Good day, everyone, and welcome to NetEase Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandi Piacente. 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 this discussion. A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F. The company does not undertake any obligation to update these 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 2018 third quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast of this conference call will be available on the NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase's senior management is Mr. William Ding, Chief Executive Officer; Mr. Charles Yang, Chief Financial Officer; and Mr. Hilton Huang, Co-President of NetEase Game. I will now turn the call over to Mr. Yang, who will read the prepared remarks on behalf of Mr. Ding.

Thank you, Brandi, 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. With that said, I will deliver opening remarks on William's behalf. We are very pleased to report another strong quarter with total revenues up 35% year-over-year. Each of our primary business lines continues to grow supported by our loyal community of users and our strong R&D team that strive supreme best-in-class games and internet services to both users in China and internationally. Total revenues for our online games in the third quarter stood at RMB10 billion for the second consecutive quarter and we are confident that this trend is sustainable. In addition to our growing catalog of games and world class R&D capabilities, our online games portfolio is more diversified than ever before. We now operate numerous games that span a wide variety of genres both domestically and internationally, as well as games that appeal to both PC and mobile players. Through this diverse catalog, we can appeal to a multitude of players and interest levels worldwide. With the introduction of new games and our work in mobile has propelled our success in recent years. Our flagship titles remain remarkable steady. In the third quarter, Fantasy Westward Journey and Westward Journey series enjoyed another quarter of year-over-year growth, driven by the popularity of new expansion packs released over the summer. Some of our newer titles released in recent years, share this type of longevity such as Invincible, Onmyoji, Knives Out and Identity V just to name a few. The remarkable longevity of these games is a task immense to NetEase unique skillset and the ability to operate games successfully over long periods of time. Very few companies globally can attach to this…

Thank you. [Operator Instructions] We'll take our first question from Thomas Chong with Credit Suisse.

Hi, thanks management for taking my question and congratulation on the solid set of result. My first question is about the online gaming business, in particular recent cooperation with Blizzard. Can you share a bit more about details about the timing of the launch of the new games, the revenue sharing ratio? And more importantly, do we expect to co-develop new games in the future? And my second question is about - sorry, directly to environment, how we should think about the online games outlook in 2019? Thank you.

[Foreign Language] Okay. Let me translate the answers for William. So on the Blizzard Corporation, as you all know, our time proven collaboration is almost a decade long with very, very pleasant partnership with Blizzard, bringing in great experiences to Chinese gamers, their type. And the collaboration Diablo mobile game is just another strong testament to the great partnership. We expect if everything goes on smoothly that the mobile game of Diablo Immortal will be launched globally next year. Regarding your second question on regulatory environment, so first of all, we believe the government's intention to regulate and make the game segment overall as a healthy and sustainable segment. And we fully understand and support the government intention. China is the fastest growing and is also now the largest game market in the world. And throughout the fast development, there are also certain issues emerging for instance undesired impact online inappropriate content et cetera. But in the longer term, the regulators intention is really to promote online game segment as a format of entertainment, educational asset, as well as to promote creativity in cultural innovation. So in the longer term, the government is fully in supportive of developing online games industry being healthy and sustainable manner. Operator, next question, please.

We'll now take our next question from Eddie Leung with Merrill Lynch.

Thank you for taking my questions. Management has mentioned that we have accumulated a large space of users and there are more and more applications as far as content available to these users. So I'm just curious as how many of them actually using multiple services or consuming multiple content on the NetEase and how is that ratio trending and how management can encourage different business units to cooperate and hopefully get the users to have more NetEase services? And then just a separate question on the regulation on games. Could you remind us how many of your games in your pipeline already obtaining the ISP approval? Thank you.

Eddie, can you translate your first question in mandarin, we didn't really get your question.

[Foreign Language]

Okay. Thank you, Eddie. So you have translated the first question and I'll translate your second question to William. [Foreign Language] Okay. Eddie, I will answer your first question. So first of all, we do not disclose user specific metrics to our different lines of businesses. But having said that, as you know, NetEase now has evolved into a much more diversified franchise more than just game company. So definitely users of NetEase products and services are enjoying the more and more content, premium content and elevated user experiences from the NetEase overall brand. We do not have the specific metrics to evaluate the overlap, but we think the overlap should be a significant ratio because after all, users in different verticals they want to simply use the very best products and services they can find in the market. And as some of you may know, earlier this month, we have experimented a VIP membership program, which upon purchase of the membership, you will get a lot of membership benefits across different lines of our products, games, e-commerce, music et cetera. So that is also a measure to promote all kind of a cross experience of different products and services to our user base.

[Foreign Language] So Eddie, I'll transfer your second question. NetEase is never a name to compete based on quantity of games. As you know, the games that we launched are top priority, the emphasis is always premium quality best-in-class experiences we provide to the users. So for the next quarter, for next year, we are very optimistic about which pipeline that we are going to bring differentiated contents to the users. So all-in-all, it is not a game about quantity, but rather it is the quality of the games and the user experience upon the release of our games. As you can see, we've been quiet active and bringing in newer games throughout 2018. We think the trend will continue into 2019.

We'll move next to Alicia Yap with Citi.

Hi. Good morning, management, thanks for taking my questions. I have two quick questions. Number one is that, with the reason external funding for the NetEase Music, could you share with us the strategic thinking about this music business. Is that mean, we could try to use these funding to offset some of the passionate for the business and the NetEase trying to separately spinoff the music business in the future? How is the competitive landscape given the dominant positions from Tencent music, will this be any special value proposition that NetEase means they attract users to come over or do you think user actually will be using both NetEase and Tencent music platform? So the second question just very quickly is that on the online games revenue, we have been keeping the promise that we actually able to achieve the quarterly runway of that, so should we actually expect these grow to maintain and that we will keep these quarterly run rate stable and gradually improving? Thank you.

[Foreign Language] So Alicia, to answer your two questions, first Cloud Music. First of all, we view the competition with TME as a very healthy competitive dynamics. As you know TME and NetEase Cloud Music are now probably the leading two camps of online music on differentiated value propositions. For us, we are going to continue invest into R&D, maintaining Cloud Music's strong reputation as a trend with of emphasis on innovation. This round of financing is a strong testament of recognition and support from both strategic and financial investors. So it is also - this also provide a strong motivation for us to keep Cloud Music as independently operated business franchise, which will set a stage for its potential spinoff IPO in the future when the time is ready. For your second question, short answer is yes. We are very optimistic about maintaining a sustainable and healthy growth trend of our online games revenue in the longer term. This is underpinned by our continued R&D effects, investment and collaboration with multiple games studios. But aside from just financial metrics, William also wants to emphasize that a healthy and sustainable growth for games businesses is not only measured by financial metrics, but rather we care a lot more about the users satisfaction and user recognition of our game quality that applies to both the gamer, audience in China and in overseas. This would require NetEase to continuously invest to ensure that our competitive advantage, innovation in localization, in understanding difference geographies of the market are always ahead of the curve and we are confidence to achieve that.

Next we'll move to Jialong Shi with Nomura Securities.

William and Charles good morning and congratulations on a very sold quarter. I'll first ask my questions in Chinese. [Foreign Language] I have two questions here. My first question is about the regulations and in particular the regulation M2 to protect to restrict minors game play time. And we noticed NetEase competitor Tencent recently had talked to the mayors to restrict minors' time spent on Tencent's game. So I just wonder if NetEase may file a suit and if yes, and what will be the potential impact on NetEase revenue going forward? My second question is about the strategies toward NetEase e-commerce business. We saw NetEase Music and also Youdao subsidiary were both spun off within the past year by raising capital from external investors. And now looking across NetEase incubated businesses, the e-commerce business is the only baby tiger that has yet to be spun off, so I just wonder if NetEase may consider inviting external strategic investors into your e-commerce business, so that you guys may leverage external resources brought by those investors? Thank you.

[Foreign Language] Thanks Jialong. I'll translator briefly William's answers. First your question on the anti-addiction measures, so yes we agree that game operators share the responsibility to create a healthy online game environment for minors. In fact more than a decade ago, when we were operating PC games, we already had measures in place to provide protection to minors to prevent addiction. For our logging system, we always encourage and require real name with real personal age information for your logging. So on that we are going to continue to improve and enhance our mechanism to ensure that we share the appropriate responsibility as a game operator. But beyond that William also commented that for anti-addiction for minors probably this should not be only narrowly focused on online games. In fact in this cyber world and this mobile Internet age, there are multiple parties who can contribution their asset and obligation in creating a more conducive and healthy Internet, mobile Internet environment for the minors. For your second question e-commerce, so as you know Kaola and Yanxuan are two supplementary arms of our e-commerce businesses. In particular for Kaola, we've chosen it to focus on the cross border e-commerce as an entry point, which we believe this is the right choice. Especially most recently President Xi saying that China import Expo is being strongly encouraging imports, China's imports in the coming years. And we think there's huge upside to Kaola being a dedicated and leading operator in this cross border e-commerce. We do not rule out the possibility that along the way of the development of both Kaola and Yanxuan in its growth phase when there's the right and strategic partners emerge. But for now, we do not have any plan or any disclosure to make.

And we'll take the next question from Natalie Wu with CICC.

Hi, thanks for taking my question. I have two here. First of all about your e-commerce business. This I'm concerned on market regarding the inventory issue on your e-commerce business. Just wondering can you share some color on the SKU management, methodology of that business? Second question is about the overseas revenue contribution. You mentioned that your overseas revenue contributed then those games, so past 10% for the first time, which is very great number, last quarter I remember the number was nearly 5% percent, so just wondering can you help us understand what the actual 5% contribution, how much is related with missed out and how much by identity? And also is there blueprint for your overseas revenue contribution in the mid-term? And also that growth, how much is related about the overseas expansion in Diablo? Thank you. I would translate myself. [Foreign Language]

Thank you, Natalie. In the interest of time, I will take the questions and answer that directly in English. First of all for e-commerce, when you look at inventory of our e-commerce, I think the market needs to understand that it's not really apple-to-apple to many of the domestic e-commerce operators, because for cross border e-commerce, the inventor days will invariably be longer, it started when we make overseas procurement, including shipping et cetera. But as we scale up, we are continuously optimizing our inventory management and we are confidence that there is still a lot of space for us to improve and optimize here. Secondly for the overseas revenue contribution, well in fact this is the first time that we announced the split. It was quite a milestone achievement for us to arrive at about 10%. In the past couple of quarters, well we do not provide specific ratio, but it is climbing up trend as we communicated in prior calls. The overseas contribution today primarily comes from Knives Out strong performance in Japan. Now, with Identified will some other new games that we plan to bring to the international market, we are confident that the overseas revenue contribution will be more diversified going forward. But as to a percentage ratio, we really cannot give out any specific target because you would understand that it's also a dynamic, right. Domestic games growth is also very, very strong. So what I can say is that the absolute dollar amount for sure we are very, very confident that overseas games revenue is going to witness strong growth, but as to the percentage, it is actually difficult for us to predict. For your third question, R%D expenses is acting fast, it's less so affected by the overseas expansion because majority, super majority of our game studios are domestically situated in China. So whether the game is distributed in China or distributed in the overseas market, bulk of the R&D expenses that incur in China anyways and with successful game that's been proven in China and by launching this game in a new geography outside of China if does not necessarily incur a great amount of marginal, additional R&D expense.

Thank you.

And due to time constraints, we will take no further questions. I would like to turn the call back to management for closing remarks.

Thank you once again for joining us today. If you have further questions, please contact NetEase's IR Director, Margaret Shi, based in Hangzhou, or TPG Investor Relations. Thank you and have a great day.

Thank you, everyone.

Everyone that does conclude our conference call. We do thank you all for your participation. You may now disconnect.