NetEase, Inc. (NASDAQ:NTES) Q1 2023 Earnings Call Transcript

NetEase, Inc. (NASDAQ:NTES) Q1 2023 Earnings Call Transcript May 25, 2023

NetEase, Inc. beats earnings expectations. Reported EPS is $1.69, expectations were $1.25.

Operator: 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 Margaret Shi, Senior IR Director of NetEase. Please go ahead.

Margaret Shi: Thank you, operator. Please note the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for 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 announcement of the filings on the website of Hong Kong Stock Exchange.

The company does not undertake any obligation to update its 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 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’s senior management is Mr. William Ding, Chief Executive Officer; and Mr. Charles Yang, Chief Financial Officer.

I will now turn the call over to Charles, who will read the prepared remarks on behalf of William.

Charles Yang: 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 RMB25 billion in the first quarter, up 6% year-over-year. Our net income attributable to NetEase shareholders increased 54% year-over-year to RMB6.8 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 passive 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. Eggy Party became China’s most downloaded game on iOS in the first quarter, further solidifying its leading position in the casual game arena. Eggy Party’s accomplishment is a testament to NetEase content innovation and operational know-how that keep 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 Eggy Party’s distinct game ecosystem, including upgrading our creative incentive schemes and game additives.

Our users can now design more sophisticated mini games with more flexibility and versatility, making the game more engaging and self-sustaining. We’ve seen 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. Eggy Party is approaching its first year anniversary this weekend. With our comprehensive UGC ecosystem, our user community has been creating more than 1 million apps per week, providing players with continued fresh and enjoyable content. As a key focus of our Eggy Party operational strategy, we will be further strengthening our UGC offerings to help ensure the longevity for Eggy 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 Eggy Party in Southeast Asia and we received valuable feedback. We are working to bring Eggy Party to global audiences in the near future and believe that players worldwide will enjoy the engaging gameplay and unique UGC experience that Eggy 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 Bungo 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 successful launch on June the 30th and many other titles such as Badlanders and Racing Master ready for the Chinese mainland market.

We are also planning for Harry Potter: Magic Awakened to make its international market debut. As our next-generation MMORPG, Justice mobile game is dedicated to creating a unique game 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 fair 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 games 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 impacts game storyline, Justice mobile game provides players with more personalized gaming experiences that add to users’ enjoyment of the game. Badlanders, 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 testing, Badlanders had shown strong player attraction. 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 escape 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.

The 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 Awakened is nearly here. Our dedicated team has been working hard to enhance and refine the gameplay of this long waited 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 quarter, we were pleased to announce the establishment of Anchor Point Studios which is led by Paul Ehreth. 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 Points Studios is dedicated to developing action, adventure games that pushed the boundaries of entertainment and also 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 experience 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 work 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 games studios overseas spanning Japan, the U.S., 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 economy over game creation and development. We hope that soon NetEase games will be — 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 Youdao. Youdao 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 continues to show solid growth as we further improve and enrich 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 Youdao Fun 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. Youdao Fun 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 Pen X5 and P5 achieved a 100% accuracy rate in 12 complex online and offline application scenarios. Moreover, the applications available on our Youdao Dictionary Pen 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 world 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 communities 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 RMB2 billion, reflecting this mixed results. However, we continued our initiatives to drive margin expansion. They have paid off with gross margins reaching above 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 expand our content offering 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 B’in Music’s rich library of C-Pop stars, we renewed our agreement with Rock Record, deepening our strategic partnership.

We also broadened our music content with the addition of music licensing contract with CoMix Wave Films, an anime film studio known for its critically acclaimed Makoto 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 an increasing suite of supportive tools. We have recently launched several support programs, such as a new voice power project and project Cloud Ladder 2023 with the aim 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 Yanxuan, our private-label consumer brand. On April 11th, Yanxuan celebrated its seventh anniversary. Committed to delivering quality products to our users, Yanxuan has further deepened 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 had established independent production line 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, Yanxuan 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 placed significant emphasis on the ongoing development of our ESG practices and the continued improvement of our ESG regulatory framework. Our asset has been widely recognized and we have been 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 showcases our ESG accomplishment 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 concept into our design. 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 placed 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 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, Youdao, Cloud Music and Yanxuan. 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 revenues for the first quarter were RMB25 billion or $3.6 billion, representing a 6% increase year-over-year. Total net revenues from our games and related value-added services were RMB20.1 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 Westward Journey series and our newly-launched games, such as Eggy Party. Net revenues from our mobile games accounted for approximately 72% of our total net revenues from online games operation.

Youdao’s net revenues were RMB1.2 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 RMB2 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 reinforced risk controls by reducing the in-app exposure of certain live streaming function and lower 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 RMB1.9 billion, up nearly 13% year-over-year mainly due to increased contribution from Yanxuan. 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 margin in more details, gross profit margin was 66.7% for our games and related value-added services segment, compared with 62.2% in same period of last year. The growth was primarily driven by the termination of certain licensed games with comparatively lower gross margin 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 continued 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 Yanxuan. Total operating expenses for the first quarter were RMB7.7 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 RMB1.1 billion for the first quarter, which is up quarter-over-quarter and year-over-year mainly due to the mark-to-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 credit deferred 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 RMB7.6 billion or $1.1 billion. Non-GAAP basic earnings per ADS for the quarter was $1.71 or $0.34 per share. Additionally, our cash position remains strong with net cash of approximately RMB95.1 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 $0.093 per share or $0.465 per ADS. Lastly, under our current $5 billion share repurchase program starting in mid-January this year, approximately 3.1 million ADS has been repurchased as of the first quarter end for a total cost of approximately $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.

Q&A Session

Operator: Our first question will come from Alicia Yap of Citigroup. Please go ahead.

Alicia Yap: Hi, thank you. Good evening. So, thanks for taking my questions. So have management experienced any of the weakness in the NetEase scheme because of the macro consumption weakness that you’re 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’s expectation for the gaming growth in the — for the existing title in the next few quarters? Thank you.

William Ding: So far, we’ve not seen any effect from the macro weakness not in game. 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.

Margaret Shi: Next question, please.

Operator: The next question comes from Xueqing Zhang of CICC. Please go ahead.

Xueqing Zhang: 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 feedback for Justice mobile? We have implemented AI technology in various aspects, such as the creation, NPC dialog and the player looks. What should we expect for future games coming out of AI innovations? Thank you.

William Ding: Let me just do the quick translation. So we just finished two — the last rounds of testing. And so, we mentioned we expanded our testing user base across different downloads. So we’re pleased to see we were able to attract users for the different game environment, not just MMO, but other games along with as well. So even with two weeks of testing period, we received some very positive and good feedbacks. And over the next month or two, we will continue adjusting and multiplying the game. So by June the 30th, and hopefully, our users should be able to see a game that they approved in the last. Thank you. So, as you’ve noticed that we have been applying a lots of AI technologies into the games. And I think during the testing period, users have given us very positive feedback.

And previously, you were — we were applying AI technology in games and now we are applying games onto AI. So, for the very beginning of constructing the game, we — this game, we’ve been using deep learning and technology. So I think there is a lot of excitement. The users will be seeing a lot of exciting functions coming up to the game. Thank you.

Margaret Shi: Next question, please.

Operator: The next question comes from Felix Liu of UBS. Please go ahead.

Felix Liu: Thank you, management, for taking my question, and congratulations on the strong first quarter results. My question is on Eggy Party. Can management share more color on the game’s trend so far in second quarter? After its strong performance in the first quarter, how does management see the domestic and user trend from rest of this year and the games monetization potential? And lastly, what is your — more details on the overseas strategy for this game? Thank you.

William Ding: Yes. So, Eggy 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 Eggy Party with the continued innovation within the game. During this summer you — also we’re seeing a number of other exciting games coming out of NetEase game pipeline. And obviously, we also have overseas plans for Eggy Party. So overall, we have very strong conviction that NetEase will continue to deliver fun, high-quality game for our users. Thank you.

Margaret Shi: Next question, please.

Operator: The next question comes from Kenneth Fong of Credit Suisse. Please go ahead.

Kenneth Fong: Thank you, management, for taking my questions. Can you provide an update on the overseas game studio investment plan, including like R&D investment and development stage? Thank you.

William Ding: Yes. So we have about 10-plus – closer to already now in the — in overseas markets. We will be pleased to bringing all those great talents of 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 are — we will be very happy to be showing the two decades of operational — our operational know-how within NetEase with those producers. Thank you.

Margaret Shi: Next question, please.

Operator: The next question comes from Lei Zhang of Bank of America Securities. Please go ahead.

Lei Zhang: Thanks management for taking my question and congrats on the strong set of results. Can management elaborate more on AI beta strategy and its impact to our game device and investments as well as related cost savings? Thank you.

William Ding: So what we have seen in the past two years is we’ve seen various different applications being used under the foundation model. So for us, the most important thing is choosing — for different products, choosing the right scenarios for the application of those foundation models. We think that going forward, the R&D cost will be coming more efficient. We’ll find ways to save cost. And so — but I think that the foundation models will be pretty much similar. But the most important thing for us is choosing the right one for our products. Thank you.

Margaret Shi: Next question, please.

Operator: The next question comes from Lincoln Kong of Goldman Sachs. Please go ahead.

Lincoln Kong: So my question is about the new game competition. Will be this year approval process start to normalize? There has been a lot of new games released into 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 we have some sort of thoughts around how to strengthen the ability of long-term prospects of the games such as Eggy Party or ? Thank you.

William Ding: So, yes, you’re right. Over the last four to five years, we’ve seen a lot more new games in the market. But at the end of day, consumers only choose the one 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 have — we’ll maintain our competitive edge in this industry. For example, MMO games, that’s one of our historically strongest suites. We’ve seen there is actually very little competition in this upper — in this genre against NetEase. So for example, our MMORPG mobile game, Justice mobile, will be launched on June 30th. The development team has over decades — one decade of R&D experience.

And so, I’m pretty confident in the success of that game. Similarly, in June, you will also see games with other genres being launched to the market. So, we are confident that the market will see a variety of different products coming up on NetEase that’s just strong as games like Eggy Party or FWJ. Thank you.

Charles Yang: And Lincoln, just to add one more point. In addition to our continuous innovation and launching of successful new games, the NetEase strengths in the long-term operating 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 growth in the first quarter. Identify V in its fifth year, again, record-high growth in the first quarter. The sustainability of these legacy titles are truly impressive, which add — 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.

Lincoln Kong: Great. Thank you. Thank you.

Margaret Shi: Thank you.

Operator: The next question next comes from Alex Poon of Morgan Stanley. Please go ahead.

Alex Poon: Thanks, management, for taking my question. My first question is related to our games gross 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.

Charles Yang: Sure. 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 the scale is the 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 comparatively speaking of much lower margins, so the rapid 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 in 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 NetEase 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 be that. From time-to-time, we will revisit the — for instance, we extend our share buyback program from our originally $500 million to $1 billion, $2 billion, $3 billion.

And right now, our Board has approved a master plan of $5 billion buyback. Dividend payout ratio, we’ve also raised from 25% to 30% 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 return value to our shareholders to share the joy of a sustained growth and value creation to our long-term shareholders.

Margaret Shi: Okay. Thank you. Operator, we have time for just one more — one last question, please.

Operator: The next question comes from Natalie Wu of Haitong International. Please go ahead.

Natalie Wu: Thanks for taking my question. My question is related with the Cloud Music. Just wondering what’s the consideration behind a lower shared ratio for live streaming function on Cloud Music. And also you mentioned that you reduced the in-app exposure for certain live streaming function, just wondering is it due to certain regulators’ requirements or what? And also excluding this impact, what kind of the year-on-year growth should we be seeing? And when do you expect revenue of Cloud Music to return positive growth on the current condition? Thank you.

Charles Yang: In the interest of time, let me answer this question directly in English. 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. And 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 to — in a sustainable manner rather than some of the agencies which commands 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 an P&L breakeven in the coming future.

Natalie Wu: Thank you.

Margaret Shi: Operator?

Operator: That does conclude the question-and-answer session. I would like to turn the conference back over to Margaret Shi for any additional closing remarks.

Margaret Shi: Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly or Piacente Financial Communications. Have a great day. Thank you.

Charles Yang: Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.