NetEase, Inc Management Discusses Q2 2012 Results - Earnings Call Transcript

NetEase, Inc (NTES)

Q2 2012 Earnings Call

August 15, 2012 9:00 pm ET

Executives

Brandi Piacente - President

Onward Choi - Acting Chief Financial Officer

Lei Ding - Founder, Chief Executive Officer and Director

Analysts

Timothy Chan - Morgan Stanley, Research Division

Rencheng Bao - China International Capital Corporation Limited, Research Division

Mark A. Marostica - Piper Jaffray Companies, Research Division

Atul Bagga - Lazard Capital Markets LLC, Research Division

Wallace Cheung - Crédit Suisse AG, Research Division

William Huang - Barclays Capital, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

Thomas Chong

Presentation

Operator

Good evening, ladies and gentlemen and thank you for standing by. Welcome to the NetEase, Inc. Second Quarter 2012 Earnings Call. [Operator Instructions] This conference is being recorded today, August 15, 2012. I'd like to turn the conference over to Ms. 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 liability as established by the U.S. 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 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.

West [ph] builds our reputation on introducing innovative product and services that shape China's Internet market. Through this standard of excellence, we can both satisfy user demand and further elevate China's Internet content with our benchmark offerings, this continues to drive loyalty and appeal within our growing community.

For the second quarter of 2012, our total revenues increased 12.7% year-over-year, with online games growing by 10.8% and advertising services increasing by 20.4%. Our self-developed games continue to drive our growth capturing the attentions of new users and increasing playtime within our existing community of game enthusiasts. Standout performances in the quarter came from our self-developed titles, including Ghost, which achieved record revenue in May, Fantasy Westward Journey and Tianxia III. The long-term success of our self-developed games is driven not only by the top-quality user experience and innovative game play we offer, but also by the introductions of new features and the expansions of game life cycles through the introductions of new content via the launch of the expansion packs, as well as the integrations of user feedback. This strategy prolongs the enjoyment of our current users and attracts new players to our diverse collections of games.

The second quarter was filled with activities to stimulate user demand, and during the period, we launched open beta testing for Ghost and Tianxia III as well as introduced new content, both Fantasy Westward Journey. We also launched new expansion pack for Warsong of Westward Journey, Heroes of Tang Dynasty, and Westward Journey Online II. And we expect the impact of these expansion packs to be reflected in the coming quarters as the market absorbs these new adventures. We expect other activities in the second half of the year for our self-developed games to include the launch of new expansion packs for Fantasy Westward Journey, Tianxia III, Ghost and Westward Journey Online III. Our research and development team has been diligently working on new additions to our portfolio of games. The first 2 of these games, Wu Hun, which we have renamed Kung Fu Master and Soul of Warrior, which we have renamed Soul of the Fighter, are designed to address users increasing appetite for action games and further diversify our portfolio.

In July, we launched initial closed beta testing for these 2 games, and while it is still early in the testing process, initial feedback has been encouraging. We are currently preparing to commercially launch both games in the second half of the year.

In addition, our next-generation 3D MMORPG, Dragon Sword and 3D action real-time strategy game, Heroes of Three Kingdoms, are being developed to the highest standards of quality, and we will be performing technical tests this year to obtain user feedback on those games.

In conjunction with the launch of our new games and expansion packs, we plan to conduct our usual large-scale promotional activities. Our marketing schedule currently calls for hosting summer vacation promotions for Fantasy Westward Journey, as well as celebrating the 10th anniversary of Westward Journey Online II and conducting promotional campaign to market our 2 new games.

Turning to our portal activities, mobile assets is a growing theme among China's Internet users, and we are keenly aware of the importance of offering relevant advertisings and portal services that appeal to an increasing mobile society as well as traditional Internet users.

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