NetEase Inc (NTES) 2024 Q2 法說會逐字稿

Good day and welcome to the NetEase 2024 second-quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandi Piacente. Please go ahead.

Thank you, operator. Please note that today's discussion will contain forward-looking statements relating to the future performance of the Company and are intended to qualify for the Safe Harbor from liability, as established by the US Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the Company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report on Form 20-F, and in announcements and filings on the website of the Hong Kong Stock Exchange. The Company does not undertake any obligation to update this forward-looking information except as required by law.

During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2024 second-quarter earnings news release issued earlier today.

As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the NetEase corporate website at ir.netease.com.

Joining us today on the call from NetEase's senior management are Mr. William Ding, Chief Executive Officer and Mr. Bill Pang, the Vice President of Corporate Development.

I will now turn the call over to Bill who will read the prepared remarks on William's behalf.

Thank you, Brandi, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages we talk about here are based on RMB.

Established games, exceptional content, innovation, and robust community ecosystems are central to our ongoing growth as we expand our reach domestically and abroad. In the second quarter, we pushed each of these drivers, growing our total revenues to RMB25.5 billion. With our drive for innovation and leading R&D capabilities, we launched more hit titles in the second quarter, enhancing our appeal to broader audiences across diverse game genres. At the same time, we are extending our brand and international reach, unlocking more avenues for growth. Now, looking at some of our games' performances in more detail.

Once Human, a multiplayer open-world survival game set in a post-apocalyptic world, attained over 230,000 peak concurrent users on Steam shortly after its launch, and ranked among the top 5 most-played games in the world on Steam in July. The innovative creature designs blend supernatural transformations with everyday items, such as the highly popular bus monster, providing players with an incredibly fresh and bizarrely fun experience. As a high-quality survival game, it combines multiple layers of objectives to pursue, including exciting open-world exploration, monster fights and house crafting. Shortly after an update in August, Once Human ranked No.1 on Steam's top seller chart in 12 countries and regions, amassing over 10 million worldwide downloads.

We also launched our highly anticipated Battle Royale title, Naraka: Bladepoint Mobile, in late July, featuring a fast-paced and dynamic melee-focused combat experience. Powered by NetEase Fuxi leading technologies, Naraka: Bladepoint Mobile introduced a Copilot AI system, which enables players to team up with AI allies on instant vocal interactions and immersive battle experiences. Videos featuring Copilot teammates have been really popular and have spread widely across social media. Upon its release, the game immediately climbed to the No.3 position on the iOS grossing chart and maintained the No.1 position on the iOS free download chart for over a week. The new mobile version boosted overall franchise excitement, pushing PC and console DAUs to new highs and setting a record of 380,000 concurrent users on Steam during the game's 3rd anniversary.

While we bring players new hit titles with exciting experiences and in diversified genres, content enhancements and innovative gameplay continue to infuse vitality into our flagship portfolio.

Our Fantasy Westward Journey and Westward Journey Online franchises are testaments to the longevity and popularity of our legacy titles. In the second quarter, we launched a brand new expansion pack for Fantasy Westward Journey Mobile, adding new content and fresh gameplay that, once again, drove a record-high quarterly revenue. Westward Journey Online Mobile also attracted both longtime fans and new players, by reintroducing classic gameplay that was widely praised on the PC version in the early days.

We also brought innovations to Infinite Borders, our flagship Three Kingdoms-themed SLG title. In April, we launched a new update that infuses the concept of the four seasons to influence player activities with unique enhancements or challenges. For example, spring is ideal for planting, summer focuses on training troops, autumn leverages harvest for strategic deployments, and winter is best for recovery or surprise attacks. By introducing seasonality into strategic planning, players can experience realistic ancient battles and develop more comprehensive tactics. Along with rich rewards offered during the summer campaign in May, Infinite Borders' DAUs hit a three-year high in the second quarter.

Identity V continued to propel collaborations with renowned IP around the world, winning immense popularity. In July, it hit the No.4 position on China's iOS top-grossing chart, and in August, it ranked No.2 on the iOS top-grossing chart in Japan and No.3 in China. The momentum resulted in record-high DAUs in August and record revenue in the second quarter, surpassing last quarter's high.

Turning to Eggy Party, the hit game continues to deliver heartwarming experiences to our large player community. In June, we hosted a ball-themed 2nd anniversary event, presenting players with various stages to perform dances, fly or play rhythm games in a festive atmosphere. Beyond gaming, Eggy Party is pioneering the development of the UGC ecosystem. Our self-developed editor continually introduces new features, like new skills and creature skins. We are also expanding the scope and impact of the UGC system by partnering with leading Chinese universities to offer coding courses and college competitions based on our UGC editor.

Justice Mobile also achieved exciting success with rich updates that we launched for its 1st anniversary in late June, featuring brand new content, fresh categories, skins, and gameplay across PvE, PvP and PvX areas. Catering to the demands of different types of players, Justice Mobile attracted enthusiastic new players and brought existing players back, driving it to the No.3 position on the iOS top-grossing chart in June. With our innovative seasonal update mechanism, Justice Mobile advanced the MMO genre, attracting a large user base and showcasing its robust potential to become an evergreen game.

With a concentration on innovation, we are growing our presence across different genres and platforms worldwide with a strong game pipeline.

In June, we completed a new round of testing for Where Winds Meet, an open-world action-adventure RPG title, and received great feedback from a large group of players. During the testing period, the number of reservations increased significantly. We currently plan to launch the game on PC and mobile this year, and our first phase of cross-platform testing will start on August 28.

Marvel Rivals, the 6v6 Superhero team-based PvP shooter, announced its console plan during Sony's State of Play in May and showcased a new cinematic trailer at the Marvel Games panel at San Diego Comic-Con in late July. The panel revealed exclusive behind-the-scenes creation stories, along with beloved characters Jeff and Thor joining the Closed Beta Test. Widely praised during testing on both PC and consoles, Marvel Rivals proceeded to have a stunning showcase at Gamescom in Cologne this week, where it is accessible at both Microsoft Xbox and NetEase Games booths, and announced its release date for December 6.

In June, we announced FragPunk, a fast-paced 5v5 hero shooter game, at the Xbox Games Showcase 2024. Featuring innovative card mechanics and a unique carnival punk style, the game has already gained meaningful attention overseas. Its first Closed Alpha Test in North America on Steam ended in early July, cumulatively attracting over 2,000 influencers to stream and try out the game. With extensive acclaim, it became the 3rd most trending game on Steam. FragPunk is scheduled to be released in 2025.

To further enhance our strong portfolio, built on our robust, foundational R&D expertise, we also look forward to delivering more diverse content and games to players worldwide through global partnerships.

Since World of Warcraft returned in June, player response has been overwhelming. People were immensely excited to return to Azeroth, praising the enduring charm of the game's classic scenes and quests, and re-establishing their ties within the local community. We look forward to the August 27 launch of World of Warcraft: The War Within, with the simultaneous release of the upcoming version in China and all other regions worldwide. On top of this, Hearthstone announced its return on September 25, and to celebrate, all cards from 2023 will be available for free and more engaging China-only events can be expected.

Recently, Dunk City Dynasty officially partnered with the NBA and secured an official NBA license in China. Legendary players like Dirk Nowitzki and Brad Miller joined the game in July, sparking great excitement. And on our 1st anniversary in August, beloved star player Tracy McGrady joined the game, further elevating player enthusiasm. The game plans to introduce 30 NBA teams with unique basketball cultural items, such as jerseys and courts, bringing historic basketball moments to life. Basketball transcends borders and cultures, uniting fans worldwide. We look forward to delivering more collaborative content in the future and will continue to promote and celebrate basketball culture.

Marvel Snap, developed by Second Dinner and featuring a revolutionary game experience within the Marvel Universe, is slated for launch in the Chinese market on August 29. Combining innovative deck-building strategies and card battle tactics into each exciting game, the well-established title is highly accessible to beginners yet quite challenging to masters. Following its Closed Beta Test in China in June, synergy with the movie Deadpool & Wolverine in late July created another hype wave among local fans.

With each of our games, we aim to bring innovative, lasting experiences to players that fuel our growth and invigorate players worldwide. By extending our reach across genres and platforms, more players are being introduced to the NetEase experience, both domestically and internationally. Going forward, we will continue to leverage our rich R&D capabilities, hit games in different genres, worldwide partnerships and two decades of operating experience to advance our game portfolio and drive the next wave of gaming trends.

Turning to Youdao. In the second quarter, Youdao continued to prioritize digital content services, online marketing services and AI-driven subscription services. As a result, it achieved historic-high operating cash flow and significantly narrowed its operating loss.

Our digital content services achieved healthy revenue growth, fueled by our AI-powered products. The recent update to our intelligent learning platform, Youdao Lingshi, provides students with university admission consultation services, including recommendations on which colleges to apply to, application strategies and personalized study plans tailored to each student's unique capabilities and personality. Coupled with our highly regarded personalized learning program, these services' renewal rates continued to reach new highs in the second quarter.

The robust growth of our AI-driven subscription services reflects our steadfast commitment to investing in technology. The recent update of Hi Echo, our digital human language coaching app, featuring a children's character that engages with students on a range of topics and kids' mini-games, has generated great enthusiasm among young learners. As we continue to iterate our products and expand offerings, our AI-driven subscription services have experienced six consecutive quarters of rapid sales expansion, with approximately 200% year-over-year growth in the second quarter. Fueled by multiple drivers, online marketing services' strong growth momentum continued in the second quarter. While our Real-Time API (RTA) services expanded our user base across more industries, our KOL-led advertising services continued to grow both in China and abroad. Notably, our overseas advertising services sales have accelerated with our enhanced international KOL database amid growing export demands.

For smart devices, our dictionary pen maintained its leading market position and ranked No.1 in its sales category on major e-commerce platforms in China, for five years in a row. Recently, we launched Youdao Dictionary Pen X7, which featured Mr. P AI Tutor's personalized tutoring capability, along with translation services powered by our large language model. This new product won broad recognition soon after release.

Turning to NetEase Cloud Music. Cloud Music continued to propel quality development across its music-centric ecosystem, further cultivating its unique community and enhancing its music-centric monetization.

To further nurture our content ecosystem, we continually expand our music offerings to meet diverse audience demands. During the second quarter, we advanced our cooperation with various music labels and steadily extended partnerships with popular musicians, singers, and groups. In particular, we amplified our offering in signature music genres, by adding content from well-known rappers, rock bands, and J-Pop artists. We also remain deeply committed to supporting independent artists and continue to enhance our comprehensive support for these artists throughout their journey in the music industry.

To further invigorate our unique community with high-quality music experiences, we recently upgraded our app, introducing more personalized recommendation functionality, overall framework enhancements and an improved content distribution strategy, while also optimizing features like Daily Recommendations and Private DJ. Alongside improving the music listening experience, we strive to foster connections and resonance within our music-inspired community. To enhance the value of our iconic Comments section, we implemented several upgrades to make this section more intriguing for users to explore across more scenarios. For example, we display selected hot comments on the vinyl player while users listen to music, and invite users to explore comments on a wide array of music on our innovatively designed Moments Square section, all of which led to elevated user engagement.

Turning to Yanxuan. During the second quarter, Yanxuan continued to launch new products and lead sales across various online categories. During the 618 Festival, our pet foods secured the Top 3 positions in several vertical category sales charts on major e-commerce platforms. House cleaning products were also top-ranked on several platforms following the launch of a new series featuring an ancient Chinese tale. These product successes highlight our strong R&D capabilities and commitment to innovation.

At NetEase, innovation and forward momentum are at the heart of everything we do. Across our games, music, education and lifestyle brand businesses, we are committed to creating rich ecosystems that bring users exceptional experiences and stakeholders increasing value as we continue to grow and expand our reach worldwide.

That concludes William's comments. I will now provide a brief review of our 2024 second-quarter financial results. Given the limited time on today's call, I'll be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. As a reminder, all amounts are in RMB unless otherwise stated.

Total net revenues for the second quarter were RMB25.5 billion, or USD3.5 billion, representing a 6% increase year-over-year. Total net revenues from our games and related VAS were RMB20.1 billion, up 7% year-over-year. The additional growth was primarily due to increased revenue contribution from mobile games such as Identity V and Justice Mobile. Net revenues from our mobile games accounted for approximately 76.4% for our total net revenues from online game operations.

Youdao's net revenues were RMB1.3 billion, a year-over-year increase of 10%, primarily due to increased revenue contribution from Youdao's online marketing services. NetEase Cloud Music’s net revenues were RMB2 billion, a 5% increase compared to the same period last year, primarily due to increased net revenues from membership subscriptions.

Net revenues for innovative businesses and others were RMB2.1 billion, a slight increase compared with the same quarter of 2023, mainly due to increased revenue contributions from Yanxuan and some of our innovative businesses.

Our total gross profit margin was 62.9% in the second quarter, compared with 59.9% for the same period in 2023. Looking at our second quarter margins in more detail.

Gross profit margin was 70% for our games and related VAS, compared with 67.4% in the same period last year. The increase was primarily due to changes in product mix.

Our gross profit margin for Youdao was 48.2%, compared with 47% in the same period last year. The increase was mainly due to the improvement of gross profit margin from its online marketing services.

Gross profit margin for Cloud Music reached 32.1% versus 27% in the same period last year. The margin improvement primarily resulted from increased net revenues from membership subscriptions and continued cost optimization measures.

For our innovative businesses and others, gross profit margin was 34%, compared with 29.5% in the second quarter of 2023. The increase was primarily due to changes in product mix within the segment.

Total operating expense for the second quarter was RMB9 billion or 35.5% of our net revenues.

Taking a closer look at our cost composition. Our selling and marketing expenses as a percentage of total net revenues were 13.7%, which is relatively flat with the same period last year.

Our R&D expenses as a percentage of total net revenues were 17.5% in the second quarter, compared with 16.3% for the same period last year. We remain committed to investing in content creation and product development that keep our products and content at the forefront of the industry. We believe that our investments in R&D will remain a key catalyst for future growth over the longer-term.

The effective tax rate was 16% for the second 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 second quarter totaled RMB7.8 billion, or USD1.1 billion. Non-GAAP basic earnings per ADS for the second quarter were USD1.67 or USD0.33 per share.

Additionally, our net cash totaled RMB116.1 billion as of June 30, 2024, compared with RMB110.9 billion at the end of 2023.

In accordance with our dividend policy, we are pleased to report that our Board of Directors has approved a dividend of USD0.087 per share or USD0.435 per ADS for the second quarter.

Lastly, under current USD5 billion share repurchase program, which started in mid-January last year. Under this program, we had repurchased approximately 12 million ADSs as of June 30, 2024, for a total cost of approximately USD1.1 billion.

Thank you for your attention. We'd like now to open the call to your questions.

(Operator Instructions) Your first question comes from Alicia Yap with Citigroup.

Hello, thank you. (spoken in foreign language)

My question is related to Naraka: Bladepoint Mobile. I believe management should be satisfied with the performance so far since the launch. So can management share and elaborate the user breakdown and the profile, for example, the percentage of the user that have not played the PC version of Naraka? And also, the percentage of users that are brand new gamers to NetEase game, meaning that they have never played other NetEase game in the past.

And a follow-up on that is that any comment on the timing of the overseas launch for Naraka in different markets? Thank you.

(spoken in foreign language)

So as a brand new action genre of mobile game, we are very happy with the current retention rate. To answer your question, to give you more colors now, not only we can see a very stable core user base has been already formed, which is a very important and very successful, and there are other very satisfying indicators as well. For example, the female players' percentage on mobile is much higher than on PC. And among all players who played the mobile version, 70% of them have never played the PC version before. And close to half of them are actually new to NetEase. They are new NetEase game players. So all these are very satisfying.

And for now, our focus is to keep optimizing the game, making sure the game is as perfect as possible, and focusing on the domestic market first. And when the opportunity surfaces, we will consider launching the game in other markets.

Next question please.

Your next question comes from Jialong Shi with Nomura.

(spoken in foreign language)

I will translate my question. I have a few questions about the legacy PC version of FWJ. So for all these adjustments NetEase has done to PC FWJ since this year, what is the purpose that you want to achieve through these adjustments? When do you expect to achieve this targeted purpose? Do these adjustments have anything to do with the instruction from the game regulators?

Also, I would like to understand the financial impact from these adjustments on PC FWJ. We noticed that the price of the virtual currency for PC FWJ declined in the first half of this year. Just wonder whether this decline in prices of virtual currency has any correlation with the game's gross billings. When do you expect the gross billings for PC FWJ to fully recover? Thank you.

(spoken in foreign language)

First of all, thank you for your interest in understanding more details of FWJ. But I would also like to emphasize that NetEase is now a much more grown-up and mature company. We have multiple games. We have a very healthy portfolio of games. We have Naraka: Bladepoint. We have Identity V. We have Eggy Party, all sorts of large games. FWJ, as one of our flagship titles, has been in operation for more than 20 years. In the past 20 years, from time to time, we will do some upgrades in the gameplay and refresh the game system, tuning the game system. That's happening from time to time. It's kind of normal to us because certain gameplay is fun for a period of time. Maybe it's no longer that fun after many years. We never change the brand of FWJ. But the gameplay inside the game has been refreshed many, many times in the past 20 years. So the goal of the adjustment is to keep polishing the game, making sure the quality, the experience of the gameplay, everything is better and better, and the gamers enjoy more fun from playing the game. That's the purpose.

As of any adjustments to any community-based product, not only games, there will be some short-term turbulence and maybe some short-term pain as well. That's a common thing. In our experiences, that's quite common and a short-term temporary thing. It will be behind us. Again, thank you for your interest in FWJ. Again, we also encourage you to broadly look at our broad portfolio as well. Thank you.

Next question, please.

Your next question comes from Ritchie Sun with HSBC.

(spoken in foreign language)

Thank you, management, for taking my questions. First of all, regarding Identity V, we have seen the grossing rank surprisingly exceeded the expectation of the market. What have we done to successfully drive the revenue growth of this game? And how does management assess the potential for the asymmetrical battle genre and whether there are competitions?

Second of all, regarding Justice Mobile, the game has launched a new season. We see the grossing rank in July, surging the top 10, but it has declined since in August. What are the key reasons behind it? Is it because the mixed response for the new season or more competition impacts from Naraka: Bladepoint or natural decay from MMO? And how does management plan to improve the longevity of the game? Thank you.

(spoken in foreign language)

(spoken in foreign language)

First, regarding your question to Identity V. Identity V is a game that has been in operation for more than six years. During these six years, we have been exploring and polishing the game, making sure the quality and experience of playing the game is better and better every day. That's a continuous effort the team has put into developing and operating the game for the past six years. That's a non-stop effort. Of course, we are happy to see some great results in Q2. We want to say that that result is a reflection of the continuous effort and also a reflection of NetEase's capability of running the game in a long-term manner, and keeping the longevity of the game. And in the meantime, making the game better day by day. And actually, not only Identity V, we are keeping doing this for all our games. And we hope someday you can see similar great success of our other games as well.

And to your second question regarding Justice Mobile, first of all, the new season of Justice Mobile features immense amount of new content, re-engaged a large group of players back to the game, which is very helpful. Currently, the game has stepped into a stable operation phase. Compared to other real-time MMO titles, the game has demonstrated very strong stability on overall players' activeness. Our priority now is to maintain the player's activeness as well as the diversity of the ecosystem. We remain committed to providing fair gaming experiences, enable a casual environment without too much burden on players, and continuously value their opinions, aiming to build an evergreen MMO on a mobile platform that people have never seen before.

Next question, please.

Your next question comes from Yang Bai with CICC.

(spoken in foreign language)

Hi, management. Thank you for taking my question. I have two questions related to our game business. First, we observe that the company has a diverse portfolio of products achieving high DAU, such as Naraka and Eggy Party. How should we think about our strategy to differentiate and outperform in this highly competitive high DAU game market?

My second question is about our overseas game business. How should we track the development trend of our overseas game business in the future? And could Management share more color about the release timeline of new titles in the overseas markets? Thank you.

(spoken in foreign language)

So first, regarding your question on the high DAU product matrix, as a matter of fact, internally we don't specifically define this game as a high DAU game and that game is not. We actually don't look at the game product from this lens because our fundamental belief is that as far as we can make a high-quality, fun-enough game, players will come. So high DAU is not a specification of the design. It's a result and reflection of high-quality, fun-to-play game. As you know that over the years, we have been keeping trying, keeping exploring different types of games, different genres. We started from MMO, but now we extended into sports. We extended into PvP games. We extended into shooting games. We are trying with our expertise to develop, to explore multiple genres, multiple fronts, what kind of fun and high-quality game we can provide to the players. That's what guides us, and that's our focus.

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

Thank you. Next question please.

Your next question comes from Lei Zhang with Bank of America.

(spoken in foreign language) [Good evening management, thank you for taking my question. My question is about Where Winds Meet. Is there an updated timeline for the game? Can we expect the PC version and the mobile version to be launched at the same time? We are aware of the announcement for the tests on both versions on August 28th. Could management share more detailed updates on the game’s advancement based on the feedback from the last testing round?] (added by company after the call)

(spoken in foreign language)

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

One other point I want to point out is that there will be differences between the PC version and the mobile version because of the platform differences. To make it fun to play both on PC and mobile, a lot of changes and optimization work need to be done. Please be more patient. Give us some time to polish the game. The plan on record now is to release the game within this year.

Thank you. Next question please.

Your next question comes from Lincoln Kong wtih Goldman Sachs.

(spoken in foreign language)

Thank you, management, for taking my question. My question is about Eggy Party. From some third-party data, we see some grossing pressure in the past few months for this game. Can management share the reason behind it? How should we ensure the longer-term operation of this game? Regarding the broader leisure category, no matter party games, idle games, what's our company's R&D strategy and direction here we can share? Thank you.

(spoken in foreign language)

So yes, you're right. Eggy Party is one of the biggest games of NetEase in terms of user base. And from our end, we do see that the ratio between the revenue versus user numbers is relatively low compared to other games. But we want you to be rest assured that there's no need to worry about this one. We're actively exploring how to change this because we want to emphasize again that the most important fact is it's a game fun to play and whether our users like the game or not. From what we see, the users like the game very much. They actively participate in the game every day. And that gives us the ground that we can, over time, to explore a way to balance the size of users and the level of revenue. Please do be rest assured. We're exploring that, and we will figure that out.

Thank you, and next question.

Your next question comes from Felix Liu with UBS.

(spoken in foreign language) Thank you, management, for taking my question. My question is on your upcoming pipeline. So can management share for the remaining 2024 and looking into 2025, what are the key pipelines that we should watch out for? And more specifically, I noticed that you recently got Banhao [license approval] for two Marvel series, Marvel Rivals and Marvel Snap. What are your expectations on their domestic launch? And also, you showcased a new game called FragPunk in Xbox showcase. Any comments on that one? Thank you.

(spoken in foreign language)

You're right. Not only did we receive approval for Marvel Snap, which is a card game, Marvel Rivals, which is the hero shooter game, but also we are working on other new generation titles like you mentioned FragPunk, which is the PC shooter game which we just started testing in the overseas market as well as we mentioned in the script that we're going to have a Hearthstone launch in next month as well.

One thing we want to point out is all in this batch of games, they are not our traditional type of game. They are competitive games. And every single one of them are actually from high production quality competitive games. We have high hope and confidence about this batch of games. As we said, this batch of games will start to launch from the latest month to next year and we hope they can be a successful batch of games.

Thank you. Next question please.

Your next question comes from Thomas Chong with Jefferies.

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

(spoken in foreign language)

(spoken in foreign language)

Let me do the translation. First of all, NetEase has actually been actively embracing AI for a long time. And AI technology has been widely applied throughout our game development through the process and works from all different disciplines , design, art, programming, and in every other different disciplines . For example, in some of the labor-intensive boring work, in some areas, the AI replacement rate is already 90% or so. And that actually will free up development people so they can be focused on to explore more fun gameplay, really creative part of game development instead of the labor-intensive part.

And regarding the R&D impact on the R&D cost, AI will free some of the human resources from the labor work. But we'll reinvest this into development resources on exploration of gameplay and the creative part. So the R&D spending should stay in the reasonable range for the long term.

Thank you. And we probably have time for one more question. Please.

Your next question comes from Lei Zhang with Bank of America.

(spoken in foreign language) Thanks for the follow-up opportunity. My question is regarding World of Warcraft. Any feedback regarding the new users and the old users? And how to say the revenue contribution? And can you share with us the timeline for the other games to come back? And any future cooperation with Blizzard down the road? Thank you.

(spoken in foreign language)

Thank you for your question. Since the return of World of Warcraft, actually, the players have been very actively returning to the game. All metrics are actually exceeding our expectations. The split actually between the new players and existing players before server shutdown is about four to six, which demonstrates that the game is not only attracting old players back, but has the capability of capturing new players as well.

And regarding the impact on the financial side, for sure, it will increase the PC revenue. Talking about other games, we'll unfold the plans and on this unfolding return of other Blizzard games, we're happy to see we have built up a close relationship and reached consensus with each Blizzard product team because we strongly believe the return is not only just rebooting the service. It should be far beyond that and we get fully prepared to ensure even better experiences to other players than before. And upon this returning of Blizzard games, the development teams from Blizzard side and NetEase ThunderFire directly built up a very deep cooperation and trust on a point-to-point teamwork base, which lays the foundation of deep mutual trust and future possibilities for deep cooperation in the future. Thank you.

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

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