Good day, and welcome to the NetEase 2019 4th Quarter and Fiscal Year Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Margaret She, 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 in this discussion. A general discussion of the risk factors that could affect Nae's business and the financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20 S. 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 2019 Q4 and fiscal year financial statements news release issued earlier today.
And with respect to non GAAP financial measures related to the results of our consolidated subsidiary, Youdao, please visit the Investor Relations website of NetEase@ir.netease.com. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will also be available on NetEase IR website. Joining us today on the call from NetEase Senior Management is Mr. William Ding, our CEO Mr.
Charles Young, 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 now based on renminbi. 2019 was an eventful year for NetEase. We expanded the reach of our online games, grew our international presence, IPO ed our online learning on Youdao, advanced our music platform, and refined our operations in e commerce. For the full year, we grew our total net revenues by 16% to RMB59.2 billion and increased our GAAP net income from continuing operations attributable to our shareholders by 60% to RMB13.3 billion.
Online games segment is the cornerstone of our business. Despite having launched fewer games throughout the year, we continued to grow our online games business at a healthy rate in 2019 with 16% year over year increase in net revenues. Driven by the steady performance of our long standing titles, we once again exceeded RMB10 1,000,000,000 this quarter for the past 7 consecutive quarters. Our flagship titles continue to provide solid support for our online games business with increasing longevity and user loyalty. In 2019, revenues from Fantasy Westward Journey Online and Fantasy Westward Journey Mobile both grew at double digit rate, remaining prevalent after years of operations.
Westwood Journey Online and its mobile version also grew steadily in 2019. After over 15 years of operation, our SWJ and WWJ franchises have been instilled in the collective memory of a generation of Chinese players. We further expanded the reach of these IPs through the introduction of SWJ3D in mid December last year, captivating both returning fans as well as new audience. As another iteration of the F. W.
J. Franchising mobile, this 3 d version game reserves the classic gameplay and social system, while bringing brand new experiences to mobile users in a real time three d world. We are still working on new updates and expansion packs to further optimize the experience for FJ3D, and we are confident that over the long term, the 3 d version will show similar longevity and popularity as our other titles in this franchise. In addition to growing and strengthening our existing franchise, we are also good at incubating new ones. Our corporate DNA in content innovation, marketing expertise and long term operations have allowed us to consistently deliver new and long lasting game titles to our users.
Onmyoji is the first of these relatively younger franchises that we have built in house. We are pleased to see that as we introduce more innovative new storylines, new characters and other new content, the influence of our Mioji's IP is growing and resonating well with gaming players. In 2019, ARMYOGI topped the iOS growth in chart 4 times, stabilizing at a new run rate after more than 3 years of operation. In December, we launched Onmyoji, the card game, its 2nd spin off game, living up to expectations. The new Onmyoji!
Card Game carried on the tradition of impressing the market with its exquisite artwork. With this iteration, we also introduced more competitive and strategic gameplay, winning over a large group of hardcore collectible card players. We are now also currently working on several new Onmyoji games, including Onmyoji: Youkai Koya, a simulation game which we plan to launch in the first half of this year. Identity V is another young IP where we see the potential to be building to a successful NetEase franchise. With this goal in mind, we are continually enriching this IP through a variety of initiatives, including esports, IP collaborations and offline activities.
We have hosted a number of high profile events featuring Identity V including both international and regional series tournaments, Most notably, our global championship, Call of the Abyss, has attracted over 8 100,000 players from the rounds of world since December. We also collaborated with Happy Valley, a popular national theme park brand in China, bringing some of the in game characters to life. We are pleased to see the early success of Identity V as it becomes another powerful IP franchise, establishing a broad and vibrant community of young players in China and abroad. Invincible, our 2015 launch that has been growing steadily year over year in terms of the revenue and active users is now one of China's biggest SLG titles. Like with many of our games, we invented a brand new in game mechanism that resets gamers' scores every season, creating a much more balanced game experience and setting a new standard for the genre.
Given the recently increasing popularity of SLGs in China, we are optimistic about our prospects and are working to bring more exciting content to the promising SLG category. The prerequisite to build a successful franchise is the ability to create popular game IPs in house, which is propelled by our world class R and D infrastructure. Over the past 2 decades, we have built 1 of the largest in house R and D teams with China's most talented and passionate game creators supported by one of the most unique and comprehensive R and D infrastructures in the world. We empower each of our talent with our game enthusiastic corporate culture and second to none training mechanism in the industry. Our training program at MedEast Games Academy are widely recognized in China as the premier online games training institution for the creative minds.
Most recently, 2 of our training programs were awarded the 2019 ATD Excellence in Practice Award by the Association For Talent Development, one of the most authoritative international awards in the global talent development industry. As we move ahead, we will continue to foster talent and simulate new ideas that propel the development of our games. 2019 is also a fruitful year for our licensed games, especially for our joint venture with Blizzard Entertainment. World of Warcraft Classic was launched in August as an inventive recreation of Wow VI, and it was very well received by a generation of returning players and newcomers alike. We are very pleased to see the continued popularity of Wow in China, achieving a record number of total monthly subscribers in the 4th quarter with increased revenue quarter over quarter.
In 2019, we continued to advance our games and make inroads that expand our reach in overseas market. Knives Out remained a household name in Japan, topping the iOS growth in chart multiple times during the year, Leveraging our knowledge of building game brands, we further strengthened Nai Zhao's brand presence by engaging in a series of successful collaborations and our first ever Esports Championship tournament in Japan. Identity V also exemplifies our ability to operate games in the overseas market over the long term, leading Japan's iOS topping chart for the first time in September. With the success of these titles, we have accumulated a better and deeper understanding of our users in terms of their interests, social behaviors and preferences in style, aesthetics and gameplay. We have integrated this successful experience and know how into the design of our other games, enhancing our ability to deliver popular titles to Japanese users.
In addition to our success in Japan, we've also expanded our footprint across more regions. In December, we launched Marvel Super War in several Southeast Asian markets where it topped many of the iOS downloads charts. Building on our existing success at home and abroad, we have many exciting games in our pipeline, including Harry Potter Magic Awakened, EVE Echoes, Amyouji YOKI Koya, Ghost World Chronicle, Revelation Mobile Game, Diablo Immortal, and Pokemon Quest. Turning to our online learning business, Youdao made solid progress in 2019, significantly growing its online course business. Youdao enhanced several course products, including high school Chinese and Physics, practical English for adults and coding courses for kids.
We are also seeing excellent adoption and a rapid increase in sales of Youdao's intelligent learning devices, driven by the successful launch of our 2nd generation dictionary pen. We also expanded our tutoring and sales team and substantially improved our tutoring and operating systems to support them. These assets have been rewarded by robust growth in gross billings of Youdao's online courses by 125% in 2019 and over 200% in the 4th quarter. More importantly, we have accumulated experience that we can replicate across our highly scalable online course model and are beginning to benefit from economies of scale. In 2020, NetEase will continue to support Youdao's mission to bring users more effective and technology driven education experiences.
Our cloud music revenue hit a record high in the 4th quarter with membership revenue more than doubled year over year. Revenues from digital albums and live streaming also grew rapidly. Sales of digital albums have proven to be particularly effective on our platform. For example, sales from a 22 year old Chinese pop star, Wang Yibo's digital single No Sense exceeded RMB10 1,000,000 within just 11 hours. Similarly, sales of Chinese singer songwriter Hua Chenyu's digital single How I'd Like to Love This World exceeded RMB50 1,000,000 after 45 days online, marking the highest digital single sales record online in China, according to a third party data source.
NetEase Cloud Music is home to a large number of independent musicians. More than 100,000 independent artists feature their music on our platform and their songs were played back more than 270,000,000,000 times in the year. This makes NetEase Cloud Music the most recognized platform for distribution capability and its broad influence to create more viral content across the Chinese music industry. And finally, our focus with Yanxuan in 2019 remained on improving supply chain management and operating efficiency. We effectively reduced our inventory compared to a year ago and consistently improved our positive feedback rate from users in the quarter.
We made adjustments to our pricing management, which resulted in increased revenue and better gross margins from the business. Our participation in product design has resulted in the creation of many hip products by providing valuable research and market analysis gained from the customer end to our manufacturers. At the same time, we have significantly improved our membership system and are seeing the benefits of increased member repurchase rate. As for our manufacturer and factory initiatives, we have helped to build tailored online data systems that have further improved their manufacturing process and quality. In 2020, we will continue to enhance our brand influence and reaching China by bringing even more high quality and personalized products to a growing number of consumers.
We are excited for the new year As our existing game titles continue to impress the market with their phenomenal longevity, 2020 will also see more game launch in China and globally from NetEase. 2020 also marks the 20th anniversary of NetEase being a publicly traded company. As an internet veteran in China, NetEase has remained relevant and continues to be a forerunner in the evolving market. With our long track record of success, our goal is to inspire our ever growing community while bringing increasing value to each of our stakeholders. Before I pass the call over to Charles, I would like to share some updates on the evolving situation with the coronavirus outbreak in China.
Right after the corona outbreak, we reacted instantly and rolled out a series of initiatives to support the affected regions. We set up a special fund of RMB100 1,000,000. The fund will be used to purchase medical equipment and medicine from home and abroad and deliver to places where the outbreak is the most severe and help is most needed. At the same time, Yanshan immediately delivered over 200,000 free masks and other protective supplies to our customers and set up special funds for the supplier partners. For Youdao, we were among the first ones in the industry to offer free courses to K-twelve students in affected areas, which was later expanded to other regions of China.
For the college students, Chinese University MOOC connected with 800 universities covering 4,000 professors' lectures. We also provide our technology support to help other offline educational institutions to move courses to online through Youdao Intelligent Cloud. Our company took every asset to protect the health and safety of our employees and adopted multiple measures to maintain our operation efficiency, such as flexible work policy and remote office collaboration using our proprietary technology. Overall, with respect to the outbreak, we currently expect to see some impact to our business lines in the near term. However, the situation is evolving.
NetEase is committed to providing support to our employees, users and communities and working together as we together move through this challenging time. This now concludes William's comments. I will provide a brief overview and review of our Q4 and full year 2019 financial results. Given the limited time on the call, I will be only presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details.
Koutoum net revenue for 2019 were RMB59.2 billion or US8.5 billion dollars representing 16% increase year over year. Net revenue for the 4th quarter came in at RMB15.7 billion or US2.3 billion dollars representing a 9% increase year over year. For 2019, our net revenues from online game services grew 16% year over year to RMB46.4 billion, and in the Q4, it was also up 5% year over year to RMB11.6 billion. Mobile games accounted for approximately 70% of net revenues from our online game services in the 4th quarter. For 2019, net revenues from Youdao were up 78% to RMB1.3 billion and in the Q4 net revenue from Youdao was up 78% to RMB410 1,000,000, primarily due to increased net revenues from its online courses and sales of the intelligent learning devices.
For 2019, net revenues from innovative businesses and others were up 12% to reach RMB11.5 billion. In the Q4, it was up 18% year over year to reach RMB3.7 billion, mainly due to the increased revenue contribution from cloud music and CC live streaming. Our gross margin was 50 2.2% in the 4th quarter. Gross margin for our online games remained relatively stable. It fluctuates quarter to quarter within a narrow bandwidth based on the revenue mix of mobile and PC as well as self developed and licensed games.
Youdao's gross margin improved to 29.8% in the Q4. This was primarily driven by the improvement of the sales and asset economies of scale. Gross margin for Innovative Businesses and Others was 20.6% in this quarter. Margin improvement both year over year and quarter over quarter was primarily due to the increased revenue from Cloud Music. For the Q4, total operating expenses were RMB5.2 billion.
Our selling and marketing expenses as a percentage of total revenue was 13.7% in this quarter. On a full year basis, selling and marketing expense as a percentage of full year net revenue was at 10.5% compared with 13.5% in 2018. R and D expenses were RMB2.3 billion, up 5% from the previous quarter. We remain committed to investing in content creation and product development, which is what defines us as a technology company. On a full year basis, R and D expenses represent 14.2% of full year's net revenue comparing to 14.4% in 2018.
The effective tax rate was 22% for Q4 and 18% for the full year 2019. The lower effective tax rate for the Q4 and for the full year compared to the 2018 period were mainly due to reduced losses from certain loss making subsidiaries of the company. Non GAAP net income from continuing operations attributable to our shareholders for the 4th quarter totaled RMB3.7 billion or US526.1 million dollars representing a decrease of 23% quarter over quarter and an increase of 15% year over year. Our non GAAP diluted earnings per ADS from continuing operations were RMB28.03 or US4.03 dollars for the Q4 of 2019. Our cash position remains strong.
As of December 31, 2019, our total cash and cash equivalents, current and non current time deposits and short term investment balance totaled RMB74.4 billion compared with RMB 49.7 billion as of the year end of 2018. In accordance with our dividend policy, we are pleased to report that our Board of Directors have approved a dividend of US1.02 dollars per ADS. On February 26, our Board also announced and approved a new share repurchase program for up to US1 $1,000,000,000 of our outstanding ADS for the next 12 months beginning on March 2.
Thank like to ask your questions to management in Chinese, please immediately repeat your question in English. Please ask one question per time. We will take our first question from the line of Alex Poon from Morgan Stanley. Your line is open. Go ahead.
I'll translate my questions. First is regarding music. So we are hearing the master agreements between Tencent Music and the top three labels are ending this year and next year. And how will this change the competition landscape, revenue growth and cost structure of NetEase Cloud Music in the next 2 years? And my second question is regarding the overall company.
Kaola has been loss making, but it has been sold and music already raised enough funds and the overall company margin is improving. So what's the thoughts on balance sheet cash flow in the next 2, 3 years? Thank you very much.
Okay. Thank you, Alex. For your first question, let me provide a brief translation of William's response. So firstly, label companies exclusivity arrangement in the past years has hurt China's overall online music industry and affects all sorts of players along the value chain, not only just the platform like us, but also app stores, hardware manufacturers, upstream and downstream players along the chain. We hope that all label companies, not just the big three going forward, can all comply with the regulatory framework set in China with aim to provide a healthy environment to the overall industry as a whole.
Financially, it's definitely going to make the cost structure of the cloud music of the whole industry to return to a more healthy and normalized level because in the past, the whole industry has been overpaying the content cost twice, 3 times or even more to the label companies in this unfair setup. Once the cost structure can normalize, then players like NetEase Cloud Music can focus more resources in promoting innovative music content and encourage native Chinese musicians with our mission to create a vibrant, healthy and successful music culture and community in China. So that's the response to your first question. On your second question, on the cash, so first of all, let me make a comment that with a conscious effort of being more focused on our core businesses starting from the end of 2018 and you see a series of fruitful actions throughout 2019, we are benefiting from the economies of scale. As a result, our balance sheet has been growing strong.
Our cash position has been very, very strong. Along the way, we've been also very disciplined in paying dividend, increase the dividend payout ratio and have a regular stock buyback programs. All in all, we've acted in a responsible way to our shareholders. And especially in a relatively more volatile market, we think by having a strong cash flow position together with a disciplined and responsible treasury policy to our shareholders that will make NetEase even stronger and more defensive company throughout this macro turmoil. Operator, next question please.
We'll take our next question from Hillman Chan from Citigroup. So my first question is on the coronavirus impact on our various business lines, positive and negative, and how long the impact would last in our point of view? My second question is on the overseas game expansion. Could management update on the time line with the major IPs like the ARPU, Marvel and Harry Potter? Thank you very
much.
Okay. Thank you, Huong Men. Let me provide a brief translation for your 2 questions. First question on the coronavirus impact to our different business lines. Firstly, William commented that the situation definitely affects the economy as a whole.
It also affects us, different views to different extent. In particular, advertising segment will be more affected by the situation, whereas our online games and online education businesses are relatively less impacted by the situation for now, especially for online education, given the physical restrictions of people going out and moving around, it helps to raise the awareness and the adoption rate of online education, which propels the trend of the growth of this new format of learning? For your second question on our general strategy and pipeline about overseas games, firstly, William commented that we are very serious and very focused on overseas expansion as a major business strategy of our games for you. We've achieved 1st step achievements in Japan with a couple of games that's been well established and we are hoping to further leverage this experience and expanding to mainstream Western market by offering, by bringing more high quality products to the users in those geographies. In the past couple of years, we've been consciously moving up the learning curves and we think we are more prepared, more ready to reap some fruit in this year and in the coming 2, 3 years.
Operator, next question please.
We will take our next question from the line of Alex Yao from JPMorgan. Your line is open. Please go ahead.
So I would like to follow-up with a question regarding the impact from the coronavirus breakouts on the
gaming side of the
business. So from a consumer's perspective, are you guys seeing increasing usage and a better monetization during the coronavirus breakouts? And then secondly, from content development perspective, is the current situation making internal content development more difficult? Would that potentially affect the new game launch in China this year? Thank you.
Thank you, Alex. I'll provide a brief translation for everyone's benefit on the call. So in terms of the user metrics, William commented that Chinese New Year period is always a high season for online entertainment as a whole for our games. This New Year period is obviously being affected by the coronavirus situation, so it is a longer Chinese New Year period. User metrics has been stronger than the previous similar process in Chinese New Year.
And for your question on the R and D impact, so now we do not see any significant delays or impacts to our R and D development progress as well as the planned pipeline launch schedule. Obviously, the virus situation is evolving and we will continually to assess the impact on the game development, if any. And William also further supplemented the virus impact on the online learnings. In particular, we are a firm believer that online learning actually offers a better user experience overall, visavis the traditional offline learning. I think with the virus situation, more and more people are now more receptive and adapted to the online learning model.
And for a lot of learners, it is also an opportunity for them to be more outreaching to a more variety of knowledge that is only available and offered in a convenient way online. So all in all, we think this virus situation is probably a catalyst to propel the overall online learning industry as a whole. Operator, next question please.
We will take our next question from the line of Natalie Wu from CICC.
I will just say myself quite quickly. My question is regarding the Cloud Music. Just wondering despite that you launched several features last year, including the Cloud Village. So you emphasized on the live broadcasting features on the community gap. According to Request Mobile, the daily time spend per user dropped by around 20% in the second half of last year.
Wondering, what's the reason to hide or it's just simply because the Crest Mobile data is not acting right. Can you give us some color on the Cloud Village feature contribution for the Cloud Music and also what kind of new features we should be anticipating this year? Thank you.
Thank you, Natalie, for your question. Let me briefly translate William's comment. So Cloud Village, as well as the other features such as live streaming, etcetera, This is overall, this is our way of thinking how as a music platform we can enhance value add to our users. Most of them are very vibrant music enthusiasts. We want to provide an integrated experience, not only just listening, but from listening to also spending more time watching the screens as well as interactions.
So many of the initiatives and the strategies are around building a more vibrant community on our NetEase Cloud Music platform. But the mission of us tapping into the online music segment is really to provide the most conducive channel of promoting native songs, native IPs for the Chinese independent musician artist. With regard to your second part of the question on the QuestMobile data, again, I think you are referring to the average daily user time spent on the app. Again, we do not know how external third party data channels track these numbers, but based on what we are seeing in the second half, there's no decline in the user activity and the user time spent on our platform as a whole. So that's probably something you can further verify and double check with the external channel.
Operator, next question please.
We will take our next question from the line of Shijia Wang from Nomura. Your line is open. Please go ahead.
Hi, good morning, Wayne and Charles and Margaret. Thanks for taking my question. I have two questions. My first question is a follow-up on the overseas expansion. I just wondering how much of Medi's mobile gaming revenue is currently generated from overseas market.
And management mentioned earlier on the call this year will be a harvest year for NetEase online gaming business in the overseas market. So I just wonder what is the growth potential for the revenue contribution from the overseas game market going forward? My second question is about regulation. I just wonder how management think of the regulatory environment year for China's online gaming industry. Last year, the authorities suspended new game approvals for certain number of mouse.
So I just wonder what management think of the regulatory trends this year for China's game market? Thank you.
Okay. Thank you, Xiaolong for your questions. Let me provide a brief translation and further supplement to some of the number related questions. Firstly, William commented that I think as all of us have noticed that over the Chinese New Year period, Apple iOS App Store has also implemented more stringent requirements requiring developers who upload their content onto Apple Ios Store would need to provide evidence of approvals, which is in line with the regulators' more emphasis and regulation on IP protection. In a way, we think that this is going to be more beneficial to 1st tier players, big players like NetEase.
We have over 50 game studios, over 10,000 in house developers working in a very compliant way of creating premium content. So when the whole environment, whether it's the iOS App Store, whether it's the regulators that's putting more emphasis in protecting IP and also encouraging regulated content to only regulated contents to be uploaded and also having more punishment on the IP violations that is longer term beneficial for the whole industry, in particular towards upstream content providers. On top of our emphasis on in house development, we are also putting more focus on collaborating with global developers, joining hands, strong hands together, hopefully in making a joint effort to provide some exciting content to the global audience that naturally brings to your first part of the question. For 2019, on a full year basis, this is the very first time that NetEase overseas game revenue has accounted for more than 10% of the overall game revenue, First time in that is history as bringing us closer to a global premium game operator. Like William commented earlier on, I think this year and the next couple of years, we are going to see more fruit.
We are going to bear more fruit in our international expansion. Operator?
Thank you for the time.
Due to time limit, that concludes today's question and answer session. At this time, I will turn the conference back to Margaret Xu 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 on TPG Resolutions. Have a great day.
Thank you, everyone.
That concludes today's conference. Thank you, everyone, for your participation. You may now disconnect.