XD: Maintaining a pace of releasing 1-2 new self-developed games annually (2H23 Earnings Call Summary).

The following is the summary of the 2023 annual performance conference call of XD for financial report analysis, please refer to " "Doubled Stock" Heartbeat: 2023 Too Bad? The Savior Has Arrived "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Management's Statements:

1. Review of 2023 Operations:

① Challenging first half of the year: The company faced challenges in the industry environment and operations. Several games launched earlier did not meet expectations, leading to significant operational and financial pressure in the first half of the year. To achieve the annual profit target, the company made adjustments in personnel and organizational structure, and implemented controls on marketing budgets, resulting in a decrease in user volume in the first half of the year.

② Recovery in the second half of the year: Through the efforts of the company's team, especially with the release of new games such as "Sword of Bellflower" and "Muffin" in the Hong Kong and Taiwan regions, user volume significantly increased in the second half of the year. User quality and game distribution share also showed significant growth in the industry.

1. 2024 Goals:

The company plans to launch more new games this year, aiming for a more stable achievement of goals. Compared to the past few years, the company is adopting a more conservative strategy to enhance user experience and satisfaction.

2.2. Q&A Analyst Interactions

Q: How do we evaluate the successful release of "Muffin" in the Hong Kong, Macau, and Taiwan regions? What lessons can we learn from this experience that can be applied to the R&D and release of future new games?

A: I believe that our entire company, whether in R&D or distribution, is constantly learning, adjusting, and growing. The success of "Muffin" in the Hong Kong, Macau, and Taiwan regions is inseparable from the experience accumulated in many previous games, as well as reflection and contemplation on past experiences. We have made certain adjustments and changes in commercialization and operational distribution, and our distribution team has accumulated a lot from past experiences and achieved growth. This growth and achievement are gradual processes. For us, we value not only "Muffin" but also hope for continuous growth and improvement in multiple products.

Q: What will be the domestic distribution strategy for "Muffin"? If choosing to exclusively release on "Taptap," is there an opportunity to generate positive feedback among "Taptap" users like "Jiangnan Baijingtu" did before, promoting user growth?

A: The successful release of "Muffin" in the Hong Kong and Taiwan regions has brought us a certain level of certainty. Although there is still a need for continuous adjustments and issue resolution in the product, we still have confidence in the domestic release of the game. We hope to steadily promote and distribute the game. Based on the validation in the Hong Kong and Taiwan regions, we believe "Muffin" is now a relatively mature product Our domestic distribution strategy will proceed as planned, as we have rich experience in launching multiple products domestically and have a certain grasp of distribution and promotion.

Although we tend to exclusively launch games on the 'Taptap' platform, we need to consider the positioning of the game and the differences in the audience. The audience for 'Muffin' mainly focuses on the economically practical consumer group, unlike 'Jiangnan Baijingtu' or 'Sausage Party' which have a large number of DAUs. However, for the 'Taptap' platform, DAU is certainly one of the goals pursued, but user quality and spending power are equally important. This year, we will recommend more developers to integrate into our ad backend to more directly observe user spending power. Therefore, we will pay more attention to the long-term value and commercial potential of users. In addition, we will also carefully consider other promotion channels, such as mini-games, to help promote games and expand the user base.

Q: Our recently launched self-developed products have performed well. How is the overall production capacity reserved for the next three to five years? And in the shorter term, what is the pace of launching self-developed products next year and this year?

A: In the past few years, our research and development capacity has been quite aggressive, with multiple production lines opened, but the results have not been satisfactory, leading us to summarize and reflect. Considering the company's historical accumulation, team situation, and actual conditions, we believe that it is not suitable to expand production lines too much and launch multiple games at the moment. Therefore, given our current status, it may be more appropriate to launch one to two new games each year. In terms of preparing for new games, we will be more cautious, and the current plan is to continue preparing and developing new games in the next one to two years. Additionally, we are also considering new directions for exploration. For old products in history, considering factors such as lifecycle or performance, we may shrink or end projects and consider new directions for the team.

Q: Currently, there are four games in development. Could you briefly introduce the other three besides 'Muffin'?

A: Currently, we have several products in testing or preparation for release in China. In addition to 'Muffin,' there are two other products that may be familiar to everyone. The first is 'Heartbeat Town,' a game we have been developing for several years and recently obtained a license for. We plan to conduct paid testing at the end of April, and if successful, it will be officially launched this year. The other is a turn-based combat game called 'Yise,' which will also undergo testing in April. In addition to these announced products, we have other products in the preparation stage, the specific content of which is not convenient to disclose at the moment.

Q: Could you briefly introduce the overall optimization direction and highlights of the 'Taptap' product end for this year?

A: Our main goal this year is to enhance user and developer stickiness, as well as improve the efficiency of the entire industry, making it easier for developers to acquire users and for us to effectively gain users. We hope to provide developers with higher quality users with stronger payment capabilities through this collaborative approach. We will work around this main theme to continuously improve the efficiency of the entire chain, expand our business scale, and increase the influence on developer products Q: Have we confirmed the launch plan of "Muffin" in the Japanese and Korean regions?

A: We have not yet determined a specific timetable, but our focus is on ensuring stability. After the launch in the Hong Kong and Taiwan regions, the team will need to handle a large amount of daily work. Therefore, we will not be overly anxious, but will prioritize the release in mainland China. Once the release in mainland China is completed, we will arrange the release plans for other regions.

Q: How should we manage the sales expenses for the 24th year?

A: It may need to be looked at separately, as the situations on the game side and the "Taptap" side are different. The game side is relatively simple, and we will assess marketing expenses based on the actual launch of the game. For products like "Muffin," because of its good commercial performance, we may have a specific marketing budget, and if the results continue to be good, we will definitely allocate a portion of the revenue as marketing expenses. Therefore, looking at the whole year, the marketing expenses for the game may increase compared to last year. The same applies to "Taptap," where all our marketing activities will be adjusted based on the final results. The biggest change this year is that we are no longer just pursuing the growth of DAU or MAU, but are more focused on the growth of users and whether their actual spending capacity in "Taptap" games has increased, as well as whether they are generating value for our advertisers. Therefore, we will continue to track these metrics and pursue high-quality, high-spending users from a marketing perspective.

Q: From a positioning perspective, what are your views on the gameplay of "Muffin" and the future (medium to long term) operational strategy?

A: In terms of gameplay, this game is similar to "Immortal Urala," and we hope that its lifecycle can exceed the latter. However, idle games typically have shorter lifecycles, and as a relatively innovative category, reasonable expectations are needed. The team hopes to extend the game's lifecycle, although this category cannot undergo infinite horizontal updates and lacks reference objects, it will face some uncertainties and challenges, but we will do our best to create an excellent product.

Q: How did "Sausage Party" perform in the second half of the year? Are there any adjustments or new expectations for next year's operational plan? In terms of high DAU games, are we considering having "Heartbeat Town" take over, or will we continue to invest more resources in the operation of "Sausage Party"?

A: Although "Sausage Party" faces competition from products like "Egg Party" or "Dream Star," we believe it still has room for improvement. We will not easily give up on investing in "Sausage Party" and plan to continue improving and addressing changes in user age groups and competitive challenges. We will try new methods to seek greater development opportunities. Considering its wide user base, this IP is worth long-term operation and planning, which is not contradictory to our long-term development of IPs.

From a market positioning perspective, "Heartbeat Town" may attract more female players, but we hope it can have a broader user base and have a greater impact, similar to the growth "Jiangnan Baijingtu" brought to "Taptap." Although "Heartbeat Town" is innovative in its category, success is not easy, and we have encountered many challenges in the development process Despite this, this year we have decided to conduct paid tests and launch them online, hoping to achieve better results.

Q: In the second half of 2023, there was a trend of stabilization and recovery in the user base of 'Taptap'. Currently, based on the advertising placement on 'Taptap', have there been any trend changes in 2024? Additionally, does the company plan to further increase the commercialization rate of 'Taptap'?

A: Currently, we have observed no significant trend changes in advertising placement on 'Taptap'. Our customer acquisition strategy still adjusts based on the effectiveness for advertisers, and currently, we are maintaining a relatively stable state.

Q: In the second half of 23, there was a significant increase in sales expenses. Is this mainly due to increased investment in games by the company, or is it due to increased marketing expenses on 'Taptap'? How is the company planning its self-developed games?

A: Both factors contributed. In terms of games, as we have launched multiple games, including 'Sword of the Bellflower' launched in the recent second half of the year, the marketing expenses for games have relatively increased. At the same time, marketing expenses on 'Taptap' have also increased because we pursue effectiveness, and if the results are good, we will increase investment.

Q: The self-developed team has been continuously optimized. How is the company planning its self-developed games?

A: Last year, we made adjustments to the self-developed team, re-evaluated project and team maintenance capabilities, and decided to focus more on developing self-developed capabilities. Despite a decrease in overall numbers, through efforts in resource allocation in recent years, we believe there has been a significant improvement in self-developed capabilities and game production standards. We highly value the experience accumulation of the core team. In the future, we will carefully consider team expansion but will continue long-term investment in self-development.

Q: Overall, the performance outside the mainland seems to be stronger than previously expected. In the past, the revenue from mainland games was usually two to three times that of Hong Kong, Macao, and Taiwan regions, but recent data shows that this pattern seems to have changed. Is this due to environmental factors or a preference for non-mainland regions in terms of art or gameplay in development?

A: I think your observation may be mistaken. Our products still perform strongly in China, usually several times or more than the overseas markets. We have never neglected the domestic market as it is one of our most important foundations. At the same time, we are also considering other regions such as Hong Kong, Taiwan, Japan, Korea, and Europe and America, hoping our games can be successful overseas. Overall, these are within our expectations.

Q: We have noticed the growth of small and medium-sized developers in the mini-game market. With more and more mini-games emerging, do we have enough capacity to accommodate them?

A: We have been paying attention to the development direction of H5 games and other mini-games, but in terms of player experience, compared to APP games, mini-games have not shown significant improvements in performance and presentation, but rather changes in gameplay. For developers, whether they choose to make more money from mini-games or if APP games are better, there is currently no clear conclusion But for us, mini-games are an option. Currently, the mini-game market is mainly driven by advertising and is suitable for games that can attract users as soon as they go live. Although the situation may change, we will closely monitor and make adjustments based on the mini-game market and player demands.

Q: Since MAU is not the primary consideration, could you share the user value goals? What is the strategy of 'Taptap' in North America? What about its strategy overseas? In Europe, allowing in-app testing to go live, does this help its development overseas?

A: Firstly, MAU is still an important observation indicator in our business, but we value the ability to create value for developers and users more. We focus on the effectiveness of the entire business chain, because if these effects continue to improve, MAU will also increase accordingly, which is not contradictory. In North America and overseas, we are readjusting our strategy, viewing it as a phase from zero to one, and realizing that there is uncertainty in this process. Therefore, we maintain strict financial discipline rather than simply investing resources. Despite the challenges, we remain optimistic.

Q: Epic previously sued Google and Apple, does this help 'Taptap' in overseas markets? Also, in the long run, what level of MAU do you think 'Taptap' might reach?

A: The overseas market has benefited us, especially in terms of Google Play and Apple App Store's antitrust actions and changes in EU policies. Apple is also adjusting its policies, which may be beneficial to all developers. For 'Taptap', the key is not just getting listed, but providing greater player value. Therefore, the opening of a time window does not mean everyone will succeed, the key is to solve current problems.

I believe that in the domestic market, there is still several times the long-term MAU growth space. From an optimistic perspective, it could be two to three times, or even more, if a new growth curve can be achieved. However, we should not see this as a purely investment target, but as a necessary measure for business growth, requiring continuous investment in research and resources.

Q: Does 'Taptap' have plans to further increase the monetization rate in the domestic market?

A: We do not have specific improvement targets, but focus on whether developers still see 'Taptap' as a cost-effective channel. Market competition will determine our position. The monetization rate must balance developer returns and user experience. We hope to bring value to users and developers through new means, rather than directly increasing the monetization rate. Overall, our up value has slightly increased from 23 years to now.

Q: What is the entire process of independently developing games, from project initiation to launch? Is the project chosen based on game type, or is more emphasis placed on creativity and planning factors?

A: Our project initiation process is currently more cautious. At the initiation stage, we mainly consider team composition, the category direction the team is suitable for, and past accumulations. Based on these considerations, we evaluate market demand and business opportunities to determine if the project has potential. We consider different categories and lines in talent selection, thus forming teams suitable for different styles and categories Long-term accumulation and growth are crucial for us, and we hope that the team can continue to create and inherit in specific categories and directions.

Q: Is the outstanding performance of 'Sword of Bellflower' considered within the company's expectations, or is it beyond expectations? Will the successful experience be reusable?

A: We hope to continue to learn from the successful experience of 'Sword of Bellflower' and achieve sustained growth in future projects. Although the launch is just a starting point, we realize the importance of continuous operation in the future. The upcoming major version updates and preparations for launches in other regions will bring better performance and long-term vitality to the product.

Q: Could you provide information on the return of the management team, trading arrangements, external investments, and business account separations?

A: Over the past year, our company has undergone some adjustments and changes. We value the importance of the core team, whether in game development or management. Therefore, we have made some personnel adjustments. We are pleased to welcome back some former colleagues who have worked with us for a long time, which is a positive change for us and will greatly assist us. We look forward to the continued growth and improvement of the team, and hope to attract more outstanding talents to join our company in the future.

Currently, we do not have any definitive trading arrangements. If there are any, we will disclose the information in accordance with regulatory requirements, and promptly disclose it on the HKEX website, including the company's official website.

Q: What is the proportion of female players in 'Muffin' and the considerations for promoting female players in China?

A: The proportion of female players in the 'Muffin' game is relatively high, which is considered good in its category because of our game's fresh art style. However, in the AFK game category, the proportion of female players is generally low, even though our game has a higher number of female players in this category, they are not the main group. Therefore, our promotion strategy will continue as usual, but will focus more on publicity and material selection. We will also consider platforms like Xiaohongshu within the normal promotion scope.

Q: Taptap's monthly active users grew by over 10% in the second half of 23, is there any growth guidance for 24?

A: Several important titles were launched in the second half of last year, bringing back user numbers and sales. The industry continues the trend from last year this year, with continued growth in the first quarter, but the company will not provide guidance.

Q: Regarding the increase in downloads of 'Taptap' on iOS, what are the main reasons? Does the iOS version of 'Taptap' have advertising revenue, and can it further contribute to revenue growth?

A: Our iOS growth is due to our focus and investment in the iOS version. We started investing in the team for version updates over a year ago and adopted an agile strategy. Although the contribution to user numbers and revenue is relatively small, we hope to make a breakthrough on iOS to demonstrate our influence on the community and player decisions However, the product form on the iOS platform is restricted by Apple's review, which limits our creativity compared to the Android platform. Despite achieving good results in this situation, we are still in the early stage of development in the long term, and we need to explore more in terms of product form and user habits to provide more value to users.

Q: What are the company's thoughts on the development of AI games?

A: I believe that AI has tremendous potential in the field of game development, although the direction is not yet clear. In the long run, AI is expected to help developers create games more easily, which is very beneficial to the entire industry. However, compared to large language models like GPT or video generation technologies like Sora, the future development direction of AI in the gaming field is still unclear. Therefore, we need to stay attentive and cautious, although we remain optimistic in the long term.

Regarding AI games, we can consider it from two aspects: one is the potential impact of AI on gameplay and presentation forms, which is currently uncertain; the other is the application of AI in reducing costs during the development process, such as in art, text translation, and music production, which has been widely used. We are more concerned about how AI will change game content, which is a challenging but also very attractive direction.

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