NetEase Inc (NTES) 2004 Q4 法說會逐字稿

Thank you for standing by everyone. And welcome to the NetEase 2004 fourth quarter and fiscal year end conference call. On today's call 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 are intended to qualify for the Safe Harbor from liability as established by the U.S. 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. Just as a quick reminder, this conference is being recorded. Also, in addition, a webcast of this conference call will be available on the NetEase corporate website at corp.netease.com. I would now like to turn the conference call over to Mr. Ted Sun, Acting Chief Executive Officer of NetEase. Please go ahead sir.

I am very pleased to be here today to review NetEase's fourth quarter and fiscal year end 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 continued success of NetEase's online games division, combined with the growth of our advertising business were key revenue drivers in the year 2004, helping drive total net revenue growth of 58.8% for the full year. This again demonstrates the value of our diversified revenue strategy over the years.

Touching upon each segment, year over year advertising growth continued, with full-year 2004 net revenues growing 81.6% over the year 2003, as our efforts in the year 2004 to rejuvenate and improve our content -- channel content proved very successful.

The fourth quarter declined versus the third quarter, however, it was attributable to typical seasonality impact as well as our advertising clients' reduced spending following the marketing in intensive Olympic period in quarter 3. We believe these fourth quarter trends were seasonal and consistent with the overall online advertising market in China.

The wireless value-added services business, in contrast, did not perform as well, becoming a smaller third portion of our overall revenue makeup. The WVAS market continues to prove a challenging environment, attributable to several factors. However, we continue to believe that there is long-term potential on this particular segment and will continue to invest in specific areas of the WVAS business.

We want to highlight in particular, RG continued to be a focus for NetEase, and now represents 36.7% of our WVAS and other revenue in the fourth quarter.

Let me now turn to Michael, who will provide an overview of our online game business for the quarter.

Thank you Ted. Hello everyone. NetEase's online games positions continued to outpace the industry in 2004, with net revenue growing 192.4% compared to the industry growth of 47.9%, according to the IDC and General Administration of Press and Publications online game industry reports released in January 2005.

This was driven by the continued success of Westward Journey 2 and Fantasy Westward Journey, which both experienced double-digit growth in the fourth quarter. Also, both games continued to experience new peak levels of concurrent uses during the quarter, with each Westward Journey 2 and Fantasy Westward Journey reaching more than 159,000 users. This success was boosted by special further events that we launched within the games, which we plan to continue during 2005.

Fly for Fun, the newest addition to our game lineup, was beta launched in December and has reached more than 20,000 peak concurrent users. To be frank, we have been experiencing some technical issues due to the complexity of the technology which has been resulting in server instability. We are working to address the technical issues and, at the same time, are working with the Korean developer to beef up the content and to make for grander commercial launch, now planned for the second quarter of 2005.

In terms of strategic development, in view of the current market popularity and success of our 2D games, we are focusing more resources on developing further and more comprehensive expansion packs for Westward Journey 2 and Fantasy Westward Journey, our 2 in-house 2D games. To take full advantage of the situation and also push back the release of our next generation games, we will be launching this expansion pack in the coming several months.

As for our next generation MMORPGs, we are finalizing development work on a self-developed 2.5D game, which is based on Chinese martial arts background during the Tang dynasty, and are also working to finish development of our self-developed 3D game, this on Chinese mythology. We now plan to launch these new games in the second quarter and the third quarter respectively.

Broadening our reach into new areas of online gaming, we will be launching a community casual games platform, consisting of around 9 casual games, which is expected to be launched within the next 2 quarters. We expect these games to appeal to a broader base of users from our MMORPG users.

All in all, 2004 was an exciting year, firmly establishing itself as 1 of the leaders in online gaming in China. And 2005 promises to be an even more exciting year, given the number of games we will be launching.

Let me now turn the call to Denny, who will go into a little more detail on the numbers for the last quarter and full year of 2004.

Thank you Michael. As usual, I will talk through some of the key highlights for the quarter and for the year. Please note that all figures are in U.S. dollars.

Fourth quarter, total net revenue grew 9.7% over the previous quarter, and 55.1% year over year. Total net revenues for the full year increased 58.8% to $109.2m. As Michael mentioned, for 2004, net revenues in our online games business grew by 192.4% and was the main driver of our top line growth. For the quarter, net revenue increased 22.6% sequentially.

For advertising services, in the fourth quarter, net revenues decreased by 12.4% sequentially. As Ted mentioned, this was due to the seasonality decrease in advertising, combined with the fact that customers spend a large portion of their marketing budget during the summer Olympic period. For the full year, advertising revenue grew by 81.6%.

Wireless value-added and other fee-based premium services decreased 23.5% quarter over quarter. As Ted mentioned earlier, we are continuing to work in a challenging and wireless environment. There is strong competition in the wireless value-added sector, which combined with a general decrease in popularity of SMS-related products, as well as the ongoing implementation of the mobile phones new billing platform across China, continues to impact our results.

Gross profit in the fourth quarter grew 9.3% over the previous quarter to $25.1m. The Company achieved $87m in gross profit for the fiscal year 2004, representing a 57.6% increase over 2003.

Gross margin in the fourth quarter increased slightly to 88.3%, from 88% in the previous quarter thanks to the continued economy of scale. Gross margins for advertising and wireless value-added services and other fee-based services decreased however, due to the fact that the decline in revenue was not accompanied by a corresponding decrease in the fixed costs associated with these services.

Operating expenses decreased in the fourth quarter by 4.8% from the previous quarter to $9.3m. This was largely due to a reduction in marketing expenses as the corporate marketing campaign begun earlier in the year was substantially completed in the fourth quarter.

We recorded a net profit of $15.7m for the fourth quarter, a 19.3% sequentially increase. For the full year, net profit was $53.3m, up by 36.7% over 2003.

We reported full-year diluted earning per ADS of $1.54 - $1.54 under U.S. GAAP. If the Company had not taken into account the dilutive impact of the assumed the conversion of the $100m convertibles [indiscernible], the Company would have reported a diluted earnings per share of $1.62 - $1.62 for the fiscal year 2004.

Looking at the balance sheet, our combined total cash and held-to-maturity investments was $276.6m at the end of the fourth quarter, and we report a positive operating cash flow of $24.4m fourth quarter.

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 first quarter of the year 2005. 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 first quarter this year to be between $36.5m and $37.5m, with advertising services revenue to be flat to a slight decrease of 5% quarter over quarter. Online games services revenue to increase by 16 to 18% quarter over quarter. And wireless and other fee-based premium services revenue to decrease by 15 to 20% quarter over quarter.

Furthermore, we expect total selling and marketing expenses to be between 12 and 14% of our total net revenue in the first quarter. In addition, during the quarter we also expect to incur a one-time research and development expense of approximately $2.5m, resulting from the purchase of the 3D games technology related to the future development of our online games.

Net profit we expect to continue to increase during the first quarter to between $15.7 to $16.5m. These figures have already taken into account the abovementioned $2.5m one-time expense for the purchase of 3D technology.

Let me conclude again this quarter by saying that we are generally optimistic about the Company's prospects going forward, as reflected in our guidance. Our online games business is doing very well. And we expect this to continue, particularly as we expect to launch additional titles in the near few quarters.

We also expect the contribution of 2.5D and other non-SMS services to contribute a growing proportion of our wireless value-added and other fee-based premium service business. Despite the fact that we are expecting advertising revenue for the first quarter to be somewhat impacted by low seasonality, we continue to be optimistic about our advertising business for the full year.

Finally, we continue to work on increasing our portal content and use their offerings, which we hope will make NetEase an even more attractive platform for advertisers and users in the future.

I am now happy to take your questions. Operator, please open the floor for Q&A.

[OPERATOR INSTRUCTIONS]. The first question is from Safa Rashtchy with Piper Jaffray.

Good morning everyone. Congratulations on a good quarter. Questions - first on the advertising front. Ted, can you tell us any potential impact from increased advertising spending by the e-commerce companies, notably eBay and Alibaba, which apparently have allocated significant funds for marketing this year. Do you have any exclusive won and exclusive deals with either 1 of them and do you expect to benefit from that increased spending? And I have a couple of follow-ups.

Yes, we are expecting to be benefit from the increased spending of the 2 online auction companies. Actually, we have already signed up an arrangement with eBay China for the year 2005, with an extension to the year 2006. So we are not allowed to take any advertising business from Taupao (ph) or Alibaba because of the exclusive arrangement with eBay China.

But obviously eBay China has to pay us a premium for such an arrangement. But they expect of us we are not able to disclose because of the confidentiality undertaking of the contract. I can add the spending from eBay China in year 2005 will be much higher than they're spending on us in year 2004.

Okay. Great. A second question on the online games. You continued to do very well with your game titles despite the increased competition out there. I'm wondering if you could give some insight to us as to how in your competitive landscape has changed with the introduction of some new games and more marketing activities by your competitors. Are you finding the need to increase either your marketing PR efforts or the way that you position games? Have you changed anything by way of positioning your games to the players?

Okay. In Q4 last year, both of our existing titles, Westward Journey online version 2 and Fantasy Westward Journey did very well. Both of them recorded a couple of digit growth in terms of quarter over quarter revenue growth. And we believe that that was due to some additional marketing. We felt that more importantly because of the successful launch of the expansion packs to the 2 games.

For the year 2005, hopefully I will turn to Michael to give you more details in answering your questions. Michael?

Yes, sure. For the 2D games, we will continue to put more resource -- we will put more resources especially in order to release more and more expansion packs, more comprehensive expansion packs for both Fantasy Westward Journey and Westward Journey 2. In addition, we will put more resources to integrate more marketing events, together with the same in online and offline events.

In view -- this is the strategy which has changed a little bit slightly, because in view of the current overall market for the 2D games that we see, that the 2D games continue to be growing at a very fast pace. So I think that's the strategy that we have changed a little bit. And at the same time we might want to push back a little bit on the release of the 3D games because of the current market for the 3D games seems to be -- seems to be mostly if we release later actually.

Okay. And 1 last question, if I may. Fly for Fun, that's your newest game, it seems like it hasn't had quite the early success that you saw with Fantasy. Could you give us some update on how the sales have been progressing for that and what your expectations are for that game in Q1 at least?

Michael, can you answer that as well?

Yes, sure. For Fly for Fun, the current peak concurrent users that we have reached during the open phases for the game is around 20,000 users right now. We have experienced some technical problems regarding to the server stability and also regarding to the players and users logging on with the server.

The game currently can actually still raise a lot of interest from the users. And we can see by the number of new users -- new additional users every day that coming from the portal and from different channels. However, the game seems to be having some difficulty in retaining the users right now, mainly because of the technical stability.

Right now -- frankly, we did underestimate the technical complexities of the games in terms of the server size. And we are swapping more experienced engineers to work on this, and fixing the problems together with our Korean partners.

So the bottom line is that we will -- the new target for the commercial launch for this game is going to be in May 2005. And during this time we will also develop more content while we are fixing the technical problems, together with our Korean partners.

Great. Thank you very much.

Let me -- you asked before. In terms of the online games business, we have changed our strategy slightly by focusing more of our resources on the 2 existing games because of the success of the 2 existing games rather than allocating more resources to the development of the new games.

For example, Fantasy Westward Journey has already broken the record of our peak concurrent user in January. It recorded more than 400,000 peak concurrent users in January for Fantasy Westward Journey, which is a very encouraging number.

That's helpful. Thanks for that. Great quarter.

We will next take a question from Jason Brueschke of Pacific Growth Equities.

Thank you.

Hi Jason.

Hi. First of all, very nice quarter gentlemen. I want to follow up on a couple of question that Safa has asked. The first question I have is can you give us what the average concurrent users were or are for Fly for Fun. You've given us the peak, but just normalize over a month or something. What are you seeing on average as the number of users?

That should be around 8,000 to 10,000 right now.

Right. And a follow-up on the competition question. I guess my question in some ways, it makes sense to me that you would focus on the 2 existing games given how well they're doing. But my question is at some point it would seem to me that the growth from those 2 games will start to flatten out. And at that point, certainly, your overall growth in the gaming business will be highly dependent upon the success of new games.

Could you maybe give us 2 bits of information? First of all, when do you see Fantasy peaking out, as well as Westward Journey? And when you are going to ramp up the new games, do you think at that point you will need to significantly increase your sales and marketing expenses to make sure that those new games are successes as well/

Okay. Let me give you some historical numbers. In Q4, the quarter over quarter revenue growth for Westward Journey online 2 was 15.2%. And the revenue quarter over quarter, the growth quarter over quarter -- revenue growth for Fantasy Westward Journey was 33.2% in Q4 over Q3. So both numbers are very encouraging.

Fantasy Westward Journey is only a 1-year-old game. We do not expect to see a peak at least until later year 2006, as demonstrated by the performance of Fantasy Westward Journey which has been 2 year -- more than 2-year-old game and we're still recording a very encouraging and healthy quarter over quarter revenue growth. So Fantasy Westward Journey is even more popular game.

We really do not expect to see the peak at least until later year 2006 or year 2007. I think it will continue to see quite healthy growth quarter over quarter during this year, especially if we continue to launch -- to focus more on launching more comprehensive expansion packs and virtual events to the games.

Westward Journey online, actually we are very pleasantly surprised with the performance in Q4. I think that was resulted from the success of the expansion packs that we launched in the later part of 2003 -- the middle of Q3. And we will continue to do that to maintain the growth of Westward Journey online 2. But here is has been a more than 2-year-old game. We believe that the peak will be reached later this year. But we believe that although it may reach a peak for the game but it will plateau for at least a few quarters before reduction in terms of user base and revenue.

Michael, maybe you can add more if I am not answering it in full.

In terms of the marketing expenses, I don't think we will need to increase too much marketing expenses over the launch of the new games as well as the continued promotion of the 2 existing games because we have already developed further expenses distribution channel. We have the benefit of the portal, which has accumulated a huge user base of younger demographics, who are our targeted users for our online game business. We have already developed a very strong person to person marketing channels among the Internet base as well.

So, although in launching new games we may need to do more promotion on printed media etc., but that would not incur any abnormally high marketing expenses in launching new games. I think for the whole year -- year 2005, we have budgeted around $10m in the marketing -- selling and marketing. I think that's the level. $8m, is that correct Michael?

Correct. Correct.

Selling and marketing. $8m in the selling and marketing expense for the whole online game business. And that has been included in what I -- the budget for overall selling and marketing expenses for the whole Company. That we believe for the year 2005, the total selling and marketing expense as a percentage to our total net revenue on an annual basis in year 2005 will be around 15% of our total net revenue on an annual basis. And that has included the budget for the marketing expense for our online game business.

Thank you. That's a very thorough answer. I think it's going to help a lot of people understand how the model really does seem to be ramping here. Let me maybe just ask 1 last question on the gaming business.

In Q3, correct me if I'm wrong on this assumption, but in Q3, you released and expansion pack and you saw -- I do believe both of the games, you saw a boost up in your revenues in the third quarter. And then you largely guided Q4 a little bit less growth, in part because there was no expansion packs that were planned to be released in Q4. But what I'm hearing you saying is that you saw some reacceleration in growth in Q4 because of that expansion pack activity.

My question is, is that true? And if so, why is it you're planning and releasing an expansion pack or that you already have for each game in Q1? And do you now see the expansion pack having not a 1 quarter boost to revenues, but a multi-quarter boost to revenues?

And can you also tell us what your expansion pack roll-out is? You have traditionally done 2 a year per game. Are you planning on making that 1 a quarter or something even more frequent? Thanks.

Usually there is the time lag for the users to get use of -- get interested in the expansion pack. But maybe let me turn to Michael to give you more detail about the timing as well as about the launch of expansion packs.

Yes, sure. In terms of the expansion packs, I think in general -- the general market for other games, they are releasing somewhere around 1 to 2 expansion packs for their games each year. I think that is more the general market practice.

For us, I think that we are putting more resources in releasing more and comprehensive expansion packs. What we are releasing is -- we are targeting to have somewhere around 3 expansion packs a year to around 4 expansion packs. And for the expansion packs -- can I just mention there is a small time lag for the expansion pack to really bring into the effect of growing the games. Usually there is around maybe sometimes a month's time for the players -- for all the Internet interfaces and for all the players to download the new extension packs. And also for the players to be -- get really interested in the new expansion packs.

So, for example, if an expansion pack is released in September, like the Westward Journey 2 last year, the real growth will begin somewhere around in October. And the evaluation (ph) -- the effect will bring over the whole quarter. And that's why we see a growth of Westward Journey 2 in the Q4 although the expansion pack was released in September 2004.

And at the same time, in terms of the strategy, we are going to have 1 expansion pack for Westward Journey 2 during the first quarter. We are also going to have 1 expansion pack for Fantasy Westward Journey during the first quarter. And we will have 1 expansion pack -- 1 new expansion pack for Westward Journey in around May. And then for Fantasy Westward Journey it's somewhere probably a little bit earlier than that.

Michael, can you talk about the expansion pack launch planned for the first quarter for the 2 games? Have they been launched or exactly which month will they be launched?

Okay. Let me go through for Westward Journey 2 again. For Westward Journey 2, the last expansion pack was released in -- 1, of course in September 2004. This is the 1 that we call the master craftsmanship, that we give the player more new crafting skills, new game interface and user abilities.

And the other expansion pack that we have actually just launched is also for Westward Journey 2, was in late January 2005. And we give the players more new magical tools to travel around different servers (ph) and different places. And also some new maps for the players. The next targeted expansion pack for Westward Journey 2 is in May. So that's all for the Westward Journey 2.

And then for the Fantasy Westward Journey, the last 1 that we have just -- we have launched was in October 2004. And it's called Mysterious Legend. And the next 1 that we are going to launch is going to be in March 2005, it's going to be called Beautiful Life, which includes the new system where they can -- the players can have wedding system and can have child and so on. And the children can go on. And the next 1 is going to be around July or June 2005.

Great. Thank you. I've taken up a lot of time. Can I just ask you 1 quick question? The revenue guidance for Q1, is that gross revenues or net revenues?

The total revenue is gross revenue.

That's gross revenue guidance. So it's before the VAT?

Before the business tax. It's $36.5m -- between $36.5m and $37.5m total gross revenue before business tax.

Great. Thank you very much guys. Congratulations.

We will next move to a question from William Bao Bean with Deutsche Bank.

Thanks. Just a couple of follow-ups, in terms of industry game -- the game industry dynamics, any big changes recently in terms of competition, especially with regard to the 3D games going out, or the success or lack of in terms of some of the new 3D games driving your focus on 2D? Thanks.

Michael, can you talk about the market competitive landscape in terms of the launch of the 3D game -- the next [Image 2] as well as the expected launch of the 3D game of Warcraft? Maybe you can touch on the data testing of the Kingsoft (ph) new 2D game as well.

Yes, sure. In terms of the current market, of course we are seeing more 3D games launching in the market. Of course, the 2 big titles are 1 from -- [Image 2] from Seena (ph) and Antisoft (ph) and the other 1 is World of Warcraft from Blizzard [indiscernible].

For Image 2, we are seeing -- I have a feeling, of course, that peak concurrent users during the beta was around 160,000 to 180,000. That was before their commercial launch. And after the commercial launch, I actually haven't seen any posted data from Seena. But I think usually a game, when fully launched, that there is, in general markets, there is a drop of around 50 to 50% -- 40 or 50% of the users from the open data, and depending on different games, of course.

So that's for Image 2. And we don't see, at least from the market, that the game is growing hugely. But it's kind of flat and growing at a slow pace. And for World of Warcraft, of course you can get more information from [indiscernible]. And as far as we understand this thing is going to be launched some time in the middle of this year, or some time before that.

And virtual World or Warcraft of course is the 3D game and the brand name of amongst Chinese players. Of course, at the same time, we have also seen a lot of risk related to World of Warcraft. Firstly, the game being very high -- we believe that the game has a very high cost of operating cost -- operating cost. And we believe that the game would have problem in charging a very competitive price to the other games in the market right now.

And secondly, we believe that the game still has a lot of problems compared to the Chinese game background because, after all, the culture and the background of this game has improved -- the Westward cultural games has not been proved a success. There is no games with Westward -- western culture has proved success in the market -- in the Chinese market right now. And we also are seeing the risk from Warcraft, despite the game map it's a very good [indiscernible].

But at the same time, we are seeing this popularity from a game from Kingsoft (ph). As far as we understand it has the beta launch for Kingsoft field game. We believe it is called [indiscernible - Chinese language]. Anyway, in Chinese it's [indiscernible - Chinese language]. [Inaudible] the realm of 130,000 peak concurrent users during the data. And it is a 2D game. And it has also surprised a lot of the players in the industry right now.

Okay. So I think that's most of the games launched and to be launched during this year from other players.

Okay. And in terms of the PC requirements for some of the 3D games, have you -- is that 1 of the drivers for you slowing down the launch of the 2D -- 3D, sorry. Or is it just the success with the 2D? Is PC requirement an issue?

Michael, can you?

PC requirement is an issue because, first of all, there are many kinds of 3D games. Some 3D games actually requires a smaller, lighter PC hardware configurations. For example, the World of Warcraft, we believe that the PC requirement is light for World of Warcraft with [Image 2].

So even for 3D games there are many different kinds of PC hardware requirements. And as far as we understand, for games that we believe requires 512MB of RAM to 1GB of RAM, we believe that in the market right now there is maybe around 40% to 50% of the market -- of the PCs can reach such hardware configurations.

Okay. Thanks. And this last question, could you talk a little bit about your NetEase brand marketing strategy for the year? You just finished your major campaign in Q3. And what do you plan to do for 2005? Thanks.

In terms of the corporate brand campaign, as I mentioned previously, that only will be done once every 2 to 3 years. So this year we will not have any major corporate brand promotion campaign but we will continue to -- obviously we will have to continue marketing to enhance our brand equity.

Our focus this year in terms of the portal side for marketing is to promote our key content [in China].

Okay. Thanks guys.

Next will be Wallace Cheung with DBS Vickers.

Hi. Great quarters Ted and Michael and Denny.

Thank you Wallace.

Yes, and a couple of questions. First of all, can you talk a little bit on your strategy in the casual game business? How can you differentiate from [indiscernible]?

And secondly, question on the wireless part. It seems revenue coming down and the cost of sales actually going up. I'm just a little bit worried if the revenue continues to go down is it possible for you guys to keep visibility in this business.

Okay. Maybe let me answer the second question first. And I will let Michael or Denny to give you more details on -- to elaborate on my answer. And I will let Michael answer your first question.

In terms of the gross margin for the wireless VAS business, in Q4 it has included a one-time provision for a prepayment to a media partner related to the wireless VAS business. And that one-time charge was around RMB3m. And although we have prudently taken the full provision for that prepayment that we are expecting to make some certain recovery, is possible to make certain recovery of that in the future. We are just prudently maintaining the one-time provision for the full amount first in Q4.

And other reasons for the lower gross margin for the WVAS and other business, because that has included all the cost of revenue related to our non-content and non-online games business products, including our e-mail, instant messaging, online album, chat room and other community or re-entered products and services. And most of them are free. And that's why the cost of revenue for the wireless and other services is generally higher than the other -- than the other 2 specific [areas].

Maybe I will let Michael to tell you more details about the one-time charge and maybe let Denny to give you a little bit more on the gross margin for the wireless VAS business.

Yes, sure. Regarding to the one-time charge, it is a partnership with a TV production program company. That partnership basically is to have the TV production program to promote our SMS and other wireless products. And the agreement -- the partnership was formed in second half of 2004. And the partnership seems to have been having some problems right now because, for 1, that the media company in China is taking more control in terms of the TV production and the TV programs.

And, for example, even for part of the -- like a text roller for the TV programs that have been produced by our partners, that could actually be changed when the TV programs are actually being broadcasted over the different channels. So that has affected hugely in the promotion of our SMS products. And at the same time that we are seeing some change in the channels that this TV production program company has been reaching. So we are working together with this company to change the contracts and terms right now.

But for conservative sake, of course, this prepaid revenue of -- revenue sharing of RMB3m, we are taking a one-time provision right now. This is certainly for conservative (ph) sake. And for the gross margin I will pass you to Denny.

Hi Wallace. I will give you some more light on the gross margin. As Ted has and Michael has been saying, that this low gross margin for the quarter for WVAS and others was affected by a one-time charge. If we exclude that one-time charge, then the margin would be around 39% for the [indiscernible].

Just again also explained that [indiscernible] affected by the other fee-based free services that we are offering to the users of our portal. So in fact we are looking at the WVAS [attachment immediately], although we didn't [indiscernible] out, I would think that the margin for WVAS would be around close to 50%.

Having said that, we are continuously considering, actually seriously considering the cost restructuring for both the WVAS and also for the other fee-based services that we are providing to the users. And hopefully we will be able to save some costs in this particular segment and give a better gross margin in the future.

Right, maybe I can go through the first question that Wallace asked, regarding to the casual games. For the casual games, our strategy right now is to roll out a platform of casual games during the first half -- around the middle of 2005. And this platform will include around 9 casual games.

Those casual games are comparatively -- will include of course chess and board games and also include some comparatively more sophisticated games, such as the likes of Tetris and the likes of most of those kind of things.

And I think the advantage for us to roll out the casual games platform, of course, once again is the experience of our in-house development. All these things will be in-house developed. And I think quality again is our main advantage. And you can see from the experience and from the track record of the games that we have developed so far.

And secondly, of course, this is going to be a platform of casual games. Of course, also again, with the advantage of in-house development, we can integrate all these casual games under 1 single platform, where gamers can communicate with other players within this platform. And also have, of course, arbiters (ph) and having different kind of virtual items within this platform and can be traded between all these games.

I think the first advantage of [indiscernible] a casual games platform is, of course, integration with our other products. 1, for example, is the POPO, which is the instant messenger of NetEase, where we can take -- POPO is also an integrated platform and also a marketing channel for these casual games.

Hi. Just a final question. Do you see any net impact with Shingai (ph) have apparently have taken control of Seena (ph). Will that have any major impact on your free business? Thank you.

Let me comment on that. I think it's too early to say the outcome of the Shingai investment in Seena, because at this time Shingai has earmarked the data clearly, they have a concrete plan and intention, while Seena has not stated any of their intentions or reaction yet. So it's too early for any third party to comment on that. I think this is only the beginning of the story.

But I can tell you we are expecting to see more mergers and acquisition activity in the Chinese Internet sector involving both international companies and domestic players as well. But this is a reflection of the potential of the Chinese Internet market. And I think that's all I can say about Shingai's investment in Seena at this time.

Thank you.

I think we have time for only the last question now.

Okay. And the final question will come from Frank Shi with CLSA.

Hi Frank.

Hi guys. A question on the games sector. Is the growth coming from new gamers or is the growth coming from more hours from the existing gamers? And also can you talk briefly about the sort of business in the POPO if it's growing and what you want to do with that business? Thanks.

Michael, can you talk about both?

Yes, of course. The growth of the games is typically -- a majority comes from new gamers coming to the games. As you can see, the number of concurrent users and the number of peak concurrent users have both grown during the quarter. And with similar ARPU for these gamers.

And for the strategy of POPO, I think, as I have just mentioned, for 1 that POPO will continue to be targeting the demographics of the younger generation within this instant messenger market. And at the same time it will integrate together with our casual games platform.

So POPO will -- seemingly to be more kind of entertainment young market and chatting and, of course, Internet community. And right now we are seeing growth of the POPO right now, with over 22m registered users right now -- sorry 24m users right now. And we are also seeing growth in the number of concurrent users.

Okay. Thank you.

Okay. Let's conclude the conference call and thank you everyone.

That does conclude this conference call. Thank you all for joining us and have a wonderful day.

Thank you. Bye.