NetEase, Inc. (9999) Earnings Call Transcript & Summary

Good day, and welcome to the NetEase 2024 Fourth Quarter and Fiscal Year 2024 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.

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. Today's discussion, management will also discuss certain non-GAAP financial measures for certain comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the fourth quarter 2024 and 2024 fiscal year 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 remarks on William's behalf.

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 are based on RMB. At NetEase, we are dedicated to innovation and strive for continuous breakthroughs across our businesses. While 2023 was a year of expanding our portfolio across various game genres, 2024 was about pushing boundaries with both innovation and accelerating our brand awareness in the global market. These strategic steps reinforce our foundation for sustainable long-term growth. By the end of the year, our total net revenue reached RMB 105.3 billion with RMB 83.6 billion from games and related value-added services, both marking new record highs. Notably, this marks the 22nd consecutive year of revenue growth from our online games operations. The successful launch of new Bloodstrike titles in the fourth quarter advanced each of our growth drivers: innovation; diversification; and globalization. By redefining gameplay and setting new industry standard for premium quality, we have created tremendous player enthusiasm. Our games captured attention across genres within and beyond the traditional gaming community and on both domestic and global scale. Let's start today by reviewing our new games performance, then we'll take a look at our broader portfolio and pipeline. Marvel Rivals, our fast-paced Superhero shooting game, sparked massive excitement across global market following its launch. It claimed the #1 spot on Steam's top seller chart within 4 hours of its release, attracting over 10 million players in its first 72 hours and 20 million players in its first 12 days. With over 40 million players accumulated so far, Marvel Rivals is redefining the hero shooter experience through its unique art style, innovative combat system and ever-changing battlefields. Its key team-up ability add a dynamic layer of immersive interactions among players while recreating iconic Marvel moments with our fresh take that adds a new dimension to the Marvel universe. During the Season 1 update, Marvel Rivals once again topped Steam's top seller and most played chart. Our collaboration with Marvel Comics also brought Marvel Rivals to life for comic fans through an Infinity Comics series on Marvel Unlimited. The synergy not only amplified the game's momentum but also bridge the walls of gaming and other media forms, captivating audience beyond the gaming community and solidifying Marvel Rivals as a corporate phenomenon. With more superheroes and exciting events on the horizon, Marvel Rivals will continue to evolve. We are thrilled to bring even more new experiences to the game that keeps players engaged and inspired. At the end of December, we launched our highly anticipated open-world action adventure RPG, Where Winds Meet. Within 4 days of its PC launch in China, the game has amassed 3 million downloads and topped the iOS download chart for around 2 weeks following its mobile launch. The booming mobile version drove total players across PC and mobile to over 10 million within a week and over 15 million after 2 weeks. Rooted in a richly crafted world with deep historical backdrop, Where Winds Meet innovatively introduced the Chinese martial arts into open world exploration experience. On top of that, we pioneered a mode that caters to both single player and multiplayer preferences, which reinterprets Wuxian story in a brand-new way. Players can immerse themselves in the intertwine conflict of Asian cities like Taiwan, win its characters contrasting faith during historical changes and develop social network with other people along the journey. Building on the single-player experience, the game seamlessly integrates challenges that encourage social exchange. While continuously refining the experiences, we aim to create a compelling plan of solo and multiplayer elements, offering players a diverse way to experience the world. With community-high praise, we expect the audience of Where Winds Meet to continue to expand over time with the game becoming another flagship evergreen title. Our plans to build on the game's initial success are underway. We are currently working to bring Where Winds Meet to console platforms and introduce Saga to players in more regions. In addition to our new game launches, the return of Blizzard Games to China has been highly successful. with a strong momentum throughout the fourth quarter. The return of World of Warcraft has consistently sparred tremendous enthusiasm from the community, supported by our diverse localized events that are driving the franchise to new heights. Shortly after Hearthstone's return, we quickly reorganized the highly anticipated Hearthstone Gold series in China. The event set new records, drawing in over 10,000 fans in person and more than 10 million players gathered to watch online. Just yesterday, Overwatch 2 made its return to China, reigniting player excitement. As Blizzard portfolio gradually returns to Chinese market, we are further strengthening our partnership with Blizzard, exploring localization opportunities and bring more exciting content for China's robust game community. Whether developing or operating a title, we're always committed to innovation and operational excellence. We apply this across our portfolio and continue to see the results of our dedication reflected in our new and legacy franchises. With operations across decades, our beloved legacy franchises continue to set new records and amass fans, thrilling players with enduring popularity. Fantasy Westward Journey continued to bring players' fresh experiences through well-timed events and new content in the fourth quarter. The Champion [indiscernible] expansion pack featuring the iconic transformation abilities of Monkey King, Sun Wukong, introduced all new skills and [indiscernible]. Meanwhile, the Spring Festival event planned around the year of Snake brought the community a vibrant New Year atmosphere. For Fantasy Westward Journey Mobile, we continue to infuse new content into the game, which gained heightened popularity throughout the year and led to the record high revenue for 2024, nearly a decade after its launch. Westward Journey Online II also achieved record high annual revenue, driven by enriched gameplay and activities as well as refreshed gaming experience powered by new servers. Players flock to the in-game ceremony for Tang Dynasty Emperor Taizong, and explore new maps and missions set in to thriving Asian cities of Luoyang. Stepping into 2025, we also introduced our major new annual server update for Westward Journey Online Mobile. We accompanied the update with a dual sharing system. It generated significant new community interest and further strengthened bond among players while keeping long-term fans coming back for more. Identity V is another testament to our long-term operational success with our established titles. After setting consecutive new quarterly records in the first 3 quarters, both in terms of player numbers and revenues, Identity V achieved record high revenue in 2024. In the fourth quarter, we sustained intense player activity with our comprehensive operational strategy, which players love. For example, in November, we launched a cross-branding campaign with Persona 5 Royal, introducing the beloved Phantom Thieves of Hearts to our game. Fans appear in gloves for the crossover event, driving Identity V to #2 position on the iOS top grossing chart. Naraka: Bladepoint franchise also continued its impressive run with action-based combat community. With the December update, Naraka: Bladepoint partnered with CD Projekt Red for a special crossover on the Witcher 3: Wild Hunt, introducing more beloved characters through new costumes and in-game events. Most recently, our January collaboration with King of Fighters brought iconic KOF characters, Athena and Mai Shiranui into the game, seeing high level of player interest. Naraka: Bladepoint Mobile has also been growing its player base since its launch in the third quarter and surpassed 50 million players in December. For Eggy Party, we continue to nurture its dynamic UGC ecosystem. The community is highly connected, feeling very great supply and demand for content creation. The platform consistently add diverse game modes to build on its rich content offerings, allowing players to enjoy relaxing and heartwarming moments with their Eggybuddies. So far, we have successfully introduced several popular game modes, including mobile, asymmetric battle arena, Werewolf, Petkeeping and farm management, each captivated a large audience within the Eggy Party community. Our innovative MMO, Justice Mobile, maintained its large and active player base in the fourth quarter. In late December, Justice Mobile hosted a groundbreaking virtual concert for its cross-year celebration, immersing players in festivities and inviting them to participate in an interactive feast. The event created a truly unforgettable audiovisual experience by merging cutting-edge technology with Asian art. Beyond conventional concert, all players who join as their in-game characters embarking on an exploratory journey through various immersive scenes. The concert ignited considerable buzz among players, attracting over 3 million concurrent viewers online. The robust community engagement and related CN content updates propelled Justice Mobile to #2 on the iOS top grossing chart shortly after the event. Since its launch in July, Once Human has cultivated a dedicated survival player fan base around the world, and we continue to build on this. The new PVP and PV scenario we introduced in the fourth quarter sparked a player search. The spike in total concurrent users drove Once human to rank on Steam's top 10 most play chart and to #3 on Steam's top seller chart. Anticipation on the much-awaited mobile version is also mounting. We now have over 10 million preregistrations as we finalize the game's mobile version for its global launch in this April. With the addition of a mobile version, we expect to attract even more fans worldwide. Adding to our ever-expanding and increasing diverse portfolio, we have a great lineup of new titles in our pipeline with several key games planned to hit key markets in the coming months. The global launch for Fragpunk, our fast-paced 5 versus 5 tactical shooter game is set to begin on March 6. We expect the game to become a dynamic force in the shooting experiences for fans worldwide. Featuring an innovative free cards system with shifting combat dynamics and a colorful punk art style. Through meticulous game development, Fragpunk is set to disrupt the traditional shooting experience with all new rule-breaking gameplay that we think players will love. Next up is Destiny: Rising, which successfully concluded its first closed beta test in December. The community's broad enthusiasm won Destiny: Rising Pocket Gamers' annual, most anticipated, Game Award. Using the valuable insight we gained from early tests in target regions, we are currently working to make the game even better. Our goal is to bring this fresh shooting adventure setting an alternative destiny time line [indiscernible] players around the globe. Lastly, I'd like to highlight our Superhero team-based tactical RPG, Marvel Mystic Mayhem. It just finished close beta cross-country testing in January with a unique art style, rich cast of characters and varied and rewarding gameplay that fuel the community. Sweeping positive player feedback gives us confidence that players will love Mystic Mayhem experience as they fight with beloved Marvel characters across various bizarre dream labs. As many of you know, we have been steadily expanding into new game categories over recent years. Diversifying our portfolio has allowed us to carve a path beyond the traditional MMO game that define our early journey in the gaming industry. Along the way, we have achieved significant milestones and gained invaluable insights into genres that were once new to us. Each successful vertical we entered reinforces our ability to craft impactful games across diverse categories. Moreover, our diversified game portfolio has strengthened our global presence, enable our games to reach and resonate with audience worldwide. As we expand our game offerings, upholding superior quality and stay agile in our operational iterations, we're confident that we can continue captivating global audience with new innovative titles and grow our international reach. Now let's move to Youdao. With its continued focus on technology-driven innovation and profitability enhancement, Youdao's operating profit increased by over 10% year-over-year in the fourth quarter, and it achieved its first ever annual operating profit in 2024. In the fourth quarter, learning services revenue declined as we further focus on long-term growth, balancing revenue and profitability. By prioritizing high-demand courses, we achieved healthy development and reinforced profitability. Notably, Youdao Lingshi flagship course, featuring tiered learning videos and AI-powered support continue to thrive. With strong engagement and loyalty, it achieved a retention rate of over 70% in the fourth quarter. Recently, we launched Confucius-o1, China's leading step-by-step busing model for education. As a 14B lightweight model, it supports deployment on consumer-grade GPUs and delivers detailed problem-solving processes. With its high accuracy and robust reasoning capabilities, Confucius-o1 has been seamlessly integrated into our AI learning assistant, Mr. P AI Tutor, earning excellent user feedback and surpassing 100 million users. Youdao's online marketing services has also continued to advance. Domestic performance-based advertising reached record-breaking revenue, led by gaming and AI tool sector. Internationally, we recently established an official partnership with Google, laying a solid foundation for further expansion. We have also sharpened our technology edge in overseas KOL marketing. By developing an evaluation model, we can precisely match KOL selection with specific demand, driving high conversion rates. Our Smart Devices segment maintained healthy growth. Our flagship Youdao Dictionary Pen solidified its leading position in the Double 11 online shopping festival, dominating the top position in this category on JD and Tmall sales chart for 5 consecutive years. Building on this success, we launched Youdao Dictionary Pen A7 Pro in January, featuring higher performance to further fuel growth ongoing. Turning to NetEase Cloud Music. NetEase Cloud Music continued to drive quality development across its music-centric ecosystem, nurturing its unique community and distinctive content offerings. We continued reinforcing our signature music consumption experiences while expanding consumption scenarios and brand awareness. We launched and iterated several innovative features to improve users joy and interface with music and music-inspired content in Q4. For example, our new feature, Lyric Book, allow users to highlight their favorite lyrics, create a personalized lyric collection and share that unique Lyric Book with others. Additionally, Live Bot enhanced users' music discovery journey, offering recommendations that flow naturally with each user's distinctive taste. These functions were highly popular with music fans and increased user engagement. Building our compelling consumption experiences, we continue diversifying music consumption scenarios. For example, co-branding activities in collaboration with our game division helped expand our existing audience, while introduced and enhanced music-inspired social interaction features in games further extended our brand presence. Expanding our music library also allows us to keep bringing users diverse range of licensed and original music. In Q4, we deepened our partnership with Kakao Entertainment and strengthened our Chinese music collection this January by collaborating with renowned artist, Lee Ji-eun, bringing his full discography back to our platform, including many beloved classics. On the in-house music side, we stepped up our efforts as well. Several tracks gained widespread recognition in Q4, including hit, Follow. We're also growing our copyright collaboration with popular artists. January, Hua Chenyu's digital album Tipping Point debuted on our platform, selling over 1 million copies within 24 hours. In Q4, we celebrated the 10th anniversary of our independent musician platform with special events highlighting our musicians journeys, helping to deepen the connection between the artists and fans. As of December, our platform boasted over 770,000 registered artists, making it one of China's top platforms for independent musicians. As we continue to improve our music-focused monetization, subscription-based membership remained an important driver of online music revenue growth. To further optimize our premium offering, we enhanced our content appeal, introduced cutting-edge features, added membership privileges for subscribers and refined our comprehensive pricing strategy. This effort boosted subscriber growth and deepened engagement, laying a solid foundation for more sustainable growth. Finally, let's look at Yanxuan. Yanxuan continues to focus on key categories and drive growth through best-selling products. In 2024, core categories like Pet Products and Home Cleaning recorded solid growth, reinforcing their market leadership. Meanwhile, other key categories keep gaining popularity through its star products. Our [Foreign Language] Down Jackets known for exceptional quality and strategic marketing remained a standout performer in the fourth quarter, breaking into top 5 position for menswear on Tmall sales chart. Across our NetEase family of businesses, we pursue innovation that advances our company and the industries we serve. We are extending this to our global aspiration for our games as we further diversify our portfolio and bring beloved titles to fans worldwide in 2025 and beyond. We believe these initiatives will fuel lasting value creation across our business and for our players, partners and shareholders alike. This concludes William's comments. I will now provide a brief review of our 2024 results with a focus on the fourth quarter. Given the limited time on today's call, I will present 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. Our total net revenue for 2024 were RMB 105.3 billion or USD 14.4 billion, representing a 2% increase year-over-year. For the fourth quarter, total revenue were RMB 26.7 billion or USD 3.7 billion. For 2024, net revenue from games and related VAS were RMB 83.6 billion, up 3% from 2023 and up 2% year-over-year in Q4 to RMB 21.2 billion. Specifically, net revenues from online games were RMB 80.4 billion, up 6% from 2023 and up 5% year-over-year in Q4 to RMB 20.5 billion. Through 2024, our PC client games delivered strong performances, achieving 17% year-over-year growth with an impressive 57% increase in Q4. The Q4 growth was primarily driven by titles such as Naraka: Bladepoint, Westward Journey Online II and several licensed titles. While the positive momentum in PC games has shifted our revenue mix, mobile games remain a significant part of our business. In the fourth quarter, they accounted for approximately 65% of our total net revenue from online games and operations -- online game operations. And for the full year, it made up about 73%. Youdao's net revenue for 2024 were up about 4% for the year to RMB 5.6 billion, primarily due to revenue growth from online marketing services. They declined 9.5% year-over-year in the fourth quarter to RMB 1.3 billion, primarily due to the decline in learning services revenue as we focus on the business that serve our long-term growth objective with better profitability. NetEase Cloud Music's net revenue were up a little over 1% at RMB 8 billion for the full year and RMB 1.9 billion in the fourth quarter, a 5% decrease year-over-year. As discussed in previous quarters, the decline reflects lower revenue from social entertainment service, which aligns with our refined focus on sustainably improving profitability. Net revenue for innovative business and others were RMB 8.1 billion for the year and RMB 2.3 billion for the quarter, down 6% and 17%, respectively, year-over-year. The decline was mainly due to decreased revenue contribution from Yanxuan, advertising services and some other innovative businesses. For the year, our total gross profit margin was 62.5%. In the fourth quarter, our gross profit margin slightly decreased year-over-year to 60.8%. Looking at our fourth quarter margin in more detail. Gross profit margin was 66.7% for games and related VAS compared with 69.5% in the same period last year. The decrease was primarily attributable to higher proportion of net revenue from licensed game, which carry lower margin than our self-developed titles. Our gross profit margin for Youdao was 47.8% compared with 49.9% in the same period last year. The decrease was mainly due to reduced revenue contribution from learning services. Gross profit margin for NetEase Cloud Music was 31.9% in the fourth quarter versus 30.3% in the same period a year ago. The margin improvement primarily resulted from increased revenue from membership subscriptions and continued cost management improvement. For innovative business and others, gross profit was 37.8% compared with 34.4% in the fourth quarter of 2023. The increase was primarily a result of margin improvement in Yanxuan. The operating expenses for the fourth quarter were RMB 8.5 billion or 32% of our total net revenue. Taking a closer look at our cost composition. Our selling and marketing expenses as a percentage of total net revenue were 10.5% for the fourth quarter compared with 15.6% for the same period last year, mainly due to decreased spending on gaming promotions during the quarter. On a full year basis, selling and marketing expenses accounted for 13.4% of net revenue, relatively stable with 13.5% in 2023. Our R&D expenses as a percentage of total net revenue also remained stable year-over-year at 16.7% in the fourth quarter compared with 16.5% for the same period last year. On a full year basis, R&D expenses accounted for 16.6% of net revenue up slightly from 15.9% in 2023. We remain committed to investing into content creation and product development. We are also seeing leverage in our R&D investments longer term. The effective tax rate was 15.3% for the full year and 13.4% for the fourth quarter. As a reminder, the effective tax rate is presented on an accrual basis and the tax credit deferred for each of our entities at different time periods depending on applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the fourth quarter totaled RMB 9.7 billion or USD 1.3 billion, up 31% year-over-year. Non-GAAP basis earnings per ADS for the quarter was USD 2.09 or USD 0.42 per share. For the full year, non-GAAP net income attributable to shareholders was up 3% to RMB 33.5 billion or USD 4.6 billion, which is USD 7.17 per ADS or USD 1.43 per share. Additionally, our cash position remains strong. As of year-end, our net cash position was about RMB 131.5 billion compared with RMB 110.9 billion at the end of 2023. In accordance with our dividend policy, we are pleased to report that our Board of Directors has approved a dividend of USD 0.24405 per share or USD 1.22 per ADS for the fourth quarter. Lastly, under our current USD 5 billion share repurchase program starting in mid-January last year. We had repurchased approximately 21.2 million ADS as of December 31, 2024, for a total cost of approximately USD 1.9 billion. Thank you for your attention. We would like now open the call to your questions. Operator, please.

[Operator Instructions] Your first question comes from Yang Bai with CICC.

[Foreign Language] I will translate by myself. Concerning Fragpunk, could management share more color on its beta test achievements, current preparations for launching and post-launch operational priorities. What's the company's perspective on competition within the shooter game market segment?

[Foreign Language]

[Interpreted] Okay. I'll do the English translation. Fragpunk has [Technical Difficulty] large-scale testing, both domestically and in overseas market, which feedback met our expectations. Players gave high appraisal to our innovative gameplay and system design and provided a lot of valuable advices as well. After months of iteration, we're now ready to launch. After launch, as always, we'll continue to monitor player feedback, update better levels, provide new characters and crack down shooting behaviors, building a healthy gaming environment for the players. Currently, as I said, there are multiple well-performing shooting titles in the shooting genre, shooting is a big genre in which our R&D teams had shooting experience. This actually reinforce our confidence in our game, no matter the control fittings, the system designs or the hero narratives, including its very unique art style. Everything has its unique signature and will be appealing to existing and new players. We do have confidence that the game will be successful.

Your next question comes from Yang Liu with Morgan Stanley.

[Foreign Language] I will translate my question. First, I congratulate the positive feedback from the gamers on Where Winds Meet and we see quite positive metrics on retention and DAU, et cetera. But also, we hear a lot of feedback to expect the company to improve the cosmetics and also the multiplay game play in the game. So I would like to ask what is the next stage monetization strategy for this title? And where could we see improvement? And also, I would like to ask about the overseas launch plan for this title, where and what market?

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Interpreted] Okay. Thank you, William. I will do translation. Where Winds Meet -- thank you for your question. Where Winds Meet is widely claimed since its launch, demonstrating a solid performance with robust metrics. The inclusion of both single player and multiplayer mode has created a diverse demand of players. And the monetization strategy centered around cosmetics was widely welcomed. Furthermore, our content ecosystem featuring casual and low-pressure gaming experience lays a healthy foundation for long-term operation. In the future, we will continue to focus on infusing new content, our maps to enrich our open world, creating diversified quality costumes, crafting various interesting and innovative single player and multiplayer experience for single player and multiplayer game plays for our gamers. And we'll -- from time to time, we will talk to players face-to-face, collect their feedback to keep modifying, keep polishing our game. Regarding your question on the overseas plan, we do notice that Where Winds Meet -- wide appraisal of its unique open world style and the unique interpretation of Wuxian content, which actually gained us wide attention and anticipation from overseas audience as well. Currently, we have started working on the overseas version, and we hope we could present that to overseas players within 2025. Thank you for your question.

Your next question comes from Ritchie Sun with HSBC.

[Foreign Language] I have 2, but the first one is about Marvel Rivals. Regarding the 40 million users, can you share more about the paying propensity paying ratio? And what is the next growth strategy that we're looking at? Will we expand the marketing or esports or even connectivity with the Marvel movies to further expand our user base?

[Foreign Language]

[Interpreted] Thank you for your question. Marvel Rivals, especially after Season 1, has gained wide appraisal from worldwide players. And this is a product we're going to keep investing both on development and marketing. And we do believe this product, we're going to keep operating, keep enhancing, keep investing for 10 years and beyond. To your question, yes, the team does have plans for esports, and we're going to announce our esports plans, hope to have this esports plans to further enhance the overall gaming ecosystem. And to your question, yes, we're going to do a lot of crossover events and promotions with other media in the future. And this is a key product we'll keep investing. Thank you for your attention.

Your next question comes from Alicia Yap with Citigroup.

[Foreign Language] So my question is related to Overwatch, given the games relaunched in China yesterday. So what are the company's current expectations for the game? And how will NetEase strike a balance between Marvel Rivals and Overwatch?

[Foreign Language]

[Interpreted] Thank you for your question. Regarding our expectations for Overwatch, it's similar to those for World of Warcraft and Hearthstone. We aim not only to just restore the operation as it is, we aim to really revitalizing the product and reaching new highs. We are encouraged to see that from the day 1 relaunched yesterday from the data, from the user feedback, we are happy to see that we are on that trend. Both Marvel Rivals and Overwatch are excellent superhero shooters in this category and both well designed and supported by outstanding development teams. We will each strive to meet diversified demand of our respective player community. We believe the market is large enough to accommodate 2 excellent games in the market.

Next question is from Ritchie Sun with HSBC.

[Foreign Language] Can you discuss how does the user and grossing trend look like for World of Warcraft and Hearthstone after a strong initial boost from the pent-up demand? And after this normalization, what is the next step to improve the longevity of these titles?

[Foreign Language]

[Interpreted] Thank you for your question, 6 months after its return, Where Winds Meet and Hearthstone are still performing far better than any other time in the history. Of course, as you mentioned that during the launch time, it's not uncommon that things will normalize and compared to the release time. We have closely collaborated with our partners at Blizzard to plan upcoming content plan, and we believe we will reignite players' engagement. And in the long term, we have established a strong trust with Blizzard development team and are committed to addressing the feedback from Chinese players to provide -- to improve their gaming experience in the local way. Thank you for your question.

Next question is from Lincoln Kong with Goldman Sachs.

[Foreign Language] So my first question is about the overseas market. So after the Marvel Rivals' success and also some of the adjustment of our overseas studios, how should we think about our future expansion strategy in the overseas market? So will we follow more direction of Marvel Rivals or Fragpunk, those are self-developed games. How should we think about our advantage in the overseas market? The second question about AI in the game. So after the success of DeepSeek and a huge inference cost dropping, how would NetEase integrate our AI versus our current game portfolio as well as our future pipeline? Could management share with us more around the gameplay innovation, users interaction, our production efficiency or cost discipline or any aspects related to AI?

[Foreign Language]

[Interpreted] Okay. I will do the translation. So to your question, the user demand preference in overseas market are not the same as the user demand preference in China market. We realize that. And we actually pay a lot of attention to support our overseas studios. We -- to support the creators in the overseas market to be creative to create content to meet the local demand in the overseas market. So our commitment to support the really high-quality studios and really master creators to create very creative games for overseas market. That is our strategy. There's no change on that. Yes. So that's the answer to the first question. And the second question regarding AI. AI is and will significantly increase the efficiency in the R&D process in the development pipeline. There's no doubt about that. We have been doing that, and we're going to do that in the future. And also, there are many, many other applications of AI in gaming. For example, in games, it could help the users to better engage with the content, better understand the content, better onboarding on the content for the new gamers. And we're exploring that in a massive way as well. And we believe AI for the R&D process, the creative process of gaming industry is going to make huge positive contributions. We're very positive about that. Thank you for your question.

Next question is from Lei Zhang with Bank of America.

[Foreign Language] My first question is regarding the game [Foreign Language], which got game approval previously. Should we expect it to be launched in 2025? And given the competitive of ACG game, so how do we think about its positioning and the differentiation here? Secondly, one follow-up on the sales and marketing expense, which have a meaningful reduction in Q4. So I want to know the driver and whether we changed the sales and marketing strategy? And going forward, how should we look at the sales and marketing trend in 2025?

[Foreign Language]

[Interpreted] So I will translate the first question first. Okay. Yes. So we have completed an offline test for Naraka this January, and the feedback is honestly quite positive. The development is undergoing in a very smooth way on track, and the team is growing in the orderly manner as well. For competition, we believe competition is a good thing, and it actually reflects that the market -- there's an interest in the market in this genre of game, and there's unmet demand there. As long as we meet the player expectations, we're confident that we can deliver outstanding products. Currently, we are focusing on refining our content to keep developing the product, and we plan to invite more players for testing when we are ready.

[Foreign Language]

[Interpreted] So regarding the market spending decrease in Q4, as you know, we keep innovating our marketing engine and exploring higher efficient ways and tools and system to operating -- to do the marketing operating. And this actually is a reflect of our improved efficiency in terms of marketing operation. Operator, next question, please. For the time being, we probably have time for one more question, please.

The next question comes from Felix Liu with UBS.

[Foreign Language] Let me translate myself. My question is on the news of recent organizational changes. We noted there have been quite a few changes within both your domestic and overseas studios. Could management share the reason and consideration behind these changes? And how should we think about your mid- and long-term investment plan for new games?

[Foreign Language]

[Interpreted] Okay. I will do the translation. When we allocate resources among different products across different studios, no matter domestically or including our overseas studios, so we pay a lot of attention, a lot of key attributes, for example, the quality of the work and it's the work going to meet the future demand of players when the work is released in market years later as well as the production efficiency of the work, everything. So if some project, we can foresee that when the product face market years later, is likely not to be kind of players. We will very firmly use the word, press the break. And if some projects, if they're really high quality, meeting the future market demand, actually, we're going to double down. So it's all about the product itself, the quality, the development efficiency. Is it going to meet the ever-growing user expectation because game development is a long cycle, it's 3-year, 4-year, 5-year cycle. When we charge a project, we have some assumptions. And during that development process, we'll keep monitoring to see if the product is going to be able to meet the future demand and to do resource allocation adjustment. That's a normal course of game development management. We have been doing that for a long time and doing that way. Thank you for your question.

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

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.

Thank you, bye-bye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]