Earnings Call Transcript - NTES Q2 2022

Operator, Operator

Good day, and welcome to the NetEase 2022 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Margaret Shi, IR Director of NetEase. Please go ahead, ma'am.

Margaret Shi, IR Director

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the future performance of the company and are intended to qualify for Safe Harbor from liability as established by the 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 in 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 in announcement and 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 2022 second quarter earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, the investor presentation and a webcast replay of this conference call will be available on NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase senior management 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.

Charles Yang, CFO

Thank you, Margaret, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. We are very pleased to report another solid quarter with net revenues growing to RMB23.2 billion, up 13% versus the same period last year. Our online games continue to be our primary growth driver with net revenues from our games and related value-added services coming in at RMB18.1 billion for the second quarter, up 15% year-over-year. Please note, we changed our segment categorization this quarter. The expanded games and related VAS segment now includes game-related value-added services such as CC Live streaming, game-related accessories and merchandise, etc. We believe this revised segment categorization better reflects the performance of our well-rounded capabilities around the broadly defined game ecosystem and value chain. Players continue to gravitate to our long-lasting franchises. In the second quarter, revenue from our Fantasy Westward Journey Saga kept on growing, further impressing the industry with its strength and longevity. Through the solid foundation we built and continuous iterations we release every few months, this flagship saga remains among the most well-crafted games in today's market, remaining highly attractive to users even after nearly two decades of operation. Over the years, we have built complex and intricate ecosystems within the games, constituting well-balanced, comprehensive economic systems and intimate user networks. We see these games as a work of art and science and they are ever evolving as we dynamically adjust the finest details. In terms of newly launched titles, we are extremely excited to see Diablo Immortal with tens of millions of players dominating the iOS top download chart in multiple regions. Diablo Immortal offers fantastic gameplay that relishes the authentic Diablo experience while also featuring an MMORPG social experience, where players can share a massive world with others as they explore. We are working hard to keep it fresh and plan to continuously introduce exciting new content for Diablo Immortal in a fast-paced manner to keep players engaged. Diablo Immortal's debut was also a huge opportunity for us to showcase our world-class development capabilities, leveraging our robust self-developed game engine. Over the years, our team has worked hard to recreate the Diablo sensation on mobile, putting great effort into every detail of the game and overcoming countless barriers along the way. In the second quarter, Naraka: Bladepoint maintained strong engagement levels as we introduced a series of content updates. By the end of May, the game has sold 10 million copies worldwide since its release about a year ago, turning it into one of the best-selling PC games in the world. Along with its one-year anniversary, we recently announced an array of exciting updates for Naraka: Bladepoint, including a brand new map called Holoroth. Holoroth brings fresh combat experiences to players and a wealth of new features such as weather systems, interactive objects and new areas to explore, winning wide praise from players. On June 23, we debuted Naraka: Bladepoint on Xbox Series X and joined Xbox Game Pass. In its first two weeks on the market, an impressive one million new players jumped into the game, enjoying the exciting gameplay which had been optimized for the console. The game will next be available on Xbox One. Simultaneously, we are working to bring Naraka: Bladepoint's authentic melee combat to mobile platforms. Development is progressing smoothly and pre-registration has been very encouraging with more than three million users already registered without much marketing. Another exciting title that topped the charts in the second quarter was Infinite Lagrange. With new creative social media marketing initiatives, we greatly expanded the game's user base, which triggered wide player interest in our Sci-Fi SLG title. We are also seeing strong retention of new players, further boosting our confidence in this promising category. We continue to introduce new gameplay and all-rounded graphic updates on ships, stars and space stations to further strengthen our leadership in the SLG category. Moving on to our pipeline, in addition to the aforementioned Naraka: Bladepoint mobile version, our strong pipeline is bursting with other exciting titles in the making. Harry Potter: Magic Awakened is under preparation for global launch following its debut in China last September. With our latest round of beta testing in July, we received very positive feedback from the player community. Together with Warner Bros. Games, we look forward to co-publishing this amazing title for a global audience soon. Domestically, our development of the Justice mobile game is well on track, building on the success that our PC phenomenon Justice created back in 2018. The Justice mobile game will recreate a vivid world of the Song Dynasty on mobile devices with our cutting-edge game technologies, such as motion capture and global illumination. As a leader in the MMO category, we will keep pushing boundaries and continue to raise the bar for the industry. The Justice mobile game will no doubt introduce a brand new game experience to the MMO universe and offer players a world of greater freedom and more imagination. We are determined to become a well-respected premium global game content provider on the international stage. Our globalization strategy will be an essential part of the next chapter of our growth story. Our world-class R&D infrastructure, coupled with our top talents from all over the world, will serve as a strong foundation to build the next sensation of blockbusters for players worldwide. We always follow an innovative-first approach and look for creative minds with the same passion for games. Through strategic investment and partnership, as well as setting up first-party overseas studios, we've successfully built a strong connection with top talent across the global stage. In the second quarter, we made further progress in our globalization efforts, successfully bringing internationally renowned game veterans to NetEase. During the quarter, we were pleased to have announced that renowned industry veteran Jerry Hook, a founding member of Xbox Live and one of the key masterminds behind the Halo and Destiny franchises, will be heading our newest first-party studio Jar of Sparks based in Seattle. We also announced the onboarding of Emile Liang, who had previously spent over 23 years with Ubisoft and was a producer of the Far Cry and Assassin's Creed franchises. We are excited for him to join as a Lead Producer in our Montréal Studio, bringing us more expertise in AAA game production. In Japan, we are also excited to welcome another master producer, Hiroyuki Kobayashi, who was a 27-year Capcom veteran and the producer of Resident Evil, Devil May Cry, Sengoku Basara, and many other well-known game series. Similar to our previously announced overseas studios, our new studios and producers have great autonomy over the games they want to build allowing these top-notch talents to rise organically and maximize their creative genius. Now turning to our education business, total net revenues for Youdao were RMB 956 million in the second quarter and we achieved positive operating cash flow of RMB 104 million in this quarter, despite the challenges faced during the COVID resurgence and business transition. For the second quarter, net revenues from smart learning devices were RMB 240 million, up 16% year-over-year, demonstrating our resilience despite the pandemic's impact on the supply chain and logistics. Our flagship products maintained their remarkable popularity where we released a variety of diversified new products to cover a broader range of learning scenarios. Youdao dictionary plan series and Youdao listening part both led their respective categories during JD.com's June 18 Shopping Festival. In July, we introduced a new product called Youdao Smart Learning Pad, our very first learning pad equipped with AI diagnosis and adaptive learning functions. The product satisfies users' needs for reading, listening, writing, and practicing on one consolidated device. We continue to diversify our product offering in the STEM Education sector in which we achieved sustainable growth with gross billings expanding by more than 9-fold in the second quarter year-over-year and over 180% quarter-over-quarter. For example, in the second quarter, gross billings from Youdao international chess increased by over 60% quarter-over-quarter. With an aim to create a comprehensive and user-friendly online learning community, we also launched the Youdao Broad Game Academy application at the end of last year to better serve our students of Go, Chess, and Chinese chess courses. As a result, the monthly average DAUs on this platform has increased over 7x compared with that of the first quarter. Looking ahead, Youdao will continue to upgrade its diversified product and services to empower more efficient learning experiences for Chinese students. Driven by our proprietary technologies, we remain confident in Youdao's development trajectory in the second half of this year. On cloud music, despite a more challenging industry environment and macro headwinds, we maintained strong growth in the second quarter and total revenues improved by 29% year-over-year to RMB 2.2 billion. Our membership paying ratio also reached 21%, demonstrating the resilience of our business and high demand for the cloud music immersive music experience, along with users' increasing willingness to pay for premium content. Our online music services MAU stood at RMB 182 million with our DAU over MAU ratio staying well above 30% during the period. Gross margins have continued to improve and reached 13% in the second quarter compared with just 4% in the same period last year. By enhancing our product and community features and through technological innovation, we are bringing music lovers and artists alike the premium experience they crave. During the period, we launched our new high-resolution audio feature offering users higher audio quality for an immersive audio experience, coupled with our seamless listening function. We are committed to bringing users superior sound quality through the latest technology. User interaction is also a key component to the music experience we aim to provide with our new music-inspired social networking app MUS, where we are utilizing music content to connect users. Within this app, users can connect with others who share a similar music taste, based on their listening preferences and personality insights. On the content side, to satisfy the music needs of our younger users, we continue to build our content and give users increasing choices to express themselves. As of June 30, 2022, Cloud Music was also home to over 500,000 registered independent artists with 2.3 million music tracks created by this group of talented musicians. In addition, we are also working in collaboration with top labels to secure more top talent content while simultaneously achieving better commercial terms. Regarding our recently licensed content, we've added multiple licensing agreements with major overseas and domestic music labels such as SM Entertainment, PF Entertainment, YG Entertainment, all of which provide our users with access to more hits at an improved ROI. This will continue to be our goal as we negotiate with multiple copyright holders to bring in music content that resonates with our community and complements our offering. Looking ahead, we plan to keep growing in the scope, content coverage, and community size. Moving on to Yanxuan, our private label brand continues to launch popular products that consumers love across diverse channels in the second quarter, with the goal of bringing consumers products that facilitate a more leisurely and modern lifestyle. Yanxuan focuses on its development of high-quality original product design. During the second quarter, we launched a number of popular products such as handmade vinegar, ergonomic chairs, skin-friendly built items, and Chinese-style fragrances, covering food, home furnishing, bedding, as well as personal hygiene and maternity products. Lastly, in June, we published our ESG report for 2021, highlighting that we have officially established a dedicated sustainable development department and formed an ESG Committee at our Board level that consists of three independent directors. In addition, we remain committed to continuing to develop our carbon strategy and enhancing more transparent disclosure. In 2021, as part of our environmental and social endeavors, we successfully reduced over 3,800 metric tons of carbon emissions in warehouses, logistics, and packaging sites, and donated over RMB 80 million for flood relief and efforts towards pandemic control. In addition to our ongoing work to help students in remote mountainous areas, we also provided a great number of smart hardware, high-quality courses, and online learning platforms to rural schools. We were pleased to learn that with our help, many students achieved positive results in this year's college entrance exam and were successfully admitted to top universities, including Peking University. Across our business, we strive to serve the greater good of society as a whole and use our technology and other resources to support a better future. So far, we are making steady progress in growing our core game businesses and international presence. With the global launch of new games across different platforms and the establishment of our overseas studios, which affords us access to the best creative minds anywhere in the world, we are getting ready for the next phase of our global ambition. This concludes William's comments. I will now provide a brief review of our 2022 second 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 second quarter were RMB 23.2 billion or US$ 3.5 billion, representing a 13% increase year-over-year. As we disclosed in our earnings release issued earlier today, beginning in this quarter, we've consolidated revenues from certain value-added game services with our online games operations and renamed the category games and related-value added services. We think this is a better depiction of our game business ecosystem. In addition to online games, we provide a range of tools and services to our users to enhance their overall gaming experience when they play our games, such as the CC live streaming service, a platform offering various live streaming content with a primary focus on game broadcasting and certain game-related merchandise sales. These revenues were previously included under our innovative businesses and others line item, and historical periods have been adjusted accordingly. Online game operations are still the primary component of this segment, accounting for nearly 93% of our total games and related value-added services revenue. The ratio is steady with the prior period and same period a year ago. Total net revenues from our games and related VAS were RMB 18.1 billion, up 15% year-over-year. The growth was primarily due to increased revenue contribution from the launch of new games, such as Naraka: Bladepoint and Harry Potter: Magic Awakened, and other exciting games such as Fantasy Westward Journey Online. Net revenues from our mobile games accounted for approximately 66% of net revenue from the operation of online games. Youdao’s net revenues were RMB 956 million, compared with RMB 1.3 billion in the same quarter last year. The decline was mainly due to the conclusion of Youdao's after-school tutoring services for academic subjects under China's compulsory K9 education system, which were previously included in its learning services back in 2021. Net revenues from Cloud Music were RMB 2.2 billion, up nearly 30% year-over-year. The increase was mainly due to the increased revenues from membership subscriptions, as well as social entertainment services. Net revenues for innovative businesses and others were nearly RMB 2 billion, up 14% quarter-over-quarter, mainly due to increased contribution from Yanxuan in the second quarter. Our total gross profit margin rose to 55.9% in the second quarter, up slightly compared with 54.5% in the second quarter of last year. GP margin for the games and related value-added services was 64.9%. The majority of our gross profit in this segment is contributed by online games revenue. The contribution from related VAS is relatively much smaller, which carries a lower margin than online games. Therefore, even with adjustments to our line items, our games and related VAS margin is generally stable with some narrow fluctuations based on the revenue mix of mobile and PC titles, self-developed, co-developed, as well as licensed games. GP margin for Youdao was 42.8%, compared with 52.3% in the same period of last year. The decline was mainly due to the lower revenue proportion from Youdao's learning services, resulting from the conclusion of the after-school tutoring businesses for K9 academic subjects. Gross profit margin for Cloud Music continues to improve in the second quarter, climbing to 13% versus 4.1% a year ago. The significant margin improvement primarily resulted from strong top-line growth, as well as the improved efficiency of our content investment. GP margin for innovative businesses and others was 25.8% compared with 27.3% last year. The decline was mainly due to decreased revenue from higher-margin advertising services. Total operating expenses for the second quarter were RMB 8 billion, or 35% of our total net revenues. If we look at our cost composition in more detail, our selling and marketing expenses, as a percentage of net revenue were 14%, compared with 15% for the same period last year. The change was mainly due to less marketing spend related to Youdao. If we exclude Youdao, our selling and marketing expenses as a percentage of net revenue were 12%, compared with 11% in the same period last year, mainly due to increased spending on certain games' promotion during the second quarter. Our R&D expenses were RMB 3.6 billion or 15% as a percentage of total net revenue, compared with 17% for the same period last year. We remain committed to investing in content creation and product development. We are also seeing leverage in our R&D investment. Our other income was RMB 785 million for the second quarter compared with RMB 28 million last quarter. The quarter-over-quarter increase was mainly due to fluctuations in the exchange rate of the US dollar against RMB over the last couple of periods. Our effective tax rate for this quarter was 22%. As a general reminder, the effective tax rate is presented on an accrual basis and the tax credit is deferred from each of our legal entities at different time periods depending on applicable policies and our operations. Our non-GAAP net income from continuing operations attributable to shareholders for the second quarter totaled RMB 5.4 billion or US$ 808 million. Non-GAAP basic earnings per ADS from continuing operations for the quarter was US$ 1.23 or US$ 0.25 per share. This quarter, we also had RMB 625 million of net income from discontinued operations, which was related to the disposal of the Kaola business. Additionally, our cash position remains strong. As of the quarter-end, our net cash position was about RMB 88 billion, compared with RMB 86 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$ 0.072 per share or US$ 0.36 per ADS. Lastly, we continued to buy back shares during the period. Under our share repurchase program for up to US$ 3 billion, approximately 24 million ADS has been repurchased as of June 30 this year for a total cost of approximately US$ 3 billion. Meanwhile, under the NetEase Youdao purchase program for up to US$ 50 million, approximately 1.7 million ADS has been purchased for a total cost of about 18 million as of June 30. In addition, NetEase purchased about 0.8 million ordinary shares of Cloud Music for a total cost of US$ 8 million during the second quarter. Thank you for your attention. We would like to now open the call to your questions. Operator, let's go to Q&A.

Operator, Operator

Thank you. We will take our first question from Yang Bai from CICC.

Yang Bai, Analyst

Thank you, management. NetEase has been actively pursuing opportunities in the overseas market in recent years and has established several game development studios abroad. What is our perspective on the future pace of overseas investments? Additionally, could you share some insights on the products currently in development? Thank you.

William Ding, CEO

The overseas market is extremely important for NetEase. As everyone knows, in the past year, we've not received any license approval for new games in China. So we have had to strategically shift some of our R&D resources to the global market, targeting European, Japanese, and other Asian markets. We have a very strong track record in game production and high R&D efficiencies, and we are now working closely with many overseas developers to find products that will be welcomed by global game players. We have many products under development, and hopefully, you will see some of them being introduced to the market very soon. On June 2, everyone saw the success of Diablo, which we co-developed with Blizzard, and I think it's been a very strong release of that game. Thank you.

Operator, Operator

Our next question is from the line of Thomas Chong from Jefferies.

Thomas Chong, Analyst

Thank you management for addressing my questions. We’ve observed that Internet companies are emphasizing cost reductions, particularly in areas like staff and marketing expenses due to global economic challenges. Can management provide their insights on the future of operating expenses related to sales and marketing, research and development, and general and administrative costs? Thank you.

William Ding, CEO

Thanks to management for taking my questions. We have seen Internet companies highlighting cost efficiencies, such as staff costs and marketing spending in light of global macro challenges. Can management share their thoughts about the outlook for operating expenses in sales and marketing, R&D, and G&A? Thanks.

Margaret Shi, IR Director

The question is about the optimization of costs. Sometimes throughout the development operation of our business, we do cut costs in certain areas, but we will also increase our investment in other areas. At NetEase, we will continue to optimize the way we spend our cost structure. Just because there is weakness in the macro environment, it doesn't necessarily mean that we have to take certain actions to address that. At NetEase, we think very long-term, and we care about the sustainable long-term growth of the company. Thank you.

Charles Yang, CFO

And Thomas, it's Charles. Just to add a bit more. As you can see, we've always been very committed to R&D spending over the past couple of years. Our total headcount also remained relatively stable because we believe investing in talent and technology is key to creating world-class content.

Margaret Shi, IR Director

Thank you, Thomas. Next question, please.

Operator, Operator

Thank you. We will take our next question from the line of Kenneth Fong from Credit Suisse.

Kenneth Fong, Analyst

Thank you, management, for addressing my question. What is your perspective on the domestic regulatory environment and the anticipated Banhao approval? Given the expected decrease in future Banhao approvals, how will this impact our strategy, including the Jar app and IP investments? Thank you.

William Ding, CEO

Thank you, management, for taking my question. What is management's view on the domestic regulatory landscape and the expectations on the Banhao approval? With the likely lower number of Banhao approvals in the future, how will this change our game strategy, including the Jar app and IP investment? Thank you.

Margaret Shi, IR Director

As I mentioned earlier, one of the reasons we have to look abroad and be more active in expanding our user base overseas is due to the lack of new game approvals in China. Secondly, it indicates that we must value or cherish the domestic market even more, as the licensing process has become a precious resource. We must ensure that every game we develop and launch in the market will be popular and well-received by gamers in China. Thank you.

Operator, Operator

Thank you. We will take our next question from Lincoln Kong from Goldman Sachs. Your line is open now. Please go ahead.

Lincoln Kong, Analyst

My question is about two single game titles. First is on Infinite Lagrange. What is the reason behind this title's popularity in recent months, and why are we seeing such strong MAU growth? Secondly, regarding Naraka: Bladepoint mobile, what is the potential for the mobile game version? What is our differentiated strategy to penetrate the large DAU base for battle royale game types, especially in acquiring market share from competitors?

William Ding, CEO

So my question is about two single game titles. First is on Infinite Lagrange. What is the reason behind this title's popularity in recent months, and why are we seeing such strong MAU growth? Secondly, regarding Naraka: Bladepoint mobile, what is the potential for the mobile game version? What is our differentiated strategy to penetrate the large DAU base for battle royale game types, especially in acquiring market share from those competitors?

Margaret Shi, IR Director

For Infinite Lagrange, our team has strong expertise in developing such games. This title has been in operation for quite a while, and we introduced a new version this year that the players seem to have loved, attracting a whole new set of players. This gives us confidence that we will be able to continue expanding in this category. Thank you.

William Ding, CEO

Margaret Shi, IR Director

There are numerous large DAU products in the market that are similar to Naraka. The reason we think Naraka: Bladepoint has been so successful is due to the unique user experience it creates, such as combat experience and free movement in the game. Other developers have not been able to create a game like Naraka in the past, as it requires very hardcore and cutting-edge technology to deliver such a user experience. Therefore, we will continue to explore various ways to ensure our users have a continued excellent experience. Thank you.

Operator, Operator

Thank you. We will take our next question from the line of Alicia Yap from Citigroup. The line is open. Please go ahead.

Alicia Yap, Analyst

Good evening, management. Thank you for addressing my questions. I would like to inquire about the risk of delisting US ADRs. Can you share any insights into your plans for a primary listing in Hong Kong and the expected timeframe for that? Additionally, do you have any updates on the ongoing discussions between China and the US regarding the potential delisting of ADRs from the US exchange? Thank you.

Charles Yang, CFO

Thank you, Alicia, it's Charles. Let me answer your question directly in English. Firstly, we are very closely monitoring the situation. As everyone knows, this is a question that goes beyond the control of an individual company; it is more of a geopolitical issue. However, we remain cautiously optimistic that the US and China, the two largest countries in the world, will find some common ground of interest. We don't think a hard decoupling between Chinese companies would take place or get accelerated. What we can control, however, is making proactive preparations in the hypothetical scenario that could occur. NetEase will be prepared to continue being a listed and liquid asset. As many of you know, we were the second Chinese ADR that underwent a dual listing in Hong Kong back in 2020. Although we are currently in a secondarily listed status on the Hong Kong Stock Exchange, the conversion from a secondary to a primary listing is essentially a technical paperwork process, which can be done smoothly. Some of that preparation work has been underway for a while. We believe that if the situation requires a conversion, it will be a very swift and smooth process.

Alicia Yap, Analyst

Thank you, Charles.

Operator, Operator

Okay, thank you. We will take our next question from Natalie Wu from Haitong International.

Natalie Wu, Analyst

Let me ask my first question. Thank you, management, for taking my question and congratulations on a very strong quarter. My question is about the recent rumor regarding the World of Warcraft mobile game. I heard that the collaboration has been halted. I wanted to clarify whether this is an independent issue or if we should be concerned about the company's future relationship with Blizzard, especially after the Microsoft deal next year. Additionally, following up on the Infinite Lagrange mobile game, I was curious if most of the recent incremental user bookings are coming from the game publisher plan initiatives. If so, how should we consider the related margin profile? Thank you.

William Ding, CEO

I heard that collaboration has been halted. I wanted to ensure this is an independent effect, or should we be concerned regarding the company's future relationship with Blizzard, especially after the Microsoft deal next year? Secondly, very quickly following up on the Infinite Lagrange mobile game, I was wondering if a majority of the recent incremental user bookings are generated through the game publisher plan initiatives. If yes, how should we think about the related margin profile? Thank you.

Margaret Shi, IR Director

Regarding the World of Warcraft situation, it is an independent matter. Our relationship with Blizzard has been very good. As you’ve seen recently, we co-developed and co-published Diablo and achieved very positive results. Thank you.

Charles Yang, CFO

Yes, Natalie, for your second question on Infinite Lagrange. The short answer is that we continuously monitor and explore what we think are effective ways of user acquisition. Marketing is one of many other conducive channels for certain types of games, though maybe not all. For Infinite Lagrange, it has worked for certain types of marketing spending. However, all in all, when we look at the overall margin profile of a game, we factor in many considerations, marketing channels being one. The increasing popularity of Infinite Lagrange isn't solely dependent on one single marketing channel. It has played a role, but the success is really underpinned by the continuous expansion packs, particularly the expansion pack that we released in the second quarter, which was particularly effective.

Natalie Wu, Analyst

Got it, very clear. Thank you.

Operator, Operator

Okay. Thank you. We will take our next question from Charlene Liu from HSBC.

Charlene Liu, Analyst

Thank you, and thank you to management for the opportunity to ask my question. We see that the app has had a fantastic launch, achieving impressive download and revenue growth numbers. How does management assess the app's performance so far? What are your expectations regarding the game's longevity? Additionally, what key performance indicators will you be monitoring? Thank you very much.

William Ding, CEO

Thank you, management, for giving me the opportunity to ask the question. We understand that the app is off to an excellent start, recording amazing download and growth billing figures. How would management evaluate the app performance so far? What are your expectations on the longevity of the game? Also, what are the key KPIs you would be tracking mainly? Thank you very much.

Margaret Shi, IR Director

Diablo has achieved very prominent results on a worldwide stage. It is a very strong MMO game, and like we've done with many of our legacy games, we will continue to issue strong content and good expansion packs to serve our global game players. Thank you. Thank you. Next question, please.

Operator, Operator

We will take our next question from the line of Alex Poon from Morgan Stanley.

Alex Poon, Analyst

I have two questions. My first question is about the monetization strategy for overseas titles compared to domestic titles. When Diablo was first released, some US gamers commented that the game design felt overly monetized. Looking ahead, as we develop mobile games, will gamers have to adjust to this monetization approach, or should we consider lightening our monetization system? My second question concerns the performance of Naraka: Bladepoint on Xbox since its release in June and its availability timeline for PS5 and other platforms in the future. Thank you.

William Ding, CEO

When Diablo was initially released, we saw some comments from US gamers saying the game design was perhaps over-monetized. In the future, when we design mobile games, will gamers need to adapt to this kind of monetization, or do we need to adjust our monetization system to be a bit lighter? My second question is related to the performance of Naraka: Bladepoint on Xbox after its release in June and its timeline for PS5 and other platforms in the future. Thank you.

Margaret Shi, IR Director

Our product is designed to provide a strong user experience for all players. We are not targeting only those who spend a lot of money in the game. We want to serve all of our players of all levels equally well. Many of my friends globally have hosted and have had a great time playing Diablo without spending much money. It's true that there are many cultural differences and player preferences in different regions around the globe, and we will strive to provide a great experience to players in every country and every region. Thank you.

William Ding, CEO

We are committed to delivering a strong user experience for all players, not just those who spend a lot of money on the game. Our goal is to serve players of all levels equally well. Many of my friends around the world have enjoyed playing Diablo without spending much. We recognize that there are cultural differences and player preferences in various regions, and we will work hard to ensure a great experience for players in every country and region. Thank you.

Margaret Shi, IR Director

Naraka: Bladepoint was launched on Xbox and we joined Xbox Live, which brought us a lot of incremental users, particularly console game players. Regarding the PlayStation 5, we are looking at a launch around the end of this year or early next year. Thank you. Thank you very much. Thank you, that ends our call. Operator?

Operator, Operator

Thank you. Okay. Due to time constraints, that concludes today's question-and-answer session. I will turn the conference back to Margaret Shi for any additional or closing remarks.

Margaret Shi, IR Director

Thank you once again 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. Thank you.

Operator, Operator

That concludes today's conference. Thank you, everyone, for your participation.