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Good day and welcome to the NetEase 2021 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time. I would like to turn the conference over to Margaret Shi, IR Director of NetEase. please go ahead.
Thank you, operator. Please note, the discussion today will contain forward-looking statements relating to the 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 a certain risks and uncertainties, assumptions, and other factors. Some of this 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 NetEase business and the financial results is included in certain filings of the Company with the Securities and Exchange Commission, including its annual report on [Indiscernible], and the announcements and the findings on a 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 discuss certain non-GAAP financial measures for comparison purposes only. For definition of non-GAAP financial measure -- as a reconciliation of GAAP to non-GAAP financial results, please see the 2021 third quarter 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 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, and Mr. Charles Yang, Chief Financial Officer. I will now turn the call over to Charles, who will read the prepared remarks on behalf of William.
Thank you, Margret. 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 RMB. The third quarter was an exciting one for NetEase. We launched a number of top ranking games, bringing our game revenues to a new record of RMB $15.9 billion.
Our other business segments also grew robustly, supporting our total net revenues growth of around 19% year-over-year, reaching $22.2 billion RMB. For online games, our flagship title continues to demonstrate strong growth up to nearly 2 decades of operation. Revenues from Fantasy Westward Journey Online and Westward Journey Online, both grew at double-digit rates year-over-year in the third quarter.
The mobile versions of these 2 legacy saga shows resilient year-over-year growth as well. Adding to our strong portfolio of PC games, our new hit games, NARAKA: BLADEPOINT and Nightmare Breaker to [Indiscernible] PC games revenue to a new record high in the third quarter, growing by 30% year-over-year, far outpacing industry growth. Featuring Unchained [Indiscernible] Combat, back.
NARAKA BLADEPOINT has taken the PC games market by storm, reinvigorating the stable battle royale genre with exciting novo ideas. It's global success showcased our ability to bring first rate games to the world stage. By November the 10th, we had already sold more than 6 million copies of NARAKA BLADEPOINT worldwide in just four months’ time, making it one of the top sellers ever on Steam platform.
Players in both China and global markets are hailing NARAKA BLADEPOINT for it's thrilling combat experience. So far, NARAKA BLADEPOINT has retained an 80% positive review rate on Steam, which naturally leads to excellent user retention and continued user growth. We believe NARAKA BLADEPOINT will experience the same level of longevity as many other NetEase flagship titles.
We work hard to keep our games fresh and plan to continuously introduce more exciting new content including new modes, heroes, and maps. To add to the enthusiasm, we are also currently working around the clock to extend the game offering to console and mobile platforms. We expect to bring players these exciting versions in the next year.
On the heels of NARAKA: BLADEPOINT deal, we launched another PC game, Nightmare Breaker in September. It is an action-based competitive fighting game taking place in a fantasy setting. Players can choose from a variety of roles with unique abilities to battle against dark horses and save the world. As a game with unique game play, Nightmare Breaker further expands our base of PC players.
Turning on to the mobile side. Our new hit game, Harry Potter: Magic Awakens, having chunks of millions of players going viral across China. It instantly dominated both top downloads charts and top growth in China, following its launch in September. Harry Potter Magic Awakened comes through as a charming wizardry world, touching the heart of millions. The game has attracted large crowds from young generation across the game of community.
It's leveraged design are gaining great acclaim, including iconic European retro picture books. An interesting card-based comeback infused with abundant competitive game play. We hope Harry Potter Magic Awakened will continue to gain a duration from players in China, maintaining its popularity over the longer term as many of our other titles do. We are equally excited for its global launch, calling all the nostalgia of generations of Harry Potter fans.
We believe this game has great potential for extensive popularity across the globe. Currently, we are working hard on its localization for other geographies, with plans to formally launch Harry Potter: Magic Awakens in some of the major overseas markets next year. As another title we launched in the domestic market, our space-themed SLG game, Infinite Lagrange, also had a strong start in China in the third quarter.
Sci-fi fans were captivated by the game's intense and exciting travel through time and space. In time, we believe Infinite Lagrange will continue to earn respect from even more players extending our strength in the SLG market through its super immersive space experience. On the international brand, we introduced The Lord of the Rings: Rise to War to the US, Europe, and several other overseas markets.
Making a strong debut at the end of the third quarter. The Lord of the Rings: Rise to War, has a master huge user base across the globe with engaging and thought-provoking game play, as well as the strong appeal of The Lord of the Rings IP, we see great potential for the growth of its users.
We expect The Lord of the Rings: Rise to War to be phased similarly to our other time - prove n SLG title, Invincible, with revenue ramping up gradually and showing an upward trend over time with a long-lasting life cycle. Complementary to our in-house R&D capabilities, we have also been deepening our [Indiscernible] these footprint through strategic investment and partnership. We are looking for talent and teams that complement our R&D skills on a global scale.
Over the past few years, we've invested in top teams, including Bungie, Quantic Dream, Second Dinner, and Theorycraft, as well as the recently announced strategic funding in Kaola and acquisition of Grasshopper in Japan. With these partnerships, we plan to share our know-how in R&D and operations while gaining new inspiration from the creative minds of these overseas studios, as well as a deeper understanding of overseas users and their preferences.
Together, we share the same passion and vision to build the next sensational blockbuster for players worldwide. In addition, we have launched a few games studios in places such as Montreal, Tokyo, and LA with an aim to attract the best international challenge to further broaden our R&D capabilities.
Moving to our game pipeline, as I mentioned earlier, in the next year, we plan to launch Harry Potter; Magic Awakens in more overseas regions, as well as bringing players, console and mobile versions of NARAKA: BLADEPOINT. Very soon, we will be introducing another highly anticipated game, The Showbiz: Dream Chaser, our self-developed Showbiz simulation game.
Catering mainly to emerging female users, this game provides players with a new role playing experience as an actor or actress in the world of Showbiz. Here, players get to live their dreams of fame and explore exciting life of a performer in the entertainment industry. Highly acclaimed for its distinctive setting, immersive experience, and art design, we believe The Showbiz: Dream Chaser could open up a new genre with great market potential for NetEase.
Our pipeline also includes Diablo Immortal and Ghost World Chronicle. Moving ahead, we will continue to bring players inspiring a new game that stands the test of time in China and worldwide. Turning to Youdao, we have made solid progress with our transition to better align Youdao 's business with the latest regulatory guidelines which aim to alleviate excessive academic pressure on Chinese youth.
While we are in the process of disposing of our academic after school tutoring business, we are making excellent progress with our other pillars of future growth, including STEM courses, adult learning, mass devices, and education digital optimization solutions. Total net revenues for Youdao in the third quarter were R&D $1.4 billion, representing a 55% growth year-over-year.
Revenues from the after-school academic tutoring classes in China compulsory education system accounts for around 25% of Youdao's total net revenues. In the third quarter, we continued to grow our Steam costs offerings for Youdao go Youdao wait fee its gross billings and user engagement has been growing rapidly since its launch last year.
During the quarter, we upgraded its current AI system during the period giving our students more efficient platform for practices. Youdao [Indiscernible], Youdao Xiaotuling, which prepares children for programming education, launched pricing classes in this quarter and became a member of China Computer Federation Programming Trainer Accreditation. Our reach in the adult education space is also expanding as encouraged by the authorities.
For example, our extraordinary memory, [Indiscernible] retained its leading position with gross billions approaching R&D $100 million in a single quarter. We also recently announced a collaboration with Amazon Web Services, AWS, to bring its 3 digital training courses to Chinese users on NetEase for our classroom. Living devices remain robust with high -- record-high revenues of R&D $255 million, a 56% increase year-over-year.
Youdao continuously upgrades and enriches its product offerings to facilitate efficient learning on the different scenarios. In the third quarter, collaborating with the People's Education Electronic and Audiovisual Press, we launched a new version of our award-winning dictionary pen containing over 4,000 original sounds from textbooks published by the Press.
We also rolled out our Youdao listening part in September, which helped improve student's English skills in listening, speaking, and reading through real-time intelligence scoring and pronunciation correction function. In addition, we are working with local schools experimenting with different digitization solutions, which gave school teachers more automated teaching and grading tools and facilities, enabling more efficient teaching.
Now, looking at our Cloud Music business, we continue to improve our differentiated music community ecosystem by our product and content enhancements to keep us ahead of the curve. We are now better positioned amid a healthier industry development. Our top-line growths drive solid margins in the third quarter, representing our second consecutive quarter of positive growth margins.
Some of our innovations include upgrading our main Cloud Music homepage in August, adding new community features. Users are also in joining our newly-launched music [Indiscernible] function, which opens the video creation capacity to individual users, allowing them to distribute customized content to frame.
In addition, we launched Village Citizenship Cloud, giving each of our users a personalized ID in Cloud Village, allowing them to feel a fresh sense of belonging. This created a lot of bonds on the social media, further extending our brand influence. In combination with other industry players, we are actively working to secure more high quality content with respect to ROI, especially following the recent favorable industry changes.
In the third quarter, we completed a direct agreement with Warner Music Group, which means we now have direct digital distribution contracts with all the 3 of the world's largest recording label groups. We are also pleased to see such favorable collaborations with big labels at a more reasonable cost structure, providing us with the flexibility to optimize our content investments using a more disciplined and predictable approach.
Meanwhile, we are also actively competing -- completing our major Chinese music library. Recently adding several new copyright, including Modern Sky, one of China's largest independent record labels, and Emperor Entertainment Group, one of the largest entertainment groups in Hong Kong. Our negotiations with some major music labels are close to being finalized and we expect more to come further complementing our song library offering.
Turning on to Yanxuan as NetEase private-label consumer brands. Yanxuan continues to build its brand awareness by regularly launching highly popular products by our diversified channels. Apart from solid sales growth from external e-commerce channels, we now have things strong momentum from short video platforms such as [Indiscernible] and Kuaishou with top popular products like bathroom fragrance and coffee brackets.
Our advanced and differentiated original design products are being very well received by the users and the market. In Q3, we successfully launched several original design series across categories, including clothing, dining and kitchen, home furnishing, and personal hygiene and maternity. We are gaining increasing recognition for excellent design and creative style.
In August, we won 2 prestigious Red Dot Award for our Dear John bedding design and Yanxuan Dunhuang Museum key packaging design, competing amongst thousands of design submissions that came from more than 60 countries and regions. Sleeve [Indiscernible] adds to NetEase Yenshen increasing number of award and all [Indiscernible] which includes the 2021 German iF Design Awards along with many other international awards and recognitions from the design industry.
During the Double 11 promotion, we recorded over 100 million GMV through Taobao and Tmall channels, and on JD, we were also the number one brand for daily goods and products. Commensurate with our way extensive growth across our businesses, our capacity to give back has grown as well, enabling us to amplify our ability to help our communities.
Our resolve towards social responsibility has also been heightened by the immediate needs of those will have fallen victim to natural disasters and public health crisis. Most recently, we were deeply saddened by the destruction and loss felt by those Jiangxi and Henan provinces.
To help these flood-ridden areas ravaged by natural disaster, NetEase has donated over $50 million to Henan and RMB 20 million Jiangxi to support much needed relief assets and posted after reconstruction. The mounting metro disasters tell us that we all must become better custodian of the earth. As a corporate citizen, NetEase is committed to environmentally responsible action.
In addition to our financial contributions towards natural disaster alleviation and restoration, we're leveraging our strength and resources for environmental protection. We believe games have the power to raise awareness among billions of people across the globe about environmental conservation and restoration.
In the third quarter, [Indiscernible] one of our flagship titles joined the second annual Green Game Jam, organized by the UN facilitators, playing for the planet alliance. Player needs to go to the forest in the game, to put out the forest fire during the activation. Our participation in these alliance, represents NetEase increased social responsibility, using games as a tool to create environmental awareness to help protect our planet.
As we continue to advance our environmental and social pursuits, we are thankful for our growing business that allows us the financial capability and social influence to support these efforts. Moving ahead, we will continue to cultivate our business by exploring more creative practices to enrich our broad content, increase our product exposure, and bring even more diverse and engaging experiences to our users while leveraging our strengths to enact positive social and environmental change.
This concludes William's comments. I will now provide a brief review of our third quarter 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 third quarter were RMB 22.2 billion or $3.4 billion representing 19% increase year-over-year.
Our net revenues from online games services were RMB15.9 billion up 15% year-over-year. The-year-over-year increase was primarily due to our newly launched games, such as NARAKA: BLADEPOINT and Harry Potter: Magic Awaken, as well as from existing games such as Fantasy Westward Journey Online and Westward Journey Online 2.
Net revenues from our mobile games, accounted for approximately 69% of the total net revenues from online game services in the third quarter. Youdao 's net revenues reached RMB 1.4 billion, up 55% year-over-year, driven by fast-growth of [Indiscernible] Youdao Q3 services, as well as increased sales of intelligence learning devices. Of the Q3 total revenues, about 25% of that relates to academic subject courses in China 's compulsory education system.
Net revenues from innovative businesses and others were R&D $4.9 billion for the third quarter of 2021, up 26% year-over-year, mainly due to increased contribution from NetEase Cloud Music. For Cloud Music, both membership and live streaming revenues maintained solid growth momentum, driven by robust paying user expansion.
Our total gross profit margin was 53.2% in this quarter, with the breakdown as follows: Gross profit margin for our online games services was 64.5%. As a reminder, this number is generally stable with some narrow fluctuation based on the revenue mix of mobile and PC type host, as well as self-developed and licensed games.
Gross profit margin for Youdao was 56.6%, compared with 45.9% in the same period of last year. Significant growth was primarily attributable to the improved learning services gross margin due to improved economies of scale and continuous optimization of our faculty compensation structure.
Substantial sales growth of the smart learning hardware, such as our Youdao Dictionary Pen 3.0, also contributed to these gains as this line carries a higher gross margin than other product lines. Gross profit margin for innovative businesses and others was 15.6%, compared with 16.8% last year. The decrease was mainly due to decreased gross profit margin from the games streaming business and CC live streaming.
NetEase Cloud Music, however, enjoyed its second consecutive quarter of positive GP margin. For the third quarter, total operating expenses were RMB 8 billion or 36% of our total net revenues. Our selling and marketing expenses as a percentage of net revenues were 14.1%, compared with 14.7% in the prior quarter. The quarter-over-quarter decrease was mainly due to decreased marketing-spending related to Youdao.
R&D expenses were RMB 3.8 billion. The third quarter is our seasonally high quarter for R&D as our new campus hires graduates and commences their career with us. We remain committed to investing in content creation and product development, which is call to our sustainable future growth. The effective tax rate was 19.6% for the third quarter [Indiscernible].
The effective tax rate is presented on an accrual basis and a tax credit differs from each of our entities at different time periods depending on applicable policies and our operations. Non-GAAP Net Income attributable to our shareholders for the third quarter totaled RMB 3.9 billion or $599 million. Our non-GAAP basic earnings per ADS, were $0.9 or $0.18 per share. Our cash position remains strong.
As of September 30th, our total cash and cash equivalents, current and non-current time deposits, and short-term investment balance total RMB98 billion compared with RMB100 billion, as of end of last year. In accordance with our dividend policy, we are very pleased to report that our Board of Directors, has approved a dividend of US$0.045 per share, or US$0.225 per ADSs.
Lastly, under the current two-year share repurchased program, approximately 13.5 million ADSs have been repurchased as of September 30, for a total cost of approximately US$1.3 billion. Meanwhile, under NetEase, Youdao share purchase program, approximately 0.1 million ADS, has been purchased for a total cost of $1.8 million as of September 10th. Thank you for your attention. We would like to open the call to your questions. Operator, please go to Q&A.
Thank you. [Operator Instructions]. We will now take our question from Alex Poon, from Morgan Stanley. Please go ahead.
[Indiscernible], My question is -- first of all, congratulations on very strong results and gain pipeline. My question is regarding Harry Porter overseas release schedule. Do we have more specific timeline for different regions for release next year? How's the progress of content localization and community localization, etc.? How's -- do we have a revenue expectation for overseas? How is it compared with China revenue? Thank you very much.
Thank you, Alex. Let me answer your question directly in English. We have a strong pipeline and Harry Potter is one of them. And right now, we're subject to obviously the progress of localization. We intend to launch Harry Potter to some overseas market, as early as first half of next year. And given the huge fan base of the Harry Potter IPO worldwide and particularly encouraged by the very strong performance of Harry Potter in China.
We are hopeful that, this game would become a worldwide sensation. The publishing right is a commercial arrangement between NetEase and time wanted for some of the markets, NetEase will be in charge of publishing, well by, majority of the overseas market publishing will belong to [Indiscernible]
Charles, thank you.
Thank you. I will take our next question from Alicia Yap, from Citi. Please, go ahead.
Thank you. [Indiscernible] Thank you, Management. My question is related to NetEase Cloud Music. So how do you see the overall competitive landscape and also the time spent dilution from the short video platform? Do you worry is the leading short video platform like Douyin, that could enter more aggressively in the online music content that could actually pose some threat to Cloud Music overtime and also affect the user time spend on Cloud Music. Thank you.
[Indiscernible]
We do observe that, at least in the short-term, short-format video -- though all the general video format has taken some of the user time spent. That not only knew that, but also in games, in other forms of entertainment. But what's the major difference between music and the video is that music creates that resonance between users. It creates an immersive experience for users.
So videos, if you put one -- after you watch one video, you probably don't want to watch it again. But for music, you tend to want to listen to it over and over again if it's a piece of music that you love. The second question on competitive -- on potential new competitors, new entrance to the market, our view is that this is a very open market.
We very much welcome others to join and help those independent musicians in China to realize their dreams. Thank you. [Indiscernible]
We will now take our next question from Natalie Wu from Haitong International. Please go ahead.
Thank you. [Indiscernible] Thank you for taking my question and congratulations on a better short quarter. So my question is regarding NARAKA BLADEPOINT. Just want to get an update of the Cobby bank digital Youdao's revenue contribution versus in-game purchase revenue contribution at the point of 6 million copies worldwide.
And also for each part, how should we understand the deferral treatment in terms of the revenue recognition? Also, if management can share with us some thoughts on the longevity of these games, that would be great. Thank you.
Natalie, in the interest of time, I'll answer that question directly in English. Firstly, on your question on revenue recognition. So both for the copy of sales, as well as the team app purchase, we adopt the revenue deferral treatment over an expected life spend. So this is consistent with our revenue recognition treatment of other PC and mobile games.
Obviously, with the games being launched a few months back, now the more -- and the gross billions will come more and more from the in-app purchases, which we are very confident that NARAKA: BLADEPOINT, just like many of our other NetEase flagship titles, will have a very time - proven longevity.
We think a combination of stellar global sales record for copies, as well as our longevity through operation, through content update, this will create a unique model for the global PC games in terms of proving the longevity and sustainability of the gross billion over the longer term. Hopefully that answers your question.
Yes, very clear. Thank you, Charles.
We can now take our next question from Kenneth Fong from Credit Suisse. Please go ahead.
[Indiscernible]. Thank you management for taking my question. I have a question on the NetEase Cloud Music. Note that we have obtained full corporate rights authorization from Emperor Entertainment recently, and also the big 3. So how should we think about the pace of signing up new copyrights and impact and benefits on our content costs and the margin going forward? Thank you.
[Indiscernible]
Over the last few years, the masses in China have not been perfect, which is why the industry players in music industry have been paying a much more expensive price to the label companies than anywhere else in the world. As everybody has seen, on July the 24 and authorities have base guidelines to certain companies and asked them to give up exclusive rights.
So I think overall, we would like to see is that -- where we would like to see is to be able to pay a fair price to the label companies across the world. And now we have -- we are confident under the right -- under the right direction from our authorities that the Chinese type music industry will continue to converge into the same -- in the right direction.
At secondly, we seen that every music Company in China, should be really be focusing on helping independent musicians to create good music, to create future relates and positive messages. As a socially responsible Company, NetEase Cloud Music has been making those preparation. And that is our agenda and is our goal. Thank you.
Shi, Thank you.
Steve and I will take our next question from Thomas Chong, from Jefferies. Please go ahead.
[Indiscernible] Thanks, management, for taking my questions and congratulations on a very strong set of results. My question is about our M&A strategies as well as the use of cash. In addition, can management share about the cost in terms of the trend in operating expenses? Thank you.
Thank you Thomas. I will answer your question directly in English. So firstly, for our M&A strategy, NetEase has always been a very -- we're always very focused in our core pillars of businesses, games, Online, music, on online education, private label brand yen share. So our business development will be concentrated in our major verticals.
And we obviously prefer and for the past two decades or so, we've been growing organically, but we also remain highly active to explore opportunistic opportunities to deploy M&A to further supplement our growth. That's always been our consistent approach towards M&A. In terms of the cash proceeds used, again, we invest most of the cash into ourselves, into our talent acquisition and retention, into our content creation, and it takes patience and it takes commitment.
For instance, a major title of next blockbuster game can easily take a few years. We speak budgets to develop. I think this is also one of our competitive edge that has a major gain -- a powerhouse that we can afford, and we can be determined to focus on what we are really good at and what we really want to create. OpEx trend is, I think, NetEase has been listed for over 21 years and we always had a very consistent approach into expense management.
We focus greatly on our return, given our strong cash balance sheet, we are not shy to spend money. However, we never burn cash for the sake of spending money. Whenever we spend money in terms of selling, marketing into R&D, it is ultimately ROI -driven, that we want to make sure that the money we spent today may not necessarily give us the top-line return within the same quarter, but we will be handsomely rewarded.
As such, we expect that we maintain a prudent, yet healthy level of selling marketing. On the R&D front, we are committed to spend more. That is also encouraged by the authorities, and I think that is also what a long-term sustainable technology Company should do. Thomas, that's the answer to your question.
Thank you, and congratulations on a strong quarter again.
Thank you Thomas.
We'll now take our next question from Eddie Leung, from Bank of America. Please go ahead.
[Indiscernible] I will do the translation myself. I have a follow-up question on your pipeline for the overseas game market. We understand that a good gain should be public across our different regions. But there are also our cultural and [Indiscernible] differences. So just wondering the size are working with overseas due deals. If you were tiny studios will also be involved at in our game projects, be signed as specifically for the overseas markets? Thank you.
[Indiscernible]
It also comes from Japan. So our China-based team, they have most -- their main focus is on the Chinese-themed games that they know well. The Chinese speaking countries. But secondly, we also -- we have been putting a lot of energy and resources in games that coveted for the global launch. For those games, when they think about the game play, the world view and all the details in a global manner.
And all those types of games are typically joint-developed by our China-based teams and some of our overseas games. For example, Montreal and certainly we also have games that are being developed solely by the overseas teams who will be working on games that you buy -- that buy them and are targeted in the markets that they know the most [Indiscernible] And so altogether, we hope to introduce to the global audience more and more exciting games to play. Thank you.
Thank you.
We will now take our next question from Jialong Shi from Nomura Securities. Please go ahead.
William, Charles, Margaret, and [Indiscernible] I will translate myself. My question is about metaverse which is a very hot new area these days, and lots of companies are planning to invest heavily in this field. Can management share with us your vision on metaverse and what are the potential growth opportunities it may bring to the online gaming industry. And what are your strategies to tap this opportunity? Thank you.
[Indiscernible]
Okay. Yes. So [Indiscernible] is indeed, the New [Indiscernible] everywhere today. But then on a hand, I think nobody has actually had [Indiscernible] time experience in what it is. But we are technology totally ready. We know how to accumulate the relevant know-how, the relevant skill-sets, when that day comes. So I think when that day eventually comes, we will probably be one of the fastest [Indiscernible] in the methods by the state. Thank you Delo.
At this time, I would like to turn the conference back 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 directly on TPG Investor Relations. Have a great day. Thank you.