in the next 2 to 3 years, the profit margin of our games will remain relatively stable.
You are right, our overseas studios are in the investment stage, and the games they develop may not enter the market until 2025 or later. However, we do have a very strong and sizable portfolio of existing games that provides strong support for cash flow, profitability, profit and profit margins.
As for our subsidiaries such as Cloud Music and Youdao, they have shown a significant trend of reducing losses. We are very confident that these two companies can maintain self-sustaining development and balance of payments in a very optimistic way. Therefore, all in all, I believe that our profit margin will remain stable and slightly increase in the next 2 to 3 years, and after 2025, the profit margin will mainly be driven by the commercial release of overseas games, which is still in the development stage.
Q7: Is there anything you can share about new products and directions for the second half of the year?
A7: We definitely have long-term planning in terms of game works this year and in the future. And we believe that innovation is the soul of works, so we will attach great importance to the gameplay of various works themselves. We are also confident that we can continue to launch strong best-selling games to the market year after year.
Last year, we had hit games, and this year we have "Egg Party", which is a breakthrough. We have also been successful in melee games and casual games that you can play with your family and friends. So I have great confidence that you will continue to see new, exciting, and innovative games come out alternately.
Risk disclosure and statement of this article: Dolphin Analyst Disclaimer and General Disclosure.
