NetEase, Inc. (NTES)

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NetEase, Inc. (NTES)

Q3 2012 Earnings Call

November 14, 2012 8:00 p.m. EST


Brandi Piacente – IR, The Piacente Group

Onward Choi – Acting Chief Financial Officer

William Ding – CEO and Director


Richard Ji – Morgan Stanley

Dick Wei – JP Morgan

Alicia Yap – Barclays Capital

Eddie Leung – Bank of America Merrill Lynch

Mark Marostica – Piper Jaffray

Tian Hou – T.H. Capital

Jialong Shi – CLSA

Thomas Chong – BOCI

Alex Yao – Deutsche Bank



Ladies and gentlemen, thank you for standing by, and welcome to the NetEase Incorporated's third quarter 2012 earnings call.

[Operator Instructions]. This conference is being recorded today.

And I would now like to turn the conference over to Brandi Piacente. Please go ahead.

Brandi Piacente

Thank you, operator. Please note that 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 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 SEC, Securities and Exchange Commission, including its annual report on Form 20-F. The company does not undertake any obligation to update this forward-looking information except as required by law.

As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on the NetEase corporate website at ir.netease.com.

I will now turn the conference call over to Onward Choi, Acting Chief Financial Officer, who will read the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Onward Choi

Thank you, Brandi. Before I begin, please note that for the purposes of this discussion, all percentages are based on renminbi.

For the third quarter of 2012 we reported total revenues of RMB2 billion, driven by our online games and increasing advertising revenue contribution. During the third quarter we continued to advance our growth strategy for our self-developed games by introducing expansion packs that extend the lifecycles of our games and attract new users and by launching new games that broaden and diversify our portfolio. As we continue to focus on improving game content and quality, the popularity of our self-developed games is escalating, coupled with our successful promotional activities to better serve our players. NetEase brand-new games are contributing an increasing amount to our online game revenues mix.

Total online game revenues for the third quarter were RMB1.7 billion, driven by increased revenue contribution from our self-developed games. We have steady performances from Fantasy Westward Journey, Westward Journey Online II, and our two new games, Kung Fu Master and Soul of the Fighter. Tianxia III and Ghost also achieved steady performance during the third quarter.

Following the release of expansion packs and new content in the second quarter as well as associated promotional activities, both Fantasy Westward Journey and Westward Journey Online II achieved record-high PCUs in August. In the third quarter we introduced new expansion packs for Fantasy Westward Journey, Westward Journey Online III and Tianxia III, including a 3D version for Tianxia III that offers even more exciting 3D events.

We are also very pleased with the performance of both our two new action games, the high-quality fighting experience provided by Kung Fu Master and Soul of the Fighter has been well-received by players. We followed this positive reception and user feedback by launching unlimited beta testing for games on September 13 and October 18, respectively. We were met with equal enthusiasm.

The October 2nd release of the highly anticipated fourth expansion pack of Blizzard Entertainment's World of Warcraft, Mists of Pandaria in mainland was another important milestone during this period. With elements that appeal to Chinese culture, Mists of Pandaria has proven to be especially engaging, and we believe that it is being widely embraced by China's gaming community.

As we look to the final quarter of 2012 and move into 2013, we will continue to focus on providing premium quality and addressing user demand through our best-in-class feedback channels. We are pleased to announce that we will launch Heroes of Tang Dynasty II on November 16. This will be a comprehensive update of our popular and long-running game Heroes of Tang Dynasty, to further build on the success of this game. Our plans for the coming months also include introducing two new games to broaden our portfolio and game styles, Heroes of Three Kingdoms, our 3D action real-time strategy game, and Dragon Sword, our next-generation 3D MMORPG.

Turning to our portal business, we continue to enhance our portal content which helps to strengthen our community and drive our advertising services revenues through the loyalty of our current advertisers and by attracting new advertisers to our leading portal. Advertising sales continue to improve in the third quarter with automobile, fast-moving consumer goods, and financial services as the top-performing verticals. In the first quarter, our advertising sales grew 10.2% year over year and 19% sequentially. Our advertising business benefited from the popularity of our leading mobile news applications as well as our broadcast of the London Olympics. Our London Olympics coverage was extremely successful this year, resulting in an unprecedented number of downloads and portal activity that exceeded our results from the Beijing Olympics in 2008.

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