Good day, and welcome to the NetEase 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Margaret Shee, 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 the 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 its discussion. A general discussion of the risk factor that could affect NetEase's business and financial results is included in certain filings of with the Securities and Exchange Commission, including its annual report on Form 20 F and the announcement and filings on the website of the Hong Kong Stock Exchange. The company does not undertake any obligation to update this forward looking information, except as by law. During today's call, management will also 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 21 Q2 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 the NetEase corporate website at ir.netease.com. Joining us today on the call from NetSuite's senior management team is Mr. William Ding, our Chief Executive Officer and Mr.
Charles Yan, our Chief Financial Officer. I will now turn the call over to Charles, who will read the prepared remarks on behalf of William.
Thank you, Margaret, and thank you everyone for participating in today's call. Before we begin, I would like to remind everyone that all percentages are calculated based on rmb. Our gross momentum continued in the 2nd quarter with total net revenues of RMB20.5 billion, representing an increase of 13% year over year. For our online games, in the Q2, total revenue was RMB14.5 billion, Up 5% year over year despite a high comparable base in 2020. Our PC and mobile games remain our dual growth engines for online games.
On the PC side, Naraka Bladepoint, Our next generation Battle Royale game is one of the hottest game in the market. 1st launched in China in July, Followed by the global launch in August 12, Narrative: Bladepoint quickly became the best weekly seller on Steam, Winning the enthusiasm of Chinese and overseas players and marking a new breakthrough for us in the global market. With captivating gameplay and state of the art graphics, Narrative Bladepoint's debut was very well received Among hard core players in Western markets, we will continue this positive trend by introducing more content From different cultures around the world and start to work on other formats of the game, including console game and mobile version as we look to Hacking to these large market opportunities in China and abroad, our legacy flagship PC titles, Particularly, SWJ, New Westwood Journey Online and Tianxia continue to show remarkable longevity With strong year over year growth after nearly 2 decades of operations, we have created a strong and sophisticated social community Within each game and we continue to keep our users engaged with regular introductions of high quality expansion packs. This type of longevity has also been extended to the mobile side, Fantasy Westwood Journey mobile game, Westwood Journey Online mobile game and their spin offs continue to demonstrate strong performances during the Q2.
Touching on some highlights from a few other mobile games this quarter, LifeAfter remains an iconic title Holding strong appeal with young users, we introduced a major and new expansion pack, The Revenant in August, Offering players a new category of characters, new maps and more gameplay options, These innovations allow our gamers to explore the doomsday world in an unprecedented and exciting way, Bringing live after back to the Cop of China's iOS download chart. Onmyoji Arena, Our mobile game based on our proprietary OMIOSHI IP has progressively built strong appeal Among the young generation of players, leveraging our strength in art design, our Miyoji Arena has impressed users with its widely acclaimed spinoff across various themes, including Chinese Traditional culture, cyberpunk and Japanese anime, some of the skin designs have even become high trending topics, bringing us a continuous stream of new players. Amiyoji, the original flagship Game is another NetEase game that continues to shine and frequently lead China's iOS top growth in China. During the Q2, we rolled out a new version that greatly enriched the Amyouji world. The update features a fascinating new storyline and 2 popular new characters that thrilled our player community.
Again, fortifying Amioji's standing as a top AGC theme game in China. During the Q2 and more recently, we have also expanded our offerings in new genres as we continue to We launched Ace Racer in July, our very first self developed racing game, Leveraging our industry leading art and graphic capabilities, Ace Racer features track designs based on real urban landscapes Chinese cities such as Hangzhou and Chongqing. Shortly after its release, ACE reset top the iOS download chart And reached the top 10 on China's iOS Growth in China. 2 weeks ago, Infinite League Runge, Our space themed SLG game made a strong debut in China climbing up into a top 3 3rd top 30 title on the iOS grossing chart in less than a week. As a new game of this genre, We introduced to the Chinese market as invisible.
We hope Infinite Lagrange will also earn the respect From playing players and a good share of XLG market through a content innovation, Other new games that we recently launched in China include Pokemon Fest, Marvel Super War. These games further enrich our dynamic domestic game portfolio genres and many of them quickly reached the top of the iOS download chart following their releases. Moving to overseas market, we are very excited to see our games keeps reaching new milestones outside of China. Over 3 years ago, Knives Out made its name in and became one of the highest grossing games ever made by a Chinese game developer to go overseas. Nai Zhao has held its leading position and continues to take its place in the upper echelons of Japan's iOS top growth in China, particularly when following various collaborations with well known local Japanese IPs such as EVA and One Punch.
Today, Naraka Blade Point has emerged as our next breakthrough on the international stage, which further boosts our global expansion efforts By opening the door to mainstream Western market, on steam alone, narrative Blade Point has achieved the milestone of 100,000 peak concurrent users and the number will be even higher when we include players to play the game on our official channels. As one of our global initiatives, Naraka Blacepoint Start off with Chinese martial art culture and then substantially broaden this concept to Eastern fantasy by introducing universal elements more familiar to Western players such as new characters like Persian warriors and new weapons such as muskets and talents. These elaborate designs have greatly helped build strong mindshare amongst hardcore player community in the Western market. Furthermore, for Harry Potter: Magic Awakened, One of the market's most anticipated titles, we closed the final round of beta testing in June with very encouraging user feedback. It is now set for launch on September 9 across Chinese mainland, Hong Kong, Macau and Taiwan and will be successively launched to various other regions globally.
We look forward to seeing eager global players become Hogwarts freshmen, meet diversified wizard partners, Learn spells, gain magic knowledge and experience the amazing life of wizardry. The Lord of the Rings: Rise to War is another exciting title coming soon. Pre registration for this game has been available Since August 25, with engaging and thought provoking gameplay, as well as a strong appeal The Lord of the Rings IP, we see great potential for this release and look forward to impressing players with its global launch, which is now confirmed to be on September 23. For Diablo Immortal, In July, we had our 1st beta testing in China, and we are very excited with the strong feedback from the user community. We will keep working to bring our worldwide players engaging game experiences.
The list goes on. We have a handful of other exciting titles in our pipeline as well. A few other Pre announced names include Nightmare Breaker, a PC game and Ghost World Chronicle. Our mission to create world class games for players has never wavered. We are relentlessly scaling new high in terms of game development technology, our game engine is one of the key assets Within our R and D infrastructure, recently, we've made a significant step forward with 1 of our flagship game engine, game engine, Messiah, in which we are pleased to have implemented the world's first high quality, Real time global illumination algorithm on mobile devices.
This is a major breakthrough with our in house engine technology, helping us to greatly speed up the pace of our artistic development and bringing world class visual effects into our games. Turning to Youdao, our net revenues in the second quarter were RMB1.3 billion, representing a Youdao is and has always been committed to enhancing its competitiveness for the young generations through advanced technology. In line with evolving national guidelines, our aim is to explore new strategic opportunities in non academic businesses such as steam courses, adult learning and smart learning hardware devices. In the second We further expanded our steam cost offering. For example, net revenues from Youdao Go, Youdao Weiqi increased by nearly 180% quarter over quarter and we launched more advanced level courses To further meet our users growing learning needs, back in March, with an eye towards the growth We established a dedicated division on adult education By integrating our Youdao premium courses for adults, China University MOOC and NetEase Cloud Classroom.
In terms of premium causes for adults, its net revenues accounted for around 22% of total net revenues in the 2nd quarter. Meanwhile, we launched an upgraded version of our practical English course to provide adult users with more immersive and In addition, 137 courses on the China University MOOC platform has been certified by the Ministry of Education as recommended courses for academic studies and continued career development. Learning devices remain another major revenue source for Youdao with a mission to improve learning efficiency. This segment generated net revenues of RMB206 1,000,000 in the 2nd quarter, increasing 139% year over year. We also introduced a new version of our dictionary pen, Youdao Dictionary Pan K3 designed to be more friendly to elementary school and pre k More affordable and supportive of learning arithmetic in addition to English and Chinese.
With that said, we expect Youdao to be somewhat less affected by the recent regulations as it has other high growth businesses In addition to existing K-twelve academic after school tutoring classes, whose revenues accounted for around 41% of Youdao's total revenue in the 2nd quarter. Looking ahead, Youdao will continue to strictly comply with national guidelines and we are confident in Youdao's future development as Youdao has one of the most talented R and D and teaching skill sets in the industry. Looking at our cloud music business, we have successfully maintained our user growth momentum over the past quarters Despite the industry wide slowdown, while DAU over MAU ratio remained above 30% in the 2nd quarter, Owning to our advanced social networking functions and promotions like 88 VIP program in the 2nd quarter, Our membership paying ratio almost doubled year over year. In terms of margin, we continue to see improvement With our cloud music business as it increases its scale, in the past quarter, MedEase Cloud Music achieved positive gross margin for the first time ever, marking a new milestone with our music operations. We believe that our ongoing top line growth in this segment will position us to continue driving margin expansion over time.
We keep our users engaged through constant innovation and product improvement. Earlier this year, we gave our prize winning function, listen together, another new touch, allowing users to listen to music together, not only with friends, but also with other users, providing additional social networking opportunities. Furthermore, our newly launched function playlist Sharing has been very well received by our users, allowing multiple users to co create and manage playlist at the same time. On the content side, we are pleased to see the changes that the music industry is currently undergoing, which paves the way for strong and sustainable growth over the long term. We hope to work together with other industry players to ensure quality music is accessible to a wider audience at a more reasonable cost, which will ultimately benefit music lovers and the industry as a whole.
Now turning to Yanxuan. As our private label consumer brand, we continue to focus on building Yanxuan's brand equity. Primarily, we are introducing highly popular products with proprietary award winning product designs and strictly controls product quality. In April, Yanxuan Healthcare Theory and Mooncake Gift Box won the German IF Design Award 2021. Working with major channels including Taobao, Tmall and JD, Our recognition from the broader public is actively growing.
During the June 18 promotion period, Yanxuan topped JV's household daily sales list and our cat food category recorded the highest domestic cat sales on both Tmall and JD for the 1st day of the June 18 promotion. In June of this year, we published our 2020 ESG report, outlining our ESG policy, Achievements and improvements we made throughout the year. We started our ESG effort as early as 2018 and issued our first ESG report last year. As a company deeply committed with social responsibilities, We will be keeping our effort to being a responsible public company and we will continue to pursue the ESG initiatives And we'll forge ahead with our strength to create greater value for our stakeholders and the community at large. Finally, during the quarter, we celebrated our 24th anniversary.
As we review our past and look toward our future, We know innovation is key. Innovation has been at the heart of our journey and will continue to be the driver for our future growth. It empowers us to create amazing products and services that are adored by 100 of millions of people. As we move forward, we will be dedicating even more time and resources to identifying and training talent and fostering innovation that creates a more promising and exciting future in each of the verticals we operate. This concludes William's comments.
I will now provide a very brief review of our Q2 2021 financial results. Given the limited time of 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 2nd quarter were RMB RMB20.5 billion or USD3.2 billion, representing a 13% increase year over year. Our net revenue from online gaming services were RMB14.5 billion, up 5% year over year Despite of last year's high base benchmark, the year over year increase was primarily due to newly launched games, Revelation mobile game and existing games such as Fantasy Westward Journey Online.
Net revenues from our mobile games accounted for roughly 72% of total revenue and overseas revenue accounted for roughly 10% of total revenue in the 2nd quarter. Youdao's net revenues reached RMB1.3 billion, up 108% year over year, driven by fast growth of both Youdao online courses and the sale of intelligent learning devices. Net revenues from Innovative Businesses and Others were RMB4.7 billion for the Q2, up 26% year over year, mainly due to the increased contribution from NetEase Cloud Music. For Cloud Music, both membership and Streaming revenues maintained solid growth momentum driven by robust paying user expansion. Overall, total gross profit margin was 54.5% with a breakdown as follows: Gross profit margin for gaming services was 66.1%.
As a reminder, This number is generally stable with some narrow fluctuations based on the revenue mix of PC versus mobile games as well as self developed and licensed games. Gross margin for Youdao was 52.3% compared with 45.2% in the same period of last year. The significant year over year growth was mainly attributable to the improved learning services gross margin, which was due to improved economies of scale and continuous optimization of its faculty compensation structure. Substantial sales growth of smart learning hardware such as Youdao Dictionary PEN 3.0 also contributed to these gains As this line carries a higher GP margin than other product lines, gross profit margin For Innovative Businesses and Others was 19.3% compared with 18.5% last year. The improvement was mostly driven by NetEase Cloud Music as its gross margin turned positive for the first time during the quarter.
For the Q2, total operating expenses were RMB7.4 billion or 36% of our total net revenue. Our selling and marketing expenses as a percentage of net revenue were 14.7%. If we exclude Youdao, our selling and marketing expenses as a percentage of net revenue were 10.6% compared with 10.7% in the Q2 of last year. R and D expenses were RMB RMB3.4 billion, largely stable from the previous quarter. We remain committed to investing in content creation and product development, which is core to our revenue growth.
As a percentage of net revenue, R and D expenses accounted for 16.6% compared with 14.9% in the previous quarter. The effective tax rate was 24.3 percent for the 2nd quarter. As a reminder, the effective tax rate is presented on accrual basis and the tax credit defer 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 Q2 totaled RMB4.2 billion or US655 million dollars Our non GAAP basic earnings per ADS were US0.89 dollars or 0.20 per share. Our cash position remains strong. As of June 30, our total cash and cash equivalents, Current and non current time deposits and short term investment balance totaled RMB1.8 billion compared with RMB100 1,000,000,000 as of the 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 US0.0 for $8 per share or US0.24 dollars per ADS. Lastly, Under the share repurchase program approved by our Board on February 25, approximately 4,600,000 ADS has been repurchased as of June 30 for a total cost of approximately US0.5 billion dollars Today, our Board announced the approval of amendment to further increase the total authorized repurchase time amount From the previously approved US2 $1,000,000,000 to a new tax amount of US3 $1,000,000,000 Additionally, our Board has also approved a share purchase program of up to US50 $1,000,000 of Youdao's outstanding ADS Thank you for your attention. We would like now to open the call to your questions. Operator, please go to Q and A.
Thank Call. Please limit your questions to 1 at a time. If you wish to have follow-up questions, please rejoin the queue. And we will now take the first question from Alex Yao from JPMorgan. Please go ahead.
Thank you, management, for taking my question. I have a question on King Nature in game indulgence and the new policy introduction. Can you share with us your policies on teenager in game indulgence Protection. And also how should we think about the impact from the recently introduced new policy that Miners cannot play game during the weekend. They can only play game at A specific time, I.
E. 8 p. M. To 9 p. M.
From Friday to Sunday, what's How should we think about the financial and the operational impact to your gaming business? Thank you.
Yes. I'm sure many of you have read our news about the new anti Egyptian protection Measures that the government has issued on the teenagers' underage kids. There are some very stringent requirements such as Only 3 hours a week is allowed to play out on games. As one of the largest gaming companies in China, We're in full support of this decision. Over the past years, we have noticed there are certain games around the industry that have had a negative impact on children.
And then so we think that the new requirements, the new regulations will to keep teenagers away from games for as far as possible. So we want companies in this industry together to support this regulation requirement. And also financially, we would like to share with you that less than 1% of our revenue actually come from underaged children. Alex, just to clarify, when we say less than 1%,
We are defining minus as age below 18. Different companies might have disclosed different But according to China law minus Wei Chen Yanren's definition is for people below the age of 18. For that category of population, it accounts for less than 1% of our total games on gross billing financial implications.
Thank you, Alex.
And we will now take our next question from Kenneth Fung from Credit Suisse. Please go ahead.
Thank you for taking my question. I have two questions. One is the new regulation for online game news that this can limit the exposure for the underage, while the Short term financial impact will be limited. How should we think about player cultivation going forward? And will it limit the longer term or medium term potential for film growth?
The second question is with no more exclusivity for the music copyright, How should we think about our direction, pace as well as the investment in the music copyright and content going forward? Thank you.
Yes. Kenneth, to answer your first question, we think that the healthy wholesome growth of our Children is a top priority for the nation, for the government. And as a company, we need to think About our self responsibility, we need to think about, think long term and for the greatness of the society. So we are interested in making positive high quality gains that appeals to adults and appeal to audience around the globe. We are not as interested in making profit in through minus.
And to answer your second question, As you might have just noticed that TME has just announced their made announcement about relinquishing their exclusivity, And we certainly hope that is a sincere announcement from PME. It's not a decision. They're not going to be saying one thing and doing another. Here, we want to appeal take the opportunity to appeal to the label companies and every stakeholder and partners in the industry to co create a wholesome, balanced news industry and net ease with ultimate I would also like to add that we are very thankful for The right decision that the regulatory bodies have made relating to the antitrust regulations and policy. The antitrust policy sends a very clear and positive and a very exciting signal to the entire industry, which is widely anticipated and warmly welcomed by users.
Thank you. Thank you, Kenneth. Next question.
And We will now take the next question from Alex Poon from Morgan Stanley. Please go ahead.
I translate myself. My question is related to the strong game pipeline in the second half, including Lord of the Rings, ZARAKA, Blade Point, Harry Potter and Nightmare Breaker, etcetera. All of these games are very Strong titles, how should we think about the game revenue growth and the contribution from these games, especially starting in Q4? Thank you very much.
Thank you, Alex. I'll answer your question directly in English. As you may know, narrative Blade Point was Already launched in the summer and we have made another major breakthrough on Steam platform. This again, this is not only a new genre game, but also a new achievement. I think very excited to witness.
Next month is going to be busy. Harry Potter, Lord of the Rings And a few other games are all set to launch in September with a few others In the later half of this year, the one thing though I want to reiterate is that NetEase here at NetEase, we always emphasize On the quality of the games, the longevity of the games and the user appreciation And receptivity of these games, we are not so much interested in the financial ups and downs in one particular quarter or 2, But rather we are very confident that our relentless effort in launching these new games will continue to diversify Our game genre offerings continue to advance our global expansion initiatives As well as gaining more market share across different categories of the games. And to echo what William commented earlier on, we really think the open secret of winning the heart
And we will now take the next question from Natalie Wu from Haitong International. Please go ahead.
Thanks, Ms. Ding, Charles and Marguerite for taking my question and congratulations on another solid quarter. My question is regarding the game Norica. So just wondering what's management's expectation for the game Regarding the revenue model, what kind of revenue will come What percentage of the revenue will come from the copy based and item based We have remodeled. And also, how should we see the longevity of this game?
And will there be more Derivative version of other genre of Naraco coming out in the future. And also, will this success
Thank you. Thank you, Natalie. The answer comes from Jupong. Yes, so the game right now we adopt a mix of Copy based sales and also in game purchase. As of today, the items the in game items that We created have been very attractive to our players, which have caused a very Encouraging sale of in game items.
So today, our in game purchases actually contribute more than the copy based sales. Going forward, we'll continue to create more in game in terms of functions that appeals to our worldwide users. In terms of longevity, we have long term plan for this game. Today, we actually host we have ranged a number of very exciting esports campaigns In China and abroad, we will continue to introduce and launch new characters, new gameplays to keep the content interesting to our users. So we are very confident with the longevity of this game.
In terms of the strategy going on to different formats of Entertainment. Well, we are actually going to launch this game on consoles around Christmas time, and We also have a team working on the mobile version of this game. And at the same time, we have we host Esports campaigns around the world to keep creating viral to keep the interest high around the game and that we keep creating viral discussions of So that's so we have a very holistic plan for Marika Blade Point. Thank you.
And Natalie, to your last part of the question, whether there is any inspiration for our overall game strategy, I think with the breakthrough achieved by narrative play point, it gives us extra confidence in terms of diversification, Not only in game genres, but also in different distribution platforms. For instance, Narrator: Blade Point is a very successful A game that has tapped into the global, particularly the Western gamer community via Steam platform. I think that gives us more experience and know how of developing and publishing future games, Especially towards the global market. Okay. Operator, next question, please.
Thank you. We will now take our next question from Thomas Chong from Jefferies. Please go ahead.
My first Question is about Harry Potter. Given the game is going to be launched worldwide, just want to get a sense about our Expectation for this game in the domestic market versus the overseas market, any Color about our marketing strategies, the way that we attract users, any strategy Can be shared, I would be grateful. And then my second question is about the recent regulatory environment. Given the government is having a stringent measure about the fandom culture in China And more regulations on the live streaming these days. Just want to get a sense about how the fandom culture would
Thank you, Thomas. I will answer your first question on Harry Potter directly in English And William will comment on your second question. For Harry Potter, it is set to launch in Greater China area On the 9th September, which is about 9 days from now, highly anticipated. Given the strong popularity and global appealness of the Harry Potter IP, we are very confident That this high quality game will be a huge success, Both domestically and in the international market, with this game launch we are hopeful that it can further reinforce The NetEase game brand image amongst the global gamer community. That's the answer to your first question.
Yes. So We are actually in support of the recent regulations on the entertainment industry. For NetEase Cloud Music, We think the impact for us is somewhat minimal because for us the priority, the strategic goal is about creating original music. So our focus is about helping independent musicians to create music and those are talented individuals in China. Thank you.
Okay. Operator, next question please. Thank you, Thomas.
Thank you. We will now take the next question from Eddy Lang from Bank of America Merrill Lynch. Please go ahead.
We have two questions. The first one is on the tax rate. We understand that Certain Internet companies couldn't get the approval for to enjoy a preferential tax rate of key software subsidiaries recently. So just I wonder if net is would see any impact to the tax rate? And then secondly, regarding the overseas game markets, should we expect NetEase to set up more overseas Studios?
And if so, any more color on the future plan? Thank you.
Thank you, Eddie. Well, in the interest of time, let me answer your two questions directly in English. Firstly, on the tax rate, this is in fact not a new development In our 20 F issued earlier this year, we have already disclosed that there will be certain tax Policy changes as announced by the Tax Bureau earlier this year, certain Industries, including e commerce, games, etcetera, are no longer eligible for the key software Qualification, as a result, we can no longer enjoy the 10% preferential tax rate. However, specifically for NetEase for game businesses, we are still entitled To the high-tech qualification, which grants us a 15% preferential tax rate, Net net, we believe these tax rate changes will have roughly speaking about 3% implication to us. So 2020, our overall effective tax Rate is around 19%.
I think this year for 2021, the At full year level, our tax rate will be somewhere in the low 20s Secondly, for our overseas game expansion, we've previously announced our ambition To achieve at least 30% of our game gross billing contributed From the overseas market in 3 to 5 years' time, we are very well on track to achieve that. Narratively, point is Another big exciting achievement that we have achieved this year. For the overseas market, we are now very setting up overseas studios in Canada, in Japan and in Europe. The format of our collaboration or rather the format or strategies for us to tap into the international market can be very diversified, doesn't necessarily require us to set up our own standalone studios. We are also very active In collaborating with the world class developers around the world, supplementing each other's strengths, In some cases, jointly developed or co developed hit games that's targeting for the global gamer community.
So I think NetEase remains very open minded, very practical and very, very active in this regard. Thank you, Eddie. Operator, in the interest of time, let us That concludes the call today. Thank you all very much.
Maybe I'll just finish with the concluding remarks. Thank you once again for joining us today. If you have any questions, please feel free to contact us directly for TCG Investor Relations. Have a great day. Thank you.
Thank you.
And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.