Earnings Call Transcript - NTES Q3 2025

Operator, Operator

Good day, and welcome to the NetEase Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandi Piacente. Please go ahead.

Operator, Operator

Thank you, operator. Please note that today's discussion will contain forward-looking statements relating to the future performance of the company and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F and in announcements and filings on the Hong Kong Stock Exchange's website. 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 third quarter 2025 earnings 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's senior management are Mr. William Ding, Chief Executive Officer; Mr. Zhipeng Hu, Executive Vice President; and Mr. Bill Pang, Vice President of Corporate Development. I will now turn the call over to Bill, who will read the prepared remarks on William's behalf.

Bill Pang, Vice President of Corporate Development

Thank you, Brandi, and welcome, everyone, to today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. The third quarter marked continued momentum and strong execution across our NetEase family. By uniting creativity with exceptional operations, we created more meaningful connections with players, driven by our diverse portfolio of games that expanded our global reach and reignited our player enthusiasm for our key franchises. Total revenues increased 8% year-over-year, reaching RMB 28.4 billion in the third quarter, and revenues from our games and related VAS grew 12% in the third quarter compared with the same period last year. Innovative creativity and long-term operation remain the defining force behind NetEase's ongoing player engagement and global expansion, whether for new launches or established titles. Our teams are dedicated to delivering unexpected gaming experiences and responsive live services that are winning over players worldwide. This strategic creative approach continues to gain traction overseas, amplifying the influence and excitement of multiple games in the third quarter, including our new releases. Destiny: Rising, our new free-to-play mobile sci-fi RPG shooter quickly topped the iOS download chart in the United States and other major Western markets following its global launch on August 28. The game has received widespread acclaim, securing leading positions on the iOS download chart across nearly 100 markets worldwide, featuring Destiny's iconic powerful gunplay across diverse modes setting a new timeline. The game has earned positive feedback from long-time fans, while gaining traction within the broader shooter game community. The excitement continued in China, where Destiny: Rising debuted on October 16 and immediately topped our downloading chart, drawing in players nationwide to experience the streaming shooting action at their fingertips. Marvel Rivals continues to captivate the superhero shooter fan base around the world. Kicking off its fourth season on September 12, the game introduced a wealth of refreshing new content, features, special events and team-ups. Following the update, it reached #3 on Steam's global top seller chart. The new map, K'un-Lun: Heart of Heaven transport players to the Asian East, while the debut of Angela and eagerly anticipated Vanguard spurred excitement across the player community. Additionally, inspired by Marvel Animation's Marvel Zombies, a limited-time PvE Zombie mode was released, featuring challenging bosses, Zombie Namor and Queen of the Dead just in time for Halloween. Beyond the game, Marvel Rivals Ignite celebrated its grand finals at DreamHack Atlanta, held in collaboration with ESL FACEIT Group. Elite players from around the world showcased their exceptional skills and strategies, drawing massive engagement both on-site and online and reflecting Marvel Rivals' growing appeal. As we continue to enrich our global portfolio through diverse partnerships, our original titles are also gaining increasing momentum worldwide. Delivering a distinctive survival open world experience to players globally, Once Human launched engaging updates in the third quarter, organizing its growing global community. On October 30, the game introduced a major new scenario centered on the capture and customization of deviations alongside a significant refresh of the PvP experience that provides more intense combat options. The highly anticipated collaboration event with the global hit game Palworld also went live on the same day, bringing popular pros to a dedicated in-game island, which further invigorated the player community. We recently shared some of our upcoming international expansion plans at worldwide gaming events like Gamescom and Tokyo Game Show 2025, generating even more excitement in the community with engaging player interactions. We exhibited Where Winds Meet at Gamescom 2025, showcasing our creative ambition in cultural storytelling and next-generation Wuxia World building. In China, Where Winds Meet continued to captivate Wuxia fans with its narrative-rich setting, authentic Chinese martial arts theme and innovative gameplay that combines single and multiplayer. Each newly unveiled district not only engages our existing fans, but also attracts new players, driving continued growth in both revenue and monthly active users to new highs in the third quarter. On November 14, we brought Where Winds Meet to the global market on both PC and PlayStation 5. Within just 2 days, we achieved a peak of 190,000 concurrent players, secured the #5 spot among the most played games and #4 position for top seller globally on PlayStation. This underscores the widespread appeal of our captivating Wuxia universe to an even broader audience. To further enhance community engagement, the mobile version has commenced preregistration and is set to launch soon. Our highly anticipated title, Ananta, also garnered significant attention at the Tokyo Game Show. Players showed enthusiasm for in-depth game trailers and engaging hands-on playcasting. They were captivated by the game's imaginative action design, high-fidelity visuals and modern urban storytelling. Setting a dynamic and immersive city environment, Ananta blends high-energy action with open-world freedom, offering players an experience that goes well beyond conventional gameplay. We are pleased to see mounting excitement and anticipation for this title, including recognition from the Japan Game Award 2025 Future Division, where it was named one of the most promising upcoming games. Our groundbreaking MMO, Sword of Justice went global across mobile and PC platform on November 7, topping the iOS download chart in multiple regions. The international release included AI-powered NPCs and an intelligent face creation system. We showcased this at the Tokyo Game Show in September, highlighting how emerging technologies are reshaping gameplay experiences. Sword of Justice also continued to engage domestic players in the third quarter with its ever-evolving gameplay and rich content. On top of the new releases we have brought to the international stage, our established games are also gaining traction in multiple regions worldwide. Our realistic car simulation game, Racing Master has continued to gain popularity overseas through localized content, making it highly resonate with players in Japan since it launched there last year. Player engagement spiked in August during its anniversary celebration with carefully designed in-game content, boosting the game's performance in Japan. Exciting e-sports events like the Racing Master 2025 Legendary Cup Finals held in Bangkok in August brought passionate racers and fans from across Asia together, uniting Racing Master's distinctive global community. As firm believers in live operations, we stay closely attuned to players' evolving expectations across every title, and our domestic games continue to deliver strong performances. Each game update presents new opportunities to entertain, engage and grow our communities. This approach continues to resonate with players, driving steady growth across our domestic portfolio for both new titles and games that have been around for decades. Fantasy Westward Journey Online, one of our longest running flagship titles at 22 years and counting, amplifies our dedication to sustain high-quality operations. The game is built around an inclusive ecosystem that allows players of all types to find enjoyment. We continue to inject fresh vitality through new features and mechanics. In July, we launched our innovative unlimited server, which offers classic gameplay under a popular modern model that eliminates the entry barrier of upfront time-based payments. This generated substantial enthusiasm from long-time fans and newcomers alike, significantly boosting player engagement. As a result, it has achieved 4 successive record peak concurrent player counts since the third quarter, reaching a height of 3.58 million in early November. Fantasy Westward Journey Mobile also continues to evolve as we regularly introduce new features that players love. To meet players' demand, we launched our new casual server, which is designed for fun and streamlined play. It offers Fantasy Westward Journey Mobile's signature gameplay in a lighter format featuring simple progression, low threshold and intuitive controls. With a surge of new and returning players, monthly active users reached a 2-year high in September. Another long beloved MMO, Tianxia, continues to engage its community with deeply resonated updates. In October, we concluded closed beta testing for Tianxia II Classic. This version recreates the game's iconic art style and slower-paced gameplay, allowing players to experience its distinctive Chinese cultural events. Meanwhile, the existing Tianxia client will undergo a complete upgrade with player progression seamlessly shared with Tianxia: Wanxiang, the brand-new cross-platform client powered by Messiah, our flagship in-house engine. The upgrade will both enhance graphic quality and expand access for players across PC and mobile platforms, allowing them to experience the Messiah universe everywhere. Identity V's fan base maintained a high engagement level in the third quarter, supported by our steady cadence of seasonal updates and partnerships. New characters released along with each season update, including Hunter of QS and the Survival of Lanternist in the third quarter, infused new energy into Identity V's distinctive role, reinforcing Identity V as a top destination for asymmetric gameplay fans. In addition, the game's collaboration with the Palace Museum Classic on September '25 added Majestic rooftops of the Forbidden City to Identity V's manner, adding a new layer of cultural depth. Eggy Party also experienced robust growth with the third anniversary celebration in July, sparking renewed enthusiasm across the player community. Daily active users exceeded 30 million and average playtime hit record highs, driving historical engagement levels. Two new gameplay modes quickly followed in September. Spooky Treasure Squad presents an intense extraction experience, and Crazy Farm introduces a casual and social farming simulator. Both were highly praised and attractive in returning users during the National Day holiday. Meanwhile, we continue to evolve Eggy Party's AI-powered AIGC tool, making its map design faster, easier and more enjoyable. We believe that together, these innovations are keeping Eggy Party fresh and its community inspired. Thanks to this ongoing effort, we saw Eggy Party's performance recover to historical peak levels in both daily active user and average playtime, which we expect will pave the way for smooth development in the coming years. Another example of our player-first philosophy and commitment to innovative high-quality content is Onmyoji, one of China's earliest and most iconic anime-style games. On September 10, we launched its ninth anniversary celebration, featuring rich new content and gameplay updates shaped by player feedback. The highlight was a new character Yuki Gozen whose beautifully crafted CG trailer gained widespread attention on social media from both long-time fans and the broader anime community. It was broadly heralded for its innovative use of stereoscopic screens and 2D animation tags to create a naked-eye 3D visual effect. With strong community support, Onmyoji quickly entered China's top 10 iOS download chart, demonstrating the vitality of this enduring IP and the strength of our long-term operations. Our commitment to engaging players and continuous innovation is also evident in Naraka: Bladepoint. In the third quarter, we rolled out new heroes and exciting collaborations such as Armor Hero in September and the time-limited return of Nier in October. Naraka: Bladepoint esports presence is also growing. The 2025 Naraka: Bladepoint Pro League, NBPL, autumn season marked its first professional league since being selected for the 2026 Aichi-Nagoya Asian Games, culminating in its rolling finals in October. Now in its fourth year, NBPL has become the cornerstone of Naraka's esports ecosystem and China's top professional league for the title, driving increasing social media engagement across major platforms. We continue to expand our domestic portfolio with new lighthearted experiences that appeal to a wider range of audiences. Our MMO featuring magical heartwarming creatures inspired by Chinese fairy tales has built a dedicated fan base since its launch in August, designed with a portrait interface for easy one-handed play. The game combines the joy of capturing and nurturing creatures with strategic turn-based combat and building a homeland for them to thrive in. Backed by our players and supported by world-class partners and global teams, we're building enduring collaborations that keep expanding what's possible in gaming. Blizzard titles continue to elevate the gaming experience for Chinese players. World of Warcraft rolled out updates across both classic and modern servers during the third quarter, sustaining strong engagement among long-time fans and newcomers alike. To further enhance the localized experience, the game just launched a highly anticipated China-exclusive Titan Reforged server this week, blending the nostalgia of classic expansions with modern gameplay elements. The new server fulfills players' long-awaited expectations and has reignited excitement across the World of Warcraft community. Overwatch 2 has also recently introduced a new Chinese hero, Wuyang, further deepening the game's diverse roster of characters. Meanwhile, Hearthstone celebrated its 11th anniversary, amassing over 100 million registered players in China. A series of special anniversary events drove enthusiastic participation from both loyal fans and newcomers to the game. The Diablo franchise also continued to capture attention. Diablo II Resurrected, the legendary remaster of the installment that helped define the franchise returned to China on August 27. The newest season was released in October, pushing the game's daily active player base to record highs. In parallel, Diablo IV, the latest blockbuster bringing the series' signature dark aesthetics to new heights, was launched in China on December 12. Furthermore, the genre-defining real-time strategy game Starcraft II also returned on October 28, triggering excitement among fans. Minecraft China Edition, the localized version of the globally popular sandbox game, reached 1.25 million concurrent players on August 17, an impressive milestone in its eighth year of operation. Committed to nurturing its UGC ecosystem, the game continues to enhance creation tools and expand exposure for community creators, now supporting over 300,000 creators. By delivering enriched locally tailored experiences, Minecraft China Edition has fostered a highly engaged and loyal player community. Beyond the above titles, other globally renowned franchises in our portfolio also continue to thrive in China, engaging vast creative communities and expanding local ecosystems. Along with our expanding global presence and evolving development capabilities, our domestic community continues to thrive. Regardless of geographies or genre, we'll continue to put players first and work closely with our partners to deliver memorable high-quality experiences across our beloved franchises and existing new titles still yet to come. Turning to Youdao. Youdao continued to solidly execute its AI-native strategy in the third quarter with healthy development of both its education and advertising businesses. For learning services, Youdao Lingshi grew gross billing by over 40% year-over-year in the third quarter. Notably, they partnered with the Yau Mathematical Science Center of Tsinghua University, providing technical support to a platform designed to identify and support mathematically gifted students. The platform is currently being piloted in top-tier schools with a national rollout plan following further refinement. Youdao's online marketing services achieved robust growth in the third quarter. As we advance the use of AI across multiple advertising processes, we further enhanced our expertise in programmatic advertising and influencer marketing campaigns, elevating the efficiency and effectiveness of advertising. For smart devices, we continue to enrich our offerings with technology upgrades. In the third quarter, we launched a new tutoring pen, Youdao Space X, which features a series of intelligent capabilities such as precise scanning for long-form and multi-graphic problems to help students learn more effectively. Turning to Yanxuan. The business continued to perform well across major e-commerce platforms, led by steady development in its core categories such as pet food, home sense, and home goods. Propelling technology-driven innovations, Yanxuan's product launches have consistently stood out in the market. Its new pet food product has a refined production process, making it smoother and easier for pets to digest, earning widespread praise for addressing common digestive issues. Across the NetEase family of businesses, we continue to build on our foundation of creativity, quality and disciplined execution. Looking ahead, we are focused on advancing our development capabilities and global reach, scaling our original IP into lasting franchises and elevating every experience we deliver. Guided by innovation and the trust of our communities, we're shaping a future defined by meaningful growth and enduring impact. That concludes William's comments. I will now provide a brief review of our 2025 third-quarter financial results. Given the limited time on today's call, I'll be presenting abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. As a reminder, all amounts are in RMB unless otherwise stated. Total net revenue for the third quarter was RMB 28.4 billion or USD 4 billion, representing an 8% increase year-over-year. Total net revenue from our games and related VAS was RMB 23.3 billion, up 12% year-over-year. Specifically, net revenues from online games were RMB 22.8 billion, up 3% quarter-over-quarter and 13% year-over-year. The quarter-over-quarter increase in online games net revenue was due to higher net revenues from self-developed games such as Fantasy Westward Journey Online and Sword of Justice, as well as certain licensed games. The year-over-year increase was attributable to higher net revenue from self-developed games such as Fantasy Westward Journey Online, Eggy Party, and newly launched Where Winds Meet and Marvel Rivals, as well as certain licensed games. Youdao's net revenue reached RMB 1.6 billion, representing a 15% increase quarter-over-quarter, driven by growth in smart devices and online marketing services. Year-over-year revenue rose by 4%, attributed to a higher contribution from online marketing services. NetEase Cloud Music's net revenue of RMB 2 billion remained stable quarter-over-quarter, but decreased by 2% year-over-year. Notably, revenue from membership subscriptions continued to show healthy growth both sequentially and year-over-year. Revenues from social entertainment services and others, though still lower compared with the same period last year, stabilized quarter-over-quarter. Net revenues for innovative business and others were RMB 1.4 billion, down 15% quarter-over-quarter and 19% year-over-year. The sequential decline was primarily driven by Yanxuan due to its high base during the 618 e-commerce festival. The year-over-year decrease reflected an increase in certain intersegment transaction elimination and to a lesser extent, decreased net revenue from Yanxuan and certain other businesses. Gross profit for the third quarter of 2025 was RMB 18.2 billion, up 10% year-over-year, primarily driven by increased net revenue from online games. This quarter, our total gross profit margin was 64.1%. Looking at our third quarter margin in more detail, the gross profit margin was 69.3% from games and related VAS compared with 68.8% in the same period of last year. The improvement was mainly driven by a higher mix of PC games in China, which typically have higher margins. Our gross profit margin for Youdao was 42.2% compared with 50.2% in the same period last year. The decrease was mainly due to the declining gross profit margin of online marketing services. Gross profit margin for NetEase Cloud Music was 35.4% in the third quarter versus 32.8% in the same period a year ago. The margin improvement was primarily driven by steady growth in our core online music business with lower contributions from social entertainment and other lower-margin services. For innovative business and others, gross profit margin was 43.0% compared with 37.8% in the third quarter of 2024. Despite the impact of intersegment elimination mentioned earlier, the improvement was mainly driven by better margins at Yanxuan and the higher revenue contribution from certain innovative businesses with relatively stronger margins. The total operating expenses for the third quarter were RMB 10 billion or 36% of our net revenue. Taking a closer look at our cost composition, our sales and marketing expenses as a percentage of total net revenue were 15.7% compared with 14.5% for the same period last year, primarily due to increased marketing expenditure related to online games. Our R&D expenses remained stable at 16% of total net revenues in the third quarter compared with 16.9% for the same period last year, reflecting our consistent investment in content creation and product development. The effective tax rate was 13% for the third quarter. As a reminder, the effective tax rate is presented on an accrual basis in accordance with applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the third quarter totaled RMB 9.5 billion or USD 1.3 billion, up 27% year-over-year. Non-GAAP basic earnings per ADS for the quarter was USD 2.09 or USD 0.42 per share. Additionally, our cash position remains robust with net cash of approximately RMB 153.2 billion as of September 30, 2025, compared with RMB 142.1 billion at the end of last quarter. In accordance with our dividend policy, we are pleased to report that our Board of Directors has approved a dividend of USD 0.11 per share or USD 0.57 per ADS. The company announced today that its previously approved share repurchase program of up to USD 5 billion for the company's ADS and other shares in the open market or other transactions will be extended for an additional 36 months until January 9, 2029. As of September 30, 2025, approximately 22.1 million ADS have been repurchased under this program for a total cost of approximately USD 2 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please.

Operator, Operator

Your first question comes from Xueqing Zhang with CICC.

Xueqing Zhang, Analyst

Congratulations on the third quarter. My question is about Fantasy Westward Journey. Given that FWJ PC has consistently set new records for online player count since this summer, I would appreciate it if the company could share its operational structure for this evergreen title. I have several follow-up questions on it. Firstly, what are the core driving factors behind the unlimited player server? Secondly, what is the user profile? What is the ratio of retaining players to new players? Lastly, is this model replicable across other flagship titles?

William Ding, CEO

We would like the company to share its operational structure for the game FWJ PC, which has been breaking online player count records since this summer. We have several follow-up questions regarding this. Firstly, what are the main factors driving the unlimited player server? Secondly, what does the user profile look like? What is the ratio of retained players to new players? Finally, can this model be applied to other flagship titles?

Bill Pang, Vice President of Corporate Development

The longevity of Fantasy Westward Journey Online PC is largely due to its stable economic system and unique gaming experiences that are uncommon in most other games. Our team has worked hard to provide a sustainable and enjoyable experience, a reliable ecosystem, and innovative content. This dedication has been acknowledged and valued by players, as evidenced by the market response. In the unlimited server, we eliminated the initial time-based payment, simplified gameplay and systems, and offered a lighter gameplay experience while maintaining the core designs that have evolved in our classic server over the years. Compared to the comprehensive and diverse game experience offered in the classic server, the unlimited server delivers enjoyable experiences in a more straightforward and direct way, with an easy learning curve. The unlimited server has drawn back many former players and attracted new ones. This new demographic for the unlimited server has also positively impacted the classic server by bringing in additional new and returning players. Fantasy Westward Journey Online, as a legacy game, has been operational for 22 years. We remain dedicated to innovation and diversifying the experience to continue meeting the needs of our community. Moving forward, we will prioritize long-term development, offering our wide player community various choices within a single game.

Operator, Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong, Analyst

Can management comment on the gaming trend in China and internationally? Additionally, can management discuss the strategy for overseas expansion?

William Ding, CEO

Can management comment on the gaming trend in China as well as overseas? Additionally, can management discuss the overseas expansion strategy?

Bill Pang, Vice President of Corporate Development

Okay. I will do the translation. During our business operations in overseas markets, we have gained valuable experiences driven by our strong in-house development capabilities. For instance, in Japan, Knives Out has proven to be very popular in national network games. Last December, we launched Marvel Rivals globally, which was highly successful. On November 15 this month, we released Where Winds Meet in global markets. All these products have achieved significant success internationally, and we receive a lot of positive feedback from the community. We observe that in the overseas market, NetEase stands out as one of the leading game development companies in our industry. We are the only company delivering genuinely Chinese authentic online games to the global market. For example, Where Winds Meet embodies a very Chinese essence. We are the only major successful company that offers this level of authentic experience to online gamers worldwide and have received very positive feedback. Looking ahead, we believe we have the capability to deliver more success stories to overseas markets and provide gamers around the globe with high-quality content and services. We are confident in this.

William Ding, CEO

We bring authentic Chinese online games to the global market. For instance, Where Winds Meet showcases a deep Chinese experience. We are uniquely positioned as a successful company delivering this level of authenticity to online gamers worldwide and have received very positive feedback. Moving forward, we are confident in our ability to achieve more success in international markets and to offer gamers around the globe high-quality content and services.

Bill Pang, Vice President of Corporate Development

Yes, there are some further comments from William. One is that this month, we launched our Sword of Justice in the global market. Three years ago, we released Naraka: Bladepoint on PC globally. As you heard, we presented our games to the public for both ANANTA and Sea of Remnants. The market has high expectations. This year, we showcased the ANANTA game and it was recognized as one of the most promising upcoming games by the Japan Games Award 2025 Future Division. NetEase is based in China, and we are also establishing our presence in the global market. That is what we have been working on. We have achieved some successes and we will continue to do so.

Operator, Operator

Next question comes from Ritchie Sun with HSBC.

Ritchie Sun, Analyst

Regarding Identity V, we have observed fluctuations in revenue and daily active users in recent months. Can management explain the reasons for this and the strategy for enhancing performance? Additionally, World of Warcraft and Hearthstone have been back in China for a year now and are about to face challenging comparisons. Could management discuss the current performance metrics compared to a year ago and the plans for driving sustainable growth moving forward? Furthermore, we are interested in understanding Diablo IV's monetization potential given the increasing competition in the ARPG genre.

William Ding, CEO

Can management discuss the reasons behind the recent performance in grossing and daily active users, as well as the strategy to improve it? Additionally, can management talk about how World of Warcraft and Hearthstone have performed in China over the past year, particularly in comparison to last year, and share plans for sustainable growth? We would also like to hear about the monetization potential of Diablo IV given the increasing competition in the action role-playing game genre.

Bill Pang, Vice President of Corporate Development

Okay. I will translate this part first. Indeed, it's true that there has been some influence from competing products during the summer holidays, particularly among general users in lower-tier cities. However, we have also noticed that the impact has eased since the start of back-to-school time. In fact, in September, Identity V actually reached historical highs starting from the new semester compared to the same period in previous years. While Q4 historically has never been the peak season for Identity V, the team is focusing on preparing new content and marketing campaigns for the Chinese New Year cycle. During this period, we observed the demand from the community for diversified gameplay. We have been preparing more comprehensive and large-scale side game modes, and we are also working on the next chapters of the game.

William Ding, CEO

The team is focusing on preparing new content and marketing campaigns for the Chinese New Year cycle. During this period, we observed the demand from the community for diversified gameplay. So we have been preparing more comprehensive and large-scale side game modes, while on the other hand, we're also working on the next chapters of the game.

Bill Pang, Vice President of Corporate Development

Thank you. As we near the end of the current expansion of World of Warcraft, a decline in performance compared to this launch period is expected. Meanwhile, Hearthstone has consistently maintained its schedule of expansion updates over the past few years. With a different operational strategy than in the past, the performance of both games is actually higher than when operations were closed previously. Moving forward, we will continue to strengthen our collaboration to maintain our unique competitive offerings in the China market. One specific example is the Titan Reforged Server for Warcraft, which was developed collaboratively by our Chinese and U.S. teams. Together, we set the target and tailored it to meet specific demands, and the outcome has been very positive. This demonstrates that by working more closely together, we can achieve better results than before. Regarding Diablo, Diablo IV has distinct qualities, and we have new business plans in place for it. We believe it will secure its rightful market share and perform well commercially in the ARPG segment after launch. Additionally, StarCraft II has reached record high user engagement since its launch, revitalizing the RTS genre.

Operator, Operator

Your next question comes from Alicia Yap with Citigroup.

Alicia Yap, Analyst

I wanted to follow up because management mentioned that ANANTA was recently showcased at the Tokyo Game Show and received positive feedback. I'm interested in more details about the user feedback, and how we should consider the market positioning and differentiation of this game. It seems that the game features substantial content and innovative gameplay, so any comments on that would be appreciated. Additionally, are there any updates on the timing for the next testing phase and the official launch planned for 2026?

William Ding, CEO

Earlier mentioned ANANTA was recently showcased at the Tokyo Game Show and received positive feedback. I would like to know more details about the user feedback and how we should consider the market positioning and differentiation of this game. It seems that the game includes substantial rich content and innovative gameplay, so any comments on that would be appreciated. Additionally, are there any updates regarding the next testing timing and the official launch timing in 2026 that you can share?

Bill Pang, Vice President of Corporate Development

We showcased the latest update and playtesting of ANANTA at the Tokyo Game Show, which gained significant attention on social media globally and was recognized as one of the most promising upcoming titles by the Japan Game Award 2025 Future Division. We are confident that our combination of vibrant quality content, innovative monetization strategy, and emphasis on long-term operations will help the game establish a new standing within the industry ecosystem. We are currently planning to enhance our development process, which is on track, and will proceed with testing and launches as planned. We will share more updates when the time is right.

Operator, Operator

Your next question comes from Jialong Shi with Nomura.

Jialong Shi, Analyst

We noticed from the media that the number of new games in your pipeline each year appears to be smaller than in previous years. If this observation is accurate, could you share your current strategy for launching new games in the market? If NetEase is not launching as many new games annually, what will drive growth for your online gaming business?

William Ding, CEO

We noticed from media that it seems the number of new games in your pipeline every year is smaller than in the past few years. If our observation is correct, I wonder what is your current strategy towards launching new games into the market? If NetEase does not launch as many new games each year, what will be the growth driver for your online gaming business?

Bill Pang, Vice President of Corporate Development

Okay. I will do the translation. The whole company will be very focused on our successful products. Among the already successful products, we'll keep refining and focusing. We don't want to distract too much focus to churn out many new products, which we don't have strong confidence in. For new projects, we will look at products more prudently and with more focus, ensuring that whatever new product we develop has confidence in its marketability. We actually don't see this as contradictory. We believe that being focused is one of the core competencies a company needs. That's our view.

Operator, Operator

Our next question comes from Felix Liu with UBS.

Felix Liu, Analyst

My question is about the recent news of organizational changes in your game department. Will these changes impact the near-term operations of the related games? How does management view the current organizational structure in relation to your game strategy? Should we anticipate further changes?

William Ding, CEO

My question is about the recent news of organizational changes in your game department. Will these changes impact the near-term operations of the related games? How does management think about the current organizational structure in the context of your game strategy? Should we expect more changes to come?

Bill Pang, Vice President of Corporate Development

Okay, I will do the translation. Regarding the recent adjustments and changes, it's part of the company's normal personnel turnover process and has been carried out without impacting the daily operations of our games, so you can be assured. The adjustment aims to make operations more focused and efficient, allowing us to continue concentrating on creating high-quality and enduring products. For existing evergreen titles, we have directed our teams to stay focused on continuously refining and optimizing the games. For new titles that show evergreen potential, we will allocate sufficient resources to develop them into long-lasting successful games. However, for teams that are not keeping pace with market trends or user demand, we must also make decisive cuts to ensure the healthy development of our core initiatives. NetEase has been around for 28 years, and our commitment to producing high-quality products has remained unchanged. We will allocate more resources to evergreen titles and provide more opportunities to teams that are creative and willing to innovate.

Operator, Operator

Your next question comes from Lincoln Kong with Goldman Sachs.

Lincoln Kong, Analyst

So my first question is about AI. We have actually seen some of the games like Eggy Party or Justice Mobile that have already integrated AI applications. Going forward, for our existing portfolio and the new games, how should we think about AI bringing additional opportunities to our gamers? My second question is regarding future new games. Given that the company is now focusing more on the quality of those new games, how should we think about the potential important game genres going forward? Specifically, for the shooting game genre globally, I think we have seen rapid growth. How would NetEase differentiate itself in this shooting genre?

William Ding, CEO

How should we consider AI creating new opportunities for our gamers in relation to our existing portfolio and upcoming games? Additionally, as the company emphasizes the quality of new games, what important game genres should we expect to be significant moving forward? Specifically regarding the global shooting game genre, which has experienced rapid growth, how will NetEase distinguish itself in this area?

Bill Pang, Vice President of Corporate Development

Okay. I'll provide the translation. First of all, concerning the question about AI, we have been incorporating AI into our development process, and it plays a crucial role in both game development and operations. We have gained extensive hands-on experience in this area. When compared to many of our overseas peers, we have more practical experience. We have invested significant resources in researching AI and its application in game development, innovation, and operations. User experience is the best guide for how we should implement technologies. However, we don't have time today to delve into detailed explanations of user experiences. Regarding your next question about the future direction of the product, as we mentioned, we will concentrate our resources on creating high-quality flagship products that we believe will succeed. We will not aggressively launch many projects blindly; that is not our strategy. We plan to take a focused approach to new projects. In the coming years, we believe that compared to many other companies in our industry globally, NetEase has a clear vision for future products and we will achieve significant breakthroughs.

Operator, Operator

Your next question comes from Yang Liu with Morgan Stanley.

Yang Liu, Analyst

Let me translate my question. My question is about the Sea of Remnants, this new game. Could the management share information about the research and development progress and the expected launch timing? What will be the commercial strategy for this title? Is there any direct competitor for this game? What can NetEase do to stand out?

William Ding, CEO

Let me translate my question. My question is about the Sea of Remnants, this new game. Could the management share about the R&D development and expected launch timing? What will be the commercial strategy for this title? Is there any direct peer or competitor for this game? What can NetEase do to differentiate?

Bill Pang, Vice President of Corporate Development

I will handle the translation. First of all, the Sea of Remnants is a very important product for us, and we place a strong emphasis on it. Our team has significant development and operational experience within the company. This game is built on our proprietary game engine and will support PC, mobile, and console platforms. Regarding the gameplay and content, we have a clear strategy in place. We anticipate that it will offer a novel experience in the market. It will feature a multi-character cultivation format, but not in the traditional sense. We believe that the sailing experience on the ocean, along with the rich combinations of characters and classes, will provide an exciting new experience for gamers.

Operator, Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to Brandi Piacente for any additional or closing remarks.

Operator, Operator

Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly. Have a great day. Thank you.