NetEase - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the NetEase 2023 second quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Margaret Shi, Senior IR Director of NetEase. Please go ahead, ma'am.

Margaret Shi (Senior Director of Investor Relations)

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the future performance of the company and are intended to qualify for 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 in this discussion. A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F and the announcements and the 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 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 2023 second quarter earnings news release issued earlier today. Please note that certain financial information regarding Cloud Music we'll be discussing on this call has been prepared in accordance with IFRS. For additional information, please refer to Cloud Music's interim report for the first half of 2023. 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 NetEase corporate website at ir.netease.com. Joining us today on the call from NetEase senior management is Mr. William Ding, Chief Executive Officer, and Mr.

Charles Yang, Chief Financial Officer. We will now turn the call over to Charles, who will read a prepared remark on behalf of William.

Charles Yang (CFO)

Thank you, Margaret, and thank you everyone for participating in today's call. Before we begin, I would like to remind everyone that all percentages are based on RMB. Our total net revenues came in at CNY 24 billion, an increase of nearly 4% year-over-year, and our net income attributable to shareholders increased by 56% year-over-year to CNY 8.2 billion. Our long-standing franchises are still resonating well with our users. In the second quarter, revenues from our Fantasy Westward Journey saga continues to grow year-over-year, further impressing the industry with this IP's longevity and sustainable popularity. Westward Journey franchise recently celebrated its 21st anniversary since its commercial launch. Games from our flagship series, crafted on solid foundations and continual iterations every few months, maintain their top-tier positions and alluring charm in today's market, even after nearly two decades of operation.

In addition to these legacy titles, we are proactively cultivating an expanding array of long-lasting franchises. We believe our recent portfolio additions, such as Eggy Party and NARAKA: BLADEPOINT, are showing similar popularity with potential longevity. Continuing its successful streak after more than a year of operation, Eggy Party achieved another record high for active users this summer, surpassing the peak it reached during the Chinese New Year period this year. In the second quarter, it was the most downloaded game in China, which speaks to the game's strong reputation and user engagement. Additionally, we have our sights set on long-term success, and we are deeply committed to fostering a thriving UGC ecosystem. In June, we successfully hosted our very first creative conference and introduced a series of new incentives, providing even better support and rewards for creators.

Furthermore, we've diligently upgraded our game editor by introducing a series of advanced components and interactive functions, such as NPC and clock editor. These additions not only offer increased flexibility, but also push the boundaries of creative possibilities. To build on the domestic popularity of Eggy Party, our plan to launch it in the global market is well underway. We went through our first round of testing outside of China in April, which has given us valuable insight. Our development team is working hard to optimize the game experience based on this feedback. We plan to test Eggy Party in a few more regions, including the Europe, North America, and Japan markets, before we officially introduce Eggy Party to worldwide audiences.

For NARAKA: BLADEPOINT, we proudly announce that we added another 10 million new users in the past year, reaching a new milestone of 20 million users in total after two years of operation. To celebrate the game's two-year anniversary, we increased an array of captivating new content, featuring fresh weapons, heroes, and engaging gameplay features. Most notably, during its two-year celebration, NARAKA: BLADEPOINT made some exciting moves, transitioning into a free-to-play model and debuting on the PlayStation 5 to expand its accessibility to a wider audience, resulting in a remarkable surge in active users and being voted as PlayStation's best new game in July. Furthermore, the development of NARAKA: BLADEPOINT's mobile version is making steady progress. We have a firm focus on preserving the game's hardcore essence on mobile devices to further its reach to a broader audience in China and potentially globally.

The huge success we have seen with our June new releases, Justice Mobile Game and Racing Master, has been very exciting for us and demonstrates our ability to once again set the bar for the MMO industry and expand genres to brand new categories through first-class content innovation. Justice Mobile Game is arguably the first game in the world to bring fresh, real game experiences to users by leveraging machine learning technologies. The game has dominated both the iOS download and grossing charts upon its release in China. Within a month, Justice Mobile Game attracted over 14 million players, which is unheard of for any MMO game. Notably, it has drawn in massive groups of Generation Z players who were previously unfamiliar with the MMO genre, revitalizing the spotlight on MMOs within the Chinese game industry.

As a forerunner in the MMO world, we continuously explore new horizons of innovation that brings all new creative gameplay into the genre. Justice Mobile Game offers a more balanced game experience, which resonates well with younger generation, prompting players to willingly spend on cosmetic items they love within the game. Also, by leveraging our advantage in machine learning technologies, Justice Mobile Game's development team will be significantly more efficient in producing new and frequent expansion packs that keep our game players super engaged. Turning on to Racing Master. Since the game's June debut in China, it has swiftly risen to the top position on the iOS download chart and claimed the number 3 spot on the top grossing chart. This milestone launch marks the addition of our second racing car game to our portfolio, expanding our presence in this very popular genre.

With Racing Master, we pioneered China's first proprietary AAA standard racing simulator mobile game, introducing an authentic racing experience into the mainstream of China's gaming sphere. Developing a simulation racing game is no small feat. It requires a deep pool of technical expertise, such as understanding dynamic crash physics, aerodynamics, and real-world tracks. These take years to build from the ground up. This kind of undertaking requires a lot of dedication and passion for games, as well as a strong commitment to bring it to life. We have ambitious plans for Racing Master in the global market. We are about to commence overseas testing with an aim to bring Racing Master's authentic racing simulation experience to global mobile players around the world.

Badlanders, our next-generation looter shooting mobile game, has received positive reviews from players and achieved the number 2 position on the iOS download chart following its launch on June 8. We are dedicated to refining the game to fully unleash its long-term potential. At the end of June, we also rolled out Harry Potter: Magic Awakened to the global market, including Japan, North America, and Europe, where it topped the download charts in more than 50 regions. The game was well received by Harry Potter fans across the world and has been acclaimed for its world-class design and authentic representation of the original IP. Our most recent addition is Dunk City Dynasty, which we launched just yesterday. The game tops the iOS download chart. Authorized by the NBA Players Association, Dunk City Dynasty marks our debut into the self-developed basketball game domain.

Dunk City Dynasty lets basketball fans build their dream team with all-star NBA legends, and dominate the court with real-time commands using strategic prowess and leadership skills. Transitioning to our pipeline. Alongside the exciting titles mentioned earlier, such as NARAKA: Bladepoint mobile game, Eggy Party, and Racing Master for the international markets. Where Winds Meet, our open world adventure RPG, is counting down to its eagerly awaited 2024 launch. At Gamescom 2023, held this week, Where Winds Meet unveiled a wealth of thrilling revelations, which is now capturing significant attention from players worldwide. Set at the onset of the Song Dynasty, a time of warfare and turmoil, Where Winds Meet allows players to embark on a journey as a mysterious swordman and immerse themselves in the heart-pounding allure of our interactive open world.

Our dedication towards R&D underpins our ability to continue to scale through consistent proprietary game launches. Nevertheless, we remain committed to bringing top-quality worldwide games to Chinese market. Since we introduced Minecraft to China in 2017, we have seen an incredible surge in its popularity within Chinese gamers community, where fans have embraced the opportunity to craft and explore their unique world, as well as those of others, limited only by imagination. Recently, we are very pleased to have renewed the term of Minecraft license and are dedicated to continuously serving Chinese players in the long term. In the second quarter, we are pleased to announce the establishment of a new game studio named PinCool in Tokyo, which is being led by Ryutaro Ichimura, a 20-year game industry veteran and longtime producer of the Dragon Quest franchise.

PinCool plans to leverage its diverse knowledge as an entertainment production company to deliver top-notch entertainment experiences to users worldwide. While it will mainly focus on developing titles for game consoles, PinCool will also venture into various forms of entertainment. Equally exciting, we've welcomed T-Minus Zero Entertainment to the NetEase family. The studio is located in Austin, Texas, headed by Rich Vogel, an experienced game developer who has led development on groundbreaking multiplayer and service-based games such as Meridian 59, Ultima Online, Star Wars Galaxies, and Star Wars: The Old Republic. T-Minus Zero Entertainment is developing an online multiplayer-focused third-person action game that takes place within a sci-fi universe. Now let's move on to Youdao.

The company's net revenues resumed its robust growth trajectory following the pandemic's impact earlier this year, registering a 26% year-over-year increase to reach CNY 1.2 billion, led by strong performance in our learning services and online marketing services. Our differentiated theme courses continues to drive year-over-year increase in our learning services revenue. For our goal and coding courses, their renewal rates have reached close to 70%, demonstrating our users' satisfaction with our course content. Online marketing services for Youdao achieved record revenues in the second quarter, nearly doubling comparing to the same period of last year. This achievement can be attributed to the utilization of our proprietary algorithm, which has substantially elevated advertising precision and efficiency.

Notably, it operates at a nearly 90% accuracy rate in intelligently targeting, tagging KOLs and reduce the time required to produce advertising materials by 80%, all the while enhancing user satisfaction. For smart learning devices, we continue to invest in innovative technology and rolled out new products. We were excited to launch Youdao Dictionary Pen X6 Pro model in August, our first dictionary pen, powered by our proprietary Ziyue Large Language Model, which is the first large language model designed specifically for the education sector in China. X6 Pro offers highly personalized tutoring functions for students of varying ages and levels of learning progress. For instance, the platform introduces a digital human language coach named Echo.

Echo engages users in interactive English oral practice, which teaches students how to initiate a conversation, express themselves naturally in a native manner, and provide grammar analysis based on students' submitted texts through scanning. Looking ahead, our focus on technological innovation remains our driving force, while we compel long-term success across our business lines. Turning to NetEase Cloud Music. In the second quarter, Cloud Music continues to enrich its music-centric ecosystem and optimize the user experience, resulting in a thriving music community. Total online music MAUs steadily climbed to 207 million for the first half of 2023, marking a 14% year-over-year increase. Despite the industry-wide slowdown, total revenues were CNY 1.9 billion, remaining stable compared to last quarter.

This can be attributed to a combination of strong growth in online music services, driven by revenues from subscription-based memberships and declining social entertainment services as we shift towards more sustainable development. Regarding margins, we are making remarkable progress. Our growth margin continues to improve in the second quarter, reaching 27% versus 13% for the same period of last year. Cloud Music also achieved positive operating profit for the first time under IFRS in the first half of 2023. We continuously enrich our music library to offer a comprehensive music selection for our diverse audience base.

In addition to the partnerships we established earlier this year with B'in Music and Comics Wave Films, we were happy to announce our collaboration with the country's top pop singer, Chris Lee, leading brand, Yu Ding Mi, and renowned Mandarin label, RYCE Entertainment, which represents a number of highly acclaimed international pop stars, including Jackson Wang. Furthermore, we have also extended our collaboration with popular Korean labels, including Dreamus, SLL, and JTBC. Our collaboration efforts with copyright holders have also proven to be successful in terms of digital album sales. Notably, the digital album, I Feel, by the leading Korean girl group, (G)I-DLE, achieved over CNY 10 million in gross sales and 430,000 copies sold after its release in May. We continue to empower and support independent artists.

By the end of June, we were serving a growing community of more than 640,000 registered independent artists. In addition to our support programs for nurturing music talent, we actively harness cutting-edge technology to provide tools that aid in music creation. During the second quarter, we introduced Cloud Music X Studio, a voice synthesis software developed in collaboration with Xiaoice, a technology innovator in lifelike interactions. This innovative tool offers 12 natural singing voices covering a variety of singing styles, and provides musicians with resources in music creation. Moving forward, we will continue to foster our music-centric ecosystem, further grow our community, and drive healthy long-term monetization and margin expansion for NetEase Cloud Music. Now moving on to Yanxuan. In the second quarter, our private label brand continues to thrive by strengthening its portfolio with a focus on premium quality.

This coincided with a steady increase in Yanxuan's revenues and significantly enhanced its profitability. In particular, the June 18 promotion yielded exceptional results. Our products achieved strong rankings on best-selling charts in diverse categories, including pet food, household cleaning products, and office furniture across leading e-commerce platforms. In Q2, we also introduced a campaign that highlights the production journey of some of our popular products. Using short films, we showcase how much detailed attention goes into the making of some of these products, which was heavily validated by our user community. Looking ahead, we will persist in our dedication to explore and introduce to consumer, great, well-crafted products under the Yanxuan brand. In summary, innovations through content production continues to be the cornerstone of NetEase, and will be what propels our future growth. Superior content, products, and services come from fresh ideas.

This concept forms the heart of our company, where we will always strive for excellence, manifest through hard work and persistence to inspire the industries we serve, from games to music, to education, to retail. We work to reimagine what is possible, creating value for our global community, our employees, and our stakeholders. This concludes William's comment. I will now provide a brief review of our 2023 second quarter financial results. Given the limited time on today's call, I will be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for more details. Total net revenue for the second quarter were RMB 24 billion, or $3.3 billion, representing a nearly 4% increase year-over-year.

Total net revenues from our games and related value-added services were CNY 18.8 billion, up nearly 4% year-over-year. The growth was primarily driven by increased revenue contribution from mobile games, including our strong legacy titles such as Fantasy Westward Journey series and our newer games such as Eggy Party. Net revenues from our mobile games accounted for approximately 74% of our total net revenues from online games operation. Youdao's net revenue were CNY 1.2 billion, a year-over-year increase of 26%, primarily due to increased revenue contribution from learning services and online marketing services. Net revenues from Cloud Music were CNY 1.9 billion, an 11% decline compared to the same period last year. As explained last quarter, these results reflected declining revenue of social entertainment services as we adjusted our focus to improve profitability in a sustainable manner.

We introduced multiple measures to enhance the listening experience of more dedicated music fans, lowered the revenue sharing ratio to broadcasters and agencies, as well as reinforced risk controls and additional live streaming function optimization. Net revenues for innovative businesses and others were CNY 2.1 billion, up 10% year-over-year, with a balanced approach to top line growth and margin expansion. Our total gross profit margin continues to grow, reaching close to 60% in the second quarter, compared with 56% in the second quarter of last year. Looking at our second quarter margin in more detail, gross profit margin was 67.4% for our games and related value-added services sector, compared with 64.9% in the same period of last year. The growth was primarily driven by the termination of certain licensed games with comparatively lower gross margin.

Our gross profit margin for Youdao was 47%, compared with 42.8% in the same period of last year. The increase mainly resulted from increased revenue contribution from its learning services and online marketing services, which carry higher margins. GP margin for Cloud Music continues to improve in the second quarter, climbing to 27% versus 13% in the same period one year ago. The quarter-over-quarter and year-over-year increase in Cloud Music's gross profit primarily resulted from the growth of membership services and continuous cost optimization initiatives. For our innovative businesses and others, gross profit margin was 29.5%, compared with 25.8% in the second quarter of 2022. The increase was primarily the result of margin improvement in Yanxuan.

Total operating expenses for the second quarter were CNY 8.3 billion, or 35% of our total net revenues. Taking a closer look at our expense component, our selling and marketing expenses as a percentage of total net revenues were 13.6% in the second quarter and remained relatively stable year-over-year. Our R&D expenses as a percentage of total net revenue also remained stable year-over-year at 16.3% in the second quarter. As an innovative content and technology-driven company, our commitment to investing in content creation and product development is ongoing. We are also seeing leverage in our R&D investments in the longer term. Our other income was CNY 2.8 billion for the second quarter.

The increase was mainly due to the mark-to-market value appreciation of certain publicly traded securities in our investment portfolio during the quarter, as well as higher unrealized net FX exchange gains. As per applicable accounting standards, we are required to reflect these fair value changes. Effective tax rate was 8% for the second quarter of 2023. The lower effective tax rate for the second quarter was mainly due to tax benefits recognized in this quarter. As a reminder, the effective tax rate is presented on an accrual basis, and the tax credits defer for each of our entities at different time periods, depending on applicable policies and our operations. Our non-GAAP net income attributable to our shareholders for the second quarter totaled RMB 9 billion, or $1.2 billion.

Non-GAAP basic earnings per ADS for the quarter was $1.93 or $0.39 per common share. Additionally, our cash position remains strong, with net cash of approximately RMB 99.6 billion as of June thirtieth, compared with RMB 95.6 billion as of the end of last year. In accordance with our dividend policy, we are pleased to report that our board of directors have approved a dividend of $0.105 per share or $0.525 per ADS. Lastly, on our current $5 billion share repurchase program. Starting in mid-January this year, approximately 6.1 million ADSs have been repurchased as of June thirtieth this year, for a total cost of approximately $536 million. Thank you for your attention.

We would like now to open the call to your questions. Operator, let's move on to the Q&A.

Operator (participant)

Thank you. If you wish to ask a question, please press star, then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are 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 rejoin the queue. Your first question comes from Alex Poon with Morgan Stanley. Please go ahead.

Alex Poon (Equity Analyst)

Congratulations, management and, development team, we have got, blockbuster title, one after another, launching this year. Can management elaborate how the Justice Mobile leverage AI to boost revenue and user engagement? And how the Justice Mobile became the first one, of this kind in China to adopt AI? And can management also share some of the difficulties and expectations of this game into the future? Thank you very much.

William Ding (CEO)

[Foreign language] So I want to answer this question. AI in Justice Mobile, we mainly include improving our research and development efficiency and improving user experience in two aspects. In terms of improving research and development efficiency, we are in the production link, in this, the development link, we are all using AI to improve our efficiency. But more importantly, in the entire game research and development process, we changed from the game plus AI concept to AI plus game concept. That is, we assumed from the beginning that the whole world is established on the basis of a large AI model, and then improve the user experience of the players in all aspects.

From the very beginning, when the player customize the character, to when the player enters the world and interacts with the whole world, we use AI in every aspect, to produce such a high-efficiency content and its interesting, to improve the rich open world experience of the players. We also see players showing a strong stickiness under such a novel experience, and a good word-of-mouth publicity. This plays a very important role in attracting former non-MMO users to our game. So we are also continuously iterating our such a AI deeply integrated content experience. What I want to say is that, our this work was not done overnight. Since AlphaGo defeated Lee Sedol in 2017, we have noticed that AI will have a huge impact on the content industry in the future.

Since then, we have started to make preparations. During the whole process, we also overcame a lot of difficulties. Today's success is also the result of the whole company's continuous years of investment in AI.

Margaret Shi (Senior Director of Investor Relations)

[Translator]: Thank you. I will do a quick translation. It says that the AI has effect on us in two ways. Firstly, it has greatly enhanced our R&D efficiency, and secondly, it enhanced our user experience. From the R&D efficiency perspective, we've adopted AI technology in programming, in graphic designing, and I think most importantly, we changed the way we think about designing games from just games plus AI to AI plus games, which means that at the very beginning of designing the game, we start thinking AI. We build a whole world view based on AI, AI world, which gives our user experience, our users a very immersive strong open world experience.

So from what we're seeing, our users have been highly attracted to this game. We saw very strong stickiness and engagement of users to the game. It has also, I think, the enjoyment that users have gotten from the game has caused voluntary spread or promotion of our game within the gamer community, and we've been able to attract many gamers who were traditionally not MMO game players.

Another thing we wanted to add on here is that applying AI technology into our game development is not something that can be achieved overnight. We started thinking about AI as far back as 2016, 2017 when we saw AlphaGo, and that's when we realized AI will have a profound impact on gaming. So that's when I think what the results in today is the accumulation of all the investments and dedication we have put into AI research and AI development in games. Thank you. Next question, please.

Operator (participant)

Your next question comes from Yang Bai with CICC. Please go ahead.

Yang Bai (Analyst)

哎，好嘞，谢谢，谢谢管理层啊。那个我们注意到公司今年的这个继战台、巅峰极速和逆水寒之后呢，又有一款新的游戏，全明星街头派对，啊，在这个上线之后有非常不错的这个表现，现在看来已经到了畅销榜的这个第八位。那么，能否请管理层分享一下，啊，对这个游戏的一些看法，啊，以及怎么去看待体育游戏这个赛道的机会？另外呢，我们近期也看到了这个公司，发布了一款都市开放世界题材的游戏，代号无限大的宣传片，啊，这个看起来，好像又是一款重磅的这个产品，啊，那能否也请管理层啊，介绍一下这个游戏？

I will translate by myself. After the success of Eggy Party, Westward Journey, Justice Mobile, we noticed that the company has recently launched a Dunk City Dynasty, which ranked number 8 on China's iOS top grossing charts soon after its launch. Could management share more color on the operation strategy of this game? And how should we think of the opportunity of Esports game? Besides, we can also see that the company released the PV of urban open world game, Project Mugen, which seems to be another big title. Could management tell us more about this game? Thank you.

William Ding (CEO)

[Foreign language]

Margaret Shi (Senior Director of Investor Relations)

[Translator]:Yes, to ask the first question, on Dunk City Dynasty.

[Translator]: So this game is actually our first attempt in sports game genres, particularly in basketball. After researching this market, we think there's potential innovation we can do in this particular genre. So we actually, when we started to put together the team of developers and game designer, we asked all the team members, we chose all the team members who are hardcore basketball players personally. So all of them have a passion about basketball, and they want to create the best basketball game ever in the market. So yes, it's actually taken us a few years of development and dedication, optimization, so we wanted, we feel like we only launched the game when we feel like we've mastered a great graphics, arts, and a maneuver and a style in that game. So going forward, we hope to continue to expand the user base of this game and hopefully become the dominant player in this category. Thank you.

William Ding (CEO)

[Foreign language] 第二个问题是，代号无限大的。那么，这款游戏是我们希望在二次元游戏开放世界领域进行一个，结合目前相关的很多的一些，游戏研发的技术，包括大数据生成、人工智能等，进行一个全面的升级的游戏研发尝试。那么希望，通过这样的一个产品，进一步巩固我们在AI游戏研发方面的一个实力，同时给大家，特别是二次元玩家，带来一个全新的二次元开放都市的这样的一个游戏体验。为了这款产品，我们也准备了很久，相信在不远将来就会给大家见面。

Margaret Shi (Senior Director of Investor Relations)

[Translator]: So the second question is on Code Infinite. So this is actually our attempt on innovating the anime style and game genre. So of ACG games. This is our attempt to bringing the open world experience, the AI technology into the ACG genre. And so this is our attempt to further solidify our development capabilities in AI, and also give our the ACG game lovers a true experience of open world city lifestyle game experience. And hopefully we'll be able to introduce the game to our gamers in the not too far future. Thank you. Thank you. Next, please.

Operator (participant)

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

Ritchie Sun (Analyst)

[Translator]: Good evening management. Thank you for taking my question. What's the rationale behind the change of NARAKA: BLADEPOINT to a free-to-play game? And how's the reception in terms of in-game item sales and user base? And how would this change the game performance trajectory going forward? Thank you.

Margaret Shi (Senior Director of Investor Relations)

[Translator]: Okay, so after we turn this game to free-to-play, we're able to bring in more users. So after this transition, we actually saw a great improvement in terms of both our active users and also our revenues. So we think that was the right decision to make. Thank you.

Thank you. Question, please.

Operator (participant)

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

Felix Liu (Analyst)

[Translator]: Let me translate myself. On the domestic pipeline, congratulations on the launch. How, when Where Winds Meet, and we look forward to more color on the game in Gamescom. Can management share more color on the status, R&D status of the game? What are the potential, you know, launch time that we're looking at? And what is the game's differentiated marketing positioning compared with Justice Mobile, given both seems to be open world, martial art-based, RPG game? Thank you.

William Ding (CEO)

Where Winds Meet is our most very ambitious open world game. It has very different world view from Justice Mobile. Where Winds Meet also actively absorbed some of the advantages of other open world games. So our launch time frame is expected to be no later than the second quarter of next year, possibly earlier. I believe NetEase has a very rich experience in developing open world MMORPG games. We are looking forward to this game to bring a different experience to our users. Thank you.

Margaret Shi (Senior Director of Investor Relations)

[Translator]: Yeah. So Where Winds Meet is actually a very important game for us. It actually has a very different world view to Justice. So when we're developing Where Winds, we are actually learning from, you know, different games with open world experience, and hopefully we'll be able to launch it by the second half next year.

William Ding (CEO)

Second quarter.

Margaret Shi (Senior Director of Investor Relations)

[Translator]: Second quarter next year. So, for NetEase, we believe we have a lot of experience in open world games. So, then every game we launch, we try to bring our users a different user experience. Thank you.

Operator (participant)

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

Lincoln Kong (Executive Director)

[Foreign language]谢谢，感谢接受我的提问，也恭喜这个非常优秀的业绩和一系列新游戏的成功。我想问一下，咱们就是网易在这个新的有些游戏类型上的领域的一些经验。其实过去十二个月呢，我们也看到，就是无论蛋仔，这个巅峰级数，还有刚上线的这个全民星，都是很成功的游戏，但也是可能网易之前，相对来说可能少一点涉及的一些游戏类型。那如果去稍微回顾一下的话，应该怎么样去理解或者总结我们在这些类型上的一些游戏的成功经验？那么在现在这些已经有了这些游戏的突破之后呢，之后再，无论相关类似的休闲派对、赛车，或者其他甚至像射击等领域，我们未来的这些研发和一些运营策略，公司是否有一些不同的侧重或者是变化。

[Translator]:Thank you, management, for taking my question. My question is about the new game type of game offer an NetEase gameSo in the past 12 months, we have seen a very successful launch of Eggy Party, Racing Master and also recently the Dunk City Dynasty. Those are relatively, you know, less exposed games are from NetEase in the past. So how should we conclude and understand the success, e.g., you know, learning from these games? And after the breakthrough of all these different type, you know, with companies on the development or operational strategy, have any new change or priority in a, in the future, especially for those like Eggy Party, car racing or even like a shooting type of games?

William Ding (CEO)

对，我，我想作为一个互联网公司，互联网内容公司来说，最重要的一件事情就是保持创新的态度和精神，总是我们要在研发方面大量的投入。但当你看到这些成功的作品的时候，是我们过去几年时间在这几个品类里面默默地付出。也许你只看到了成功的时候，没看到我们这个失败的项目，所以网易是一个劝而不可的，永远在研发上大量投入和不停创新的企业。我们在未来的游戏开发品类上，我们还会继续通过研发和创新，创造出一些受用户喜欢的产品出来。谢谢。

Margaret Shi (Senior Director of Investor Relations)

[Translator]:So as the internet company, as a content provider, we keep our innovation spirit at heart, and we continue to invest heavily R&D. So the success you've seen in the past 12 months are some positive results from the past effort we're putting in R&D and in developing games. But these are successes, but they have been failed too. But we will continue to work hard, never give up, and we want to bring our game users continued great game content through our innovation and dedication R&D. Thank you.

Operator (participant)

Your next question comes from Kenneth Fong with Credit Suisse. Please go ahead.

Kenneth Fong (Head of China Internet Securities Research)

[Foreign language] 嗨，丁总，Charles，Margaret，你们好，谢谢接受我的提问，也恭喜一个非常出色的业绩。我有一个问题是关于毛利率的，我看到在自研游戏的强劲表现以及持续的渠道优化，我们应该怎么想下半年，以及2024年这个毛利率的趋势呢？我翻译一下，

[Translator]:thank you for taking my question and congrats for the very strong set of results. I have a question about the gross profit margin, what's the game business and overall business gross profit margin outlook for second half and 2024 as we see strong performance of our self-developed titles and continuous channel optimization. Thank you.

Charles Yang (CFO)

Okay, thank you, Kenneth, it's Charles. In the interest of time, let me answer this question directly in English. As you have rightly put, NetEase prioritizes our R&D resources and attention to self-developed proprietary games, which would yield a, relatively speaking, much higher margin vis-a-vis licensed games. In the first half of this year, we continue to enhance our game services related GP margin, largely because the termination of certain licensed games, as well as very strong performance of our self-developed legacy games such as SWJ, WWJ, as well as new games such as Eggy Party. In the second half, as you can already tell, that we launched multiple new, exciting, very, very strong performing games in June. So the trajectory of more self-developed games contributing to higher margins is somewhat sustainable.

Margaret Shi (Senior Director of Investor Relations)

Thank you, Kenneth.

Kenneth Fong (Head of China Internet Securities Research)

Thank you。

Margaret Shi (Senior Director of Investor Relations)

Next question, please.

Kenneth Fong (Head of China Internet Securities Research)

Thank you。

Operator (participant)

The next question comes from Natalie Wu with Haitong International. Please go ahead.

Natalie Wu (Analyst)

[Foreign language]诶，晚上好，谢谢接受我的提问。那么我的问题呢，主要是关于咱们在海外的这个游戏的拓展啊，就想再了解一下，从短期和长期的这个维度上面来说的话，咱们现在看哪些市场和地区是一个这个战略的一个重点 以及集团在海外扩展的一个策略，以及这个相应的运营的目标，我不知道在短期长期的，这个维度上面来说会是怎么样的？那么，Charles您也在之前提到了Monoca的一个Bethesda的转型和蛋仔的一个，海外的扩展。那么如果要说在这些尝试底下收获到的，最重要的一个经验教训，以及对未来的一个业务的启发，是什么？最后想很快地问一下海外游戏收入上的这个贡献。Thanks for taking my question. My question is related with the game overseas expansion plan, just wanna, get an update of, both in the short term and the long term, which market and regions will be the focus, for your game expansion?

[Translator]:Wondering if you can give us an update of your overseas expansion plan and target both in short term and long term. And Charles just mentioned that, monetization transition and, Eggy Party, Charles, your prepared remarks. So, just wondering if if Natalie get any inspiration or lessons or learned from this kind of recent initiatives? And lastly, just for housekeeping, what the overseas revenue contribution for game in last quarter? Thank you.

William Ding (CEO)

[Foreign language] 对外游戏，当然我们认为最有价值的市场是欧美和日韩，日韩、欧美，那它的游戏的终端也跟中国的经营一样，中国主要目前还是以移动端游戏为主，那海外主要是Console和PC。同样，中国的题材也不一定适合海外的，海外的市场需求，所以我们在拓展海外的业务的时候，就是我刚刚讲到的，第一是欧美日韩，第二个是PC Console，第三是什么样的题材。我想网易在这方面已经做了很多的努力和尝试，我相信很快会有收获的一天，很快会有收获的一天。谢谢。

Margaret Shi (Senior Director of Investor Relations)

[Translator]:Okay, so as in terms, in terms of geographical focus, for us, it's Europe, North America, and Europe, Japan, and Korea. So in terms of, the markets are very different in the sense that in the China market, mobile game is the mainstream kind of game that we play, whereas, you know, overseas markets, console and PC games are still the mainstream. And thirdly, in terms of genres, a lot of the games are popular, a lot of the genres are popular in China, probably do not apply for overseas markets. So what are the genres that will attract overseas audiences?

[Translator]:It's a topic that we are studying, and we've spent a lot of time evaluating, and I'm sure that once very soon, we'll be able to introduce to the world, you know, the right genre, right, the right answer. Thank you.

Charles Yang (CFO)

Natalie, for your second part of the question, overseas games revenue. Well, since the strong performance of Eggy Party from Q4 at the end of last year, the overseas revenue percentage has slightly declined to a single digit from previously around 10-ish. So, but again, the primary reason of that percentage mix change is mainly due to the strong performance of certain of our new games launched mostly in domestic market. Now, with Justice Mobile and Racing Master strong debut launch in June, we would expect my domestic games, particularly domestic mobile games in the second half, to continue to grow, outgrow fast, at a faster rate than my overseas game revenue.

Margaret Shi (Senior Director of Investor Relations)

Thank you.

Natalie Wu (Analyst)

Thank you.

Operator (participant)

Your next question-

Margaret Shi (Senior Director of Investor Relations)

Thank you, operator.

Operator (participant)

comes from of-

Margaret Shi (Senior Director of Investor Relations)

No, I think this we've got, that's all the time we've got for today.

I think that's all the time we've got for today. So maybe this conclude the question and answer session. So, thank you once again for joining us today. If any further questions, please feel free to contact us directly or, P, Piacente Financial Communications. Thank you. Have a good day!

Operator (participant)

Thank you. The conference has ended. You may now disconnect your line. Thank you.