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NetEase, Inc. (NASDAQ:NTES)
Q2 2019 Earnings Call
Aug 8, 2019, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the NetEase Second Quarter 2019 Earnings Conference Call. The conference is being recorded.

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

Margaret Shi -- Director, 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 US 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 cause NetEase's business and the financial results is included in certain filings of the company with Securities and Exchange Commission, including its Annual Report on Form 20-F. The company does not undertake any obligation to update it's forward-looking information, except as required by law.

During today's call management will discuss certain non-GAAP financial measures, for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2019 second quarter financial results news release issued earlier today.

As a reminder, this conference is being recorded. In addition, an investor presentation and the webcast replay of this conference call will be available on NetEase's corporate website at ir.netease.com.

Joining us today on the call from NetEase senior management is Mr. William Ding, Chief Executive Officer; Mr. Charles Yang, Chief Financial Officer and Mr. Hilton Hui, Co-President of NetEase Games.

I will now turn the call over to Mr. Yang who will read the prepared remarks on behalf of Mr. Ding.

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 based on renminbi. We are very pleased to report another quarter of financial and operational growth across our businesses with a 15% increasing revenue and 46% growth in our net income on a year-over-year basis. Online games remained a cornerstone of our business. Despite a seasonally slower period in the second quarter, the steady performance of our game portfolio marks the fifth consecutive quarter that we have exceeded RMB10 billion in online game revenues. Our flagship titles continue to provide solid support to our online games business. Throughout the year, these titles have remained relevant to each generation of users, as we diligently explore and create innovative new elements to our games, keeping our content fresh.

Take Fantasy Westward Journey online, as an example, over the course of the last 15 years, since its initial launch, we have introduced close to 30 major expansion packs, averaging approximately two major expansion packs per year, with many smaller scale updates along the way. For FWJ's mobile version, we have made even more frequent updates with nearly 40 major updates, since its initial launch four years ago. Beyond substantial game overhauls and additions, we consistently look for various ways to keep our users engaged.

During the quarter, we held a number of FWJ E-Sports tournaments, which helped boost our user stickiness and drive continued revenue contribution for future periods. The expertise we have gained from operating these flagship titles over the long-term has been deployed in developing our newer games, providing us with more steady revenue streams in what is now a very diverse game portfolio. Invincible, Onmyoji and Identity V launched in 2015, '16 and '18 respectively, serve as good examples of our superior game longevity with different game genres.

Invincible continues to grow steadily in terms of revenue and number of active users, achieving new record in the second quarter. Onmyoji topped the iOS grossing chart in China, twice in the second quarter, as we launched our hit expansion pack in Q2 that featured a rich and captivating story line. Identity V is also growing steadily after more than a year of operation.

During the quarter, we also launched an updated version of Solution [Phonetic] and renamed this MMO Sensation into all about Xuan Yuan. The update came with a full-fledged overhaul of the game, including improved graphics, new characters and new social systems. As a ground breaking game in the MMORPG genre, the original CLX [Phonetic] impressed the market at its initial launch over a year ago with its best-in-class graphics and high degree of freedom for users to customize and design their own characters and story lines. The game quickly accumulated a large and loyal community of users, particularly among the younger generation. Now with the relaunch, we are thrilled to delight players even without the games original IP. Our strong content and an amazing team of designers captured the spirit of the game while breathing new life into this market favorite. As a result, all about Xuan Yuan is attracting a growing user base and generating increased revenue contribution quarter-over-quarter.

Our growing portfolio of games has generated a solid fan base. Our goal is to have an even larger and deeper impact on the vibrant community of game users. Onmyoji is the first of these younger IPs that we are cultivating. In order to expand the reach of Onmyoji's IP, we are currently working on four new Onmyoji games. These include the Japanese Collectible Card Game called, Onmyoji: The Card Game. A simulation game called Onmyoji: Yokai Koya and two other Spin-Off games.

In July, we also launched the Onmyoji, cafe and shop in Guangzhou featuring popular Onmyoji characters. This location has become a must see destination for many young fans. We are confident that these initiatives will further strengthen our increasingly valuable game IP and further enhance our recognition among younger generation. In terms of newer titles, we most recently launched BuildTopia and Sky in China, and a few other games overseas. BuildTopia is a real-time creative shooting game topping the iOS download chart within a day of it's launch. And Sky is a adventure game bringing users a heart warming experience and receiving multiple recommendations from the Apple store. We also launched an updated version of Tom and Jerry which prove instantly popular among younger players taking the game to the top of the iOS download chart, shortly after its launch and continues to trend well with a growing user base.

Globally, we continue to advance our games and make inroads that expand our reach. Knives Out remained popular in Japan and topped the country's highest grossing games chart multiple times in May and June. Additionally Identity V was ranked for the first time on Japan's iOS top three grossing chart in July, following our collaboration with famous Japanese comics. The success of these games has helped us to gain a much better understanding of Japanese users and their preferences allowing us to better tailor our games for the Japanese market. Some of the titles, we recently introduced in Japan also show promising signs of popularity. We now have three more titles in Japan, which are live after previously known as Night Falls: Survival. Cyber Hunter as well as Super Mecha Champions, a Mecha anime shooting game which we just released in July. All three of these games topped Japan's iOS download chart shortly after their launches.

In the second quarter our overseas games revenue accounted for more than 10% of our total games net revenue. Having the right products is the key to global expansion and we will continue to invest in game content that will resonate with global players. In terms of R&D, we are looking for talent and teams that complement our R&D skills on a global scale. In July, we announced our minority investment in behavior interactive, an online games pioneer in Canada and the leader of the Asymmetrical Battle Arena genre. In addition, we also launched a new video game studio in Montreal, Quebec in Canada with an aim to hire local and international resources to broaden our R&D capabilities in North America.

Our extensive pipeline also holds a number of exciting new titles for the upcoming quarters. These include Fantasy Westward Journey 3D, Xuan Yuan Sword: Dragon Upon the Cloud, Pokemon Quest and Bloom & Blade.

Moving on to our e-commerce business. During the second quarter we made additional progress to improve our operating efficiency. We further optimized our internal structure, enhanced our warehouse and logistics operations and upgraded our supply chain management. For Kaola, our self-build bonded warehousing Ningbo began trial operation in June. This warehouse is capable of handling millions of orders every year, which we believe will help us to improve operating efficiencies even further.

During the quarter, we also signed strategic partnerships agreement with additional international brands such as L'Oreal and Maybelline, enabling our customers to more conveniently access these world-renowned beauty brands.

For Yanxuan, we continue to promote supply chain upgrade by helping manufacturers improve their design, reduce production cost and enhance efficiencies. We are further deepening our collaborations with top-performing partners, which will allow us to renegotiate better commercial terms, implement better controls over quality and optimize product creativity.

On the product side, we are even more selective with new product offerings, enabling us to focus on and dedicate our resources to top products with the highest repurchase rate and customer satisfaction rating, by offering customers greater value for their money with better product quality and pricing, we hope to further improve customer satisfaction.

Turning on to our online music business. We continue to innovate and create a highly differentiated product with an unparalleled social experience on our NetEase Cloud Music app. At the end of July, we added a new highly popular community module known as the Cloud Village. This is a music community that fosters discussion, creation and sharing and personalized expression around music. It is presented in the format of waterfall containing music video blog, music micro blog and many other exciting features that allow music lovers to follow and express themselves interactively. This brand new module changes the way that users experience music from just listening to also watching and interacting. At this moment we have over 800 million users on our music app, which is 50% up year-over-year. Subscriber numbers are also growing very strongly at 135% year-over-year increase.

For online education, Youdao continues to deliver solid growth and we see significant opportunities in the online learning industry. Over the course of the last 13 years, Youdao has built a robust suite of technology driven learning products and services. With its leading AI technology, strong content and predictive development capabilities Youdao has steadily build a large engaged and diverse user base with over 100 million average total MAUs in the second quarter of 2019. We do not take the responsibility of education lightly and we encourage innovation within each content studio at the Youdao.

Our courses are regularly evaluated and their success is measured by user satisfaction ratings, which we believe is pivotal to the long-term sustainable growth of any online learning company. Youdao most recently hosted its Annual Product Launch Conference in Beijing. At the event we announced five different products for children including Youdao Children's English mobile app, Youdao Mathematics Online Course and Youdao Chinese Reading Online Course. All designed to improve children's learning habits as well as Youdao sell tooling and kata [Phonetic] to online courses teaching coding to children between the age of 3 to 18.

Additionally, we also announced our second-generation Youdao Dictionary Pen supported by more advanced optical character recognition and technology, allowing more accurate and effective scanning translation. In an evolving Internet market, content is king and NetEase is best known for our content creation capabilities. This rings true across our different business segments. We continue to emphasize product enhancement, craftsmanship and innovation, and better user experiences to thrill our ever-growing user community of different segments. Through our industry knowledge, deep IP, diversification strategy within our core competencies and our international growth initiatives, we believe we can continue to bring relevant exciting new products and services to NetEase players, fans and users around the world.

As we continue to grow and evolve, we are always very appreciative of the long-term support from our shareholders. With that in mind, our Board of Directors have approved a dividend payout ratio of 30% this quarter. We are delighted to be returning value to our investors as our business continues to boast healthy and growing profits.

This concludes William's comments. I will now provide a very brief overview of our second quarter 2019 financial results. Given the limited time on the call, I will be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details.

For the second quarter, our total net revenue were RMB18.8 billion or $2.7 billion representing approximately 15% increase year-over-year. Net revenues from online game services were RMB11.4 billion, down 4% quarter-over-quarter, but up 14% year-over-year. The sequential decrease was due to the second quarter, typically being a slower quarter seasonally. Year-over-year increase was primarily driven by increased revenue contribution from flagship titles, such as FWJ and new games such as Justice and Life-After. Mobile games accounted for approximately 72% of net revenue from our online games in the second quarter.

Net revenue from e-commerce, were RMB5.2 billion and net revenues from advertising services were RMB582 million. Net revenues from our innovative businesses and others were RMB1.5 billion up 18% quarter-over-quarter and 23% year-over-year, both due to increased contribution from Cloud Music, CC live streaming and Youdao.

Our overall gross margin was 43.3% in the second quarter, compared with 44.1% in the preceding quarter and 44.5% for the prior year's period. Gross margin for our online game services for the second quarter was 63.1%. By and large, our gross margin for games is generally stable fluctuating quarter-to-quarter within a narrow bandwidth based on the revenue mix of mobile, PC, self developed and licensed games.

For e-commerce our gross margin was 10.9% in the second quarter. We achieved a positive gross margin for our innovative businesses and others business of 1.4% in the second quarter versus losses of 13.1% and 7.3% in the prior quarter and second quarter of last year respectively. The significant improvements came from increased revenue contribution from some of our business lines within this segment, as mentioned a moment ago, as well as better cost controls.

For the second quarter, total operating expenses were RMB4.6 billion. Our selling and marketing expenses as a percentage of net revenue were 9.4% in the second quarter, largely stable from the previous quarter. We continue to see operating leverage, as we benefit from economies of scale and improve operational efficiency.

E-commerce related shipping and handling expenses, included in selling and marketing expenses as a percentage of e-commerce revenue was 7.4% in the second quarter, significantly improved from 8.4% in the previous quarter. R&D expenses were maintained at around $2 billion level reflecting our commitment to investing in content creation and product development, which is what defines us as a technology company. Operating income for the second quarter of 2019 increased by 2% quarter-over-quarter and 50% year-over-year to RMB3.5 billion. The effective tax rate for the second quarter was 18%. The lower effective tax rate in the second quarter was mainly due to reduced losses from certain subsidiaries, as well as certain tax credits being recognized for certain subsidiaries of the company during the quarter.

Non-GAAP net income attributable to our shareholders for the second quarter totaled RMB4 billion or $531 million representing an increase of 21% quarter-over-quarter and 34% year-over-year. Our non-GAAP diluted earnings per ADS were RMB28.06 or $4.09 for the second quarter of 2019. Our cash position remains strong. As of June 30, 2019, our total cash and cash equivalent, current and non-current time deposits and short-term investments balance totaled RMB55.6 billion compared with RMB50.1 billion as of year end last year.

For the second quarter, we are pleased to report that our Board has approved a dividend of $1.04 per ADS representing a 30% dividend payout ratio. As we mentioned earlier in William's remarks, we are thankful for the long-term support from our shareholders and we are always looking for ways to return value to our shareholders. As a result, this quarter's higher dividend payout ratio reflect this commitment as we continue to both healthy and growing profit.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Hillman Chan from Citi.

Hillman Chan -- Citigroup Inc -- Analyst

Hi, good morning management. Hi, good morning, Management. Thank you for taking my question. I have a question regarding the overseas expansion strategy for our games. So as we noticed, we recently launched new game studio in Montreal and acquired stake in behavior, interactive and our games are doing well in Japan and in some overseas market. So going forward in the future could management share more on the strategies in particular what are the key focus markets by geography, the target game genres and the steps you will take to achieve the overseas growth either from organic growth or M&A and also some of the update on the latest partnership synergy with overseas studio [Phonetic] would be helpful? Thank you.

William Ding -- Chief Executive Officer

[Foreign Speech]

Hi, thank you Hillman. I will provide a brief translation of William's comments for everyone's benefit. So, as you can see that we have been very active and open-minded for deeper collaboration with global premium game studios, this is because for ourselves, NetEase, we have been cultivating in game content development, R&D with almost two decades of expertise and experiences. So, we are very, very open-minded and we'll continue to explore deeper collaboration with peers, the best-in-class studios globally.

In terms of the overseas expansion strategy, William has summarized from a few different aspects. First is about our games launch, NetEase games into global stage. Currently, we have achieved certain milestones in Japan and we are hopeful and we are working hard to make also our popular content, popular games into a popular hit into mainstream western market in North America and Europe.

In terms of collaboration, with global peers, we've always been focusing on joint R&D development as a priority, because that is our know-how and that is where we see a lot of supplementary capabilities that we can provide to each other. The goal is to jointly develop by leveraging each other's competitive strengths to develop premium content for global gamers.

As to the genres, there is no fixed rigid framework. We are very open-minded to be more explorative in nature, because as everyone can witness in the most recent years game genre has been evolving very fast and we are very glad that NetEase is always a pioneer in the forefront of keeping innovation in terms of game plays and genre.

Hillman Chan -- Citigroup Inc -- Analyst

Thank you so much William and Charles.

Charles Zhaoxuan Yang -- Chief Financial Officer

Thank you.

Operator

We would take our next question from Alex Poon from Morgan Stanley. Your line is open. Please go ahead.

Alex Poon -- Morgan Stanley -- Analyst

Hi, good morning. Thank you for taking my question. I have a question regarding the music business. It is very glad to see the new module Cloud Village launched recently. Can you also talk about in the second half, how your monetization strategy will change? And I also have seen some news regarding the timetable of profitability. Can you also share with us how are you going to control the costs and achieve the profitability? [Foreign Speech]

William Ding -- Chief Executive Officer

[Foreign Speech]

Okay. Alex also for for everyone's benefit, let me quickly translate William's remarks. So, we are glad to see that you've noticed in our most recent version update of Cloud Music. There is a prominent music community feature called Cloud Village. So everyone, a true music lover is now official Villager of our app. As we've mentioned previously, a key focus of Cloud Music is to dedicate our platform and our user outreach to promote independent musicians and independent music, here in China. And with this community features, I think this is more productive in us achieving this mission.

In terms of your question on monetization by and large, I think it can be categorized into one being the user subscription, which we now seeing a very robust growth in both the overall users as well as subscriber growth more than 135% year-over-year. Second is act from advertising, which again come growth hand in hand as we are growing our user base and popularity among the users. The third is broadcasting, which is not only in the format of video live streaming, but also audio broadcasting. Fourth, now with the establishment of a community feature, we will also be more innovative and exploring deeper monetization opportunities around these community interactive features.

In terms of your question on profitability, we have never officially commented on any timetable, but rest assured, we feel very, very confident about the growth upside of China's online music industry as a whole, and NetEase as you can now witness for the past few records. we are very disciplined in controlling costs at a reasonable level, as well as be focusing on the return on the various investment, whether it's selling, marketing or R&D into our different business segments. So profitability is ultimately our target.

Alex Poon -- Morgan Stanley -- Analyst

[Foreign Speech]

Operator

We would take our next question from Natalie Wu from CICC. Your line is open, please go ahead.

Natalie Wu -- CICC -- Analyst

Hi. Good morning. Thanks for taking my question. I actually have two here. First one is regarding the Cloud Music as well. You just mentioned about the -- you mentioned the Cloud Village module. Actually I tried that module and it's very innovative and interesting. Just wondering, can management share with us some further operating metrics regarding the user engagement recently for other Cloud Music? I just want to get a sense of how that's -- that new function has improved the user engagement, say the daily active user or the daily time spend, something related with that?

And secondly about the Mobile IP. Just wondering how should we anticipate that use of Mobile IP? Will there be some new brand -- some brand new games or journalists launching under these IPs? Or just new updates with these new features embedded in our existing games? Thanks. [Foreign Speech]

Charles Zhaoxuan Yang -- Chief Financial Officer

Thank you. Natalie. I will answer your first question on operating metrics, and then William will further comment on the Mobile IP. Well, as you know, we've only launched this new updated version almost, I think it's July 29, toward the very end of July. So it's about 10 days. So there's really not a lot of operating metrics that I can specifically share. But we've seen very, very encouraging signs of strong growth in both DAU and MAU, since we launched the most updated version. This data is exactly why we are confident that our innovation in bringing in this new interactive community feature will eventually be very well rewarded. Because it is not only a way of change in people's habit of experiencing music, but hand in hand as this new feature is now not only encouraging users to listen, but also to watch and interacting with other music lovers, it also creates possible opportunities for us to explore monetization potential. And I'll leave the second question to William.

William Ding -- Chief Executive Officer

[Foreign Speech]

For the Mobile IP, Natalie, it's a big area for a deep-rooted collaboration is that we will buy, we will leverage mobile's global popularity of the IPs to develop games. And it's not only one, it's actually several games across different genres, that we have different schedule and timetable to collaborate literally develop with mobile and the partnership also goes beyond games. For all those details, it will be gradually announced as we further progress along these long-term strategic partnership.

Natalie Wu -- CICC -- Analyst

Got it. Thank you. Looking forward to that.

Operator

We will take our next question from Thomas Chong from Jefferies. Your line is open. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

Hi, good morning. William, Charles and Margaret. Thanks for taking my questions. Congratulation on solid cost control for this quarter. And my question is mainly focusing on the cost side. Often for the GP margin the innovation and others achieved the first positive gross profit in the past 12 months. Can we basically assume that our cost control, is where we are solid, and we should expect innovation and others to maintain GP margin to be positive going forward, as well as for e-commerce do we need to stay stable GP margin for e-commerce in 2019?

And my second part of the question is about the opex. Can management comments about the headcount that we have in Q2 versus Q1? And how should we think about 2019? In particular for R&D expenses, is there any reason why we see a sequential decline? Should we expect the trend to go -- to be continued in the following quarters? Thank you. [Foreign Speech]

Charles Zhaoxuan Yang -- Chief Financial Officer

Thank you, Thomas. I will take your questions. On the cost side, let me first begin by saying that NetEase has been listed since 2000 for 19 years and we have gone through various cycles over the last 19 years of journey being a listed company. So we've always been very, very disciplined in terms of making adaptive measures to -- in corresponding to different macro environment. For 2019, as we commented in the previous quarters' earnings call, one key focus is a more disciplined balance between gross and margin, so we are very happy that at least for the last two quarters we have been delivering on what we have promised to the market being very disciplined.

Well, having said that, it doesn't mean a scale back in terms of headcount by the end of the second quarter, the overall headcount is by and large stable versus a quarter ago or end of last year. So a lot of market rumors commenting on massive layoffs and all that, those are actually just not fact. So relating to your other questions R&D, yes, we are a technology company. So R&D is an engine for our continued sustainable growth for the longer term. I do not see any reason why we should scale back or cut down R&D cost significantly. Quarter-to-quarter, small fluctuations that can -- it's difficult to explain, sometimes it relates to some one-off event, sometimes it's the provisions and all that. But I think a general trend is that we are going to dedicate a considerable amount of our net revenue into R&D. But again like I commented earlier on what ever formats of investment, whether it's R&D and or selling, marketing, we focus internally on the return on these investments.

In terms of margin, the reason why we have grouped some business segments into innovative businesses and others is exactly because they are in a relatively early stage. So, as they continue to grow, they are top line at user base. The economies of scale will help us to improve their margin trajectory. It is too early to predict whether all those relatively young business segments, we are then starting from this quarter, always have positive GP margin. But I do not see any indication of margin materially decline. So going forward, as long as my music business, my Youdao are growing healthily, I think earlier on Natalie also -- I think Alex also ask that question, profitability making positive profit and then returning value to our shareholders. It always remains as a priority to NetEase.

Thomas Chong -- Jefferies -- Analyst

Thank you Charles. And congratulation again.

Operator

Thank you. We will take our next question from Bill Liu, Goldman Sachs. Your line is open. Please go ahead.

Bill Liu -- Goldman Sachs -- Analyst

Thank you. Good morning and thank you for taking my question. I have a follow-up question on costs, mainly about the sales and marketing line. I noticed that for this quarter, it's almost flattish quarter-on-quarter, but a reduction from a year-on-year perspective. So, I wonder for the sales and marketing expense, so how should we think for this line for rest of the year, given that for on one side, we have a deceleration in e-commerce growth and on the other hand, the new -- the number of new approvals has been rather limited comparing to previous expectation. Thank you.

Charles Zhaoxuan Yang -- Chief Financial Officer

Thanks, Bill. I'll again take that question, since it relates mostly to financials. For selling and marketing, majority of the selling, marketing is allocated to games. And as you mentioned, relatively speaking, a few new games that is being launched in the first half of this year, that explains why the selling and marketing on games is relatively lower amount comparing to periods where we have major titles that we need to promote.

Now on e-commerce, as I mentioned for now at least two, three quarters, it's always a balanced approach between how fast we want to grow the top line as well as the profit profile of my e-commerce segment, and I think coming into 2019, we are more disciplined in keeping that balance in a sense that we will not -- it's just never our philosophy that we are to pursue a faster top line growth at the expense of a bigger loss. So that is not our intention, and it's never in our corporate DNA. So these two factors accounts mostly why in the first half for the past two quarters, selling and marketing expense has been maintained at a very cautious and disciplined level. Well, that does not mean that we face resource constrained. In the second half, if there are new games that's ready for marketing and promotion, we will do so. And if there are opportunities for us to see a reacceleration of my e-commerce or other business segments, top line growth, we will not hesitate to spend marketing dollars, but whatever marketing dollars we spend, it will be a very calculated investment, focusing on returns and focusing on the results of my marketing dollar expenditure.

Bill Liu -- Goldman Sachs -- Analyst

Okay. Thank you.

Operator

Thank you. We will take our next question from Eddie Leung, Bank of America Merrill Lynch.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Hey, good morning guys. Good morning. Thank you for taking my questions. I have two quick questions. The first one is about E-Sports. It seems like there is a plan to invest in a stadium in Shanghai. So wondering how would that affect our capital expenditure going forward. And then secondly, just any update on game regulation. Any thing related to the young users, time restriction, anything along that line would be helpful. [Foreign Speech]

William Ding -- Chief Executive Officer

[Foreign Speech]

So Eddie, I'll translate the first question. I think you noticed the recent news we made at ChinaJoy. Yes, we are going to invest in Shanghai, it was related. And Shanghai is very supportive of E-Sports, and overall new economy as a whole, as you may notice that our team Dragon which most recently won Championship in the Overwatch League is a team that is based in Shanghai. And we've also had plan to invest. It's not solely just for e-sports stadium, but it's a e-sports and as well as R&D center that is more tilted toward developing e-sports relevant game content. So that's a longer-term strategic plan.

And in terms of capex, because its going to be spend across next three, five years or even longer. So from the financial statement, from a cash flow perspective, these are well within our resource capability and control. It is not going to impact our financial results materially at all.

[Foreign Speech]

And on your second question, game regulation. We don't have any further update on how the regulation is progressing.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

[Foreign Speech]

Thank you.

Operator

Thank you. We will take our next question from Jialong Shi from Nomura. Your line is open.

Jialong Shi -- Nomura -- Analyst

Hi, good morning -- Hi, good morning, management. Thanks for taking my call. I have two questions. First question is about your dividend payout and as Charles mentioned in the prepared remark, you revise your dividend payout from a fixed 25% to the range of 20% to 30% going forward. So I still -- I just wonder, the rationale to make this change. Is it fair to think going forward you will be able to pay higher than previous 25% in dividend since your earnings outlook is getting better.

And my second question is about Fantasy Westward Journey 3D, and this game will -- based on the games website, this game will start a new donor testing today. So can you give us some colors on its revenue potential based on the performance during the past rounds of testing? And is there any potential cannibalization risk between the upcoming FWJ 3D and your existing 2D FWJ game?

And finally, how long do you expect this latest round -- how long this latest round of testing may last, and when you expect to monetize this new game?

[Foreign Speech]

William Ding -- Chief Executive Officer

[Foreign Speech]

So, to just translate for everyone's benefit. For FWJ 3D, yes, we started -- we will start close beta testing are enjoyed today. As to the official launch and monetization timeline that will be subject to, first of all, obviously the approval, when we can get the license. Secondly also based on the testing results of this closed beta testing round.

On your concerns on internal cannibalization, as this FWJ 3D and the current FWJ PC version and the FWJ mobile version, they are targeting different user appeals. So see -- we see very, very little concern if any at all in terms of user internal cannibalization. We are very, very confident and positive about the future outlook of FWJ 3D upon its official launch.

Charles Zhaoxuan Yang -- Chief Financial Officer

For your first part of the question on the dividend payout ratio. Let me comment saying that NetEase is in fact one of the very, very few technology companies globally that has been consistently paying dividend, returning dividend to our shareholders on a quarterly basis. Every quarter the exact dividend payout ratio is obviously subject to the Board approval. So now the Board has authorized management instead of a fixed 25% point to a 20% to 30% range, and does not mean that we are bound by this range. So every quarter the exact dividend payout ratio will be dependent on the financial and operational performance of the company and ultimately, subject to the Board's reapproval, so it does not indicate that in the future we will always be paying 30%, but we are still pleased that this quarter, we are paying more, because we are confident about our sustainable profitability profile down the road. For the future quarters, it all depends on how the macro economy and our outlook of the company's performance change.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

That concludes today's question-and-answer session. Margaret, at this time, I would turn the conference back to you for any additional or closing remarks.

Margaret Shi -- Director, Investor Relations

Thank you again for joining us today. If you have any further questions, please feel free to contact us or TPG Investor Relations. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Margaret Shi -- Director, Investor Relations

Charles Zhaoxuan Yang -- Chief Financial Officer

William Ding -- Chief Executive Officer

Hillman Chan -- Citigroup Inc -- Analyst

Alex Poon -- Morgan Stanley -- Analyst

Natalie Wu -- CICC -- Analyst

Thomas Chong -- Jefferies -- Analyst

Bill Liu -- Goldman Sachs -- Analyst

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Jialong Shi -- Nomura -- Analyst

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