NetEase Inc (NTES) 2006 Q1 法說會逐字稿

Good day and welcome to NetEase first-quarter 2006 financial results conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Ms. Brandi Piacente. Please go ahead.

Thank you, operator. Today, you will first hear from Mr. Denny Lee on behalf of Mr. William Ding, Chief Executive Officer, who will discuss some of the highlights for the quarter ended March 31, 2006. Next will be Mr. Michael Tong, Chief Operating Officer, who will review our online game business and finally Mr. Denny Lee, Chief Financial Officer, will review the financials.

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 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 relating to the fluctuation and 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 conference call over to Mr. Denny Lee who will read the remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Thank you, Brandi. Hello, everyone and thank you for joining us. Total gross revenues for the first quarter increased to 8.7% over the prior quarter and 61.7% over the first quarter of 2005. Our online game business, which accounts for approximately 85% of our total business, continued to outpace the industry with total gross revenues growing more than 71.9% from the same period in 2005.

First-quarter online game revenue exceeded guidance and grew 12.4% over the fourth quarter of 2005 and 71.9% over the same period a year earlier. Total gross margin of our online game business has remained strong at approximately 90.7%.

During the first quarter, Fantasy Westward Journey, which remains the number one game in China three years after its initial launch in 2004, achieved approximately 1.3 million peak concurrent users and posted double-digit growth in revenues.

Turning now to our new game pipeline. Currently, both our 2.5D and 3-D games are in various stages of beta testing. Datang, our 2.5D game, is under external closed beta and Tianxia, our 3-D game, is under internal closed beta. We expect Datang to open beta testing by May 31, 2006. And Tianxia to enter open beta testing in the second half of 2006.

In addition, we have begun to execute on many initiatives for our online advertising businesses. As one of the leading Internet portals in China, we will be making a big push in 2006 in maintaining our leadership position in this business.

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

Thank you, Denny and hello, everyone. I will now provide a more detailed overview of our business for the quarter. Overall, we are pleased with our progress in our online game business in the first quarter. Total revenues for this business grew 12.4% quarter-over-quarter and 71.9% year-over-year driven by double-digit revenue growth of Fantasy Westward Journey.

While we did see some declines in revenues for Westward Journey Online II, this four-year-old game continues to remain among the top three most popular games in China. As Denny mentioned, Fantasy Westward Journey grew to approximately 1.3 million peak concurrent users in the March quarter, the game's highest CPU level since it was released in 2004 and the highest number of peak concurrent users in the entire MMORPG market in China.

We are pleased to see that Fantasy Westward Journey grew by 22% in revenue during the quarter; although our expectation was higher. Westward Journey Online II revenues declined slightly by 4% and continues to remain the third most popular online game in China after more than three years.

In view of the current market popularity and success of our two in-house developed games, we continue to focus more resources on developing better and more comprehensive expansion packs and new content for Westward Journey II and Fantasy Westward Journey to take advantage of the growing strength and nationwide popularity of these games.

With respect to our advertising business, total revenues for this business decreased 10.9% quarter-over-quarter and grew by 36% year-over-year to $7.7 million maintaining similar marketshare compared to previous quarter. We continue to build our portal and advertising business through the addition of new content and services for our Internet users.

On the application side, NetEase continues to maintain its leadership position in free e-mail and we will continue to innovate on monetizing the uses. As for content, we have since last year been working more closely with major vertical portals, such as China Finance Online and Sofun.

During the first quarter, we have added another critical partner as we enter a new corporation with Mango City to view content in coordination with our Company's efforts to develop our travel channel.

Let me now turn the call over to Denny who will go into more detail on the numbers for the first quarter of 2006.

Thank you, Michael. I will now go through some of the key highlights for the quarter. Please note that in order to provide a more meaningful comparison of NetEase current operating results, (indiscernible) to the Company's adoption of statement of financial accounting standard 123(R), which took effect this year. In some cases, we are providing non-GAAP results from the first quarter. Reconciliation of these non-GAAP financial measures are provided in the unaudited financial information included in today's earnings release.

First-quarter total gross revenue increased 8.7% from the preceding quarter and 61.7% over last year's first quarter to $66.1 million. First-quarter gross revenue in our online game business were better than the Company's guidance, an increase of 12.4% sequentially and 71.9% year-over-year to $56.2 million.

Advertising services revenue decreased by 10.9% quarter-over-quarter and increased 36% year-over-year to $7.7 million in the quarter ended 31, March, 2006. The quarter-over-quarter decrease in revenue was due to the seasonal impact as certain advertisers decreased their spending during the first quarter.

Wireless value added services and other revenues increased 2.5% quarter-over-quarter and decreased 13% year-over-year to $2.2 million in the first quarter of 2006. We believe the wireless value added services market is fueled by the ongoing restructuring of the industry.

Our overall GAAP gross margin in the first quarter were 82.7%. However, because of the Company's first-time adoption of 123(R), which took effect this year, it will be more meaningful to compare non-GAAP gross margin to the prior period.

Our non-GAAP gross margin for online game business increased slightly at 90.7% for the first quarter compare to 89.4% in the prior quarter and 89% for the first quarter of 2005 primarily due to the termination of revenue sharing arrangements with spokespersons for Fantasy Westward Journey and Westward Journey Online II in November 2005.

Non-GAAP gross margins in our advertising business declined to 55.3% in the first quarter primarily as a result of additional decline in spending by certain advertisers during the first quarter of 2006. Non-GAAP gross revenue for wireless value added and other customers declined in comparison to the preceding quarter and the same quarter a year ago since we increased the service depreciation costs associated with the Company's free e-mail services.

Total GAAP operating expenses for the first quarter of 2006 were $14.2 million. And total non-GAAP operating expenses for the first quarter of 2006 were $11.5 million compared with non-GAAP operating expenses of $11.8 million for the preceding quarter and $10.9 million for the same period last year. The decline in non-GAAP operating expenses were primarily the result of lower G&A expenses resulting from the decrease in provision for (indiscernible) debt expenses due mainly to the fulfillment of certain long-term debt.

We continued to carefully manage our expenses and operations to achieve solid financial results during the quarter. As a result, we reported another solid quarter of both sequential and year-on-year net profit growth, recording GAAP net profit of $36.6 million and a non-GAAP net profit of $39.9 million, which represents a 15.5% increase over previous quarters non-GAAP net profit of $34.3 million and 107.7% increase over non-GAAP net profit of $18.6 million for the first quarter of 2005.

The Company reported GAAP basic and diluted earnings per ADS of $0.28 and $0.26 respectively, which included the impact of approximately $3.3 million or $0.02 per ADS in non-cash share-based compensation costs. Non-GAAP diluted EPS were therefore equal to $0.28 for the first quarter of this year.

As of the 31st of March 2006, our combined total cash and (indiscernible) deposit balance were $459.8 million and we reported a positive operating cash flow of $51.4 million for the first quarter this year.

Now I would like to read to you our financial guidance for the second quarter of this year. Please note that the following outlook statements are based on our current expectations and these statements are forward-looking and actual results may differ materially.

We expect the total gross revenue of the Company in the second quarter of this year to be between $59 million and $70.5 million, with online gaming services revenue to increase by 4% to 6% quarter-over-quarter, advertising services revenue to increase by 12% to 14% quarter-over-quarter and wireless value added and other revenue to be flat or an decrease by 5% quarter-over-quarter.

Net profit during the second quarter is expected to be between $38.5 million and $39.9 million -- $39.8 million. These estimates include the effect of share-based compensation expenses of approximately $3.2 million. Please note that such share-based compensation expenses are only our best estimate as of today and the actual expense may differ from the estimate.

Also we caution that we cannot predict the future exchange rate of renminbi versus other currencies and therefore cannot accurately estimate the effect of any changes in exchange rates on our financial results.

Accordingly, our guidance assumes no change in exchange rate in the second quarter in 2006 and have [recorded] the same exchange rate as our 31st of March 2006 of $1 U.S. dollar to renminbi 8.0167. Our actual results could differ however from our guidance as a result of fluctuations in the [R&D] exchange rate.

And finally on behalf of William, he would like to thank everyone for joining us today. He would also like to make a brief comment about NetEase's newest addition to the Company's senior management team.

As mentioned in today's press release, Zhonghui Zhan has been with NetEase for over nine years and has recently been appointed to Co-COO. Mr. Zhan will primarily be in charge of overseeing the Company's online game operation and Michael Tong, the Company's existing COO, will now turn his focus to deal with our NetEase portal and advertising business, which is a major initiative for the Company in 2006.

With Michael's existing track record in successfully growing the Company's online game business combined with his profound knowledge of the Company, Michael is the ideal person to fill a dominant position in the portal and advertising market.

Management believes 2006 will be an exciting year for NetEase and we look forward to showing you continued progress as we execute on our growth initiatives. We now would be happy to take your questions and operator, please open the floor for Q&A.

(OPERATOR INSTRUCTIONS). Lu Sun, Lehman Brothers.

Good morning, everyone. Congratulations on a great quarter. I actually have two questions. One is regarding your new game pipeline. Can you explain to us why there is some kind of delay in the launch of Datang's open beta and what are your expectations for this game? Will you launch it before the end of May?

And second question is on your advertising business. You mentioned that you'll focus a lot more on this business in 2006. What is your growth outlook and what are the new initiatives to really drive this business in comparison with your competitors? Thank you.

This is Michael. For Datang, we are going to enter the open beta on the 31st of May, this month. So I think this is especially difficult in line with what we've said before where we mentioned the same quarter of 2006 for the open beta pipeline. I think there is a slight delay in that. But I think it's because we want to add both content, to launch a more comprehensive game and for Tianxia, we are going to launch this game by the second half of this year and it's actually due to similar reasons that we want to add more content and to make sure that the game is very comprehensive when we launch the game.

For the advertising business, I am afraid that we cannot give out official growth outlook on the numbers, but I think again we did mention to investors and analyst before that we are confident that we will -- net profit growth at least in line with the market and also we are -- in terms of how we differentiate between organizing this business and the others.

I think we also mentioned that we have two [spokes] of our strategy. One is on the application side and the other is on the use and other general content. Where on the application side, we continue to build up different kinds of services like the e-mail, which is -- we have the number one leadership position compared to other competitors, which is fairly unique when compared to other portals.

May I just have one final follow-up? Regarding to your marketing trend, fairly this quarter is very impressive. Going into let's say the second and third quarter, would you expect that the operating margin will be slightly lower because you have to spend more to promote your new games and also launch new applications on the portal?

Lu, this is Denny. Let me take the questions. In the first quarter of 2006, the margins -- they are really very positive and in particular for our online game services. The gross margin was higher than 90%, which is actually even higher than the fourth quarter and over the first quarter of last year. The main reason for that is we have, as mentioned in our press release, we have terminated revenue sharing arrangement with certain spokesperson for both of our titles, which saves us some cost over there.

This is ongoing and not just a onetime and so the gross margin for that online game business will likely to remain 90% or approximately the high 80% going forward. With the addition of the new price and with the revenue contribution becoming more in the later part of the year when the new titles are up and running, then there may be some small slight impact on the margin, but I don't expect that the margin impact will be very significant because of the economy of scale obviously.

And on the other business segment, on online advertising, you can see some slight improvement in our margins this quarter and going forward because the second and the first quarter will be our high season for online advertising, whereas the costs are relatively stable and we expect that there will be also improvement in our gross margin in our online gaming in our portal. (indiscernible) for the wireless and other, the margin, the negative gross margin is actually because of our continuous investment in our e-mail business.

We are going to continue in that area because we see that as one of our strengths of our portal and the margin will continue to be managed going forward if the wireless business is not recovered on the revenue side.

On the operating expenses side, you are right in saying that when we're launching our new titles, there will be increases in marketing expense, but we don't expect that we will spend a huge amount of money on that market of new titles in particular because our new titles, they are already well-received in the market and we will do reasonable efforts to market our games and our effort because of this growth in revenue. Then the percentage of the marketing expenses as a percentage of the net revenue will not increase significantly.

And for G&A expenses because it is more amortization of their expenses, which we incurred for the whole year, then it will be more likely to stay flat. And as a percentage of the net revenue, it will have some leverage. And R&D is the area that we definitely want to increase for effort and also increase our spending over there in terms of increasing our headcount and also to give renumerate our R&D keep/hold pattern. So going forward, we expect that R&D expenses will increase in both the absolute terms and also in terms of net profit percentage.

So all in all, we are seeing that we will be able to maintain our high operating profit margin.

Thanks very much and congratulations again.

Thank you.

(OPERATOR INSTRUCTIONS). Wallace Cheung, Credit Suisse.

Congratulations, Michael and Denny on the great quarter. My question is very short. Actually in the second quarter, had you factored in any (indiscernible) revenue from potentially Datang? If not, should we expect that incremental revenue can come in third quarter?

No, we have not factored any revenue from Datang in the second quarter. I am sorry that we cannot give you an exact date on the open beta yet.

My follow-up question will be -- so in such a case, in the online game business like guidance, like 4% to 6% quarter-on-quarter growth, should we expect to see the majority of the growth actually coming from Fantasy Westward Journey Online?

Yes, I think we can give you a bit more detail on this where Fantasy Westward Journey growth will be on the upper side of the single digits and Westward Journey Online II will be kind of flat.

And Wallace, this is Denny. Let me supplement a little bit on that projection. As you can see in last quarter, the sequential growth on the online game revenue (indiscernible) is that approximately low percentage of 5% is coming actually from Westward Journey II and about the high single digit percentage growth is coming from Fantasy Westward Journey, which is a new game. And whereas in Q4 over Q1, in the past quarter, the increase in revenue was mainly coming from Fantasy Westward Journey, which saw a more than 22% growth in revenue. Whereas for Westward Journey, which is our older title, we saw actually a decline in revenues sequentially by around 4%.

However, when we are giving our guidance for the second quarter in 2006, the situation has changed a little bit because firstly the Westward Journey Online version II because of their -- we get it because of expansion pack impact, we launched an expansion pack earlier this year and we start seeing the impact and we are projecting like a flat quarter in the second quarter for Westward Journey II.

Whereas Fantasy Westward Journey, we are actually projecting high single digit growth for that second quarter. I hope that makes you clearer on what would be the mix of their revenue growth.

Pretty clear. Thanks so much. Congratulations.

Richard Ji, Morgan Stanley.

Hi, Michael, Denny, an excellent quarter. I have two questions. The first question is regarding your portal and we know you have made some progress in striking a third-party content alliance with Sofon and most recently Mango and your traffic is clearly like up five brands. Clearly (indiscernible) on the (indiscernible). Can you just elaborate a little more on how you're going -- going forward, how you're going to leverage your portal strength for revenue growth?

I think the first thing is still advertising revenue definitely, which is the proven way of monetizing uses on follow and also as we've mentioned how differentiated that's -- besides the normal content of like a news or finance, we continue to have different kinds of applications. We just had id e-mails, one of our hero products and recently we have a very popular product called photo sharing, which is also a very popular product and we will maintain and continue to fuel different kind of services for the Internet usage, not just on general content, but also on different kinds of services with our technologies and so on.

And the first ways, of course advertising and of course, going forward, we continue to see the possibility of premium services or paid services. Obviously that would be a lot more remote.

And another related question is about R&D initiative and clearly why we are impressed by your high margin, but we also wanted to see you invest for the future. Can you just give us a little more color on what are the particular areas would be a major priority for the next 12, 24 months?

(Chinese)

I think in terms of -- let me translate what William just mentioned. On advertising, on monetizing the portal, I think the one thing that we point out is that in terms of traffic, I think we are very similar to the other portals, like major competitors. I think that our rate of monetization is not as good as the others and we would focus in bringing up this rate of impacting our users.

In terms of the R&D, we have been recruiting a lot of very talented programmers and engineers to help us to develop different kinds of new services and products. Of course that will include technology in the advertising -- the traffic systems, different kind of new services and products that we're going to launch and we will be announcing later on in the second half of the year for the portal as well.

(OPERATOR INSTRUCTIONS). Safa Rashtchy, Piper Jaffray.

Good quarter, congratulations. I have a question on your deals, both the existing ones and the (technical difficulty). First on existing ones, it appears that Fantasy is continuing to grow and there is no sign that it is reaching the top. I would like to know if you share that view or this has been helped by the expansion packs. In other words, if you could give us your assessment of where the (technical difficulty) Fantasy is, as well as what should we expect for Westward Journey II and I had a quick follow-up on the new games.

Fantasy Westward Journey, we are going to have the next expansion pack, which is actually already launched in this today and this new expansion pack where users in different servers can be placed together in one special place and they can have a huge competition and huge warfare. And this is new for Fantasy Westward Journey.

We have done similar expansion packs for Westward Journey II before and the results were quite good. But I want to remind that usually the expansion pack results does not effect very quickly. So it might actually affect later on in the one month time or so in terms of the revenue growth for this game.

You asked me about where the limits for Fantasy Westward Journey, frankly we don't know, but I think we are very confident to see the game continue to grow in the next two quarters or so. Then for Westward Journey II, I think Denny also explained, although the game decreased by 4% this quarter compared to last quarter, we are actually seeing a flat quarter in the second quarter of this year for Westward Journey II and that is mainly because we feel that the expansion packs that we have launched in the middle of the first quarter is taking effect actually much later in the second quarter and that is why we are seeing a flat quarter.

Given that the game has been running for more than 3.5 years, I think it is already a very effective achievement for Westward Journey II. So we are in a peak or what we have mentioned before, a plateau period for Westward Journey II right now.

Okay. And on the upcoming games, you have been testing them for quite some time and I think, as you can sense, investors are quite anxious to see when they will finally come out to open beta and then to the commercial launch. Can you give us some color as to what you are finding with internal closed beta? What are you expectations based on the trials that you have seen so far, to what do we have you modify the games? Just give us some color as to what your outlook on the game changed during these trial times?

Yes, the open beta is going to be 31st of May, this month, two weeks later and then for Tianxia, the open beta, we haven't decided yet, but it will be in the offices in the second half of this year. Then in terms of the commercial launch, again historically we spend about between one to three months time for the open beta, between open beta and commercial launch. I think we will be able to achieve similar period of time for these two new games.

In terms of expectations, again, we're sorry that we can not give any numbers on that. But for Datang, which is a 2.5D game, obviously we will be targeting more towards inland cities and where there is computer hardware configuration, it is much lower and Tianxia will be targeted more towards the coastal cities where they have better hardware to run the free games. And again these two games are not social-oriented, which we do not see much competition between the current games that we have.

But other than that, I won't want be able to give you more in terms of the color, like the numbers on the expectation of the open beta or commercial launch.

Frank Shi, CLSA.

Congrats on good results. Can you talk about your marketshare in the common games market and do you see the market increasingly concentrated on the top game and also I heard you are developing a new game at this time? Thank you.

(Chinese)

It's Michael. In terms of the marketshare of the online game business right now, I think it was really easy to calculate because it was because it used to be a lot of MMORPG games picking up the majority of the marketshare. So we are able to calculate between Shanda and ourselves, The9, in terms of the marketshare that we have. But it is getting more and more difficult frankly because we are seeing more casual games, right, coming out, which are also making money in the marketshare right now.

So it used to be we just calculate the market of those listed companies. We are seeing more and more unlisted companies where they have showed their numbers, interest in some press releases. So it is getting more and more difficult to calculate exactly what the percentage is that we have in terms of the market right now.

But we can calculate in terms of -- and you can easily calculate in terms of MMORPG. I think the way I look at it -- I think -- does that answer your question actually?

No. I just want to have an idea of whether the market is more concentrated on the top line. i.e. you and (indiscernible) -- the top MMORPG games.

The market continues to concentrate a bit on the MMORPG like ourselves or obviously World of Warcraft, but we are definitely seeing more and more of the games coming out from different types of nonlisted companies. I'd like to mention like a Freestyle store. They seem to be making quite a bit of money as well. It is just more difficult right now, but I think it is still a little bit more concentrated like in terms of the top five players continue to have more than like 70% of the market.

Thank you. And since we're talking about casual games, when do we expect NetEase to generate some meaningful revenue from casual games?

I think right now -- for '06, I think the policy for us is to continue to launch the two new games, Datang and Tianxia. So I think within 2006, we don't see any material revenue coming from the casual games and I think it will be on the agenda for 2007 (indiscernible).

I assume you are also developing new MMORPGs. Right?

Yes, of course.

James Mitchell, Goldman Sachs.

Could you break out the average concurrent uses for each game by month or the quarter?

Yes, of course.

Thank you.

Average concurrent uses for Westward Journey II in January is 199 -- 200,000. In February, 205,000. In March, it is 198,000. And then for Fantasy Westward Journey in January, it was 444,000. And in February, it was 478,000 and in March, it is 453,000. Is that clear?

Dick Wei, JPMorgan.

Congrats on a good quarter. I just want to, if you can, let us know if is the expansion pack for the existing games, further schedule for that and also, as Frank asked a question about upcoming games, if you can give us some expectation or schedules for the new games that would be great.

Yes. The expansion pack for Fantasy Westward Journey has just been launched within these two days. As (indiscernible) explained, it's cross server warfare, something like that. And it is a new kind of expansion pack for Fantasy Westward Journey. It used to be more concentrated on the social and communications. Now we have a little bit more competition within the games, plays. That is -- assuming -- we hope to attract a bit more new kinds of users for the games.

Then for Westward Journey Online II, it should be around August of this year and I don't have much information right now for that particular piece of expansion pack yet. Then for the other new games that we are developing now, of course there will be Westward Journey III and one other game that we are developing right now, which we are targeting an '07 launch, but I think it is too preliminary to explain the exact timing and also the details of these games. But that is the time right now.

Okay. Is it both, Westward Journey III and the other game, is it a 2007 launch? --

I am sorry?

Westward journey III is also in 2007, the same schedule?

Yes, it is just very preliminary. But there is no exact timing right now.

And so just for Westward Journey II, is the new engine going to be launched by the end of the year as well?

Yes, that's right. There will be a new engine for Westward Journey II as we have explained before.

Jason Brueschke, Citigroup.

My two questions are -- first of all, it seemed that a one to three-month open beta launch for your new games strikes me as slightly long considering how long you have been in closed beta in working on these games. Could you may be comment on what you hope to achieve if you end up doing a two or three-month open beta and why the necessity for that.

Then I have a -- the second question is could you maybe give us an update on what your planned use is for your cash? You have an enormous amount of cash. Are you thinking about a dividend or any M&A on the horizon? Thanks.

Yes, I think we don't have much to comment on the one to three-month. It is short and long. I think if it is one month, it's short. If it is three months, it is long. But think we just say it is one to three months generally and that is also our experience before. And then I think for the next question is in terms of cash that we have?

This is Denny. And for our cash, we have been always evaluating the past uses of the cash. Both I think repurchases and also dividend is an alternative, but there is no clear decision yet. And on M&A, it is less likely because we -- in the past history when we tried to grow our business organically instead of acquiring companies and we don't expect to use so much cash in doing M&A. Okay?

Great. Thanks.

William Bean, Deutsche Bank.

Just wanted to get a sense of Fantasy Westward Journey, whether you know where you are seeing the new users come from or the growth. Is it just people playing longer hours or coming back with the expansion packs or are you actually seeing a lot of new users signing up?

This is Michael Tong. I can answer your question. In terms of the new uses, we are actually seeing a lot of new users coming for both games every month and everyday and these new users -- part of them would be new users in the market that they have not played any games before. It could be new users that have left the game maybe one year ago and then come back for the expansion pack. That is usually -- slow back users, but not really new users. It doesn't mean that the users play longer hours or spend more money in the games. In terms of the ARPU or average time usage, they have been very, very stable and it is still around 40 hours or so per month.

Can you give a breakdown of the new versus the returnees?

I would say the new and the returning is somewhere around one to two. So every two new users -- of every three new users, there are two new users and one comeback user.

Okay. And sorry, this is really a stupid question I guess, but looking at -- you are saying the new games -- the market, believe it to be very well-received. Is there some specific poll or article or place that we can look to get a sense of just how well-received it will be? What gives you that impression that the new games will be well-received in the market?

The easiest thing to do is to look at the bulletin board within our game.

Okay. So you are not talking about any specific newspaper poll or something like that. It is just a buzz on the board?

Yes, actually I think the most objective way to look at it.

Antonio Tambunan, Bear Stearns.

Congratulations on the quarter. I just have really a couple of short questions. Michael, I just want to doublecheck, did you say that the March AC was 453,000 or 463,000?

453,000.

5-3, right? I have a quick question. You guys mentioned stability of the ARPU growth. Was there any increase, even a slight increase from last quarter in terms of the ARPU?

(Chinese)

The ARPU has been very stable.

So we haven't seen any increase at all, right? Okay. And I guess the last thing I really want to ask is -- I know somebody else already touched on this earlier, but you said you have a huge initiative for '06 on expanding your new function in the portal business. Does that mean we are expecting something -- we are not expecting something that you did back in 2004, right? We have a huge summer blow-out advertising campaign, right?

(Chinese)

Yes, there will be more product coming out for the portals and also we expanded on the marketing side, but it is not going to affect our financial in terms of the percentage of marketing costs much.

Let me add onto that and the campaign that we did in 2004, it was different from the normal product marketing. It was a branding for the 163.com that we very seldom use. We only do it once every three or four years. This year, there will be a lot of new product launch and marketing trends like we received in 2004.

That's pretty much about it. Thank you very much.

Tian Hou, C.E. Unterberg.

My question is really related to your printed card distribution system. Can you give me some color on that? Is there any changes in the past quarter and in terms of your distribution strategy?

I guess -- a fair part in on your question is on the distribution platform, is there any change in 2006 for our phonecards?

Actually the question really comes from one instance regarding your (indiscernible), R&D --.

It looks to me like it is a very simple question. Would there be any changes in our distribution platform and --?

Have you changed it or are you going to change it, yes?

(Chinese)

Very fine question. I think we have been having this distribution platform for our phonecards for a very long time and in different ways. First, with various new ways to distribute more. Of course, we will find new ways. I am sorry I don't really understand your question actually.

Okay. (Chinese). So that's where the question comes from.

Actually that is -- when we raised the phonecards for the 50 point phonecard price, there have been some distributors that mentioned a -- they don't like about it. But the way we look at it, everything just goes back to normal and everything has just go back to normal in the way they distributed cards and so on. We have been tracking this every day, every week and it has no effect on our distribution on not wanting to distribute our (indiscernible).

Okay. Thank you. The other question really is related to a new operating model, which is imposed by Shanda. Lately, they licensed their game at the regional level and sort of wholesale their games and did you see that as something that could potentially give you impact in the future?

(Chinese)

Yes, I think it is just a different way of distributing games and it is a new, but I don't think that we like to imitate and also we don't think that it is something that is not affecting us.

Ming Zhao, [SFG].

I want to ask a question on the advertising side. Maybe a few small questions. First, since your competitors gave year-over-year growth on the advertising, I wonder if you could also provide the same color on your advertising year-over-year terms. And also I think maybe more detail even last 3Q, you had a surge in the advertising revenue quarter-over-quarter. Are we going to see the same kind of thing through Q3? Lastly, on the search side, could you give us some breakdown in terms of pecentage? What is the percentage of advertising revenues from search? Would you partner with Google? Do you see growth very good over there? Thank you.

Why don't we just focus on the search question because I'm afraid we don't have time to answer -- we didn't get all the questions, but let's focus on the search one. In terms of the search, the quarter-over-quarter increase for the search revenue, it is actually a bit of a decrease and it is actually -- the composition of the search decreased from 12% in terms of the overall online advertising to 10% right now. I think that is due to a bit obviously more competition from Baidu and also from Google, who are operating more in China right now.

And then right now, we also -- of course, right now, we are following Google in terms of search, which we have explained before. Other than that, we cannot give you a year expectation on the search market because we are still a very small player and I don't think it is appropriate for us to give you a search market overview.

How about on the branded advertising side? Could you give us the year-over-year growth rate?

I think on the year-over-year guidance, we never give out full-year guidance, but we have been talking to you, all the investors, analysts, etc., we are comfortable that we will be -- are in the lead as to market growth rate. And you can see from the trend in the first quarter that we actually compare it year-over-year. It was about 36% year-over-year growth. And the second and the third quarter will be up (indiscernible).

At this time, I would like to turn the call over to Ms. Piacente for closing remarks or additional remarks.

Again, thank you for joining us today. Please feel free to contact us if you have any further questions. Have a good day.

That does conclude today's conference call. We thank you all for joining us. At this time, you may now disconnect.