NetEase Inc (NTES) 2004 Q3 法說會逐字稿

Hello everyone and welcome to the NetEase 2004 Third 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 US 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, 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. Please go ahead sir.

Thank you, operator. Hello everyone and thank you for joining us. I am very pleased to be here today to review NetEase's third-quarter performance. I will first discuss some of the highlights of the quarter and then turn it over to Michael Tong, who will review our online game business and finally Denny Lee who will review the financials.

The result of the third quarter emphasizes once again that our diversified revenue streams provide us with a strong platform to benefit from the overall growth in the internet market in China with areas of strong performance mitigating areas of weaker performance. Thus, although the wireless value-added and other fee-based premium services have been operating under a challenging environment, which led to a quarter over quarter drop in its revenues during the third quarter, we still managed to report a healthy growth in total net revenues which was driven by the continued growth of our two other business lines -- online advertising and online games.

Our extensive user base forms a powerful audience for both our products and services and those of our advertisers as well. And we expect that this user base will continue to grow, as we speak, through continuously expand and improve our content and user services.

One way we are increasing user loyalties is through a variety of incentives for frequent users. For example, we recently launched an incentive campaign targeting frequent POPO instant message users through the [first venture] offering of 2G of e-mail storage. This not only encourages POPO usage, but also help us to grow our position as the largest free e-mail provider in China and to drive users to our site.

Let me now turn the call over to our Chief Operating Officer, Michael Tong, to review the highlight of our game -- online game business.

Thank you, Ted, hello everyone. During the third quarter, we continued to see organic growth in our online games business driven by the launch of expansion packs for both Westward Journey II, and Fantasy Westward Journey, both of which were developed in-house. It is testimony to the strength of our in-house developments capability. Today we have more than 57 million registered accounts for Westward Journey II and Fantasy Westward Journey. The number of peaks concurrent users for Westward Journey II resumed growth in the third quarter reaching approximately 300,000, up by 50,000 over the previous quarter. At the same time, the number of peak concurrent users for Fantasy Westward Journey continued to grow increasing to approximately 255,000 in the third quarter from approximately 180,000 during the preceding quarter.

We continue to develop new features to drive user growth and royalty. For example, in the fourth quarter, we will be launching new features for Westward Journey II, including a new tutoring system, which will make Westward Journey to more accessible to new users by lowering the entry-barrier for new gamers and the virtual vendor system which will allow players to trade with each other. We will also be holding community events in the "virtual worlds" for both of our games, which will enhance the gamers' experience.

Beta testing for Fly for Fun, again we licensed from Korea in July of this year, began in early September and has received good responses. We aim to launch the open Bata version in early December of this year followed by the commercial launch in January of 2005. With Fly for Fun, we are aiming to expand our user base by targeting the action-oriented 3D gaming market as opposed to Westward Journey II and Fantasy Westward Journey which are more community-oriented games.

In addition to the launch of Fly for Fun, we also continue to develop our own in-house titles. The development of our first 3D game based on Chinese mythology has been progressing very well and we expect to launch the beta version in the second quarter of next year. The launch of the beta version of another 2.5-D game based on martial arts with Tang Dynasty background, another massively multi-player online role-playing game we are developing in-house is targeted for the first quarter of 2005. The development of our casual games is also progressing steadily and the first of these, the billiards game, will be launched in November. Our casual games, which give users an exciting game experience in a relatively shorter amount of time precision will allow us to target a large number of users who would not otherwise be inclined to play massively multi-player online games.

Overall, NetEase games continue to grow in popularity and the success of the expansion packs of Westward Journey II and Fantasy Westward Journey, demonstrates our in-house capabilities and bodes well for the launch of a number of our self-developed titles in 2005. Now let me turn this call to Denny Lee, our CFO, who will review the numbers with you in details.

Thank you, Michael, and good morning everyone. This morning, similar to last time, I will highlight some of the key points of the quarter rather than repeating all the numbers in the press release. Please note that all the figures are in U.S. dollars. We are pleased to report total net revenue of $28.8 million for the quarter representing a 15% increase over the previous quarter and a 63% year-over-year increase. The Company reported a net profit of $13.2 million or 40 cents per diluted ADS. This represents a 25% increase over the year ago period and a 10% increase over the previous quarter

Net revenues from online game services were $19.4 million showing healthy growth of 22% over the previous quarter due to the growing popularity of our two self-developed titles, Fantasy Westward Journey Online and Westward Journey Online version II, as well as some online promotion activity. As mentioned by Michael just now, in the first quarter, revenues from Westward Journey Online II grew 9% over the previous quarter while in the same period revenue from Fantasy Westward Journey grew by 45%. Fantasy Westward Journey represented 43% of our total online game revenue for the quarter.

Our advertising business during the quarter benefited from the strength of our user base with net revenues from advertising service growing by 25% from last quarter to $5.6 million. We believe that this is primarily due to increased demand for advertising space on the NetEase website, which resulted primarily from the Company's ongoing efforts to improve the content of the NetEase website and expand its user base.

Gross profit for the quarter was up 57% year-over-year and 16% from the last quarter. Gross margins increased slightly to 79.6% in the third quarter from 79.5% in the preceding quarter, due largely to the increase in gross margins for online advertising and online gaming services, which [awaited] a decrease in the gross margin for wireless value-added and other fee-based premium services.

Gross margins for wireless value-added service business declined due to increased costs incurred in connection with our free services. In particular, we saw higher costs from the increased usage of our free SMS service offered through POPO, our instant messenger surface as well as additional costs surrounding our free e-mail services. For online games enhanced the economy upscale little to further improve on the gross margins we achieved the last quarter. The gross margin for online game was 88% this quarter and would have been 88.4% had they not been partially offset by one-time write off of the remaining unamortized portion of PristonTale of the licensing fees.

Total operating expenses for the quarter rose to $10 million, 137% increase over the corresponding period a year ago and a 27% increase sequentially. As discussed in our press release, the increase was largely in connection with production and placement cost for an ongoing marketing campaign, which includes TV commercials, [view] port and bus advertisements. As mentioned in the last quarter earnings announcement, this increase was partially offset by a one-time insurance claim related to and now set through the cross action litigation in the U.S.

Moving to the balance sheet, we ended the third quarter, we have combined the total cash and how to mature the investment bonds of $252 million. We reported a positive operating cash flow of $18 million in the third quarter. To sum up our efforts in in-house game development and our portal content at thriving revenue growth by expanding our user base and provide the cerebral audience for advertising. Going forward, we will continue to build on this effort. I will now turn the call back to Ted Sun for his closing remarks.

Thank you, Denny. I would now like to read a view of financial guidance for the fourth quarter. Please note that the following outlook statements are based on current expectations. These statements are forward-looking and actual results may differ materially. We expect the total revenues of the Company in the fourth quarter this year to be between 32 million and $32.8 U.S. With advertising service revenue to decrease by 4 to 8% by quarter-over-quarter, online game services revenue to increase by 11% to 13% quarter-over-quarter and wireless and other free based premium services revenue to decrease by 5 to10% quarter-over-quarter. While we expect our online game services to continue to enjoy the benefit of economies of sale its gross margins is expected to remain stable as it will be affected by the amortization charges of upper licensing fee after the commencement of open beta testing of Fly for Fun.

Despite the fact that the majority of the pending campaign spending took place in the third quarter. There is still some remaining spending in this quarter as the campaign will last until the end of the year. In addition we will increase the marketing spending for the online game business in the fourth quarter, due to the launch of Fly for Fun. We expected total selling and marketing expenses to decline from 25% of total net revenue in the third quarter to between 17 and 18% of total net revenue in the fourth quarter. We expect net profit to continue to increase during the fourth quarter to between 14 to $14.5 million U.S.

Let me conclude by saying that we are generally optimistic about the Company's prospect going forward as we reflected in our guidance. Our online game business is doing very well and we expect this to continue. Particularly as we expect to launch additional titled in the next few quarters. We also expect the contribution of 2.5G and IVRS services to contribute a growing proportion of our wireless value asset and other C based premium service business. Despite the fact that we are expecting a slight drop in ever tightening revenue for the fourth quarter due to the low seasonality and the fact that many of our advertisers spend the bulk of their annual advertising budget in the previous quarters. We continue to be optimistic about our advertising business.

Finally we continue to work on improving our portal content and user offerings which we will hope will make revenues and even more attractive platform for advertisers in the future. I will now be happy to take your questions. Operator please open the floor for Q&A.

Thank you Mr. Sun. The question and answer session will be conducted electronically. To ask a question please press "*" "1" on your telephone keypad. Again that’s "*" "1" to ask a question. We remind you if you are using a speaker phone then please make sure that your mute function is turned off to allow your signals to reach our equipment. And we will take our first question of the day from Zafar Rachi (phonetic), Piper Jaffray.

Hello [Zafar] good morning.

Good morning guys. Good quarter. If you could clarify couple of things that Denny you went over and I couldn’t write them down. Could you repeat for us the growth rate that you sighted for Westward Journey II and Fantasy Westward Journey in the quarter?

Yes. For Fantasy -- for Westward Journey the revenue increased by 9% quarter-over-quarter in the third quarter and Fantasy Westward Journey the revenue divide from it increased by 45% in the third quarter compared with quarter two.

Okay, I mean given that kind of growth your guidance seems to be pretty conservative calling for a 11% to 13%. Could you talk about how you see the growth for especially Fantasy in the fourth quarter and also beyond that and how do you see the growth for Westward Journey?

Michael do you want to --

We believe that growth of Fantasy Westward Journey continue to have a very strong growth momentum and you can see that right now that the gains grow by 45% in this quarter over the previous quarter. And we believe this strong growth momentum to continue and you can also see that the Westward Journey to grow by around 9% from Q2 to Q3 and I think, which you can see that we would be able to extend the life of this game to kind of a slight growth or kind of very small growth rate. So that's how we come up with the 13 -- 11 to 13% of online game growth business in Q4. And also you can see that -- for the Fly for Fun, we are only going to commercialize it in Q1 so the revenue contribution for Fly for Fun is yet to be included in our growth of Q4. So that's you might view that 11% to 13% of Q4 is little bit small that you can see that probably in Q1 we can get a even may a better growth then.

Right but my point Michael is that the numbers you gave assuming I think you said 45% of revenues came from Fantasy, that number suggests that you are expecting the growth to be almost half of what it was in Q3

No Q3, I think the other different reasons for us to have a more conservative projection in Q4 because Q3 is strictly to highest decent because of the summer holidays and also we have launched a pension pack for Fantasy Westward Journey in Q3 while in Q4 it is not as high at the season when compared with Q3 and we do not have any [pen] for expansion packet to the launched for Fantasy Westward Journey during Q4. That’s why we try to be more conservative with the projections.

Okay. Could you also review for us the pipeline of the games you have for 2005 whether under development or scheduled for closer dated as --?

Yes.

And also if I may add to that when do you expect to have Fly for Fun commercially launched?

Fly for Fun is -- has been under close rated testing and its schedule to start the open rated testing in early December of this year and we plan to commercial launch it in January of year 2005. And other than Fly for Fun we have two other self developed titles, one of them would be will be -- will talk the beta version in the first quarter and we will start the commercial launch in the second quarter. And other one we will start the beta version in the second quarter and we would commercial launch it in the third quarter and this is the driven type line and in addition to these sales developed titles we are also exploring other licensing opportunities. So in efficient to these field prices there can be additional title to be launched next year r.

Okay, great. Thank you.

Thank you, [Zafar].

We'll take our next question from Jay Chang, Credit Suisse First Boston.

Hi good morning. How you guys doing.

Good, thank you.

Couple of questions. On the online games -- I don't may be I made some of my calculations wrong, but it looked like either the effective tariff for the average usage per day went slightly down from kind of historical level based on kind of some of the numbers I was using before to get your revenue number. Could you talk a little about the underlying usage patterns relative to your peak concurrent user number, because it looks like some things have changed slightly in the quarter -- I may be wrong about that. The second question relates to Fly for Fun, do you have any kind of open beta peak and current user target before you actually go commercial -- I mean is January a set date or would you actually kind of be more flexible and may be take a little bit longer to ramp up? And then my third question relates to the SMS in wireless side. I noticed that gross margins went down a quite a bit, a) I guess do you see those gross margin levels staying low because of the promotional incentive times you are giving to POPO users and then secondly are you actually seeing any market share gains by offering those types of free SMS services to your user base from some other competitors in the market on the instant messaging side. Thanks a little bit -- few questions?

Say let me pick -- this is Michael let me answer your first question. When you look at the -- I think the question you have is when you look at the peak concurrent users for Westward Journey 2.0, which is around 300,000 over the past quarter and when you look at the revenue it somehow -- it doesn't gel. What I can explain is that we have -- we were able to -- the reason is because we were able to hold a very successful event, the second anniversary of Westward Journey 2.0 during the past quarter. And the event has been very successful and it had kind of increased or spiked the peak number of concurrent users during the event, so there is kind of a spike of that peak concurring uses. After the event, the average peak concurrent users continue to grow but it grows at kind of a slower rate than like a $300,000 peak concurring uses.

That was in August, right the anniversary event?

That's right, that was in August.

That was mainly Westward Journey 2.0, not really Fantasy that had anything

It had nothing to do with the Fantasy Westward Journey.

Okay.

Michael Tong. So and then on the Fly for Fun, open beta as we said in December -- early, December and we are expecting to commercialize it in January '05. Right now it's under closed beta right now and the response has been very good from our players. And we are expecting kind of a level of Fantasy Westward Journey [inaudible] Westward Journey when it went open beta, which is around 100,000 to 1200000 during the open beta and then also around the same kind of numbers after 3 months after the commercial launch, so if you look at the market with similar games -- 3D games previously in the markets there are some other games which we kind of benchmark on achieving the similar numbers.

Okay.

So that surprised us. And then on SMS --

Gross margins kind of going forward for wireless and then if you are actually seeing any market shares gains or how you are evaluating to sustain that incentive program?

Yeah I would say that market shares is more for the growth of market share for POPO, and we have actually seen very good gains in terms of number of users for POPO through the use of this marketing program and kind of their integration with SMS as well. And it also helped us to do cross selling between the POPO users and SMS users. So that's really kind of for the future in terms of the cross-selling, but market share for POPO itself has definitely grown. Some numbers which I can tell you is our peak concurrent users for POPO during the quarter is 255,000 or 259,000 or 260,000 versus 180,000 over respectively for Q3 over Q2.

Okay that's great. And just one follow-up question on just your view of kind of the overall gaming market you actually grew quiet a bit in the third quarter and is obviously some summer holidays and you got a lot of new events and new expansion paths, but do you think those new users are coming from people who haven't played the games before or are they coming from second tier games or they maybe even coming from some of your larger competitors in terms of where do you think your users are coming from?

It's really a combination of all of this.

Okay. Thank you, great quarter guys.

Thanks.

From CLSA (phonetic) Frank Shark (phonetic).

Hi, good morning guys. Are you planning to raise rate on your advertising business, and what do you plan to do in sort of the search effort, what's your strategy there? Thanks.

In terms of the advertising rate we usually increase -- have the new rate cut at the beginning of the year and this is -- we will do the same at the beginning of year 2005 and the overall average effective increase in the rate will be around 8-10%. And about the search business, at this time it represents around 8-10% of our total advertising business and we have a partnership with Google for both using their technology as well as some partnership in the selling of key words. We started the partnership in July and our search revenue during the period in the third quarter increased by 30% when compared with Q2.

Okay. Thanks, yeah, that's all I have. Thanks.

Great, see you.

From Flynn Technology (phonetic) Chang Chou (phonetic).

Great, good morning and congratulations.

Good morning.

Yeah, one question is with this online games, right now the internet cafes are kind of closing down, do you see any long-term impact or how many of your players are really playing at home?

Right now -- this is Michael, and in terms of the number of users playing between on internet cafes and at homes or at office and schools it's somewhere around internet cafes around 50%, and at homes it's around 25-30% and then other places like schools or offices it's around 10-20% so this is generally in line with the markets right now which is also similar for our own games.

I don't really think that they are closing down of any internet cafes has been continued so much. There has been some cracking down of the internet cafes for those who have not met safety standards like fire standards and so on during the second quarter, but I don't really think that it has -- the government has cracked down much of the internet cafes during the third quarter and not even in the fourth quarter. So I think that has really -- is not affecting the market anyway, and in fact, even after the cracking down of those internet cafes, which I saw in some news is officially said that around 8000 to 10,000 number of internet cafes being crack down and it hasn't really -- it hasn’t affected our business at all. The reason I think is that for those small internet cafes being cracked down, I think the player just go to large internet cafés to play and it just hasn't affected our business at all.

Okay. For your casual games, which you really launch this quarter, where you think you really have some revenue contribution?

For the casual games that we are going to launch this quarter, I think in terms of revenue we are looking at somewhat in the later part of Q1 or maybe the earlier part of Q2 for 2005 in terms of real revenue contributions. I think that casual games strategy is really to try to attract as many users as possible first to really -- to grow the clerical mass of users before we can actually charge money. And you probably understand that the casual game market is -- the strategy is usually this way and also usually we don’t charge for the game play, but we probably charge on the likes of special items and the likes of goal points and something like that.

Okay. For the license of the game Fly for Fun, with the earlier experience of the hackings, those issues -- for this one, how vaster measure are you [inaudible] to prevent the same things to happen again?

The only thing I can say is that for this Fly for Fun, we license the game -- it's almost like a co-development license that means that we actually have access to the source code and so far we have not experienced any kind of hacking, especially since we are under the [coast area] right now. And [thing] is that we will be using same kind of measures that we have been using for our own games like the likes of Westward Journey and Fantasy Westward Journey and all of this measures has been very successful. So we think that it's going to be just successful for Fly for Fun.

Okay, that’s great. Ted, may I follow-up for another question, for wireless side for the fourth quarter, you basically guided on another quarter. My question is where you see the revenue to [stabilize]?

As you can see, the percentage of decline in Q4 guidance has already dropped from the actual decreased percentage in Q3 and we are expecting that we will [keep] the bottom in the next two quarter or so.

Okay, great, thanks.

Thank you.

Next we will hear from Dick Wei, JP Morgan.

Hi, good morning guys.

Good morning, Dick.

A good quarter. I guess just couple of questions on the game side. I am curious do you have any initial users' estimates for your 2.5-D and your 3D games going into next year, how many users will it be before you go to commercialize? And then the second question is do you expect any cannibalization for those two games with your Fantasy and Westward Journey II game? And the third question is do you see any competitions with your [inaudible]? Thank you.

This is Michael. Let me try to answer your question in terms of the initial user estimate for the two games, two self-developed games. I think it's actually a bit too early to say the user estimates for those two games, but what I can say is that for the 3D game, I think it's going to be the -- we are expecting it to be the most successful games of all of those games that we have previously launched before. So we are -- we think this is going to be a -- it’s a really, really great game and it’s going to be a real hit for the market in 2005. And for the 2.5-D game that we are also developing in-house, I think you can -- you might want to try to benchmark it with other 2.5-D marshal arts games and the likes of those countries -- those provided by Kingsoft or some other similar games. So, I think that’s the only thing I can give you kind of an estimate for benchmarking. And in terms of the cannibalizations, which we -- first of all, we don’t think that there will be much kind of cannibalization because the kind of games that we are providing are quite different, as we have mentioned before for Fantasy Westward Journey and Westward Journey, those are more community-oriented while for the 2.5-D marshal arts games is kind of the Chinese background and action-oriented and for Fly for Fun is kind of a medieval or world background, fantasy background, and also kind of action-oriented. And then for the 3D game, it's kind of a Chinese background, but it’s kind of a really big thing, so -- and inclusion of all these social communities and a lot of new features. So, really don't think there will be much of a cannibalizations between all these games and especially so far the experience with our Fantasy Westward Journey and Westward Journey II, the cannibalization of those two games -- I wouldn’t rephrase cannibalization, but really kind of a migration from the Westward Journey II to Fantasy Westward Journey is around 10% only, and -- which is really -- actually which is a thing that is a good thing for us because it can help for the initial success -- to bring the initial success to a critical mass for Fantasy Westward Journey with those kind of migration from Westward Journey II. So I think a little bit of migration is actually good thing for our games.

And although it's bit early to talk about the 2.5-D and the 3D game, but we can talk about the targets for Fly for Fun, which will be launched very soon. Our target for the peak concurrent user during the open beta testing will be around 150,000 peak concurrent user and after commercial launch -- after 3 months of commercial launch, our target will be to reach the target of 100,000 peak concurrent users for Fly for Fun.

Okay, great, thank you, guys.

Next we will hear from Jason Brueschke, Pacific Growth Equity.

Thank you. Let me start with the advertising revenues, my first question is really to compare where you guys are currently standing verses Sina and SOHU. You are guiding for a slight sequential decline in the fourth quarter whereas Sina and SOHU both for flat to slightly up and they also indicated that their expectations for price increases for Sina, I believe, it was 15% in 2005 and SOHU was 15-20% or just slightly lower. Could you help us understand, first of all, why you are declining while they are probably flat to up and why you are not going to be able, you believe, to put through the same price increase? And then secondly, is there some way to gauge weather some of the changes that you are making to improve the content and usability of your site will actually allow you to maybe in the mid-term of 2005 go ahead and put a second price increase to bring you more in line with your competitors? Thanks.

Yes, first of all, in terms of the first question, I think the industry groups of the advertisers of ours are quite different from those of Sina and SOHU. The demographics our user base are generally younger and we do not have advertisers from the property sector with very few advertises from the automobile and the financial institutions sector. A lot of our advertisers are mainly from the handset manufactures, IT products, FMCG such as beverages, education sector. And the fourth quarter is generally a lower season for the advertisers of our industry groups as compared with theirs. For example, beverages companies do not advertise during winter. They spend most of their money during spring and summer.

And for the price increase, as I said 8-10% is the average effective rate increases for our advertising space. Some of the more popular advertising space increase can be as high as 30%, but on the other hand, some of the less popular properties we will reduce the rate in order to attract more advertisers. And I think that's one of the reasons why we are expecting a lower rate increase than others. And as I said, this will be the rate increase at the beginning of the year and there can be another rate increase during the year.

And in terms of the content, we have been trying to improve or I should not say improve, expand our content to attract more niche group of more mature users or readers such as our property channel, our automobile, our business news channel, those are some of the new content channels or content channels that we have revamped recently or going to be revamped in order to attract more niche group of more mature readers. And once we are successful in doing that we would be able to attract the advertisers of those higher-priced products as well and at that time probably it's more comparable for us with Sina and SOHU.

Great. Thank you. As a follow-up to that, you kicked off a big branding campaign last quarter, could you give us a little color on how you think that branding campaign has gone and what you think the material benefits that you either have already enjoyed or that you are going to enjoy in 2005 from that?

I think it's quite difficult to specifically single out the benefit from the branding campaign, but I can give you some of the numbers such as the previews of our content channels, the number of e-mails increase, and the search traffic increase during the period. The search traffic increased by 28%, our number of e-mail -- registered e-mail increased by around 30% and our total previews for our content channel increased by around 12% during the period from the beginning of the marketing campaign through the end of the quarter. So although there are different reasons in contributing to such increases, but I would say the marketing campaign would be one of factors contributing to those improvements.

Great. Let me actually may be one final question, in this field with be free e-mail and your cross strategy with POPO, Yahoo! signed an agreement with 12 companies in China in September to offer them free e-mail and the companies are not insignificant in and around the internet and tech space and some people view that as Yahoo! being beginning to take a much more competitive stance in the market versus where they have been in the past. So, I guess, two comments from you -- first of all, how you think that Yahoo! making a move into offering free e-mail is likely to impact what you are doing and your strategy in and around POPO? And then just secondly may be more generally what your opinion is that Yahoo! is likely to be doing in and around the Chinese market both on the portal side as well as generally versus you instead of your competitors? Thanks.

Let me take the second question first. I think what we are seeing what Yahoo! is doing now is they are focusing on the e-mail as well as search. I think it's much more sensitive for them to go into content and that's the reason why they are focusing more on e-mail and the search business. And I think the next area that they might focus into will be the e-commerce area. They have already formed a joint venture with Sina in doing option competing with eBay and there might be other e-commerce area that they would be looking into, but I think it's much more sensitive for an US company to go into content in China.

Did you say you think it's more sensitive for them to go into content or not to go into content?

To go into content.

Okay and the effect of this -- the e-mail partnership that they signed in September, do expect to see any meaningful impact on your business in the coming quarters from that?

Michael, can you take that.

We don't think that it's going to be affecting our business that much in terms of the 12 partnerships that they have signed. The reason is because it is actually very sensitive for Yahoo! to sign with those 12 kind of vertical portals in China because it is very sensitive for them to share the -- one of the conditions for them to sign those partnership is for them to share the user base data between Yahoo! and the 12 vertical portals. And I think with this sensitivity, I am not sure if the details of those partnerships, is it going to be only for those who sign up on the e-mails or not or for those -- only for those new users and so on, because I think it would be again pretty sensitive for those portals to just give their user base to yahoo and to sign up just for the benefits of having e-mail account for their users. So we have felt if how this is going to progress in the future. And on the other hand we ourselves are more for 163.com and that is we have been able to brand ourselves in terms of the general users, general consumers market as very stable and very safe e-mail service providers and we are really targeting so much on the consumer markets rather than having to do kind of the corporate and consumer accounts.

Okay. Thank you very much.

I think we can have time to have one more question.

We will take our final question of the day from Richard G (phonetic) of Goldman Sachs.

Good morning.

Hello Richard. Good morning

When I look at your given guidance for the fourth quarter of 11-13% Q on Q growth, should I be thinking then that interestingly you're looking for Fantasy Westward Journey to be growing at 20% or a little more and Westward Journey 2.0 to be flat quarter-on-quarter? That will be the first question. The second question relates to 3D game, I think you remember about a year ago, the 3D game was due to ship this quarter we're now in -- I think everyone has delays with these games and that's just part of the industry, but I was wondering what is particular within the 3D game was causing delays to you -- whatever it would be the graphics engine or the storyline or something else or all together? Also the cost of developing new games, are those currently being expensed to the P&L, it's my impression in the past or are some of them being capitalized -- I noticed that your PP&E and software on the balance sheet which had been flat for a couple of years seemed to have pickup over the past two quarters?

In terms of the 3D games I think it's kind of a change in our strategy to launch the likes of Fly for Fun and also for the 2.5-D game which we see much bigger and open market right now. In terms of the market we see there is kind of drop of others, 2.5-G games and we see an open opportunity here so that's we think it's actually better for us to launch the 2.5-G games and also for Fly for Fun first before launch the 3D game. And as a result we -- actually in developing more interesting functionalities and more interesting contents for the 3D game to make it even better games when it is going to be launched in the second quarter of 2005, so I think it's more a change of our strategy when we see a open opportunity in the market right now. And the second question?

It's just with regards to whether you are expensing all of the costs of game developments or if not why the PP&E on the balance sheet is increasing?

This is Denny. Our accounting policy is to expense all the R&D costs for the online game as they are incurred, so there is nothing being capitalized in the balance sheet. And the increase in the property, plant and equipment actually is because of several reasons, because of the increase in servers, because of the increase in the personal computers that we assigned to every new staff, and that is mainly the reason for the increase in PP&E.

Okay. And the final of the first question was just on the guidance, would the 10-13% game revenue guidance growth for the fourth quarter that you expect and trying to see Westward Journey to be up on the order of 20%+ and Westward Journey 2.0 to be relatively flat.

That is about right. Kind of, Westward Journey 2.0 is flat for slight growth and then Fantasy Westward Journey is over 20-25% growth.

Great, thank you very much.

Okay, thank you and that does conclude our conference call.

Again that concludes today's NetEase Conference. We thank you all for joining us.