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spk12: Good day and welcome to the NetEase 2023 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marjorie Couture, Senior IR Director of NetEase. Please go ahead.
spk14: Thank you, Operator. Please note the discussion today will contain forward-looking statements. relating to future performance of a company and are intended to qualify safe harbor from liability as established by the U.S. Private Security 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 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 the filing from the company with the Securities Exchange Commission, including its annual report on Form 20S, and the announcement in the filing from the website of the Hong Kong Stock Exchange. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2023 First Quarter Earnings news release issued earlier today. As a reminder, this conference has been 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 Yan, Chief Financial Officer. I will now turn the call over to Charles, who will read the prepared remarks on behalf of William.
spk02: 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. We kicked off 2023 with an impressive performance from our game portfolios that drove our total net revenues to RMB 25 billion in the first quarter, up 6% year-over-year. Our net income, attributable to NetEase shareholders, increased 54% year-over-year to RMB 6.8 billion. Revenue from our Fantasy Westward Journey Online Series flagship titles once again grew steadily in the first quarter. This franchise continues to captivate Chinese audiences and enjoyed another quarter of impressive performance thanks to a variety of immersive festive activities and engaging new expansion packs, particularly during the Spring Festival period. Our flagship games have remained incredibly popular with users for almost two decades now due to the sustained in-game user connections and continuous iterations we release every few months to keep our users engaged and content. Our newer titles are also showing impressive results. Aggie Party became China's most downloaded game on iOS in the first quarter, further solidifying its leading position in the casual game arena. Aggie Party's accomplishment is a testament to NetEase content innovation and operational know-how that keeps players engaged through the consistent addition of fresh and exciting content updates, new gameplay features, tournaments, and crossover events. Following its successful launch, we've been taking significant steps to solidify Aggie Party's distinct game ecosystem, including upgrading our creator incentive schemes and game editor. Our users can now design more sophisticated minigames with more flexibility and versatility, making the game more engaging and self-sustaining. We see new generative technology as a great tool for users to create content more easily, and we will develop and offer more of these features in our game editor to encourage more people to participate in this creative process. Aggie Party is approaching its first year anniversary this weekend. With our comprehensive UGC ecosystem, our user community has been creating more than one million apps per week, providing players with continued fresh and enjoyable content. As a key focus of our Aggie Party operational strategy, we will be further strengthening our UGC offerings to help ensure the longevity for Aggie Party that we see in many of our other games. Following its success in China, we are testing its potential on the global stage as well. We've already soft-launched Aggie Party in Southeast Asia and received valuable feedback. We are working to bring Aggie Party to global audiences in the near future and believe that players worldwide will enjoy the engaging gameplay and unique UGC experience that Aggie Party has to offer. Another good example of our casual games showing longevity is Identity V, our five-year-old asymmetrical battle arena game. In the first quarter, Identity V achieved record high net revenues driven by a successful crossover campaign with Bongo Stray Dogs, a famous Japanese anime series. Moving on to our game pipeline, we have a very busy summer planned ahead for this year, with Justice Mobile Game set for launch on June the 30th, and many other titles such as Badlander and Racing Master ready for the Chinese mainland market. We are also planning for Harry Potter Magic Awakens to make its international market debut. As our next generation MMORPG, Justice Mobile Game is dedicated to creating a unique gaming experience that will set a new bar for the MMO market. Differentiating itself from traditional MMOs, Justice Mobile Game caters to the preferences of younger generations offering a wide variety of cosmetic items. The game also provides players with a fairer playing ground, ensuring a sense of equality and fostering a more balanced game experience. Justice Mobile Game is one of the first pioneers to apply machine learning technology in the game's creation and development. Such technologies have further enhanced our development process. and enabled us to greatly enrich the open world experience in Justice Mobile Game, including new gameplay, storyline, and maps. In addition, through innovations like computer-driven non-player characters that allow players to chat and have them interact in unique ways that impact game storylines, Justice Mobile Game provides players with more personalized gaming experiences that add to users' enjoyment of the game. Badlander, our next-generation looter shooting mobile game, is scheduled for launch on June the 8th with close to 20 million pre-registered users. In our recent round of testing, Badlander has shown strong player traction. As an exciting addition to NetEase's roster of shooting games, We are hopeful that Badlanders will help us tap into new territory with its brand new space mechanism and exciting battle experience. Next in the pipeline is Racing Master, a new car racing game that we will be bringing to players on June 20th, which has also had over 20 million pre-registered users. Racing Master boasts AAA quality and the most authentic experience possible for a racing simulation game with dynamic car handling and performance that allows players to fully immerse themselves in the thrilling world of racing cars. We are happy to announce that the highly anticipated global launch of Harry Potter Magic Awakens is nearly here. Our dedicated team has been working hard to enhance and refine the gameplay of this long-awaited game for both mobile and PC, ensuring that players around the world get the most authentic and thrilling experience of the Wizarding World. This summer, Harry Potter Magic Awakened will be distributed in most regions across the globe. NetEase is primarily responsible for the Asian market, while Warner Bros. Games will handle distribution in other geographies including Europe, the Americas, Africa, and Oceania. We believe that our efforts will pay off and that this addition to the beloved Harry Potter IP will be worth the wait. We are excited to release this game to a global audience and hope that players will enjoy it as much as we do. We continue to make solid progress in our globalization strategy. During the podcast, we were pleased to announce the establishment of Anchor Point Studios, which is led by Paul Ehres. With over 20 years of experience in game design and direction for PC and console, PC, Paul has an impressive track record that includes making essential development contributions to hit titles such as Control and Halo. Anchor Point Studios is dedicated to developing action-adventure games that push the boundaries of entertainment and offer players unique and surprising gameplay experiences. We are also excited to welcome Bad Brain Game Studios to the NetEase game family, which we announced earlier this week. Bad Brain Game Studios is a new game studio located in Canada led by Sean Crooks, an experienced producer who has worked on the Watch Dogs franchise and Driver San Francisco. In addition to his own franchise experiences, Sean Crooks assembled a veteran team who also worked on many other major franchises such as Army of Two and Splinter Cell. the studio is developing an ambitious new game franchise based on the story-driven action-adventure theme built with Unreal Engine 5. After years of strategic planning, we now have over 10 proprietary NetEase game studios overseas, spanning Japan, the US, Canada, and Europe, which prepare us for our next stage of international growth. Moving forward, we remain committed to attracting, investing, and supporting our international talent, giving them full autonomy over game creation and development. We hope that soon these games will not just be a household name in China, but also globally associated with fresh, engaging, and long-lasting gaming franchises. Now let's move on to Yeodao. Yodao resumed its growth trajectory of STEAM courses and other key business lines despite a challenging environment in January due to the pandemic. Our STEAM courses continued to show solid growth as we further improved and enriched their content. The recent launch of our champion class in the fourth quarter of last year yielded exceptional results which we saw as our course participants won the youth group championship at the British Youth Go Open in January. Additionally, the gross billings of Youdaofang Reading, our digital online reading service for children, powered by advanced natural language processing capabilities, increased by nearly 40% year-over-year in the first quarter. Youdaofang Reading provides tailored reading content based on users' age and reading behavior, enabling a personalized experience for each user. We are dedicated to continuously improving our smart devices and providing users with better experiences. As an industry pioneer, in the first batch of product standard tests conducted by the Chinese Academy of Information and Communications Technology, our Youdao Dictionary 10 X5 and P5 achieved a 100% accuracy rate in 12 complex online and offline application scenarios. Moreover, the applications available on our Youdao Dictionary 10 operating system are continuously expanding to provide users with a diverse range of options. Our Smart Learning Pad has also been upgraded utilizing computer-powered technology to offer specialized word training and help students plan their learning strategies more effectively. Looking ahead, we will continue to focus on technological innovation and leverage our cutting-edge technology to ensure the long-term success of our smart devices and learning services. Turning to our cloud music business, In the first quarter of 2023, Cloud Music continued its ongoing efforts to enrich its music-centric ecosystem and expand its unique content offerings, resulting in a thriving community with high user engagement. Our online music MAUs continued to show steady growth, while our membership paying ratio remained solid at around 20%. Our online music has continued to show solid growth momentum on a year-over-year basis, while our social entertainment revenue has declined as we enhanced the listening experience of more dedicated music fans and adjusted our focus to improve profitability in a sustainable manner. In the first quarter, total net revenue declined 5% year-over-year to RMB $2 billion, reflecting these mixed results. However, we continued our initiative to drive margin expansion. They have paid off with gross margin reaching about 20% for the first time and further reinforcing our bottom line performance. This has been achieved through the ongoing optimization of our copyright cost structure and improved revenue sharing strategy. to extend our content offerings and ensure access to important copyrighted music. We continue to work with music labels that help us grow our music library. Following our licensing agreement for rights to digital music from Being Music's rich library of CPOP stars, we renewed our agreement with Rock Records, deepening our strategic partnership. We also broadened our music content with the addition of music licensing contracts with Comix Wave Films, an anime film studio known for its critically acclaimed Makato Shinkai movies. Support for independent artists remains a top function of our cloud music platform. By the end of March, NetEase Cloud Music was home to a cumulative 630,000 registered independent artists and we continue to foster new talent with an environment founded upon creativity and the increasing suite of supportive tools. We have recently launched several support programs such as the new voice power project and project cloud ladder 2023 with the aim of of discovering and nurturing music talent. We offer a range of valuable resources to independent artists, including professional training, traffic referrals, and enhanced incentives and assistance for promoting independent artists' music. With these offerings, we are seeing more independent artists joining our cloud music platform, leveraging our services and realizing their commercial value. Going forward, we will continue to foster our music-centric ecosystem, further grow our community, and drive healthy long-term monetization for NetEase Cloud Music. Now on to NetEase Yanshan, our private label consumer brand. On April 11, Yanshan celebrated its seventh anniversary, committed to delivering quality products to our users Yanshan has further deepened the supply chain model, particularly in top categories, such as pet food and supplies, and home cleaning. Furthermore, we have taken a comprehensive approach to ensure the best possible user experience. For instance, we have established independent production lines to help maintain consistent product quality, and we have partnered with suppliers and vendors to enhance our innovative capabilities through joint laboratories. In the first quarter, Yanshan realized significant year-over-year sales growth from categories including pet supplies as well as home cleaning, home furnishing, bedding and mattresses. Top selling products during the quarter also include cat food, bathroom fragrance, coffee cookies, suitcases, and jelly blankets. It remains our mission to provide consumers with more high-quality original designed products that promote a relaxed and enjoyable lifestyle. Lastly, we would like to touch upon our ESG initiatives and achievements. We place significant emphasis on the ongoing development of our ESG practices and the continual improvement of our ESG regulatory framework. Our assets have been widely recognized, and we have achieved leading scores in authoritative ESG evaluations, such as MSCI, DJSI-CSA, and Sustainalytics, with scores that consistently improved. In late April, we released our 2022 ESG Annual Report, which showcased our ESG accomplishments for the last year. In terms of corporate governance, we have optimized the composition of our Board of Directors to promote diversity with female representation comprising 40% of our board right now, leading the average international level. We are also committed to reducing our carbon footprint and implementing energy saving and emission reduction measures. In 2022, we decreased our greenhouse gas emissions per unit of net revenue by 5%. We have also started our own IDC construction and incorporated low-carbon concepts into our designs. Furthermore, talent development is critical for our success, and we are proud to have been recognized by Forbes as one of the world's best employers for the fifth consecutive year. We actively promote diversity, equity, and inclusion, and are also proud to have a high percentage of female employees, again, leading the industry average. We also place great importance on career development, offering comprehensive employee development programs that provide a wide range of opportunities to support employee growth, training, and maximizing our employees' potential. In summary, NetEase's next wave of growth will be driven by content innovation across all of our business lines. This has always been a core value and driving force at NetEase, and we will continue to bring more diverse product experiences to our users in gaming, Yorda, cloud music, and Yen Chef. Our goal is to delight and elevate our community, both domestically and abroad, while creating value for our company and stakeholders. This concludes William's comments. I will next provide a brief review of our 2023 first 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 further details. Total net revenue for the first quarter were RMB $25 billion, or US dollar $3.6 billion, representing a 6% increase year-over-year. Total net revenues from our games and related value-added services were RMB 20.1 billion, up 8% year-over-year. Growth was primarily due to increased revenue contribution from mobile games, including our strong legacy titles, such as the Fantasy Westworld Journey series, and our newly launched games, such as Aggie Parties. Net revenues from our mobile games accounted for approximately 72% of our total net revenues from online games operation. The adult net revenue were RMB 1.2 billion, a year-over-year decrease of 3%. The primary reason for the decrease in net revenues was the challenging environment due to the pandemic in China, particularly in January. Net revenues from Cloud Music were RMB 2 billion, which represented a 5% decline compared to the same period last year. In the first quarter, Cloud Music introduced a number of measures to its live streaming services to enhance the listening experience of more dedicated music fans and reinforce its risk controls by reducing the in-app exposure of certain live streaming functions and lowering the revenue sharing ratio to broadcasters and agencies. These measures led to a decrease in net revenues from Cloud Music's social entertainment services, but improvement in its margin profile. Net revenues for innovative businesses and others were RMB 1.9 billion, up nearly 13% year-over-year, mainly due to increased contribution from Yansheng. Our total gross profit margin was 59.5% in the first quarter, compared with 54.5% in the first quarter of last year. Looking at our first quarter margins in more detail, gross profit margin was 66.7% for our gains and related value-added services segment, compared with 62.2% in the same period of last year. The growth was primarily driven by the termination of certain licensed gains with comparatively lower growth margins as well as more revenue contribution from our organic channels. Our GP margin for Youdao was 51.7% compared with 53.1% in the same period of last year. The year-over-year decline mainly resulted from the reduction in net revenues. Gross profit margin for cloud music continues to improve in the first quarter, climbing to 22.4% versus 12.2% in the same period a year ago. Margin improvement mainly resulted from our optimized revenue sharing strategy as well as continuous improvement in cost control measures. Our innovative businesses and others line GP margin was 25.4% compared with 21.7% last year. The increase was mainly due to the result of increased revenues from the ancient. Total operating expenses for the first quarter were RMB 7.7 billion, or 31% of our total net revenues. Taking a closer look at our expense composition, our selling and marketing expenses as a percentage of total net revenues were 11.6% in the first quarter and remained relatively stable year over year. Our R&D expenses as a percentage of total net revenues also remained stable year over year at 15% in the first 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. Other income was R&D 1.1 billion for the first quarter, which is up quarter over quarter and year over year, mainly due to the market value appreciation of certain publicly traded securities in our investment portfolio during the first quarter. As per applicable accounting standards, we are required to reflect these fair value changes in our P&L. The effective tax rate was 19.5% for the first quarter. As a reminder, the effective tax rate is presented on an accrual basis, and the tax credits differ from each of our entities at different time periods, depending on applicable policies and our operational results. Our non-GAAP net income attributable to our shareholders for the first quarter totaled to RMB 7.6 billion or US dollar 1.1 billion. Non-GAAP basic earnings per ADS for the quarter was US dollar 1.71 or US dollar 0.34 per share. Additionally, our cash position remains strong with net cash of approximately RMB 95.1 billion as of March end 2023 which is approximately the same level as that at the end of last year. In accordance with our dividend policy, we are very pleased to report that our Board of Directors have approved a dividend of U.S. dollar 0.093 per share, or U.S. dollar 0.465 per ADS. Lastly, under our current U.S. dollar 5 billion share repurchase program, starting mid-January this year, Approximately 3.1 million ADS have been repurchased as of the first quarter end for a total cost of approximately US dollar 267 million. Thank you for your attention. We would like now to open the call to your questions. Operator, let's go to the Q&A.
spk12: Thank you. If you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. 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. Our first question will come from Alicia Yap of Citigroup. Please go ahead.
spk11: Hi. Thank you. Good evening. Good evening, Manager Chen. Thank you for accepting my question. My question is about the entire game market and the red line. So thanks for taking my questions. So have management experienced any of the weakness in the NetEase game because of the macro consumption weakness that we are seeing? And have you seen any gamers actually scaling back on their virtual item spending? And then do you think gaming in general has been or will be affected by the macro weakness in China? And then what is management expectations for the gaming growth and growth for the existing title in the next few quarters? Thank you. 对,目前我们还没有看到消费疲软的影响。
spk04: We haven't seen such an impact on the game industry. We are still very confident. Moreover, we are not only supporting China's consumer market, but we are also focusing on the future overseas market. In the future game, our team is still very confident to be able to make
spk14: So far, we've not seen any effects from the macro weakness, not in games. We are very confident that we are going to be able to provide high-quality games, not just for the China market, but also for the global market. Thank you.
spk13: Next question, please.
spk12: The next question comes from Zouquan Zhang of CICC. Please go ahead.
spk09: Good evening, Ms. Guan. Thank you for accepting my question. Congratulations on your performance. My question is about the water-resistant hand oil. The water-resistant hand oil has started a new test. Is there any progress you can share with us? Good evening, management. Thanks for taking my question and congratulations on the strong results. My question is related to Justice Mobile. Can management provide an update on the recent testing feedback for Justice Mobile? We have implemented AI technology in various aspects, such as space creation, NPC dialogue, and player lyrics. What should we expect for future games coming out of AI innovations? Thank you.
spk15: Second question is...
spk14: Let's do the quick translation. So we just finished the last rounds of testing. So we managed to expand our testing user base across different runways. So we're pleased to see we were able to track users from different game runways, not just MF4, but other game runways as well. So during this two weeks of testing period, we received some very positive and good feedbacks. And over the next month or two, we'll to continue adjusting and modifying the game. So by June the 30th, hopefully our users should be able to see a game that they've been praising a lot. Thank you.
spk15: The second question is about AI technology in the game. As you can see, AI technology in the game has created a lot of new systems in the game. During this period, players have been expanding. Among them, So as you've noticed, we have been applying a lot of AI technologies
spk14: into the games, and I think during the testing period, users have given us very positive feedback. Previously, we were applying AI technology in games, and now we are applying games onto AI. So from the very beginning of constructing this game, we've been using this learning and technology, so I think there's a lot of excitement. We'll be seeing a lot of exciting functions coming out of this game.
spk13: Thank you.
spk12: The next question comes from Felix Leo of UBS. Please go ahead.
spk00: Thank you, management, for taking my question, and congratulations on the strong first quarter results. My question is on Aggie Party. Can management share more color on the game's trend so far in second quarter after its strong performance in first quarter? how does management see the domestic and user trend from rest of this year and the game's monetization potential? And lastly, what is your, you know, more details on the overseas strategy for this game? Thank you.
spk04: We are very confident that Danza Party will become a game that players will like in the next two or three years or even more. We are confident that we will continue to innovate this product to meet the needs of users.
spk14: Yeah, so Aggie Party, we've seen very strong results since the launch of this game, and we are confident over the next two to three years we are going to be able to build a sustainable family party game on top of Aggie Party with continued innovation within the game. During the summer, you'll also be seeing a number of other exciting games coming out of NetEase game pipeline. And obviously, we also have overseas plans for Aggie Party. So overall, we have very strong conviction that NetEase will continue to deliver fun, high-quality games for our users.
spk13: Thank you.
spk06: The next question comes from Kenneth Fong of Credit Suisse. Please go ahead.
spk03: Thank you very much for taking my question. Can you provide an update on the overseas scheme studio investment plan, including like R&D, investment, and development stage? Thank you.
spk04: There are some works from overseas studios that can serve both overseas and Chinese markets. I believe that with these experienced teams, everyone is double-minded. We are also willing to share our past 20 years of creative experience with them to help them make more eye-catching games.
spk14: Yeah, so we have about 10 plus, close to 20 studios already now in the overseas markets. We're really pleased to bring out all those great talents, those gaming veterans from different markets around the world. And hopefully, beginning from next year or the year after, the market will see some of those block hit titles be produced from those studios. And we think that collaborating with those talented individuals, talented producers will be a win-win situation for NetEase. We will be very happy to be sharing the two decades of operational know-how within NetEase with those producers.
spk13: Thank you. Next question, please.
spk12: The next question comes from Lei Zhuang of Bank of America Securities. Please go ahead.
spk01: Hi, good evening. Thank you for accepting my question, and congratulations on your very strong performance. My question is to follow up on the issue of the AI model. Can you share with us what you think about our entire financial system Thank you for taking my question and congrats on the strong set of results. Can management elaborate more on AIG's strategy and its impact to our game development investment as well as related cost savings? Thank you.
spk04: The development of AI in the past five years We can use a hundred flowers to play, a hundred houses to fight, and flowers to play to wake me up. Every day, there will be applications based on large models in various scenarios. In this field, we think that the scene is the most important. As for the research and development aspect, we think that different product scenarios. This is what we need to think about first. I think the big models in the world are all big and small. So I believe the real winner of AI is to choose the right scenario and make it
spk14: So what we've seen in the past few years is that we've seen various different applications being used under the foundation model. So for us, the most important thing is choosing the different products, choosing the right scenarios for the application of those foundation models. We think that going forward, the R&D costs will be becoming more efficient. We'll find ways to save costs. So I think that the foundation models will be pretty much similar, but the most important thing for us is choosing the right ones for our products. Thank you. Next question, please.
spk12: Next. The next question comes from Lincoln Kong of Goldman Sachs. Please go ahead.
spk05: Thank you, Mr. Ding. Congratulations on this strong business. My question is more about the competition of new games in the market. Since the normalization of domestic board games, we have seen a lot of new games in the market in the past two months. In the next few months, there will be more new games coming in. Regarding the existing game titles, how do we continue to strengthen their long-term operation capabilities, especially in the case of Dreamweaver and this year's very popular D&D Party? So my question is about the new game competition. With this year, the games approval process started to normalize. There has been a lot of new games releasing to the market. So can management comment around the competition landscape of the new game market in China? Do we see sort of any of the changes in the trend for the flagship titles and can Can we have some thoughts around how to strengthen the ability of long-term prospects of the game, such as Agipati or FWJ?
spk04: Thank you. Thank you
spk14: So yes, over the last four to five years, we've seen a lot more new games in the market, but at the end of the day, consumers only choose the ones of the highest quality. So NetEase will continue to lead the market through innovation, whether it's through gameplay innovation or application of brand new technology. We have full confidence that we will maintain our competitive edge in this industry. For example, MMO games, that's one of our historical strongest suits. We've seen there's actually very little competition in this genre against NetEase. For example, our MMORPG game Justice Mobile will be launched on June 30th. The development team has over one decade of R&D experience, so I'm pretty confident in the success of that game. Similarly, in June, you will also see games of other genres being launched to the market. So we are confident that the market will see a variety of different products coming out from that East that's just strong as games like Agri-Party or FWJ. Thank you.
spk02: And, Lincoln, just to add one more point, in addition to our continuous innovation and launching of successful new games, the NetEase strength in the long-term operation of our legacy titles should also be emphasized here. For example, Fantasy Westward Journey Mobile, one of our earliest mobile games, has a record high grossing in the first quarter. Identity V In its fifth year, again, record high growth in the first quarter. The sustainability of these legacy titles are truly impressive, which serves as sort of the backbone cash cow to further stimulate our investment and dedication into innovation, into making even better and greater new games.
spk03: Thank you. Thank you.
spk06: Thank you.
spk12: The next question comes from Alex Poon of Morgan Stanley. Please go ahead.
spk08: Good evening, Mr. Ding, Charles, Margaret. Congratulations on a very strong performance. 我的问题是关于财务的,想问一下我们游戏的毛利率一季度应该是七年的这个新高是接近67个percent,能不能解释一下这个背后的一些原因,然后我想很快问一下第二个问题是我们的派股息的股息率今年或者明年有没有机会提升,谢谢。 Mike, thanks, management, for taking my question. My first question is related to our gains growth margin, which is a seven-year high, close to 67%. Can management share the reason behind this very high margin? And my second question is related to our dividend payout ratio. Is there any possibility of increasing it this year or next year? Thank you very much.
spk02: Alex, in the interest of time, let me answer your question directly in English. Firstly, on the gross profit margins of my gaming segment, I think one big driver for that is our continued growth of my scale. and comes with a scale is operating leverage. We've been introducing new games and steady growth, consistent growth over the last many years. Secondly, as we all know, we have terminated certain licensed games starting January of this year. Those games are comparatively speaking, are of much lower margins, so the revenue mix shift is favorable to a higher margin. And thirdly, we've been making conscious effort of continuously optimizing the channel cost, average channel cost, by trying to strive a fine balance between the iOS, Android channels, as well as our official channels. So putting all these continuous effort and some of these one-off revenue mix implications, that's why we achieved a record high gross profit margin in the recent many years. Now, the second question on the dividend. Right now, we are paying 30% dividend payout ratio, making that ease actually one of the very, very few tech companies, not only in China but globally, that we've been paying a regular dividend for the last 10 years. We use dividend payment as well as share buyback as a tool, a combination of tools to share the growth to share our sustained growth and return value to our shareholders, and we are committed to do that. From time to time, we will revisit the, for instance, we extend our share buyback program from originally $500 million to $1 billion, $2 billion, $3 billion, and right now our board has approved master plan of five billion US dollar buyback dividend payout ratio we've also raised from 25 percent to 30 percent a few years back going forward as we continue to achieve sustained growth from time to time we will review and revisit to see what is the optimal and best way to to return value to our shareholders, to share the joy of sustained growth and value creation to our long-term shareholders.
spk14: Okay. Thank you. I think we have time for just one last question, please.
spk12: The next question comes from Natalie Wu of Haitong International. Please go ahead.
spk10: I'd like to ask about the music. I'd like to know about the music. What are we considering when it comes to reducing the volume of the music? And then the function of weakening the live broadcast, is it because of the requirements of the supervision? So after removing this part of the impact, what will happen to the revenue of our music? And in this situation, when can we achieve a turnover of the music? Thanks for taking my question. My question is related with the cloud music. Just wondering what's the consideration behind a lowered shared ratio for live streaming function on cloud music. And also you mentioned that you reduce the exposure of certain live streaming functions. Just wondering is it due to certain regulators requirements or what? And also if Excluding this impact, what kind of the young year growth should we be seeing, and when do you expect the revenue of Plough Music to return positive growth under current conditions?
spk02: Thank you. In the interest of time, let me answer this question directly in English. You know, the revenue composition of cloud music mainly comes twofold. One is the online music services, which continued its steady growth trajectory year over year, underpinned by the continuous expansion of the paying users. The social entertainment services sector has experienced year over year decline As we previously mentioned in the call, we've been turning more conscious to focus on the healthy and sustainable profitability of the business growth rather than just looking at the top line growth. As a result of that, we've been making some conscious effort of diverting resources to what we think are broadcasting services that's more dedicated to the music fans in a sustainable manner rather than some of the agencies which command a much, much higher revenue sharing asks. So as a result of that, you are seeing possibly decline in our revenue year-over-year, but at the same time our gross profit margin profile has significantly improved from 12% one year ago to right now 22.4% in this quarter. We think we are on the right way to achieve a more sustainable and healthy margin profile which As long as we are committed and disciplined in doing so, this roadmap should bring us to a cash flow breakeven and ultimately a P&L breakeven in the coming future.
spk11: Thank you. I'll put it.
spk12: And that concludes the question and answer session. I would like to turn the conference back over to Margaret Hsu for any additional questions. Closing remarks.
spk14: Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly or peer-centered financial communications. Have a great day. Thank you.
spk12: Thank you. The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.
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