Lessons learned from the past three years: Don't make empty promises, focus on implementation (Minutes of the Heartbeat 2H22 Conference Call)

The following is a summary of the 2022 full-year performance conference call of Heart Motion Company.HK. Financial report reviews can refer to "Heart Motion Company: It's not easy to say 'heart motion' when TapTap drops the chain".

I. Management Overview

There were many challenges in 2022, but overall satisfaction with performance, revenue, and TapTap users reached new highs. However, there were also unexpected areas where we hope to make up in 2023.

New game developments:

1. "T3" and "Genshin Impact" will be launched as soon as possible this year. Because they have already been released overseas, some commercial data and issues are clear, and they are currently being debugged. Compared to overseas, we still have more confidence in the performance of the domestic market.

2. "Sword of the Ring Orchid" is also planned to be launched this year. Although it has not yet obtained the license in China, the license application and issuance process seems healthy based on current observations, so we hope to be able to synchronize with a global launch after obtaining the license this year. This is one of our highly anticipated products.

Domestic TapTap :

There was already considerable improvement in revenue last year. This year, we hope to make efforts in the areas of community and user account value. There were also good performances at the developer level last year, but in the process of communication between developers and users, we still found some deficiencies, so we hope to improve this year.

Overseas TapTap :

Although it seems that there was no growth in overseas users compared to 2021, the users in 2021 merely appeared to be more numerous because they were mainly in relatively backward countries and regions (with low user value). However, in 2022, we mainly penetrated some European and American T0 countries.

So although the total number did not increase, there has been a change in the user structure of TapTap. We have the ability to help some developers do some overseas testing in European and American T0 countries, as well as precipitation of high-quality players.

This year, we hope to make some attempts in Hong Kong, Macao, Taiwan, and East Asia.

Profit and loss balance :

It was our goal for this year after it was proposed last year. We hope to achieve high-quality profit and loss balance, rather than relying solely on layoffs to achieve low-quality implementation.

Of course, we took a lot of actions regarding layoffs last year, hoping to concentrate resources on high-quality project products, which is an expression of high-quality team optimization.

II. Analyst Q&A

Q1: The reason for the year-on-year increase in TapTap ARPU in the second half of the year?

A: Generally speaking, ARPU in the second half of the year is higher than that in the first half of the year. Last year, in addition to technological upgrades, we also established a core sales team and established contacts with key manufacturers in terms of advertising cooperation and services. Unlike two years ago, when manufacturers came to us for ad placement.

Q2: The combination and progress of AI technology for cost reduction and efficiency improvement?

A: AI has a great impact on the entire game industry, in three areas:

1. In terms of production, AI can participate in it. In the past half year, game companies have developed and changed the most, from waiting to actual use.

There may be a decrease in costs, but the larger change is that everyone's manufacturing efficiency will improve.

1. On the platform level, we hope that AI can improve the service quality for users and developers on TapTap. AIGC can enhance the platform's content production capabilities and lower the threshold.

2. AI brings a completely different gaming experience. We will spend some time and energy exploring this direction. However, this is a gradual process in the medium to long term, and the market may overestimate this change in the short term.

Q3: Will AIGC's lowering of R&D thresholds and increased supply benefit the TapTap ecosystem? After the decrease in R&D costs for developers, will there be an increase in promotional expenses?

A: The direction and trend is certain, but not as fast as most people imagine. Currently, the most direct impact is on small and medium-sized developers who have no drawing or development capabilities; AI can provide assistance.

However, it is not possible for AI to completely replace our company's R&D content in the short term. time is needed, like six months or a year. In the entire gaming industry, the increased production cost of games and players' higher requirements have been aspects that may not be favorable to manufacturers. This may mean that small and medium-sized developers may not be able to break even.

But the emergence of AI has re-established the production cost of games to an acceptable level, and small and medium-sized developers can also develop games and gain the expected returns.

Q4: What is TapTap's ROI like? According to research, on short video platforms like Douyin, CPA may have reached 1,000-3,000 yuan. Do we have certain cost-effectiveness compared to other advertising platforms?

A: Compared with other platforms, TapTap still has strong appeal, and we will continue to find ways to improve efficiency. When manufacturers invest in TapTap, it is not entirely based on CPA, because the marketing goals are different at different stages.

Advertising on TapTap is different from advertising on Douyin. TapTap is essentially a community where games can appear in rankings or other places through operations to increase brand recognition and gain natural traffic. This cannot be achieved on other commercial platforms like Douyin.

Q5: Progress on overseas TapTap? The impact of Chinese companies accelerating global expansion on TapTap?

A: Our main direction this year is still to support Chinese companies' globalization. We will focus on core regions, such as North America, Western Europe, and Hong Kong, Macau, Taiwan and Japan, where Chinese game companies are going.

Currently, our primary concern is whether TapTap can satisfy the needs of good users and developers, rather than just growth.

Q6: The situation for T3 and Torch Light's overseas launch? More detailed plans for China? A: To be honest, the commercialization of several games last year did not meet our expectations, including T3 and Torchlight. Torchlight is a seasonal game, and the first season performed well, but the second season was worse than we expected.

We have also summarized some problems, and we plan for the third season of Torchlight to be launched in China. However, there is limited time, so we cannot make significant adjustments.

Since this is a seasonal game, our adjustment ideas will also be gradually promoted through version updates from season to season. Therefore, we tend to look at the game's specific performance and changes from the perspective of a season's time frame.

T3 is also a seasonal game. However, this time, there will be more significant changes in the domestic launch. Previously, it focused on 3v3, but we will change to 5v5, and some hero skills will be strengthened or adjusted.

Q7: Is there a sign of the recovery of game advertising and a higher growth rate? What is the plan for the entire year?

A: The growth of Taptap was still relatively high last year, so from Taptap's perspective, we did not feel a severe winter, so we cannot speak of recovery.

Since the resumption of game licenses, there has been a certain lag in the launch of new games, so as new games gradually increase, it will surely benefit Taptap.

Q8: What is the proportion of Taptap's marketing expenses? What is the trend of change this year? Did a reduction in promotion affect Taptap's user growth in the second half of the year?

A: Taptap's marketing expenses account for one-third of the total marketing expenses. There will be a reduction this year, further for 2023, and will be adjusted according to the operating situation.

This year, we will focus on evaluating the impact and role of Taptap's marketing investment on the product itself.

Q9: The performance of the high DAU game "Egg Party" is good. Will Xindong make breakthroughs in high DAU games?

A: "Egg Party" is, indeed, a very stunning product, surpassing the expectations of many industry insiders.

But my main inspiration is that there is such a user group in the market. What we need to do is to meet the demands of this kind of user group.

We also have experience operating high DAU games, including "Party Star" and "Sausage Party," but there are also many peers in the market. NetEase has always wanted to do large-scale DAU games but has difficulty doing so.

We believe that T3 can also lock in a portion of specific user groups (basic user groups) through seasonal updates and operations, and then further expand.

Q10: Will there be a new high DAU product proposed this year?

A: There will be no new high DAU product this year, but other products will be proposed. Doing high DAU products is not like scratching lottery tickets, making a pile and gambling on one success. For companies with relatively strong capital, such as NetEase, they can do it, but it is not suitable for us. We will still focus on the few products we have on hand.

On the one hand, we will continue to operate "Sausage Party" and hope to further expand the user group. On the other hand, we believe that T3 also has the potential to become a similar product. But we will not easily set up a DAU product, but will achieve it through different product forms.

Q11: Which do you prefer, community AI or game AI?

A: We prefer both. However, the product form of AI games is still uncertain, and AI's help for tools and communities is very certain. Investment in this area will definitely be made. For example, interactive search in the gaming field, combining developer relations to give players a better experience. For example, we can develop an AI robot that informs players about all information related to the game, as well as informs developers about game operations, player experiences, and feelings.

Q12: Will overseas TapTap try to insert interfaces of overseas large models?

A: We will consider it.

Q13: Is there a plan for agent distribution this year?

A: We mainly focus on our own products this year. We hope that in the future, game companies will not need a publisher and can rely on TapTap to release their products.

Overseas will do agent distribution, because the environment is different, and game companies have financial pressure and need to distribute through multiple channels.

Q14: Does the European Union require Apple to open third-party app stores?

A: We picked up the iOS version again last year, and we have also launched on Apple and Google Play overseas, but the application store still has great restrictions on us, and we cannot do many functions. There is still a gap between the promotion of the bill and the effective implementation by manufacturers, which requires some time. We will continue to pay attention to changes in trends.

Q15: How is "Town of Passion" now? At present, the performance of several self-developed products does not seem to meet expectations. What are the experiences and adjustments obtained?

A: Mainly, we have learned some lessons, and there are too many projects in progress, and the projects are relatively complex, with relatively low overlap between projects. So this year, resources will be concentrated on important projects.

"Town of Passion" has been greatly reduced. The category is very good, but the implementation difficulty is quite high. Originally, the pressure was quite high with 100 people invested. Therefore, the focus is currently on doing the important parts. We will conduct some tests this year. If the effect is good, we will continue to invest. If the effect is not good, we may also reduce it.

I personally still have high hopes for the direction of "Town of Passion", but the company's resource scale cannot yet support a complete content.

Q16: "Star Party" did not buy much, and the performance was average. Will "T3" and "Torch Light" increase their purchases?

A: We believe that the main problem is not with promotion. I believe our promotion capability is still OK. The problem is not with TapTap either. The problem lies in the quality of the product itself and whether it can withstand the user's experience and needs, retention and income.

However, these two are also season products, and they will go through an iterative process.

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