NetEase - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good day and welcome to the NetEase First Quarter 2025 Earnings Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Helen Wu. Please go ahead.

Helen Wu (EVP)

Thank you, operator. Please note that today's discussion will contain forward-looking statements related 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 those 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 the announcement of filings on the Hong Kong Stock Exchange website.

The company does not take any obligations to update its forward-looking statements except as required by the 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 first quarter 2025 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 on the call from NetEase senior management are Mr. William Ding, Chief Executive Officer, 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 (VP of Corporate Development)

Thank you, Helen, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. We started 2025 with strong momentum. Innovative content and exceptional operations continue to underpin our growth. As we further globalize and diversify our expanding game portfolio, our total net revenue increased 7% year-over-year. Alongside the success of our new titles, our flagship titles continued to captivate players throughout the first quarter, reaching new record highs after decades of operations. This combination of new hits and long-time fan favorites drove our total revenue from gaming and value-added services up by 12% year-over-year to RMB 24.0 billion. Several new titles have recently debuted globally, and more players around the world are embracing our games than ever before.

We now have a rich and growing global portfolio of games that spans a range of diverse genres, reinforcing our competitive edge in the dynamic gaming landscape with innovations that elevate our offerings and the industry as a whole. Starting with Marvel Rivals: its successful launch last December marked a major milestone in our portfolio and a meaningful step forward in our globalization journey. Backed by critically acclaimed gaming experience and dedicated live operations, it has continued to build strong momentum among players worldwide. In the first quarter, player engagement remained high, and the launch of Season 2 in April brought renewed excitement. Themed around Hellfire Gala, a once-a-year celebration of mutant culture and identity, the seasonal update introduced a new map, a new hero, and fresh team-ups, welcoming both veteran players and newcomers to the living island.

Following the update, Marvel Rivals reclaimed its number one position on Steam's global top-seller chart. To deepen our connection with the player community, we are moving to a two-month season cadence starting with Season 3, while keeping the momentum high by introducing a new hero each month. With continuous development and iteration, we are committed to delivering a distinctive and evolving gaming experience to players worldwide. Next is FragPunk, our fast-paced five versus five tactical shooter game that has energized global fans with a sleek shooting experience, innovative shot cards, and bold art expression. Within just three days of its PC launch in March, the game achieved over 110,000 peak concurrent players and became number six on Steam's global top-seller chart. Building on this momentum, we launched Chapter 2 of Season 1 on April 29th with over 70 brand-new shot cards, along with updated heroes and maps.

With the update, FragPunk also debuted on consoles, making the game available to an even broader player base. As we continue pushing the boundaries of the shooter experience with systematic innovation and upgrades, we're also growing the game's community and hope to make FragPunk one of our new titles. We also just launched the much-anticipated Once Human mobile edition on April 24th. It quickly gained global attention, claiming the top spot on the iOS download chart in more than 160 regions. The optimized handheld experience is highly valued by mobile players as we retain the depth of the PC version while featuring cross-platform play, progression, and rewards. Meanwhile, the mobile launch generated even more community enthusiasm across platforms, driving the game to the number five spot on Steam's top-seller chart. Across PC and mobile, our open-world PvP and PvE phenomenon is reaching more users.

Where Winds Meet has continued to draw players into its immersive world since its breakout domestic launch in December. Its ability to blend subtle storytelling, a richly layered historical setting, and high-fidelity graphics has made Where Winds Meet a game-changer in the open-world Wuxia genre. We added more fresh content on March 28th, introducing Qinghe, a brand-new district set against a stunning desert landscape and attracting a draw of new players. By the end of March, more than 30 million players had joined the community, and player engagement continues to be high, reinforcing the game's long-term potential. We are excited to build on this success and reach more players, with plans to launch the game in more regions across PC, mobile, and console platforms later this year. These titles also demonstrated robust performances, driven by strategically tailored experiences for local communities.

The return of each title in 2024 reignited player enthusiasm, driving engagement to historical highs. This was especially evident by Overwatch, which broke new records of peak concurrent players upon its relaunch on February 19th. A brand-new stadium mode was launched in China this April alongside its global release. In addition, momentum has been ongoing for World of Warcraft and Hearthstone, both of which saw consistent popularity during Chinese New Year, with targeted in-game events and localized designs. Notably, World of Warcraft achieved leading sales through live commerce on social media, providing fans with an entertaining experience in a fresh way. Hearthstone came out with culturally resonant content, such as alternative art cards or signature cards inspired by Chinese painting and World of Warcraft pseudo-embroidery-inspired mounts. These creative designs rejuvenated the long-beloved IPs by infusing fresh elements that resonate with players, engaging both long-time fans and new players.

In addition, Diablo III entered technical testing in April, paving the way for its re-entry into the Chinese market. Together, these successes demonstrate the strength of our operating capabilities and the close collaboration with our partners. Looking ahead, we are excited to bring players even more intriguing content, created and delivered with care by passionate teams and collaborators. As we celebrate the success of our new and returned titles, our established NetEase Games continue to play a vital role in our portfolio. Our long-standing beloved titles serve as foundational pillars and steady sources of revenue, with alluring content updates and continuous gameplay enhancements that deliver timeless appeal. The Fantasy Westward Journey franchise is a prime example. After decades of operations, it continues to be one of China's most influential brands.

In the first quarter, we celebrated Fantasy Westward Journey mobile's 10th anniversary with a range of new content updates, including a crossover with the renowned animation IP Digimon. The update sparked player engagement, signaling a remarkable beginning for its next decade. Westward Journey Online II, another cherished classic, also maintained healthy traction in the first quarter with festive Chinese New Year events and interactive live streaming that reignited player passion. Another example is our iconic asymmetric battle arena game, Identity V, first introduced to the global market in 2018. The player base greatly expanded in the first quarter, achieving a new quarterly high on top of its record-breaking momentum in 2024. The excitement extended into April, with registered players surpassing 400 million globally during Identity V's seventh anniversary celebration. Similarly, our action-based battle royale game, Naraka: Bladepoint, has built a strong global player base since 2021.

The game saw new record revenue in the first quarter with our updated PvE content. Players can now team up and confront formidable villains side by side, adding another layer of play through strategy, skill building, and collaboration. Both Identity V: Asian Games version and Naraka: Bladepoint have also been named as the official esports events for the 2026 Aichi-Nagoya Asian Games. Each is the first title in this genre to be included in the Asian Games, marking another breakthrough for domestically developed games on the international stage. Moreover, this veteran title's ability to reach new milestones highlights the strengths of our long-term operations, premium content, crossover events, and our increasing strengths in esports operations. Moving to Eggy Party, the game further solidified its leadership in the party game genre with robust sequential growth in the first quarter.

Excitement lit up Eggy Island on Chinese New Year's Eve, featuring a vibrant lineup of performances. Players jumped into the New Year celebrations, enjoying live entertainment, joining in activities with friends, and creating a night to remember. The addition of the beloved Chinese animation IP Calabash Brothers added another layer of festivity, with Eggy Party attracting over 100 million players and new monthly players reaching a record high. As for our groundbreaking MMO game, Justice Mobile, it continues to raise the bar for innovation. In March, we introduced Starry Dreamland, a virtual amusement park in the heart of the Wuxia-inspired world. Packed with familiar attractions and activities that resonate with the younger generation, this new setting quickly became a hit. Justice Mobile is also pushing technology boundaries. We continue to elevate the gaming experience, adding enhanced interaction with AI-powered NPCs and improved lighting effects through cutting-edge graphic technology.

We have also made it a lot easier and more fun for players to get creative. With our upgraded creation system, players can produce their own video clips using in-game animations, complete with custom scripts, character motions, and voice-overs. It's a powerful tool that opens the door to a whole new level of creative expression. Justice Mobile's strong momentum has expanded to more regions since its launch in Hong Kong, Macau, and Taiwan last November, as has our leading basketball game, Dunk City Dynasty. Currently, Dunk City Dynasty is targeting expansion to more regions across the Western market and Southeast Asia in May. Similarly, Racing Master has secured a solid position in Japan, Korea, and Southeast Asia. The game topped the iOS download chart across multiple regions with each geographic launch.

These solid operational metrics are a great indicator of what we can expect in other markets when we bring these titles to more regions. As we work to build on the success of our existing games and introducing them to more players around the world, we have a range of exciting upcoming titles on the way. The new titles in our pipeline will continue to push the envelope of creativity and interaction, elevating our portfolio and the overall gaming experience we bring to our gaming communities. MARVEL Mystic Mayhem, our superhero team-based tactical RPG, is currently preparing for its official worldwide launch. The closed beta test 2.0 conducted in March sparked massive passion within the community, where we gathered valuable feedback from players to aid in the final touches. With more details to be announced shortly, we eagerly anticipate introducing players to these exciting confrontations on a global scale.

Some of our other titles under development include Destiny: Rising, our epic sci-fi RPG shooter game featuring a new adventure set in the alternative Destiny timeline. This one is currently in active development and progressing as planned. ANANTA, our highly anticipated metropolitan RPG, is also deep in development. The game draws on our years of experience in the gaming industry to deliver innovative gameplay shaped by deep player insights. As across our portfolio and pipeline, we're reaching more players through a wider range of genres and expanding our global footprint. We're launching new titles and building on the momentum of our existing hits with updates players love, all while delivering new, inspiring experiences that resonate with fans around the world. By continuing to reimagine what's possible in gaming, we help advance the industry as a whole. Our commitment to quality and innovation shapes each area of our business.

Looking now at Youdao, with a relentless focus on technology-driven innovation integrated into the user experience and a disciplined effort to foster long-term sustainability, Youdao achieved record-high first-quarter operating profit, maintaining the profitability momentum of previous quarters. Turning services revenue declined in Q1 as we continued to prioritize core services with strong long-term potential. By focusing on high-demand subjects, we advanced quality operations and further strengthened profitability. As a part of this effort, our online intelligent learning platform, Youdao Lingshi, upgraded its college entrance planning system to deliver more seamless and personalized guidance based on individual needs, driving exceptional user engagement and loyalty. By prioritizing AI technology in the development of our products and services, we have seen strong user reception and robust growth in AI subscription sales.

Our existing applications continue to evolve, with our dictionary and translation services now delivering industry-leading accuracy and a smooth user experience, powered by our proprietary large language model, Confucius. This model innovatively integrates multiple models and leverages online direct preference optimization during training, which enhances its ability to generate responses that are aligned with users' preferences. This elevated experience has driven increasing engagement in our AI translation services. Youdao's online marketing services remained focused on high-quality growth. In the first quarter, sales from overseas grew sharply, driven by strengthened collaboration with overseas partners and KOLs. We also boosted operational efficiency through advanced technologies. For example, we launched Youdao MagicBox, a video creation tool that simplifies the production of high-quality advertising videos through intuitive inputs, making ad content creation easier and more time-efficient. Our smart devices segment maintained healthy year-over-year growth.

Building on our leading position in China's dictionary pen market, we continue to bring new innovations to the industry. In the first quarter, we launched Youdao SpaceOne, a next-generation device equipped with a larger screen than dictionary pens and the ability to answer students' open-ended questions in real time, much like a human tutor. Powered by advanced large language models, Youdao SpaceOne can accurately interpret images, respond with natural voice interactions, and deliver highly accurate answers across a wide range of school grade levels. As our online businesses continue to explore avenues for delivering meaningful experiences in entertainment and learning, the NetEase family remains committed to enriching people's lives and product lifestyle and product with services that consistently impress our users with exceptional quality. Take Yanxuan as an example. A strong commitment to quality and innovation drove another quarter of healthy performance across our core product categories.

In the first quarter, our pet product and household cleaning items remained top sellers within their category on major e-commerce platforms. Particularly, the signature product maintained strong momentum, while new releases such as our Car Scent Cup and limited-edition New Year bathroom fragrancy saw strong consumer demand. We were especially delighted that in March, one of our cat food products, specially formulated to support healthy fur, received the 2025 Pet Orange Dot Award, a notable recognition from the pet industry. Additionally, ESG initiatives are ongoing priorities for NetEase. Earlier today, we published our sixth annual ESG report outlining our progress towards sustainable growth, transparency, and social responsibility. We believe that technology can both empower and inspire. Through AI-driven innovations, we're redefining entertainment experiences while modernizing traditional industries for safer, more efficient production.

Our business growth reflects the trust our users place in us, further motivating our efforts to serve our communities. While our business has limited environmental impact due to its predominantly online nature, we continue to enhance our carbon reduction efforts across data centers and office campuses to strengthen operational resilience. In 2024, by prioritizing energy-saving measures within our operations, we successfully achieved a 16% reduction in greenhouse gas emissions compared to the previous year. Leading ESG rating organizations have also recognized our progress in sustainability. Notably, MSCI upgraded us from A to AA in this latest assessment, designating NetEase as a leader among 237 companies in the global media and entertainment sector. S&P Global included us in this 2025 Sustainability Yearbook, and Sustainalytics has rated us as a low-risk company for the sixth consecutive year.

Each of these honors speaks to the dedication and ESG standard we uphold across our company. As we look to the months ahead, we are encouraged by the global momentum we have established and the breadth of opportunities across our increasingly diversified game portfolio and broader NetEase family of businesses. With a robust pipeline of new releases, continued global expansion, and ongoing enhancement to our most iconic franchises, we are well-positioned to sustain our growth and deepen our connection with players worldwide, creating more value for players, partners, and shareholders. That concludes William's comment. I will now provide a brief review of our 2025 first-quarter financial results. Given the limited time of 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.

Total net revenue for the first quarter will be RMB 28.8 billion, or $4.0 billion, representing a 7.4% increase year-over-year. Meanwhile, current contract liabilities will be RMB 17.7 billion, up 16% quarter-over-quarter. Total net revenue from our games and related VAS will be RMB 24.0 billion, up 12% year-over-year. Specifically, net revenues from online games will be RMB 23.5 billion, up 14% quarter-over-quarter and 15% year-over-year. This growth was primarily driven by increased revenue contributions from key PC games, such as newly launched titles Marvel Rivals, as well as established mobile games like Identity V. Specifically, net revenues for our PC games accounted for approximately 34% of our total online games revenue, representing an increase of 13% quarter-over-quarter and an increase of 85% year-over-year. Youdao's net revenue will be RMB 1.3 billion, representing declines of 7% year-over-year and 3% quarter-over-quarter.

This was primarily due to strategic structural improvements in the learning services segment, which is increasingly focused on high-demand subjects. NetEase Cloud Music net revenue will be RMB 1.9 billion, declining 8% from the same period last year and 1% from the previous quarter. This was primarily due to decreased revenue from social entertainment services. Net revenue for innovative businesses and others will be RMB 1.6 billion, decreasing by 17% year-over-year and 29% quarter-over-quarter. The decline was mainly due to decreased net revenue from Yanxuan, advertising services, and certain other businesses in this segment. Gross profit for the first quarter of 2025 was RMB 18.5 billion, up 9% year-over-year and 14% quarter-over-quarter. This was primarily driven by increased net revenues from online games, as mentioned above. Our total gross profit margin was 64.1% in the first quarter, compared with 63.4% for the same period in 2024.

Specifically, in more detail, gross profit margin for our games and related VAS was 68.8%, compared with 69.5% in the same period last year. The change was primarily due to fluctuations in product mix. The operating expense for the first quarter was RMB 8.0 billion, or 28% of our net revenues. Taking a closer look at our cost composition, our selling and marketing expenses as a percentage of total net revenue were 9.4%, compared with 15.0% for the same period last year, mainly due to decreased spending on gaming promotions during the quarter. Our R&D expenses as a percentage of total net revenues remained stable year-over-year at 15.2% in the first quarter, compared with 15.5% for the same period last year. We remain committed to investing in content creation and product development. The effective tax rate was 15.3% for the first quarter.

As a reminder, the effective tax rate is presented on an accrual basis, depending on applicable policies and our operations. Our non-GAAP net income attributable to shareholders for the first quarter totaled RMB 11.2 billion, or $1.5 billion, up 32% year-over-year. Non-GAAP basic earning per ADS for the quarter was $2.44, or $0.49 per share. Additionally, our cash position remains robust, with net cash of approximately RMB 137.0 billion as of March 31, 2025, compared with RMB 131.5 billion at the end of 2024. In accordance with our dividend policy, we are pleased to report that our board of directors has approved a dividend of $0.135 per share, or $0.675 per ADS.

Lastly, under our current $5 billion share repurchase program, which started in mid-January of 2023, we had repurchased approximately 21.6 million ADS as of March 31st, 2025, for a total cost of approximately $1.9 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time.

If you wish to have follow-up questions, please feel free to join the queue. Your first question comes from Miranda Zhuang with Bank of America. Please go ahead.

Miranda Zhuang (Equity Research Analyst)

[Foreign language] Thank you for taking my question. My question is about Identity V. This game had a consistent and strong performance throughout last year and is now one of the top games among company's game portfolio. Can management share the reasons behind and how to think about the game growth going forward after the comp base becomes higher? Any implication to the revival of your other games? Thank you.

William Ding (CEO)

[Foreign language]

Thank you for your question. Yeah, you're right. Identity V being a very unique asymmetric PVP game has been there for six years. And during the past six years, we never stopped, keep investing, keep optimizing, keep improving this game.

As a result, the game is not only very successful in China, it is actually in a very leading position in Japan as well. You're right. Our other teams actually learned a lot from the hands-on experience of the Identity V team to how to keep improving the operations, continuous operation improvements of our other games. Looking to the future, Identity V will keep investing more and more resources into the game Identity V to bring the fun of asymmetric PVP to more players. Thank you.

Operator (participant)

Your next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.

Lincoln Kong (Executive Director)

[Foreign language] Thank you, Manjun, for taking my question. So my question is about Marvel Rivals. We have seen some user number volatility in the recent months. How should we think about to ensure the life cycle and the longevity of this IP?

I think the management talking about we're going to shorten the season length, season time going forward, and also introduce more frequently our hero and the characters. Going forward, should we think about more adjustment in terms of the long-term operation and monetization strategy? Thank you.

William Ding (CEO)

[Foreign language]

Thank you for your question. As you mentioned, we introduced the Season 2 update in April, which achieved wide popularity among players and resulted in a significant boost over operating metrics. For season-based products, it's normal to observe fluctuations in operating metrics that align with the cadence of seasonal updates. The process itself will actually also help to solidify the user base. Starting from Season 3, we'll reduce the seasonal update interval from three months to two months. Additionally, we will initialize Marvel Rivals esports event in May to develop our esports ecosystem.

We believe that with more efficient content updates and our evolving esports ecosystem, we'll see gradual improvement across all in-game metrics. Thank you.

Operator (participant)

Your next question comes from Felix Liu with UBS. Please go ahead.

Felix Liu (Executive Director and Equity Research Analyst)

[Foreign language] Let me translate myself. First, thank you, management, for taking my question. Congratulations on the strong results and the strong performance of Marvel Rivals and FragPunk. Could Manjun share how you think about your latest strategy for overseas markets, given the backdrop of the strong performance of your domestically developed games and the news of shutdowns of some of your overseas studios? Thank you.

William Ding (CEO)

[Foreign language]

Thank you for your question. Yeah, for a long period of time, we have actually paid a lot of attention to the overseas markets, including the European market, North America market, Japan, and the Korea market.

In the past period of time, we did close some of our overseas studios, but those decisions were purely made based on the positioning of the future product and consideration of product quality. As you see, since last December, our domestically made games, namely FragPunk and Marvel Rivals, they indeed achieved not a bad result in overseas markets. We believe this is in line with our judgment and how we see the overseas market according to our plan. We believe that in the future, NetEase will make more and more games suitable for global markets. Thank you.

Operator (participant)

Your next question comes from Yang Liu with Morgan Stanley. Please go ahead.

Yang Liu (Executive Director)

[Foreign language] Let me do the translation. The well-winged meat saw improving feedback and monetization. What has NetEase done here is proven effective. What is the next step for this title's operation? Thank you.

Thank you for your question. Where Winds Meet is a game that we spent five years to develop: an Asian Chinese historical background open-world game. When it was released in late December last year, it got a lot of acclaimed reviews from users. We actually pay a lot of attention to this game. It is a very important game to us. In the future, we are going to keep investing into the game, namely to further polish the art representations, keep polishing the gameplays. It will be a long-term game for us. When players play the game, we encourage players to play on PC because on PC, it has much better graphical presentations. Where Winds Meet, the success so far has provided us a lot of hands-on experiences. We are going to learn from the experiences and deploy them into other products to help our other products to be successful.

We believe Where Winds Meeet in the coming 5-10 years is going to be one of our evergreen titles. Thank you.

Operator (participant)

Your next question comes from Ritchie Sun with HSBC. Please go ahead.

Ritchie Sun (Director of Internet Research)

[Foreign language] Thank you, Management, for taking my questions. Congrats on a very robust quarter of results. My question is about Once Human. The mobile version has done well in the download rank, but monetization remains quite preservative. How would management rate the performance of Once Human and its potential? What are the key competitive edge and differentiation of this product? What are the plans to further enhance the commercialization going forward? Thank you.

William Ding (CEO)

[Foreign language]

Thank you for your question. Once Human Mobile launched, it's very successful. It's achieved top downloading spot on 166 regions on iOS. In the first week, we got more than 6 million new users.

Regarding what you observed on the top-classing chart, one of the nature of this game is that it's a cross-play game. Players, they can choose to play on PC and on mobile with the same account. So a lot of top players, they play on both clients, and they choose to pay on the PC side. Actually, after the mobile version launch, from the PC side, the concurrent user, they increased by 90%, and payment actually drove by 500%. And the payment on PC actually increased; the payment ratio from PC actually is more than 50%. That is why you see when we launched the mobile game, actually on Steam, it's ranked onto one of the top-seller charts. Probably the players pay on PC actually kind of impacted the top-classing chart ranking on mobile. For the specialty of this game, this is kind of a script-based, seasonal-based game.

That's one difference compared to other SoC type of game. In the future, we're going to further satisfy the gamers' demand from two angles. One is we're going to add new gameplays, new script-based gameplays that can further satisfy the demand from users from PvE kind of exploration or PvP kind of confrontation. The other front that we're exploring is we're going to explore the prioritized ecosystem. Some of the SoC players, they have demands to, for example, open their private servers. That's a different kind of gameplay experience. We're going to explore how to satisfy this kind of demand. Thank you.

Operator (participant)

Your next question comes from Yang Liu with Morgan Stanley. Please go ahead.

Yang Liu (Executive Director)

[Foreign language] Let me do the translation. FragPunk's popularity declined fast after the launch stage. What can NetEase do to help FragPunk to differentiate better in the overseas FPS game competition? Thank you.

William Ding (CEO)

[Foreign language]

Thank you for your question. FragPunk was actually made by a new team. From a new team perspective, we're satisfied with the performance so far. The game actually has a solid foundation. It's innovative. The card mechanism allows for rapid updates and iterations regarding gameplay modes. We have been telling the team that it's important that we keep engaged in this market and keep refreshing and seeking for opportunities for gameplay expansions. We're committed to supporting this product in the long run to support the long-term operations. To achieve this, we encourage the team to make sure that we have a very solid, stable team and give the team more room and more time to keep growing. From the market operation perspective, we'll continue to invest into overseas markets, maintaining visibilities through all sorts of vehicles, including tournaments, including collaboration with influencers and other IP crossovers.

This will maintain our loyal player base while we're seeking for breakthrough opportunities. Thank you.

Operator (participant)

Your next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong (Regional Head of Internet and Media)

[Foreign language] Thanks, Management, for taking my question. My question is about resource allocation. Can Management comment about the allocation of resources in domestic and overseas markets over the next few years? Thank you.

William Ding (CEO)

[Foreign language]

Yeah. From NetEase's perspective, we believe we do have sufficient resources to do both domestic and overseas markets at the same time. From the 20 years' history, we have been doing this business. We have accumulated a lot of tools, tool chains, and talents. Of course, we have shortcomings as well. For example, like how to understand the demand from overseas gamers. On that part, we'll keep improving. But from resource allocation perspective and execution perspective, we do have sufficient resources to do both markets. Thank you.

Operator (participant)

Your next question comes from Xueqing Zhang with CICC International Corporation. Please go ahead.

Xueqing Zhang (Analyst)

[Foreign language] Thanks, Management, for taking my questions and congratulations on the solid quarter. I have two questions. My first one about your new titles. We have noticed that several new titles achieved great performance. Which key evaluation metrics are prioritized during the product ideation and the approval phases in the company? And how shall we expect the pipeline in one to two years? My second question is a follow-up one on esports. Congratulations on Identity V and Naraka being selected for the 2026 Asian Games for the first time. May I ask whether Management plans to take this opportunity to develop international esports operations? And what's the company's long-term strategy for the esports games? Thank you.

William Ding (CEO)

[Foreign language]

Yes. Thank you for your question. We'll answer the first question first.

Over the past 25 years, we have accumulated a lot of experience, tools, and talents. Our talents, our teams, they're really passionate about gaming. When we charter a new project, we welcome all sorts of talents with creative thinking about game ideas. When we consider a new product case, actually the first attribute we consider is whether or not the core team members, they're passionate about gaming, are they passionate about the specific game project they're proposing, and including how to execute them out over years. If they satisfy all this threshold, we'll actively evaluate and think about this product. Of course, we do have an internal evaluation system. In the future, actually, we'll open this platform to more game lovers outside, talent outside if they want to join us, if they have creative ideas, we welcome them.

Specifically about the pipeline in the next couple of years, rest assured, do not need to worry. We have other very good products that our pipeline has not been announced yet. Thank you.

[Foreign language]

[Foreign language]

Yeah. Thank you for your question and interest about our product in the Asian Games. For a long period of time, we have been actually paying a lot of attention to esports. And this time, two of our products have been selected. That is a testimony of not only the quality of the game, but also the gamer base of the games. And we hope our self-developed game not stop at being part of Asian Games. We hope them to be included in higher level Olympic Games. Talking about esports operation, in Hangzhou, we have the largest esports stadium, and we continue to run esports tournaments here.

We also, in Shanghai, have our own private esports stadium, which is one of the biggest, and we have continuous esports operation based there as well. In the long run, we are going to, in the long term, continue to invest into esports operations. Thank you. Operator, for the sake of time, we have time for one more question.

Operator (participant)

Thank you. Your final question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap (Equity Research Analyst)

[Foreign language] Thanks, Management, for taking my questions. With the help of AI, it seems like the game studios are able to produce content updates very quickly and then also shorten the overall development time for the expansion pack.

Would that affect and change how NetEase plans to expand the expansion pack release timing and also the game promotion targeting as AI increasingly taking a more important part of the game development and game publishing? Thank you.

William Ding (CEO)

[Foreign language]

Thank you for your question. We actually have been using AI in our game development and gamers' experience for a long time, at least five years. In the past five years, we never stopped investing into technologies, including AI technologies. A lot of this result actually has been deployed in our applicated in our game development and content production. For AI in general, we believe it's not specifically attached to specific one company. It should be a whole industry kind of thing. In the whole industry, everyone will be actively adopting AI technology.

Just every company with their different context, maybe the brands or the business, how they apply AI technology might be different. I want to emphasize again, actually, AI is critically important, not only to the game industry and to many other businesses as well. It has been a critically important thing. Thank you.

Operator (participant)

That concludes the question and answer session. I would like to turn the conference back over to Helen Wu for any additional or closing comments.

Helen Wu (EVP)

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