NetEase, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• New Game Launches:
  • Marvel Rivals: Over 40 million players, topped Steam charts, with plans for eSports and cross-media promotions.
  • Where Winds Meet: Over 50 million players in two weeks, innovatively combined Chinese martial arts with open-world exploration, plans for console and global launch.
  • Blizzard games: Return to China successful, with World of Warcraft, Hearthstone, and Overwatch 2 reigniting player excitement.
  • Other games: Westward Journey, Identity V, Naraka: Bladepoint, NetEase Cloud Music, and Yanxuan had various updates, launches, and operational improvements.
• Youdao: Operating profit up over 10% YOY in Q4, first annual operating profit in 2024. Launched Confucius-o1 AI model, advanced online marketing services, and smart devices segment grew.
• NetEase Cloud Music: Continued quality development with features like Lyric Book and Lightbulb, diversified consumption scenarios, deepened partnerships, and focused on subscription-based growth.
• Yanxuan: Focused on key categories, with pet products and home claim growth, and Down Jackets performing well in sales.

Segment Performance

• Games and related value ad services: In 2024, net revenue was RMB 83.6 billion, accounting for approximately 79.4% of total net revenue. In the fourth quarter, it was RMB 21.2 billion. The gross profit margin was 66.7% in Q4 compared to 69.5% in the same period last year, mainly due to a higher proportion of net revenue from licensed games with lower margins.
• Youdao: Net revenue in 2024 was RMB 5.6 billion, down 9.5% in the fourth quarter to RMB 1.3 billion. The gross profit margin was 47.8% in Q4 vs. 49.9% last year, mainly due to reduced revenue from learning services.
• NetEase Cloud Music: Full-year net revenue was RMB 8 billion, up ~1%, and RMB 1.9 billion in the fourth quarter, down 5%. The gross profit margin was 31.9% in Q4 vs. 30.3% last year, with margin improvement from increased membership subscriptions and cost management.
• Innovative business and others: Full-year net revenue was RMB 8.1 billion, and RMB 2.3 billion in the fourth quarter, down 6% and 17% respectively. The gross profit was 37.8% in Q4 vs. 34.4% in Q4 2023, due to margin improvement.

Guidance

• New Games: FragPunk to launch globally on March 6th, Destiny: Rising had successful closed beta, MARVEL Mystic Mayhem had positive closed beta feedback.
• Youdao: Continue focus on long-term growth, profitability, and AI integration in learning services.
• NetEase Cloud Music: Continue diversifying music consumption scenarios and optimizing premium offerings.
• Innovative business: Continue expanding and innovating new products and services.

Risks

• Market Competition: Competition in shooter game market and other segments may impact performance.
• Operational Risks: Ensuring post-launch operations, meeting player expectations, and managing AI integration risks.
• Regulatory and Policy Risks: Impact of regulatory changes on game launches and operations in various regions.

Q: As a continuing trend, could management share more color on its data test achievement, current preparations for launching and post-launch operational priorities, what’s the company's perspective on competition within the shooter game market segment?

A: The AI-powered game has undergone large-scale testing domestically and overseas, with feedback meeting expectations. Players appreciated innovative gameplay and system design. Now ready to launch, post-launch will monitor feedback, update levels, add new characters, and address cheating to build a healthy gaming environment. Confident in the game's success due to unique features.

Q: I will translate my question. First, I congratulate the positive feedback from the gamers on Where Winds Meet and we see quite positive metrics or retention DAU, et cetera, but also we hear a lot of feedback to expect the company to improve the cosmetics and also the multi-play game play in the game. So, I would to like ask what is the next stage monetization strategy for this title? And where could we see improvement? And also, I would like to ask about the overseas launch plan for this title, where and what market?

A: Where Winds Meet has solid performance with single and multi-player modes. Monetization strategy centered on cosmetics, with plans to infuse new content, enrich maps, create diversified costumes, and collect player feedback for improvement. Overseas launch planned for 2025, leveraging the game's unique open-world style and content.

Q: Regarding the 40 million users, can you share more about the paying propensity paying ratio? And what is the next growth strategy that we're looking at? Will we expand the marketing or e-sports or even connectivity with the Marvel movies to further expand our user base?

A: Marvel Rivals has gained wide appraisal. The team has plans for eSports and will announce eSports plans to enhance the gaming ecosystem. Will do crossover events and promotions with other media to expand user base.

Q: Given the games relaunching China yesterday. So what are the company's current expectations for the game? And how will NetEase strike a balance between Marvel Rivals and Overwatch?

A: Expectations for Overwatch are to revitalize the product and reach new highs. Both Marvel Rivals and Overwatch are excellent superhero shooters with unique features, and the market is large enough to accommodate both.

Q: So, my first question is about our overseas market. After the Marvel Rivals' success and also some of the adjustment of our overseas studios, how should we think about our future expansion strategy in overseas market? So, we follow more direction as some Marvel Rivals and Fragpunk, those are self-developed games. How should we think about our advantage in the overseas market? The second question is about the AI and the game. So, after the success of DeepSeek and a huge influence cost dropping, how would NetEase integrate our AI versus our current game portfolio as well as our future pipeline? Could management share with us more around the gameplay innovation, a user's interaction or production efficiency or cost discipline any aspects related to AI.

A: For overseas market, pay attention to supporting overseas studios to create content meeting local demand. AI will increase R&D efficiency, help users engage with content, and is being explored in massive ways for gameplay innovation, user interaction, production efficiency, and cost discipline.

Q: Regarding the game of [indiscernible] which got game approval previously, should we expect it to be launched in 2025? And giving the competitive of ACD game, so how do we think about its positioning and the depreciation here? Secondly, one follow-up on the sales and marketing expense, which had a meaningful reduction in Q4, so I want to know the driver and whether we change the sales and marketing strategy? And going forward, how should we look at the sales and marketing trend in 2025?

A: [Indiscernible] game had offline test in January with positive feedback, development on track, and will invite more players for testing when ready. Competition is good, reflects market interest. Sales and marketing expense decrease reflects improved efficiency in marketing operation, with focus on higher efficient ways and tools.

Q: Let me translate myself. Thank you management for taking my question. My question is on the news of recent organizational changes. We noted there have been quite a few changes within both of our domestic and overseas studios. Could management share the reason and consideration behind these changes? And how should we think about your mid- and long-term investment plan for new games?

A: When allocating resources among projects, focus on product quality, development efficiency, and whether it meets future player demand. Adjust resources based on product's ability to meet future market expectations, as game development is a long cycle.