Good day, and welcome to the NetEase 2021 First 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 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 this discussion. A general discussion of the Risk factors that could cause net interest 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 announcement in 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 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 2021 Firstly, 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 NetSu Senior Management is Mr. William Ding, our Chief Executive Officer and Mr. Charles Yang, 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 based on renminbi. We began the year with a record quarter exceeding RMB20 1,000,000,000 in revenue for the first time And net income attributable to the company's shareholders increased 25% year over year to RMB4.4 billion. Our games business also reached a new record of RMB15 RMB15 1,000,000,000 in net revenues, up 11% year over year in the Q1 despite a high comparable base last year. In Q1, our flagship titles continued to demonstrate strong growth after nearly 2 decades of operation With revenues from Fantasy Westward Journey Online and Westward Journey Online Mobile all growing at double digit rates year over year.
Tianxia 3 is another exemplary case. It is one of the rare instances where a legacy PC MMORPG game Has regained growth after reaching maturity, leveraging our growing knowledge and more recent successes in both MMO and non MMO genres, we added some casual flavors to this legacy MMORPG, Giving our players a fresh feel and creating new content for users to consume and enjoy. We also crafted an in game event at the end of last year, which quickly generated strong interest and discussions In the Players Circle, leading to a large inflow of returning users who rejoined the game. Other games in the spotlight during the Q1 included Life After, Aomioji, Identity V and Invincible. Life After has remained an iconic title with strong appeal among young users.
The new collaboration with the movie Godzilla versus Kong in the Q1 was well received by players As they thought of doomsday monsters, Tom Yooji also showed remarkable longevity remaining at the forefront of China's iOS During the Q1, we rolled out a highly anticipated IP collaboration with Demon Slayer, A classic Japanese anime, further strengthening of Onmyoji's position as a top ACG game in China. Celebrating its 3rd year anniversary in April, Identity V continues to draw the attention of young players, Bringing them a thrilling competitive experience with a distinctive gothic art style. Between January to May, We hosted our annual global championship tournament, Call of the Abyss, with its finale being set in Hangzhou, Attracting close to 2,000,000 game players globally to participate in this event. InviXible remained steady in the Q1 With strong user engagement, holding unwavering loyalty from its fan community, despite numerous INVincible live games Hoping up in the market, InvinciBull has proven to be a trend setting pioneer in this game genre. This also echoes well with our corporate DNA in product innovation.
In terms of new games, We have launched a few new ones since the beginning of this year. We started with Revelation Mobile game in January. As we discussed last quarter, this is our self developed RPG game based on our flagship PC title, Capturing both returning fans and brand new MMO players. We then launched Elysium of Legends in March, A self developed card RPG game that brings together legendary figures in Chinese history. Shortly after these releases, both games reached the top of the iOS download chart in China.
On the license front, In January, we introduced Yu Gi Oh! Dual link, a competitive card game based on the Talgic IP that we licensed from Konami and more recently in May, we brought the highly anticipated casual game Pokemon Quest To our domestic audience, featuring cube shaped Pokemon, the game invites players to befriend and create their Pokemon team To tap and battle through Tumble Cube Island. Shortly after its release, Pokemon Quest quickly climbed to the top of the iOS download Charting China. In overseas market, we continued our efforts to expand our offerings, while maintaining steady operation of our existing titles. Knives Out once again reached the number one spot on Japan's iOS top grossing chart a couple of times during the Q1.
Following a collaboration with well known Japanese IP, The Promised Neverland in February, Identity V was also crowned number 2 on Japan's iOS POP Pros in Chart. The success of these games Has helped us to gain a much better understanding of Japanese users and their preferences, allowing us to be more sophisticated In localization efforts, for instance, we found that Japanese users greatly value the sense of occasion. Users want to feel the grandness and ceremonial appeal in each game event. Take Knives Out as an example. Nighthouse Day, the widely anticipated annual celebration officially recognized by the Japanese Anniversary Association since 2019 marks the start of the game's annual carnival on May 5, Which includes the biggest Esports Championship tournament in Japan as well as other exciting activities.
We invited all of our users, brought millions of them online on that day, and the event has become one of the top trending topics And recognition already in the overseas markets today, we are hopeful that our upcoming releases We'll bring the next generation of games to the world stage and further expand our footprint in more regions, particularly in the U. S. And Europe. In April, we launched Infinite Lagrange in Europe. Similar to Invincible, we expect Infinite Lagrange, our first globally targeted SLG game To ramp up its revenue gradually and show a similar upward trend and longevity with time.
This game will be next available in the U. S. And other overseas markets over the coming months. As our very first next gen SLG, We have been under development for a number of years. We hope that this title will extend our success in SLG Into overseas market.
The highly anticipated Harry Potter: Magic Awakened is also on track to meet eager audiences. We are thrilled to bring this game to wizard fans soon, taking players around the world on a magical adventure. Earlier this month, we announced that we joined hands with our Polish partner, 11 Bit Studios, To develop and publish the mobile version of the world renowned IP, Frostpunk, globally. Later this year, players will be able to access this elaborately crafted post a couple of lips Social survival game on mobile platforms. In addition, we have a handful of other exciting titles in our pipeline.
Adding to those we just mentioned, our pipeline also includes The Lord of the Rings, Rise to War, Nightmare Breaker, Diablo Immortal and Ghost World Chronicle. For more details on these titles, Please join our annual product launch event on May 20, 2 days later, which will be hosted online this year and will have a dedicated English section for our global game players and business partners for the first time. We are proud of our world class R and D infrastructure, which has been pivotal in maintaining a competitive edge in this market And delivering long term value. The most important element is our people. With that in mind, We encourage our talents to share and exchange ideas with industry veterans worldwide.
We just hosted the 2021 NetEase Game Developers Summit in April with a 3 day forum covering topics like game design, art and technology. The event brought together our internal developers as well as external industry partners, including gurus in the Western games And developers community to share their in-depth game development philosophies and experiences, Sparking wide attention from developers, game players and many others in the industry. Now turning to our Education business. Youdao achieved strong and sustainable growth in the Q1. Total net revenues from Youdao increased by 147 And year over year to RMB1.3 billion and overall gross margin significantly improved To 57%, reaching a new record since its IPO back in 2019.
Gross billings from Youdao's K-twelve segment was up 130% year over year despite the high base last year due to the outbreak of COVID-nineteen. K-twelve paid student enrollment doubled year over year to 306 1,000. In order to match the growing scale and ensure the optimum teaching quality, we continued to strengthen our Servicing team, which comprises 197 instructors and over 4,000 well trained tutors by the end of the Q1. Given that different syllabus is used in different parts of China, One of the most important agenda for us is to ensure localized content for courses we offer. We took our junior high school Chinese as the pilot case.
During the past spring semester, we launched up to 31 versions of junior High School Chinese meeting the needs of students in 31 different provinces. The localized courses Has turned out to be very effective and very welcomed by our students. Net revenue of Youdao's learning devices Also continued a year over year growth of 2 80%. In March, we introduced a Dictionary 10 3.0 Pro version, further supporting bilingual translation of Chinese and Korean languages to meet the demand of a wider range of language learners. Youdao also further integrated the functions of our dictionary pen and the Youdao dictionary app, Making the offline, online transition even more efficient and effortless.
Looking ahead into 2021, We are confident that Youdao will continue to grow its position as a leading provider of intelligent learning services and products And our diversified business models, products and technologies will give us the upper hand in the evolving After School Tutoring and EdTech Market. For our Cloud Music business, we have come a long way, Celebrating its 8th year anniversary last month, we are proud to say that we have sought and created new possibilities for music in this digital era. Our platform, which features a vast and highly interactive content community, Has become a widely recognized household name that is seen as a cultural emblem amongst particularly the post-90s or younger generation, With a large base of young music lovers on our platform, we are more willing to explore and discover music. We have been the creative outlet and a natural stage for independent musicians to shine. We strongly believe independent artists A crucial driving force for the music industry and our platform uniquely positions us to nurture them in the modern era.
In April, we held our annual signature event, the Indie Music Artist Ceremony for the 3rd time, Celebrating the past year of their music and encouraging independent musicians to continue creating their remarkable work. In addition to our original music, we want to continue bringing together a library of new, unique And influential music pieces from around the world and providing music fans with the ultimate audio experience. We have just announced a direct digital distribution partnership with Sony Music Entertainment, 1 of the world's 3 largest recording companies following UMG, this is the 2nd direct licensing arrangement We have signed with the big three labels and we are proud to see these positive changes happening in the music industry in China. Moving on to Yanshan. As a private label consumer brand, we further strengthened our brand appeal among the young middle Plus, developing products that revolve around their needs, centered around this notion and along with Yanxuan's 5th Year anniversary, we developed a new value proposition, live the way you like through a promotion intended to express the voice Of the new middle class.
This campaign resonated strongly with its intended audience, starting lively discussions. During the last year, we rolled out a range of highly popular Yanxuan products, which have sold well since their introduction. Our strategy to incubate more hit products has paved a smooth path for us to strengthen Yanxuan's product portfolio. We recently introduced a number of new star products, such as our proprietary laundry pods, wireless earbuds, Bathroom fragrance, which quickly became top selling products on multiple platforms and some of the most recognized products In those emerging categories, we see potential in many of our proprietary products and we are working to introduce a greater number Of Signature Products this year. Additionally, we continue to optimize our operating efficiency in the Q1.
During the quarter, both our inventory turnover days and the fulfillment efficiency were improving. In summary, we are off to a strong start in 2021. Our game portfolio is getting ready for exciting new titles For both domestic and global players, while our existing games continue to hold strong, our online education, Music and e Commerce businesses are each on solid footing as well. Premium and diverse content creation Across our businesses continue to be our primary objective as we move forward, entering a new phase of growth And generating additional value for all of our users and stakeholders. This concludes William's comments.
I will now provide a very brief overview of our Q1 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 Q1 were RMB20.5 billion are US3.1 billion dollars representing a 20% increase year over year. Our net revenues from online game services RMB15 1,000,000,000, up 11% year over year.
This year over year increase was Primarily due to increased revenue contribution from newly launched Revelation mobile game, Fantasy Westward Journey H5, As well as PC games such as Fantasy Westwood Journey Online. Net revenues from our mobile games Accounted for approximately 73% of net revenues from online game services in the Q1. Youdao's net revenues reached RMB1.3 billion, up 148% year over year, Driven by fast growth of both its online courses and sales of intelligent learning devices. Net revenues from Innovative Businesses and Others were RMB4.2 billion for the Q1, Up 40% year over year, mainly due to increased contribution from NetEase Cloud Music as well as Yanshan and Our total gross profit margin was 53.9% in the 1st quarter with a breakdown as follows. GP margin for our online game services was 64.6%.
As a reminder, this number is generally stable with some narrow fluctuation based on the revenue mix of mobile and PC titles as well as self developed and licensed games. Gross margin for Youdao was 57.3 percent compared with 43.5% in the same period of last year. The significant growth Was primarily attributable to the improved gross margin from Learning Services due to the economies of scale And the continuous optimization actually of its cost structure. It is also due to the substantial sales growth Of the smart learning hardware such as Youdao Dictionary 10, which carries a higher gross margin than other hardware product lines. GP margin for Innovative Businesses and Others was 14.4% compared with 15.8% in Q1 of last year.
While the margins for NetEase Cloud Music and Yanxuan have improved year over year significantly, The impact was partially offset by the decrease in GP margin from the rest of the business segments in this line. For the Q1, total operating expenses were RMB6.8 billion, representing 30 3% of the total net revenues. Our selling and marketing expenses as a percentage of net revenue were 13.5% In the quarter, excluding Youdao, our selling and marketing expenses as a percentage of net revenue were below 10%, lower than the previous quarter. As a reminder, fluctuation in selling and marketing as a percentage of revenue Largely depends on the number of new games launches in a particular quarter, the genres they are in and the most suitable marketing plans Adopted for each new game launches. R and D expenses were RMB3.1 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 were 14.9% compared with 15.3% last quarter. Effective tax rate in this quarter was 22%. The effective tax rate represents certain estimates by the company Regarding the tax obligations and benefits applicable to it in each quarter. Non GAAP net income Attributable to our shareholders for the Q1 totaled RMB5.1 billion or US776 1,000,000.
Our non GAAP basic earnings per ADS were RMB7.58 or US1.16 dollars Our cash position remains strong. As of the quarter end, our total cash and cash equivalents, Current and non current time deposits and short term investment balance totaled RMB 106 1,000,000,000 compared with RMB100 1,000,000,000 as of the year end last year. In accordance with our dividend policy, We are very pleased to report that our Board of Directors has approved a dividend of US0.06 dollars per share or US0.3 dollars per ADS. Lastly, under the share repurchase program approved by our Board, Approximately 3,000,000 ADS has been repurchased in the Q1 for a total cost of approximately RMB330,000,000 Thank you for your attention. We would like now to open the call to your questions.
Operator, please go ahead to Q and A.
Thank you, For the benefit of all participants on today's call, if you wish to ask your question to management in Mandarin, please immediately repeat your question in English. We'll take our first question from Alex Poon with Morgan Stanley.
Harry Potter, Lord of the Rings, My question is regarding the press release. We have mentioned these big titles, Harry Potter, A Lot of the Rings, Diablo Immortal will be coming in the next few months, in the coming months. So I'd like to understand about The launch schedule and details around these 3 big titles. Thank you very much.
Thank you, Alex. I'll answer your question directly in English. We do have very, very strong visibility and confidence For a rich pipeline, including highly anticipated games like Harry Potter, Lord of the Rings, Diablo Immortal And a few others that I mentioned just now. And many of these games have already obtained the license approvals already from the regulators. Most of these games will be launched in the second half of this year.
In fact, 2 days later on our Annual Gala Game Day May 20 event, we will be In more details, existing games as well as some of the exciting new titles, I would encourage you and the investor community to join our event online to get more details Just in 2 days' time. So a little bit more patience, please.
Thank you. We'll take our next question from Jialong Shi with Nomura.
Thanks. Good evening, management. Thanks for taking my questions. I will So I will translate my questions. In recent years, There have been some independent game studios, which were able to launch very successful self developed titles.
Just like NetEase, these new game studios also publish their games on their own instead of going through 3rd party publishers. So my question is, do you think in China's mobile gaming space, the competition is becoming more intense? And if that is the case, how does NetEase plan to
The companies that you mentioned have had great success in recent years. It means that the overall environment Creativity, especially in games, is very good in China. NetEase, we have been a business for over 20 years. We will continue to innovate to thrive. We are happy with the for the success that the smaller gaming companies have achieved, And we will continue to thrive and continue to exceed.
Thank you. Thank you.
Thank you. We'll take our next question from Thomas Chong with Jefferies.
Hi, management. Thanks Thank you for taking my questions. Can you comment about our online music strategies, in particular, subscription and live streaming Yes. Thomas, do you want to translate your question in English? Okay.
Thomas, I will answer your question directly in English. Yes, there are As we've been mentioning in the past couple of quarters, there are plenty of possibilities In terms of product innovation, in terms of monetization streams that's centered around this music vertical, And we are very encouraged to see strong continued and robust growth in both subscription, live streaming, Advising and new possibilities as we continue to innovate And try out. So right now NetEase Cloud Music, despite the fact that it's been 8 years old now, It is still in its relatively early nascent stage, so lots of possibilities. Revenue growth in the Multiple formats that you mentioned have all been very strong. And specifically, you asked about long format Audio, that's a very important vertical.
In fact, we are a forerunner and a pioneer In this particular long format audio, majority of our live streaming revenues Actually come from long format audio. And there are more players that's been following suit and coming into This vertical, it has just proven one more time that how the potential upside of this vertical. And I think NetEase Cloud Music, just like many other product lines under the NetEase brand umbrella, We focus on unique product features powered by product innovations, target Specifically to this vibrant younger generation of music enthusiast, with that we are actually very confident on multiple fronts, both in terms of product features as well as monetization potential. Thomas?
Thank you. Yes, operator, next question please. Thank you, ma'am. We take our next question from Eddie Leung with Bank of America.
So my question is actually a bit a follow-up on the game industry. So number Congratulations on the continuous success of our fantasy Westworld Journey and our Westworld Journey series. But it seems to be interesting to Observe that globally, no matter whether it's a successful PC, mobile or console game developers, It seems to be relying, to some extent, new versions or new games On some of the old IPs, very big IPs, while it's actually some of the new companies are able to come up with Big iconic IPs. So just wondering as a leading global game company, How are we thinking about this current issue? And is there any indication when we develop our game strategy?
Thank you.
We do not entirely agree with your comments. We think, obviously, it's important For new companies to create new IPs, new titles, but we think more importantly, it's a long time long term operation Of good flagship titles. From NetEase perspective, we will continue to do What we are doing over the past years, we've launched a number of very great innovative industry leading titles, Including on Miogi, Justice and Nerica, BladePoint to name a few. So we think we will continue to do what we're doing and to create New games as well as maintaining a long term stability of our existing titles. Thank you.
And Andy, just to add one more point. As you can witness in the past couple of quarters, When there are fewer new game launch in a particular quarter or 2, NetEase financial performance has been steady. It is again something we talked earlier in the past. NetEase is a very, very unique combination of continuous innovation To come up with new titles as well as the operational know how to extend The longevity and effective monetization of the old titles, it is because of this combination that we are able to deliver Very steady and gradually improving financial profile for over 2 decades.
Yes, that's very true. Thank you.
Thank you. We'll take our next question from Alicia Yap with Citi.
Thank you for taking my questions. My question is related to the cloud music. So with NetEase now currently signing directly with all the 3 major music label, Will that change the overall attractiveness of the content selection for user? And also, would that help on driving The music subscription growth. Any material change on the gross margin impact?
And also can management Elaborate the music strategy into the IoT partnership, any interest that you are extending the partnership with the OEM. Thank you. As the streaming platform or social community for music enthusiasts, NetEase Cloud Music is Actively has always been actively seeking partnerships with content providers or label companies in order to help them promote their music In China, that answered the first question. And in terms of IoT or furnishing or home furnishing, Again, it's another important growth area for Netitask Music.
Thank you. Thank you. We'll take our next question from Elsie Tang with Goldman Sachs.
Good evening, William, Zhou, Zhou, and Margaret. My first question is about international games. We noticed that there are a lot of exciting titles for this year and it seems that for different international markets where we have different genres. That's the first of the key points to touch base with the audiences over there. So just want to follow-up talk a little bit more here that when we think about different international markets, do we actually have the sort of differentiated competitive strategy?
And then if there are any further like detailed color on how we're positioning ourselves, that would be great. And then the second question is on Innovative Businesses, and we noticed the seasonal fluctuation in contribution to the revenue of the Innovative Businesses. And 4th quarter could be a good year sorry, a good quarter where maybe e commerce is contributing more and the first quarter is low. I just want to understand a bit more. So in terms of the growth curve of the 2 major lines, one is e commerce, one is the cloud music.
Would we describe the growth curve and where they are currently on that growth curve for these 2? And in the long term, do we have any targets for them to
Yes, we do have we have noticed that there are because there are different culture and different devices that's used by users in different parts of the world, We need very different products targeted to particular regions and countries that resonate with the users there. And we are confident we will figure this out. For example, in Japan, we already have a number of very successful titles, including Lifestyle, NTT5, Life after. Recently, we have launched a new PC game, Marika: Bladepoint on On Steam and that has been performing that has resonated very well with the users during the testing phase. It's a melee combat type of game based on oriental Chinese martial art.
And we are really surprised we are very pleased to see That it has responded well by the global users. Thank you.
And Elsie, for your second question, I'll answer that directly in English. Our newer businesses, whether it's online education, online music, NetEase, Yan Shem, All of them are in relative younger phase comparing to our game businesses. So by and large, we think these younger business verticals have a very promising growth trajectory. They should grow faster than my game BU in general. When you look at each However, different BUs might experience different seasonality.
For instance, Q1 is a traditional peak season for Game performance specifically because of the Chinese New Year, whereas it's a relatively low season, For instance, for e commerce, likewise, education also witnesses strong seasonality In the different semester courses throughout the calendar year. So all in all, don't be overly concerned A quarterly fluctuation, but generally speaking, when you look at on an annual trend basis, for instance, My innovative businesses and others line as well as my Youdao in 2020, both lines has been growing very strong and much faster Then my online game services. What we want to achieve down the road eventually is that all of our Deeply incubated and cultivated verticals will have a very Robust and sustainable growth. And as they continue to grow and emerge, what we want to appeal to the users is What NetEase holds in common, a premium product and services offerings with elevated user experience. That is the corporate DNA in common across the board.
Operator, next question please.
Thank you, sir. It appears there are no further questions at this time. I'd like to turn the call back to the management for 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 Relations, Investor Relations. Have a great day.