Netease (Nasdaq: NTES; HKEX: 9999) released its second quarter report for the fiscal year 2024, which ended on June 30th. Net revenue was 25.5 billion yuan, a year-on-year growth of 6.1%. Net income attributable to Netease shareholders was 6.8 billion yuan, compared to 7.6 billion yuan in the previous quarter and 8.2 billion yuan in the same period last year. Non-GAAP net income attributable to Netease shareholders was 7.8 billion yuan, compared to 8.5 billion yuan in the previous quarter and 9 billion yuan in the same period last year.

Netease CEO Ding Lei, Vice President of Corporate Development Pang Dazhi, and Vice President Hu Zhipeng, among other company executives, attended the subsequent earnings conference call, interpreting the key points of the financial report and answering analyst questions.

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

Citigroup analyst Alicia Yap: My question is about the mobile game "Eternal Return." Is the management satisfied with the current performance of the game? Could the management team please share more details about the user profile of "Eternal Return"? For example, how many users have never played the PC version of "Eternal Return"? How many users are completely new to Netease, having never played any Netease game before? Also, how is the management team planning to launch "Eternal Return" in the overseas market?

Hu Zhipeng: As a brand-new category of mobile platform operation game, we are very satisfied with the performance of "Eternal Return". You can see a very stable number of active users, which also proves that our core user group has formed and the proportion of players is significantly higher than the PC version. According to the statistics, currently 70% of players have never played the PC version of "Eternal Return", and nearly half of the players are new users to Netease. So, based on the current operation, we will continue to focus on the domestic market, optimize our products, and introduce this product to the overseas market at the right time.

Nomura Securities analyst Jialong Shi: My question is about the PC game "Fantasy Westward Journey." I would like to ask the management team, I noticed that there have been many adjustments to the game this year. What is the reason for these adjustments? What goals are you mainly trying to achieve? Are these adjustments related to government regulations? From the current perspective, have these adjustments already achieved the expected goals? Are there any major adjustments planned for the remaining time of the year for the PC game "Fantasy Westward Journey"? Also, I would like to understand the impact of these adjustments on the revenue and number of users of the PC game "Fantasy Westward Journey". We have seen a certain degree of decline in the price of gold coins in the PC game in the first half of the year. Can the management team explain whether there is a correlation between the decline in the price of gold coins and the game's revenue? How long will it take for the revenue of the PC game "Fantasy Westward Journey" to recover to the level before the adjustments?

Ding Lei: I would like to emphasize that Netease is now an internet company with various games, and our games are not limited to just the PC game "Fantasy Westward Journey." We have "Eternal Return," "Egg Party," and "Identity V." They are all performing well.

"Fantasy Westward Journey" PC game was launched by us twenty years ago. In the iterative process of each year and each period, we found that some gameplay elements were not interesting enough. So this time, we made some adjustments on May 20th. The ultimate goal of these adjustments is to improve the quality of the product and make players like it more. During the adjustment process, there will definitely be some growing pains, which is quite normal.

As for the decline in the price of gold coins mentioned, I think it also reflects the short-term fluctuations in the adjustment process. In the long run, I believe that the game will return to its own fun. I hope that investors should not worry too much about the performance of a game, after all, NetEase's games are not only the client game "Fantasy Westward Journey".

HSBC Bank analyst Ritchie Sun: I have two questions. The first question is about Identity V. I saw that the game's revenue ranking continues to exceed expectations. What work has the management done to successfully promote the growth of this game? How does the management evaluate the market potential of asymmetric competitive games? Are there any competitors in this regard?

My second question is about Onmyoji mobile game. Recently, a new season of Onmyoji mobile game was launched. I saw that it once rose to the top ten in revenue ranking in July, but it clearly declined in August. What is the main reason behind this? Is it because users have different reactions to the new season? Or is it due to competition? Or is it influenced by the mobile game Eternal City? Or is it because MMORPG games are declining in the market? How does the management plan to improve the lifecycle of this game?

Ding Lei: Identity V is a game that we have been operating for six years. In the past six years, we have been exploring and polishing the quality of the product. In the second quarter of this year, Identity V performed well, which I think is the result of collective efforts. This shows that NetEase actually has the ability to operate games in the long term. I hope that in the future, our other games can become as excellent as Identity V and improve every quarter.

Regarding the question about Onmyoji mobile game, I will let Hu Zhipeng answer.

Hu Zhipeng: I will answer the question about Onmyoji mobile game.

Onmyoji mobile game has a massive content update in the new season, which has actually attracted a large number of players to return. At present, the operation of Onmyoji mobile game has entered a very stable period. Compared with other real-time MMORPG games, we have seen that Onmyoji mobile game has shown a strong user online presence. Our most important goal is to maintain the stability of user online presence and the diversity of player ecosystem, adhere to our initial concept of "divergence converging", continue to reduce pressure, actively respond to player feedback, and strive to make it a long-term operating MMORPG game on the mobile platform.

CICC analyst Yang Bai: I have two questions. First, we see that the company's product matrix in terms of daily active users (DAU) is becoming richer, including Eternal City, Egg Party, and so on. I would like to ask how the management thinks about the breakthrough in the direction of large DAU?

My second question is, how does the management team envision the development of the company's overseas market? Can you give us an outlook on the new products related to this?

Ding Lei: In fact, I believe that as long as a game is interesting enough and of good quality, having a high DAU (Daily Active Users) is a natural thing. We did not specifically define whether a game has a big or small DAU. We have been experimenting with games in different categories, including MMORPG games, competitive games, sports games, and shooting games.

Regarding your second question, the overseas market has always been a market that Netease takes very seriously. When we see products like 'Once Human' achieve success overseas, we are also very happy. This shows that we have the ability to create products that foreigners like. We are not only focused on the Chinese market. However, if we want to have more categories to adapt to the overseas market, I believe Netease still needs some time, but we can see that we have advantages now.

Bank of America Merrill Lynch analyst Lei Zhang: My main question is about 'Yan Yun Sixteen Sounds.' Is there a latest schedule for this project? Can we expect the PC and mobile game versions of 'Yan Yun Sixteen Sounds' to be launched simultaneously? In addition, I saw that the management team announced today that the latest testing date for 'Yan Yun Sixteen Sounds' on both platforms is on August 28th. Therefore, I would also like the management team to share with us the latest progress of this game based on the feedback from the previous round of testing.

Ding Lei: For 'Yan Yun Sixteen Sounds,' we are still adding a lot of content to enhance the fun of the game.

As for whether the PC and mobile versions will be launched together or with a one-month gap, it is not a particularly important matter. I believe the most important thing is that the product itself is enjoyable for users in the long term. 'Yan Yun Sixteen Sounds' is not a standalone game, but a open world online game that has been planned and operated for many years. The content and experience here are far beyond imagination.

In addition, there are differences in the gaming experience between mobile and PC. These differences also need to be improved through game design and gameplay. I hope everyone can be patient and the current plan is to release it this year.

Goldman Sachs analyst Lincoln Kong: My question is about 'Egg Party.' According to some third-party data, I see some pressure on the game's revenue recently. I would like to ask the management team for the specific reasons. How should we think about the long-term operation of this game? Can the management team share with us the future research and development strategies and directions for casual games in general, whether it's parties, idle games, simulation management, and so on?

Ding Lei: 'Egg Party' is one of the largest games in terms of user volume at Netease. In terms of revenue, the ratio between users and revenue is indeed a bit low. But I don't think we need to worry too much because the company is actively exploring in this area, hoping to improve revenue.'

I believe the most important point in a game is the fun factor itself. Currently, we haven't seen any users who don't like this game. Everyone is still actively participating in this game. So, the company may need some time to find a balance in terms of revenue.'

UBS analyst Felix Liu: 'Can management share with us the company's product lineup in 2024 and 2025? And what are the key products to look out for? Also, we noticed that the company recently obtained licenses for two Marvel games and showcased a game called FragPunk at the Xbox Showcase. Does management have any outlook on these games?'

Ding Lei: 'We have already obtained licenses for two games, which should be launched soon. One is 'Marvel Ultimate Reversal', and the other is 'Marvel Showdown'. One is a shooting game, and the other is a card game. In addition, 'Hearthstone' will also be launched on September 25th. Of course, the 'FragPunk' you saw is also a highly anticipated PC game. We have just started preliminary testing of this game overseas.'

We have high expectations and confidence in these products within our company. These products are different from traditional ones. They are all competitive games, with two being shooting competition games and one being a card game. In early next month, our 'Marvel Ultimate Reversal' will be officially launched. It has been proven to be a high-quality work in the overseas market, and we hope it can be successful in China.'

Jefferies analyst Thomas Chong: 'My first question is about AI. Can management share with us how AI has improved the company's game production and work efficiency? My second question is about the future trend of operating expenses. Can management share with us whether R&D expenses will continue to increase? What is the plan for marketing expenses in the future?'

Hu Zhipeng: 'As we all know, Netease has always embraced AI technology in the game industry with a very positive attitude. AI technology is now widely used in various professional fields of game development, including production software for planning, art, and programming. Currently, we have also added an assessment of AI applications for newcomers and expert recruitment.'

From the current usage, we can see that the tedious work that traditionally requires a large amount of manual labor has gradually been replaced by AI, with a replacement rate of over 90%. However, I believe that such replacement can only ensure that we can provide more abundant content for everyone, allowing us to have more time to explore and provide more interesting products.'

Therefore, overall, our research and development expenses will continue to be maintained within a reasonable range. We will use the cost savings brought by AI efficiency to create more competitive and quality content.

Bank of America Merrill Lynch analyst Lei Zhang: I have a follow-up question here, regarding 'World of Warcraft.' I have seen that the feedback from players after the return of 'World of Warcraft' has been quite positive. Could management share some related data with us? Such as the number of returning veteran players, new player additions, and so on.

Additionally, how does the company view the impact of the return of the 'World of Warcraft' game on revenue? Also, I have seen news that 'Hearthstone' may return on September 25th. Can management also reveal the return dates of other Blizzard games to us? Furthermore, does NetEase have any other potential collaboration opportunities with Blizzard in the future?

Hu Zhipeng: After the return of 'World of Warcraft,' we have observed very positive player feedback, with all data exceeding our previous expectations. The proportion of new to returning players is approximately 4:6. This indicates that the game not only continues to attract returning players but also has the ability to attract new players.

The return of the game will undoubtedly increase the company's revenue in the client games sector. Other games from Blizzard will also make a comeback gradually. We have established close relationships and consensus with each of Blizzard's product teams. I believe that the return of the games is not just a matter of restarting servers but requires thorough preparation to provide players with a better experience. After this return, a direct point-to-point deep cooperation has been established between Blizzard and the R&D team of Rayfire. I believe this will lay a solid credit foundation for future deep collaborations.