Earnings Call Transcript
NetEase, Inc. (NTES)
Earnings Call Transcript - NTES Q3 2020
Operator, Operator
Good day and welcome to the NetEase Third Quarter 2020 Earnings Conference Call. Today’s conference is being recorded. And I would now like to turn the conference over to Margaret Shi. Please go ahead, ma’am.
Margaret Shi, Moderator
Thank you, operator. Please note the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect NetEase’s business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F and the announcements in the filings on our website. The company does not undertake any obligation to update these forward-looking information except as required by law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2020 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 will be available on the NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase’s senior management team 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.
William Ding, CEO
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 based on renminbi. We are pleased to report another strong quarter with financial and operational growth across all of our primary lines of businesses. Our total net revenue increased by around 27% year-over-year reaching RMB 18.7 billion for the third quarter. Our net income from continuing operations was RMB 3 billion, which includes a net foreign exchange loss of RMB 1.6 billion compared with RMB 4.1 billion one year ago, which included a net gain on foreign exchange rates. Net revenues from online game services grew by 20% year-over-year reaching RMB 13.9 billion in the third quarter, driven primarily by the resilience of our existing titles, a best illustration of our operational efficiency in addition to our R&D expertise. For our PC games net revenues, we delivered 13% growth year-over-year, well above the general industry trend with new expansion packs launched for the summer holidays, our legacy PC titles including Fantasy Westward Journey Online, and new Westward Journey Online II continued their strength into the third quarter. As two of the largest and longest running game IPs in China, both games continue to attract a loyal crowd after nearly two decades of operation, and we continue to build on that. Take FWJ as an example, owing to its strong IP effect, we successfully launched FWJ H5, a more casual version of mobile attracting returning FWJ fans and other MMO players. We continue to expand our strong game portfolio through consistent creation of successful new titles and franchises. We are able to create blockbusters because our games each introduce gameplay and standards that the market has never seen before. Many of them opened up brand new categories that others are eager to follow. This is particularly well demonstrated by the success we have had in SLG and ACG-themed games. We launched Invincible in 2015, which pioneered a new SLG gameplay that has been dubbed Invincible-like SLG with new game rules such as resetting gamers’ scores every season and creating a new combat model that encourages players to strategize and form alliances. Overall, the game introduced a much more balanced game experience for SLG gamers. In the last five years since its launch, Invincible has grown steadily and organically in terms of both users and revenue. Celebrating its fifth anniversary in October, Invincible once again reached the top five on China’s iOS game grossing chart further strengthening its position as one of China's biggest SLG titles. Despite numerous Invincible-like games popping up in the market, Invincible holds unwavering loyalty from its fan community. We are going to build upon our expertise in the SLG genre and continue to innovate. Our plans include next-generation SLG games such as The Lord of the Rings, Rise to War, and Infinite Lagrange for both China and the global markets. ACG is another widely talked-about genre and our launch of Onmyoji in 2016 was one of the major factors in turning ACG into a mainstream game genre in China. As the market's first ACG-themed blockbuster, Onmyoji has accumulated a large group of loyal followers among younger players allowing for another chart-topping moment in September with its fourth-year anniversary celebration. As a part of our IP extension strategy, we have a number of games, comics, movies, plays, soundtracks, and other entertainment products lined up. We recently launched Onmyoji: Yokai Koya, a simulation game, the third spin-off game based on the Onmyoji theme which followed our mobile and CCG offerings released in earlier years. We also announced our first movie based on Onmyoji IP, The Yin-Yang Master which will premiere on Chinese New Year. The movie stars some of China's top actors and actresses and has attracted heated anticipation. While we continue to cultivate Onmyoji's IP, we are also leveraging our ACG know-how in the development of other games in this genre. At the end of October, we introduced for all time our very first ACG themed baking simulation game. We have also a couple of ACG themed games lined up for pipeline launch including Unknown Future and Akasha Book. In line with our innovative spirit, last year we launched the iOS version of Sky, a licensed award-winning adventure mobile game featuring unique graphics and gameplay which brings users to a beautifully animated kingdom waiting to be explored. With the launch of its Android version in July this year, we are very pleased to offer this high-quality game to a much larger user base. As another brand-new category with almost no direct competition, Sky presents players a heartwarming experience and has established a vibrant fan community among younger generations. In September, with the introduction of an update featuring a new map along with Adventure Pass, an in-app item similar to Battle Pass, we saw a boost in gross billings for Sky in September climbing to the top three on China iOS top grossing chart. The prerequisite for us to build a series of successful titles is the corporate DNA to innovate. This is enabled by our world-class R&D infrastructure, we are always discreetly preparing for the latest technologies and we are always at the forefront of many advanced developments. For example, over the past three years, we have built one of the best in-house game AI Labs in China. Our group of experienced scientists are focused on applying the leading AI technologies to our game development. Empowered by AI, we are able to further increase our R&D efficiency as well as bring in more AI-powered innovative game features and visual effects to enhance our players' game experience. On the overseas front, we are gaining more traction internationally with continuous content updates to our leading titles. This quarter our overseas gaming revenue has reached a record high. In Japan, Knives Out remained a household name topping the iOS grossing chart multiple times during the quarter. We further strengthened Knives Out's brand presence by engaging in a series of successful collaborations, including Eva and One Punch Man. Identity V also reached the top three growth in games on Japan's iOS grossing chart following a series of online and offline activities with its second-year anniversary celebration in July. Turning to our games under development, we announced a number of titles in our robust pipeline, including Unknown Future, Akasha Book, Revelation mobile game, Infinite Lagrange, Harry Potter: Magic Awakened, The Lord of the Rings: Rise to War, Nightmare Breaker, Ghost World Chronicle, Diablo Immortal, and Pokémon Quest. Revelation is one of our flagship MMORPGs which we have been operating for more than five years on PC. We have just closed the final round of beta testing of its mobile version and user feedback was very encouraging. Carrying on the legacy of the PC game, the Revelation mobile game brings players to our big world of discovery and adventure. They can travel across vast fields, through deep oceans, and up to the sky. We are expecting to bring this highly anticipated game to the users before Chinese New Year. As for our education business, Youdao had another strong quarter with total net revenues up 159% to RMB 896 million. Gross billings from Youdao’s online classes accelerated at 228% year-over-year to RMB 955 million supported by our large-scale marketing and branding initiatives. Gross billings growth in our K-12 segment reached a record high of RMB 676 million, up 369% year-over-year, and K-12 paid enrollment expanding to around 499,000 in this quarter. Youdao further strengthened its servicing capabilities as well. To better serve the new enrollments during the summer, we continued strengthening our top-quality instructor team by recruiting those of the highest caliber and we increased the number of teaching assistants by over 600 to around 3400 now. We are constantly looking to upgrade our content offerings with the best-in-class technology and teaching materials to make learning more efficient for our students. This effectively improved the conversion and retention rates for certain classes during the third quarter. Net revenue of Youdao’s learning devices also grew significantly by 289% year-over-year to RMB 163 million attributable largely to the huge market popularity of our Dictionary Pen second series. We continue to lead the intelligent learning device market with our active technology advancements. In September, we launched our brand-new product named Super Dictionary, an electronic dictionary device that supports translating text and photos and all the other functions from Youdao Dictionary without the distraction of smartphones. We are highly committed to the online education space and we believe this is the right time to be acquiring students and taking advantage of the sector’s rapid growth. We are confident that Youdao will continue to grow in a robust and sustainable manner. Turning to music, NetEase Cloud Music is growing rapidly. We saw notable increases in the number of paying users supported by our continued efforts to create an innovative user experience and the recent successful collaboration with Ali Baba and their customer loyalty Baba VIP program. The paying ratio has also notably improved. In terms of music content, we continue to partner with worldwide music labels and top artists to provide our users with access to the fullest music content possible. In the third quarter, we secured more direct partnership with leading record labels such as UMG and BMG gaining us access to even larger music catalogues. Concurrently, we continue to emphasize our original music library by strengthening our support and investment in independent musicians with dedicated teams of professional songwriters, composers, producers, as well as other resources such as AI technology and marketing solutions. We have various incubation initiatives in place to help young and aspiring musicians to create better music and to be appreciated by the users. NetEase Cloud Music is now home to more than 200,000 independent musicians, where they will always find help and resources they need and an avenue to connect with millions of music lovers. For Yanxuan, we saw encouraging year-over-year net revenue growth in the third quarter as well as continued improvement in operating efficiencies. Our strategic focus for Yanxuan is clear. By creating compelling merchandise, popular products and enhancing brand recognition among users, Yanxuan is now making steady progress, establishing itself as a leading new consumer brand in China. Some of our most popular products include cat food, bluetooth earphones, and ergonomic chairs, each of these for example has become the bestsellers of their respective categories for online sales in China. Additionally, as we continue to improve our operating efficiencies for Yanxuan, we further enhanced our pro membership benefits, giving our loyal customers value they truly appreciate. This has resulted in rapid growth in pro membership user base. We have also taken strict measures to manage all stages of products from early product development to post-marketing tracking of product performances, effectively lowering the production and logistics costs. In summary, our consistent focus on creating innovative and high-quality content is what propels our leading role within these market verticals and what makes us even more confident as we further expand in each of our key business segments. We will fulfill our commitment to users and shareholders as always, with a strong sense of purpose and solid rationale focusing on the return on investment. We are confident that we can continue to provide our user community with excellent products and services that support solid long-term returns for our investors. This concludes William’s remarks.
Charles Yang, CFO
I will now provide a very brief overview of our 2020 third-quarter 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 the third quarter were RMB 18.7 billion or US$ 2.7 billion, representing a 27% increase year-over-year. Net revenues from online games were RMB 13.9 billion up 20% year-over-year, primarily driven by the increased net revenues from FWJ H5, Life-After, Knives Out, and Sky. Mobile games accounted for approximately 73% of net revenues from our online games in the third quarter. Net revenues from Youdao increased by 169% year-over-year in the third quarter, reaching a record high of RMB 896 million, primarily due to the increased net revenues from online classes with a rapid increase in K-12 paid student enrollment and increased sales of intelligent learning devices. Net revenues from innovative businesses and others were RMB 3.9 billion for the third quarter, up 42% year-over-year, mainly due to increased contribution from NetEase Cloud Music business. Our total gross profit margin was 53% in the quarter, with a breakdown as follows. GP margin for our online game services for the third quarter was 63.6%. As a reminder, this number is generally stable with some narrow fluctuations based on the revenue mix of PC and mobile as well as self-developed and licensed games. GP margin for Youdao for the third quarter was 45.9%, compared to 25.8% a year ago. The year-over-year increase was primarily attributable to a significant increase in net revenues, improved economies of scale, and further optimization of our faculty compensation structure. This marks our fourth quarter of consecutive improvement on a sequential basis. GP margin for innovative businesses and others was 16.8% compared to 15.2% for the third quarter of last year. The increase was due to improved GP margin of NetEase Cloud Music driven by its strong revenue growth. As a reminder, the GP margin of innovative businesses and others line would fluctuate mainly due to the revenue mix of this line. For the third quarter, total operating expenses were RMB 7 billion. Our selling and marketing expenses as a percentage of net revenue were 18.5% compared with 12.8% in the prior quarter. The quarter-over-quarter increase was mainly due to increased marketing related to Youdao. Excluding Youdao, our selling and marketing expense as a percentage of net revenues were 12.9% compared to 10.7% in the prior quarter, mainly due to increased spending on certain game promotions during the quarter. Our R&D expenses were RMB 2.8 billion as we remain committed to investing in innovative content creation and product development. That's what defines us as a technology company. As a percentage of net revenues, R&D expenses were 14.9% this quarter, compared with 13.2% in the prior quarter, mainly due to R&D headcount increase. Our R&D expenses are principally related to online games. Other income was RMB 266 million for the third quarter, which included net investment income of RMB 1.3 billion and net foreign exchange loss of RMB 1.6 billion due to the U.S. dollar's exchange rate depreciation against RMB. This compares with other income of RMB 915 million in the same period last year, which included investment income of RMB 395 million and a net foreign exchange gain of RMB 121 million. The effective tax rate was 10.9% for this quarter, compared with 18.6% in the prior quarter. The effective tax rate is lower this quarter, as certain of our subsidies received and recognized certain tax credits in this quarter. Non-GAAP net income from continuing operations attributable to our shareholders for the third quarter of 2020 was RMB 3.7 billion or US$ 540 million. Our non-GAAP diluted earnings per ADS from continuing operations were RMB 5.35 or US$ 0.79 for the third quarter. Our cash position remained strong. As of September end, our total cash and cash equivalents, current and non-current time deposits, and short-term investment balance totaled RMB 103 billion compared with RMB 74 billion as of the year end last year. In accordance with our dividend policy, we are pleased to report that our Board of Directors has approved a dividend of US$ 0.195 per ADS or US$ 0.039 per share. As a reminder, we changed our ADS ratio on October 1 from one ADS for every 25 ordinary shares to one ADS for every five ordinary shares. And finally, under our current share repurchase program for up to 2 billion as of September quarter end, approximately 15.3 million ADS have been repurchased under this program for a total cost of US$ 1.1 billion. Thank you very much for your attention. We would like now to open the call to your questions. Operator, let's go to the Q&A.
Operator, Operator
We will now take our first question from Alex Poon at Morgan Stanley. Please go ahead. The line is open.
Alex Poon, Analyst
Translating my question, I would like to inquire about your overseas game strategy. Over the past eight to ten months during COVID, there has been significant success in the expansion of Chinese mobile games in international markets, including Chinese RPG games. NetEase possesses many strong legacy RPG IPs. Could you share your strategy regarding geographical focus, genre, product investment, and the competitive landscape? Thank you.
William Ding, CEO
My question is about your overseas game strategy. Over the past several months during COVID, we have observed significant success in the international expansion of Chinese mobile games, including RPGs. NetEase possesses a number of strong legacy RPG intellectual properties. Could you share your strategy concerning geographical focus, genre, product investment, and the competitive landscape? Thank you.
Charles Yang, CFO
I will provide a brief translation of William's remarks. So Alex, first of all, we are very dedicated in focusing on the overseas strategy for NetEase. Right now, in Japan, we have achieved a small step. Beyond Japan, we think major markets what NetEase is eyeing for in terms of game lineups, there will be games that are being developed specifically for global launch, games such as Harry Potter as well as certain games in the SLG genre. There's also another more casual game, UNO, which has been also performing quite well in the overseas market. Going forward, we are very confident about our NetEase developed games' competitiveness when Chinese games are going overseas because quality and the sophistication of these games are what we think we have a competitive edge vis-à-vis the peers. Thanks. Operator next question please?
Operator, Operator
Thank you. We will now take our next question from Elsie Cheng from GS. Please go ahead. The line is open.
Elsie Cheng, Analyst
Our more casual game, UNO, has been doing very well in overseas markets. We are highly confident in the competitiveness of our NetEase developed games when they enter international markets, as we believe the quality and sophistication of these games give us a competitive advantage over our peers. Thank you. Operator, please proceed to the next question.
William Ding, CEO
We are performing quite well in the overseas market. Looking ahead, we are very confident in the competitiveness of our NetEase developed games as they enter international markets because we believe the quality and sophistication of these games give us a competitive advantage over our peers. Thank you. Operator, can we move on to the next question?
Charles Yang, CFO
I will briefly summarize the question and William's remarks. The question is inquiring about NetEase’s game development strategy for the next three to five years and our perspective on the industry in both China and globally. William's response emphasizes that we believe this is a very positive sector. Game entertainment is thriving, as demonstrated by the strong reception of platforms like the PS5 and Xbox by consumers worldwide, especially during the COVID-19 pandemic, which has fostered new forms of gaming interactions and increased consumer demand. We see a promising future in this industry. For NetEase, we have nearly two decades of experience in game development and operations, and we are committed to investing further in research and development and marketing. We don't only focus on Japan; we are also targeting the mainstream Western market, particularly Europe. Overall, we are confident that our experience, track record, readiness to invest, and ability to guide future game development genres position us well. We believe our high-quality game products will be well received in both the domestic China market and in various international markets.
Elsie Cheng, Analyst
Thanks.
Charles Yang, CFO
Operator, let's go to the next question please?
Operator, Operator
Thank you. We will now take our next question from Alicia Yap from Citi Group. Please go ahead. The line is open.
Alicia Yap, Analyst
Hi, thank you. My question is related to online music. How does management envision the future landscape of the online music industry in China? Will there only be two major players, or do you anticipate more entrants into the market? Additionally, is there a market share target that NetEase Cloud Music aims to achieve in the future? Thank you.
William Ding, CEO
Hi, thank you. So, my question is related to online music. How does management envision the future landscape of the online music industry in China? Will there be just two major players or do you foresee more players entering the market, and is there a market share target that NetEase Cloud Music hopes to achieve in the future? Thank you.
Charles Yang, CFO
Okay, I will provide a brief translation of William's remarks. So first of all, we have launched NetEase Cloud Music for more than seven years ago and over the last seven years, as we all can see, the consumer habit has dramatically changed to streaming music, streaming consumption rather than buying a CD or downloading mp3. Right now, there are two players. Obviously, we are very confident and ambitious that into the future, we will have a leading market share. The way for us to position ourselves is on one side, we do want to emphasize original and organic music, and bring them to the end users to be better appreciated and accessed by the music listeners and at the very same time, provide resources to support and nurture China's independent musicians in supplying more and more high-quality music content building a healthy cycle organically. Obviously, there might be more challenges coming into this sector, but we are confident that as long as we commit to the purpose and mission, we should be able to achieve a leading market share in this very promising online music sector in China.
Alicia Yap, Analyst
Thank you, Charles. Thank you, William.
Charles Yang, CFO
Operator, next question please? Thank you, Alicia.
Operator, Operator
We will now take our next question from Kenneth Fong from Credit Suisse. Please go ahead. Your line is open.
Kenneth Fong, Analyst
We observed that recent game releases like Genshin Impact have been utilizing platforms like BiliBili and TapTap to bypass the significant revenue sharing associated with the Android channel. Considering the success of these launches along with the growth of cloud gaming platforms, does this suggest that the bargaining power is starting to shift toward us as leading game developers? How should we view potential margin improvements in the medium term and the possibility of gradually reducing these channel fees over time? Thank you.
William Ding, CEO
We noticed that some recent game launches like Genshin Impact have been launching through platforms like BiliBili and TapTap to avoid the high revenue sharing of the Android channel. With the success of this launch as well as the Cloud gaming platforms, does it mean that the power of negotiation is gradually shifting towards us as major game developers? How should we think about margin upside over the medium term and also any room for this channel fee to gradually decline over time? Thank you.
Charles Yang, CFO
I will provide a brief translation of William's remarks. So Kenneth, first of all, we remain very optimistic on how the future trend is shifting. Right now, as we all know, China is arguably the most expensive channel fee country in the world, especially for the Android channel fee, whereby the global standard is the same as Apple iOS app Store 30%. In China, the norm is a 50% Android channel fee. So we also encourage players such as Yanxuan and others, including ourselves, to explore other non-conventional ways of distributing high-quality content to the end users. Recently, we saw the news that Apple has announced that they are going to reduce the channel fee to 10% for small developers, in an effort to encourage better upside and economics for the developers. We do think, probably Google Play and others will also follow suit. Let's wait and see, but broadly speaking, as a trending-wise, a shift towards content providers is probably a more and more clear and visible trend that we can all observe globally and that should also come to China.
Kenneth Fong, Analyst
Recently, we saw the news that Apple has announced they are going to reduce the channel fee to 10% for small developers, in an effort to encourage better upside and economics for the developers. We do think that probably Google Play and others will also follow suit. Let's wait and see, but broadly speaking, a shift towards content providers is becoming a clearer and more visible trend globally that should also extend to China.
Operator, Operator
Thank you. We will now take our next question from Binnie Wong, HSBC. Please go ahead. Your line is open.
Binnie Wong, Analyst
My question is mainly about the sales and marketing expense. We notice that even without Youdao, NetEase has also increased its sales and marketing as a percentage of revenue. Is this due to some of the overseas launches? Looking ahead to future quarters, as we introduce some of the larger projects we have planned, should we anticipate any further changes or structural adjustments in our marketing strategies that we should be aware of? Thank you and congratulations on a very strong quarter once again.
Charles Yang, CFO
Thank you, Binnie. I will answer this selling and marketing expense question directly from my end. Well, I think for Youdao, they posted the earnings call just now ahead of this call. The explanation was fairly sufficient that we are very, very confident that this is the right time and we are in a ready state to continue to invest more aggressively in acquiring users. We will be rewarded by the ROI given how prudent we are, although we are investing more into selling and marketing in Youdao, but the unit economics works. So we are not shy of investing more in expanding our market share and the user scale as robust as possible. Excluding Youdao for this quarter, our selling and marketing as a percentage of net revenues again, excluding Youdao, stays at around 12.9%, slightly below 30%. This is still a very healthy level compared to many industry peers. Our NetEase approach towards selling and marketing is always very straightforward. It is always ROI driven. We have a very high standard of the required rate of return internally. So when we invest, by the way, the excluding Youdao, the substantial amounts of the selling and marketing are game related, now game related either for the existing titles for the maintenance, old tax that we spend to maintain the longevity and the efficiency of the gross billing, as well as new games such as the FWJ H5 and new genres of the games that we are going to launch down the road. So all-in-all, I do not think when we tap into the international market or when we go into a new genre, that's a determining factor for us to spend irrationally. Regardless of which market, which genre or which specific new game that we are going to launch, I think we always do prudent math behind it before we deploy the selling and marketing resources. So it's just a matter of timing gaps. Sometimes we will be launching, we will be spending up front in the same quarter, but the gross billion of these sales and marketing expenses will only be reflected into the gross billions that might only be recognized in the subsequent quarters into recognized revenue.
Binnie Wong, Analyst
Thank you, Charles, very clear. Thank you.
Charles Yang, CFO
Thank you, Binnie.
Operator, Operator
Thank you. We will now take our next question from Natalie Wu, Haitong International. Please go ahead. Your line is open.
Natalie Wu, Analyst
Thank you for your question and congratulations on a strong quarter. I would like to ask about the increase in sales and marketing expenses, specifically how much of that is attributed to Cloud Music. Also, concerning margins, if we disregard the impact of last year's deal and Youdao's increased losses, we saw a 4% year-over-year margin increase. I'm curious about how much of this can be linked to the growth of the lower-margin music business or if there have been investments in other business units. Additionally, regarding Cloud Music, how should we consider the revenue model and margin profile of the music business going forward? Thank you.
Charles Yang, CFO
Okay, thank you, Natalie. It's a finance-related question, so I'll answer directly from my end. For this quarter, total selling and marketing expenses was RMB 3.4 billion. Roughly speaking, RMB 1.15 billion is Youdao, the remaining about RMB 2.3 billion are selling and marketing excluding Youdao. Out of that RMB 2.3 billion, the super majority of that is game-related. So music Yanxuan media and others compared to games represents just a small fraction. So it is not really about us investing irrationally into some lower return segments in a big amount. You've also pointed out the declining trend of the operating margin overall. I think obviously, mathematically, a big reason for that is what I just explained to Binnie’s question. There's a timing gap right, for instance, for both Youdao and games, in particular. The expenses are recognized in this quarter. However, gross billions are not entirely recognized into revenue into the same quarter. Beyond that, there's also another factor in the game revenue mix. For instance, the PC and mobile game ratio stays relatively stable. However, within the mobile games, we are also pioneering with some different genres of the games, for instance, FWJ H5, which is a more casual mobile game. Even though it is the same broad category of a mobile game, if you were to look at a more casual game, vis-à-vis a hardcore MMORPG mobile game, they would demonstrate different margin profiles. I think that's another small factor explaining why you are observing a downward trend of the operating margin. That in fact reminds us of many years ago, when we decided to transition from the PC game into mobile games, a revenue mix change, resulting in certain margin profile changes. I do think that's, again, it's the mathematics right, whether you want a bigger pie, whether NetEase is bold enough and confident enough to tap into more genres of the games, they might be demonstrating some different margin profiles, versus our most familiar MMORPGs, but we do think it is the right move for us to be more diversified in terms of genre offering. So Natalie, hopefully it answers your question.
Natalie Wu, Analyst
Yes, very clear, but what about the longer-term margins of your music business?
Charles Yang, CFO
For music, so you hide your second question into your first question. For music, yes so I have to admit that it is still a loss-making business for now, even at the GP margin level, because we all know that the music content licensing fee is still at an irrationally high level. Because our music monetization is growing very well, the economies of scale is helping us to improve the margins. In a sense, it is still negative GP margin, negative operating margin, but the negative margin is being narrowed down. Going into the future, we do think the macro trend is in favor of us. On one side, the music, record labels, music licensing fees are more rationalized, especially following the non-exclusive licensing arrangement into the medium to longer run. At the same time, we are also emphasizing a lot more on organic and original music from independent musicians. With all that, I think it is something to expect that very soon, in two to three years' time, the overall China's online music segments should be a very profitable segment.
Natalie Wu, Analyst
Got it very clear. Thank you, Charles.
Charles Yang, CFO
Thank you.
Operator, Operator
Thank you. We will now take our next question from Thomas Chong from Jefferies. Please go ahead. Your line is open.
Thomas Chong, Analyst
Thank you, management, for taking my questions, and congratulations on a strong set of results. My question relates to NetEase Cloud Music. We've just discussed the strong revenue growth momentum. Could you provide insights on the growth of paying subscribers and live streaming revenue? Additionally, how should we view the revenue mix over time and the opportunities for new business models? Thank you.
Charles Yang, CFO
Okay, thank you, Thomas. I'll answer your question directly in the interest of time. I think this probably would be the last question on this earnings call. So first of all, subscription revenue has been trending up very well. We have seen a notable increase this quarter, both in terms of the paying user base, as well as the paying ratio, as mentioned in the scripts earlier on. In fact, when we compare that to our peers who have publicly disclosed their paying ratios, I think our paying ratio is slightly better. But for the entire industry, this is still a single digit. It’s a very low paying ratio. There's plenty of upside room for China's online music industry to improve, substantially improve the paying ratio, that the first comment. Live streaming is a very fast-growing monetization vertical format is for Cloud Music, partly because we also grow from a relatively much smaller base. So right now, live streaming is already becoming a very sizable and significant major revenue contributor to my overall NetEase Cloud Music revenue. At the same time, we are also very, very actively ramping up other formats of monetization such as advertising, for instance. New business model is always a time-sensitive topic. I think that, I’ve been saying this for multiple quarters already, that's the exciting part of China's online music industry because trying not to fix your imagination by what Apple Music or Spotify has been doing in a different geography. I think for China's online music industry as a whole, we will be, along with the other players in the sector, experimenting and pioneering some interesting new format event monetization that is probably not yet available in the Western world. And on that, we can give one thing on the direction, we do think that music is not, at least NetEase Cloud Music is not just a platform to play songs. It is an avenue for social interaction. So social interaction, social media, this is a direction that we are focusing a lot on exploring potentially new business models and potentially new monetization models.
Thomas Chong, Analyst
Thank you, Charles. Congratulations on a strong set of results.
Charles Yang, CFO
Thank you, Thomas.
Operator, Operator
Thank you. Ladies and gentlemen, that will conclude today's Q&A session. I will now turn the call back to your host.
Margaret Shi, Moderator
Thank you for joining us today. If you have any further questions, please feel free to contact us directly or TPG Investor Relations. Have a great day.
Operator, Operator
Thank you. Ladies and gentlemen, that will conclude today's call and you may now all disconnect.