Xindong (Minutes): Overseas Outbreak Benefits from the Return of Key Partners

The following is a summary by Dolphin Research regarding$XD INC(02400.HK) the 2025 H1 earnings call minutes. For earnings interpretation, please refer to《XD Inc.: Frequent 'Dark Horse' Games, TapTap Accelerates Monetization》

I. Review of Core Financial Report Information:

1. Guidance: The company plans to launch new games in the second half of 2025, including the domestic release of "Ether." Additionally, new games are being prepared for 2026. In the future, the company will continue to focus on new industry changes, seize new opportunities, and strive to introduce more interesting new content, innovation, and transformation at the TapTap platform level.

2. Capital Expenditure and Business Advancement: The company is currently in a relatively healthy financial state, benefiting from increased revenue, allowing for more stable reinvestment of profits into game development and platform construction, aiming for better returns in the future.

II. Detailed Content of the Earnings Call

2.1, Executive Statements of Core Information:

1) 2025 Business Review:

a. H1 Business Performance: The company performed well overall in the first half of 2025, with stable business operations. Although no new games were released in the first half, several previously operated games achieved significant success, such as the successful launch of "Ragnarok RO: Origin" in Southeast Asia, and the continued operation of "Torchlight" and "XD Town," both showing a positive upward trend. The TapTap platform also performed relatively steadily in the first half, with growth in both user numbers and revenue.

b. H2 Outlook and New Plans: The company has several new plans for the second half of 2025, including the domestic launch of the "Ether" game next month, which the company holds high expectations for.

2) 2026 Goals:

a. New Game Preparation and Investment: The company has several new games in preparation, planned for release in 2026. Thanks to increased revenue, the company is currently in a healthy financial position, with sufficient profits available for continuous and stable investment in game development and platform construction, aiming for better returns in the future.

b. Platform Development and Innovation: The TapTap platform will continue to focus on industry dynamics, seize new development opportunities, and strive to introduce interesting new content, changes, and innovations.

2.2, Q&A Analyst Questions and Answers

Q: Can the company provide an update on the performance of the "Ether" overseas Indonesian server and the progress of the domestic server testing?

A:The "Ether" overseas Indonesian server has performed well, exceeding company expectations, with positive player feedback and significant profits and revenue. The company believes this game category is a first attempt in both technology and type, with potential for long-term operation. The domestic server is expected to launch on September 25, but faces challenges from the highly competitive domestic market and high player demands. The company is fully committed and confident in the long-term development of this project, but short-term performance needs to be viewed rationally and objectively.

Q: What are the company's operational promotion plans and commercialization expectations for the domestic launch of "Ether"?

A: Based on the long-term update potential of "Ether" gameplay and the successful experience of the overseas server, the company plans to continue investing resources in operations. The overseas server has already achieved significant profits and revenue, laying the foundation for future development. Despite fierce domestic competition, the company will continue to explore and address operational challenges. The company holds a cautiously optimistic attitude towards the commercialization performance after the domestic launch, focusing more on long-term growth potential.

Q: TapTap's revenue grew by nearly 40% in the first half of the year, despite no significant increase in user numbers. How does the company explain the specific role and manifestation of AI or algorithms in this?

A: TapTap's revenue growth in the first half of the year is mainly attributed to three factors: First, increased industry competition, leading to higher advertiser revenue and willingness to invest; second, efficiency improvements brought by algorithm optimization, contributing to less than half of the growth factors; third, an increase in ad display frequency. The company continues to invest in reinforcement learning-related algorithms, which are gradually maturing. In the future, the company is also exploring the application of large language models in algorithm recommendations to enhance effectiveness. Currently, the contribution of large model AI to advertising revenue is minimal. The company focuses more on user volume and product service growth rather than solely pursuing high commercialization rates.

Q: The company has recently achieved success with several games (such as Muffin, XD Town, and the international version of "Ether"). What are the successful experiences, and how will these experiences guide future product initiation and development?

A: The company believes that continuous success is partly due to luck, but the core lies in continuous investment in game development over the years, the continuous improvement of team capabilities, and good vision in project initiation and category selection. The company recognizes that success is not guaranteed to continue, and in the future, it will focus on enhancing the "hard strength" of development, including technical and artistic performance, to increase the current 50% success rate to a higher level. This will be achieved by increasing development investment rather than relying solely on past experiences.

Q: What is the company's outlook for the TapTap PC version, including potential user scale, commercialization opportunities, and specific timelines?

A: The company launched the TapTap PC version to align with the growth trend of core PC players, serving existing users and expanding on the PC platform. Although Steam performs well, its revenue-sharing model does not serve all developers and players. The TapTap PC version has achieved stable growth, mainly driven by the launch of new games, and is committed to collaborating with more partners to enrich the number of games. Currently, it can provide effective promotion and testing support for new PC game developers, forming a virtuous cycle. The company will continue to invest and focus, but cannot currently provide specific scale expectations and timelines.

Q: The company believes that products like XD Town and Torchlight have the potential to be evergreen games. What does the company define as the most important metric for measuring an evergreen game? Is it user activity or monetization capability?

A: The company has clearly set long-term operational capability as a goal since the project initiation, especially for self-developed products, to ensure that high investment can yield continuous output. For evergreen games, user activity is crucial because as long as users remain active, payment capability is naturally not an issue. The key is how to make players feel the value of the product through continuous content updates and investment, thereby willing to continue investing time and money. The company has accumulated experience in this area and has already validated some successful paths with multiple products.

Q: What is the company's strategy for developing new games in the future? Will it focus on evergreen games or maintain category diversity?

A: The company's self-developed products will clearly focus on evergreen games to ensure that high investment can achieve long-term continuous operation and output. For agency-published games, category openness will be maintained. Given that several games currently show evergreen potential and investment continues to increase, the number of new game projects in the coming years will be reduced accordingly. The strategic goal is to have more online, continuously operating, and well-performing evergreen projects rather than pursuing the quantity of new projects.

Q: What is the company's overall plan for AI, and what are the specific applications of AI in game operation development and TapTap ADN business?

A: The company holds a positive attitude towards AI applications in game development, believing that the industry's overall progress in this area is open and transparent, and the company remains in sync. For the new TapTap ADN business, it is currently in the very early stages of team formation, and while there is a market potential of tens of billions, it is too early to say whether it can expand to hundreds or even thousands of billions. If this business succeeds, AI-generated content (AIGC) and large model AI will show great potential in it.

Q: The TapTap PC version download entry is online, but the promotional actions are not obvious. What is the specific promotion rhythm and measures?

A: The company is conducting appropriate promotion for the TapTap PC version, with a strategy similar to the mobile version, that is, simultaneous promotion with the launch of new PC games. The promotion rhythm is stable and continuous investment rather than large-scale concentrated promotion at specific time points. The PC version's functions have become stable and can be promoted. The company will continue to invest based on market opportunities and strive to find more partners to enrich the platform's game quantity, promoting its virtuous cycle growth.

Q: Regarding the RO2 product under development, how does the company view its integration of classic IP and open-world elements? How does it stand out in a competitive market and attract old players?

A: The company is creating RO2 out of a deep love for the RO IP, aiming to make up for the regrets of RO1 and provide players with a better product. The choice of open-world elements is to challenge the team's capabilities, pursue technology and industry development, rather than short-term profitability. Although the open-world challenge is significant and competition is fierce, the company believes this is a necessary path for team progress. Introducing an open world on the original strong IP foundation is a strategy that combines conservative and aggressive approaches, aiming to attract old players with innovation and continuously invest in improving product quality.

Q: Besides RO2, what are the main considerations for the company's future product line planning and new product initiation directions in terms of gameplay or categories?

A: The company's future product initiation mainly follows three principles: First, it must have long-term operational capability; second, the product must have internationalization potential; third, it must achieve breakthroughs and improvements in technology, as demonstrated by the RO2 project. In addition, the company will comprehensively consider category opportunities and market competition. Currently, the company has some new projects in planning but will maintain a cautious attitude, and the number of new projects will not be particularly high.

Q: XD Town has performed well in the domestic server. What are the company's plans for its overseas release, and can the overseas market performance surpass the domestic server?

A: XD Town is expected to launch overseas early next year, with overseas testing possibly starting at the end of this year. The company is confident in XD Town's overseas performance and will make every effort for continuous operation and long-term investment, as the domestic server has already achieved good results and demonstrated long-term effects. The overseas market is considered very important, but the company cannot currently confirm 100% whether its performance can surpass the domestic server, and it needs to be judged after in-depth testing.

Q: With stable TapTap user growth, what is the trend of sales expense investment in the first half of this year and the whole year? How does the company consider sales investment strategies in the future?

A: TapTap's sales expense investment in the first half of this year and the whole year will increase compared to last year, but not significantly. In the short term, marketing expenses have a significant impact on user growth. However, the company's core investment focus is on product development, committed to driving user volume and activity growth by creating value for users and developers, rather than solely relying on sales expenses for user growth.

Q: Is TapTap's user growth mainly driven by increased sales expenses or by the influence of blockbuster games (including first-party and third-party) on the platform?

A: In the short term, TapTap's user growth is significantly influenced by marketing expenses. However, the company's core strategy is to focus on creating value for users and developers, expanding user volume and activity by enhancing products and services. For example, the launch of the TapTap PC version is also to align with market trends, serving the needs of developers and PC players who are increasingly launching PC versions of games, thereby driving user growth.

Q: With ample company funds, will there be a proposal for dividends or buybacks in the annual report to reward shareholders?

A: The company originally planned to provide stable returns to shareholders through continuous dividends. However, considering the tax situation differences among shareholders worldwide, the company may adjust its strategy in the future, adopting buybacks instead of dividends. This move aims to provide shareholders with greater flexibility in handling assets and, under the premise of continued good company performance, can reward shareholders while avoiding share dilution and even achieving continuous growth, which is considered a healthier execution method.

Q: The number of ad display slots on the TapTap platform has increased. Will the company continue to consider increasing the ad load rate in the future, especially considering that it is currently at a lower level compared to competitors?

A: The company clarifies that the previously mentioned growth refers to the increase in ad exposure, not the increase in ad inventory slots. This is mainly due to the increase in daily active users (DAU) or the average ad viewing duration/frequency per person, thereby increasing the total exposure. The company has not mentioned that it will continue to increase the ad load rate in the future. On the contrary, the company focuses on user volume and product service growth, and pays attention to advertiser ROI, not pursuing endless commercialization rates.

Q: The recent introduction of game advertising regulations by the state, will this affect the company's future revenue?

A: The company is working with relevant departments and industry partners to study these regulations. If the policy is strictly enforced, it is expected to have some impact on game advertising placements, which may affect the company's future revenue.

Q: With the launch of new servers, the proportion of net revenue recognition has increased significantly. What are the company's considerations for net and gross revenue recognition in the future, and is this a special situation?

A: The net or gross recognition of game revenue depends on the contract terms, that is, whether the company plays a leading role or an agency role in game distribution. Currently, most of the company's net revenue recognition mainly comes from RO overseas revenue. This is not a special situation but is executed based on specific cooperation agreements.

Q: How does the company view the future growth potential of the open-world track? What unique advantages does RO2 have as a new product in this field?

A: The company believes that the core user group of RO2 is no different from RO1, and the open world is not a novel concept but an upgrade from 2D loaded maps to a 3D seamless large world, responding to players' desire for a richer and more three-dimensional world experience. This move aims to restore the virtual world with updated technology and more complete capabilities. The company views the open world as a key step in the team's technological evolution and self-challenge, aiming for continuous progress to keep up with the times and industry development. The RO2 project attempts an open world on the original IP foundation, combining conservative and aggressive strategies.

Q: TapTap's advertising revenue growth far exceeds the industry. Is it a trend for third-party game manufacturers to advertise on its platform? Has the advertiser mindset changed, and can this trend continue?

A: It has become a trend for third-party manufacturers to advertise on TapTap, mainly due to its high return on investment (ROI). Even with the company's advertising revenue growth outpacing peers, advertising on the TapTap platform remains more competitive than other platforms, allowing advertisers to earn more, which constitutes the platform's core commercialization competitiveness. Advertisers are more concerned about whether the investment can be profitable and cover development costs, forming a healthy ecosystem. Therefore, as long as TapTap can continue to provide high ROI, this trend can continue.

Q: If Apple opens third-party external link payments, what positive impact will it have on TapTap?

A: If Apple's platform tax policy is relaxed, opening third-party external link payments will have a positive impact on TapTap. The reduction in platform tax will increase advertisers' profit margins and budget. Game manufacturers tend to invest additional profits in advertising to acquire more users, which will directly benefit advertising platforms like TapTap.

Q: How is the company's independent ADN business revenue reflected in the financial report? Is it included in the information services segment?

A: The company currently does not refer to it as TapTap ADN but as an independent ADN business. Its revenue is currently included under "other income" in the financial report, rather than the information services segment.

Q: What is the company's overall plan for TapTap's user growth in the second half of the year?

A: TapTap's user growth is currently stable. The company expects that growth in the second half of the year may not be as smooth as in previous years, with the main driving force depending on whether there are blockbuster games launched and the company's breakthroughs and innovations in products. The company will continue to focus on and strive to improve product services to promote user growth.

Q: What is the company's overall outlook for the future development of TapTap mini-games?

A: The development of TapTap mini-games aims to empower more game creation enthusiasts and potential developers, providing a platform that allows them to more easily and simply create game prototypes, receive player feedback, and form a community. The development of AI technology provides a good opportunity for this, and the company believes that AI can significantly lower the threshold for game creation, helping talented individuals who lack skills or resources to create and launch their first game. The ultimate goal is to leverage AI technology and platform ecology to discover more game creation talents and provide players with more excellent games.

Q: The company's performance growth relies not only on new games but also on updates to old games like RO and the revenue recovery of games like Torchlight and XD Town. How does the company strategically adjust for long-term operation of evergreen games or old games, and update season versions and gameplay to achieve revenue recovery and evergreen status?

A: The company has incorporated long-term operational capability into its core considerations at the beginning of game initiation, choosing game types with the potential for continuous content updates. For example, the seasonal system of "Torchlight" and the continuous trend season content updates of "XD Town" were determined as long-term operational directions at the time of initiation. The company believes that game types theoretically suitable for long-term operation, through continuous efforts, even when facing challenges, have the confidence to achieve long-term success.

Q: The company's performance in distribution, especially overseas distribution, has exceeded expectations in recent years. Has there been any personnel or strategic direction adjustments behind this to improve the success rate?

A: The improvement in overseas distribution success rate is closely related to personnel adjustments in recent years. Key partner Huang Xiwei returned to take charge of domestic and international distribution and gradually merged his original entrepreneurial team into the company to jointly undertake overseas distribution tasks. In addition, the company has accumulated valuable experience and growth through the overseas distribution of multiple games. These factors have collectively driven a significant improvement in distribution success rate.

Q: Is the change in Apple's tax policy (such as iOS opening external links) a good opportunity for TapTap to go global? What is the company's view on TapTap's globalization strategy?

A: The company will continue to pay attention to changes in Apple's tax policy, as it has a positive impact on advertising budget. TapTap's ultimate goal is to achieve globalization, especially as more products, including mini-games and AI ecosystems, are launched in the future, the platform's competitiveness will continue to increase. At this stage, the company is more focused on refining existing products to ensure they have core competitiveness, thereby successfully expanding into overseas markets in the future.

Q: The recent progress of the Spark Editor is not obvious. What is its specific situation and the company's current plan?

A: The Spark Editor has undergone significant adjustments recently. Previously, due to insufficient investment, the functions and high-quality game output did not meet expectations. With the development of AI technology, the company is exploring how to use AI to empower developers to create more creative and higher-quality games. The Spark team is still in place, but the direction has been adjusted to two parts: one is to combine the existing SE engine with the Spark Editor to support AI in creating 3D games; the other is to study how to make AI more conveniently use the editor to orchestrate games. These are still in the early stages of investment and research, and more investment will be made once there are clear outputs.

Q: Investors are concerned about the company's email project Filo Mail. What is the company's positioning and planning for it?

A: The company positions the Filo project between "key focus" and "non-core," originating from the personal needs of the company's management for email use overseas, and is led by the original TapTap partner Chris team. As a company with an internet product background, it has experience in making such products. The project has a relatively small investment scale and also serves as an entry point for the company to explore AI and AI programming fields, aiming to gain understanding and experience through small-scale, low-cost projects. The company believes that Filo has certain potential and will continue to pay attention to it.

Q: Will the company consider developing new projects similar to "Muffin 2" in the future?

A: The company aims to develop products with long-term operational potential. Although Muffin still faces challenges in sustainable operation, the company believes that this game type (a relaxed, low-cost MMO team experience) has great potential and has proven to have player scale and spending capability. If the company develops new projects in the future, it will be based on Muffin's production concept, striving to find more effective long-term operational methods to solve the sustainability issues of existing products, but not necessarily in the form of "Muffin 2."

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