NetEase, Inc. (NTES) Q2 2021 Earnings Call Transcript

NetEase, Inc. (NASDAQ: NTES) Q2 2021 earnings call dated Aug. 31, 2021

Corporate Participants:

Margaret Shi — Director of Investor Relations

Charles Zhaoxuan Yang — Chief Financial Officer

William Ding — Founder, Director and Chief Executive Officer

Analysts:

Alex Yao — J.P. Morgan (Asia Pacific) Limited — Analyst

Kenneth Fong — Credit Suisse — Analyst

Alex Poon — Morgan Stanley Asia Limited — Analyst

Natalie Wu — Haitong International — Analyst

Thomas Chong — Jefferies — Analyst

Eddie Leung — Bank of America Merrill Lynch — Analyst

Presentation:

Operator

Good day, and welcome to the NetEase 2021 Second Quarter Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Margaret Shi, IR Director of NetEase. Please go ahead.

Margaret Shi — Director of Investor Relations

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 are included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F and the announcement of the 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 a definition 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 NetEase senior management is Mr. William Ding, our Chief Executive Officer; and Mr. Charles Yang, our Chief Financial Officer.

I will now turn the call over to Charles, who will read the prepared remarks on behalf of William.

Charles Zhaoxuan Yang — Chief Financial Officer

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 renminbi. Our growth momentum continued in the second quarter with total net revenues of RMB20.5 billion, representing an increase of 13% year-over-year. For our online games, in the second quarter, total revenue was RMB14.5 billion, up 5% year-over-year despite a high comparable base in 2020. Our PC and mobile games remained our dual growth engines for online games.

On the PC side, Naraka: Bladepoint, our next generation battle royale game, is one of the hottest game in the market. First launched in China in July, followed by the global launch in August the 12, 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 game play 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 game and mobile version 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 up 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 regular introductions 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 continued to demonstrate strong performances during the second quarter.

Touching on some highlights from a few other mobile games this quarter. Life-After remains an iconic title, holding strong appeal with young users. We introduced a major and new expansion pack, The Revenant, in August, offering players a new category of characters, new maps and more game play option. These innovations allow our gamers to explore the doomsday world being in a unprecedented and exciting way, bringing Life-After back to the top of China’s iOS download chart.

Onmyoji Arena, our mobile game based on our proprietary Onmyoji IP have progressively built strong appeal among the young generation of players. Leveraging our strength in our design, Onmyoji Arena has impressed users with its widely acclaimed skin art across various themes, including China’s traditional culture, cyberpunk and Japanese anime. Some of the skin 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 lead China’s iOS top-grossing chart. During the second quarter, we rolled out the new version that greatly enriched the Onmyoji world. The update features a fascinating new story line and two popular new characters that thrilled our player community, again fortifying Onmyoji’s standing as a 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 China, our very first self-developed racing game. Leveraging our industry-leading art and graphic capabilities, Ace Racer features track design based on real urban landscapes of Chinese cities such as Hangzhou and Chongqing. Shortly after its release, Ace Racer topped the iOS download chart and reached the top 10 on China’s iOS grossing chart.

Two weeks ago, Infinite Lagrange, our space-themed SLG game, made a strong debut in China, climbing up into a top three — first top 30 title on the iOS grossing chart in less than a week. As a new game of this genre, we introduced to the Chinese market after Invincible, we hope Infinite Lagrange will also earn the respect from game players and a good share of SLG 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 download chart following their releases.

Moving to 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 game 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 next breakthrough on the international stage, which further boosts our global expansion efforts by opening the door to 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 broadened its concept to Eastern Fantasy by introducing universal elements most familiar to western players such as new characters like Persian Warriors and new weapons such as muskets and canons. These elaborate design with have greatly helped build strong mind share amongst 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 the 9 across 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 freshman, 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 25. With engaging and thought-provoking game play as well as a 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 23. For Diablo Immortal, in July, we had our first beta testing in China and we are very excited with 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 player have 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 engine, Messiah, in which we are planning to have implemented the world’s first high quality real-time global illumination algorithm on 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 net revenues in the second quarter were RMB1.3 billion, representing a 108% growth year-over-year. As an intelligent learning company, Youdao is and have 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 STEAM courses, adult learning and smart learning hardware devices.

In the second quarter, we further extended our STEAM course offering. For example, net revenues from Youdao Go, Youdao AG, increased by nearly 180% quarter-over-quarter. And we launched more advanced level courses to further meet our users’ growing learning need. Back in March, with an eye towards the growth opportunities in adult education sector, we established a dedicated division on adult education by integrating our Youdao premium courses for adults, China University MOOC and NetEase Cloud Classroom.

In terms of premium courses for adults, its net revenues 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 has been certified by the Ministry of Education as recommended courses for academic studies and continued career development.

Learning devices remained another major revenue source for Youdao with a mission to improve learning efficiency. This segment generated net revenues of RMB206 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 set in the industry.

Looking at our Cloud Music business, we have successfully maintained our user growth momentum over the past quarters despite the industry-wide slowdown. While DAU over MAU ratio remained above 30% in the second quarter, owning to our advanced social networking functions and promotions like 88VIP program in the second quarter, our membership paying ratio almost doubled year-over-year. In terms of margin, we continue to see improvement with our Cloud Music business as it increases its scale. In the past quarter, NetEase Cloud Music achieved 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 improvements. 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, [Foreign Speech] has been very well received by our users, allowing multiple users to co-create and manage playlist 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 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, we continue 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 quality. In April, Yanxuan Healthcare Series and Mooncake Gift 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, outlined our ESG policy, achievements and improvements we made throughout the year. We started our ESG effort as early as 2018 and issued our first ESG report last year. As a company deeply committed with social responsibilities, we will be keeping our efforts to being a responsible public company, and we will continue to pursue the ESG initiatives and we’ll forge ahead with our strength 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 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 retaining talent and fostering innovation that creates 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 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 second quarter were RMB20.5 billion or US$3.2 billion, representing a 13% increase year-over-year. Our net revenue from online game services were RMB14.5 billion, up 5% year-over-year despite of last year’s high base benchmark. The year-over-year increase was primarily due to newly launched games, Revelation mobile game 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 RMB1.3 billion, up 108% year-over-year, driven by fast growth of both Youdao online courses and the sale of intelligent learning devices. Net revenues from innovative businesses and others were RMB4.7 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 live streaming revenues maintained solid growth momentum driven by robust paying user expansion.

Overall, total gross profit margin was 54.5% with the breakdown as follows. Gross profit margin for game services was 66.1%. As a reminder, this number is generally stable with some narrow fluctuations based on the revenue mix of PC versus mobile games as well as self-developed and licensed games.

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 other product lines. 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, total operating expenses were RMB7.4 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 RMB3.4 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 differ from each of our entities at different time period depending on applicable policies and our operation. Non-GAAP net income attributable to our shareholders for the second quarter totaled RMB4.2 billion or US$655 million. Our non-GAAP basic earnings for ADS were up US$0.89 or US$0.20 per share.

Our cash position remains strong. As of June 30, our total cash and cash equivalents, current and non-current time deposits and short-term investment balance totaled RMB1.8 billion compared with RMB100 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 US$0.048 per share or US$0.24 per ADS.

Lastly, under the share repurchase program approved by our board on February 25, approximately 4.6 million ADS have been repurchased as of June 6 — June 30 year for a total cost of approximately US$0.5 billion. Today, our board announced the approval of the amendment to further increase the total authorized repurchase amount from a previously approved US$2 billion to a new amount of US$3 billion. Additionally, our board has also approved a share purchase program of up to US$50 million of Youdao’s outstanding ADS for a period not to exceed 36 months beginning on 2 of September.

Thank you for your attention. We would like now to open the call to your question. Operator, please go to Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we will now take the first question from Alex Yao from J.P. Morgan. Please go ahead.

Alex Yao — J.P. Morgan (Asia Pacific) Limited — Analyst

[Foreign Speech]

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 from the recently introduced new policy that minors cannot play game during the weekend. They can only play game at a specific time, i.e. 8 PM to 9 PM from Friday to Sunday? How should we think about the financial and operational impact to your gaming business? Thank you.

William Ding — Founder, Director and Chief Executive Officer

[Foreign Speech]

Yes. I’m sure many of you have read on news about the new anti-addiction protection measures that the government has issued on the teenagers, under-aged kids, but there are some very prudent requirements such as only three hours a week is allowed to play online games. As one of the largest gaming companies in China, we’ll improve both of these decisions. Over the past years, we have noticed that certain games around the industry has had a negative impact on children. And so we think that the new requirements, the new regulations will keep teenagers away from games for as far as possible. And so we want companies in this industry together to support this regulation requirement. And also, financially, we would like to share with you that less than 1% of our revenue actually come from under-aged children. Thank you.

Charles Zhaoxuan Yang — Chief Financial Officer

Alex, just to clarify. When we say a less than 1%, we are defining minors at age below 18. Different companies might have disclosed different data. But according to China law, minors’ 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 implications.

Margaret Shi — Director of Investor Relations

Thank you, Alex.

Operator

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

Kenneth Fong — Credit Suisse — Analyst

Thank you, Charles, Margaret and William.

[Foreign Speech]

Thank you for taking my question. I have two questions. One is the new regulation for online game will significantly limit the exposure for the under-aged, while the short-term financial impact will be limited. How should we think about clear cultivation going forward and will it limits the longer term or medium term potential for game growth? The second question is with no more exclusivity for the music copyright, how should we think about our direction, pace and also investment in the music copyright and content going forward? Thank you.

William Ding — Founder, Director and Chief Executive Officer

[Foreign Speech]

Yes. Ken, just on the first question, we think that the healthy wholesome growth of our children is 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 for the greatness of the society. So we are interested in making positive high quality games that appeals to adults and appeal to audience around the globe. We are not as interested in making profits in — through minors.

And to answer your second question, as you have — you might have just noticed that TME has just announced the — made announcement about relinquishing the exclusivity, and we certainly hope that is a sincere announcement from TME is not a decision. They’re not going to be saying one thing and doing another. And here we want to appeal — take the opportunity to appeal to every — to the label companies and every stakeholder and partners 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 everyone in this industry.

[Foreign Speech]

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

Margaret Shi — Director of Investor Relations

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 — Morgan Stanley Asia Limited — Analyst

[Foreign Speech]

I’ll translate myself. My question is related to the strong game pipeline in the second half, including Lord of the Rings, Naraka: Bladepoint, Harry Potter and Nightmare Breaker, etc., 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 Zhaoxuan Yang — Chief Financial Officer

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 Steam platform. Again, this is not only a new genre game, but also a new achievement I’ve been 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 later half of this year.

The one thing though I want to reiterate is that NetEase — here at NetEase, we always emphasize on 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 game 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 — Morgan Stanley Asia Limited — Analyst

Charles, thank you.

Operator

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

Natalie Wu — Haitong International — Analyst

[Foreign Speech]

Thanks, Mr. Ding, 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 management’s expectation are for the game regarding the revenue model? What kind of the revenue will come from — what percentage of the revenue will come from the content-based and IT-based revenue model? And then also, how should we see the longevity of this game? And will there be more derivative versions of other 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.

William Ding — Founder, Director and Chief Executive Officer

[Foreign Speech]

Thank you, Natalie. Do they also come from DuPont. Yes, for the game right now we’ve got the 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-based sales. Going forward, we’ll continue to create more in-game items, 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. We will continue to introduce or launch new characters, new game plays 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 on to 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 eSports campaigns around the world to keep creating — to keep the interest high around the game. And on that, we’re creating viral discussions of the game. So that’s — so we have a very holistic plan for Nakara: Bladepoint. Thank you.

Charles Zhaoxuan Yang — Chief Financial Officer

And Natalie, to your last part of the question, whether we — whether there is any inspiration for our overall games strategy. I think with the breakthrough achieved by Naraka: Bladepoint, it 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 Steam platform. I think that gives us more experience and know-hows 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 — Jefferies — Analyst

[Foreign Speech]

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 about 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 recent regulatory environment. Given the government is having a stringent measure about the fandom culture in China and more regulations on the live streaming these days. Just want to get a sense about how the fandom culture will affect our music business and also our live streaming outlook? Thank you.

Charles Zhaoxuan Yang — Chief Financial Officer

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 Greater China area on the 9 of September, which is about nine days from now, highly anticipated. Given the strong popularity and global appealingness 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. 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 — Founder, Director and Chief Executive Officer

[Foreign Speech]

So we are actually in support of the recent regulations on the entertainment industry. For NetEase Cloud Music we think the 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.

Charles Zhaoxuan Yang — Chief Financial Officer

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 — Bank of America Merrill Lynch — Analyst

[Foreign Speech]

We have two 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 to the tax rate? And then secondly regarding the overseas game markets. So we expect NetEase to setup more overseas studios? And if so, any more color on the future plan? Thank you.

Charles Zhaoxuan Yang — Chief Financial Officer

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, etc., 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, full year level, our tax rate will be somewhere in the low-20s neighborhood. Secondly, for our overseas game expansion, we’ve previously announced our ambition to achieve at least 30% of our game gross billing contributed from the overseas market in three to five years’ time. We are very well on track to achieve that. Naraka: Bladepoint is another big exciting achievement that 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 setup our own standalone studios. We are also very active in collaborating with the world-class players around the world, supplementing each other’s strengths. In some cases, jointly develop or co-develop games that are targeting for the global gamer community. So I think NetEase remains very open-minded, very practical and very, very active in this regard.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Thank you.

Charles Zhaoxuan Yang — Chief Financial Officer

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

Margaret Shi — Director of Investor Relations

Thank you once again — Yeah, maybe I’ll just finish with the concluding marks. Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly at CPG Investor Relation. Have a great day. Thank you.

Charles Zhaoxuan Yang — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]