Industry recovery, but cautious investment remains (Heartbeat Company 1H23 Performance Conference Call)

Below is the summary of the 1H23 performance conference call for Heartbeat Company. For the interpretation of the financial report, please refer to the article "TapTap Returns to Pre-liberation Era, Heartbeat Lacks a Second Hit Game".

I. Management Remarks

There are still many challenges in 2H23. Some new products, such as "Sword of Bellflower," are undergoing testing and have already been launched in the Hong Kong and Taiwan regions. Based on the current feedback, this product has a large user base and great potential. The domestic version is expected to be launched in mainland China and other overseas regions in November 2023.

After adjustments in 1H23, TapTap currently has many promising investment opportunities. The company will continue to invest in market promotion and product development.

II. Analyst Q&A

Q1: What are the plans for TapTap's overseas commercialization?

A: Currently, there are no plans for commercialization.

Q2: How does TapTap view the growth of Monthly Active Users (MAU) and platform development?

A: After a decline in the first half of the year, MAU showed some recovery in July and August. The change in 1H23 MAU was due to cost control. The company reevaluated the return on investment (ROI) of its promotions, resulting in reduced investment and a decrease in 1H23 MAU.

Starting from 2H23, through adjustments in product and promotion strategies, the company has found opportunities to acquire cost-effective users.

MAU changes reflect the company's selective approach to user growth. Growth only reflects a part of the overall picture. Similar trends can be observed in other domestic competitors within the same period, influenced by both macro-environmental factors and the company's investment. The company is capable of finding ways to achieve growth.

Q3: Does the company have any new game project plans?

A: There are products under preparation for 2024 and 2025, but they have not been fully approved yet.

Q4: TapTap has recently started featuring PC games. What progress has the company made in this area? What is the expected revenue contribution?

A: Currently, the company's investment in this area is not substantial; it is more of an exploration. The core audience of TapTap is mobile game players, but players do not limit themselves to a specific type of gaming device. Currently, a significant proportion of TapTap users are players of PC and console games.

Q5: With abundant game offerings during the summer, has the company observed an increase in user acquisition costs? How do you foresee the trend of game acquisition costs in 2H23?

A: The eCPM (effective cost per mille) during the summer did not show significant changes compared to previous periods; it followed the normal industry cycle during summer and winter vacations.

Q6: What is the expected lifecycle and future operational plans for "Torchlight" and "T3"?

A: Both games are designed in a seasonal format, and we hope to continuously gain player recognition and growth through seasonal updates. It is still too early to say if we will achieve 100% of our expectations. In 2H23, we hope to gain more recognition and growth with the updates in each season. The company will continue to observe whether DAU and monetization can stabilize. Currently, the investment in games aligns with their performance. If the games perform well, corresponding investments will be made, and adjustments will be made if there are any issues.

Q7: What is the arrangement for the development team in the pipeline?

A: In the future, we will be more cautious in increasing the number of development personnel, depending on the performance of the products. Currently, all development personnel are focused on the products, and the control of personnel corresponds to the performance of the products, so there won't be significant deviations.

As for new projects, the company will be more cautious and strive for a higher success rate. In the long run, there are several products that we intend to operate for the long term, including "Torchlight," among others. Ideally, we hope that the products will improve with each season, and then gradually increase the investment in personnel.

Q8: There will be two new games launched in 2H23. How will the marketing budget be allocated?

A: There won't be a particularly significant impact. The marketing efforts for these two products will be relatively restrained, and it is expected that the marketing costs will be recovered in a short period of time. "Sword of the Bellflower" has performed well in Hong Kong and Taiwan, so the company may invest slightly more in it, but there won't be a significant deviation.

Q9: Are there any new game projects planned before 2025? Will there be an increase in agent games in the future?

A: There are plans for 2024 and 2025, but they are not yet confirmed or in a state where they can be announced. The investment in these products is expected to be relatively small.

Q10: What are the changes to the Spark Editor?

A: There haven't been significant changes. Currently, we are waiting for the approval of the version number.

Q11: How do you view the situation of game advertising?

A: The overall gaming market in China is in a state of recovery. Various manufacturers have plans to launch new products during the summer and 2H23, and the company currently does not feel any downward pressure.

Q12: How do you view casual games and mini-program games?

A: There is not a high overlap between our user base and the users of mini-games. However, the company will make some attempts, especially games that are suitable for TapTap users, such as "Sheep Adventure," which is also popular among TapTap users. We will make some simple attempts, but the investment proportion will not be particularly high.

Q13: Currently, most game communities are still on QQ. Will TapTap consider developing a closed-loop communication and chat room system?

A: It can be considered, but it would be quite complex to implement. It's not enough to just develop it; we need to consider whether it can be better than QQ in terms of user experience. This would be a significant challenge.

Q14: The company's success rate in self-developed games is not very high. Will the company reconsider the importance of agent distribution to balance the pipeline?

A: We will consider it if there are good opportunities and products. From a platform perspective, we hope to empower all developers. For some products that are particularly suitable for TapTap and have long-term contributions and deep compatibility, we will consider signing them.

Q15: There has been a certain decrease in the revenue share for game developers in 1H23. Which game products are responsible for this?

A: It is mainly due to agent games such as "Endless Urara," some NetEase games, and "Blue Beauty Dream." Overall, the decrease in revenue share corresponds to the decrease in revenue. Q16: How do these companies save costs with the decrease in bandwidth costs?

A: In the first half of the year, the cost of bandwidth will also decrease accordingly.

Q17: What are the sources of incremental government subsidies and financial income?

A: 1) Most of the government subsidies are tax refunds, which were higher in the first half of the year because some expenses in 2022 were accumulated due to the pandemic and will be given to the company in 2023. 2) Financial income is also increasing because the interest on overseas US dollars has been rising, and the company has some cash reserves in US dollars.

Q18: What are the main products that contributed to the decline in overseas game operating revenue?

A: The revenue of "RO: Guardian of Eternal Love" and "Unending Ullala" is stable but showing a slight decline.

Q19: How do you view the lifecycle of "Sausage Party"? For games with a large number of daily active users (DAU), big companies have had good results after trying (NetEase). How does the company plan its own big DAU games, and what are the plans for "Sausage Party" in the future?

A: "Sausage Party" is currently in a stable mid-term state and is also a typical seasonal game. Each season update will have a noticeable impact on user numbers.

Several factors have influenced this year:

As a mid-term product, the advantage is that the majority of users have played it and know the product. When the company introduces good gameplay and versions, it can still drive user retention.

Q20: What is the company's positioning for TapTap in the future? Will it focus on hardcore users or will there be some diversification?

A: There are many directions, but all are being explored. There will be some control over the commercialization of the main site because a high commercialization rate can affect user experience and developer experience to some extent. However, besides the main site, the company sees many other areas to explore, and some are already being implemented.

Q21: How do you forecast the trend of the expense-to-revenue ratio for the three expenses in the future, considering that the expense-to-revenue ratio for 1H23 has decreased?

A: The expenditure on marketing expenses follows the pace of new game launches, making it difficult to predict. However, overall, the marketing expenses for new game launches will definitely be recovered and will not affect profits.

Q22: The company has obtained some new import licenses. What are the plans for the upcoming releases of the three games that already have import licenses?

A: The company has two types of games: one is purely commercialized games, and the other is games with lower commercialization levels that are independently distributed by agents. The latter serves as a supplement to the game content ecosystem on TapTap.

Q23: What are the recent changes in TapTap usage duration? What is the medium-term goal for traffic?

A: There is no specific target for optimizing usage duration, and the company will not create videos and communities solely for this purpose. The company will categorize users and provide concise services for users who come for new games and reviews, while offering more value to users who seek more reviews and strategy content. There is also a group of users who form their own communities while using the platform.

We generally look at the Daily Active Users (DAU) to gauge platform activity, and we don't particularly focus on the duration of each individual session.

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