Earnings Call Transcript
NetEase, Inc. (NTES)
Earnings Call Transcript - NTES Q2 2021
Operator, 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, IR Director
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 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 and the announcements and their filings on the website of the 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 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 are Mr. William Ding, our Chief Executive Officer, and Mr. Charles Yang, 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, CFO
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. 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 and followed by the global launch on August 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 in 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 their spin-offs continue to demonstrate strong performance during the second quarter. Touching on 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 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 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 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. By 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 other locations. Shortly after its release, Ace Racer topped the iOS download chart and reached the top ten on China's iOS grossing chart. Two weeks ago, Infinite Lagrange, our space-themed SLG game, made a strong debut in China, climbing into the 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, and we hope Infinite Lagrange will also earn the respect of game players and a good share of the SLG market through its content innovation. Other new games that we recently launched in China include Pokemon Quest and 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 games keep reaching new milestones outside of China. Over three 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 IPs such as Eva and One Punch. Today, NARAKA BLADEPOINT has emerged as our new breakthrough on the international stage, which further boosts our global expansion effort 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 the game on our official channels. As one of our global initiatives, NARAKA BLADEPOINT starts off with Chinese martial arts 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 cannons. These elaborate designs have greatly helped fuel strong mindshare among 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 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 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 engaging game experiences to our worldwide players. 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 achieving new heights 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 plan to implement the world's first high-quality real-time global illumination algorithm in our mobile devices. This is a major breakthrough in our in-house engine technology, helping us to greatly speed up the pace of our artistic development and bring world-class visual effects into our games. Turning to Youdao, our net 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 guidelines, our aim is to explore new strategic opportunities in non-academic businesses, such as adult learning and smart learning hardware devices. In the second quarter, we further expanded our ETL offerings. For example, net revenues from Youdao went up by nearly 180% quarter-over-quarter, and we launched more advanced level courses to further meet our user's growing learning needs. Back in March, with an eye toward growth opportunities in the adult education sector, we established a dedicated division on adult education integrating our Youdao premium courses for adults, China University MOOC, and NetEase Cloud classroom. In terms of premium courses for adults, its net revenue 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 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 growth 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, 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 in 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 prize-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 has been very well received by our users, allowing multiple users to co-create and manage playlists simultaneously. 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 to 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, the Yanxuan Health Care Series and Mooncake 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 keep our efforts to be a responsible public Company, and we will continue to pursue the ESG initiatives, and we will 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 towards our future, we know innovation is key. Innovation has been at the heart of our journey and will continue to drive 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 comments. 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 game services was 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, such as 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 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. The 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 other product lines. 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 Music as its gross margin turned 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 as 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 operations. Non-GAAP net income attributable to our shareholders for the second quarter totaled RMB 4.2 billion or USD 655 million. Our non-GAAP basic earnings for ADS were USD 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 100 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 USD 0.048 per share or USD 0.24 per ADS. Lastly, under the share repurchase program approved by our board on February 25th, approximately 4.6 million ADS have been repurchased as of June 30th for a total cost of approximately USD 0.5 billion. Today, our board announced the approval of the amendment to further increase the total authorized repurchase amount from the previously approved USD 2 billion to a new cap amount of USD 3 billion. Additionally, our board has also approved a share purchase program of up to USD 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 now like to open the call for your questions. Operator, please proceed to Q&A.
Operator, Operator
Thank you. To ask a question, please do so now. If you would like to ask a question in Chinese, kindly repeat it in English. We ask that you limit your questions to one at a time. For any follow-up questions, please rejoin the queue. We will now take the first question from Alex Yao from JP Morgan. Please go ahead.
Alex Yao, Analyst
Thank you, Management, for addressing my question. I would like to inquire about the in-game spending habits of teenagers and the recent policy changes. Can you provide details on your measures for protecting teenagers in relation to in-game spending? Additionally, how should we interpret the effects of the new policy that restricts minors from playing games on weekends, allowing them to play only between 8:00 PM and 9:00 PM from Friday to Sunday? What are the anticipated financial and operational impacts on your gaming business? Thank you.
Charles Yang, CFO
I have a question about teenager in-game indulgence and the new policy introduction. Can you share your policies on protecting teenagers from in-game indulgence? Also, what should we consider regarding the impact of the new policy that prohibits minors from playing games over the weekend, allowing play only from 8:00 PM to 9:00 PM from Friday to Sunday? What are the financial and operational implications for your gaming business? Thank you.
Margaret Shi, IR Director
Yes. I'm sure many of you have read about the new anti-addiction protection measures that the government has issued regarding teenagers. There are some very prudent requirements such as allowing only 3 hours a week for game play. As one of the largest gaming companies in China, we're in full support of this decision. Over the past years, we have noticed that there are certain games in the industry that have had a negative impact on children. Therefore, we think that the new requirements and regulations will keep teenagers away from games for as far as possible. We want companies to treat this regulation and requirement as a standard, and also, financially, we would like to share that less than 1% of our revenue actually comes from under-aged children. Thank you.
Charles Yang, CFO
Alex, just to clarify, when we say less than 1%, we are defining minors as those below 18. Different companies might disclose different data, but according to Chinese law, minors definition includes people below the age of 18. For that category of population, it accounts for less than 1% of our total games gross billing, including financial implications.
Margaret Shi, IR Director
Thank you.
Operator, Operator
And we will now take our next question from Kenneth Fong from Credit Suisse. Please go ahead.
Kenneth Fong, Analyst
Thank you, Charles and Margaret. Thank you for taking my question. I have two questions. The first is regarding the new regulation for online game boosts, which limits exposure for underage users. While the short-term financial impact will be modest, how should we consider clearer cultivation moving forward, and will that affect the long-term or medium-term potential for fleet growth? The second question is, without any more exclusivity for the music copyrights, how should we view our direction, pace, and investment in music copyright and content in the future? Thank you.
Charles Yang, CFO
The first question concerns the new regulation for online game boosts, which aims to reduce exposure for underage users. Although the short-term financial impact is expected to be minimal, how should we approach future cultivation, and will this affect our long-term or medium-term fleet growth potential? The second question addresses the lack of exclusivity for music copyrights; how should we evaluate our strategy, speed, and investment in music copyright and content in the future? Thank you.
Margaret Shi, IR Director
Yes. On the first question, we think that the healthy and wholesome growth of our children is a top priority for the nation and for the government. As a Company, we need to think about our responsibility. We need to think long-term for the greatness of society. Therefore, we are focused on making positive, high-quality games that appeal to adults and the global audience. We are not as interested in making a profit from minors. In answer to your second question, as you might have noticed, TME has just announced the relinquishment of exclusivity, and we certainly hope that this is a sincere announcement and not a decision that they will later retract. We want to appeal to the opportunity to collaborate with label companies and every stakeholder in the industry to co-create a healthy and balanced music industry, and NetEase is fully committed to this initiative.
William Ding, CEO
We are not as interested in making a profit from minors. In answer to your second question, TME has just announced that they will be relinquishing exclusivity, and we sincerely hope this is a genuine announcement and not something they will retract later. We aim to collaborate with label companies and all stakeholders in the industry to create a healthy and balanced music industry, and NetEase is fully committed to this initiative.
Margaret Shi, IR Director
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 sends a very clear, positive, and exciting signal to the entire industry, which is what is anticipated and warmly welcomed by users. Thank you.
Kenneth Fong, Analyst
Thank you.
Margaret Shi, IR Director
Thank you, Kenneth. Next question.
Operator, Operator
And we will now take the next question from Alex Poon from Morgan Stanley. Please go ahead.
Alex Poon, Analyst
My question is about the strong game lineup for the second half, which includes titles like Lord of the Rings, NARAKA BLADEPOINT, Harry Potter, and Nightmare Breaker. These are all significant games. How should we view the growth in game revenue and the impact of these titles, particularly as we move into the fourth quarter? Thank you.
Charles Yang, CFO
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. Again, this is not only a new genre game but also a new achievement that I think is very exciting 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 that I want to reiterate is that 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 solely interested in the financial ups and downs of any 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 gain more market share across different categories. To echo what William mentioned earlier, we believe the key to winning the hearts of gamers lies in the quality and content of the games, rather than any other tricks or measures. So Alex, hopefully, that answers your question.
Alex Poon, Analyst
Thank you, Charles.
Operator, Operator
And we will now take the next question from Natalie Wu from Haitong International. Please go ahead.
Natalie Wu, Analyst
Thank you, Ms. Charles and Margaret, for addressing my question, and congratulations on a strong quarter. I want to ask about the game NARAKA. What are Management's expectations for its revenue model? Specifically, what percentage of revenue is expected to come from both the copy-based and free-to-play models? Additionally, how long do we anticipate this game will remain relevant? Will there be more variations of NARAKA in different genres in the future? Could this success influence our strategic focus and investments moving forward? Thank you.
Charles Yang, CFO
My question is about the game NARAKA. I'm curious about Management's expectations for the revenue model. What percentage of revenue will come from the copy-based and free-to-play models? Additionally, how do we assess the game's longevity? Will there be more derivative versions in different genres of NARAKA in the future? Could this success potentially change our strategic focus and investments moving forward? Thank you.
Margaret Shi, IR Director
Yes, for the game right now, we have a mix of copy-based sales and also in-game purchases. As of today, the in-game items that we've created have been very attractive to our players, leading to encouraging sales of in-game items. Currently, our in-game purchases actually contribute more than copy-based sales. Going forward, we will continue to create more in-game items that appeal to our worldwide users. In terms of longevity, we have a long-term plan for this game. We currently host a number of very exciting eSports campaigns in China and abroad and will continue to introduce new characters and new gameplays to keep the content interesting for our users. Thus, we are very confident in the longevity of this game. In terms of strategy going into different formats of entertainment, we're planning to launch this game on consoles around Christmas time, and we also have a team working on the mobile version of this game. At the same time, we host eSports campaigns worldwide to keep creating viral discussions about the game. We have a very holistic plan for NARAKA BLADEPOINT. Thank you.
Charles Yang, CFO
And Natalie, regarding your last question about whether there is any inspiration for our overall games strategy, I believe the breakthrough achieved by NARAKA BLADEPOINT gives us extra confidence not only in terms of diversification of game genres but also in different distribution platforms. For instance, NARAKA BLADEPOINT is a successful game that has connected with the global, particularly the Western gamer community, via the Steam platform. I think that gives us more experience and know-how for developing and publishing future games, especially targeting the global market.
Operator, Operator
Thank you. We will now take our next question from Thomas Chong from Jefferies. Please go ahead.
Thomas Chong, Analyst
Thank you, Management, for addressing my questions. My first inquiry is about Harry Potter. As the game is set to launch globally, I would like to understand our expectations for the domestic market compared to the international market. Any insights into our marketing strategies and how we plan to engage users would be appreciated. My second question concerns the reasons behind regulatory changes. With the government implementing strict measures on fandom culture in China and increasing regulations on live streaming, I would like to know how this fandom culture might impact our music business and our outlook for live streaming. Thank you.
Charles Yang, CFO
Thank you, Thomas. I'll answer your first question on Harry Potter directly in English. The game is set to launch in the greater China area on September 9th, which is about 9 days from now and is highly anticipated. Given the strong popularity and global appeal of the Harry Potter IP, we're very confident that this high-quality game will be a huge success both domestically and in the international market. We hope that with this game launch, we can further reinforce the NetEase game brand image among the global gamer community. That's the answer to your first question.
William Ding, CEO
The game is set to launch in the greater China area on September 9th, which is about 9 days from now and is highly anticipated. Given the strong popularity and global appeal of the Harry Potter IP, we're very confident that this high-quality game will be a huge success both domestically and in the international market. We hope that with this game launch, we can further reinforce the NetEase game brand image among the global gamer community. That's the answer to your first question.
Margaret Shi, IR Director
So we are actually in support of the recent regulations on the entertainment industry. For NetEase Cloud Music, we believe that the impact for us is somewhat minimal because for us, the priority and strategic goal is about creating original music. Our focus remains on helping independent musicians create music and foster their talents in China. Thank you.
Thomas Chong, Analyst
We are actually in support of the recent regulations on the entertainment industry. For NetEase Cloud Music, we believe that the impact for us is somewhat minimal because our priority and strategic goal is about creating original music. Our focus remains on helping independent musicians create music and foster their talents in China. Thank you.
Charles Yang, CFO
Operator, next question, please. Thank you, Thomas.
Operator, Operator
Thank you. We will now take the next question from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.
Eddie Leung, Analyst
We have two questions. The first one is about the tax rate. We understand that certain Internet companies have not received approval to benefit from a lower tax rate for key software subsidiaries recently. We would like to know if NetEase will be affected by this regarding its tax rate. The second question pertains to overseas game markets. Are we expecting NetEase to establish more overseas studios? If so, could you provide any details on future plans? Thank you.
Charles Yang, CFO
Thank you, Eddie. In the interest of time, let me answer your two questions directly in English. Firstly, regarding the tax rate, this is not a new development, and in our 20-F issued earlier this year, we already disclosed that there will be certain tax policy changes, as announced by the Tax Bureau. Certain industries, including e-commerce and games, are no longer eligible for key software qualification. Consequently, we can no longer enjoy the 10% preferential tax rate. However, specifically for NetEase, for our game businesses, we are 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 a 3% implication to us. So in 2020, our overall effective tax rate is around 19%. I think this year, for a full year level, our tax rate will hover somewhere in the low 20s. Secondly, regarding our overseas gaming expansion, we have previously announced our ambition to achieve at least a 30% contribution from the overseas market in 3 to 5 years' time. We are well on track to achieve that. NARAKA BLADEPOINT marks an exciting achievement this year. For the overseas market, we are proactively setting up new overseas studios in Canada, Japan, and Europe. Our strategy to tap into the international market can be very diversified and does not necessarily require us to set up standalone studios. We are also very active in collaborating with world-class players around the world, supplementing each other's strengths, and co-developing games targeting the global gamer community. I think NetEase remains very open-minded, practical, and highly active in this regard.
Eddie Leung, Analyst
Thank you.
Charles Yang, CFO
Thank you, Eddie. Operator, in the interest of time, let's conclude the call today. Thank you all very much.
Operator, Operator
Thank you.
Margaret Shi, IR Director
Thank you once again. Maybe I'll just finish with these concluding remarks. Thank you, once again for joining us today. If you have any questions, please feel free to contact us directly. Have a great day. Thank you.
Charles Yang, CFO
Thank you.
Operator, Operator
And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.