NetEase, Inc NTES CEO William Ding on Q4 2019 Results

Thank you, Margaret, and thank you everyone for participating in today's call. Before we begin, I would like to remind everyone that all percentages are now based on RMB. 2019 was an eventful year for NetEase. We expanded the reach of our online games, grew our international presence, improved our online learning yield, advanced our music platform, and refined our operations in e-commerce. For the full year, we grew our total net revenues by 16% to RMB 59.2 billion and increased our GAAP net income from continuing operations attributable to our shareholders by 60% to RMB 13.3 billion. Our online games segment is the cornerstone of our business. Despite having launched fewer games throughout the year, we continued to grow our online games business at a healthy rate in 2019, with a 16% year-over-year increase in net revenues, driven by the steady performance of our long-standing titles. We once again exceeded RMB 10 billion this quarter for the past seven consecutive quarters. Our flagship titles continue to provide solid support for our online games business with increasing longevity and user loyalty. In 2019, revenues from Fantasy Westward Journey Online and Westward Journey Mobile both grew at double-digit rates, remaining prevalent after years of operations. Westward Journey Online and its mobile version also grew steadily in 2019. After over 15 years of operation, our SWJ and WWJ franchises have been instilled in the collective memory of a generation of players. We further expanded the reach of these IPs through the introduction of FWJ 3D in mid-December last year, captivating both returning fans and new audiences. This new iteration of the franchise in mobile preserves the classic gameplay and social system while bringing brand new experiences to mobile users in a real-time 3D world. We are still working on new updates and expansion packs to further optimize the experience for FWJ 3D, and we are confident that over the long term, the 3D version will show similar longevity and popularity as our other titles in this franchise. In addition to growing and strengthening our existing franchises, we are also good at incubating new ones. Our core competency in content innovation, marketing expertise, and long-term operations have allowed us to consistently deliver new and long-lasting game titles to our users. Our Onmyoji is the first of these relatively younger franchises that we have built in-house. We are pleased to see that as we introduce more innovative new storylines, new characters, and other new content, the influence of our Onmyoji IP is growing and resonating well with game players. In 2019, our Onmyoji franchise's iOS gross revenue quadrupled, stabilizing at a new high range after more than three years of operation. In December, we launched Onmyoji: The Card Game, its second spin-off game, living up to expectations. The new Onmyoji card game carried on the tradition of impressing the market with its exquisite artwork. With this iteration, we also introduced more competitive and strategic gameplay, winning over a large group of hardcore collectible card players. We are now also currently working on several new Onmyoji games, including Onmyoji Yokai: A Simulation Game, which we plan to launch in the first half of this year. Identity V is another young IP where we see the potential to build a successful franchise. With this goal in mind, we are continually enriching this IP through a variety of initiatives, including esports, IP collaborations, and offline activities. We have hosted a number of high-profile events featuring Identity V, including both international and regional series tournaments. Most notably, our global championship, Call of the Abyss, has attracted over 800,000 players from around the world since December. We also collaborated with Happy Valley, a popular national theme park brand in China, bringing some of the in-game characters to life. We are pleased to see the early success of Identity V as it becomes another powerful IP franchise, establishing a broad and vibrant community of young players in China and abroad. Invincible, our 2015 launch that has been growing steadily year over year in terms of revenue and active users, is now one of China's biggest SLG titles. Like with many of our games, we invented a brand new in-game mechanism that resets gamers' progress every season, creating a much more balanced gaming experience and setting a new standard for the genre. Given the increasing popularity of SLG in China, we are optimistic about our prospects and are working to bring more exciting content to this promising category. The prerequisite to build a successful franchise is the ability to create popular game IPs in-house, which is propelled by our world-class R&D infrastructure. Over the past two decades, we have built one of the largest in-house R&D teams with China's most talented and passionate game creators, supported by one of the most unique and comprehensive R&D infrastructures in the world. We empower each of our talents with our game enthusiasts' corporate culture and a second-to-none training mechanism in the industry. Our training programs at NetEase Games Academy are widely recognized in China as a premium online games training institution for creative minds. Most recently, our training programs were awarded the 2019 AP Excellence in Practice Awards by the Association for Talent Development, one of the most authoritative international awards in the global talent development industry. As we move ahead, we will continue to foster talent and stimulate new ideas that propel the development of our games. 2019 was also a fruitful year for our licensed games, especially for our joint venture with Blizzard Entertainment. World of Warcraft Classic was launched in August as an authentic recreation of WoW, and it was very well received by a generation of returning players and newcomers alike. We are very pleased to see the continued popularity of WoW in China, achieving a record number of total monthly subscribers in the fourth quarter with increased revenue quarter-over-quarter. In 2019, we continued to advance our games and make inroads that expand our reach in overseas markets. Knives Out remained a household name in Japan, topping the iOS grossing chart multiple times during the year. Leveraging our knowledge of building game brands, we further strengthened Knives Out's presence by engaging in a series of successful collaborations and hosting our first-ever esports championship tournament in Japan. Identity V also exemplifies our ability to operate games in overseas markets over the long term, leading Japan's iOS shopping chart for the first time in September. With the success of these titles, we have accumulated a better and deeper understanding of our users in terms of their interests, social behaviors, preferences in style, aesthetics, and gameplay. We have integrated this successful experience and know-how into the design of our other games, enhancing our ability to deliver popular titles to Japanese users. In addition to our success in Japan, we have also expanded our footprint across more regions. In December, we launched Marvel Super War in several Southeast Asian markets, where it topped many iOS download charts. Building on our existing success at home and abroad, we have many exciting games in our pipeline, including Harry Potter: Magic Awakened, EVE Echoes, Onmyoji Yokai, Ghost World Chronicle, Revelation Mobile, Diablo Immortal, and Pokémon Quest. Turning to our online learning business, Youdao made solid progress in 2019, significantly growing its online course business. Youdao enhanced several core products, including Youdao School Chinese, physics, practical English for adults, and coding courses for kids. We are also seeing excellent adoption and a rapid increase in sales of Youdao's intelligent learning devices, driven by the successful launch of our second-generation dictionary pen. We also expanded our tutoring and sales team and substantially improved our tutoring and operating systems to support them. These efforts have been rewarded by robust growth in gross billings of Youdao's online courses by 125% in 2019 and over 200% in the fourth quarter. More importantly, we have accumulated experience that we can replicate across our highly scalable online course model and are beginning to benefit from economies of scale. In 2020, NetEase will continue to support Youdao's mission to bring users more effective and technology-driven education experiences. Our cloud music revenue hit a record high in the fourth quarter, with membership revenue more than doubled year-over-year. Revenues from digital albums and live streaming also grew rapidly. Sales of digital albums have proven to be particularly effective on our platform. For example, sales from a 22-year-old Chinese rock star, Wang Hao's digital single 'No Sense' exceeded RMB 10 million within just 11 hours. Similarly, sales of Chinese singer-songwriter Cotton's digital single 'How I'd Like to Love This World' exceeded RMB 50 million after 45 days online, marking the highest digital single sales record online in China. According to a third-party data source, NetEase Cloud Music is home to a large number of independent musicians. More than 100,000 independent artists feature their music on our platform, and their songs were played back more than 270 billion times in the year. This makes NetEase Cloud Music the most recognized platform for original music by Chinese artists. In 2019, we plan to use the platform's distribution capability and its broad influence to create more viral content across the Chinese music industry. Finally, our focus with Yanxuan in 2019 remained on improving supply chain management and operating efficiency. We effectively reduced our inventory to a year goal and consistently improved our positive feedback rate from users. In the quarter, we made adjustments to our pricing management, which resulted in increased revenue and gross margins from the business. Our participation in product design has resulted in the creation of many cheap products by providing valuable research and market analysis gained from the customer end to our manufacturers. At the same time, we have significantly improved our membership system and are seeing the benefits of increased member repurchase rate. As for our manufacturer and factory initiatives, we have helped build tailored online data systems that have further improved their manufacturing process and quality. In 2020, we will continue to enhance our brand influence and reach in China by bringing even more high-quality and personalized products to a growing number of consumers. We are excited for the new year as our existing game titles continue to impress the market with their phenomenal longevity. 2020 will also see more game launches in China and globally from NetEase. 2020 also marks the 20th anniversary of NetEase being a publicly traded company. As an internet pioneer in China, NetEase has remained relevant and continues to be a forerunner in the evolving market with our long track record of success. I hope to continue to inspire our ever-growing community while bringing increasing value to each of our stakeholders. Before I pass the call over to Charles, I would like to share some updates on the evolving situation with the coronavirus outbreak in China. Right after the outbreak, we reacted instantly and rolled out a series of initiatives to support the affected regions. We set up a special fund of RMB 100 million. The fund will be used to purchase medical equipment and supplies from home and abroad and deliver to places where the outbreak is the most severe and where help is most needed. At the same time, Yanxuan immediately delivered over 200,000 three-layer masks and other protective supplies to our customers and set up special funds for the supply of protective gear for Youdao. We were among the first in the industry to offer free classes to K-12 students in the affected areas, which was later expanded to other regions of China. For college students, we connected with 800 universities covering 4,000 professors' lectures. We also provide our technology support to help other offline educational institutions move courses online through Youdao Intelligent Cloud. Our company took every effort to protect the health and safety of our employees and adopted multiple measures to maintain our operational efficiency, such as flexible work policy and remote office collaboration using our proprietary technology. Overall, with respect to the outbreak, we currently expect to see some impact to our business lines in the near term. However, the situation is evolving. NetEase is committed to providing support to our employees, users, and communities and working together as we move through this challenging time. This now concludes William's comments. I will provide a brief overview and review of our fourth quarter and full year 2019 financial results. Given the limited time on the call, I will be only presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. Total net revenue for 2019 was RMB 59.2 billion, or US$8.5 billion, representing a 16% increase year-over-year. Net revenue for the fourth quarter came in at RMB 15.7 billion, or US$2.3 billion, representing a 9% increase year-over-year. For 2019, our net revenues from online games services grew 16% year-over-year to RMB 46.4 billion, and in the fourth quarter it was also up 5% year-over-year to RMB 11.6 billion. Mobile games accounted for approximately 70% of net revenues from our online game services in the fourth quarter. For 2019, net revenues from Youdao were up 78% to RMB 1.3 billion, and in the fourth quarter net revenue from Youdao was up 78% to RMB 410 million, primarily due to increased net revenues from its online courses and sales of intelligent learning devices. For 2019, net revenues from innovative businesses and others were up 12% to reach RMB 11.5 billion. In the fourth quarter, it was up 18% year-over-year to RMB 3.7 billion, mainly due to the increased revenue contribution from cloud music and CC live streaming. Our gross margin was 52.2% in the fourth quarter. Gross margin for our online games remained relatively stable; it fluctuates quarter to quarter within a narrow bandwidth based on the revenue mix of mobile and PC as well as self-developed and licensed games. Youdao's gross margin improved to 29.8% in the fourth quarter, primarily driven by the improvement of the sales and economies of scale. Gross margin for innovative businesses and others was 20.6% in this quarter. Margin improvement both year over year and quarter over quarter was primarily due to the increased revenue from cloud music. For the fourth quarter, total operating expenses were RMB 5.2 billion. Our selling and marketing expenses as a percentage of total revenue was 13.7% in this quarter. On a full-year basis, selling and marketing expense as a percentage of full-year net revenues was 10.5%, compared with 13.5% in 2018. R&D expenses were RMB 2.3 billion, up 5% from the previous quarter. We remain committed to investing in content creation and product development, which is what defines us as a technology company. On a full-year basis, our R&D expenses represent 14.2% of full-year net revenue, compared to 14.4% in 2018. The effective tax rate was 22% for Q4 and 18% for the whole year 2019. The lower effective tax rate for the fourth quarter and for the full year compared to the 2018 period were mainly due to reduced losses from certain loss-making subsidiaries of the company. Non-GAAP net income from continuing operations attributable to our shareholders for the fourth quarter totaled RMB 3.7 billion, or US$526.1 million, representing a decrease of 23% quarter-over-quarter and an increase of 15% year-over-year. Our non-GAAP diluted earnings per ADS from continuing operations were RMB 28.03, or US$4.03, for the fourth quarter of 2019. Our cash position remains strong. As of December 31, 2019, our total cash and cash equivalents, current and non-current time deposits, and short-term investment balance totaled RMB 74.4 billion, compared with RMB 49.7 billion as of the year-end of 2018. In accordance with our dividend policy, we are pleased to report that our Board of Directors have approved a dividend of US$1.02 per ADS. On February 26, our board also announced and approved a new share repurchase program for up to US$1 billion of our outstanding ADS for the next 12 months, beginning on March 2. Thank you for your attention. We would like now to open the call to your questions. Operator, let's go to Q&A please.