Financial Data and Key Metrics Changes - Total revenue for Q3 2025 was $57.6 million, down approximately 19.1% year-over-year and down 2.7% sequentially, primarily due to a decline in DAU [11] - Year-to-date revenue stands at $179.7 million, down 18.9% year-over-year [11] - Adjusted EBITDA for the quarter was $7.2 million, down 50.5% year-over-year, resulting in a 12.6% operating margin compared to 20.5% [11] - MAU declined 24.9% year-over-year and DAU decreased 25.3% year-over-year, with declines concentrated in the casual segment [11] Business Line Data and Key Metrics Changes - The direct-to-consumer business showed strong growth, with revenue of $7.7 million, a 48% quarter-over-quarter increase, representing 16.7% of total in-app purchase revenue, up from 9.1% in Q3 2024 [8] - The social casino category remains challenged, contributing to year-over-year declines in DAU and ARPDAU across most of the portfolio, except for MyKonami, which showed double-digit year-over-year increases in ARPDAU [7][8] Market Data and Key Metrics Changes - The broader sweepstakes market is facing regulatory contraction, reducing the total addressable market (TAM) by roughly 25%, but growth in remaining open states remains strong, with an addressable market of $3.5 billion to $4 billion [6] - The company is focused on expanding its sweepstakes effort, which is currently live in open beta across 15 states [5][6] Company Strategy and Development Direction - The company is focused on reshaping its business to navigate market headwinds, tighten expense structures, and reorient towards durable growth [3][4] - There is an emphasis on modernizing development approaches, particularly through the adoption of AI to improve efficiency across game development and player targeting [10] - The company aims to balance disciplined investment with improvements in operating efficiency while advancing initiatives that can re-energize growth over time [14] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging operating environment and the need to reposition the business, sharing concerns about valuation and direction [3] - The company expects full-year results for both net revenue and consolidated adjusted EBITDA to fall below the low end of previously provided guidance ranges due to recent softness in player activity and monetization [12] - Management remains hopeful about the potential for growth in the sweepstakes market and the upcoming launch of Tetris Block Party, which is seen as a promising initiative [26][27] Other Important Information - The playAWARDS loyalty platform has been streamlined to focus on higher-quality partners and more aspirational rewards, resulting in a 16% sequential increase in the retail value of rewards purchased [9] - The company ended the quarter with approximately $106.3 million in cash, no debt, and access to a fully undrawn $81 million credit facility, providing flexibility for future opportunities [12] Q&A Session Summary Question: Feedback on WinZone from World Series of Slots - Feedback has been generally positive, but the sample size is small. The company is encouraged by consistent improvements in retention and monetization metrics [18] Question: Impact of California's ban on social casino games - The company has not seen benefits yet, but is monitoring the situation closely as the ban goes into effect [19] Question: Reevaluation of business strategy - The company is looking at both organic and inorganic opportunities for growth, including potential M&A [20][22] Question: Visibility into 2026 business performance - The company hopes to have more clarity on contributions from sweepstakes and Tetris Block Party by year-end [25][26] Question: Marketing strategy for sweepstakes - The company plans to open all jurisdictions and then deploy modest marketing capital to gauge performance before scaling up [28] Question: Revenue and EBITDA guidance for 2025 - The company expects a sequential decline in Q4 revenue from the core business, with challenges in stabilizing the social casino segment [32] Question: Strategic opportunities with iGaming operators - The company sees potential for partnerships with iGaming operators as the sweepstakes market evolves [36][39] Question: Drivers of D2C revenue growth - Improved merchandising within apps and relaxed policies have driven growth in direct-to-consumer revenue [41]

Core Viewpoint - The demonstration of AI-generated games may not be as impressive as anticipated, revealing significant limitations in current AI capabilities in game development [1][10]. Group 1: AI Game Demonstration - Matt Shumer, CEO of HyperWrite, showcased an AI-generated shooting game video, claiming it would be amazing [1]. - The video received widespread criticism, with viewers describing it as chaotic and lacking coherence, highlighting failures in visual logic and gameplay mechanics [4][9]. - Specific issues included nonsensical character actions, inconsistent visual elements, and a lack of basic physical logic, leading to a perception of the video as a failed experiment rather than a playable game [5][9]. Group 2: Industry Reactions - The video became a topic of ridicule across social media platforms, with developers and users mocking its quality and expressing concerns about the current state of AI in game development [9][10]. - Comments from the developer community suggested that the video exemplified the fundamental challenges of generative AI in maintaining narrative coherence and player experience [9][11]. - Shumer defended the demonstration, arguing it was an early sample of AI's potential in game development, likening it to early pixel prototypes from the 1980s [10]. Group 3: Future of AI in Game Development - Despite the current shortcomings, there is optimism about the future role of AI in game development, with potential applications in cost reduction and development time [10][11]. - Industry leaders are exploring the integration of AI into game engines like Unity and Unreal, with some independent teams successfully using AI for rapid content generation [10]. - The overall sentiment remains cautious, as the industry acknowledges that while AI may contribute to game creation, it is still far from achieving the level of creativity and coherence expected in high-quality games [11][12].

Summary of NetEase, Inc. Conference Call Company Overview - **Company**: NetEase, Inc (NTES.O, NTES US) - **Industry**: China Internet and Other Services - **Market Cap**: US$78,716 million - **Stock Rating**: Overweight - **Industry View**: Attractive - **Price Target**: US$138.00, with a 12% upside from the current price of US$122.76 as of May 15, 2025 [8][8][8] Key Points Overseas Expansion Strategy - NetEase has clarified its overseas expansion strategy, focusing on online games while de-emphasizing single-player games, which are seen as culturally specific and a barrier to global expansion [2][4][4] - The preview of the new game "Sea of Remnants" is viewed positively as a strong addition to its game pipeline [2][3] Upcoming Game Releases - Upcoming titles include "Destiny: Rising" and "Marvel Mystic Mayhem," both utilizing existing intellectual properties (IPs), which may result in lower gross profit margins (GPM) due to revenue-sharing agreements [3][3] - The company plans to launch "Where Winds Meet" globally and introduce e-sports for "Marvel Rivals" to boost its popularity [3][3] Financial Outlook - Management expects sales and marketing expenses to stabilize at 13-14% of revenue, recovering from previous volatility linked to "Eggy Party" [6][6] - The industry standard for marketing expenses is 20-25% of new games' annual revenue and 8-10% for existing titles [6][6] Gross Profit Margin (GPM) Concerns - The GPM is a focal point, with discussions around potential declines in revenue-sharing ratios with platforms like iOS and Android being more of an industry-wide issue rather than specific to NetEase [5][5] - NetEase is actively negotiating with platforms to lower costs, maintaining a track record of success in this area [5][5] Impact of AI on Game Development - NetEase has been a pioneer in integrating AI into game development but acknowledges that current AI technology is not yet ready for critical tasks like 3D asset modeling [7][7] - The company plans to reinvest manpower saved through AI into enhancing game quality [7][7] Management Insights - Management provided more visibility on operational expenditure (opex) outlook, indicating a strategic shift towards online gaming development [2][2] Additional Insights - The shift in strategy has led to the shutdown of certain studios, reflecting the company's commitment to its new direction [4][4] - The overall sentiment towards NetEase's future performance remains positive, with analysts expecting attractive growth in the gaming sector [8][8][8]

Core Company Insights - The company plans to distribute a cash dividend of RMB 35.00 per 10 shares, with a total cash dividend for 2024 expected to be RMB 717.56 million, accounting for 75.94% of the net profit attributable to shareholders [5][6] - The company has cumulatively distributed cash dividends totaling RMB 6.02 billion since its IPO in January 2017 [6] - The company achieved operating revenue of RMB 3.70 billion in 2024, representing a year-on-year decrease of 11.69% [28] - The net profit attributable to shareholders for 2024 was RMB 944.92 million, a decrease of 16.02% compared to the previous year [28] - The company’s total assets as of December 31, 2024, were RMB 6.92 billion, reflecting a year-on-year increase of 4.32% [8] Game Performance Overview - The company’s operating revenue primarily derives from self-developed core products, with total game gross billings for 2024 amounting to RMB 3.79 billion, a decrease of 14.92% year-on-year [10] - Asktao (PC) generated RMB 1,118.84 million in revenue, a year-on-year increase of 3.93%, while Asktao (Mobile) generated RMB 2,073.26 million, a decrease of 11.39% [10] - Overmortal (Mainland version) saw a significant decline in revenue, generating RMB 595.64 million, down 42.49% year-on-year [10] - The company’s overseas operating revenue totaled RMB 499.79 million, representing an 83.92% year-on-year increase, driven by new game launches [13] Strategic Focus and Future Plans - The company aims to enhance game performance and user experience through continuous iterations and updates of existing products [14] - Future product development will prioritize talent density in core projects and focus on engaging and commercially successful titles [14] - The company plans to launch new titles such as Scepter and Sword (Codename M88) and Jiu Mu Zhi Ye in 2025, with a focus on innovative gameplay and user engagement [20][21] Industry Landscape - The Chinese game industry reached 674 million users in 2024, with actual sales revenue amounting to RMB 325.78 billion, a 7.53% increase year-on-year [24] - Mobile games accounted for 73.12% of the actual sales revenue in the Chinese game market [24] - The industry faces challenges such as increasing traffic acquisition costs and intensified competition, leading to a decline in net profits for over 50% of major listed game companies [25] Regulatory Environment - Recent regulatory measures emphasize the healthy development of the game industry, focusing on areas such as minor protection and data security [26] - The company is committed to high-quality, differentiated, and globalized products while enhancing internal management systems to comply with regulatory requirements [27]