NetEase Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 10 speakers on the call.

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 Marjorie Couture, Senior IR Director of NetEase. Please go ahead.

Speaker 1

Thank you, operator. Please note the discussion today will contain forward looking statements relating to future performance of The company is 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.

Speaker 1

Some of these risks are beyond the conference 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 the financial results is included in certain I am from the company with the Securities and Exchange Commission, including its Annual Report on Form 20 F and the announcement in the filings of our website of the 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 Q1 earnings news release issued earlier today.

Speaker 1

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 Yan, Chief Financial Officer.

Speaker 1

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

Speaker 2

Thank you, Margaret, and thank you everyone for participating in today's call. Before we begin, I would like to remind everyone that all We kicked off 2023 with an impressive performance from our game portfolios That drove our total net revenues to RMB25 1,000,000,000 in the Q1, 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 Q1. This franchise continues to captivate Chinese audiences and enjoyed another quarter of impressive performance.

Speaker 2

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 2 decades now due to the sustained in game user connection 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 Q1, 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 mini games 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 1st year anniversary this weekend.

Speaker 2

With our comprehensive UGC ecosystem, our user community has been creating more than 1,000,000 apps per week, providing players with continued fresh and enjoyable content. As a key focus of our every Party operational strategy, we will be further strengthening our UGC offerings to help ensure the longevity For every 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 every party in Southeast Asia And it receives valuable feedback. We are working to bring anti 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.

Speaker 2

Another good example of our casual games showing longevity is Identity V, our 5 year old asymmetrical battle In the Q1, Identify achieved record high net revenues driven by a successful Crossover campaign with Bongo's 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 30 And many other titles such as Badlander 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 gaming experience That will set a new bar for the MMO market.

Speaker 2

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 Injustice 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 The Impact Game Storyline, Justice Mobile Game provides players with more personalized gaming experiences That adds to users' enjoyment of the game.

Speaker 2

Badlander, our next generation looter shooting mobile game Is scheduled for launch on June 8 with close to 20,000,000 pre registered users. In our recent round of testing, Badlanders has shown strong player traction. As an exciting addition to NetEase roster of shooting games, we are hopeful that Badlanders will help us tap into new territory with its brand new escape mechanism An exciting battle experience. Next in the pipeline is Racing Master, a new car racing game that we will be bringing Players on June 20, which has also had over 20,000,000 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 Awakened is nearly here.

Speaker 2

Our dedicated team has been working hard to enhance and refine the gameplay of this long weighted 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.

Speaker 2

We continue to make solid progress During the quarter, we were pleased to announce the establishment of Anchor Point Studios, Which is led by Paul Ehrlich. With over 20 years of experience in game design and direction for PC and console, PC Hall 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 pushed 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, Shawn Crooks Assembled a veteran team who also worked on many other major franchises such as Army of 2 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.

Speaker 2

After years of strategic planning, we now have over 10 proprietary NetEase game 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 autonomy Over game creation and development, we hope that soon, these games will be will not 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 continued to show solid growth As we further improved and enriched their content, the recent launch of our Champion class in the Q4 of last year You did exceptional results, which we saw as our cause participants won the Youth Group Championship As the British News Go opened in January, additionally, the gross billings of Youdao Fan Reading, Our digital online reading service for children powered by advanced natural language processing capabilities Increased by nearly 40% year over year in the Q1. 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.

Speaker 2

Our Youdao Dictionary 10 X5 and P5 achieved 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 Q1 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.

Speaker 2

Our online music MAUs continues to show steady growth, while our membership paying ratio remains 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 Q1, Total net revenue declined 5% year over year to RMB 2,000,000,000, reflecting these mixed results. However, we continued our initiative to drive margin expansion. They have paid off with gross margin reaching about of our copyright cost structure and improved revenue sharing strategy To extend our content offering and ensure access to important copyrighted music, we continue to work with music labels that help us Grow our music library.

Speaker 2

Following our licensing agreement for rights to digital music from Beam 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 Comixwave Films, Anatomy 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 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 discovering And nurturing music talent.

Speaker 2

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, Yanxuan celebrated its 7th 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 supply and home clinic.

Speaker 2

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 Q1, 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 blanket. It remains our mission to provide consumers with more high quality original designed products that promote a relaxed and enjoyable lifestyle.

Speaker 2

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 been achieved Leading scores in authoritative ESG evaluations such as MSCI, DJSI, CSA And Sustainalytics, 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.

Speaker 2

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 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 5th 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.

Speaker 2

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 YenChef, 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 Q1 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.

Speaker 2

Total net revenue for the Q1 were RMB 25,000,000,000 or US3.6 billion dollars representing a 6% increase year over year. Total net revenues 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 Westwood Journey series and our newly launched games such as Aggie Party. Net revenues from our mobile games Accounted for approximately 72% of our total net revenues from online games operation. Youdao's net revenue were RMB1.2 billion, a year over year decrease of 3%.

Speaker 2

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 2,000,000,000, which represented a 5 percentage decline compared to the same period last year. In the Q1, Cloud Music introduced a number of measures to its live streaming services to enhance the listening experience of more dedicated music banks and reinforces risk controls by reducing the in app exposure of certain live Streaming function and lowering the revenue sharing ratio to broadcasters and agencies. These measures led to a decrease in net revenues from cloud, music, 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.

Speaker 2

Our total gross profit margin was 59.5 percent in the Q1 compared with 54.5% in the Q1 of last year. Looking at our Q1 margins in more details, gross profit margin was 66.7 percent for our games 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 license gains 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 percent 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.

Speaker 2

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 Q1 were RMB 7,700,000,000 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 percent in the Q1 and remained relatively stable year over year. Our R and D expenses as a percentage of total net revenues Also remained stable year over year at 15% in the Q1.

Speaker 2

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 and D investments in the longer term, other income was RMB1.1 billion for the Q1, 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 Q1, as per applicable accounting standards, we are required to reflect The fair value changes in our P and L. The effective tax rate was 19.5% for the Q1. 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 Q1 totaled to RMB7.6 billion or US1.1 billion dollars Non GAAP basic earnings per ADS for the quarter was US1.71 dollars or 0.34 per share.

Speaker 2

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 US0.093 dollars $0.93 per share or US0.465 dollars per ADS. Lastly, Under our current US5 $1,000,000,000 share repurchase program starting in mid January this year, Approximately 3,100,000 ADS has been repurchased as of the Q1 end For a total cost of approximately US267 million dollars Thank you for your attention. We would like now to open the call to your questions. Operator, let's go to the Q and A.

Operator

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

Speaker 3

Hi. Thank you. Good evening. So thanks for taking my questions. So have management You know, experience 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?

Speaker 3

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 in the for the existing title in the next few quarters.

Speaker 1

So far, we've not seen any effect 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 Next question please.

Operator

The next question comes from Zhu Kuan Zhang of CICC. Please go ahead.

Speaker 4

Good evening, management. Thanks for taking my question and congratulations on the strong results. My question is related to Justeet Mobile. Can management provide an update on the recent testing feedback for Juste Mobile? We have implemented AI technology in various aspects Such as face creation, MPC dialogue and the player lyrics, what should we expect for future games coming out of

Speaker 1

Let me just do the quick translation. So we just finished The last rounds of testing, so we managed to expand our testing user base across different line words. So we're pleased to see we were able to track users from different game genres, not just MSPO, but other game genres as well. So during these 2 weeks of testing We received some very positive and good feedbacks. And over the next month or 2, we'll To continue adjusting and modifying the game, so by June 30, hopefully, our users should be able to So as you've noticed, we have been applying a lot of AI technologies Into the games and I think during the testing period, users have given us very positive feedback.

Speaker 1

Previously, we were applying AI Technology and Games, and now we are applying games onto AI. So from the very beginning of constructing this game, we've been using deep learning And technology, so I think there's a lot of excitement that you'll be seeing a lot of exciting functions coming out today. Thank you.

Operator

Next question comes from Felix Leo of UBS. Please go ahead.

Speaker 5

Thank you, management, for taking my question and congratulations on Strong first quarter results. My question is on Aggie Party. Can management share more color on the game's trend so far in 2nd quarter After its strong performance in the Q1, how does management see the domestic end user trend from Rest of this year and the game's monetization potential. And lastly, what is your more details on the overseas strategy for this game? Thank you.

Speaker 6

Yes. So at this time, we've seen

Speaker 1

very strong results since the launch of this And we are confident over the next 2 to 3 years, we're going to be able to build a sustainable family party game on top The Eggie Party with the continued innovation within the game. During the summer, you'll also be seeing a number of other exciting games coming out of Nave's And obviously, we also have over 2 plans for Aggie Party. So overall, we have very strong conviction that NetEase will continue To deliver fun, high quality games for our users. Thank you.

Operator

Thank you. The next question comes from Kenneth Fong of Credit Suisse. Please go ahead.

Speaker 2

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

Speaker 1

Yes. So we have about 10 plus close to 20 studios already now in the overseas In overseas markets, we are really pleased to bring on all those growing 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 Hit titles being produced from the 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 2 decades of operational Know how, we're within that ease with those producers.

Speaker 1

Thank you. Next question please.

Operator

The next question comes from Lei Zhuang of Bank of America Securities. Please go ahead.

Speaker 7

Thanks management for taking my question and congrats on the strong set of results. Can management elaborate more on the AIG strategy and its Impact our game development investment as well as related cost savings. Thank you.

Speaker 5

So

Speaker 1

what we've seen in the past A few years, we've seen various different applications being used under the foundation model. So for us, it's 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 and D cost will be coming more efficient. We'll find ways to save cost. So I think that the foundation models will be pretty much Similar, but the most important thing for us is choosing the right ones on our products.

Speaker 1

Thank you. Next question please.

Operator

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

Speaker 8

ahead. So my question is about the new game competition. With the this year, the games approval process started to normalize, there has been a lot of new games releasing to the market. So could management comment around the competition landscape of the new game market in China? Do we see Any of the changes in the trend for the flagship titles?

Speaker 8

And can we have some thoughts around how to strengthening the ability

Speaker 1

So yes, you're right. Over the last 4 to 5, we've seen a lot more New games in the market, but at the end of 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 have we'll maintain our competitive edge in this industry. For example, MMO games, that's one of our historical strongest suit. We've seen there's actually very little competition in this run against NetEase.

Speaker 1

So for example, our MMORPG game Justice Mobile will be launched On June 30, the development team has over decades 1 decade of R and D experience. And so I'm Pretty confident in the success of that game. Similarly, in June, you will also see games of other Runners being launched to the market. So we are confident that the market will see a variety of different products coming up in the East. That's Just strong as games like Epic Party or FWJ.

Speaker 1

Thank you.

Speaker 2

And Lin Kueh, it's 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 Westwood's Journey Mobile, one of our earliest Mobile games has a record high growth in the 1st quarter. Identify in its 5th year, again, record high growth in the Q1. 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.

Speaker 8

Okay. Thank you.

Speaker 6

Thank you.

Operator

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

Speaker 9

Mike, thanks management for taking my question. My first question is related to our games gross margin, which is a 7 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?

Speaker 9

Thank you very much.

Speaker 2

Sure. Well, 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 It's our continued growth of my scale and comes with the 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, comparatively speaking, are of much lower margins.

Speaker 2

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 in 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.

Speaker 2

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 tour, a combination of tours 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 $500,000,000 to $1,000,000,000 $2,000,000,000 $3,000,000,000 Right now, our Board has approved a master plan of US5 $1,000,000,000 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 A sustained growth and value creation to our long term shareholders.

Speaker 1

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.

Speaker 6

Thanks for taking my question. My question is related with the Just wondering what's the consideration behind a lowered shared ratio for live streaming And also you mentioned that you do stay in app exposure of certain live streaming functions. Just wondering, is it due to certain regulators' requirements or what? And also, Excluding these impacts, what kind of the year on year growth should we be seeing? And when do you expect revenue of

Speaker 2

In the interest of time, let me answer this question directly in English. The revenue Composition of Cloud Music mainly comes twofold. 1 is the online music services, which continued its Steady growth trajectory year over year, underpinned by the continuous expansion 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 to in a sustainable manner rather than some of the agencies, Which commands a much, much higher revenue sharing asks.

Speaker 2

So as a result of that, You are seeing a quarterly decline in our revenue year over year, but at the same time, Our gross profit margin profile has significantly improved from 12% 1 year ago To right now 22.4 percent 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 road map should bring us to a cash flow breakeven and ultimately, a P and L breakeven in the coming future.

Speaker 6

Thank you. Operator?

Operator

And that concludes the question and answer session. I would like to turn the conference back over to Margaret Shew for any additional closing remarks.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly, our Pure Center Financial Communications. Have a great day. Thank you.

Speaker 2

Thank you. Go ahead.

Operator

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

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