Good day and welcome to the NetEase 2020 Fourth Quarter and Full Year’s Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Margaret Shi, IR Director of NetEase. Please go ahead, ma'am. .

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the Safe Harbor from liability as established by the US Private Securities Litigation Reform Act.

Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors that could affect NetEase’s business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its Annual Report on Form 20-F and the announcement of the filings on the website of Hong Kong Stock Exchange.

The company does not undertake any obligation to update these forward-looking information except as required by law. During today's call, management will discuss certain non-GAAP financial measures for comparison purposes only.

For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2020 fourth quarter and full year earnings news release issued earlier today. As a reminder, this conference is being recorded.

In addition, an investor presentation and a webcast replay of this conference call will be available on NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase senior management is Mr. William Ding, our Chief Executive Officer; and Mr. Charles Yang, our Chief Financial Officer.

I will now turn the call over to Charles, who will read the prepared remarks on behalf of William..

GP margin for our online gaming services was 63.1%. As a reminder, this number is generally stable with some narrow fluctuation based on the revenue mix of mobile and PC as well as self-developed and licensed games. Gross margin for Youdao for the fourth quarter was 47.5% compared to 29.8% in the same period of last year.

The significant growth was primarily attributable to improved economies of scale continuous optimization of our faculty compensation structure. Gross profit margin for innovative businesses and others was 18% compared with 20.6% in the fourth quarter of 2019.

While the margins for NetEase Cloud Music and Yanxuan have improved year-over-year, the impact was offset by the decrease in GP margin from NetEase CC live streaming which covered a longer period of the annual celebration event in 2020 compared with 2019.

Additionally, gross profit margin of innovative businesses and others also fluctuate based on the revenue mix of this line item. For the fourth quarter total operating expenses were RMB6.9 billion, 35% of the total revenue. Our selling and marketing expenses, as a percentage of net revenue, was 15.6%, down from 18.5% in the prior quarter.

The quarter-over-quarter decrease was mainly due to lower marketing costs related to Youdao. Excluding Youdao, our selling and marketing expenses as a percentage of net revenues were 12.2% compared with 12.9% in the prior quarter, which is relatively stable. R&D expenses were RMB 3 billion, up 9% from the previous quarter.

We remain committed to investing in content creation and product development, which is core to our future revenue growth. On a full year basis, R&D expenses as a percentage of full year net revenue were 14.1%, compared with 14.2% in 2019.

Other income loss was RMB 1.5 billion for the fourth quarter, which included a net investment loss of RMB 272 million and a net foreign exchange loss of RMB 1.8 billion due to the US dollar's exchange rate continued depreciation against the RMB.

The net investment loss and the net FX loss, both mainly booked loss in nature and most of them did not impact our cash flow. On a full year basis, total net foreign exchange loss for 2020 were RMB 3.1 billion compared with a net gain of RMB 25 million in 2019.

The effective tax rate was 37.2% for the fourth quarter and 19.8% for the full year of 2020. The effective tax rate represents certain estimates by the company regarding the tax obligations and benefits applicable to it in each quarter.

Non-GAAP net income from continuing operations attributable to our shareholders for the fourth quarter of 2020 totaled RMB 1.6 billion or US$244.9 million. Our non-GAAP diluted earnings per ADS from continuing operations were RMB 2.34 or US$0.36 for the fourth quarter of 2020.

We would also like to point out with the rapid growth of Youdao, it is having a much more material impact on our NetEase group financials.

For 2020, Youdao generated total revenue of RMB 3.1 billion and a non-GAAP net loss attributable to Youdao's shareholders of RMB 1.7 billion compared with net revenue of RMB 1.3 billion and non-GAAP net loss of RMB 612 million in 2019. Our cash position remains strong.

As of end of 2020, our total cash and cash equivalents current and non-current client deposits and short-term investment balance totaled RMB 100.1 billion compared with RMB 74.4 billion as of the end of 2019.

In accordance with our dividend policy, we are pleased to report that our Board of Directors has approved a dividend of US$0.012 per share or US$0.06 per ADS. As a reminder, we changed our ADS ratio on October 1 from one ADS for every 25 ordinary shares to one ADS for every five ordinary shares.

And finally, under our current share repurchase program for up to US$ 2 billion, as of December 31 2020 approximately 21.1 million ADS has been repurchased under this program for a total cost of US$1.6 billion.

On February 25, 2021, our Board announced the approval of a new share repurchase program for up to US$2.2 billion of our outstanding ADS and ordinary shares for the next 24 months, beginning on March 2, 2021. Thank you for your attention. We would like now to open the call to your questions. Operator let's go to the Q&A session..

[Operator Instructions] We will take our first question from the line of Jialong Shi from Nomura. Your line is open. Please proceed..

Thanks. Good evening, management. Thanks for taking my question. Let me ask my question first in Chinese.

[Foreign Language] How much of native's Android version of mobile game revenue is contributed by third-party app stores? For this part of revenue what is the average revenue share charged by third-party Android channels? We heard from media one of NetEase online gaming peers was trying to negotiate for a lower revenue share paid to the third-party app stores.

Just wonder, if NetEase has also started to talk with your channel partners about this revenue share.

And if you did how's the progress so far?.

[Foreign Language].

I'll help translating. The China has probably obviously the highest revenue sharing ratio among all the market around the world, up to as high as 50%. It's true a few of our native games enjoys a more favorable sharing around 30% such as FWJ.

And so we think the way we are seeing in China right now is unhealthy and it's probably unsustainable because it's about 20% higher than how much Apple is charging the content providers.

And we see, we'd like to see with the Chinese Apple partners to be more in sync with our international – with the international peers to be charging the content providers a more reasonable rate. And we want to work very closely with our channel partners to create a healthy environment for the gaming industry..

And Jialong to supplement your earlier part of the question.

On our channel split on the ballpark roughly half of our game revenues were generated through iOS which again is only a very, very few game content providers in China can have such a high percentage contribution from iOS channels roughly one-third is coming from Android channels and the remainder coming from our official channels.

That's a ballpark split of the channel split..

Thanks for the color..

Thank you..

Okay. Operator, the next question, please..

Okay. We will take our next question from the line of Alex Poon from Morgan Stanley. The line is open. Please go ahead..

[Foreign Language] I'll translate myself. Back in 2019 we had a revenue target -- overseas revenue target of 30%. In the following three to five years and because of COVID-19 the growth especially outside of China has accelerated a lot. And so, wondering if there is any change to this target – revenue mix target.

Would it come earlier than expected? And then secondly is I want -- I hope to get some thoughts around casual games versus hardcore games outside of China.

What's – which one do you think would be better to achieve the growth and the ROIs compared to the China market?.

[Foreign Language] 2021 will definitely be an important year for NetEase in terms of internationalization. We have a number of games we're making such as Harry Potter and Infinite Lagrange which are expected to be launched during the year and we hope to see fruitful results from those games. Thank you. Thank you Alex. .

And Alex on your second question -- second part of the question on our strategy of thinking of overseas game introduction.

We are not betting on our future on one or two genres, but rather we think with our stronger and getting more diversified R&D capability we want to see multiple genres of games being introduced to different geographies and different users. So shooting game like Knives Out has been proven successful in Japan.

SLG games like Infinite Lagrange and The Lord of the Rings we are confident that we can leverage our domestic success into the international market as well as games like Harry Porter which is a more casual card RPG game and others.

So I think what we want to do is to have multiple genres targeting multiple geographies and catering to multiple user needs. That is our overall direction for internationalization. .

Thank you Alex. Next question..

We will take our next question from the line of Alicia Yap from Citi. .

Hi, yeah, thank you. [Foreign Language] Thank you, management for taking my questions.

My question is related to the overall growth driver for the Cloud Music for 2021 was that growth mainly driven by the subscription revenue ramp or to be driven by the online advertising revenue or even the live streaming could be growing faster? And then a small related questions on the one billion video content investment initiative recently could management share the rationale behind? And do you expect this initiative to actually revise the online advertising revenue or even further push the NetEase media business growth? Thank you..

[Foreign Language].

Yes. I'll help translating. So Alicia, you're right. The three main forms of monetization for music is membership advertising and live streaming. And one of the key focuses for music going forward will continue to be about creating our own content, helping independent musicians to create original content on our platforms.

So in that sense memberships will definitely be one of the key drivers to our monetization growth. In terms of radio, what was noticed is that music is about listening.

But what we've noticed in the industry in China and globally is that the consumers' habits have evolved from the listening to watching, which is why short-form video platforms have become extremely popular in the recent years. So when we think about making short to mid-form video we want to leverage our existing know-how.

For example, we're interested in making short to mid-form video centered around games, or centered around knowledge. So we have this -- we actually have one project within NetEase called NetEase Information World [ph] [Foreign Language].

So we -- during the Chinese New Year we realized -- we noticed that the play time on our videos have actually increased 1 to 2 times compared to previously. So going forward, we'll continue to work hard on creating content on short to medium -- mid-form video content is centered around our key businesses, games, music, et cetera. Thank you. .

Thank you..

Thank you, Alicia. Next question, please..

We will take our next question from the line of Alex Yao from JPMorgan. .

[Foreign Language] So my question is regarding your view on the PC gaming market.

How do you think about the future outlook for this market in both domestic China market, as well as the rest of the world? And then how do you position yourself in such industry? Do you still allocate new R&D resource in the PC gaming development, or you just want to strategically maintain the current PC portfolio? Thank you..

[Foreign Language].

Yes. The outcome from both William and [indiscernible] our -- the mastermind behind many key titles in NetEase. So, yes, that's something that we do care very much about PC, because of unique specifications that the PC games can have and the user experience that PC games can deliver to our gamers that we'll probably continue down this road.

So on one hand we'll continue to maintain our existing titles on PCs and we'll continue to develop new PC titles too. In May, we're actually going to launch a game called [indiscernible] which has actually the license is a very unique and creative PC game.

And also around the middle of the year we are going to create -- we are going to probably going to launch another PC game called [indiscernible]. And this is a competitive -- and it's made by the [indiscernible] standards.

And William wanted to add that in addition to our self-developed games we actually run lots of very, very popular PC game from Blizzard such as Overwatch, World of Warcraft, StarCraft to name a few. So we'll probably have the richest collection of PC games in China. And so PC will continue to be an important part of our game strategy. Thank you.

Next question, please..

We will take our next question from the line of Thomas Chong from Jefferies. Your line is open..

[Foreign Language] Thanks management for taking my questions. And the first question is regarding overseas game operations. Will we consider accelerating the pace through the use of M&A or in-house development? And then my follow-up -- another question is about the regulations.

Can management share about their thoughts regarding the regulatory environment in online games live streaming and music? Thank you..

[Foreign Language].

In terms of the overseas expansion, we're interested in both and talked about these self-developing games and also through M&A. In terms of the self-development side, there's a number of things -- there's number of ways we can do it.

For example, Harry Potter, this is leveraging the use of a very famous UK IP and using our own internal R&D to develop things for the global markets. On M&A side, yes, we are obviously very interested in achieving greater success through collaborations with different partners around the world.

We've actually -- we've always been active in -- invested in good content globally. Thank you..

And Thomas on your second question asking for the regulatory environment for game broadcasting and music. Well, in general we see that this is becoming more and more popular format of entertainment. So e-sports has been now qualified at the Asian Games and there are rumors that it can even potentially be eligible for Olympic Games.

It is a kind of sports for the young people. So game live streaming is important. NetEase CC live streaming is building on our unique edge of self-created game content and it is developed -- it's also been growing quite healthy and sustainably.

Music obviously is becoming an increasingly important entertainment content and it is not only restricted to the enjoyment of our ears by listening, but just as William previously mentioned, watching is becoming even more popular and trendy format of enjoying music as a format of entertainment content.

So, we think, everything takes on it's -- a progressive way of developing. But in general, the regulatory environment is also more and more encouraging for innovation and catering to the user preferences and behavior in general. So we are very confident and we have our own plans of investing ourselves into these areas..

We will take our next question from the line of Kenneth Fong from Credit Suisse..

[Foreign Language] I will translate myself. I want to ask about the pace and is there approximately timing of the launch of the few key IP including Diablo, Immortal, Pokémon as well as Harry Potter? Would that be like spread across different quarters to avoid competition, or we will just launch it right when they are ready? Thank you..

Thank you, Kenneth. For our pipeline, first of all, we are very confident and excited about our lineups for 2021, including just now William and Junxiong just introduced a couple of exciting PC games. On the mobile side, as you have all noticed, Harry Porter, Diablo, Immortal and Pokémon now all have already received their license approvals.

And all these games are developed with the intention for a global launch. So now that we have got the approval for the China part, as to the exact timing point of these game launches, we do not rush our producers and our studios.

If we are confident that these high-quality games are developed and designed for a long-anticipated longevity, then we are not overly concerned about whether launching this game in this particular month or the next.

But all in all, I think, we have more confidence, now given that the license approval has been obtained, that many of these highly anticipated games will be introduced to the gamer community within this year, some might be potentially as early as the first half of this year..

Thank you, very much..

Due to time constraint, that concludes today's questions-and-answer session. At this time, I will turn the conference back to Margaret Shi, for any additional or closing remarks..

Thank you, once again for joining us today. If you have any further questions, please feel free to contact us directly or TPG Investor Relations. Have a great day. Thank you. .

Thank you everyone. .

That concludes today's conference. Thank you everyone for your participation..