On April 30th, 2021, XD Inc. (02400. HK) released its annual report for 2020, along with the Chairman & CEO Dash Huang’s Letter to Investors.

In the Letter, Huang expresses gratitude for the Investors and their continuous support for XD’s philosophy of prioritizing long-term value over short-term stock price throughout the first fiscal year following the company’s IPO. 

Huang states that the ongoing generational shift in the international games industry has opened up a tremendous window of opportunities for Chinese game developers to inspire awe and respect in the world. XD must capitalize on these opportunities to optimize organizational structure and maximize productivity in game research and development. With more projects developed in-house exclusively for TapTap, the platform can then expect to see greater user growth while further reinforcing its value as a product. 

Huang also states that the company will continue to focus on improving its research and development capabilities, content, and management to grow the XD brand and the user base. A company must focus on the tangible results that reflect its long-term value and growth, and not be tempted by the short-term market fluctuations, or obsess over short-term investor voting results.

Following is the full text of the letter to investors.

Fellow shareholders, 

2020 marked our first full fiscal year since XD went public. This was a difficult year with many unprecedented challenges, but nothing has distracted us from realizing our vision. 

I feel immensely honored, especially during these uncertain times, to have the support from all our employees, friends, and investors as our philosophy of “prioritizing long-term value over short-term stock price” is beginning to bear fruit.

I frequently find myself contemplating the ever-evolving identity and value of XD. We have grown from a sole proprietorship into a public company with over 2,000 employees; we now carry great responsibilities as well as the shared dream of our employees, stakeholders, and investors alike. 

Many of our friends have labeled XD as an idealistic company. Some have even pointed out that the extent of our mission may have gone as far as unrealistic.

To address such ambivalence, we released a brand film and I would like to draw special attention to its slogan: Realize, From the Unreal.

Our mission is so ambitious that it may appear out of place in the existing reality; we see reality as is, but in no way are we satisfied with it. 

As a team of forward-looking optimists, we are at the forefront of challenging the status quo and improving upon the current reality. 

What, then, is our grand mission? A precise reflection of the statement:「Impact Each and Every Gamer by Promoting the Spirit of Craftsmanship」

What are the common qualities of excellent companies? Why do people actively leave their comfort zones to be a part of a bigger community and these companies? And what does XD have to offer to upstage our competitors? At the very core, we are all in pursuit of greater productivity in creating something meaningful and generating the most value for ourselves, our communities, and even society as a whole. 

Maximizing and making the most of this productivity, therefore, becomes our number one priority as the company works towards excellence. 

Our Mission 

Impact Each and Every Gamer illustrates our motivation to understand and empathize with gamers. Instead of outlining video games as an exhaustive cash grab, we are on a mission to build and maintain a lasting relationship with our players on the foundation of mutual trust and appreciation. 

Promoting the Spirit of Craftsmanship refers to our attitude. Developers are like the craftsmen of the games industry, and at XD, our craftsmanship is defined by our passion and extreme attention to detail in the game development process. In a market crowded with subpar and monotonous video game products, we uphold the spirit of craftsmanship in putting out profound gaming experiences that we, as gamers, can be proud of. 

I hope this paints a clear picture of our so-called unrealistic mission, and I’m confident in our collective capability and tenacity to identify and seize the opportunities, boost productivity, and ultimately realize this mission from the unreal. 

Our Opportunities

The most successful companies have typically come into existence following a market shift or during a time of great market instability. So when can we expect the next big opportunity in the gaming industry? Now!

There’s not just one, but a plethora of great opportunities to explore!

There is an ongoing generational shift in which platform-exclusive and single-player experiences with an upfront payment are making way for cross-platform, online multiplayer, and live service games. And because free-to-play (F2P) online games have long co-existed with pay-to-play (P2P) offline games, the opportunity ahead of us is not a simple paradigm shift from one to the other, but a convergence of the two.

High-quality premium games and freemium online games had historically been two distinctive branches, each with their respective strengths and weaknesses. 

For premium and AAA projects, the costs associated with the research and development (R&D) process have increased so dramatically that even the most capable developers are discouraged from creating a new IP over proven franchises. 

On the other hand, freemium multiplayer games, particularly those developed in China, have faced growing criticism of their limited content quality and intrusive pay-to-win mechanisms. 

Therefore, the convergence should come as no surprise as visionaries from both sides seek breakthroughs in business operation and product offering: many AAA studios have incorporated the freemium model into their projects, and Chinese developers are improving their product quality to rival their AAA counterparts. Two of the most symbolic cases are Fortnite and Genshin Impact. Nevertheless, these hybrid games, while remarkably successful, only make up a slim fraction of the new game releases each year. 

This reminds me of an exchange I had with some friends regarding the League of Legends Origins documentary. We attributed the legend of League of Legends to the developers’ ability to capitalize on the hidden potential of Warcraft III and create an F2P live-service experience around it. At first, there were criticisms of the game’s subpar quality and less-than-original gameplay, but through continuous improvements and iterations over the years, it evolved to become one of the most influential gaming IPs in the world. Today’s premium-games market is filled with opportunities as many of them have the potential to be adapted into a staple in the gaming market just like League of Legends.

Beyond the transition to the live-service model, there is the trend of games going from single-platform to multi-platform. 

Moving forward, video games and their player data will need to be made accessible across multiple platforms and survive frequent hardware upgrades. This will inevitably require more games to abandon the upfront premium and opt for an F2P, live-service model.

The multitude of trend shifts in game design makes up the present opportunities in the global games industry. Then there are the regional opportunities that are intrinsically beneficial to Chinese developers. 

For starters, we have the world’s largest gaming market in the number of domestic gamers, industry professionals, and overall revenue. 

The impressive mobile gaming market has motivated our team to devote a significant amount of resources into mobile game development, and the substantial revenue potential helps alleviate at scale the risks associated with developing mobile projects compared with developers based outside of China. 

The scale of China’s games market has not stalled the growth of Chinese gamers and their preferences are becoming increasingly aligned with those of Europeans and Americans. It won’t be long before experiences designed specifically for Chinese gamers start turning heads on a global scale. 

With this wealth of tremendous opportunities, we can confidently expect more Chinese game developers to inspire awe and respect in the world, and it won’t just be for their revenue, but also their global influence.

Beyond the temporal and regional opportunities, there are also unique opportunities characterized by the synergy between TapTap’s platform and XD’s R&D team. The additional revenue generated from the users on TapTap serves to further bolster our funding for in-house game development, which goes on to attract even more followers to the platform. This vigorous cycle distinguishes TapTap from other distribution platforms and is one of the most persistent forces behind XD’s growth.

Additionally, TapTap itself as a product has also exerted unparalleled commercial and industry potential. Being one of the only platforms to boast the zero revenue share model, our platform does not have any commercial bias towards players or developers: TapTap benefits from catering to the interests of both developers and players. As game creators exercise more and more influence over the gaming market and more era-defining mobile games follow in the footsteps of titles like Genshin Impact, major platforms will need to start compromising. We are already seeing this pattern in the recent conflicts between Tencent and Huawei, and Epic vs. Apple. Thanks to TapTap’s no revenue share model, we have both game developers and the gaming community as our allies.

The synergies born from being both a content producer and a platform operator are crucial elements of XD’s strategy. We are in a similar situation as Netflix where the user base from their streaming platform allowed them to produce content that would otherwise be too bold and speculative for traditional Hollywood and TV networks, and they could tailor their content to target different demographics to grow brand loyalty and attract new users. Companies like Nintendo, Sony, and Microsoft have been in similar situations too, as shown by their willingness and ability to make long-term investments in their IPs. In the mobile gaming space, XD is the only developer with an established platform that caters to third-party games: Apple, Google, and Chinese mobile phone manufacturers have platforms but they are not involved in game development; Tencent and Bytedance platforms have games but most of their traffic comes from apps such that video games are just an avenue to monetize their users. In contrast, XD has always been a video game developer and our first-party games have the primary goal to raise platform loyalty while bringing in more users.

Unlike Netflix, a lone fighter in the upward battle against Hollywood elites, our mission at XD is made less arduous due to our 0-revenue share model. This model brings us countless allies in the form of mobile game developers as they distribute their content via TapTap, get their games reviewed, and earn a reputation from our community. Without the burden of having to actively purchase all of our platform’s content, we can focus on expanding on the inventory of TapTap-exclusives.

Our vision for TapTap is to have it become a comprehensive service that is thoroughly integrated into every part of a gamer’s experience. We plan to make it easier for players to discover new games; make it faster to launch games; make it more fun to play games, and make it more engaging to discuss games. We still have a long way to go but when TapTap becomes fully mature, it will be a unique force on a global scale.

Opportunities are abundant and for everyone to exploit. The key here is how we plan to capitalize on what others cannot. Our solution? Maximize productivity. 

Increasing Productivity

I’ve spent the last few years studying our friends, our competitors, and ourselves to come up with a system to increase our productivity. With the experiments we ran throughout 2020, we have continued to learn and optimize this system.

The first step is to increase talent density.

We’ve had a focus around talent density for some time now, and it’s important to remember that this is in no way an excuse to measure the viability of our business solely against recruitment standards. In the process of increasing talent density, our leadership and management teams have learned to be extremely proactive and oftentimes make very tough decisions.

When we first relocated to our current office site in 2012, I gathered all our employees into our new lobby and proclaimed that we were to be “not just colleagues, but a family.” We continued with this mentality by gradually adding new benefits like daily catered meal services and an on-site gym. We wanted everyone to feel like a family and the new office their home.

9 years later, today, we have had to move on to something more fitting in the current climate for the same reason: boosting productivity. Therefore, we are now asking our employees to start working together as a team of world champions. 

I see a lot of similarities between an ambitious company like XD and a professional sports team like the ‘95 Chicago Bulls; we both have a mission born from passion: XD is looking to change the world of gaming and the Bulls were seeking to become champions. The leaders of these teams are responsible for ensuring each member of the team is the best fit for their respective positions. Everyone that puts in the hard work will have my utmost respect and gratitude; but if someone is not the right person for the job, no matter how hard they work, they don’t belong on the team.

Our new approach may seem harsh, but it is the best way to accomplish our updated objectives. We are now in the running to compete with the biggest companies in the world, and our goals to push the industry forward are very ambitious. We need the best team to realize these ambitions. 

XD employees can be described as craftsmen or professionals but we are no longer a family. This is an ideal environment for individuals to pursue excellence, and for those looking to challenge their limits. We care for each other like members of a professional team, we trust each other to perform our respective duties, and we take pride in the results of our craftsmanship. 

When we have the highest of expectations, we need to also match them with the top-of-the-market salaries. Just like when a team offers big contracts to build an all-star team, we are offering the highest salaries in the industry to build a world-class team here at XD.

Next up is the promotion of transparency and candor.

I frequently reminisce about running a startup. I remember being cramped in a small office space with only a handful of colleagues. Everyone knew each other well and had spontaneous conversations all the time. We worked together seamlessly and our goals were all aligned. 

Now that XD has grown to over two thousand employees, having full transparency is more difficult but also more important than ever. Employees should be able to access everything, from our current strategies and financial records to the obstacles we are all facing. This transparency is crucial for everyone to be able to both grow themselves and contribute to our collective future. This is why we have consistently promoted the incorporation of Confluence into our workflow, we make sure everything is documented, from our overarching strategies to our meeting minutes and daily work logs – all are accessible to everyone regardless of their department or position.

Over the last year, we took even more drastic steps such as integrating Slack as our new business communication platform. This way, not just our documents but all our communications have become transparent, archived, and discoverable to be used for post mortems and reflection. By giving my colleagues access to all the information I have, everyone can reach their full potential within the company. 

XD’s growth over the last year has attracted many new colleagues to the team. Everyone has their own unique experiences, great ideas, and preferred work styles. Only through open and transparent communications can everyone integrate all these variables for a team to reach its full potential and solve our industry’s biggest challenges. This is especially important for our many large-scale projects where a team can contain hundreds of members. 

In summary, the promotion of transparency and candor has helped us reduce our inefficiencies, increase our focus, improve our teamwork, and promote individual growth. 

The last step is to reduce controls and disperse responsibilities. 

With the increased talent density and the promotion of transparency and candor, we can now open the books, give each other constructive feedback, and start reducing control over our employees and entrusting them with more freedom and responsibilities. Everyone in the company is enabled and encouraged to take ownership and make informed decisions to their best judgment.

Rules and controls are typically set up to prevent employees from uninformed or irresponsible decision-making. However, exceptions are bound to happen even with the most comprehensive employee handbook, so why not save the trouble of having to constantly update these rules and entrust the talents with the responsibility and flexibility to make informed decisions? 

Our goal is to remove rules that may reduce small mistakes but restrict employees’ ability to make informed decisions. Rather than creating these inefficient rules, we look for our team to consist of smart, responsible, and capable individuals that do not require micro-management.

We began by making several policy changes to help give employees more freedom – there are no longer any limits on vacation days and most restrictions on business-related expenses have been removed. I don’t see any of these as employee benefits, but rather a manifestation of trust. We trust our high performers to make their own judgments in the company’s best interest. 

This is why we’ve always emphasized the practice of “context, not control” at XD. Everyone should make their own informed decisions, and managers need to regularly assess their teams’ ability to make such decisions. If an employee is determined to not be able to make effective decisions, then it is the manager’s turn to decide on whether to exercise more control or replace the individual. 

Given the above, the implementation of “context, not control” has been very tough but it is without a doubt worth the trouble: it creates a company culture that attracts and retains the best talents to maximize creativity and productivity from within.

Why am I trying to enforce these changes and break away from the rules of traditional management? I think this has a lot to do with my personality and life experiences. 

I like to challenge unintuitive rules and come up with alternative solutions to mistake-prone situations. No matter the job, I want to learn about everything there is to learn about the company I work at, work beside coworkers who share the same values, and avoid wasting any time on pointless bureaucracy. I want to be entrusted with responsibilities and the freedom to make responsible decisions and I seek honest and actionable feedback that helps me grow. 

For me, running a company is very much like designing a product. The modern-day company is no longer represented by factory workers and assembly lines; success is now secured by creativity, innovation, and talent. This is why, when pursuing greater productivity, we must break free from the conventional corporate and follow in the footsteps of the insightful leaders in the industry. 

I am extremely optimistic about 2021. Our ambitious mission is met with extraordinary market opportunities, our team is composed of high performers and effective managers, and our brand is validated by wonderful investors and a healthy reserve of capital. Moreover, we have a promising product pipeline, and the potential ahead of TapTap seems limitless. 

Of course, the greater the circumstances, the higher our expectations. 

Looking Back on 2020, and 2021 Resolutions

Our biggest investment in 2020 went into R&D: the team grew from 806 employees to 1,355, with a 110% YoY increase in the corresponding spending. R&D has not traditionally been a major strength of XD, but with the influx of high-performing talents and expansive adjustments to our management structure, we are seeing tremendous improvements on our in-house projects. 

Two of our competitive in-development projects have already begun testing on TapTap. Not only has the overall reception been positive, but we are also excited to have incorporated our player community into R&D such that we can use players’ feedback to improve our games. These games are scheduled to launch by the end of 2021 and are expected to grow into global IPs alongside TapTap.

We’ll have more information about the previously announced Torchlight and Codename: SSRPG during the TapTap conference upcoming in July. Another two of our in-development projects, XD Villa and Project A will be revealed at the conference.

We also have other prototypes and projects that are too early in R&D for us to share any details but we will have more information soon. 

All of our in-house projects share the three fundamentals: they target a global audience, are intended for all ages, and are designed to live an indefinite life cycle. These games will delicately complement the TapTap ecosystem and will be central to our long-term growth. 

Compared to the previous year, TapTap’s MAU increased by over 43.7% in China and 330% overseas. User growth will continue to be our priority this year. 

The remarkable user growth from exclusive and semi-exclusive titles like Genshin Impact and Canal Town (over 10 million TapTap downloads for each title) proved the significance of exclusive content for TapTap; therefore, we have plans to further aid developers in their game development process and secure even more third-party games for TapTap this year. 

In the past year, we made conclusive improvements to TapTap’s platform which laid the foundation for our upcoming projects to be effortlessly introduced to the vibrant player community. We will continue to optimize TapTap this year to better accommodate the ever-evolving community and its preferences.

TapTap.io, the global version of TapTap, has also seen significant improvements this past year and is currently operating at a lower cost thanks to the optimized back-end structure that is now fully consistent with the Chinese TapTap. These upgrades brought in momentous growth in MAU throughout the second half of 2020, and we’re expecting to see even better results in 2021. With the experience in launching both our own and third-party games internationally, we are progressively learning about the different markets and putting forth the effort in building gaming communities around the world.

TapTap Developer Services (TDS) is another important product line we announced during ChinaJoy last year and has been integrated into Sausage Man and Human: Fall Flat. We will be opening up TDS access this year for more developers to take advantage of the diverse account, social, and community features, and in turn, we’ll continuously optimize TDS based on their feedback And beyond the increase in investments, LeanCloud, a leading back-end cloud service provider we acquired in April, will dedicate its workforce to the subsequent development and operations of TDS. 

Final thoughts

In the year following the IPO, we have seen profound changes in the company’s stock price and are immensely grateful for the love and support since. However, as Benjamin Graham once said: “in the short run, the market is a voting machine but in the long run, it is a weighing machine;” we are thus continuing to “prioritize the company’s long-term value over our short-term stock price.” We believe that a company must focus on the tangible results that reflect its long-term value and growth, and not be tempted by the short-term market fluctuations, or obsess over short-term investor voting results.

At this stage, we may still not be able to provide an accurate performance forecast or make any promises to our investors. We want to be as candid and transparent as possible in communicating our current standing and strategies. We are ensuring that employees on all levels are dedicated to acting in the best interests of the company.

2021 marks XD’s tenth year in the gaming industry, and we’re immensely grateful to have experienced and grown with this dynamic environment. Our objectives remain in that we will continue to work on improving our R&D capabilities, talent density, and management, as well as growing our brand and user base. 

On behalf of all of us at XD, we would like to thank each of our friends, shareholders, partners, and players for their continued support of our business.