NetEase Inc (NTES) 2004 Q2 法說會逐字稿

Welcome to Netease 2004 second-quarter conference call. Today you will hear from Mr. Ted Sun, acting Chief Executive Officer; Mr. Michael Tong, Chief Operating Officer; and Mr. Denny Lee, Chief Financial Officer. After their prepared remarks Mr. Sun, Mr. Tong and Mr. Lee will be available to answer your questions.

Before we continue please note that the discussion today will contain forward-looking statements relating to future performance of the Company and they are intended to qualify for the Safe Harbor from liabilities established by the United States Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are, despite the Company's best intentions, subject to certain risks and uncertainties, assumptions and other factors some of which are beyond the Company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

The Company does not undertake any obligation to update this forward-looking information except as required by law. As a reminder, this conference is being recorded. In addition a webcast of this conference call will be available on the Netease corporate website at Corp.Netease.com. I will now turn the conference over to Mr. Ted Sun, acting Chief Executive Officer of Netease.

Hello, everyone, and thank you for joining us. I'm very pleased to be here today to review Netease's second-quarter performance. In particular I would like to thank everyone who offered their support during my absence, especially Denny Lee, our CFO, and Michael Tong, our new COO, who did a great job of leading the Company while I was away.

I will first discuss some of the highlights of the quarter and then turn it over to Michael who will review our online game and wireless value asset and other fee based premium services businesses. And finally Denny who will review the financials.

The growth prospects for wireless value added services and the Internet market remains quiet in China. According to the Ministry of Information Industries there were 305 million mobile subscribers as of June 2004, up 30 percent from 234 million mobile subscribers a year earlier. Also according to CNNIC there were 87 million Internet users in China at the end of June, up 28 percent from a year earlier which is leading to increased consumption of Internet services. Online advertising and online games in particular are experiencing explosive growth and were the key revenue drivers for our business in the second quarter. And with only around 7 percent of China's overall population online, just over half of the world average of 12 percent, we were well positioned to take the advantage of the potential of this fast-growing Internet population for years to come. However, despite the significant opportunities this market presents, challenges do exist.

As we mentioned previously, stricter government regulations and intense competition impacted our business and other fee-based premium services businesses this quarter. However, through ongoing innovation in our content and service offering we aim to differentiate ourselves and stay ahead of the competition. One new initiative we took this quarter was to enter into a contractual arrangement with Google under which the new version of Netease's search engine will utilize Google's rep (ph) page search function. In addition we will be cooperating in online advertising.

Under the arrangement Google's AdWords cost-per-click search advertising service will be integrated into both our web page results as well as website results which currently use Netease's own Open Directory Project system. By providing Google's web page search technology complemented by our own Open Directory Project system, we bring a superior search solution to our users. Going forward we expect our partnership with Google will help to grow our search related advertising revenue.

During the quarter we also increased the storage capacity of our free e-mail service more than tenfold from 25 MB to 260 MB to attract more users and maintain our position as the largest free e-mail provider in China. And with respect to our instant messaging service, Popo (ph), we introduced voice and video technology and now are (indiscernible) our PC to phone capability. Such initiatives continue to increase the popularity of our website. As of June 30, 2004 the Netease websites had approximately 232 million accumulated registered accounts and our average daily page used for the same month exceeded 386 million.

Advertising clients are also continuing to recognize the value of our large and loyal user base and we were pleased that our online advertising business continued to perform well this quarter with upcoming marketing activities by advertisers to coincide with or associated with the year 2004 Athens Olympic games and our ongoing efforts to improve our portal content and services. We are optimistic about the growth prospects for this (indiscernible) going forward.

Let me now turn the call over to our Chief Operating Officer, Michael Tong, to review the highlights of our online game services and wireless and other fee-based premium services businesses.

Hello, everyone. Our online games business experienced another quarter of record growth in the second quarter driven by the popularity for our latest self developed title, Fantasy Westward Journey. Big (ph) concurrent uses for this game grew to 181,000 in June 2004, a 63 percent increase as compared to peak concurring uses of 111,000 in March 2004. Our (indiscernible) game, Westward Journey Online 2.0, also posted a steady performance again this quarter and we expect to see continued growth from this game in the third quarter due to the traditional holiday peak season as well as the launch of a new game feature which allows players to complete from different virtual worlds.

I will now tell you more about the exciting online games pipeline we have lined up for the rest of the year and in 2005. Firstly, in July we licensed a new game called Fly for Fun from a South Korean game developer. An award-winning game in South Korea in June 2004, Fly for Fun is based on a fantasy world and it includes a new 3D flying system which is rare in other online games. This new system allows players to fly and to have air combat as well as to move on land. We expect to these features to greatly appeal to our target audience group which consists of players between the ages of 15 to 25. Beta testing for FlyFF is expected to begin in the fourth quarter.

We are also making good progress on our to new self developed titles including a 2.5G game and a 3D game, both planned for release in the first half of 2005. 2.5G game is based on traditional Chinese martial arts while the 3D game is based on popular Chinese mythologies which previously haven't been developed into online games. We believe both games will bring a unique and unparalleled gaming experience to our players.

We expect these new opportunities in our online games services business to further drive revenue growth in this segment going forward. As Ted mentioned earlier and further to our revised guidance in early July, our wireless, value added and other services business did suffer challenges this quarter with net revenues falling around 37 percent quarter over quarter. Despite this we continue to see huge potential in the wireless market, especially with the growth of higher end or 2.5G handsets and we are taking active steps to turn this business around.

For example, we are doing more off-line marketing on both the national and the provincial level. In addition, we are developing higher end products that bundle with our Internet related application services in order to leverage our strength as a portal. Finally, we are focusing on more higher end value added services such as 2.5G products which experienced growth in the second quarter. Although the market is still small in absolute size compared to SMS, we expect these efforts to pay off in the future. Now let me turn the call to Denny Lee, our CFO, who will review the numbers with you in detail.

This morning, rather than repeating all the numbers in our press release, I will just go over some of the highlights of the quarter. Please note that all figures are in U.S. dollars. We are pleased to report a total net revenue of $25 million for the quarter representing a 5.2 percent sequential increase and a 59.8 percent year-over-year increase. The Company recorded a net profit of $11.9 million or 36 cents per diluted ADS. This represented a 29.3 percent increase over the year (indiscernible) but was down 5.6 percent from the previous quarter due to the increase in operating expenses outpacing the increasing revenues.

Net revenues from online gaming services were 15.9 million showing healthy growth of 25.2 percent over the previous quarter due to the growing popularity of our 2 self developed titles, Fantasy Westward Journey Online and Westward Journey Online Version 2.0. In our advertising service continued increased demand for advertising space on the Netease website drove net revenue up 18.6 percent from last quarter to $4.5 million. Consistent with our previous guidance announced in early July, net revenue from wireless value added and other fee-based premium services decreased 37.2 percent quarter over quarter to $4.5 million. As anticipated, the decrease was primarily attributable to a fall in SMS sales as a result of intense competition, government regulations, (indiscernible), and new (indiscernible) our operator policies which lead to a slower growth in new users and a higher user turnover rate.

Gross profit for the quarter was up 52.8 percent year-over-year and 3.7 percent from the first quarter. Gross margin decreased slightly to 79.5 percent in the second quarter from 80.6 percent in the preceding quarter due to the decreasing gross margins from wireless value add and other fee-based premium services. Gross margin for wireless value added services business declined as costs remained stable while revenue falls. In contrast, enhanced economy of scale for online games led to record high gross margin for online games this quarter.

Total operating expenses for the quarter rose to $7.7 million, a 115 percent increase from the second quarter last year and a 25.9 percent increase sequentially. As we discussed in our press release, the increase was largely in connection with production and (indiscernible) costs for a new marketing campaign which will include TV commercials, (indiscernible) and (indiscernible) advertisements. We expect costs for this campaign will peak in the third quarter as this is when the majority of new TV commercials will be aired. Separately, operating expenses also increased in the second quarter as a result of certain one off professional fees. Specifically related to the registration of the Company's convertible bond with the SEC.

Moving to the balance sheet. We ended the second quarter with a total cash and held for maturity investment (indiscernible) of $236 million, an increase of $12.6 million driven mainly by a positive operating cash flow of $14.2 million. To sum up our diversified business model allows us to expand revenues even in the face of (indiscernible) in one of our business areas. Going forward we will continue the (indiscernible) innovation and strengthening of our planning to drive growth while controlling costs. I will now turn the call back to Ted Sun for his closing remarks.

Thank you, Denny. I would now like to read you our financial guidance for the third quarter. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially. We expect the total revenues of the Company in the third quarter this year to be between US$21.5 (ph) million and US$31 million with advertising services revenue to increase by 25 to 30 percent quarter over quarter, online game revenue to increase by 15 to 20 percent quarter over quarter, and wireless and other fee-based premium services revenue to decrease by 10 to 15 percent quarter over quarter.

We expect fully diluted earnings per ADS for the third quarter to be between 34 to 36 U.S. cents after taking into account the additional marketing expenses we expect to spend in the third quarter. As mentioned by Denny earlier, in mid second quarter we started a new marketing campaigns to increase our brand awareness which involve TV commercials, outdoor billboards and top (ph) 40 advertisements in various major cities in China. The campaign will last until the end of the year, but we expect cost for this campaign will peak in the third quarter as this is when the majority of new TV commercials will be aired.

In addition, we are taking advantage of the summer holiday season and the year 2004 Athens Olympic Games to organize additional marketing activities in promoting our different product strategies (ph) and content channels during the third quarter. Such marketing campaign and activities are expected to incur an extra spending of approximately US$3.5 million during the third quarter. But such marketing expenses are expected to be significantly reduced in the fourth quarter.

Let me conclude by saying that we are generally optimistic about the Company's prospects going forward as reflected in our guidance. While we expect our SMS revenue to decline again next quarter, the overall wireless market is still viable and growing and we are confident about its long-term potential. We are pleased that our online game and advertising services business continue to respond well to our new initiatives and ongoing innovation and we'll continue to be key revenue drivers next year. In particular we are excited about the long-term opportunities in the online game sector. And with our strong online games pipeline we'll -- make us well positioned to take advantage of these opportunities in the quarters and years ahead. I'll now be happy to take your questions. Operator, please open the floor for Q&A.

(OPERATOR INSTRUCTIONS) Dick White, J.P. Morgan.

I have a question regarding the revenue breakdown between SMS and 2.5G and (indiscernible) services, could you give out that breakdown as well as the growth for each of the segments going into the third quarter?

There is a growth of 2.5G services -- this is Michael -- there is a growth of 2.5G services from the first quarter to the second quarter. If you look at the percentage of contribution to the overall revenue, last quarter it's around 7 percent and now it has grown to around 12 percent and that's for 2.5G. And at the same time we're trying to get more revenue from (indiscernible) and ring back tone type of new services for the wireless value added services. And that is contributing around -- right now it's only around 1 percent and we see continued growth from that.

I see. And then I just wondered what is the (indiscernible) cash or gain quarter, how is the progress coming along on that?

The cash or gain (indiscernible), to clarify, this is -- I would not say it is a portal. We have a few casual games on the pipeline. In this coming quarter we are expecting to see a new casual game being launched within our website, and we are expecting to see around 1 casual game per quarter in the few coming quarters.

Okay, thank you.

Jay Chang, Credit Suisse First Boston.

A couple questions on gross margins and how you did the accounting change. Because I think for online gaming, although I know there's some difference between 1Q net and gross, on my numbers I actually get a lower gross margin number for online gaming in 2Q. I don't know if maybe Denny could clarify some of the accounting changes that happened in terms of us comparing apples-to-apples net, gross, gross profit, so on and so forth? And a second thing, just to clarify on the sales and marketing figure for 3Q, did you say incremental 3.5 or total sales and marketing of 3.5 in 3Q?

This is Ted. Just let me confirm about the marketing expenses during the third quarter. That's an extra incremental of US$3.5 million. And I'll pass it to Denny to give you more details about the accounting policy for the revenue.

As everyone is aware that we have changed the presentation of our income statement this quarter. The reason is because of the adoption of FIN 46 prospectively. Because in the past, in 2003 we did not apply to the FIN 46 whereas in 2004 we started to apply FIN 46 consolidation of the variable interest entity prospectively. And as you note that because in China when we carry out our business in China, we need to have the ITP (ph) Company which is (indiscernible) group and also the revenue we earned from the final customer is the (indiscernible) to the unlisted group and then the listed group is providing a technical (indiscernible) service to the unlisted group and in return we take over the revenue from the unlisted entity.

So we are paying 2 layers of business tax and the first layer is being paid by the unlisted entity and the second layer is being paid by the listed entity. And in the past before the consolidation of the unlisted entity, the business (indiscernible) net of games revenue we received from the final customer and then in our account we actually present net revenue from the service income, technical service income that we received from the unlisted density. And after the consolidation of the unlisted entity, because effectively it is within a group now, and the revenue of the group is actually from the outsider or third party. And the business tax is therefore presented under a tax rate line item on the income statement.

So this is the reason behind the change in the accounting presentation is mainly because of the FIN 46 adoption and the consolidation of the variable interest entity. And you talk about the gross profit margin for online games -- actually this quarter if we have not consolidated the unlisted entity the gross profit margin would have been around 91 percent comparing with the 90 percent of the previous quarter which is slightly up due to the economy of scale.

Could you take me through that calculation again? Because I have total cost on the gaming is 2.1 versus revenues of 15.9 -- I get 87 percent. Maybe I'm doing the math wrong, but it doesn't look like 91.

Because we have the supplemental information at the back of our press release, if you take the gross profit of online game for this quarter which is in R&D which is 114.5 million and then divide by the net revenue of 131.8 million -- tell you it's around 87 percent. But this is according to the new presentation. But what I've said, 91 percent was actually assets we did not consolidate it.

Okay, okay. That's fine. Just one other question on the sales and marketing, you mentioned you are spending an incremental 3.5 million over Q2. I just want to understand the ROIC calculations, what type of methodology are you using to budget 3.5 million? Where are you targeting? I mean if you are spending on, for example, on TV is there a certain segment or demographic you're trying to reach that you're not tapping right now? Are you focusing on the portal site or are you focusing on pushing more online gaming? What kind of methodology and strategy behind that kind of large spend which according to you is a one-off, although I think some people may be a little bit concerned that it may be an ongoing thing in the future as competitors continue to raise capital to spend and try to fight for marketshare.

The majority of the spending, to make it clear, part of the spending is on the branding marketing which overall branding of the Netease brand and also to give the general public and advertisers an overall awareness of Netease. At the same time part of the spending is related to the Olympic, to take advantage of the Olympics for advertisers and also for the wireless services. And also with doing this partly is related to the specific products including our e-mails, our games and also probably to the wireless services. So I think that one of the products is mainly on the overall branding and also on the Olympic Games because the overall branding -- we don't do that very often.

Okay, thank you. And just lastly, are you managing this campaign yourself with the TV or are you getting a large advertising agency to help you?

We're managing this through a media placement agency and we do the advertising agency (indiscernible) ourselves (multiple speakers) through an agency.

(multiple speakers) Could you name that agency or is it?

The placement of the media is --.

Like a Satchi, Satchi and (indiscernible) or is it a local?

It's an international company, there are only 2 big placing companies is (indiscernible).

Great. I don't want to take too much time. Thank you.

And the (indiscernible) is produced by (indiscernible) as well.

Sorry?

And the TVC, the TV commercial, is also produced by a major advertising -- international major advertising company.

Okay. I look forward to seeing them then. Thanks.

Jason Bruschgay (ph), Pacific Growth Equity.

Ted, welcome back. I'm going to make us all suffer through a little bit more on the accounting. Let me just maybe take a point that may have clarified it. The 87 percent margins are what you get under the -- basically the restatement because of FIN 46. That on an apples-to-apples basis with what we previously had last quarter it was 91 percent, but the number we should be using going forward for future quarters is 87 percent margin. Is that -- did I get that right?

Yes, that's correct, Jason. Comparing apples-to-apples we calculated that the gross margin percentage as if we were using the old basis, Denny arrived at 91 percent comparing with last quarter 90 percent. But going forward the margin will be 87 percent.

Can I just ask why you're doing this change now? Maybe it's just something I missed around FIN 46. But is this something that you guys just internally decided to do this on your own? Is it something that is just going on in the industries and we just haven't talked about it with other companies? I'm just wondering why we're having this discussion now and not at the beginning of the year or sometime in the future.

Actually I think the reason for -- first of all for the reason now behind why that changed is because of the FIN 46 and obviously we have done the market research and we know that this basis is consistent with the market players. So we are actually upholding a similar approach to the other competitors in the market.

Okay, that's helpful. Let me just kind of maybe leave that subject and go onto something a little bit more exciting. I have 2 questions about gaming, the first is Fly for Fun. Could you give us some numbers behind that? What are the -- you say you're going to do beta testing, can you tell us how much -- give us a feel for how profitable that is in Korea right now? And are we going to get a commercial launch some time in Q4 or is it going to be a commercial launch most likely in the first quarter?

The game is still in beta testing in Korea. So it's not in commercial launch yet. It's been beta tested since March this year. Usually the game in Korea takes a long time for beta testing usually it is around six months and I think the average concurrent player in Korea right now is around 12,000. The game in China, which is now in close beta testing within our company right now, we are expecting to see an open beta sometime around mid to late October and we are planning to see commercial launch within the end of this year.

Okay. And then on the two additional in house developed games, the 2.5D and the 3D games -- looking at my notes from the last conference call, it seemed like to me you were planning on a Q4 launch of this year for at least one of those games and now you're saying -- if I can get it right -- that for the first launch or the launch of both of them is going to be in the first half of 2005. Could you help us understand maybe why there's a slight push out and should we be expecting these games in Q1 of '05 or is it more towards a Q2 launch for these two new games?

Sure. The two games, we're expecting to see one of each of those games to be launched in Q1 and then Q2 respectively in 2005. There is kind of a pushback in the launching schedule because at the same time we are going to launch FlyFF, which we be believe is the right game now for the market to digest given the hardware requirement and given the market situation whether action games in the market is very needed right now. So we believe it is a good time actually to launch Fly for Fun for the moment.

Okay. And then just maybe one last question or two on the Google announcement. Could you give us some maybe color on when you expect to start receiving any type of boost to your revenues as a result of having Google's search engine combined with your -- specifically with respect to tape (ph) search and when we should expect that to actually come online? Is it going to be in the third quarter or is it pushed out a little bit further? Thanks.

Actually we expect to receive additional revenue due to the (technical difficulty) partnership from third quarter -- from this quarter.

And any kind of -- for our modeling purposes -- any indication or any kind of just general range how much we should be thinking? Is this 1 million a quarter, is it more than that or just can you give us some color what you're internally thinking that -- given that your portals and on quality -- quantity. Google is putting in quantity, what you're expecting we should be modeling going forward?

Jason, (indiscernible) is based on a minimum guarantee the payment from Google, I don't think we can disclose the minimum guarantee in this conference call. But there is an (indiscernible) upside about the minimum guarantee; i.e., if we can deliver more than a certain amount of (indiscernible) to the Google (ph) search result and then there will be an upside based on the revenue sharing percentage with Google's revenue. So just give you a little bit more about the percentage. I think in the past our revenue accounted for approximately 10 percent of our online advertising revenue. And going forward, because at both -- we project at both our online -- traditional online advertising revenue and also the search advertising revenue will grow, but so that's why I think the percentage will be approximately around -- remain stable around 10 to 11 percent of our total revenue.

That's great. I'll let some other people ask questions. Thank you, guys.

Safa Rashtchy, Piper Jaffray.

Welcome back, Ted. A couple of questions. And I don't mean to keep asking on the same question that was asked before, but I'm still somewhat shocked at the $3.5 million that you intend to spend in addition to your normal marketing costs. It appears to be that -- just to exaggerate a little bit -- with $2.5 million you could almost build a brand in China. So are you seeing increased marketing costs? Second, why do you feel the need to advertise the Netease brand because you had very good traffic and very good brand recognition especially among younger people without having to advertise? And I understand the -- some component of it to go towards the Olympics and all your competitors are doing that. So putting that aside I'm just a little surprised both at the magnitude of the spending and the need to do brand advertising at this stage.

As I said earlier about the 3.5 million extra marketing spend, it comprises a several things including the branding marketing campaign as well as other additional marketing activities that we organized to take advantage of the summer holiday season as well as the Olympic games period. For the marketing, the branding marketing campaign and we think it's about time for us to increase the spending during this period to further enhance our brand equity. Although we are enjoying a very popular brand among the Internet users, but we think the further marketing spending can accelerate the growth of our user base.

Will that be towards directing users to a specific product such as Popo or e-mail or is it to just increase your page use (ph) in general?

The branding marketing campaign is mainly focusing on the overall brand of 163.com rather than on any specific product.

Okay. And can you give us an update on Westward Journey and you mentioned that it was kind of static or flat in Q2. What is the growth rate of that game and what are you seeing in terms of demand for that?

We are seeing -- as we have said, we are seeing flat in terms of both the revenue or the peak concurrent users for the game in second quarter compared to the first quarter. We are seeing some growth in the month of July and we are expecting growth again in August because mainly of the summer season and also because of the functionalities that we have put into the game which is very well received right now.

Do you consider it flat primarily because of the new functionality that was added or are we getting close to the peak for Westward Journey do you think?

No, I don't think we're getting to the peak for Westward -- I think it is a function of if the new functions are being well received and also the seasonality of the year but I don't think that we are seeing a peak of the game as yet.

We are also seeing healthy growth with Westward Journey in July.

Okay. Great, thank you very much.

Mark Argento, Think-Equity Partners.

A couple or quick questions for you. Can you talk a little bit how in the quarter it looked like the wireless gross margin came under some significant pressure. Now I understand that with revenues down almost 40 percent quarter-over-quarter that it's going to be hard to bring expenses down, but it look as if expenses are actually relatively fixed or flat in the quarter. I just wanted to know going forward how you think you can -- how much variability there is in that expense line? And then also, if you could talk about given the way you guys are now presenting the revenues. Can you talk about or can you tell me what the revenues would have been under this new reporting for fiscal 2003 and then in particular the year ago quarter Q2 and Q3, what the actual revenue number would have been using FIN 46? Thanks.

Let me take your first question. Most of the cost in the wireless and value added services and others are very much fixed costs including personnel, including the position of the servers and the bandwidth and so on. So although the gross margin has decreased compared to the last quarters, in terms of absolute figure it is very much the same. So it is purely -- the decrease in the gross margin is purely because of the decrease of the revenue. And when we see an increase in the revenue again, then I think the gross margin will increase even in a higher value rate. I guess that's the case right now.

So should we see -- I know you guys guided the wireless revenue being down another 10 to 15 percent sequentially. So we're going to see continued degraded margins in that business next quarter as well? It doesn't like you're going to be able to do anything to stun that?

Yes, think the cost of the revenue for wireless and others will pretty bring much remain the same in absolute terms.

And then in terms of the FIN 46 like I had mentioned before, (indiscernible) and if you could just provide because it looks like revenue was inflated or -- looking at Q1 by about $1.2 million. And can you go back and quantify what the entire effect for fiscal '03 would have been, and then just give us the year ago quarter and than Q3 as well so we know what our year-over-year numbers -- or actually what the apples-to-apples numbers are?

Sure, no problem. For the year 2003 quarter two, the June quarter, the total revenue would have been 143.6 million and for Q3 in 2003 the total revenue would have been 153.4, up from .5 -- 153.5 million R&D. And for the fourth quarter it would have been 177.8 million.

Do you have the fiscal year as well?

The fiscal year for year 2003 -- let me do a quick calculation. It's around 600 million R&D.

And then there's no change to the expenses at all?

No.

So going forward basically the margins on this business are from about 300 or 400 basis points kind of below where they were in the old reporting environment?

Yes, that's right.

Okay. Alright, thank you.

Frank Shay (ph), CLSA Securities.

First question is on the (indiscernible) wireless business. Can you disclose the number of users or subscribers and also ARPU? And also on what product were you losing customers?

We disclosed that in March; we had around 2.1 million users in a wireless and value added services. And if you compare apples-to-apples in June we have around 1. -- close to 2 million or 1.99 million and if you divide the ARPU from that (indiscernible) wireless and others value added services.

But that implies a big drop in ARPU, right? Because the number of users didn't drop that much.

Yes, that's correct. The drop in need different lines of the revenue is still very much even in terms of the different lines including we usually divide our wireless (indiscernible) services into four different categories. One is the interactive entertainment the other is the Internet related that includes the Popo and the e-mails, SMS information subscription and also the ring tones. This is all within the SMS related services. And there is -- some of the drop is related to the e-mails and also on the interactive entertainment where the ARPU is a little bit higher than the other services.

So basically this is mainly the entertainment and ARPU and because of those (indiscernible) high ARPU guys?

Yes.

Thank you. My second question is the growth of your online advertising business. Can you break it down by number of customers or is it mainly because the average expanding increase (indiscernible)? So which factor is more important?

In terms of the advertising revenue, we experienced growth in terms of the number and also the average spending per customer. And in addition to that we have obtained a number of large international clients as well.

So basically this is both?

Both.

Okay. Thirdly, within your advertising business the search business is more profitable or less profitable than the online branding?

At this time it's still -- the online branding is more popular both than the search engine business.

Is it because you need to share revenue with the partner?

Because of the search engine business we are working with many different agents across the whole nation and, yes, obviously we're paying them commission for (indiscernible) businesses for us.

Okay, great. That's all. Thanks.

Justin Mardos (ph), Greene (ph) Partners.

Just a question regarding the -- just to follow-up on the advertising spend. Do you think that going to the fourth quarter if you are successful with the (indiscernible) do you think you might want to keep it at - I know you want to bring it down but how much are you really thinking? Do you want to bring it back down to Q2 levels or could you just give a little bit more guidance on that?

You mean the marketing spending?

On the marketing spending, yes.

The marketing spending -- actually we are expecting the marketing spending to be significantly reduced. Based on our current budget it will still be higher than the Q2 level, but significantly lower than the Q3 level. Part of the marketing campaign will last until the end of the year.

And then on the wireless side. You gave a breakout earlier that said roughly I think 7 percent last quarter, 12 percent this quarter is a little bit more (indiscernible). Was that 12 percent of just the wireless revenue or 12 percent of the total revenue.

12 percent of a wireless another revenue.

It's 12 percent of the wireless and others revenue.

And 7 percent in Q1, 12 percent in Q2.

And how fast will that other revenue grow into the September quarter? Do you expect to see that similar growth rate?

In the coming quarter?

In the September quarter, yes.

I think the growth rate might actually decrease in the coming quarter if you compare it -- if you just compared it with the growth rate, between the two quarters but it is definitely a growing area.

Okay, thank you.

That does conclude our question-and-answer session. I'll turn the conference back over to Mr. Sun for any closing remarks.

Again, thank you for everyone joining us today. If you have any further questions please do not hesitate to contact myself, Denny, Michael or any of our investor relationship representatives. Thank you, everyone.

That does conclude our conference call. We do thank you for your participation. You may now disconnect.