Title

Presentation

NetEase, Inc. misses on earnings expectations. Reported EPS is $1.66 EPS, expectations were $1.79.

Operator: Good day, and welcome to the NetEase 2024 Second Quarter 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.

Brandi Piacente: 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 website of the 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 2024 second quarter earnings news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase’s senior management are Mr. William Ding, Chief Executive Officer; and Mr. Bill Pang, the Vice President of Corporate Development.

I will now turn the call over to Bill, who will read the prepared remark on William’s behalf.

Bill Pang: Thank you, Brandi, and thank you, everyone for participating in today’s call. Before we begin, I would like to remind everyone that all percentages we talk about here are based on RMB. Established games, exceptional content, innovation and robust community ecosystems are central to our ongoing growth as we expand our reach domestically and abroad. In the second quarter, we pushed each of these drivers, growing our total revenue to RMB25.5 billion, with our drive for innovation and leading R&D capabilities, we launched morphy (ph) title second quarter, enhancing our appeal to broad audience across diverse game genres. At the same time, we are expanding our brand and international reach, unlocking more avenues for growth.

Now looking at some of our game’s performance in more detail. Once Human, [Foreign Language], a multiplayer open world survival game set in the post-apocalyptic world, attained over 230,000 peak concurrent users on Steam shortly after its launch and ranked among the top five most played games in the world on Steam in July. The innovative creator design blends supernatural transformations with everyday items, such as the highly popular boss monster, providing players with an incredibly fresh and bizarre refined experiences. As a high quality survival game, it combines multiple layers of objectives to pursue, including exciting open-world exploration, monster fights and house crafting. Shortly after an update in August, One Human ranked number one on Steam’s top seller chart in 12 countries and regions, amassing over 10 million worldwide downloads.

We also launched our highly anticipated battle royale title, Naraka: Bladepoint Mobile in late July, featuring a fast paced and dynamically focused combat experience. Powered by NetEase Fuxi leading technologies, Naraka: Bladepoint mobile introduced a co-pilot AI system, which enable players to team up with AI allies on instant vocal interactions and immersive battle experiences. Videos featuring co-pilot teammates has been really popular and have spread widely across social media. Upon its release, the game immediately climbed to the number three position on the iOS grossing chart and maintained our number one position on the iOS free download chart for over a week. The new mobile version boosted overall franchise excitement, pushing PC and console DAUs to new highs and setting a record of 380,000 concurrent users on Steam during the game’s third anniversary.

While we bring players new hit titles with exciting experiences in the diversified genres, content enhancement and the innovative gameplay continue to infuse vitality into our flagship portfolio. Our Fantasy Westward Journey and Westward Journey Online franchises are testament to the longevity and popularity of our legacy titles. In the second quarter, we launched a brand new expansion pack for Fantasy Westward Journey Mobile, adding new content and fresh gameplay that once again drove a record high quarterly revenue. Westward Journey Online Mobile also attracted both long-term fans and new players by reintroducing classic gameplays that was widely placed on the PC version in early days. We also brought innovation to Infinite Borders, [Foreign Language], our flagship Three Kingdoms [indiscernible] SLG title.

In April, we launched new update that infuse the concept of four seasons to influence players activity with unique enhancements or challenges. For example, spring is ideal for planting, summer focuses on training troops, autumn leverages harvest for strategic deployments, and winter is best for recovery or surprise attacks. By introducing seasonality into strategic planning, players can experience realistic Asian battles and develop more comprehensive tactics. Along with rich reward offered during the summer campaign in May, if reporters DAU hit a three year high in the second quarter. Identity V, [Foreign Language], continue to propel collaborations with Ronen (ph) renowned IP around the world, winning in mass popularity. In July, it is the number four position on China’s iOS top grossing chart.

And in August, it ranked number two on the iOS top grossing chart in Japan and number three in China. The momentum resulted record high DAUs in August and record revenue in the second quarter, surpassing last quarter’s high. Turning to Eggy Party, [Foreign Language]. The heat game continues to deliver heartwarming experiences to our large player community. In June, we hosted a boss theme (ph) second anniversary events, presenting players with various stages to perform dances, fly or play rhythm games in the festive atmosphere. Beyond gaming, Eggy Party is pioneering the developments of the UGC ecosystem. Our self-developed editor continuously introduced new features, like, new skills and creator screens (ph). We’re also expanding the scope and impact of the UGC system by partnering with leading Chinese universities to offer coding courses and college competitions based on our UGC editor.

Justice Mobile also achieved exciting success with rich updates that we launched for its first anniversary in late June, featuring brand new content, fresh categories, skins and gameplays across PvE, PvP and PvX areas. Catering to the demands of different type of players, Justice Mobile attracted enthusiastic new players and brought existing players back, driving it to the number three position on the iOS top grossing chart in June. With our innovative seasonal update mechanism, Justice Mobile advanced the MMO genre, attracting a large user base and showcasing its robust potential to become an evergreen game. With a concentration on innovation, we are growing our presence across different genres and platforms worldwide with a strong game pipeline.

In June, we completed a new round testing for Where Winds Meet, [Foreign Language], an open world action adventure RPG title and received great feedback from large group of players. During the testing period, number of reservations increased significantly. We currently plan to launch the game on PC and mobile this year. And our first phase of cross platform testing will start on August 28. Marvel Rivals, [Foreign Language], the 6 versus 6 superhero team based PVP shooter, announced its console plan during Sony’s State of Play in May and showcased a new cinematic trailer and Marvel games panel at San Diego Game Comic-Con in late July. The panel revealed exclusive behind the scene creation stories along with beloved character Jeff and Thor joining the close beta test.

Widely praised during the testing on both PC and consoles, Marvel Rivals proceeded to have a stunning showcase at Gamescom in Cologne this week, where it is accessible at both Microsoft Xbox and NetEase Games Stores and announced its release date for December 6. In June, we announced FragPunk, a fast paced 5 versus 5 pure shooter game at Xbox Game Showcase 2024. Future innovative card mechanics and unique carnival punk style (ph), the game has already gained meaningful attention overseas. Its first post beta test in North America on Steam ended in early July, cumulatively attracting over 2,000 influencers to Stream and trail the game. With extensive acclaim, it became the third most trending game on Steam. FragPunks is scheduled to be released in 2025.

To further enhance our strong portfolio, build our robust foundational R&D expertise, we also look forward to delivering more diverse content and games to players worldwide through global partnerships. Since World of Warcraft returned in June, player response has been overwhelming. People were massively excited to return to [indiscernible], praising the enduring charm of the game’s classic scenes and quests, and reestablishing their ties within the local community. We look forward to August 27’s launch of World of Warcraft: The War Within, with the simultaneous release of this upcoming version in China and all other regions worldwide. On top of this, Hearthstone announced its return on September 25. And to celebrate, all cards from 2023 will be available for free and more engaging China calling events can be expected.

Recently, Dunk City Dynasty, [Foreign Language] officially partnered with NBA and secured an official NBA license in China. Legendary players like Dirk Lewinsky and Brad Miller joined the game in July, sparkling great excitement. And our first anniversary in August, beloved star players, Tracy McGrady joined the game, further elevating players’ enthusiasm. The game plans to introduce 30 NBA teams with unique basketball culture items, such as jerseys and courts, bringing historic basketball moments to life. Basketball transcends borders and cultures, uniting fans worldwide. We look forward to delivering more collaborative content in the future and will continue to promote and celebrate basketball culture. Marvel Snap, [Foreign Language] developed by a second dealer and featuring a revolutionary game experience within the Marvel Universe, is slated for launch in Chinese market on August 29.

Combining innovative tech building strategies and card battle tactics into each exciting game, the well-established title is highly accessible to beginners, yet quite challenging to masters. Following its close beta test in China in June, synergy was movie Deadpool and Wolverine in late July created another hype wave among local fans. With each of our games, we aim to bring innovative lasting experience to players that fuel our growth and invite great players worldwide. By extending our reach across genres and platforms, more players are being introduced to the NetEase experience, both domestically and internationally. Going forward, we will continue to leverage our rich R&D capabilities, key game in different genres, worldwide partnerships and two decades of operating experience to advance our game portfolio and drive the next wave of gaming trends.

Turning to Youdao. In the second quarter, Youdao continued to prioritize digital content services, online marketing services and AI-driven subscription services. As a result, it achieved historic high operational cash flow and significantly narrowed its operation loss. Our digital content services achieved healthy revenue growth, fueled by our AI powered products. The recent update to our intelligent learning platform, Youdao Dictionary (ph) provides students with university admission consultation services, including recommendations on which college to apply to, application strategies and personalized study plan tailored to each student’s unique capabilities and personality. Cope with our highly regarded personalized learning program, these services renewals continue to reach new highs in the second quarter.

The robust growth of our AI driven subscription services reflect our steadfast commitment to investing in technology. The recent update of Pinnacle (ph), our digital human language coaching app, featuring a children’s character that engages with students on a range of topics and kids’ mini games, has generated great enthusiasm among young learners. As we continue to iterate our products and expand offerings, our AI driven subscription services have experienced six consecutive quarters of rapid sales expansion, with approximately 200% yoy growth in the second quarter. Fueled by multiple drivers, online marketing services’ strong growth momentum continued in the second quarter. While our real time API and services expanded our user base across more industries, our KOL-led (ph) advertising services continue to grow both in China and abroad.

Notably, our overseas advertising services sales have accelerated with our enhanced international KOL database and meet growing export demand. For smart devices, our Dictionary Pen maintained its leading market position and ranked number one in the sales category on major e-commerce platform in China for five years in a row. Recently, we launched Youdao Dictionary Pen X7, which featured [Technical Difficulty] and capability along with translation services powered by our large language model. This new product won broad recognition soon after release. Turning to NetEase Cloud Music. Cloud Music continue to propel quality development across its music centric ecosystem, further cultivating its unique community and enhancing its music centric monetization.

To further nurture our content ecosystem, we continually expand our music offerings to meet diverse audience demand. During the second quarter, we advanced our cooperation with various music labels and steadily extended partnerships with popular musicians, singers and groups. In particular, we amplified our offering in signature music genres by adding content from well-known rappers, rock bands and J-pop artists. We also remained deeply committed to supporting independent artists and continue to enhance our comprehensive support for these artists throughout their journey in the music industry. To further immigrate our unique community with high quality music experiences, we recently upgraded our app, introducing more personalized recommendation functionality, overall framework enhancements and improved content distribution strategy, while also optimizing features like daily recommendations and private DJ.

Alongside improving the music listening experience, we strive to foster connections and resonance with our music inspired community. To enhance the value of our iconic comment section, we implemented several upgrades to make this section more intriguing for users to explore across more scenarios. For example, we display selective hot comments on the minor players, while users listen to music and invite users to explore comments on wide areas of music on our innovatively designed Comments Square (ph) section, all of which led to elevated user engagement. Turning to Yanxuan. During the second quarter, Yanxuan continued to launch new products and lead sales across various online categories. During the 618 (ph) festival, our pets food secured top three positions in several vertical category sales chart on major e-commerce platforms.

House cleaning products were also top ranked on several platforms, forming the launch of new series featuring an Asian Chinese tale (ph). This product successes highlights our strong R&D capabilities and commitment to innovation. And that is innovation and forward momentum are at the heart of everything we do across our games, music, education and lifestyle brand businesses. We are committed to creating rich ecosystem that bring users exceptional experiences and stakeholder increasing value, as we continue to grow and expand our reach worldwide. That concludes William’s comments. I will now provide a brief review of our 2024 second quarter financial results. Given the limited time on today’s call, I’ll be presenting some 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 second quarter were RMB25.5 billion, or $3.5 billion representing a 6% increase year-over-year. Total net revenue from our games and related VAS were RMB20.1 billion, up 7% year-over-year. The additional growth was primarily due to increased revenue contribution from mobile games such as Identity V and Justice Mobile. Net revenues from our mobile games accounting for approximately 76.4% of our total net revenue from online game operations. Youdao’s net revenue were RMB1.3 billion, a year-over-year increase of 10%, primarily due to the increased revenue contribution from Youdao’s online marketing services.

NetEase Cloud Music net revenue were RMB2 billion, a 5% increase compared to the same period last year, primarily due to the increased net revenue from membership subscriptions. Net revenue for innovative business and others were RMB2.1 billion, a slight increase compared with the same quarter of 2023, mainly due to increased revenue contribution from Yanxuan and some of our innovative businesses. Our total gross profit margin was 62.9% in the second quarter, compared with 59.9% for the same period in 2023. Looking at our second quarter margins in more detail. Gross profit margin was 70% for our games and related VAS, compared with 67.4% in the same period last year. The increase was primarily due to changes in product mix. Our gross profit margin for Youdao was 48.2%, compared with 47% of same period last year.

The increase was mainly due to improvements of gross profit margin from the online marketing services. Gross profit margin for Cloud Music reached 32.1% versus 27% in the same period last year. The margin improvements primarily resulted from increased net revenue from membership subscriptions and continued cost optimization measures. For innovative business and others, gross profit margin was 34%, compared with 29.5% in the second quarter of 2023. The increase was primarily due to the changes in product mix within the segments. The total operating expense for the second quarter were RMB9 billion or 35.5% of our net revenue. Taking a closer look at our cost composition. Our selling and marketing expenses as a percentage of total net revenue was 13.7%, which is relatively flat with the same period last year.

Our R&D expenses as a percentage of total net revenue were 17.5% in the second quarter, compared with 16.3% for the same period last year. We remain committed to investing in content creation and product development that keep our product and content at the forefront of the industry. We believe that our investments in R&D will remain a key catalyst for future growth over a longer-term. The effective tax rate was 16% for the second quarter. As a reminder, the effective tax rate is presented on accrual basis, depending on applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the second quarter totaled RMB7.8 billion or $1.1 billion. Non-GAAP basic earnings per ADS for the second quarter were $1.67 or $0.33 per share.

Additionally, our net cash totaled RMB116.1 billion, as of June 30, 2024, compared with RMB110. 9 billion at the end of 2023. In accordance with our dividend policy, we are pleased to report that our Board of Directors has approved dividends of $0.087 per share, or $0.435 per ADS for the second quarter. Lastly, our current $5 billion share repurchase program, which started in mid-January last year. Under this program, we have repurchased approximately 12 million ADSs as of June 30, 2024, for a total cost of approximately $1.1 billion. Thank you for your attention. We like now to open the call to your questions.

Operator: Thank you. [Operator Instructions] Your first question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap: Hello. Thank you. [Foreign Language] [Interpreted] My question is related to Naraka: Bladepoint Mobile. During (ph) management — should be satisfied with the performance so far since the launch. So can management share and elaborate the user breakdown and the profile. For example, the percentage of the user that have not played the PC version of the Naraka and also percentage of the user are brand new gamers to NetEase game, meaning that it has never played other NetEase game in the past? And then follow-up on that is that any comment on the timing of the overseas launch for Naraka in the different market? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Okay. So as a brand new action type of genre of mobile game, we are very happy with the current retention rate. To answer your question, to give you more colors, now not only we can see a very stable core user base has been already formed, which is a very important and very successful and there are other very satisfying indicators as well. For example, the female players percentage on mobile is much higher than on PC. And among all players play the mobile version, 70% of them have never played the PC version before. And close to half of them are actually new to NetEase. They’re new NetEase games players. So all these are very satisfying. And for now, our focus is to keep optimizing the game, making sure the game is as perfect as possible and focusing on domestic market first. And one opportunity services (ph) will consider launching the game in other markets. Operator, next question please.

Operator: Thank you. Your next question comes from Jialong Shi with Nomura. Please go ahead.

Jialong Shi: [Foreign Language] [Interpreted] So I will translate my questions. I’ll have a few questions about the legacy PC version of FWJ. So for all these adjustments NetEase has down to PC FWJ since this year, what is the purpose that you want to achieve through these adjustments? When do you expect to achieve this targeted purpose? If these adjustments have anything to do with the instruction from the game regulators? Also, I would like to understand the financial impact from these adjustments on PC FWJ? We know that the price of the virtual currencies for TC FWJ declined in first half this year. Just wonder whether this decline in prices of virtual currency has any correlation with against gross billings? When do you expect the gross billings for PC FWJ to fully recover?

William Ding: [Foreign Language]

Bill Pang: [Interpreted] I’ll do the translation. First of all, thank you for your interest and understanding more details of financial journey. But I would also like to emphasize that NetEase is now a much more grown up mature company. We have multiple games. We have very healthy portfolio of games. We have Naraka: Bladepoint. We have Identity V. We have all sorts of and I give partly all sorts of large games. And Fantasy Westward Journey, as one of our flagship titles has been in operation for more than 20 years. And from time — in this past 20 years from time-to-time we’ll do some upgrade in the game place and refresh the game system, tune in the game system, that’s happening from time-to-time. It’s kind of normal to us, because certain gameplay is fun for a period of time and maybe it’s no longer that fun after many years.

So we’ll keep — we never change brand and Fantasy Westward Journey, but the gameplay inside the game has been refreshed many, many times in the past 20 years. So the goal of the adjustment is to keep publishing the game, making sure the quality, the experience of the gameplay, everything is better and better and the gamers enjoy more fun from playing the game. That’s the purpose. So as of any adjustments to any community based product, not only games, any community based product will be some short term turbulence and maybe some short term pain as well, that’s a common thing. In our experiences that’s quite common and a short term temporary thing. And it will be behind us. And again, thank you for your interest in Fantasy Westward Journey and we also encourage, again, we also encourage you to broadly look at our broad portfolios as well.

Thank you. Operator, next question please.

Operator: Thank you. Your next question comes from Ritchie Sun with HSBC. Please go ahead.

Ritchie Sun: [Foreign Language] [Interpreted] Thank you, management for taking my questions. First of all, regarding Identity V, we have seen the grossing rank are surprising the expectation of the market. What have we done to successfully drive the revenue growth of this game and how does management assess the potential for the asymmetrical battle genre and whether there are competition? Second of all, regarding Justice Mobile, the game has launched a new season. We see the grossing rank in July, surging to top 10, but it has declined since in August. What are the key reasons behind? Is it because the mix response was a new season or more competition impacts from Naraka: Bladepoint or naturally came from MMO? And how does management plan to improve the longevity of this game? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Okay. I will translate this two — for the answer of these two questions. First, regarding your question to Identify V. Identify V is a game that’s been their operation for more than six years. And during these six years, we have been keep exploring and publishing the game, making sure the game is the quality and experience, playing the game is better and better every day. That’s a continuous effort the team has put into developing and operating the game for the past six years, that’s a non-stop effort. And of course, we are happy to see that in Q2. We saw some great result and we want to say that, that result is the reflection of the continuous effort and also a reflection of NetEase’s capability of running the game in the long-term better — keeping the longevity of the game.

And in the meantime, making the game [Technical Difficulty] day by day. And actually not only Identify V, we’re keeping doing this for all our games and we hope someday you can see similar great success of our other games as well. And to your second question regarding Justice Mobile. First of all, the new season of Justice Mobile features in mass amount of new content, re-engage a large pro players back to the game, which is very helpful. Currently, the game has stepped into a stable operation phase. Compared to other real time MMO titles, the game has demonstrated very strong stability on overall players’ activeness. From this — our priority now is to maintain the players’ activeness as well as the diversity of the ecosystem. We remain committed to provide a fair gaming experiences, enable a casual environment without too much burden on players and continuously value their opinions aiming to build an evergreen MMO on the mobile platform that people have never seen before.

Operator, next question please.

Operator: Thank you. Your next question comes from Yang Bai with CICC. Please go ahead.

Yang Bai: [Foreign Language] [Interpreted] Hi, management. Thank you for taking my questions. I have two questions related to our game based business. First, we observed that the company has a diverse portfolio of products achieving high DAU such as Naraka and Eggy Party. How should we think about our strategy to differentiate and outperform in this highly competitive high DAU game market? My second question is about our overseas game business. How should we track the development trend of our overseas game business in the future? And could management share more color about the release timeline of new titles in overseas market? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Yeah. So first, regarding your question on the high DAU product matrix. As a matter of fact, we don’t — internally we don’t specifically define this again the high DAU game, that game is not. We actually don’t look at game product from this lens, because our fundamental belief is that, as far as we can make a high quality, fun enough game, players will come. So high DAU is not a spectrum of per design, it’s a result reflection of your high quality fun to play game. As you know that over the years, we have been keep trying, keep exploring different type of game, different genres. We started from MMO, but now we extend into sports, we extend into PVP game, we extend into shooting games. We are trying with our expertise to develop, to explore on multiple genre, multiple fronts, what kind of fun and high quality game we can provide to the players, that will guide us and that’s our focus.

And regarding the global market, as you can see, we are perfectly happy with the result of Once Human, which is a reflection of our capability to design and develop game, not only Chinese players, like, but the game does have a resonance among the global gamers community, that’s a very good sign. And echo to the previous point, we are still keep exploring multiple genres and it will take more time for us to explore our style of games suitable for the global market. It will take some time, but from the early result, we do have confidence to do that.

Yang Bai: Thank you.

Bill Pang: Operator, next question, please.

Operator: Thank you. Your next question comes from Lei Zhang with Bank of America. Please go ahead.

Lei Zhang: [Foreign Language]

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Okay. I’ll do this — the translation. First of all, the team is very busy adding more content, fun to play content to the game as we speak. As a matter of fact, to your question, whether or not the PC version and mobile version will be launched the same time. Actually, in our eyes that is not the most important question. It’s either same time or apart from each other about a month or so. It doesn’t really matter. What really matters is to, can we provide a game that is fun to play in the long-term to our players. We also emphasize that, Where Winds Meet is not a single player game. It’s an open world game that we plan to run for multiple years. And the content side is — the size of content is much more than a traditional expectation on the single player game.

And one other point I want to point out is that, there will be differences between the PC version and the mobile version because the platform differences. And to make it fun to play both on PC and mobile, a lot of changes and optimization work need to be done. Please be more patient, give us some time to publish the game. The plan on record now is to release the game within this year. Thank you. Operator, next question please.

Operator: Thank you. Your next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.

Lincoln Kong: [Foreign Language] [Interpreted] So thank you, management for taking my question. My question is about Eggy Party. From some third-party data, we see some grossing pressure in the past few months for this game. So can management share the reason behind it and how should we ensure the longer term operation of this game? And regarding to the broader leisure category, no matter party games, idle games, what’s our company’s R&D strategy and direction here we can share? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Okay. I’ll do the translation. So yes, you’re right. Eggy Party is one of the biggest game of NetEase in terms of the user base. And from our end, we do see that the ratio between the revenue versus user numbers is relatively low compared to other games. But we also — we want you to be rest assured that no need to be too worried about this one. We’re actively exploring how to change this, because again we want to emphasize again, the most important fact is, it’s a game fun to play. It’s — our users like the game or not. So far from what do we see, the users are like the game — they like the game very much. They are actively participating game every day. And that give us a ground that we can over time to explore a balance, a new way to balance the size of users and the level of revenue, please to be rest assured, we’re exploring that and we will figure that out. Thank you. And operator, next question?

Operator: Thank you. Your next question comes from Felix Liu with UBS. Please go ahead.

Felix Liu: [Foreign Language] [Interpreted] Thank you, management for taking my questions. My question is on your upcoming pipeline. So can management share for the remaining 2024 and looking into 2025, what are the key pipeline that we should watch out for? And more specifically, I noticed that you recently got [indiscernible] to Marvel series, Marvel Rivals and Marvel Snap. What are your expectation on their domestic launch? And also, you showcased a new game called FragPunk in Xbox showcase. Any comment on that one? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Yeah. You’re right. Not only we received approval for Marvel Snap, which is card game, Marvel Rivals, which is the hero shooter game, but also we are working on other new generation titles like you mentioned the FragPunk, which is the PC shooter game, which we just started testing in the overseas market as well as the — as we mentioned in script that we’re going to have Hearthstone launch in next month as well. One thing we want to point out is, all these special games, they are not our traditional type of game. They are competitive games. And every single one of them are actually from high production quality competitive games. We have high hope and confidence about this special game. And as we said, the game start — the special game will start to launch from latest months to next year and we hope they can be a successful special games. Thank you. And operator, next question please.

Operator: Thank you. Your next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong: [Foreign Language] [Interpreted] Thanks management for taking my question. My first question is about AI. Can management share about how AI enhance our game production and work efficiencies? And my second question is about the trend in operating expenses. How should we think about the trend in R&D expense? And should we expect it to step up because of AI? For marketing expenses, how should we think about the spending over the next few quarters? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Okay. Let me do the translation. First of all, NetEase has actually been actively embracing AI for a long time. And AI technology has been widely applied throughout our game development process and works from all disciplines like design or programming, every discipline. And for example, in some of the boring work, used to be labor intensive boring works, in some of the areas, AI replacement rate has already 90% or so. And that actually will free up people development people, so they can be focused on to explore more fun gameplay, really creative part of game development instead of the labor intensive part. And regarding the R&D — impact on the R&D cost, AI will free some of the human resources from the labor work, but we’ll reinvest into this development resources, our exploration of gameplay and the creative part.

So the R&D spending should stay in the reasonable range for long-term. Thank you. And operator, we probably have time for one more question, please.

Operator: Thank you. Your final question comes from Lei Zhang with Bank of America. Please go ahead.

Lei Zhang: [Foreign Language] [Interpreted] Thanks for the follow-up opportunity. My question is regarding World of Warcraft. Any feedback regarding the new user and the old user and how to say the revenue contribution? And can you share with us the timeline for the other game to come back? And any future cooperation with Blizzard down the road? Thank you.

William Ding: [Foreign Language]

Bill Pang: [Interpreted] Okay. Thank you. I will do the translation. Thank you for your question. Since the return of World of Warcraft, actually, the players have been very actively returning to the game, as all metrics are actually exceeding our expectations. The split actually between the new players and existing players before server shutdown is about four to six, which demonstrate that the game not only attracting old players back, but has the capability of capturing new players as well. And regarding the impact on the financial side, for sure, it will increase the PC revenue. And talking about other games will unfold the class and on this unfolding return of other Blizzard games. We’re happy to see we have built up close relationship and reach consensus, which each Blizzard product team, because we strongly believe the return is not only just reporting the service, it should be far beyond that.

It should be — we get fully prepared to ensure even better experiences to other players than before. And upon this returning of Blizzard games, the development teams from Blizzard side and maybe NetEase ThunderFire has directly built up very deep cooperation and trust on the point to point teamwork base, which laying the foundation of deep mutual trust and future possibilities for deep cooperations in the future. Thank you.

Operator: Thank you. That concludes the question-and0answer session. I would now like to turn the conference back over to Brandi Piacente for any additional or closing comments.

Brandi Piacente: Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly, and we hope you have a great day. Thank you so much.