NetEase (Minutes): "Marvel Showdown" aims for a ten-year operational cycle
The following is $NTES-S(09999.HK)$NetEase(NTES.US) the minutes of the Q4 2024 earnings call. For the earnings report interpretation, please refer to《 Sweetie turns into a cow lady, has NetEase been abandoned again in the "revaluation of Chinese concept stocks"? 》
1. Core Information Review of the Earnings Report:
NetEase released its Q4 2024 earnings report after the Hong Kong stock market closed on February 20, Beijing time, reiterating that regardless of the secondary market's reputation, product-driven companies ultimately need to rely on products and performance.
1) In terms of gaming business, Q4 growth relied entirely on PC games. The main mobile games, which account for two-thirds, faced a lack of new releases and last year's "Nirvana in Fire Mobile" set a high year-on-year comparison threshold, resulting in over 10% negative growth this quarter; this was a significant miss compared to the market's original expectation of a slowdown to mid-single-digit declines.
However, December's "Marvel Showdown" and the end-of-year "Yanyun Sixteen Sounds" performed exceptionally well, reversing some of the weak expectations and contributing to a small market rally for NetEase in December-January.
2) Gross Profit: The return of Blizzard also brought up another issue in this earnings report, as gross profit performance was relatively poor. Both year-on-year and quarter-on-quarter gross profit showed negative growth, with a gross margin barely at 61%, below market expectations.
3) Music, Youdao, and Other Innovations: The characteristics of these businesses are generally: small business scale, growth under pressure, and a strategic contraction at the group level focusing on reducing losses or achieving profitability, which overall does not bring more valuation storylines to NetEase.
4) Is the core profit inflated or real capability? In a situation where total revenue and gross profit are flat, NetEase managed to achieve significantly better-than-expected operating profit this quarter. The key here is that marketing expenses were reduced by 80%, and were more than 1 billion lower than market expectations, but there are one-time components involved.
5) Buybacks: At the end of last year, NetEase had a net cash balance of 18 billion USD, an 18% increase compared to the previous year, still a solid cash cow business. Calculating shareholder returns, NetEase's dividends for 2024 are close to 1.7 billion USD, with buybacks nearing 1.3 billion USD, totaling nearly 3 billion USD, a year-on-year increase of 30%, corresponding to a return rate of about 4.5% at the current stock price, which is neither high nor low. Additionally, there is still 3.1 billion USD remaining in the buyback quota, with only one year left in the validity period, meaning either the buyback period will be extended or the buyback pace will accelerate 6) Overview as follows:
II. Detailed Content of the Earnings Call
2.1. Key Information from Executives:
2.1.1: Games
The successful launch of the mobile game "Project: BloodStrike" in the fourth quarter has driven every growth momentum of ours—innovation, diversification, and globalization—by redefining gameplay and setting new industry quality standards. Let’s first focus on the new games, and then look at our overall product line:
1) "Marvel Showdown": A fast-paced superhero shooting game that topped the Steam bestseller list within four hours of release, attracting over 10 million players within 72 hours and 20 million players within 12 days, with a total of over 40 million players to date. "Marvel Showdown" redefines the hero shooting game experience with its unique art style, innovative combat system, and ever-changing battlefields. During the first season update, "Marvel Showdown" once again topped the Steam bestseller and most-played lists.
2) "Yanyun Sixteen Sounds": Released at the end of December, this is an open-world action-adventure RPG. Within four days of its launch on the Chinese PC version, the game accumulated 3 million downloads and topped the iOS revenue chart for two consecutive weeks after the mobile version went live. The explosive performance of the mobile version led to a total player count exceeding 10 million within a week and over 15 million within two weeks.
We expect the player base of "Yanyun Sixteen Sounds" to continue to expand over time, making it another flagship evergreen game. We are making plans to consolidate the early success of the game. Currently, we are working to bring "Yanyun Sixteen Sounds" to console platforms and introduce this game to players in more regions.
3) Blizzard-related games: Blizzard games have made a strong comeback in the Chinese market, maintaining strong momentum in the fourth quarter.
a. Shortly after the return of "Hearthstone," we quickly reorganized the highly anticipated "Hearthstone" Gold Series in China. The event set a new record, attracting over 10,000 fans on-site and over 10 million players watching online.
b. As of yesterday, "Overwatch 2" has also returned to the Chinese market, reigniting player enthusiasm. As Blizzard games gradually return to the Chinese market, we are further strengthening our cooperation with Blizzard, exploring localization opportunities, and bringing more exciting content to China's vast gaming community.
4) "Fantasy Westward Journey": In the fourth quarter, we launched the "Champion King Illusion" expansion pack featuring the iconic transformation ability of Sun Wukong. Meanwhile, the Spring Festival activities planned around the Year of the Snake brought a vibrant New Year atmosphere to the "Fantasy Westward Journey" mobile game. We continue to inject new content into the game, keeping it highly popular throughout the year and achieving a new revenue high in 2024 nearly a decade after its release 5) "Journey to the West Online": Significant growth in annual revenue. In 2025, we also launched a brand new annual server update for the "Journey to the West" mobile game. We added highlights to the update through the "Shared Destiny System," which sparked new interest in the community and further strengthened connections among players, while encouraging long-time fans to continue returning.
6) "Identity V": Another example of long-term operational success. After setting new records for player numbers and revenue in the first three quarters, "Identity V" achieved even higher revenue in 2024.
7) "Naraka: Bladepoint": In the December update, "Naraka: Bladepoint" collaborated with CD Projekt Red to launch a special crossover with "The Witcher 3." Recently, we partnered with "The King of Fighters" in January. Since its launch in the third quarter, the player base of the "Naraka: Bladepoint" mobile game has continued to grow, surpassing 50 million in December.
8) "Egg Party": Continuing to cultivate a vibrant UGC ecosystem.
9) "Nirvana in Fire": The mobile game maintained a large and active player base in the fourth quarter. At the end of December, "Nirvana in Fire" hosted a groundbreaking virtual concert for its New Year's celebration. Strong community engagement and continuous updates of related content propelled "Nirvana in Fire" mobile to the second position on the iOS bestseller list shortly after the event ended. Since its launch in July, the game has maintained strong performance.
8) "Once Human": Launched new PvP and PvE gameplay in the fourth quarter, ranking in the top ten of Steam's popular games list and rising to third place on Steam's bestseller list. Meanwhile, the mobile version exceeded 10 million pre-registrations and is expected to launch globally in April this year.
New Game Pipeline
5v5 tactical shooter "Fragpunk": Global launch on March 6. Through careful game development, "Fragpunk" will break the traditional shooting game model, bringing new rules and gameplay that we believe players will love.
"Destiny: Rising": Successfully completed its first closed beta test in December.
"Marvel: Mystic Mayhem": A tactical role-playing game featuring superhero team battles. It just completed a nationwide closed beta test in January.
2.1.2 Youdao
In the fourth quarter, Youdao saw a decline in learning service revenue as we further focused on long-term growth by prioritizing high-demand courses, balancing revenue and profitability, achieving healthy development, and enhancing profitability. Notably, Youdao's flagship course (featuring layered learning videos and AI support) continued to perform well, with a retention rate exceeding 70% in the fourth quarter due to strong user engagement and loyalty.
Recently, we launched "ZiYue-o1," a leading gradual reasoning model in the education field in China. As a lightweight model with 14 billion parameters, it supports deployment on consumer-grade GPUs and provides detailed problem-solving processes with high accuracy and strong reasoning capabilities "Zi Yue-o1" has been seamlessly integrated into our AI learning assistant - Youdao Xiao P, receiving high praise from users, with the number of users exceeding 100 million.
Our flagship product, Youdao Dictionary Pen, has solidified its leading position during the "Double Eleven" shopping festival, ranking first in sales on JD and Tmall in this category for five consecutive years. Building on this success, we launched the Youdao Dictionary Pen A7 Pro in January, further driving growth with higher performance.
2.1.3 Cloud Music
In the fourth quarter, we deepened our collaboration with Warner Music and, through cooperation with renowned singer Li Jian, included his entire discography on our platform, further enhancing our Chinese music collection in January this year, which includes many beloved classic tracks.
In terms of self-produced music, we also intensified our efforts. Several tracks gained widespread recognition in the fourth quarter. We expanded our copyright cooperation with popular singers. Hua Chenyu's digital album "Liang Bian Lin Ji Dian" premiered on our platform and sold over 1 million copies within 24 hours. As of December, the number of registered musicians on our platform has exceeded 770,000, making it one of China's top independent musician platforms.
Monetization of memberships remains an important driver of revenue growth in online music.
2.1.4 Selected: Focus on key categories and drive growth through best-selling products. In 2024, core categories such as pet supplies and home cleaning achieved robust growth.
2.2 Q&A Analyst Q&A
Q: Feedback on the 5v5 hero shooting game "Jie Wai Kuang Chao" tested at the end of last year?
A: We previously conducted large-scale testing, and the results met our expectations. After several months of adjustments, we are ready for launch. The feedback from peers has made us more confident that the game has its unique aspects in terms of operation, feel, system, gameplay, and hero narrative. The art style also has very distinct characteristics, appealing to both new and old players, so we are very confident about this launch.
Q: What is the monetization strategy for "Yan Yun Shi Liu Sheng" in the next phase? Any plans for overseas launch?
A: Since its launch, "Yan Yun Shi Liu Sheng" has received widespread recognition from players, with excellent performance across various metrics. The distinction between single-player and multiplayer modes meets the needs of various players. The paid model primarily based on skin sales has also received positive feedback.
The relaxed content ecosystem provides a solid foundation for long-term development, and we will focus on the continuous expansion of new open-world map content, providing high-quality and diverse skin designs and productions; we will also engage in regular and proactive face-to-face communication with various players to continuously optimize and improve the experience of NetEase's "Yan Yun Shi Liu Sheng."
Currently, "Yan Yun Shi Liu Sheng" has received positive reviews from users for its unique and high-quality open-world content and martial arts IP, and we are actively monitoring the needs of overseas users. We have already initiated the overseas version, and we hope to meet overseas players in 2025. Q: What is the user payment rate for "Marvel Showdown," and what are the growth strategies?
A: Currently, "Marvel Showdown" is well-received in the international market and will continue to invest for over ten years. There are indeed plans to hold esports competitions and collaborate with Marvel movies to stabilize our user base and develop new users.
Q: Regarding the relaunch of "Overwatch" yesterday: How will "Marvel Showdown" and "Overwatch" balance each other?
A: Like other Blizzard games, we not only aim to restore the operation of "Overwatch" in China but also hope to actively explore new market spaces, allowing this product to regain new vitality and reach new heights. This market is very large, and we believe it can fully accommodate two excellent products.
Q: What are the long-term operational plans for Blizzard's "World of Warcraft" and "Hearthstone"?
A: Since its launch six months ago, its performance has been far better than any period in its history at the same stage. Before the new content goes live, data decay is normal, and we have closely cooperated with Blizzard to plan for the future. The long-term relationship has established strong trust, and we will listen more to Chinese players' opinions in the future.
Q: What is the strategy for overseas studios? How does AI assist NetEase games?
A: The needs of domestic and foreign users are different; NetEase values some overseas studios and is willing to actively support and assist those that can produce high-quality products and creative producers to succeed in the overseas market. This basic strategy will not change. For the second question, with the success of AI tools like DeepSeek, it can help improve the efficiency of game development pipelines and reduce costs, making it easier for users to understand the content and get started with the works.
Q: What progress has been made with the second-dimensional game "Infinity" besides obtaining a license? Why has the marketing expense decreased so much, and what is the outlook for the trend in 2025?
A: "Infinity" completed an offline test in January, which was an invitation-only test with positive feedback, and the development is progressing smoothly with the team expanding in an orderly manner. Competition indicates a large market, which is a good thing; as long as we meet user expectations, we can produce excellent works. Therefore, we focus on the accumulation and refinement of game content, and once the timing is right, we will invite more players for testing. The decrease in marketing expenses in the fourth quarter is due to innovative marketing tools and methods, reflecting operational efficiency.
Q: What is happening with the adjustments of domestic and overseas game studios? How should we understand the mid-to-long-term investment strategy for new games?
A: The essence is resource allocation to achieve maximum effectiveness. Some projects that do not have high expectations will be decisively halted; if the expected results are good, we will increase investment. So everything depends on whether the quality of the product can meet future user expectations. Since the game product cycle often lasts three years or even longer, we continuously assess market demand throughout the stages of project initiation, development, and other aspects, adjusting investments accordingly.
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