Good day, everyone, and welcome to NetEase Fourth Quarter and Full-Year 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to IR Director, Margaret Shi. 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 updated 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 fourth quarter and full-year financial results 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 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 Games. I will now turn the call over to Mr. Yang, who will read the prepared remarks on behalf of Mr. Ding.

Thank you, Margaret. Happy Chinese New Year, 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. 2018 was an exciting year for us. We ended the year with record total annual net revenues of RMB67 billion, a 24% increase from 2017. Our strong performance was driven by a diverse portfolio of online games as well as healthy growth in our e-commerce, advertising services and other Internet product and service offerings. Our online games business remains the core of our strategy. The fourth quarter marked our third consecutive quarter exceeding RMB10 billion in online games net revenues. In the fourth quarter, our online games revenue reached RMB11 billion, a 38% increase compared with the same period last year. Our continued success in online games is underpinned by our commitment and vision to having a positive impact on the online games industry. Our ability to deliver best-in-class quality games with an emphasis on in-house R&D and NetEase IP empowered by unique corporate culture and the right training mechanisms and infrastructure to nurture talent. All of which we have spent over two decades investing in. 2018 was a fruitful year for us in terms of our online games' genre diversification initiatives. In addition to our legacy titles that's been that case the popularity. We are continuously adding new titles and creating new IP that we hope will going to the same longevity. Throughout 2018 we launched a number of highly successful games covering a wide spectrum of categories with chart-topping titles such as Chu Liu Xiang, Identity V, QwQ, Justice, Butterfly Sword, Ancient Nocturne and in the fourth quarter Night Falls: Survival. Night Falls: Survival has…

Thank you. [Operator Instructions] We'll go first to Thomas Chong with Credit Suisse.

Hi, good morning. Thanks management for taking my questions. My first question is about our investment approach on ecommerce, education, and music business. I just want to get a sense of why we choose 2019 to be the year to step up the investments across these areas. Are we seeing any new trend or industry trend that we see there is a lot of potential, and given the fact that the tax rate maybe higher on the losses, how should we think about the earnings growth or the margin trend that we should expect? And my second question is about the gaming regulations, in particular, the suspension for the new license applications. Just want to see if any color on that. And my final question is about our ecommerce business, can management talk about any view on our synergies to be expected with our strategic partner, if there's any? Thank you.

Thanks Thomas. I will translate your question one-by-one. [Foreign Language] Thomas, the first question, William would like to first remind that it has been years for NetEase to be exploring into ecommerce, online education, music. For instance, for our online education in particular for Youdao, we have almost a decade of experience nurturing into this vertical. Now we are seeing the increased sophistication of AI technology as well as a much higher level of user acceptance to education format online. That's why we think we have a huge potential market as well as the readiness and maturity of this market. It is time for us to be very focused, a making a bigger impact in online education. Music and games are in essence a content driven business and we are confident of our content creation, differentiation capability for e-commerce, again for both Kaola and Yanxuan. We've been investing for years and this is definitely an area that NetEase is going to continue to invest. [Foreign Language] For your second question, any update on gaming regulation? We also notice there are market news and rumors, yesterday talking about, latched game suspensions. We would like to say that, we do not see that, some provincial and local regulators have modified the format of material submissions. But we do not interpret that as a shutdown of new game approvals. [Foreign Language] For e-commerce, first of all, we do not make comment or response to any ungrounded market rumors. But as a mentality, NetEase is always very open minded to embrace stakeholders, strategic partners, business partners that can bring synergy, and wing-wing to our e-commerce segment as well as many of our other segments.

[Operator Instructions] We'll go next to Eddie Leung with Merrill Lynch.

Hey, good morning, guys. Just actually a very quick question on the gross margin of your e-commerce business, remember you guys, especially for example, like Charles mentioned that there would be a - hopefully a target on stabilizing the gross margin of the e-commerce business. So just wondering if you could provide some outlook on that front, given the fourth quarter fluctuation in a gross margin? Thank you.

Thank you, Eddie. I will take your question directly. For our e-commerce, as you have notice that for Q4 gross margin was lower than prior quarters as well as Q4 of last year. But at the same time, I hope that you can also notice that, a substantial improvement in us, lowering our inventory, which means in Q4, we have engaged in larger-scale promotional events to optimize our inventory structure. Going forward in 2019 and forward, it is always a very prudent strategy for NetEase to balance topline GMV revenue growth, as well as a margin profile. For now, we expect that overall e-commerce segment in 2019 and forward can still have a very robust topline growth, at the same time with a relatively stable GP margin over the full-year. But of course quarter-over-quarter, there might be fluctuation that is just typical to e-commerce seasonality.

We'll go next to Alicia Yap with Citigroup

Hi, good morning, William, Charles, Margaret and Brandi. Thanks for taking my questions. I wanted to ask could management comment how many titles that NetEase have submitted to while still waiting for approval. And if let's say China license continues to hold up longer, if the new games is ready with NetEase actually decided to launch those new schemes to overseas market first, even though China market are not yet ready to launch. Follow-up on these Charles, your questions on the, I mean, your answer on to the gross margin for e-commerce, you say stable for the full-year. Do you mean these 8% on 2018 will be the trend for 2019 and going forward? Thank you.

Okay. Alicia, I'll translate your first question and I'll take your second question directly. [Foreign Language] So Alicia, first part of your question, we have over 10 titles that has already been submitted in the approval pipeline. And as your second part of the game relation question, yes, for overseas market it is not restricted by the approval, by the domestic approval. So there are games for instance that we have already started testing and trial in overseas market for us we see that as two pillars of further growing our game segment in 2019. And for your second question our e-commerce margin, yes for us we always strive to seek a discipline balance between topline growth and margin profile. It is also our intention to maintain e-commerce gross profit margin in the neighborhoods similar to 2018 full year that is in the high single-digit area. But of course, this is not an easy battle and it requires a lot of effort and hard work from our business unit.

Again, please limit yourself to one question. We'll go next to Natalie Wu with CICC.

Hi, good morning, William, Charles, and Margaret. Thanks for taking my question. Firstly, very quickly, can you give us some color on the region breakdown for your overseas game revenue? Because it's been there shown in the couple of last quarters. And also the margin profiles there, any difference versus the domestic market. And secondary you mentioned about the online education endeavor. Also, the Youdao's revenue has been double last year. I just wondering, can you share with us any color of the contribution from the K-12 business versus the higher education? And under which line to you recognize that revenue. And also in the future, just wondering, will Youdao be the major business unit for your online education endeavor or if there will be any synergy with other business lines should we anticipate or it is just the to operate independently for Youdao. Thank you.

Okay. Thanks Natalie. I'll translate the questions. [Foreign Language] Okay. So Natalie, I'll provide a brief and summarize translation for the answers. Firstly, for the overseas games contribution for now it is mainly coming from Japan, contributed by Knives Out's performance. And as I just mentioned in the earnings call, our next focus is to further tap into mainstream Western market, hopefully, by more and more titles. In terms of margin profile, it's largely the same between domestic games and offshore games. But of course, in domestic games given the scale, we do enjoy better economy of scale, so margins are slightly higher, but there is really no significant differences between games, whether it's overseas or in domestic market. For online education, William has provided a detailed explanation just now in Mandarin. So to summarize, first of all, Youdao has now over a decade of operation, accumulating a sizeable user base. We first started as a study tool, Youdao Dictionary, and there is a high degree of overlap with the current focused K-12 online courses in terms of users. In addition, given that NetEase is a controlling shareholder of Youdao, there's also significant overlaps between the users of our email services, music, for instance, with online courses, whether being student themselves or parents of those students. And we do see kind of a coordinated asset in promoting online education by utilizing resources from our matrix of products. And more recently, driven by the AI technology, Youdao has also been introducing AI-empowered hardwares, which is also being very well received in the market. So all in all for our online education endeavor, we will be mainly focused on online education, which will mitigate and avoid many concerns around offline education that the market is being concerned about.

And we'll go next to Alex Poon with Morgan Stanley.

Hi, William. Hi, Charles. Hi, Margaret. Congratulations on the great results. I have questions regarding game business. In the last two quarters you mentioned, RMB10 billion is the online game revenue run rates. And this quarter you have surpassed RMB11 billion. So can we say RMB11 billion is your new base, new benchmark, we can reference to, especially you have a very strong pipeline of in the coming year? And the second question regarding games is, on the user acquisition side, we're seeing a lot of promotion in short video platforms to get for game business. Did you see this channel as lower user acquisition costs for game business structurally that this can improve your overall game return in future? And lastly, can you talk a little bit about, Diablo Immortal's status? And also Eclipse Isle is missing in the pipeline in your press release. I'm wondering why is that not in your press release? Thank you very much.

Sorry Alex, which game that you are referring to that's missing?

[Foreign Language]

Okay. Thanks, Alex. I'll translate to your questions to William. [Foreign Language] So Alex, I will answer your question. Firstly, as you know, we do not provide guidance revenue or profit. But as a general trend, like I have commented in last quarters that we are very confident about a solid foundation of our game revenues. Going forward, I think it is encouraging to see that we have delivered three quarters that extending above RMB10 billion. We are extremely happy to see that number has surpassed RMB11 billion. But like I said, it is a solid foundation or the future incremental increase will be supported by our continuous effort of launching new and successful games in the pipeline. For your question on user acquisition, NetEase given our scale and track record in upgrading online games. We have a diversified source of new user acquisitions among which short video live streaming is becoming an increasingly important source of new. Whether the cost is lower, it all depends, but on the average blended basis, it does seem short video is a very cost competitive and cost efficient manner for us to acquire new users. Diablo Immortal, we are a codeveloper on that game together with Blizzard. As to the exact launch timetable I would encourage the markets to direct the question directly to Activision blizzard. From a codevelopers perspective, the game development is pretty much ready. Of course there is always space for us to optimize and enhance. But it is not any concern that game development side will call us any potential delay. As your last bit of questions specific about our pipelines we did announce several exciting new games that in our earnings release in the pipeline. As you know, that we have over 50 studios on our NetEase games platform and there are numerous new games of different stages in our R&D and potential launch pipeline. And we are very, very confident about the robust game pipeline for 2019.

We'll go next to Alex Yao with JP Morgan.

[Foreign Language] Thank you, management for taking my question? I have a couple of pressures on music. First of all how do you think about the competition in trying to online music industry? And then secondly, regarding monetization, what are our strategies to improve the music monetization including both the pure music streaming operation and the potentially would you be considering adding the - my broadcasting feature to music streaming service to include the monetization? Thank you.

[Foreign Language] Alex, for the benefits of everyone in the call, I'll provide summarized translations for William's answer. So first of all about your positioning and competitive landscape, we recognized the fact that we are a relatively speaking a latecomer into online music segment. However, we are highly convinced that China's online music markets have huge potential, and after years of competition it appears now that TME and NetEase Cloud Music are the two clear leaders. And as a latecomer, we are a little bit a disadvantages in terms of copyright, et cetera. However, as a latecomer, especially with a deep insight and trying to understand the users need. We do have differentiated advantages as well comparing to competitive, especially in terms of user experience and providing trends that represents innovation, which links also very relevantly to how to think about potential monetization. It is actually for the whole industry, it is in a trial mode whether it is by paying users, advertising, livestreaming or even potentially some other new and innovative format. It is all possible. Some of the formats of innovation, a monetization has already been proven either by us or by our competitors. But we fundamentally believe there will also be other very interesting format that we can potentially think about music, music user monetization, because after all we think this huge market potential is underpinned by music content and we believe after these many years of development online music, this whole format is becoming now a new habit that is highly receptive by Chinese internet users. And uniquely - as a unique differentiation to many other type of format music content is a content that can be enjoyed repeatedly, either in different variations, by different singers, in different settings, and also there's no language boundary. So all-in-all, we think NetEase Cloud Music will remain as a pioneer and the innovative leader in terms of providing differentiated music content to our users.

At this time, I will hand the call back over to Margaret Shi 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 or TPG Investor Relations. Have a great day. Thank you.

Thank you, everyone.

That does conclude today's conference. We thank you for your participation.