Good day, and welcome to the NetEase 2021 third quarter 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.
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 a safe harbor from 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 in 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 announcements and the filings on the website of Hong Kong Stock Exchange.
The company does not undertake any obligation to update this 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 definition of non-GAAP financial measures, as a reconciliation of GAAP to non-GAAP financial results, please see the 2021 third quarter earnings 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, Chief Executive Officer, and Mr. Charles Yang, Chief Financial Officer. I will now turn the call over to Charles Yan, who will read the prepared remarks on behalf of William Ding.
Thank you, Margaret Shi, and thank you everyone for participating in today's call. Before we begin, I would like to remind everyone that all percentages are based on Renminbi. The third quarter was an exciting one for NetEase. We launched a number of top-ranking games, bringing our game revenues to a new record of RMB 15.9 billion. Our other business segments also grew robustly, supporting our total net revenues growth of around 19% year-over-year, reaching RMB 22.2 billion . For online games, our flagship titles continues to demonstrate strong growth after nearly two decades of operation. Revenues from Fantasy Westward Journey Online and Westward Journey Online both grew at double-digit rates year-over-year in the third quarter. The mobile versions of these two legacy sagas showed resilient year-over-year growth as well.
Adding to our strong portfolio of PC games, our new hit games, Naraka: Bladepoint and Nightmare Breaker, took our PC games revenue to a new record high in the third quarter, growing by 30% year-over-year, far outpacing industry growth. Featuring unchained melee combat, Naraka: Bladepoint has taken the PC games market by storm, reinvigorating the stable battle royale genre with exciting novel ideas. Its global success showcased our ability to bring first-rate games to the world stage. By November 10, we have already sold more than six million copies of Naraka: Bladepoint worldwide in just four months' time, making it one of the top sellers ever on Steam platform. Players in both China and global markets are hailing Naraka: Bladepoint for its thrilling combat experience.
So far, Naraka: Bladepoint has retained an 80% positive review rate on Steam, which naturally leads to excellent user retention and continued user growth. We believe Naraka: Bladepoint will experience the same level of longevity as many other NetEase flagship titles. We work hard to keep our games fresh and plan to continuously introduce more exciting new content, including new modes, heroes, and maps. To add to the enthusiasm, we are also currently working around the clock to extend the game offering to console and mobile platforms. We expect to bring players these exciting versions in the next year. On the heels of the Naraka: Bladepoint zeal, we launched another PC game, Nightmare Breaker, in September. It is an action-based competitive fighting game taking place in a fantasy setting. Players can choose from a variety of roles with unique abilities to battle against dark forces and save the world.
As a game with unique gameplay, Nightmare Breaker further expands our base of PC players. Turning on to the mobile side, our new hit game, Harry Potter: Magic Awakened, has enchanted millions of players, going viral across China. It instantly dominated both top downloads charts and top grossing charts in China following its launch in September. Harry Potter: Magic Awakened conjures a charming wizardry world, touching the heart of millions. The game has attracted a large crowd from young generations across the gamer community. Its elaborate designs are gaining great acclaim, including iconic European retro picture books, an interesting card-based combat infused with abundant competitive gameplay. We hope Harry Potter: Magic Awakened will continue to gain adoration from players in China, maintaining its popularity over the longer term, as many of our other titles do.
We are equally excited for its global launch, calling on the nostalgia of generations of Harry Potter fans. We believe this game has great potential for extensive popularity across the globe. Currently, we are working hard on its localization for other geographies, with plans to formally launch Harry Potter: Magic Awakened in some of the major overseas markets next year. As another title we launched in the domestic market, our space-themed SLG game, Infinite Lagrange, also had a strong start in China in the third quarter. Sci-fi fans were captivated by the game's intense and exciting travel through time and space. In time, we believe Infinite Lagrange will continue to earn respect from even more players, extending our strength in the SLG market through its super immersive space experience.
On the international front, we introduced The Lord of the Rings: Rise to War to the U.S., Europe, and several other overseas markets, making a strong debut at the end of the third quarter. The Lord of the Rings: Rise to War has amassed a huge user base across the globe with engaging and thought-provoking gameplay, as well as the strong appeal of The Lord of the Rings IP. We see great potential for the growth of its users. We expect The Lord of the Rings: Rise to War to behave similarly to our other time-proven SLG title, Invincible, with revenue ramping up gradually and showing an upwards trend over time with a long-lasting life cycle. Complementary to our in-house R&D capabilities, we have also been deepening our overseas footprint through strategic investments and partnerships.
We are looking for talent and teams that complement our R&D skills on a global scale. Over the past few years, we've invested in top teams, including Bungie, Quantic Dream, Second Dinner, and Theorycraft, as well as the recently announced strategic funding in Capybara Games, and acquisition of Grasshopper Manufacture in Japan. With these partnerships, we plan to share our know-how in R&D and operations while gaining new inspiration from the creative minds of these overseas studios, as well as a deeper understanding of overseas users and their preferences. Together, we share the same passion and vision to build the next sensational blockbuster for players worldwide. In addition, we have launched a few game studios in places such as Montreal, Tokyo, and L.A., with an aim to attract the best international talent to further broaden our R&D capabilities.
Moving to our game pipeline, as I mentioned earlier, in the next year, we plan to launch Harry Potter: Magic Awakened in more overseas regions, as well as bringing players console and mobile versions of Naraka: Bladepoint. Very soon, we will be introducing another highly anticipated game, The Showbiz: Dream Chaser, our self-developed showbiz simulation game, catering mainly to emerging female users. This game provides players with a new role-playing experience as an actor or actress in the world of showbiz. Here, players get to live their dreams of fame and explore the exciting life of a performer in the entertainment industry. Highly acclaimed for its distinctive setting, immersive experience, and art design, we believe the Showbiz: Dream Chaser could open up a new genre with great market potential for NetEase. Our pipeline also includes Diablo Immortal and Ghost World Chronicle.
Moving ahead, we will continue to bring players inspiring new games that stand the test of time in China and worldwide. Turning to Youdao, we have made solid progress with our transition to better align Youdao's business with the latest regulatory guidelines, which aim to alleviate excessive academic pressure on Chinese youth. While we are in the process of disposing of our academic after-school tutoring business, we are making excellent progress with our other pillars of future growth, including STEAM courses, adult learning, smart devices, and education digitalization solution. Total net revenues for Youdao in the third quarter were RMB 1.4 billion, representing a 55% growth year-over-year. Revenues from the after-school academic tutoring classes in China's compulsory education system accounts for around 25% of Youdao's total net revenues. In the third quarter, we continued to grow our STEAM course offerings for Youdao Go, Youdao Weiqi.
Its gross billings and user engagement has been growing rapidly since its launch last year. During the quarter, we upgraded its current AI system during the period, giving our students a more efficient platform for practices. Youdao iCode, Youdao Xiaotuling, which prepares children for programming education, launched Python classes in this quarter and became a member of China Computer Federation Programming Trainer Accreditation. Our reach in the adult education space is also expanding as encouraged by the authorities. For example, our extraordinary memory, Feichang Jiyi, course retained its leading position with gross billings approaching RMB 100 million in a single quarter. We also recently announced a collaboration with Amazon Web Services, AWS, to bring its free digital training courses to Chinese users on NetEase Cloud Classroom. Learning devices remain robust with record high revenues of RMB 255 million, a 56% increase year-over-year.
Youdao continuously upgrades and enriches its product offerings to facilitate efficient learning under different scenarios. In the third quarter, collaborating with the People's Education Electronic and Audio-Visual Press, we launched a new version of our award-winning Dictionary Pen containing over 4,000 original sounds from textbooks published by the press. We also rolled out our Youdao Listening Pod in September, which helps improve students' English skills in listening, speaking, and reading through real-time intelligent scoring and pronunciation correction functions. In addition, we are working with local schools experimenting with different digitization solutions, which gives school teachers more automated teaching and grading tools and facilities, enabling more efficient teaching. Now looking at our Cloud Music business, we continue to improve our differentiated music community ecosystem by a product and content enhancement to keep us ahead of the curve. We are now better positioned amid a healthier industry development.
Our top line growth drive solid margins in the third quarter, representing our second consecutive quarter of positive growth margins. Some of our innovations include upgrading our main Cloud Music homepage in August, adding new community features. Users are also enjoying our newly launched Music Gift Box function, which opens the video creation capacity to individual users, allowing them to distribute customized content to friends. In addition, we launched Village Citizenship Card, giving each of our users a personalized ID in Cloud Village, allowing them to feel a fresh sense of belonging. This created a lot of buzz on the social media, further extending our brand influence. In combination with other industry players, we are actively working to secure more high quality content with better ROI, especially following the recent favorable industry changes.
In the third quarter, we completed a direct agreement with Warner Music Group, which means we now have direct digital distribution contracts with all three of the world's largest recording label groups. We are also pleased to see such favorable collaborations with big labels at a more reasonable cost structure, providing us with the flexibility to optimize our content investments using a more disciplined and predictable approach. Meanwhile, we are also completing our major Chinese music library, recently adding several new copyrights, including Modern Sky, one of China's largest independent record labels, and Emperor Entertainment Group, one of the largest entertainment groups in Hong Kong. Our negotiations with some major music labels are close to being finalized, and we expect more to come, further complementing our song library offering. Turning now to Yanxuan.
As NetEase private label consumer brand, Yanxuan continues to build its brand awareness by regularly launching highly popular products via diversified channels. Apart from solid sales growth from external e-commerce channels, we now have seen strong momentum from short video platforms such as Douyin and Kuaishou, with some popular products like bathroom fragrance and coffee presses. Our advanced and differentiated original design products are being very well received by the users and the market. In Q3, we successfully launched several original design series across categories, including clothing, dining and kitchen, home furnishing, and personal hygiene and maternity. We are gaining increasing recognition for excellent design and creative style. In August, we won two prestigious Red Dot Awards for our Dear John Bedding Design and Yanxuan Dunhuang Museum Tea Packaging Design, competing amongst thousands of design submissions that came from more than 60 countries and regions.
These accolades add to NetEase Yanxuan's increasing number of awards and honors, which includes 2021 German iF Design Award, along with many other international awards and recognitions from the design industry. During the Double Eleven promotion, we recorded over RMB 100 million GMV through Taobao and Tmall channels. On JD, we were also the number one brand for daily goods and products. Commensurate with our extensive growth across our businesses, our capacity to give back has grown as well, enabling us to amplify our ability to help our communities. Our resolve towards social responsibility has also been heightened by the immediate needs of those who have fallen victim to natural disasters and public health crisis. Most recently, we were deeply saddened by the destruction and loss felt by those in Shanxi and Henan provinces.
To help these flood-ridden areas ravaged by natural disaster, NetEase has donated over RMB 50 million to Henan and RMB 20 million to Shanxi to support much-needed re-relief efforts and post-disaster reconstruction. The mounting natural disasters tell us that we all must become better custodians of the Earth. As a corporate citizen, NetEase is committed to environmentally responsible action. In addition to our financial contributions towards natural disaster alleviation and restoration, we are leveraging our strengths and resources for environmental protection. We believe games have the power to raise awareness among billions of people across the globe about environmental conservation and restoration. In the third quarter, LifeAfter, one of our flagship titles, joined the second annual Green Game Jam, organized by the UN-facilitated Playing for the Planet Alliance. Player needs to go to the forest in the game to put out the forest fire during the activation.
Our participation in this alliance represents NetEase's increased social responsibility using games as a tool to create environmental awareness to help protect our climate. As we continue to advance our environmental and social pursuits, we are thankful for our growing business that allows us the financial capability and social influence to support these efforts. Moving ahead, we will continue to cultivate our business by exploring more creative practices to enrich our broad content, increase our product exposure, and bring even more diverse and engaging experiences to our users, while leveraging our strengths to enact positive social and environmental change. This concludes William's comments. I will now provide a brief review of our third quarter 2021 financial results. Given the limited time on today's call, I will be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details.
Total net revenues for the third quarter were RMB 22.2 billion, or $3.4 billion, representing a 19% increase year-over-year. Our net revenues from online game services were RMB 15.9 billion, up 15% year-over-year. The year-over-year increase was primarily due to our newly launched games, such as Naraka: Bladepoint and Harry Potter: Magic Awakened, as well as from existing games such as Fantasy Westward Journey and Westward Journey Online II. Net revenues from our mobile games accounted for approximately 69% of the total net revenues from online game services in the third quarter. Youdao's net revenues reached RMB 1.4 billion, up 55% year-over-year, driven by fast growth of both Youdao tutoring services as well as increased sales of intelligent learning devices.
Of the Q3 total revenues, about 25% of that relates to academic subject courses in China's compulsory education system. Net revenues from innovative businesses and others were RMB 4.9 billion for the third quarter of 2021, up 26% year over year, mainly due to increased contribution from NetEase Cloud Music. For Cloud Music, both membership and live streaming revenues maintained solid growth momentum driven by robust paying user expansion. Our total gross profit margin was 53.2% in this quarter with a breakdown as follows. Gross profit margin for our online game services was 64.5%. As a reminder, this number is generally stable with some narrow fluctuations based on the revenue mix of mobile and PC titles, as well as self-developed and licensed games.
Gross profit margin for Youdao was 56.6% compared with 45.9% in the same period of last year. Significant growth was primarily attributable to the improved learning services gross margin due to improved economies of scale and continuous optimization of our faculty compensation structure. Substantial sales growth of the smart learning hardware, such as our Youdao Dictionary Pen 3.0, also contributed to these gains, as this line carries a higher gross margin than other product lines. Gross profit margin for innovative businesses and others was 15.6%, compared with 16.8% last year. The decrease was mainly due to decreased gross profit margin from the games streaming business, CC Live streaming. NetEase Cloud Music, however, enjoyed its second consecutive quarter of positive GP margin.
For the third quarter, total operating expenses were RMB 8 billion or 36% of our total net revenues. Our selling and marketing expenses as a percentage of net revenues were 14.1%, compared with 14.7% in the prior quarter. The quarter-over-quarter decrease was mainly due to decreased marketing spending related to Youdao. R&D expenses were RMB 3.8 billion. The third quarter is our seasonally high quarter for R&D as our new campus hires graduate and commence their career with us. We remain committed to investing in content creation and product development, which is core to our sustainable future growth. The effective tax rate was 19.6% for the third quarter.
As a reminder, the effective tax rate is presented on an accrual basis, and the tax credit deferred from each of our entities at different time periods, depending on applicable policies and our operations. non-GAAP net income attributable to our shareholders for the third quarter totaled RMB 3.9 billion or $599 million. Our non-GAAP basic earnings per ADS were $0.9 or $0.18 per share. Our cash position remains strong. As of September 30th, our total cash and cash equivalents, current and non-current time deposits and short-term investment balance totaled RMB 98 billion, compared with RMB 100 billion as of end of last year.
In accordance with our dividend policy, we are very pleased to report that our board of directors has approved a dividend of $0.045 per share or $0.225 per ADS. Lastly, under the current two-year share repurchase program, approximately 13.5 million ADS has been repurchased as of September 30th, for a total cost of approximately $1.3 billion. Meanwhile, under NetEase Youdao share purchase program, approximately 0.1 million ADS has been purchased for a total cost of $1.8 million as of September end. Thank you for your attention. We would like to open the call to your questions. Operator, please go to Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. For the benefit of all participants on today's call, if you wish to ask your question to the management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. We will now take our first question from Alex Poon from Morgan Stanley, p lease go ahead.
William, Charles, Margaret,
[Non-English Content] My question is, first of all, congratulations on very strong results and game pipeline. My question is regarding Harry Potter overseas release schedule. Do we have more specific timeline for different regions?
For release next year, how's the progress of content localization and community localization etc.? Do we have a revenue expectation for overseas? How is it compared with China revenue? Thank you very much.
Well, thank you Alex. Let me answer your question directly in English. We have a strong pipeline and Harry Potter is one of them. Right now, subject to obviously the progress of localization, we intend to launch Harry Potter to some overseas market as early as first half of next year. Given the huge fan base of the Harry Potter IP worldwide, and particularly encouraged by the very strong performance of Harry Potter in China, we are hopeful that this game would become a worldwide sensation. The publishing right is a commercial arrangement between NetEase and Time Warner. For some of the markets, NetEase will be in charge of publishing, whereby majority of the overseas market publishing will belong to Time Warner.
[Non-English Content ] Charles. Thank you.
Thank you. We will now take our next question from Alicia Yap from Citi. Please go ahead.
William, Charles, Margaret，[Non-English Content] Thank you, management. My question is related to NetEase Cloud Music. So how do you see the overall competitive landscape and also the time spent dilution from the short video platform? Do you worry the leading short video platform like Douyin could enter more aggressively in the online music content, that could actually pose some threat to Cloud Music over time, and also affect the user time spent on Cloud Music. Thank you.
[Non-English Content]
Alicia. Yes, we do observe that at least in short term, short format videos or other general video formats have taken some of the user time spent, not only in music but also in games in other forms of entertainment. What's the major difference between music and video is that music creates that resonance between users. It creates that immersive experience for users. Video, if you watch one after you watch one video, you probably don't want to watch it again. But for music, you tend to want to listen to it over and over again, if it's a piece of music that you love. Second question on potential new entrants to market. Our view is that this is a very open market. We very much welcome others to join and help those independent musicians in China to realize their dream. Thank you.
[Non-English Content ] William。[Non-English Content ] Margaret。
We want to take our next question from Natalie Wu from Haitong International. Please go ahead.
Thank you,[Non-English Content ]Thank you for taking my question and congratulations on a very strong quarter. My question is regarding Naraka: Bladepoint. Just want to get an update of the copy-based sales revenue contribution versus in-game purchase revenue contribution at the point of six million copies worldwide. And also for each part, how should we understand the deferral treatment in terms of the revenue recognition?
Also, if management can share with us, some thoughts on the longevity of this game, that would be great. Thank you.
Okay, Natalie, in interest of time, I'll answer that question directly in English. First, on your question on revenue recognition, both for the copy sales as well as the in-app purchases, we adopt the revenue deferral treatment over an expected lifespan. This is consistent with our revenue recognition treatment of other PC and mobile games. Obviously with the games being launched a few months back, now the gross billings will come more and more from the in-app purchases, which we are very confident that Naraka: Bladepoint, just like many of our other NetEase flagship titles, will have a very time-proven longevity.
We think a combination of stellar global sales record for copies as well as our longevity through operation, through content update, this will create a unique model for the global PC games in terms of proving the longevity and sustainability of the gross billing over the longer term. Hopefully that answers your question.
Yes, very clear. Thank you, Charles.
We want to take our next question from Kenneth Fong from Credit Suisse. Please go ahead.
[Non-English Content] Thank you, management, for taking my question. I have a question on NetEase Cloud Music. Note that we have obtained the full copyright authorization from Emperor Entertainment Group recently, and also the Big Three. How should we think about the pace of signing up new copyrights and the impact and benefit on our content cost and the margin going forward?
Thank you.
[Non-English Content]
Thank you.
Over the last few years, the methods in China have not been perfect, which is why the industry players in the music industry have been paying a much more expensive price to the label companies than anywhere else in the world. As everybody has seen, on July the twenty-fourth, the authorities have given guidelines to certain companies and asked them to give up exclusive rights. I think overall what we would like to see is to be able to pay a fair price to the label companies across the world. We are confident under the right act, under the right direction from authorities, the Chinese music industry will continue to converge into
In the right direction. Secondly, we think that every music company in the country in China should really be focusing on helping independent musicians to create good music, to relate positive messages. As a socially responsible company, NetEase Cloud Music has been making those preparations, and that is our agenda, and that is our goal. Thank you.
Oh. Thank you.
We will now take our next question from Thomas Chong from Jefferies. Please go ahead.
[Non-English Content] Thanks management for taking my questions and congratulations on a very strong set of results. My question is about our M&A strategies as well as the use of cash. In addition, can management share about the forecast in terms of the trend in operating expenses? Thank you.
Thank you, Thomas. I will answer your question directly in English. Firstly, for our M&A strategy, NetEase has always been very focused in our core pillars of businesses, games, online music, online education, private label brand, Yanxuan. Our business development will be concentrated in our major verticals. We obviously prefer for the past two decades or so, we've been growing organically, but we also remain highly active to explore opportunistic opportunities to deploy M&A to further supplement our growth. That's always been our consistent approach towards M&A. In terms of the cash proceeds use, again, we invest most of the cash into ourselves, into our talent acquisition and retention, into our content creation.
It takes patience and it takes commitment. For instance, a major title of next blockbuster game can easily take a few years with big budgets to develop. I think this is also one of our competitive edge that as a major game, a powerhouse that we can afford and we can be determined to focus on what we are really good at and what we really want to create. OPEX trend is, I think NetEase has been listed for over 21 years, and we've always had a very consistent approach into expense management. We focus greatly on ROI return. Given our strong cash balance sheet, we are not shy to spend money. However, we never burn cash for the sake of spending money.
Whenever we spend money in terms of sales and marketing into R&D, it is ultimately ROI-driven that we want to make sure that the money we spend today may not necessarily give us the top-line return within the same quarter, but we will be handsomely rewarded. As such, we expect that we maintain a prudent yet healthy level of sales and marketing. On the R&D front, we are committed to spend more. That is also encouraged by the authorities, and I think that is also what a long-term sustainable technology company should do. Thomas, that's the answer to your question.
Thank you, and congratulations on a strong quarter again.
Thank you, Thomas.
We will now take our next question from Eddie Leung from Bank of America. Please go ahead.
William, Charles, Margaret. [Non-English Content] I will do the translation myself.
Have they put pressure on your pipeline for the overseas game market? We understand that a good game should be popular across different regions, but there are also cultural and regulatory differences. Just wondering besides working with overseas studios, if your Chinese studios will also be involved in game projects designed specifically for the overseas markets? Thank you.
[Non-English Content]
Thank you. The answer comes from Bill Pang. Our China-based team, their main focus is on the Chinese-themed games that they know well for the Chinese-speaking countries. Secondly, we also have been putting a lot of energy and resources in games that's targeted for the global launch. For those games, we need to think about the gameplay, the worldview, and all the details in a global manner. For those type of games, it's typically joint developed by our China-based team and some of our overseas games, for example, Montreal.
Thirdly, we also have games that's been developed solely by the overseas game team, who will be working on games that inspire them and are targeted in the markets that they know the most well in. All together, we hope to introduce to the global audience more and more exciting games to play. Thank you.
Thank you.
We will now take our next question from Jialong Shi from Nomura Securities. Please go ahead.
William、Charles、Margaret [Non-English Content]
I will translate myself. My question is about Metaverse, which is a very hot new area these days. Lots of companies are planning to invest heavily in this field. Can management share with us your vision on Metaverse and what are the potential growth opportunities it may bring to the online gaming industry? And what are your strategies to tap this opportunity? Thank you.
[Non-English Content]
Okay, yeah, Jialong Shi, it's the Metaverse is indeed the new buzzword everywhere today. But on the other hand, I think nobody has actually had firsthand experience in what it is. But that said, we are technologically ready. You know, we know how to accumulate the relevant know-how, the relevant skill sets when that day comes. So I think when that day eventually comes, we'll probably be one of the fastest runner in the Metaverse space. Thank you, Jialong Shi.
At this time, I would like to 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.