Shulou(Shulou.com)11/24 Report--

Beijing time on November 17 evening news, Netease (Nasdaq:NTES;HKEX: 9999) today released the third quarter of 2022 earnings report ended September 30. The financial report shows that Netease's net revenue in the third quarter was 24.4268 billion yuan, compared with 23.1591 billion yuan and 22.1907 billion yuan respectively in the previous quarter and the same period last year. Net profit attributable to Netease shareholders was 6.6994 billion yuan, compared with 5.2915 billion yuan and 3.1818 billion yuan in the previous quarter and the same period last year, respectively. Based on Non-GAAP, net profit from continuing operations attributable to Netease shareholders was 7.4696 billion yuan, compared with 5.4098 billion yuan in the previous quarter and 3.8578 billion yuan in the same period last year.

After the release of the earnings report, Netease CEO Ding Lei, CFO Yang Zhaoxuan, Vice President Hu Zhipeng and other company executives attended the subsequent earnings conference call, interpreted the main points of the earnings report, and answered analysts 'questions.

The following is the main content of the analyst Q & A session of this conference call:

Kenneth Fong, Credit Suisse analyst: My question is about the partnership between NetEase and Blizzard, which will not be renewed after the contract expires next year. Can management share with us the reasons for non-renewal and follow-up arrangements?

Ding Lei: We very much hope to be able to continue acting Blizzard games, which we have also paid a lot of efforts. However, in the past period of time, the whole negotiation process was far more difficult than we expected. Activision Blizzard's request for some key terms of cooperation related to the sustainable operation of the game, the Chinese market and the core interests of players is unacceptable to us. We also saw news this morning about Activision Blizzard announcing the termination of their partnership, and we are very sorry. We also have to abide by this decision. For Chinese players, we will do our best to do a good job in the aftermath, serve the players until the last moment, and protect the consumer rights and information security of the players.

Xueqing Zhang, analyst of CICC: Congratulations on the approval of tonight's edition number. My first question is, in Q3 Infinite Lagrange got multi-terminal release approval, we know Infinite is also doing multi-terminal release, so I would like to ask management what they think about the future development trend of multi-terminal games? The second question is about game IP. Some large-scale games based on overseas IP before the company, including Harry Potter: Magic Awakening, Lord of the Rings, etc., except Harry Potter: Magic Awakening, how is the approval progress of the version number of other overseas IP games? How does the company position these overseas IPs and our own local IPs, such as Fantasy Westward Journey, etc. In the long run, how will they help the company's business?

Hu Zhipeng: With regard to multi-terminal games, we have a lot of mobile game players in the process of product operation for so many years. They really want us to launch other terminal versions, such as PC version, so that they can immerse themselves in the game world through PC computer and larger screen. Based on this, some of our mobile games have added PC simulator versions and pure PC versions to meet the multi-terminal needs of players. In addition, we also noticed that in some regions and cities, many of our users have PC computers, mobile phones and consoles at the same time. They have the habit of playing games on multiple terminals. These users also especially hope to switch game products seamlessly on multiple terminals at ordinary times. As a result, some of our games will consider launching games that include consoles and support all platforms.

There is currently no technical obstacle to developing and operating full-platform games. In the present and future, we will comprehensively consider developing multi-terminal versions of products according to user needs, combined with specific characteristics of each product and market feedback.

version number. At present, the number of overseas IP product application version numbers is not large, and those that have submitted applications are proceeding in an orderly manner according to relevant procedures. In addition, the biggest difference between overseas IP and our self-developed IP products, such as Fantasy Westward Journey, lies in the great difference between the virtual worlds that different game IPs ultimately present to players. In the past, we have developed many very successful games with oriental culture themes, such as "Fantasy Westward Journey","Journey to the West","Cold Water","Eternal Disaster" and so on. We have also introduced some overseas IPs, such as Harry Potter: Magic Awakening, Lord of the Rings, Star Wars, etc. These overseas IPs greatly enrich our virtual world background themes and meet the needs of players who want to experience more diverse virtual worlds.

Of course, because of differences in game world views, different cultural themes, and different world view backgrounds, the specific types of games will vary greatly. For example, the differences between cold weapons and hot weapons in virtual worlds will lead to the final game experience being an MMORPG (Large Multiplayer Role Playing Game) or FPS (First Person Shooter Game). Therefore, in the long run, overseas IP games will eventually further enrich our company's product line.

Goldman Sachs analyst Lincoln Kong: My question is about Netease's overseas market. We have also seen companies investing overseas since the beginning of the year, including investing in shares and acquiring studios. May I ask the management what plans they have for next year (that is, 2023)? Especially in the end game and mobile game end, next year's overseas market will have what kind of growth?

Ding Lei: I think the overseas market is mainly "walking on two legs."

"The first leg" is that our own games go overseas, such as "Fifth Personality" and "Wilderness Action" launched in Japan in the past. In the future, we will have more PC games going overseas, such as the PC game "Eternity" that we launched overseas last year. Overall, overseas games will be dominated by PC based on terminal types. "Second leg" is that we also invest quite a lot in overseas game studios. As you can see, we hope that these studios will work closely with us to develop some successful games.

In general,"self-research and investment" works are used to explore overseas markets.

Charlene Liu, HSBC analyst: My question about the outlook for the gaming industry. We see that the overall domestic and international mobile game revenue in the third quarter actually decreased by a large margin year-on-year. On the one hand, considering that short-term consumption is still relatively weak, on the other hand, I also see that today's new version number is approved, which is a very positive signal. Overall, how do we envision the timeline and pace of revenue recovery? In the long run, how should we expect the growth prospects of the domestic mobile game market?

Ding Lei: I think the game industry is a content market, so the overall consumption of this industry depends largely on the content quality of the game itself. If you have a hit game, the market will be driven; if your game content is not creative, the market will gradually stabilize or decline. So, our understanding is not that the market is fluctuating downward, but that there is no refreshing and innovative content in the market at present. So it (the gaming industry) is very dependent on the content itself.

Morgan Stanley analyst Alex Poon: The company has launched a lot of new games overseas in the past year or two. Can management share feedback from overseas players with us? What is the life cycle of the game? In the future, in order to adapt to the tastes of overseas players, will the company develop more casual games? The second question concerns costs. What is the current headcount trend? What will be the future trend of operating expenses?

Hu Zhipeng: I would like to share with you the overseas performance of "Unbreakable".

Since launching overseas, including on Xbox in June, we've been keeping a close eye on the overseas player community and gathering feedback. At present, foreign core PC players and console players are very satisfied with the unique gameplay and melee experience of this game. We often see players say they enjoy playing for hours. Of course, we also found that there are more platforms, such as the low-end console platform Xbox One, these players are still very eager for this game. We're now working to optimize the game for efficiency so that it can accommodate the hardware needs of more platforms to satisfy more players. At the same time, we will also strive to optimize the game in the novice stage of overseas players, because overseas players have different needs for novice teaching. In this regard, we work closely with the relevant experts in Montreal Studio and discuss relevant optimization solutions almost every day. I believe that in the future we will come up with better optimization solutions to meet the needs of more players.

Yang Zhaoxuan: Number of employees and operating expenditure trends. Over the past five to six quarters, our total headcount has remained relatively stable at around 30,000. At the end of last quarter, due to the end of summer school recruitment, the total number of employees of the company was about 31,000, an increase of about 1000 compared with the previous quarter.

As for operating expenses, if you've been paying attention to the company's earnings, we pay a lot of attention to costs. Every expense of the company is a prudent expenditure oriented to ROI (return on investment). We want every expense to return on itself. So a lot of times, if you see us increasing R & D spending on marketing, it actually means that the company is about to launch exciting new games or develop new product lines. If you are patient enough, you will surely see that the seeds we sow today will bring great rewards in the future. So, for the future outlook of the company, I think we will continue to grow, continue to invest, and operating expenses (in absolute dollars) will continue to increase, but I believe we will earn a great return on investment as the next cycle of products is launched in domestic and international markets.

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