NetEase, Inc. (NASDAQ:NTES) Q2 2021 Earnings Conference Call August 31, 2021 8:00 PM ET

Company Participants

Margaret Shi – IR Director of NetEase
William Ding – Chief Executive Officer
Charles Yang – Chief Financial Officer

Conference Call Participants

Alex Yao – JP Morgan
Kenneth Fong – Credit Suisse
Alex Poon – Morgan Stanley
Natalie Wu – Haitong International
Thomas Chong – Jefferies
Eddie Leung – Bank of America Merrill Lynch

Operator

Good day and welcome to the NetEase 2021 Second 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.

Margaret Shi

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 guaranteed future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of this list is beyond the Company's control and could cause the actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factor that could affect NetEase's business and the financial result, which is included in certain filings of the Company with the Securities and Exchange Commission, including its annual report on Form 20-F and the announcements and their filings on the 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 also discuss certain non-GAAP financial measures for comparison purposes only.

For definitions of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2021 Second Quarter earnings, a 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 the NetEase corporate website at ir.netease.com. Joining us today on the call from the NetEase Senior Management team is Mr. William Ding, our Chief Executive Officer, and Mr. Charles Yen, our Chief Financial Officer. I'll now turn the call over to Charles who will read the prepared remarks on behalf of them.

Charles Yang

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 calculated based on the renminbi. Our gross momentum continued in the second quarter with total net revenues of RMB 20.5 billion, representing an increase of 13% year-over-year. But for our online games, in the second quarter, total revenue was RMB 14.5 billion, up 5% year-over-year, despite a high comparable base in 2020. Our PC and mobile games remain our dual growth engines for online games.

On the PC side, NARAKA BLADEPOINT, our next-generation Battle Royale game is one of the hottest games in the market. First launched in China in July, followed by the global launch in August the 12th. NARAKA BLADEPOINT quickly became the best weekly seller on Steam, winning the enthusiasm of Chinese and overseas players and marking a new breakthrough for us in the global market. With captivating gameplay and state-of-the-art graphics, NARAKA BLADEPOINT's debut was very well received among hardcore players in Western markets.

We will continue this positive trend by introducing more content from different cultures around the world, and start to work on other formats of the game, including console games and mobile versions as we look to tap into these large market opportunities in China and abroad. Our legacy flagship PC titles, particularly FWJ, New Westward Journey Online, and TianXia continue to show remarkable longevity with strong year-over-year growth to nearly two decades of operation. We have created a strong and sophisticated social community within each game. And we continue to keep our users engaged with the regular introduction of high-quality expansion packs.

This type of longevity has also been extended to the mobile side. Fantasy Westward Journey mobile game, Westward Journey Online mobile game and there are spin-offs continue to demonstrate strong performances during the second quarter. Touching on some highlights from a few other mobile games this quarter, LifeAfter remains an iconic title, holding strong appeal with young users.

We introduced a major annual expansion pack, The Reverence in August, offering players a new category of characters, new maps, and more gameplay options. These innovations allow our gamers to explore the doomsday world in an unprecedented and exciting way, bringing LifeAfter back to the top of China's iOS download chart. Onmyoji Arena, our mobile game based on our proprietary Onmyoji IP, has progressively built strong appeal among the young generation of players.

Leveraging our strength in art design, Onmyoji Arena has impressed users with its widely acclaimed skin art across various themes, including Chinese traditional culture, cyberpunk, and Japanese anime. Some of these game designs have even become high trending topics, bringing us a continuous stream of new players. Onmyoji, the original flagship game is another NetEase game that continues to shine and frequently leads China's iOS top grossing chart. During the second quarter, we've rolled out a new version that's greatly enriched the Onmyoji world.

The update features a fascinating new storyline and two popular new characters that thrilled our player community. Again, fortifying Onmyoji spending as a hot AGC seams game in China. During the second quarter and more recently, we have also expanded our offerings in new genres as we continue to diversify our game portfolio. We launched Ace Racer in Dubai, our very first self-developed racing game.

leveraging our industry-leading art and graphic capabilities, Ace Racer featured track designs based on real urban landscapes of Chinese cities, such as Hangzhou and [Indiscernible] . Shortly after its release, Ace Racer tops the iOS download chart and reached the top ten on China's iOS growth in China. Two weeks ago, Infinite Lagrange our space-themed SLG game made a strong debut in China, climbing up into a top 3, top, 30 titles on the iOS grossing chart in less than a week.

As a new game of this genre, we introduced it to the Chinese market after Invincible, we hope Infinite Lagrange will also earn the respect of game players and a good share of the XLG market through its content innovation. Other new games that we recently launched in China include Pokemon Quest, Marvel Super War. These games further enrich our dynamic domestic game portfolio genre, and many of them quickly reached the top of the iOS downloads chart, following their releases.

Moving to the overseas market, we are very excited to see our gains keep reaching new milestones outside of China. Over 3 years ago, Knives Out made its name in Japan and became one of the highest-grossing games ever made by a Chinese game developer to go overseas. Knives Out has held its leading position and continues to take its place in the upper echelons of Japan's iOS top grossing chart, particularly when following various collaborations with well-known local Japanese IP s, such as Eva and One Punch.

Today, NARAKA BLADEPOINT has emerged as our net breakthrough on the international stage, which further boosts our global expansion asset by opening the door to the mainstream Western market. On Steam alone, NARAKA BLADEPOINT has achieved the milestone of 100,000 peak concurrent users. And the number will be even higher when we include players who played a game on our official channels.

As one of our global initiatives NARAKA BLADEPOINT start-off with Chinese martial art culture, and then substantially broadens this concept to Eastern fantasy by introducing Universal elements more familiar to western players, such as new characters like Persian Warriors and new weapons such as muskets and canons. These elaborate designs have greatly helped fuel strong mind share amongst the hardcore player community in the western market. Furthermore, for Harry Potter

Magic Awakened, one of the market's most anticipated titles, we closed the final round of beta testing in June with very encouraging user feedback. It is now set for launch on September 9th across the Chinese Mainland, Hong Kong, Macau, and Taiwan. And will be successively launched to various other regions, globally. We look forward to seeing eager global players become Hogwarts freshmen, meet diversified wizard partners, learn spells, gain magic knowledge and experience the amazing life of wizardry. The Lord of the Rings

Rise To War is another exciting title coming soon. Pre-registration for this game has been available since August the 25th with engaging and thought-provoking gameplay, as well as the strong appeal of the Lord Of The Rings IP. We see great potential for this release and look forward to impressing players with its global launch, which is now confirmed to be on September the 23rd. For Diablo Immortal in July, we had our first Beta testing in China, and we are very excited about the strong feedback from the user community.

We will keep working to bring our worldwide players engaging game experiences. The list goes on. We have a handful of other exciting titles in our pipeline as well. A few other pre-announced names include Nightmare Breaker, a PC game, and Ghost World Chronicle. Our mission to create world-class games for players has never wavered. We are relentlessly scaling new highs, in terms of game development technology. Our game engine is one of the key assets within our R&D infrastructure.

Recently, we've made a significant step forward with one of our flagship game engines, Messiah, in which we are planning to have implemented the world's first high-quality real-time global illumination algorithm in our mobile devices. This is a major breakthrough with our in-house engine technology, helping us to greatly speed up the pace of our artistic development and bringing world-class visual effects into our games. Turning to Youdao, our next revenues in the second quarter were RMB 1.3 billion representing a 108% growth year-over-year. As an intelligent learning Company, Youdao is and has always been committed to enhancing its competitiveness for the young generations through advanced technology.

In line with evolving national [Indiscernible] guidelines. Our aim is to explore new strategic opportunities in non-academic businesses, such as Steam costs, adult learning, and smart learning hardware devices. In the second quarter, we further expanded our Steam costs offering. For example, Net's revenues from Youdao go Youdao [Indiscernible] increased by nearly 180% quarter-over-quarter. And we launched more advanced level costs to further meet our user's growing learning needs.

Back in March with an eye towards the growth opportunities in the adult education sector, we established a dedicated division on adult, education is integrating our Youdao premium courses for adults, China University MOOC, and NetEase Cloud classroom. In terms of premium courses for adults, its net revenue is accounted for around 22% of total net revenues in the second quarter.

Meanwhile, we launched an upgraded version of our practical English course to provide adult users with more immersive and effective learning experiences. In addition, 137 courses on the China University MOOC platform have been certified by the Ministry of Education as recommended courses for academic studies and continued career development.

Learning devices remain another major revenue source for Youdao with a mission to improve learning efficiency. This segment generated net revenues of RMB 206 million in the second quarter, increasing 139% year-over-year. We also introduced a new version of our dictionary pen, Youdao Dictionary Pen K3, designed to be more friendly to elementary school and pre -K kids more affordable, and supportive of learning arithmetic, in addition to English and Chinese.

With that said, we expect Youdao to be somewhat less affected by the recent regulations as it has other high-growth businesses in addition to existing K-12 experiment after-school tutoring classes, whose revenues accounted for around 41% of Youdao 's total revenue in the second quarter.

Looking ahead, Youdao will continue to strictly comply with national guidelines and we are confident in Youdao 's future development as Youdao has one of the most talented R&D and teaching skill sets in the industry. Looking at our cloud music business, we have successfully maintained our user gross momentum over the past quarter despite an industry-wide slowdown.

While DAU over MAU ratio remained above 30% in the second quarter. Owing to our advanced social networking functions and promotion line, agent [Indiscernible] VIP program in second quarter, our membership paying ratio almost doubled year-over-year. In terms of margin, we continue to see improvements with our cloud music business as it increases its scale. In the past quarter, NetEase Cloud Music achieved a positive gross margin for the first time ever, marking a new milestone with our music operations.

We believe that our ongoing top-line growth in this segment will position us to continue driving margin expansion over time. We keep our users engaged through constant innovation and product improvement. Earlier this year, we gave our price-winning function, Listen Together, another new touch, allowing users to listen to music together not only with friends but also with other users, providing additional social networking opportunities. Furthermore, our newly launched function Playlist Sharing, [Indiscernible] has been very well received by our users, allowing multiple users to co-create and manage playlists at the same time.

On the content side, we are pleased to see the changes that the music industry is currently undergoing, which pave the way for strong and sustainable growth over the long term. We hope to work together with other industry players who ensure quality music is accessible to a wider audience, at a more reasonable cost, which will ultimately benefit music lovers and the industry as a whole. Now, turning to Yanxuan, as our private label consumer brand, which continues to focus on building Yanxuan's brand equity.

Primarily, we are introducing highly popular products with proprietary award-winning product designs and strictly controlled product qualities. In April, Yanxuan Health Care Series and Mooncake cake box won the German iF Design Award 2021. Working with major channels including Taobao, Tmall, and JD, our recognition from the broader public is actively growing.

During the June 18 promotion period, Yanxuan topped JD's household daily sales list, and our cat food category recorded the highest domestic cat food sales on both Tmall and JD for the first day of the June 18 promotion. In June of this year, we published our 2020 ESG report outlining our ESG policy, achievements, and improvements we made throughout the year. We started our ESG efforts as early as 2018 and issued our first ESG report last year.

As a Company deeply committed to its social responsibilities, we will be keeping our effort to being a responsible public Company, and we will continue to pursue the ESG initiatives and we'll forge ahead with our strengths to create greater value for our stakeholders and the community at large. Finally, during the quarter, we celebrated our 24th anniversary. As we review our past and look toward our future, we know innovation is key. Innovation has been at the heart of our journey.

And will continue to be the driver for our future growth. It empowers us to create amazing products and services that are adored by hundreds of millions of people. As we move forward, we will be dedicating even more time and resources to identifying and training talent, and fostering innovations that create a more promising and exciting future in each of the verticals we operate. This concludes William's coming. I will now provide a very brief review of our second quarter 2021 financial results. Given the limited time of 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 the second quarter were RMB 20.5 billion or USD 3.2 billion, representing a 13% increase year-over-year. Our net revenue from online games services, while RMB 14.5 billion up 5% year-over-year, despite last year's high base benchmark. The year-over-year increase was primarily due to newly launched games, Revelation mobile games, and existing games such as Fantasy Westward Journey Online. Net revenues from our mobile games accounted for roughly 72% of total revenue, and overseas revenue accounted for roughly 10% of total revenue in the second quarter.

Youdao 's net revenues reached RMB 1.3 billion up 108% year-over-year, driven by the fast growth of both Youdao online courses and the sale of intelligent learning devices. Net revenues from innovative businesses and others were RMB 4.7 billion for the second quarter, up 26% year-over-year, mainly due to the increased contribution from NetEase Cloud Music. For Cloud Music, both membership and [Indiscernible] streaming revenues maintained solid growth momentum driven by robust paying user expansion. Overall, the total gross profit margin was 54.5% with a breakdown as follows, the gross profit margin for Game Services was 66.1%. As a reminder, this number is generally stable, with some narrow saturation based on the revenue mix of PC versus mobile games, as well as self-developed and licensed games. The gross margin for Youdao was 52.3% compared with 45.2% in the same period of last year.

The significant year-over-year growth was mainly attributable to the improved learning services gross margin, which was due to improved economies of scale and continuous optimization of its faculty compensation structure. Substantial sales, growth of smart learning hardware such as Youdao Dictionary Pen 3.0 also contributed to these gains, as this line carries a higher GP margin than another product line. The gross profit margin for innovative businesses and others was 19.3% compared with 18.5% last year. The improvement was mostly driven by NetEase Cloud Musi as its gross margin turns positive for the first time during the quarter.

For the second quarter, post-operating expenses were RMB 7.4 billion, or 36% of our total net revenue. Our selling and marketing expenses at a percentage of net revenue were 14.7%. If we exclude Youdao, our selling and marketing expenses as a percentage of net revenue were 10.6% compared with 10.7% in the second quarter of last year. R& D expenses were RMB 3.4 billion, largely stable from the previous quarter. We remain committed to investing in content creation and product development, which is core to our revenue growth.

As a percentage of net revenue, R&D expenses accounted for 16.6% compared with 14.9% in the previous quarter. The effective tax rate was 24.3% for the second quarter. As a reminder, the effective tax rate is presented on an accrual basis, and the tax credit differs from each of our entities at different time periods depending on applicable policies and our operation. Non - GAAP net income attributable to our shareholders for the second quarter totaled RMB 4.2 billion or the U.S. $655 million.

Our non-GAAP basic earnings for ADS were the U.S. $ 0.89 or 0.20 per share. Our cash position remains strong. As of June 30th, our total cash and cash equivalents, current and non-current time deposits, and short-term investment balance totaled RMB 1.8 billion compared with RMB 100 billion as of the 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 U.S. $0.048 per share or U.S. dollar 0.24 per ADS.

Lastly, under the share repurchase program approved by our board of February 25th, approximately 4.6 million ADS has been repurchased as of June 30th, for a total cost of approximately 0.5 billion US dollars today, our board announced the approval of the amendment to further increase the total authorized repurchase amount from the previously approved U.S. dollar 2 billion, to a new cap amount of 3 billion U.S. dollars. Additionally, our board has also approved a share purchase program of up to the U.S.$50 million of Youdao 's outstanding ADS for a period not to exceed 36 months, beginning on the 2nd of September. Thank you for your attention. We would like now to open the call to your questions. Operator, please go to Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Again, [Operator Instructions] to ask a question. And for the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have a follow-up question, please rejoin the queue. And we will now take the first question from Alex Yao from JP Morgan. Please go ahead.

Alex Yao

[Indiscernible] . Thank you, Management, for taking my question. I have a question on teenager in-game indulgence and the new policy introduction. Can you share with us your policies on teenager in-game indulgence protection? And also, how should we think about the impact of the recently introduced new policy that minors cannot play a game during the weekend? They can only play the game at a specific time, i.e. 8:00 PM to 9:00 PM from Friday to Sunday -- how should we think about the financial and the operational impact to your gaming business? Thank you.

Charles Yang

[Indiscernible] [Indiscernible]

Margaret Shi

Yes. I'm sure many of you have read on the news about the new anti-addiction protection measures that the government has issued on teenagers underage kids.

there are some very prudent requirements such as only 3 hours a week is allowed to play games. As one of the largest gaming companies in China, we're in full support of this decision. Over the past years, we have noticed there are certain games around the industry that has had a negative impact on children.

And then -- so we think that the new requirements, the new regulations will keep teenagers away from people, teenagers, away from games for as far as possible. So we want companies anything to treat together to support this regulation and requirement. And also, financially, we would like to share with you that less than 1% of our revenue actually comes from under-aged children. Thank you.

Charles Yang

Alex, just to clarify, when we say less than 1%, we are defining minors at age below 18. Different companies might have disclosed different data, but according to China law, minors [Indiscernible] definition is for people below the age of 18. For that category of population, it accounts for less than 1% of our total games gross billing, financial implication.

Margaret Shi

Thank you.

Operator

And we will now take our next question from Kenneth Fong from Credit Suisse. Please go ahead.

Kenneth Fong

Thank you, Charles and Margaret. [Indiscernible] [Indiscernible] Thank you for taking my question. I have two questions. One is the new regulation for online game boost, this can limit the exposure for the underage. While the short-term financial impact will be limited, how should we think about clearer cultivation going forward, and will that limit the longer-term or medium-term potential for fleet growth? The second question is, with no more exclusivity for the music copyrights, how should we think about our direction, pace, as well as investment in the music copyright and content going forward? Thank you.

Charles Yang

[indiscernible]. [Indiscernible]

Margaret Shi

Yes. On the first question, we think that the healthy wholesome growth of our children, it's a top priority for the nation, for the government. And as a Company, we need to think about our responsibility. We need to think about -- think long-term and for the greatness of the society. So we are interested -- in making positive high-quality games that appeal to adults and appeal s to the audience around the globe. Well, we are not as interested in making a profit in -- through minors.

And to answer your second question, as you might have just noticed that TME has just announced -- made announcements about relinquishing the exclusivity, and we certainly hope that is a sincere announcement from TME, it's not a decision. They are not going to be saying one thing and do another. Here, we want to appeal to the opportunity to appeal to the label companies and every stakeholder and partner in the industry to co-create a wholesome, balanced news industry and NetEase with ultimate sincerity and sufficient funding. We want to work together with at one in this industry.

William Ding

[Indiscernible]

Margaret Shi

I would also like to add that we are very thankful for the right decision that the regulatory bodies have made relating to the antitrust regulations and policies. The antitrust policy says a very clear and positive, and very exciting signal to the entire industry, which is what is anticipated and warmly welcomed by users. Thank you.

Kenneth Fong

Thank you.

Margaret Shi

Thank you, Kenneth. Next question.

Operator

And we will now take the next question from Alex Poon from Morgan Stanley. Please go ahead.

Alex Poon

[Indiscernible]. [Indiscernible] . I'll translate myself. My question is related to the strong game pipeline in the second half, including Lord of the Rings, NARAKA BLADEPOINT BLADEPOINT, Harry Potter, and Nightmare Breaker, etc. And all of these games are very strong titles. How should we think about the game revenue growth and the contribution from these games, especially starting in the fourth quarter? Thank you very much.

Charles Yang

Thank you, Alex. I'll answer your question directly in English. As you may know, NARAKA BLADEPOINT was already launched in the summer, and we have made another major breakthrough on the Steam platform. This -- again, this is not only a new genre game but also a new achievement I think very excited to witness. Next month is going to be busy. Harry Potter, Lord of the Rings, and a few other games are all set to launch in September, with a few others in the latter half of this year.

The one thing though, I want to reiterate is that NetEase -- here at NetEase, we always emphasize the quality of the games, the longevity of the games, and the user appreciation and receptivity of these games. We are not so much interested in the financial ups and downs in one particular quarter or two, but rather we are very confident that our relentless effort in launching these new games will continue to diversify our gaming genre offerings continue to advance our global expansion initiatives, as well as gaining more market share across different categories of the games.

And to echo what William commented earlier on, we really think the open secret of winning the heart of the gamers is through the quality and the content, rather than any other tricks or measures. So Alex, hopefully, that answers your question.

Alex Poon

[Indiscernible] , Charles. Thank you.

Operator

And we will now take the next question from Natalie Wu from Haitong International. Please go ahead.

Natalie Wu

[Indiscernible] Thanks, Ms. [Indiscernible] Charles and Margaret for taking my question and congratulations on another solid quarter. My question is regarding the game NARAKA. So just wondering what's Managements expectation for the game regarding the revenue model. What percentage of the revenue will come from the copy-based and RT-based revenue model. And then also, how should we see the longevity of this game? And will there be more derivative versions of another genre of NARAKA coming out in the future? And also, will this success have any potential shift on our strategic focus and investment in the future? Thank you.

Charles Yang

[Indiscernible] . [Indiscernible] [Indiscernible] .

Margaret Shi

Thank you. Thank you, Natalie. Do they also come from [Indiscernible] Yes, for the game right now with Doctor Mix of copy-based sales and also in-game purchase. As of today, the items -- the in-game items that we've created have been very attractive to our players, which have caused a very encouraging sale of in-game items. So today, our in-game purchases actually contribute more than the copy basis sales.

Going forward, we'll continue to create more in-game items of assumptions that appeal to our worldwide users. In terms of longevity, we have a long-term plan for this game. Today, we actually host -- we have ranged a number of very exciting eSports campaigns in China and abroad will continue to introduce those new characters, the new gameplays, to keep the content interesting to our users. So we are very confident with the longevity of this game.

In terms of, the strategy going onto different formats of entertainment, we're actually going to launch this game on consoles around Christmas time, and we also have a team working on the mobile version of this game. And at the same time, we have -- we host equal campaigns around the world to keep creating various -- to keep the interest high around the game. And on that, we keep creating viral discussions of the game. So that's -- so we have a very holistic plan for NARAKA BLADEPOINT. Thank you.

Charles Yang

And Natalie, to your last part of the question, whether we -- whether there is any inspiration for our overall games strategy. I think the breakthrough achieved by NARAKA BLADEPOINT, gives us extra confidence in terms of diversification, not only in-game genres, but also in different distribution platforms. For instance, NARAKA BLADEPOINT is a very successful game that has tapped into the global, particularly the Western gamer community, via the Steam platform. I think that gives us more experience and know-how of developing and publishing future games, especially towards the global market. Operator, next question, please.

Operator

Thank you. We will now take our next question from Thomas Chong, from Jefferies. Please go ahead.

Thomas Chong

[Indiscernible] . [Indiscernible] Thanks, management, for taking my questions. My first question is about Harry Potter. Given the game is going to be launched worldwide, just want to get a sense of our expectation for this game in the domestic market versus the overseas market? Any color about our marketing strategies, the way that we attract users? Any strategy that can be shared would be grateful. And then my second question is about the reasons for regulatory and [Indiscernible] Given the government is having stringent measures about the fandom culture in China and more regulations on live streaming these days. Just want to get a sense of how the fandom culture will affect our music business, and also our live-streaming outlook? Thank you.

Charles Yang

Thank you, Thomas. I will answer your first question on Harry Potter directly in English. And William will comment on your second question. For Harry Potter, it is set to launch in the greater China area on the 9th of September, which is about 9 days from now, highly anticipated. Given the strong popularity and global appeal of the Harry Potter IP, we're very confident that the high-quality game will be a huge success, both domestically and in the international market. With this game launch, we are hopeful that it can further reinforce the NetEase game brand image amongst the global gamer community. That's the answer to your first question.

William Ding

[Indiscernible]

Margaret Shi

So we are actually in support of the recent regulations on the entertainment industry. For NetEase Cloud Music that we think that made an impact for us is somewhat minimal, because for us the priority, the strategic goal is about creating original music. So our focus is on helping independent musicians to create music. And those are talented individuals in China. Thank you.

Thomas Chong

[Indiscernible]

Charles Yang

Operator, next question, please. Thank you, Thomas.

Operator

Thank you. We will now take the next question from Eddie Leung, from Bank of America Merrill Lynch. Please go ahead.

Eddie Leung

[Indiscernible] [Indiscernible] . We have 2 questions. The first one is on the tax rate, we understand that certain Internet companies couldn't get the approval for -- to enjoy a preferential tax rate of key software subsidiaries recently. So just wonder if NetEase would see any impact on the tax rate? And then secondly, regarding the overseas game markets. So we expect NetEase to set up more overseas studios. And if so, any more color on the future plan? Thank you. [Indiscernible]

Charles Yang

Thank you, Eddie. Well, in the interest of time, let me answer your two questions directly in English. Firstly, on the tax rate, this is in fact not a new development in our 20-F issued earlier this year, we have already disclosed that there will be certain tax policy changes, as announced by the Tax Bureau earlier this year. Certain industries, including e-commerce, games, et cetera, are no longer eligible for the key software qualification. As a result, we can no longer enjoy the 10% preferential tax rate.

However, specifically for NetEase, for game businesses, we're still entitled to the high tag of qualification which grants us a 15% preferential tax rate, net-net, we believe these tax rate changes will have, roughly speaking, about 3% implication to us. So 2020, our overall effective tax rate is around 19%. I think this year, for 2021, a full year full-year level, our tax rate will be somewhere in the low 20 labor [Indiscernible] . Secondly, for our overseas gaming expansion, we've previously announced our ambition to achieve at least a 30% of our game gross billing contributed from the overseas market in 3 to 5 years' time.

We are very well on track to achieve that. NARAKA BLADEPOINT is a matter of the exciting achievements that we have. we have achieved this year. For the overseas market, we are now very proactively setting up overseas studios in Canada, in Japan, and in Europe. The format of our collaboration, or rather the format or strategies for us to tap into the international market can be very diversified, doesn't necessarily require us to set up our own standalone studios.

We are also very active in collaborating with world-class players around the world, supplementing each other's strengths. In some cases, jointly developed or co-developed shift gains that are targeting for the global gamer community. I think NetEase remains very open-minded, very practical, and very, very active in this regard.

Eddie Leung

[Indiscernible] . Thank you.

Charles Yang

Thank you, Eddie. Operator, in the interest of time, let us conclude the call today. Thank you all very much.

Operator

Thank you.

Margaret Shi

Thank you once again [Indiscernible] Maybe I'll just finish with those concluding marks. Thank you, once again for joining us today. If you have any questions, please feel free to contact us directly at [Indiscernible] relation. Have a great day. Thank you.

Charles Yang

Thank you.

Operator

And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.