NetEase Inc (NTES) 2005 Q3 法說會逐字稿

Hello everyone and welcome to the NetEase 2005 Third Quarter Conference Call. Today’s conference is being recorded. I would now like to turn the call over to Miss Brandy Pearce. Please go ahead.

Thank you Operator. Today you will hear from Mr. Michael Tong, Chief Operating Officer and Mr. Denny Lee, Chief Financial Officer. After their prepared remarks we will open the call up to 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 US Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors. Some of these risks 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.

Risks related to the fluctuations in the value of the Renminbi with respect to other currencies could also adversely affect the Company’s business and financial results.

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 call over to Mr. Michael Tong, Chief Operating Officer of NetEase. Michael?

Thank you Brandy. Hi everyone and thank you for joining us.

Overall we were pleased with our progress in our Online Game and advertising businesses. The third quarter represented a period of solid growth in our current markets and concentrated investment in the development of our next generation of products.

Total revenues increased 83% year-over-year and were up 11% quarter-over-quarter. As many of you are aware, our leading MMORPG gain, Fantasy Westward Journey, continued to be the most popular game in China. And Westward Journey Online II was able to hold on to top 3 position in terms of number of players. We attributed success to our successful expansion packs and increase service capabilities we rolled out in the second and third quarters.

Although we were pleased with the continued success of our gains, that generated revenue growth in the third quarter, we were slightly disappointed that the summer season was slower than we expected, which we believe resulted in part from increased competition in the markets. We do not view this as a long-term issue for the health of Online Game business or the ability for us to continue to lead this market and remain a developer of innovative and cutting-edge Online Games as we roll out our 2006 next generation of MMORPG products.

Our Advertising business performed extremely well, which further demonstrated the strength of the managed brand. Our performance in the third quarter was partially due to the third quarter’s seasonal increase in online advertising and our accelerating popularity among our product users.

In the third quarter, we witnessed strong year-over-year growth of approximately 34.4% and an increase of 37% quarter-over quarter. In terms of advertising revenue, the revenue was mainly due to increased spending from our existing advertisers as they increased their marketing activities during the summer months, and also new advertisers gained during the quarter.

NetEase continues to drive its advertising revenue through a combination of website content enhancement and an aggressive focus of broadening its network of market channels and sales efforts.

We continue to de-emphasize our wireless value-added services business until we view the market as one that we could bring increased shareholder value to our investors.

I would now like to give you a more detailed overview of our Online Games business for the quarter. Total revenues for this business grew 119.4% year-over-year driven by the continued success of Fantasy Westward Journey and Westward Journey Online II and grew 8.4% sequentially. As mentioned in the third quarter of 2005, Fantasy Westward Journey grew to 827,000 peak concurrent users in late summer and maintained its leadership position as one of the most popular MMORPG in China.

We are very proud of this success and contribute it to a number of factors, including continued content enhancement released during the third quarter and continued efforts to expand the Company’s distribution network to accept gains and distribution of point cards and enhanced sales and marketing efforts, and also online driven event which resulted in further penetration into the markets.

The success of our in-house developed 2D games is not only evidence of the continued health of China’s MMORPG market, but a true testament of the skills of our team to bring to markets in producing games that drive loyalty from our users. We believe we have strong views in combining traditional Chinese culture and advanced gaming technology, which has always proven to be a winning combination for us. This gives NetEase a distinct advantage over our competitors.

Now turning now to our new game pipeline. Currently our 2.5D game and 3D game are in various stages of beta testing. Da Tang, our 2.5D game is under internal closed beta and Tian Xia, our 3D game is under internal closed beta. We expect the commercial launch of these games to be in the first half of 2006.

As we mentioned in our earlier release, NetEase has strong brand recognition in the game community and is known for not compromising quality for quantity. We are taking our game portfolio to new levels and continue to focus our efforts on driving performance of our Online Games, which allows us to continue to invest in NetEase next generation of games.

Before I turn the call over to Denny, let me first say a few words about a profound loss we experienced with the parting of our acting CEO, Ted Sun in late September. On behalf of William, Denny and myself and our Company, we are all deeply saddened by his departure. Ted was involved with NetEase since 1999 and was an extremely influential contributor to making our Company what it is today. With Ted’s commitment, our Company was able to step-by-step execute on our strategy to become a leader in the Internet market in China.

Those of you that knew Ted understand he was a man of high moral commitment, dedication to the job at hand, and invested a large part of his life to our Company. His legacy is one that we are all proud of and our management team is dedicated to carrying on his vision and further driving the Company to reach new levels of success. Regarding the announcement of Ted’s successor, we will update you on who we choose for the role of our CEO position once the Board of Directors has reached a decision.

Now I would like to turn the call over to Denny, who will go into more detail on the financials for the third quarter.

Thank you Michael, and thank you for those kind words. I will now supply a financial overview of the third quarter.

Total revenues for the third quarter were $57.2 million. This represents strong year-over-year growth of 82.6% and a sequential quarterly increase of 11% driven by our Online Games and our advertising business.

We report another solid quarter of net profits which reached $32.0 million, or $0.89 per diluted ADS in the third quarter. This represents 137.2% increase over the corresponding period in 2004.

Revenues from our Online Game services increased to $46.1 million. This represents a significant year-over-year increase of 119% and an 8.4% increase over last quarter.

Revenues from Advertising services for the third quarter were $9.1 million, representing a strong year-over-year increase of 43.8% as new advertisers continued to be attracted to our large base of loyal users.

We reported total revenues for our Wireless Value Added Services segment of $2 million for the third quarter compared to $2.4 million in the preceding quarter.

Overall gross profit for the third quarter was $45.8 million, a 95.4% year-over-year increase and a 13.5% increase over last quarter. Due to the higher bandwidth costs incurred in the quarter, our gross margin for Online Game declined slightly to 89.7% to the third quarter.

Gross margins in our Advertising Services business improved in the third quarter due to increased economy upscale [ph]. Gross margins for Wireless Value Added and Others decreased to 11.3% in the third quarter from 18.4% in the prior quarter, mainly due to the charges associated with our services emails which are included in this segment.

Total operating expenses for the quarter were $11.7 million, representing a 17.4% increase over the corresponding period a year ago and an 18.3% sequential increase over last quarter, due mainly to marketing costs associated with web content enhancement and increased outdoor advertising and channel events.

Our effective tax rate increased in the third quarter mainly because of the write-back of the tax [inaudible] of approximately $2 million in the second quarter due to the confirmation of a lower tax rate for one of the Company’s operating subsidiaries during the second quarter. There was not such similar write-back in the third quarter of 2005.

Moving to the balance sheet. As of 30 September 2005, our total cash, hand deposits and held-to-maturity investments were $392.4 million, representing a 16.5% increase from the previous quarter’s $329.2 million. We reported an operating cash flow of $52.5 million for the quarter, representing a 56% increase from the previous quarter’s $30.8 million.

We reported $790,000 in exchange laws which resulted from the translation of our net monetary assets and liabilities, which are denominated in currency other than RMB as of the end of September.

I will now turn the call back to Michael for his closing remarks.

Thank you Denny. I would now like to take you through our financial guidance for the fourth quarter of 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 that the total gross revenues of the Company in the fourth quarter this year to be between $56.9 million and $58.3 million, with Online Game Services revenue to increase by 2% to 4% quarter-over-quarter; Advertising Services revenue to decrease by 11% to 9% quarter-over-quarter, and Wireless Value Added Services and Others revenue to be flat to a decrease of 10% quarter-over-quarter.

Net profit we expect to continue to increase during the fourth quarter to be between $31.4 million to $32.6 million. All of the result figures are based on an exchange rate of $1 U.S. to 8.092 RMB as of September 30, 2005.

Let me conclude by saying that to date, NetEase has sustained an extremely high growth rate and record success in the industry. Maintaining our leadership position in China’s Internet market as the number one online game developer and one of the leading Internet portals takes a strong, steady, and conservative approach of how we drive growth within the Company. We are very focused on our growth for 2006 and view the fourth quarter as a transitional period which allows us to execute on our Online Game strategy while maintaining a focus and diversified approach to our Online Advertising business. We believe we have the right strategy, resources and pipeline to deliver our initiatives for 2006 and maintain our costs to diversify our game platform through the use of cutting-edge well-developed technology and leverage our Internet portal as a base to drive new growth from the market.

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

Thank you sir. [OPERATOR INSTRUCTIONS]. Safa Rashtchy, Piper Jaffray.

Good morning, Michael and Denny; a couple of questions. The first on the Online Game side, could you elaborate a little bit Michael on your comment about the unexpected seasonality I believe or slowdown in summer time. It seems like this slowdown came quite suddenly; your games were enjoying significant sequential gain in the prior quarter, and it kind of came down to a very abrupt halt almost. If there were some competitive factors, could you tell us what areas this competition especially affected, or were there other areas in terms of a decrease in demand that caused the sudden drop.

Yes, of course; the summer time and also together with school starting in September has been slower than what we thought and partly as we mentioned also because of competition. And this competition mainly comes again from World of Worldcraft, which is if you look at the overall market’s growth and a lot of that is driven by World of Worldcraft during this quarter. And of course for us, the results have been slower than what we thought or expected. [Inaudible] the Game business by 8.4% sequentially and compared to [inaudible] costs I think we are still [inaudible] compared to other companies.

Okay and then moving down to the Advertising side, your growth was quite robust this quarter relative to market given that last year Q3 was very strong for all of the portals, could you give us a sense of how fast your real growth is? Is there some adjustment that we have to make to actually see how fast your growth is growing on a seasonally-adjusted basis?

Yes Safa, this is Denny. On the Advertising business, you will notice that in the third quarter this year, we actually grew by around 37%, which I believe is one of the highest growths among the market segment in China in this quarter. And this is due to several factors due to the continuing improvement of our content and also the strengthening of the marketing efforts.

In particular, I can give you some highlights on the growth because in the third quarter we actually increased the spending from the advertisers by [inaudible], in particular for the Internet-related which increased quarter-over-quarter by more than 36%. And from the IT business segment, we increased also by more than 35%. And the others, for example our telecom, which increased by more than 40%. And these all contributed to the good performance in this quarter. And comparing with last year in the same quarter, last year it was mainly because of the Olympic UN [ph] during the quarter that drove the growth last year. But this year I’m going to say it’s more organic plus a little bit of the summer peak season.

That’s why it’s also reflected in our guidance for the fourth quarter because fourth quarter in China is typically a slower season on our Advertising business in China, so that’s why we are guiding the 10% sequential decrease on our Advertising revenue in Q4.

But on the overall, we are very optimistic on the [inaudible] on our Advertising business because as you can see, the growth rate of the Company is actually higher than our peers, although we are starting from a smaller base but I think we are improving slowly on this.

Dick Wei, JP Morgan.

Hello? First I wondered what’s your outlook for the Westward Journey II and Fantasy Westward Journey in terms of when to expect them to flatten [ph] out. And then my second question is what is your initial read for the fatigue system?

Okay, for the 2 games that we’re operating right now, Fantasy Westward Journey and Westward Journey II, first about Westward Journey II online; the game has been running for about a bit more than 3 years right now, and I think I’ve mentioned before we are seeing that the game might peak out in our experience around 3 years of operation. So we are looking at the possibility to peak out in this quarter or next quarter. And this quarter meaning the fourth quarter and the next quarter meaning the first quarter of 2006. And that’s -- again it depends very much on the expansion pack that we are going to release in the first quarter of 2006, and compared -- relatively actually Westward Journey II seems to be a very stable game. So even when the game peaks out, we feel that game will probably plateau for a while, for another quarter or so before we actually see a bigger drop of revenue from game.

And then for what’s Fantasy Westward Journey, as we also mentioned before our experience is that these games will probably run for about 3 years before we see a peak, and Fantast Westward Journey started in January 2004, so we are looking at probably a peak-out in late ’06 or even a bit longer than that. Again, it depends very much on the expansion pack that we are going to release; we have recently released an expansion pack for Fantasy Westward Journey in late September, but the results of that are yet to be seen because we focused at the time in fine tuning the contents of that when we released the expansion pack. And also for Fantasy Westward Journey, there might be a bit of a difference with that Westward Journey Online II because since most of the other operators in the market are trying to come up with games that are trying to compete with Fantasy Westward Journey; for example [inaudible] Fantasy which is a game developed by [inaudible] and so we received more competition for Fantasy Westward Journey but we have confidence that with the expansion pack and with the also competitive advantage that we have, we will continue to see the growth of this game until the end of 2006.

And then for the fatigue system; so far we have, to update you on that, on October 20 we have released 2 servers with the fatigue system built in, and each server in each of the games, so 2 servers altogether. So Fantasy Westward Journey and also for Westward Journey, Fantasy Westward Journey we have around 280 servers right now, and Westward Journey Online II we have around 220 servers. So there is only one server out of this many servers. And for that particular service the result is I would say normal. I mean there are users who would particularly like to have this kind of fatigue system in the servers because they feel that it is more fair to play with other players who do not spend too much time on a particular server.

So let’s say I’m an office worker or something and I could only spend like 2 to 3 hours per day and he actually feels more attracted to this kind of server to play with other players who cannot play more than basically 3 to 5 hours. So there is some demand on that, but we don’t know exactly what will happen, if we are going to implement this kind of fatigue system over all of our servers, but we also haven’t come to any conclusion with the government or with other operators on when or how we are going to implement the fatigue system in all of the servers. So we are yet to announce that.

But I think if we are going to do that, I think we have a very good competitive advantage over our competitors because of our in-house development capabilities where we can design our games in a way that we can try to minimize the effect of the fatigue systems.

Lu Sun, Lehman Brothers.

Okay thank you; actually I have 2 questions on your Online Games business. First can you give us a breakdown of revenue from these 2 games? And also I would like to know the ACUs for these 2 games. It seems like the PCU to ACU ratio probably has increased during the third quarter which actually resulted in lower than expected growth from the revenue from these 2 games. And also my next question is on the new games, what is your anticipation for [inaudible]; for example which will go live first into the first quarter of ’06? Thank you.

Thank you Lu Sun. In terms of the breakdown, the growth of Westward Journey II Online was 0.3% quarter-over-quarter and the growth of Fantast Westward Journey was 13.9% quarter-over -quarter. And then in terms of the ACU and the PCU, the ACU achieved over the quarter as we mentioned for Westward Journey Online II was 514,000 and then the daily average users online for September was 193,000; and then for Fantasy Westward Journey, the peak on current users achieved was 827,000 for the month of September, also for the quarter, and then the ACU for September was 310,000.

And then on the new games, I think it’s fair only to say that expectations on specifically on numbers of these games that so far we have external gross beta started sine the middle of September it’s about close to 2 months now, and so far the response has been very good from the users. I think I also mentioned before that we have received lots of applications to become favorite [ph] users for the game just for a few hours when we opened the application; we sent more than 30,000 to 40,000 applications on that, and the game seems to have a very good response also when the gamers try out the games.

Also we continue to fine tune the game player of this game and we are looking forward to a launch in the first quarter, and that’s for Da Tang . So we cannot give our specific number for Da Tang and of course for Tian Xia.

Okay, just to follow up; so it seems like the PCU number has grown much faster than ACU number. Is there any particular reason to that? Do you think the trend will change going into the fourth quarter or going into 2006?

I think one of the reasons that we are looking at this is it’s possible of the early assumption of the fatigue systems; that means that some of the users already see the fatigue system coming along and they are changing their habits of playing the games already. So this is one of the possibilities, and the other possibility is that -- the numbers that I just gave you was the September number, and in fact if you look at the August number, which I can give you for XY2; XY2 ACU was 205,000 and PCU was 477,000. And then also for the month of August for Fantasy Westward Journey ACU was 370,000 and PCU was 760,000. And you can see that’s the ratio of the month of August and September is very different.

And I also would think that the month of September we are seeing some strange patterns being used by the users. But I do not see that as a long-term change, and we actually are seeing a bit of a pickup in the October month in terms of this kind of ratio.

Wallace Cheung, CS First Boston.

Hi Michael and Denny; thanks for taking my question. I think first of all recognize deferred revenue in this quarter actually increased quite substantially. Does that mean that you are expanding the number of unique gamers quite dramatically and you are selling more prepaid cards, and do you think this trend will continue in the fourth quarter?

And secondly I just want to get an update on the Advanced casual game status. Thank you.

Yeah Wallace, this is Denny; let me answer your first questions regarding the deferred revenue. The increase at the end of September in mainly because the long national day holiday has fallen, which is the first week of October. And I think people, the distributors are stocking up for the holiday season, which does not indicate anything on increasing the user number.

And for the casual games, again I want to explain that the casual games so far we have released 10 games on the casual games platform that we have and these games we continue to develop and to roll out games physically on a month or 2-month basis. So I think we are looking at another 3 to 4 games by the end of this month, and I think by the end of this year to be a bit more conservative by the end of January, we are looking at, we’re using around 20 games altogether, so an additional 10 games to the 10 games that we have released before.

In terms of the Advances casual games, I think the trend is that all of these 10 casual games that we are going to release in addition around 1 or 2 of them are what I would call Advanced casual games, and these casual games will not be the kind of casual games casual games like the board chess games or the kind of puzzle type of games, but it will be more like sports games or something like that. So there should be around 2 by the end of January.

By the end of January; can you give us more updates say in terms of the latest numbers of the casual games drop-off [ph], say in terms of PCU or ACU?

The PCU is very small; it should be around 20,000, a bit smaller than 20,000 actually. In terms of the number of registered users, there are 1.6 million registered users right now.

Richard Gee, Morgan Stanley.

Hi Michael, Denny; I have 2 questions and the number one the rising competition in the online game business, especially from World of Worldcraft, and QQ Fantasy, what do you expect your sales to be differently than a couple of quarters ago when you had less competition? Number one; number two is that if you learned from your past experience in terms of game design, what would you do differently now for your new games Da Tang and Tian Xia other than 2.5D and other 3D games? Thanks.

Thank you; in terms of the competition, yes you are right that World of Worldcraft and QQ Fantasy are closest competition to us than the other competitors, and it seems to us that World of Worldcraft, one of the reasons I want to elaborate at this point is that during the past quarter, World of Worldcraft has penetrated into a bit of more other smaller cities than we would have thought that they could penetrate into. And they have opened up a new group I think in early September or something like that. And they have penetrated into more cities than we had thought. And then what we think is it seems that the game has kind of stabilized and is not -- of course that would be a question that [inaudible] is denying, but it seems that World of Worldcraft has kind of stabilized rather than expanding very, very strongly.

And then for QQ Fantasy, their game is in open beta right now and it seems to be doing quite good. But I think with the expertise that we have and also the understanding of the game market that we have, I think we will continue to come up with new good content and Internet content for both of our games in order to compete with new games in the market. And there will always be new competition, and I think the most important thing is that we continue to have very good game designs, interface designs. I would not be able to tell you what kind of interfaces we are going to implement in our next expansion pack, but I can tell you that from our past experience, for example when we had our Fantasy Westward Journey over the last 2 expansion packs, we had the home building, we had the family building all these kinds of new innovative contents that we have and experience that we have.

We have new stuff even compared to [inaudible] and I think we are very confident that we will continue to [inaudible] our expansion pack that we are going to release. And I think what is more important is that distribution platforms that we have and also the portals together with innovative marketing strategies that we have like the corporation with the Internet interface and so on, I think we will continue to have high confidence with our games and competing values.

And I have a follow-up question regarding your marketing spend, and clearly a surge of marketing costs for this quarter like for your web content and also for spending on other channels, would we expect the same pattern to persist, or you may scale back marketing expense going forward? Thanks.

Richard, this is Denny. For the marketing expenses, you are right that in the third quarter that we have increased a little bit on the marketing on the campaign and also on the different channels that lead to part of the reason for the increase of good performance of our Advertising business. And if you look at the percentage in terms of net revenue, in the second quarter marketing expenses for the Company as a whole is around 9% of net revenue. And for the third quarter, it increased to around 10.3%. And for the fourth quarter, we don’t expect that as a percentage of net revenue -- say it this way -- will not be bigger than the third quarter. It will be reduced a little bit in terms of the percentage.

Frank Shi, CLSA.

Hi good morning guys; one quick question on the Online Advertising business. Denny you talk about trends in several industries. Do you see any weakness in any industries, if any? Thank you.

As you can see Frank because our advertising revenue increased by 37% and those business segments that I have mentioned the Internet-related, the IT, the telecom, and also some I have not yet mentioned, for example motor [ph], they all have a different level of increase. So we are not seeing any particular weaknesses for our Company specifically in terms of different [inaudible] which slow down the advertising spending.

Jason Brueschke, Citigroup.

Thank you very much; I have a question about the culture of your games versus World of Worldcraft. Last quarter World of Worldcraft had not taken a bite out of your gaming business and I believe that one of the reasons you gave was because there were cultural differences between your games and World of Worldcraft. Now it seems that World of Worldcraft is taking a bite and the explanation seems to be because the 9 release to server and penetrated segments in the smaller cities. Are you guys still maintaining that the Chinese culture of your games gives you the advantage and in light of what’s happened in this quarter what are the implications for the competitive advantages of Tian Xia, your 3D game, which will compete head-to-head with the World of Worldcraft in its Chinese cultural game even though World of Worldcraft seems to be doing well. Thanks.

Yes, I think in the last quarter we explained that of course World of Worldcraft has a very small minimal effect on our games because of a few reasons; one is because of the culture; second is that on the hardware requirements and also the penetration in the smaller cities. And I think in terms of the culture, how to day -- I mean World of Worldcraft is a very exceptional brand name in the market, and it is single PC [inaudible] for the past 10 years and has been pretty famous in the game industry.

And of course, even with that I think there is still a huge difference between the users when they look at the culture of World of Worldcraft and that’s why even with such an exceptional brand name, Worldcraft has been doing good but not exceptional yet I think. And it has been able to penetrate into the smaller cities; it is something that I think we have understated or unexpectedly that they would be able to penetrate into those smaller cities that we thought would have a difficult time in penetrating. And that is mainly because of the hardware requirements rather than the culture that we think is the problem.

And then the culture, I think yes they have penetrated into smaller cities but the culture effect is still there and then it has affected us a bit more, but it’s not affecting us like a head-to-head basis as yet I think, especially in the small cities.

Great and my follow-up has to do with expansion packs; last year your fourth quarter guidance was a little bit weaker than people expected and you’ve characterized it in some ways as a transition year and you in fact delivered really accelerating growth throughout 2005 off the back of that. Part of that was due to you stepped up the release schedule for your expansion packs. I’m wondering as we look out into 2006 in light of the fact that there’s going to be more competition, especially for Fantasy, will we see the same pickup as a result of the expansion packs or are you more betting that the 2 new games, Da Tang and Tian Xia will make up or any kind of deceleration growth with the expansion packs will give you guys will make up for it by having 2 new games out on the market? Thanks.

Well I think we will just look at t his both ways that we continue to have separate teams looking at the different games. So for the current games that we are operating right now, those teams will continue to come up with new and innovative expansion packs, especially expansion packs that we think we should be able to compete with the market, for example, like QQ Fantasy and so on and so forth.

And then that is still quite a different market. I mean it’s still 2D and then also Q’s version type of gamers. Then for the new games that we are coming out, of course like Da Tang and also Tian Xia and that’s what actually is more the kind of head-to-head competition we value in terms of games like World of Worldcraft and Legend of Mier [ph] or those kinds of things. And I think it’s just difficult and there is no particular reason to say we have to focus on the old games or the new games.

William Beame, Deutsche Bank.

Thanks; could you just give us a sense of what we can expect on the expansion pack side for 2006? When can we expect the first set from Da Tang and Tian Xia as well as Fantasy Westward Journey Online? Thanks.

Yes of course; for Westward Journey Online II, I think the next expansion pack is going to come out around January -- it should be before the Chinese New Year. And then for Fantasy Westward Journey, it should come out around March or so. And then for Da Tang and Tian Xia of course, we haven’t decided exactly when these games will be released but definitely the expansion of these games are already in development. So we are looking at around 6 months time after the release of each of those games that we are going to have an expansion pack. And that’s the kind of preliminary plan right now.

And I think the next question will be our final question.

James Mitchell, Goldman Sachs.

Okay, it’s going to be 2 final questions, so I apologize. First question just an accounting issue. It appears that your business packs on your game division declined quite sharply quarter-on-quarter. I’m looking at the gap between the gross and the net gain revenue.

Yes James you are right; during the quarter we have managed to get the tax preferential treatment on business packs, in particular for our online game division. In the past we were paying 5.5% business tax and in the third quarter we paid only 3.3% and we believe that going forward it will continue to be 3.3%.

Okay thank you; that clarifies that. Second final question could you attribute your fourth quarter gain revenue growth by 2% to 4% between Westward Journey II enhanced Westward Journey? I’m particularly curious about Fantasy Westward Journey given on the one hand you had the upgrade in early September but on the other hand QQ Fantasy came out at the quarter end.

Right, well I thing for the 2% to 4% of the total business, the attribute is basically around the same for both games, so for both games it’s going to grow around the same number actually. So it’s not much of a difference.

So Fantasy you would see up 2% to 4%?

Yes.

Okay.

And then especially for Fantasy Westward Journey, I think we have to take into account the new games coming out basically QQ Fantasy that’s when we look at the kind of [inaudible].

And that does conclude our question-and-answer session for today in the interest of time. Mr. Tong, I’ll turn the conference back to you.

Okay, again thank you for joining us today and if you have any other sort of questions, please do not hesitate to contact me, Denny, or our IR representative. Thank you very much.

And once again this does conclude our conference. We thank you for your participation.