NetEase, Inc. Q3 FY2025 earnings call

• Games and related VAS: Continued momentum with diverse portfolio. New releases like Destiny: Rising, Marvel Rivals, Where Winds Meet, etc., performed well globally. Established games like Racing Master, Fantasy Westward Journey, etc., also saw strong performances with updates and events. - Youdao: Executed AI native strategy, growth in education and advertising businesses, launched new tutoring pen Youdao Space X. - Yanxuan: Performed well across major e-commerce platforms, led by core categories like pet food with innovative product launches.

Total revenues increased 8% year-over-year to RMB 28.4 billion. Games and related VAS revenues grew 12% to RMB 23.3 billion, with a gross profit margin of 69.3% (up from 68.8% last year). Youdao's net revenue was RMB 1.6 billion, up 15% quarter-over-quarter and 4% year-over-year, with a gross profit margin of 42.2% (down from 50.2% last year). NetEase Cloud Music had net revenue of RMB 2 billion, stable quarter-over-quarter but down 2% year-over-year, with a gross profit margin of 35.4% (up from 32.8% last year). Innovative business and others had net revenues of RMB 1.4 billion, down 15% quarter-over-quarter and 19% year-over-year, with a gross profit margin of 43.0% (up from 37.8% last year).

Total net revenue up 8% y-o-y. Non-GAAP net income attributable to shareholders up 27% y-o-y. Board approved dividend of USD 0.11 per share. Share repurchase program extended for an additional 36 months until January 9, 2029.

Some risks beyond the company's control could cause actual results to differ materially from forward-looking statements. Detailed risk factors in filings with SEC and Hong Kong Stock Exchange.

Q: Congratulations on the third quarter. My question about Fantasy Westward Journey. Given that FWJ PC has consistently set new record for online player count since this summer, we would appreciate that the company is sharing its operational structure for this evergreen title. And we have several follow-up questions on it. Firstly, what's the core driving factors behind the unlimited player server. And secondly, what's the user profile? What's the ratio of retaining players to new players. And lastly, is this model replicable across other flagship titles?

A: The longevity of Fantasy Westward Journey online PC is based on highly stable economic system and unique enriched gaming experiences. In the unlimited server, upfront time-based payment is removed, streamlined gameplay offered. Attracted both former and new players. User demographic benefits classic server. Committed to innovation and diversified experience for legacy game.

Q: Can management comment about the gaming trend in China as well as overseas. On the other hand, can management also talk about the overseas expansion strategy?

A: Accumulated successful experiences in overseas market. For example, Knives Out popular in Japan, Marvel Rivals globally successful, Where Winds Meet well-received. NetEase brings purely Chinese authentic online games to global market, confident in further overseas expansion.

Q: Regarding Identity V, we have seen the volatility in grossing and DAU in recent months. Can management discuss the reasons behind it and the strategy to improve the performance? Secondly, World of Warcraft and Hearthstone have returned to China for 1 year already and about to face tough comps. Can management discuss the performance metrics now versus 1 year ago and plans to drive sustainable growth in the future? And the Diablo IV is also coming back soon. Can management discuss the monetization potential considering the more intense competition in the ARPG genre?

A: Influence from competing products during summer holidays, but eased since back-to-school. Preparing new content and marketing campaigns for Chinese New Year. World of Warcraft and Hearthstone performance higher than when operation closed previously. Diablo IV has unique quality and new business plans.

Q: So just wanted to follow up. I think management earlier mentioned ANANTA was recently showcased at the Tokyo Game Show and has a pretty good feedback. So just wanted to know more details about the user feedback. And then how should we think about the market positioning and also the differentiation of this game? And then it also seems that the game included a pretty decent rich content and also the innovative gameplay. So any comments on that? And then are there any updates regarding the next testing timing and also the official launch timing in 2026 that you can share?

A: Showcased ANANTA at Tokyo Game Show, attracted significant attention. Anticipate game will secure position with colorful content, innovative monetization, and long-term operations. Development on track, further updates to be shared when time comes.

Q: We noticed from media, it seems to us the number of new games in your pipeline every year is smaller than in the past few years. If our observation is correct, just wonder what is your current strategy towards launching new games into the market. And if NetEase does not launch as many new games each year, what will be the growth driver for your online gaming business?

A: Focus on success products, refine and focus on them. New projects looked at prudently and focused. Being focused is core competence. Growth driver from focusing on refining existing successful games and developing new titles with evergreen potential.

Q: My question is on the recent news of organizational changes in your game department. Will these changes impact the near-term operations of the related games? And how does management think about the current organizational structure under the context of your game strategy? And should we expect more changes to come?

A: Adjustments part of normal personnel turnover, no impact on daily operations. Aiming to make operation more focused and efficient. Allocate resources to evergreen titles and innovative teams. Committed to high-quality products, will allocate more to evergreen titles.

Q: So my first question is about AI. So we have actually seen some of the games like Eggy Party or Justice Mobile has already integrated with AI applications. So going forward, for our existing portfolio and the new games, how should we think about AI can bring additional opportunities to our gamers? And the second question is in terms of the future new games. Given that the company now focus more on quality of those new games, so how should we think about the potential important game genre going forward? Specifically like for the shooting game genre globally, I think we have seen a rapid growth. So how would NetEase sort of differentiate ourselves in this shooting genre?

A: AI used in development and operation, accumulated hands-on experience. Focus on building high-quality flagship products. In shooting genre, will focus on targeted approach to new projects, aiming for ground breakthroughs.

Q: Let me translate my question. My question is about the Sea of Remnants this new game. Could the management share about the R&D development and expected launch timing? And what will be the commercial strategy for this title? And is there any direct peers or competitor for this game? And what NetEase can do to differentiate?

A: Sea of Remnants is important product, developed with self-developed engine, supports multiple platforms. Fresh experience with multi-character cultivation, sailing experience, and rich combinations. Believed to bring new ocean experience to gamers.