On May 17th, Beijing Time, NetEase (Nasdaq:NTES) announced its first quarter earnings report for 2018. According to the financial report, Netease's net income for the first quarter of 2018 was RMB 14.173 billion (approximately US$2.26 billion), a year-on-year increase of 3.9. %; Based on non-US GAAP (Non-GAAP), the net profit was RMB1.337 billion (US$213 million), which was a decrease of 69.2% compared with the same period of last year.
After the financial report was released, executives such as NetEase CEO Ding Lei and CFO Yang Zhaohao attended the subsequent earnings conference call to interpret the main points of the financial report and answer analyst questions.
The following are the main contents of the analyst Q&A session:
Credit Suisse Analyst: My question is about the revenue contribution from PC games and mobile games. Compared with competing products in the industry, what are your expectations for the performance of NetEase's next game? The second question is about the competition of cross-border e-commerce. Does Netease have plans to lay out new retail online?
Ding Lei: We will continue to invest in PC games. We believe that PC games still have their own unique gaming experience and market space. We will launch the PC-side martial arts game “Anti Cold Water” on June 22nd. This will It is a very important work for us. We have also invested a very long time in the research and development of this work. The previous test performance showed that the user's satisfaction was very high.
In addition to this, we are also doing some other PC games. Everyone will see that although our (Wildland Action) is (mainly) a mobile version, we actually have a PC version. This is our direction on the PC. Of course, in terms of mobile games, if the analysts are interested, they will see many mobile games we are about to release on May 20th.
Therefore, the strategy of the two-day route is within the company at the same time as planning and go hand in hand.
For cross-border e-commerce, our cross-border e-commerce business is still at a leading edge compared to its competitors, and its users' satisfaction is also quite high.
Credit Suisse Analyst: Are NetEase's offline retail business layouts?
Ding Lei: No matter whether it is a koala or strict election, the offline part is something we will consider to do, but we will not do it on a large scale. Perhaps our approach will be to deploy one or two flagship stores in a certain city, Shanghai. It may be two, then mainly the function of exhibition and experience.
Citigroup analyst: I have two questions. First, in the first quarter, the company increased its sales and marketing investment. Can it help the Wilderness Action improve the flow in the second quarter? Can you introduce the mobile games business or the same year-on-year trend?
Second, with regard to "Chu Liu Xiang", how is the quality of the game compared to other RPGs (Role Playing Games) of the company? Do you think this game has attracted a lot of "Ghost Story" or "Fantasy Westward Journey" mobile version of the player?
Yang Zhaojun: Regarding the marketing investment in the first quarter, yes, this is basically equal to the advance investment in the promotion of new game categories in various geographies. I explained before that these inputs will be In the following quarter, the revenue from survival games will increase, and we are very pleased to see games like Knives Out (Wisdom Action version of Wildland Action), Terminator 2 and Rules of Survival. Both water and revenue are making a significant contribution, and we are very confident in the continuity of the contributions of these games.
The marketing expenses are echoed with the on-line of some games. In the first quarter, we had more new games on the line, so the corresponding marketing expenses will be higher. This year's overall trend will gradually normalize marketing expenses, but We also need to see our next game reserves and game schedules.
Ding Lei: "Chu Liu Xiang" has no influence on the existing MMORPGs (massively multiplayer online role-playing games) such as "Ghost Story" and "Fantasy Westward Journey". We can see that the phenomenon of user loss has not basically happened. , And its own user group is after 95, so no need to worry about this.
Bank of America-Merrill Lynch Analyst: You mentioned that you are confident that the current growth rate of mobile game revenue can be maintained for the rest of the year. Then I would like to know how much of it is based on the confidence generated by the revenue generated by new games. How much confidence is derived from the maintenance of the revenue momentum of existing games?
Ding Lei: Existing games are slowly growing steadily, and new games will bring new growth.
Goldman Sachs analyst: My question is about your "Mailbox and other" revenue column. In the first quarter, this revenue increased by 100% year-on-year. Can you elaborate on the composition of this column of revenue? What is the nature of the business? Is it a relatively high-margin advertising model? Or is it a new type of business?
Yang Zhaohao: For "Mailbox and other" business, we all know that we have separated the e-commerce business from the fourth quarter of last year and listed it separately in the financial report. So now, "Mailbox and other" business is the most important part of the business. NetEase's live broadcast services: NetEase CC and NetEase BoBo, as well as NetEase Cloud Music and some other projects we are incubating internally, as well as some research and development achievements, these are the "other" major part of the business.
As for the three-digit growth rate, it reflects the healthy growth trend of some new businesses, especially cloud music and live broadcast services.
Morgan Stanley Analyst: My question is about your contribution to overseas games. How much of Netease's game revenue is currently derived from overseas income? For overseas game strategy, you talk about how to get overseas income growth. Can you tell us about your overseas cooperation, such as cooperation with Blizzard, whether there are more mobile phones?The possibility of the game?
Second, with regard to your OpEx (operating expenses), G&A (comprehensive expenses and administrative expenses) and R&D expenses in the first quarter will be very significant compared to the previous quarter, and how much will come from the growth of personnel. What are the one-time expenses associated with game promotion?
Finally, you mentioned that NetEase's effective tax rate will increase significantly in 2018. What level will it grow this year? What about 2019?
Yang Zhaohao: The first quarter's overseas revenue is still in the lower single digits, but it is growing. We are very confident that with the increase of our entire game product portfolio and the introduction of more and more excellent products, more games will be suitable for overseas markets. It is expected that the contribution of overseas game revenue will continue to increase.
The increase in G&A and research and development expenses is mainly due to the increase in personnel. As we all know, we are a first-rate content provider in the Chinese market. Therefore, our investment in talents and other core competitiveness is very large.
The actual tax rate, as I briefly introduced at the opening session, was mainly due to large losses in some of our subsidiaries, such as e-commerce and music. Therefore, from a mathematical point of view, our effective tax rate is comparable to that of last year. Have increased. For the first quarter, we used 26% as our income tax rate, which is the latest estimate of management's actual tax rate.
Ding Lei: We will have some games that are specifically designed to issue overseas markets, such as "Wildland Action" and some games that will be released overseas. At present, we will work with some international companies to use their IP and theirs. Some of the gameplay methods are jointly developed overseas to release some games, which will be seen soon this year. These games will be promoted and appear overseas.
JPMorgan analyst: I have two questions about the game business. First of all, I would like to know about the situation of competitive games in the Chinese market. In the past few years, whether in the international market or the Chinese market, the "League of Legends" ( Games like League of Legends have achieved a high market position. In recent quarters, the latest trend is the competitive shooting survival game, or "chicken" game, attracting many players to play. In the next year or two, what do you think is the next chance for such high-DAU (day-active users), low ARPU (average per-user contribution revenue) but overall good payout rates? How is Netease positioned in the competitive game market?
Second, we have taken note of the competitive shooting survival game. We have noticed that "Knives Out" (U.S. version of "Wildland Action") is still tenacious on iOS, and its revenue is good, but it seems that it ranks in downloads. There is a very substantial decline on the list. Does this mean that NetEase has strategically abandoned this category of Chinese market? How big is the business value of this game in overseas markets?
Yang Zhaojun: Your second question is asking us whether we should abandon the "Wildlands Action" China market.
JP Morgan Chase analyst: Yes, because the download ranking of this game is constantly declining, and NetEase does not seem to be promoting this game.
Ding Lei: No. First of all, e-sports games are one of our more important strategies. In the future, a relatively large category, e-sports category, from Dota, to the card-types of Hearthstone, and the MOBA of Watchman Pioneers. (Multiplayer online tactical sports games) shooting games, then to the wilderness action chicken games, shooting survival sandbox games, and asymmetrical sports games such as "fifth personality" In the future, we will also have new games like e-sports that will come out. We think this is a very huge market.
Second, although the Wilderness Action has declined, we will not give up on the development of Wilderness Action and Terminator in the Chinese market. We think this is a very interesting topic and we very much hope that we can achieve greater market share and maintain growth through innovation.
Deutsche Bank analyst: My first question is about the proportion of Netease's strict selection and koala. Does the manager think that whether strict selection can be further scaled up or will there be a bottleneck?
Yang Zhaojun: With regard to the e-commerce business, we do not announce the information of strict election and koala separately. At present, most of the e-commerce business's contribution is still from Koala.
Ding Lei: Strict selection of business did not encounter a bottleneck. We all know that we have carefully selected the products we bought, or we have carefully selected the site. We know that the loyalty of our customers is very high.
One of the things we need to do next is to do a better job of marketing with strict selection so that more Chinese consumers can be exposed to the selection of this brand and product. This is what we need to do next, and, To be exact, NetEase is an innovative e-commerce business combining Chinese characteristics compared with other e-commerce companies.
Deutsche Bank analyst: The second question is about the mid-term game market. You mentioned that the competitive game is a strategic focus of the company. Then, in the medium to long term, you think that those areas of the competitive game will be what you want to add. Big resources to invest?
Ding Lei: The purpose of the class is to look at the game itself. First of all, we are still more optimistic about mobile games, PC games we will still be doing, but if you compare PC games and mobile games, we certainly will still think that the mobile game market will be a little bigger; Second, competitive In the game, games that are very suitable for live sports and sandbox games are very popular.
In the future, the games we need to focus on are high-level, sandboxed games, and live broadcasts. These categories will be very suitable for users.
CICC analyst: I have two questions. First of all, with regard to your e-commerce business, these quarters have very strong growth. With the gradual expansion of the e-commerce business, I would like to know whether the company needs more working capital. Does the company have any plans for this?
In addition, can management describe the current competitive landscape of the online music industry? What is the company’s commercialization strategy for cloud music products in the future?
Yang Zhaojun: You are right in the working capital of the e-commerce business. In order to ensure the authenticity and reliability of the goods, our e-commerce business is self-operated. Therefore, from the perspective of mathematics, as we expand the scale, We will need to invest more working capital, but we are not too worried about this, because as we expand and expand, we will have more choices in financing and operating leverage, and we can find a balance between funding needs and business growth. balance point.
At present, what we can say is that the company e-commerce business is still at a relatively early stage compared with those of the big competitors. As long as we maintain a rapid and strong growth momentum, we can find the best financing structure. .
Ding Lei: At present, cloud music should have a leading position in the market. Music is a very large content demand market for Chinese users. Whether it is on a mobile phone, or in a car, or later using smart speakers to listen to music, Can not do without cloud music this content platform.
One of the challenges we are currently facing is that companies need to pay record companies a very high level of security deposits. In fact, these high security funds have caused us to lose money. Cloud Music, we will have a set of their own ideas, will combine the content of Chinese users need to move forward. We will eventually base ourselves on the needs of Chinese music lovers to promote and develop China's original music. This is our goal. But music, I believe, is an indispensable requirement whether it is on mobile phones, cars or at home. (Wood)