NetEase Inc (NTES) 2007 Q3 法說會逐字稿

Good evening, ladies and gentlemen. Thank you very much for standing by and welcome to the NetEase third-quarter 2007 financial results conference call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Wednesday, November 7, 2007. At this time, I'd like to turn the conference over to Brandi Piacente, Investor Relations for NetEase. Please go ahead, ma'am.

Thank you, operator. Please note that the discussion today will contain forward-looking statements relating to future performance of the Company, and we 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.

A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filing of the Company with the Securities and Exchange Commission, including its annual report on form 20-F. 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 replay of this conference call will be available on the NetEase corporate Website at corp.netease.com.

I will now turn the conference over to Michael Tong, Co-Chief Operating Officer, who will read prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Thank you, Brandi. Thanks, everyone, for joining us. Total revenues for the third quarter were US$76.2 million compared to US$74.5 million for the second quarter of 2007 and US$76.3 million for the third quarter of 2006. Online game revenues were US$62.5 million for the third quarter compared to US$63.4 million for the second quarter of 2007 and US$62.4 million for the third quarter of 2006.

During the third quarter, we continued to expand our research and development for new games, including fee-based and [item]-based games. Westward Journey Online III, the upgraded version of Westward Journey Online II, was commercialized on September 12. Based on the results of the market surveys that we conducted with gamers during the third quarter, we decided Westward Journey Online II will continue to operate along with Westward Journey Online III.

We also plan to launch I and II expansion packs for both games, respectively, on an annual basis. This will enable the Company to develop a new game market that will appeal to those players who prefer Westward Journey Online III. In addition, this will enable us to retain players of Westward Journey Online II who have expressed their continuous support and preference on this game.

For the third quarter, PCUs and ACUs for Westward Journey Online II were 305,000 and 124,000, respectively, compared with 505,000 and 162,000, respectively, for the second quarter. Our newest expansion pack for Fantasy Westward Journey was launched on September [25th], and we will continue to issue expansion packs and patches on a regular basis to support and expand the product lifecycle of this game.

For the third quarter, PCUs and ACUs for Fantasy Westward Journey were 1.44 million and 517,000, respectively, compared with 1.47 million and 491,000, respectively, for the second quarter.

In other games we are on track for our upcoming closed beta testing for Tian Xia II, and we are continuing our development on free-to-play item-based games including Tian Xia II and Fly For Fun.

Turning to our portal business, increased traffic from portal e-mail and blogs have provided an additional platform for generating advertising revenues. Our enhanced blog services included a consolidation of similar blog contents, as well as better quality and quantity of graphics. We are also pleased with our progress in creating and commercializing new spaces through our free e-mail services, which continues to [beat] the Chinese e-mail markets.

Overall, we achieved solid growth in our advertising services during the third quarter, which brought in a total revenue of US$11.4 million for the third quarter of 2007 compared to US$8.7 million for the second quarter of 2007 and US$11.1 million for the third quarter of 2006. We are committed to building our capacity and market share in the high-growth domestic market, with improved contents and integrating with our different products as the Beijing 2008 Olympic Games draw closer.

Finally, since our last quarter conference call, we have added significant enhancements to our search engine. This includes more highly competitive features, such as toolbars, desktop dictionary, audio dictionary, and enhanced intelligence in returning search results based on diverse user search criteria.

With that, I would like to turn the call over to Onward Choi for his review of our third-quarter financial results.

Thank you, Michael. I will now provide an overview of our financial highlights using numbers and percentages based on U.S. dollars. In order not to repeat what has just been explained by Michael on the revenue side, I will focus on explaining margins and expense fluctuations, along with net profits.

Third-quarter gross profit was $59 million compared to $58.4 million in the preceding quarter and $59.8 million for the same period in 2006. The quarter-over-quarter increase in gross profit was primarily due to higher advertising services revenue in the third quarter of 2007. The year-over-year decrease was mainly due to the decrease in wireless value-added services revenue.

Gross margin for the online game business for the third quarter of 2007 was 89.4% compared to 90.2% and 89.4% for the preceding quarter and the third quarter of 2006, respectively. The quarter-over-quarter decrease was primarily due to lower game revenues resulting from increased competition coupled with higher cost of revenues. Higher cost of revenues was mainly the result of increased headcount and higher operational costs incurred during the third quarter of 2007.

The year-over-year gross margin remained relatively stable. Gross margin for the advertising business for the third quarter of 2007 was 54%, compared to 47.2% and 56.1% for the preceding quarter and the third quarter of 2006, respectively. The quarter-over-quarter increase in gross margin was primarily driven by the increase in advertising services revenue coupled with the lesser extent of increase in content costs in the third quarter of 2007. The year-over-year decline in gross margin was primarily driven by increased content costs incurred during the third quarter of 2007.

Gross loss margin for the wireless value-added services and other business for the third quarter of 2007 was 33.3% compared to gross loss margins of 28.1% and gross profit margins of 3.4% for the preceding quarter and the third quarter of 2006, respectively. Both the quarter-over-quarter and year-over-year deepening in gross loss margin was primarily due to decreased revenue from wireless value-added services, while operating expenses remained relatively fixed.

Total operating expenses for the third quarter of 2007 were $23.9 million compared to $19.1 million and $17.5 million for the preceding quarter and the third quarter of 2006, respectively. Both the quarter-over-quarter and year-over-year increase was primarily driven by increased spending on the advertising and marketing promotions of Westward Journey Online III and Fantasy Westward Journey, and higher stock-related costs as a result of an increase in research and development headcount.

Net profit for the third quarter of 2007 totaled $34.7 million compared to $41.7 million and $42 million for the preceding quarter and the third quarter of 2006, respectively.

In June, 2007, we received a reinvestment incentive tax refund of $3.2 million, which significantly reduced income tax expense for the second quarter of 2007. We reported basic and diluted earnings per ADS of $0.28 and $0.27 for the third quarter of 2007, respectively. This compares to basic and diluted earnings per ADS of $0.34 and $0.31 for the preceding quarter and $0.33 and $0.30 for the third quarter of the 2006, respectively.

As of September 30th, 2007, our total cash and time deposit balance was $410.9 million compared to $525.6 million and $404 million as of December 31, 2006 and September 30th, 2006, respectively. In addition, there was a restricted cash balance of $100.1 million as of September 30, 2007, primarily related to our committed revolving loan facilities, which is effective for a period from May 17, 2007 to July 31, 2008. The loan facility can be used at our discretion to fund any redemption requests made by the holders of its zero coupon convertibles subordinated notes in accordance with the terms of those notes.

As of September 30, 2007, we reclassified the callable obligations of the convertible notes as short-term payable in accordance with the terms of issue.

Cash flow generated from operating activities was approximately $45.3 million for the third quarter of 2007 compared to $44.2 million and $46 million for the preceding quarter and the third quarter of 2006, respectively. On July 2, 2007, the Board authorized a share repurchase program of up to $120 million of net outstanding ADS. As of September 30, 2007, we had spent in aggregate a total purchase consideration of approximately $30.8 million, including transaction costs. The share repurchase program will end on July 1, 2008.

Thank you for your attention. We will now be happy to take your questions. Operator, please go ahead.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Richard Ji with Morgan Stanley.

William, Michael, Onward, good morning. I have two questions. The first question started with your Westward Journey II migration. At the end of last quarter, you guided us that you plan to migrate Westward Journey II to Westward Journey III. I just want to clarify that the migration will no longer happen and the [related] status.

And also, a related question is that during the quarter, have you seen Westward Journey II user (inaudible) stabilize or recover after you stopped the migration process? And I have another follow-up question.

Okay. So what happened is when we launched Westward Journey III, we believed that with the new features and the new graphics and engines that we would be able to draw a lot of the users from Westward Journey II and migrate all of them to Westward Journey III. But it happens that the Westward Journey II players are so loyal to the game that even with the new features and all the new graphics, that the Westward Journey II player continued to like to stay in Westward Journey II. And majority of those gamers stayed in Westward Journey II.

And effectively what happened is we actually draw a lot of new users into Westward Journey III rather than from migrating from Westward Journey II. As we said in the scripts that we have done a lot of market survey to see what happens, how they think about -- with the players, how they think about the games. And most of the Westward Journey II players, even with the new engine and the new features, they still decided to stay on the Westward Journey II.

And there is a slight drop with the Westward Journey II players when the game was -- when Westward Journey III was being in open [beta]. But that drop has been stabilized right now. And within the Westward Journey III players, we have found that majority -- over 50% -- of the accounts are newly-opened accounts, rather than Westward Journey II players.

Okay, thank you. And the follow-up question is again regarding advertising revenue -- it climbed nicely quarter over quarter. Just want to find out what is the price increase happened during the quarter? And going forward, do you see further price increase in anticipation of (inaudible)?

Well, of course our price increase is effective on the 1st of July -- basically this quarter, the beginning of this quarter. But the price increase is very complicated, and on an overall basis, I would say the price increase is around 10% compared to before.

But that is not really the main -- I would say is not really the main reason for the increase in advertising business. It is really the increase of our traffic, especially on the content channels and our other products, including the e-mail and the blogs. And also that we are able to commercialize the e-mail better than before. And so I would say these are really the reasons for the increase, rather than purely for the price increase.

And our policy has always been that we increase our price during the middle of the year and the beginning of the year. So the next price increase is going to be in January of 2008. And of course most likely during the Olympic time then there will be another price increase, which happened to be just the right time where we usually do with our policy that happens in the first of July.

So that is the plan. But the price in the market is also swinging up because of the Olympics. So we might actually change the policy next year and see what happens in the market.

Okay, thank you.

Wallace Cheung with Credit Suisse.

Good morning, William, Michael and Onward. Question again on the Westward Journey III. I think we found that in September before the commercial launch, I think the user (inaudible) base is pretty high. And then after the conversion launch it actually was down quite a bit. Can you talk a bit more about the (inaudible) level currently and how's the situation after the commercial launch, and if you plan to drive this level to go up again?

My second question will be related to the advertising. Can you talk a little bit more about -- also about the 2008 Olympics? I think recently William has (inaudible) talk about strategies and what are the expectations on advertising growth or any kind of new content strategies going forward? Thank you.

Okay, sure, of course. For Westward Journey III, during the open beta of Westward Journey III, I think we saw PCU of a bit over 210,000 during the open beta. And after the commercialization of it, the PCU of the game reached about 150,000. And that actually happened around the national holiday. But I can only give you the PCU numbers, and I wasn't able to give ACU numbers because the game has only been commercialized, I mean, for 18 days during the past quarter. And I'm not able to give you ACU numbers for nonreported financial period. So that is the (inaudible) for the Westward Journey III, anyway.

And on the second question is on the Olympics, the main point for the Olympics is that for the content strategy, we have been working with different business partners, including the likes of (inaudible) and so on. And also that we are consolidating our different products, including the e-mail blogs and different content channels to really have integrated and consolidated products where we can allow our users to be involved in the Olympics on all of our products, so that they can experience our products, all of them, through the Olympics.

And I think it's a very great opportunity for us to promote the NetEase as a portal with a good breed of all the products where the users can experience in one single portal. And I think on the other timing side, of course, during the Olympics a lot of advertisers will be very interested to ride on this opportunity.

And we have been -- we have just had a press release to explain our strategy for the portal during the Olympic time, and a lot of the media has covered that and a lot of them are very excited about it and so are we.

Okay, just one follow-up question. How is the percentage of revenue on (inaudible) coming from Westward Journey III for the quarter?

Maybe I will take these questions, Wallace. We've gone to the (inaudible) of the revenue from the game side. Basically, the Fantasy Westward Journey contributed about 78% of the total revenue of our licensing from the online game, whereas about 90% being contributed from the XY2 and the rest for the XY3.

Oh, the rest is Westward Journey III?

Yes, the revenue for it. It actually contributed to about 1.5% on the overall game revenue for the third quarter.

And can you comment on Datang as well?

For Datang, the percentage contribution is more or less the same as XY3. It is about 1.3%.

Okay, thank you very much.

Dick Wei. JPMorgan. Mr. Dick Wei, please go ahead with your question. He must have stepped out.

Paul Keung with CIBC. Go ahead.

Operator, it seems that we're having some audio issues. It doesn't sound like it is on our end, so maybe if you could check.

I'm sorry --.

Hi, this is [Echo Herr]. I'm sitting in for Paul. I just have a question on your general strategy. Except Datang and [PNCI], do you have any new game development plan either from M&A licensing or from in-house development? I'm talking about --.

(multiple speakers)

Yes.

Well, again on the licensing, there is no -- we have been talking to a lot of different potential partners. But again, right now we don't have anything that we are able to disclose. So that is all I can say, that we have been working very hard to find business partners for the possibility of licensing games and so on.

Okay, so you think if you have -- a new plan is on the way, would it be like in '08 so we can know better? What is the timeframe of you will have a client you can announce?

We don't know. It's only when we can announce, then we will announce. We won't be able to tell you when we cannot announce.

Okay, I understand. I just want to, well, add some more off of growth strategy. And also like wireless value-added service, seeing as it's not profitable, are you going to get rid of it in the future?

I think with regard for the wireless value-added service, our tightness of the business, I think we currently have no plan of closing that business. And we are still keeping as the teams, and this is what we can update you for the time being.

I want to add that the business itself is profitable. I think when you see the gross margin, the gross loss margin in that particular business, the line of revenue and business is actually wireless and others. And that others actually include a lot of depreciation cost of the e-mail services that we only provide as a free business. So that is in the others. And independently, the wireless business itself is actually profitable.

Okay, and also do you have any plan -- no, I mean what is the process right now on the CFO search process?

I think -- Onward is our acting CFO right now, so -- and I think it's the Board to decide, is it Onward to continue to be the acting CFO or become the CFO. So I think --.

Okay, that is great. Just one last question. And in the future in all those expenses as a percentage of revenue, would you expect if there is no new games that is added to like the current status, would you expect them to be stable, including margins?

All I can say is I give you a very simple analysis on this, is that Fantasy Westward Journey 3 actually increased its revenue by 4.3% on a quarter-to-quarter basis. So on an overall basis, I would say that this game itself is still kind of on an increasing trend.

Of course, given that we have done a very successful summer promotion during the third quarter and that is also part of the increase, and also seasonally is part of the increase. But overall, the game increased by 4.3% from Q3 over Q2.

And then when we look at Westward Journey II or Westward Journey III all together, given that Westward Journey III only operated for 18 days during the third quarter; and if we -- if I use the word quarterize that revenue contributed during the third quarter, then I would say that at least Westward Journey III and II added together is very stabilized compared to the total revenue of Westward Journey II in quarter two.

And also we have, of course, Datang and some other pow-pow games and so on. So I think I would say that the game business is stabilized and there is a bit of good invest. And the good is that since we are now -- since we have decided that we separate Westward Journey II and Westward Journey III into two games, we are looking forward to be able to attract more new users for Westward Journey III.

And the game design will go on to try to attract new users, whereas for Westward Journey II we will try to design the games as to satisfy the other current users of Westward Journey II. And it is a very clear strategy going forward.

In this way, I think Westward Journey III will be a game that we are trying to grow further, rather than in maybe some of the investors and analysts maybe understand before that Westward Journey III is only a replacement of Westward Journey II, but it is not. Because now we have decided that Westward Journey III is trying to grow and trying to attract new users. So that is for the game business.

And obviously, we are also looking at the possibility of licensing new games and we are also developing other new games as well. So that is how I would describe our game business going forward.

All right. That is all of my questions. Thank you so much.

Dick Wei with JPMorgan.

Hi. Thanks for taking my questions and sorry my line was dropped off earlier. I guess my question is that can you characterize what happened in the third quarter for Westward Journey II? It looks like the ACU down like 20 plus percentage quarter-over-quarter. And I don't know if it is due to some user tried out Westward Journey III or -- but I guess some (inaudible) comments that you have is that the user is not really overlapping. So can you describe --?

Yes, I think just on explaining the drop in Westward Journey II is that during the open beta of Westward Journey III, a lot of the Westward Journey II players decided to try Westward Journey III. And that is why there is -- during this one month period of time -- and that is why there is a decrease of ACU in Westward Journey II.

But I would say that since we have now decided and announced to all the players that the two games will be totally separate and there will continue to be expansion pack and further developments for Westward Journey II that we are seeing that the decrease has been stabilized for Westward Journey II. And that is how we feel about it right now.

Okay. If you look going forward, would you feel that Westward Journey III plus Westward Journey III together is going to see revenue growth for the next couple quarters?

That is our target.

Okay. I don't know if someone asked about sales and marketing expenses, but just fundamentally is there any change in philosophy in terms of NetEase's marketing spending? I think historically the Company has been quite conservative in spending. I think some of the games companies out there now maybe spending like 12 or 20% of the top line in sales and marketing -- I don't know. Any fundamental change in your view in that respect?

I would say there is no change in the philosophy. But I would say, yes, during the first quarter that we see an increase in the marketing expense. That is purely because, for one, that we have launch on the Westward Journey III. And at the same time, we also have some summer promotions for the Fantasy Westward Journey. So there is kind of a hike in the marketing expense.

But our general philosophy has never changed. And we will continue to ask -- as you mentioned, we are more conservative in marketing expense and we will continue to be very conservative. I think this hike is partly kind of exceptional expense -- that is purely because of the launch of the Westward Journey III and so that is the reason why.

The last question is that you mentioned you see more monetization from you e-mail service. Could you further describe that?

Yes, sure. The e-mail service, I think one of the hardest things is e-mail as a media has been very difficult for the advertisers to understand before. But we have been doing a lot of education to our agencies and to advertisers, and this seems to bear some fruit right now.

And secondly, we have also developed more spaces in the e-mail services, innovative services where we, for example, that we put customized stock list right beside an e-mail lock-in page, where the users can choose to [start -- that's] the monitor or the purchase and provide financial information, which is obviously very hot in China right now. So that becomes some spaces where we are able to provide to the users and which the users are satisfied and happy with. But at the same time, we are able to generate more advertising revenue.

So the strategy really is not just to take a space within the e-mail page, but rather to provide more services and contents to the e-mail users, and at the same time increase advertising space for that.

Great, thanks a lot.

Ming Zhao with SIG.

Good morning, William, Michael and Onward. This is (inaudible) on behalf of Ming Zhao. We have two questions. The first one, just follow up JPMorgan's question. As you mentioned, you launched new advertisement to place inventory in your free e-mail services. So in your third quarter, advertising revenue, how much was contributed by this new inventory?

I don't have the particular statistics in that, especially because it is hard to calculate this way, because a lot of advertisements are placed as a package. And you know, because of this inventory, we are able to draw some new advertisers, especially including those financial institutions and fund companies. And so we are able to use that particular inventory to draw a lot of new advertisers from that financial industry.

And you know, the particular place that they put advertising includes that inventory but also includes some other inventory as well. So it would be not fair to just ask -- just say how much that we generated from that one space, but rather how this one space be able to attract new advertisers, especially from the financial industry. So that is how I answer that.

Yes, thank you. The second question is about after your postponed conversion between Westward Journey Online II and III, we saw both games resume growth. Will you operate that as two separate games going forward, or you still will convert these two games. If so, when?

We will operate the two games separately, as this is what the users want and like. Yes.

Okay. If I may, the last question. When do you plan to announce your closed beta testing and open beta testing for the (inaudible) and the Datang?

We have planned to launch our closed beta testing of (inaudible) in the first quarter of 2008. Yes, this is our plan.

Does that answer your questions?

Yes, I'm asking for Datang -- how about Datang?

For Datang is before the second -- end of second quarter of next year.

Okay, thank you.

Tony Gikas of Piper Jaffray.

Thank you for taking my question. A couple of questions. Just want to go back to the sales and marketing costs. So you ran some promotions during the quarter. Is that going to continue into the December quarter at all? Or will the sales and marketing expense go back to a normalized level?

Second question can you tell us the percentage of users that migrated from Westward Journey II over to Westward Journey III? And then my third question would be with the Olympics coming next year, do you expect user trends on the gaming side of the business to change? Do you expect any slowdown or interruptions in that business?

Right. So on the first question is that, again, that marketing expense is purely on the launch of Westward Journey III. So I would expect going forward the overall marketing expense should be lower than the third quarter, should be lower. And it would go to normalized, more or less like before. So that is the [extrication].

And for the second question -- for the Westward Journey III is out of all the Westward Journey III players -- actually, I explained this before -- that we see around 60% of them new users. And then around of course 40% is from users that are migrated from Westward Journey II. So that is the percentage out of (technical difficulty) Journey III, okay? So I hope that answers your question.

And then -- sorry -- the next question is on the Olympics. I don't know how to estimate that, but I think the best thing that we thinking about and what we are doing on that is that obviously we will have Olympic (inaudible) or related game play or design within our games so that our gamers will continue to play in our games and be able to also enjoy the Olympics. And also be able to write on this Olympic and to have games, for example, just like the Olympic Games, that we have those kind of functionality and play features within our games so that they can enjoy both at the same time within our games. So that is the simple strategy to do it.

Okay, thank you.

[Aleesa Yep] with [City Investment Research]

Yes, good morning. Thank you. I have a couple of questions. First of all, on the sales and marketing costs, do you plan to also push up your marketing costs when you launch your Tian Xia II and Datang II later, and any other expansion packs on the Westward Journey III and Fantasy Westward Journey as well?

I think the marketing costs going forward for the launch of the expansion pack and other new games will be basically compared to the previous way of how we do it. And so that I won't say there would be any kind of specific rules or so on, that it would be normal way of doing our marketing as we did.

Okay. Now, so you plan to launch Tian Xia II closed Beta first quarter '08? What is the plan for the commercial launch. And do you have any plans to convert Tian Xia II actually to a frequent-play model?

The current plan for Tian Xia II will continue to be time-based game. And then, again, in general that we usually -- we are able to commercialize a game after around two months after the open beta launch.

Okay, and then my last question. Can you comment in general the china online game industry? And have you see any changes in the competitive landscape or do you expect to see a major shift of competitive forces in light of the recent online game's IPO?

On commenting the Chinese game industry is that while we continue to see the overall growth of the industry being very healthy, we see a lot of new users coming into the industry, we see broadband penetration continue to increase and over-Internet penetration continue to increase. And obviously, there has been a lot more competitions in the game industry and we see new companies being IPO'd during the past quarter; we see at least three during the past half year.

And obviously, there has been continued trends of more and more item-based games rather than pay-to-play games, and that is why we also have item-based games coming out from ourselves, like Fly For Fun and like Datang.

Of course, for NetEase, we continue to be very strong in terms of the research and development and we have every good team and a very huge team in developing different projects to compete in this market.

Okay, thank you.

(Inaudible) with Merrill Lynch. It looks like he just disconnected. James Mitchell with Goldman Sachs.

Thank you for taking my questions, which are kind of housekeeping questions. First, if I look at the user numbers you disclosed for (inaudible) Westward Journey and Westward Journey II, it seems to be up around 2% quarter on quarter, whereas the game revenue is down around 1% quarter on quarter. Is there anything underlying that in terms of distribution discounts or is it just a rounding error?

And secondly, if I look at the game gross margins ticking down quarter on quarter, is that principally because you have released a new game? Or going forward, if you have similar revenue from basically three large games rather than from two large games would that automatically be a slightly lower gross margin activity, publishing three games for the same revenue than two games with similar revenue?

Hello, James. For the first questions, I think there has not been much change in our discount policy for the sales of the (inaudible). And the difference for the decrease in the revenues for the games business as compared with -- in terms of the present change, I can say that the difference would be mainly different from the recognitions of the expired points to contribute to the decrease.

As for the second question about gross margins, I think the slight drop in the gross margin as compared with the last quarter were mainly because we have increased more of our headcounts to strengthen our teams to run the business, and this accounts for the reasons for the decrease in the gross margins.

Okay. So in the second quarter, you had a slightly higher proportion of revenue from expired points, and in the third quarter you had a slightly lower proportion [than that]. Okay. Thank you very much.

Okay, thank you.

Evan Wilson with Pacific Crest.

Hi there. Could you help us quantify the extra costs that you expect to incur by being forced to operate both Westward Journey Online II and Online Journey III? And specifically, do you get any synergies between the games with respect to marketing support and structure costs, etc.?

And then the second question would be on Fantasy Westward Journey, since you decided to release Westward Journey Online III as an item-based game, clearly you think that for some games an item-based sales model is the right strategy. Could you talk to us about what would need to change or what your perspective is of the potential of Fantasy Westward Journey being item-based sometime in the future? Thanks.

You actually have a very good question. When we decided to have the games totally -- the two games totally separated and operated separately, we also have thought about the question of dividing the teams into two. And luckily that we have a very good pool of good programmers and designers. So basically, we are able to promote a (inaudible) programmer to become kind of heading the game going forward for Westward Journey II. And then the original chief designer for the whole project becomes the Westward Journey III, continue to work on the Westward Journey III. So that is basically what we did.

And of course, we continue to have a pool of good resources. And so, I think on the programming side and on the graphics side, it is easier for us to allocate. It's really the design team that we really have thought about and that we still be able to solve this problem, which is a very good operational problem.

And then on the second point is that we don't have any plan to make Fantasy Westward Journey to become an item-based game, so simply that.

Just to follow up on the first response. Is there any way that you could give us a percentage -- some type of percentage quantification on the costs associated with operating the second game on top of your existing costs or your previous costs for Westward Journey II?

I'm sorry, I can't. I can't give you a percentage, because we have our programmers, graphics designers and R&D team in one single pool. So it would be very hard to divide that. But that is really a game -- is not the problem. The problem is really on the design team, are we able to find the right design team to continue to operate the two games separately. And the answer is that we decided and we have fixed that -- having basically solved that problem.

Thank you.

Tian Hou with Pali Capital.

I'm not a sir. Thank you.

I apologize.

It's okay. I have a question, Michael. I just wonder if you have any expansion pack release plans and in Q4 or Q1? And I know you just released one for Fantasy Westward Journey, and how about the Westward Journey II and the III?

Yes, so for Fantasy Westward Journey, there will not be any new expansion pack for Q1, because we have just released one in end of September. So the next one should be around six months later. So most likely to be on the beginning of the second quarter.

And then for Westward Journey II and III, for Westward Journey II, I think there would be maybe one that we will plan maybe in the first quarter -- second quarter. In the second quarter of 2008, yes.

So how about Westward Journey III?

That would most likely be on the same quarter as well, I think.

Okay. And also, I just have some sort of a question I want to clarify with you. And I saw from your Website you have some server changes, like Westward Journey III server migration. And then also Fantasy Westward Journey, you have some announcements say you may merge some servers. So my question is really how many servers do you have for each of the games right now?

Sorry, I don't have this particular number right. Can I give you my e-mail or --?

Yes, no problem.

Thanks.

That's all of my questions. Thank you.

Thank you very much. At this time, there are no further questions. Please go ahead with your concluding statements.

Thank you once again for joining us today. Please feel free to contact us if you have further questions. Thank you.

Thank you very much, ladies and gentlemen. This does conclude the NetEase third-quarter earnings conference call. You may now disconnect. Thank you very much and have a good day.