NetEase Inc (NTES) 2007 Q4 法說會逐字稿

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the NetEase.com fourth quarter 2007 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today Wednesday, February 20, 2008. I would now like to turn the conference over to Brandi Piacente, Investor Relations for Netease.

Thank you, operator. 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 discussion. A general discussion of the risk factors that could affect NetEase's business and financial result is included in certain filings with 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 the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Thank you, Brandy. Thanks everyone for joining us. Total revenues for the fourth quarter were $85.3 million compared to $78.3 million for the fourth quarter of 2007 and $74.1 million for the fourth quarter of 2006. Online gaming revenues were $69.5 million for the fourth quarter compared to $64.2 million for the third quarter of 2007 and $61.9 million for the fourth quarter of 2006. As fiscal 2007 drew to a close PCUs for Fantasy Westward Journey hit an all-time high, allowing us to conclude the year on a decidedly positive note.

Following the launch of our newest expansion pack for Fantasy Westward Journey in late September, fourth quarter PCUs and ACUs for Fantasy Westward Journey hit a record-setting 1.5 million and 515,000, respectively which compares to 1.44 million and 517,000, respectively in the third quarter. We will continue to build on this momentum by incorporating future expansion packs that suit our players' needs.

During the fourth quarter we continued to expand our research and developments for new games including fee-based and item-based games. As you know, at the end of the third quarter Westward Journey III, the upgraded version of Westward Journey II was commercialized. We are continuing to implement ways to enhance the appeal of this game to our players. During the first quarter of 2008 we expect to release additional features of Westward Journey III and are confident that this will further enhance the game's appeal to its existing and new players. We also plan to release an expansion pack for Westward Journey II in the third quarter of 2008.

For the fourth quarter PCUs and ACUs for Westward Journey online II were 387,000 and 134,000, respectively compared with 305,000 and 124,000, respectively for the third quarter. In other games we are on track for our upcoming close beta testing for Tian Xia II during the first quarter of this year and expect that close beta testing for Fly for Fun and Datang II will begin in the second quarter. Diversification in our product offerings, including an intensified focus on item-based games and exploration of strategic license opportunities, will allow us to attract the larger array of game players and help to further solidify our lead in the Chinese MMORPG market into 2008 and beyond. This continues to be our primary focus, our continued market leadership through anticipating and addressing the ever-changing dynamics of the Chinese gaming market.

Our free email service continues to lead the Chinese email market, and advertisers have the opportunity to tap into one of the largest and fastest-growing use of bases in China today. With the successful integration of our improved contents with our email and blog services we are continuing to retain and grow traffic while providing a solid platform to view advertising revenues. We will seek to continue to expand our content and enhance our email and blog services in order to grow premium ad space for our Internet advertisers.

Overall, we achieved solid growth in our advertising services during the fourth quarter, which brought in revenues of $13.4 million for the fourth quarter of 2007, compared to $11.7 million for the previous quarter and $9.9 million for the fourth quarter of 2006. Lastly, since our last conference call we have continued to develop and enhance our search engine. Since the public launch of Yodao and related search products in early December, users have welcomed our improved search quality and enhanced user interface. We have observed a steady increase in the usage of the new search service compared to the previous search service.

The Chinese search market is a very dynamic one, and users' expectations about what makes a good search engine are constantly rising. Therefore we ultimately are trying to meet and exceed market expectations. We clearly have a successful and proven track record in product and user experience designed for Chinese users, and we plan to leverage our expertise in these areas and our valuable Web property assets to develop an industry-leading search engine.

With that, I would like to turn the call over to Onward Choi for his review of our fourth quarter and fiscal year 2007 financial results.

Okay. Thank you, Michael. I will now provide an overview of our fourth quarter and fiscal year financial highlights using numbers and percentages based on US dollars. In order to avoid repetitions my remarks will be focused on the discussions of margin and expense fluctuations along with net profit results. Starting with the fourth quarter results, gross profit was $66.9 million compared to $60.6 million in the preceding quarter and $62.6 million for the same period in 2006.

Posted quarter-over-quarter and year-over-year increase in gross profit was primarily due to higher game and advertising service revenue. Gross margin for the online game business for the fourth quarter of 2007 was 90.7% compared to 89.4% and 90.3% for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter increase was primarily due to high game revenues reported for the fourth quarter of 2007.

Gross margin for the advertising business for the fourth quarter of 2007 was 52% compared to 54% and 50.5% for the preceding quarter and the fourth quarter of 2006, respectively. The quarter-over-quarter decrease was primarily driven by higher stock related and [counting] cost during the fourth quarter of 2007. The year-over-year increase was primarily attributable to higher revenues reported for the fourth quarter of 2007. Gross loss margin for the wireless value added services and [others] business for the fourth quarter of 2007 was 19.5% compared to gross loss margin of 33.3% and gross loss margins of 18.9% for the preceding quarter and the fourth quarter of 2006, respectively.

The quarter-over-quarter decrease was primarily due to the continued rationalizations of operational cost associated with the Company's [flattest] value added services business in the fourth quarter of 2007. Total operating expenses for the fourth quarter of 2007 were $21 million compared to $24.5 million and $17 million for the preceding quarter, and off quarter of 2006, respectively. The quarter-over-quarter decrease was primarily driven by increased spending on the advertising and marketing promotions of Westward Journey III and Fantasy Westward Journey during the third quarter of 2007. The year-over-year increase was mainly due to higher marketing expenses to promote Westward Journey III and Fantasy Westward Journey and high stock related cost as the result of an increase in research and development headcount during the fourth quarter of 2007.

Net profit for the fourth quarter of 2007 totaled $53.4 million compared to $35.7 million and $43.9 million for the preceding quarter, and the fourth quarter of 2006, respectively. In December 2007 the Company received a reinvestment incentive tax refund of $4.1 million which helped reduce the company's income tax expense for the fourth quarter of 2007. In addition, new corporate income tax laws went into effect as of January 1, 2008 which unified the tax rate generally applicable to domestic and foreign invested enterprises in China. As the Chinese tax authorities have not yet announced detailed regulations on the applicable requirements and procedures to apply for preferential tax treatment as a high end new technology enterprise, and the continued applications of the preferential tax reporting advanced technology enterprise, such as those that have been enjoyed by certain (inaudible) subsidiaries of the company through 2007. The Company is required under applicable accounting standards to report its deferred tax assets as of December 31, 2007 at the new statutory income tax rate of 25%.

The reporting of deferred tax assets at the new statutory income tax rate resulted in a tax benefit of approximately $5.8 million for the fourth quarter of 2007. It is expected that the company will report a higher tax charge in the future quarters if and when confirmation is received from the Chinese tax authorities that such preferential tax treatments will be allowed to continue for the relevant terms as a result of a reduction to the deferred tax assets to reflect the lower preferred tax rates.

NetEase reported basic and diluted earnings per American depository shares or ADS, of $0.44 and $0.41 for the fourth quarter of 2007, respectively. The company reported basic and diluted earnings per ADS of $0.29 and $0.27 and $0.35 and $0.32 for the preceding quarters and the fourth quarter of 2006, respectively.

As of December 31, 2007 our total cash and time deposit balance was $570.1 million compared to $539.8 million as of December 31, 2006, respectively. At December 2007 we entered into an agreement with the bank to cancel on reporting loan facilities, which was taken out to enable the company at our own discretion to fund any redemption request made by the holders of our zero coupon convertible subordinated notes in accordance with the terms of those notes during the period from May 17, 2007 to July 31, 2008. As a result of the terminations of the loan facility, the restrictions on the Company's cash balance was removed on December 31, 2007.

Cash flow generated from operating activities was approximately $58.5 million for the fourth quarter of 2007 compared to $46.5 million and $72.9 million for the preceding quarter and the fourth quarter of 2006, respectively. I would now like to take a few moments to review the fiscal year results. Total revenues for fiscal year 2007 were $316.1 million compared to $304 million for the preceding year. Revenues from online games were $264.9 million for the fiscal 2007 compared to $254.4 million in the prior year period.

Revenues from advertising services were $41.8 million for fiscal 2007 compared to $39.2 million for the preceding fiscal year. Revenues from wireless value added services and others were $9.3 million for fiscal 2007 compared to $10.3 million for the prior year period. Gross profit for fiscal 2007 was $246.5 million compared to $244.4 million for the preceding fiscal year. The increase to gross profit for fiscal year 2007 was primarily due to the growth in revenues reported for Fantasy Westward Journey with an all-time high peak comparing usage numbers achieved in fiscal 2007.

Total operating expenses for fiscal 2007 were $81.2 million compared to $69 million for the preceding fiscal year. Higher operating expenses for fiscal 2007 were primarily due to an increase in marketing costs incurred for the promotions of Westward Journey III and Fantasy Westward Journey and increase in staff related cost incurred for the games research and development teams resulted from an increase in headcount.

Net profit for fiscal 2007 totaled $173.3 million compared to $170.4 million for the preceding fiscal year. In 2007 the Company received a reinvestment incentive tax refunds of $7.5 million which reduced the company's income tax expense for fiscal 2007. In addition, as mentioned above, the reporting of deferred tax assets as the new statutory income tax rate resulted in a tax benefit of approximately $5.8 million for the fourth quarter of 2007. NetEase reported basic and diluted earnings per ADS of $1.40 and $1.31 for fiscal 2007, respectively. The company reported basic and diluted earnings per ADS of $1.32 and $1.22 for the preceding fiscal year, respectively.

Lastly, on July 2, 2007 the Board authorized a share repurchase program of up to $120 million of NetEase outstanding ADS. As of December 31, 2007 we have spent in aggregate a total purchase consideration of approximately $35.7 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, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Richard Ji, Morgan Stanley.

Congratulations on a strong quarter, and I have two questions. Let me start with the first question on the new [catalyst] and especially I am very curious about the licensing opportunity in the free-to-play game pipeline. Can you help us to understand a little better about the timeline and also the pipeline status? Thank you.

Yes, sure. Of course. On the license game actually we don't have much to comment. The only thing I would say is that we do not have anything that we can disclose or anything that we have ink in with any of our potential partners. And continue to discuss with several potential partners which we believe is very possibly that we will be able to license games, but there's nothing that we can disclose as yet. We have continued to work hard.

And on the free-to-play games we have the two titles this year on 2008, which includes of course the upcoming one is Tian Xia II, which we believe the closed beta is coming out within the first quarter of this year, which is only probably within a month. And then we are going to have Datang II and Fly for Fun which are both free-to-play titles that we believe to be have the open beta within the second quarter of '08. And at the same time we are going to have a separate version of Westward Journey III, which is a free item based title as well, which is going to be later part of this year. And that and several other casual games that are not so material and we don't provide a timeline for those yet.

Thank you, Michael. And my follow-up question is regarding online advertising service; obviously has been quite strong over the past quarter and on my calculation and you guys have order pacing, SINA and Sohu in terms of advertising growth two quarters in a row. And obviously there is a small basic fact for your company other than that, can you probably shed some light on the new advertising service or any new content you've put in to help boost the advertising sales?

Yes, of course. I would say that it is a combination -- yes, you are right that on the quarter-to-quarter growth basis we have outpaced our competitors, I mean SINA and Sohu in the quarter-to-quarter basis. We have grown our advertising income quarter-to-quarter by I think it was around 15%, right? And bear in mind that on a year-to-year basis the branded advertising actually went up by 44% in this quarter. Because if you look at the overall advertising income it went up by I believe it is around 36%. That is actually a result of our search advertising, which we have a small amount of income in the fourth quarter of '06.

Where we don't have any income on the fourth quarter of '07. So the growth of the branded advertising is actually higher than that of the advertising income growth being shown on the financial results. But anyway, the point is I think it is a combination of continued improved content and continued education of the market that is one of the most influential portal in the market, especially where we have both influential media with the news, finance, entertainment, sports contents. And at the same time we have the very interactive platform with our users that combines our blog services and emails, etc. We will continue to build on that, and we believe that we will continue to have a strong advertising business.

Thank you, Michael.

James Mitchell, Goldman Sachs.

This is a kind of detailed question, so I apologize, but can you just give us the average use of Westward Journey III in the quarter? And I wanted to check on Fantasy Westward Journey. I am a little bit deaf. Did you say that it was 515,000 average users or 550,000 average users for the quarter?

Okay, let me explain this. The average compared uses of -- let me put it this way first off, on the Westward Journey III first. Peak comparing uses for Q3 was 213,000. Peak concurrent uses for Q4 was 163,000. Peak concurrent, average concurrent users for (technical difficulty) was 106,000 and Q4 was 53,000. Please bear in mind that in Q3 the peak concurrent users was reached when the game was free of charge and in open beta mode and so was the average concurrent users I think is the average of the whole quarter, which includes probably the free open beta and commercialized period. So that is the numbers for Westward Journey III.

And for Westward Journey II the ACU were 124,000 for Q3 and 133,000 for Q4. So last year on the numbers, (inaudible) now?

Yes, that's perfect. I actually had a note in my model that might be wrong that you had 47,000 average users for Westward Journey III in the third quarter, after you started charging. So I should really be comparing the 53,000 as being up on the 47,000 when you were charging, I guess, rather than --.

I don't have the 47,000 numbers on my mind, but I can double check on that. But I think yes, it is correct that you can not -- it would be misleading to compare (multiple speakers) 253. But I can make a note on this if you look at it this way on the revenue side. On the revenue side if you remember in the last quarter when we reported a 7.2 million, (inaudible) 2 million for the Westward Journey III which is around 18, 20 days of commercialization or the period we received the revenues. And if you try to [quarterlize] that and compare that with this quarter we have around 33 million revenue for the Q4 for Westward Journey III, which is -- and you compare that with Q3 and [quarterlize] it. And I think it will show something kind of flat quarter for the revenue of Westward Journey III.

Got it. And then for Fantasy Westward Journey it was probably 515,000, not 550,000 then?

515,000.

And if I could just ask a follow-up, then, you mentioned in the proprietary remarks that you might have a free-to-play version of Westward Journey III later in 2008. I guess in the past you have tended to say that because of game balance issues and so forth you would rather not take your existing games down to free-to-play roots but it sounds like you are changing your thinking on that.

I have to make it clear on this what I was saying is that we agreed to maintain two versions of Westward Journey III so there would be one version of Westward Journey III where we are going to have paid by time basis and a separate version of Westward Journey III which is based on the free game night model.

Okay. That's crystal clear. Thank you.

Alicia Yap, Citigroup Investment Research.

In your press release, I mean in your prepared remarks you mentioned that you are exploring the strategy of licensing opportunity in answering research questions; you also mentioned that you are still looking into it. Can you actually -- maybe you can tell us when you look at your pipeline and the gamers demand -- what are the types of games that will help you attract a larger user base? And what types of games that you would be most interested to bring into your pipeline?

As I answered Richard, I think there is not much more we can comment on the license game. All we can say is that we are working hard on it, and we have several potential partners that we are talking to. But it would be very difficult to answer you this way, what type of game that we are looking at because that might reveal who are the licenses or the partners that we are actually talking to.

That's fair. My second question is about the first quarter '08; so when we looked at your Q1 of the last two years you posted about 9% sequential growth in 2006 and about 3% sequential growth in 2007. In light of the snowstorm, which is a onetime event, do you see your Q1 reaching seasonally a strong quarter impacted by the weather? In other words, since you have strong, such a strong 4Q results as we are modeling for the Q1 '08, how should we think about the sequential growth? Thank you.

Well, again, it is very difficult to answer. I think the best way to answer this is that in general the best seasonality affects us in a way that the third quarter were the summer months, the longest period of time and where our demographics includes a lot of players who are still in school, then usually the third quarter is the strongest in the game business. Where in Q1 yes, of course there is also a winter break, which also usually shows a bit stronger based on the seasonality. So in a very general term, you can view it this way.

And how should we think about is there any impact on the snowstorm to your first quarter this year?

I really don't have -- I don't look at that too much because the snowstorm is a short period of time, and at the same time it is only affecting part of China. It is not everywhere, and mainly in Hunan and Hubei. And I don't think it is going to make much difference or make a big impact to the business.

Okay, and then in light with your strong 4Q, and then should you still expect a sequential growth in Q1?

That I cannot answer, sorry.

Okay, all right. I get back into the queue. Thank you.

Evan Wilson, Pacific Crest.

Thanks for taking the questions. I've got a couple. First, relative to your strong game results in Q4, how much of that do you think reflects the release of the expansion pack of Fantasy Westward Journey, and then how much do you think reflects just strong overall growth in the market? So I guess another way of asking it would be do you think you gained a material amount of marketshare because of the expansion pack in Q4?

And the second question would be just if you could comment anecdotally on any sense of your business, the strength of your business during the Chinese New Year period.

Yes, of course. I want to make it quite clear on the growth of the game business in the quarter four that yes, we definitely had a very good growth of the game business, of around 8% to 9% this quarter. On the quarter-to-quarter basis, where we also have recorded growth or sequential growth on a quarter-to-quarter basis on basically all the games. The one thing to bear in mind that another major reason for the growth of the overall business is because Westward Journey III is commercialized for the whole period of the quarter compared to only 18 days for Westward Journey III, which is commercialized in the third quarter.

So quite a majority of the growth on an absolute number basis comes actually from the results of the commercialization period of this time. So I would say that it is a very good thing that we see that, especially when we compare Westward Journey III added to Westward Journey II numbers on quarter four and it is a growth compared to Q3 on a quarterlized basis over Q2 with Westward Journey II by itself.

And we are seeing that for Fantasy Westward Journey that there is also a small growth in quarter four, but I would say that it is more kind of a flat quarter, because when you look at the ACU numbers it is basically flat and also when you look at the revenue numbers it is also basically flat. So it is a combination of what actually what you say is partly the market growth, and also partly the expansion pack that we have released in September of Q3, I mean Q3 of '07.

And it would be very difficult to answer you on weather, which contributes more to the results of this. But I would say usually Q4 and Q3 is, as I explained in the seasonality, that Q3 is usually a better quarter. So I would say the expansion pack definitely had a very good effect on extending the life cycle of Fantasy Westward Journey.

Great, and if you could also now that we are in February of 2008, if you've got any commentary on what you think the industry growth rate will be in calendar -- the whole of calendar 2008, I'd appreciate that as well. Thank you.

I think it would be difficult to say that because we are more on the MMORPG market right now, and there is the three-game market, and there is also the casual game market. And I think usually when you look at the whole game industry it consists of all these three kind of games, and we are looking at different figures. I think there has been a lot of industry reporting around like 40%, 35%, 40%. But that would be an industry that they are looking at consisting of all three kinds of games. And for the MMORPG on the item base, I think there will continue to be growth next year and also on the advanced game, advanced casual games because it is a smaller basis. The growth is probably higher.

Thanks.

[Eddie Leung], Merrill Lynch.

Hello. This is [Ken Chan] calling on behalf of [Eddie Leung]. I have two questions. I want to know how does the management expect wireless trend going forward, and can you provide a breakdown of the wireless business? And I also want to know what is the tax guidance for 2008? Thank you.

Yes, of course. You are asking on the wireless business, right?

Yes, yes.

I think for us the wireless business is auxiliary business for us in a way where we can expand the content of our portal of the services and products we have on our portals and the game business. So what we are doing is really using the wireless as a channel to provide for example on the emails that the users can receive emails on the wireless, their headphones so on. And for the contents where they can read the contents on the wireless headphones and so on. And also the games where they can use their use their headphones to protect their accounts and so on. And we do not have much products or services that are specifically targeted to wireless business where, for example, like ring tones or specific (technical difficulty) and so on, so those are very immaterial to us. So that is really our strategy for the wireless business, and so (inaudible) for us. I don't know how to answer your question, actually.

Okay. Thank you. Can we know the tax guidance for 2008?

I think given that the TRC authorities have done a tax reform effective from the first of January 2008, and given that the detailed implementation rules of how to execute the tax or the tax rate based on the preferential tax treatment that a particular company can receive, I think it would be too early to comment on the future tax rate at this moment. Because the most important point is that starting from 2008, even though companies like ourselves which are under the high-technology industries would be probably got a chance to apply for the preferential tax treatment. But not until the tax authority would grant us a confirmed evidence or confirmation on this treatment, it would be better for us to account for our tax based on the unified tax rate of 25%.

Okay, and one final question. When do you expect to launch the expansion pack for the Fantasy Westward Journey going forward?

The last one was, the Fantasy Westward Journey, the expansion pack, the previous one was launched in September last year. And so the next one we are looking at should be around Q2, and Q3 -- and if Q2, early Q3.

Okay. Thanks a lot.

Echo He, Oppenheimer.

I just want to ask have you penetrated the market deeper into more city areas? So is that going to -- I'm just thinking it might be a reason to add your peak concurrent user.

I'm sorry, how does it relate to the peak concurrent users?

Right, yes. What is the main source?

What is the main reason for the peak concurrent users new peak we have achieved in December, right, for Fantasy Westward Journey?

Yes.

I think it is probably, again, it is probably because of the expansion pack that we have released, which suits the players needs. I think geographically we continue to have always been expanding over everywhere in China. And I don't think it is because of the geographic expansion. I think it is a continued output of our marketing and channel guys. I think it is more because of the expansion pack has resulted in a good response from the users.

Okay, so in other words you have this expansion pack gets a little bit older you probably will lose some of the users that you draw back from these expansion packs, right?

That's why we need -- yes, in some places there is -- there will always be some kind of users who are leaving us. And there the churn rate has been, I believe, has been quite consistent. That's why we need -- and that is why we have been developing new expansion pack on a very frequent and consistent basis. And basically it is around two expansion packs every year.

Okay. How big is your sales forces? I mean the field salespeople?

Sales force for the game business?

Yes.

It actually consists of the marketing and the sales all together. It's around 100 people altogether. And we have -- sorry, it is around 116 people nowadays. And between that there will be the marketing people who are looking after the media, the posters, the PR and those things. But more importantly is the people who are looking after the channels where we are working with different ISPs in different provinces, regions, working with different Internet cafes, again in different places. You know, people who are on the ground who go to different provinces every day and all different kind of Internet cafes every day to make sure that our games are being distributed to the right places.

Okay. Thank you so much. That will be enough questions.

Andrey Glukhov, Brean Murray.

Thank you for taking the question. First of all, can you -- you guys have done a really good job managing sales and marketing expenses in the quarter. Can you maybe talk us through what do you expect to spend on some of your new upcoming game launches like Tian Xia II, Datang II, what sales and marketing expenses are you budgeting?

I don't have the -- I wouldn't have the numbers to tell you on an absolute basis right now. But on a relative basis I would say the overall strategy is for us to focus more on the off-line or on ground promotion where we have more people running around different places, different provinces on Internet cafes, ISPs, on those kind of cooperations rather than we have more pure advertising type on TV, or on media. Relatively those would be -- you know the budget is smaller compared to -- I mean, it is small for on ground compared to above the line type of advertising and promotion. So I think it would be relatively smaller, but I won't be able to give you an absolute figure on this.

That's helpful. And then secondly, as you are basically launching both the item based version of Westward Journey III, have you guys thought about doing something similar for Fantasy Westward Journey?

No, we don't.

Okay, thank you.

James Mitchell, Goldman Sachs.

Thank you for taking the follow-ups, which there's two. The first one is if you look at the advertising business over the last two years and the deceleration and then the reacceleration, how much of that story is EachNet retrenching its spending with you versus how much is other factors?

Not much from the e-commerce sector. Again, e-commerce sector would not just include EachNet. EachNet is part of it, but it is more than that. I would say it is -- it is more the traffic growth, it is more of better education of the home market with NetEase as a very influential media in the market and with more of the management managing our agencies and our direct sales. So on a number basis the drop -- I mean, there has not been much -- I mean from the e-commerce clients, yes, they dropped very much in Q4 and Q1 -- Q4 of '06 and Q1 of '07, but there hasn't been much of a coming back. There is some coming back, but not much actually.

Okay, great. And then unrelated question on the game business. I was quite impressed by the growth in average users for Westward Journey II in the quarter. To what extent should I view that as maybe a trend going forward, and to what extent should I say well in and the third quarter there was a distraction of Westward Journey III being free and so the fourth quarter is a stabilization after that onetime distraction?

It is a combination of the 2, but I wouldn't -- it is hard to separate or to find out which is contributing more. But my guess is yes, I think the effects from the distraction of Westward Journey III would be more objective in some way because there is a period of time where Westward Journey III is free of charge and distracted somewhat the Westward Journey II players to let them play free of charge for a while.

Okay, great. Thank you very much.

[Hia Gu], SIG.

Good morning. Congratulations on a very good quarter. I have two questions. Actually, my first question I apologize for that because I was cut off, so I may have missed this answer. The question is about would you please break down your game revenue among your games by percentage and the PCUs and ACUs for each game?

Basically I will just give you a brief outline of our game titles proportions. Our main revenues would be coming from the Fantasy Westward Journey, which accounts for about 73%. Whereas our Westward Journey II would account for about 19%, and the rest would be mainly coming from Westward Journey III, plus a small amount from the Datang II and very nominal amounts from the [Papow] games.

So you mean 90% from Fantasy Westward Journey II and 7.3% from Westward Journey online?

No, no. Fantasy Westward Journey is 73%.

73, okay.

And the Westward Journey II would be about 19%.

19%, okay.

And you can take the rest for the Westward Journey III would be about 7%, and the rest would be a nominal amount for the (inaudible) [Papow].

Okay, got it. How about PCU and ACU? Sorry.

The ACU figures. The ACU figures for Westward Journey II is 133,000. And the PCU numbers for Westward Journey II was 387,000 whereas for the Fantasy Westward Journey, the ACU numbers --

Sorry, I didn't catch your Fantasy II.

Yes, so for Fantasy Westward Journey, the ACU would be 515,000 whereas the PCU numbers would be 1.52 million.

Yes.

And for Westward Journey III, our ACU numbers would be 53,000 and the PCU numbers would be 153,000.

Okay, and the second question is about among your top advertisers what are the industries they belong to, and how do you view the 2008 and 2009 growth trends?

The top three industries would be the automotive, IT and also -- IT meaning the telecommunications companies and then the high-tech equipment like the mobiles would be the third. So these would be the three main industries for us. And obviously for '07 the highest growth rate I think among all the industries would be the financial institutions. And it should be the same for all the portals. I think in '08 it would be continued growth of the financial industries as one of the major growth drivers in terms of growth rate. And then we continue to see automobile have a very strong growth in putting up more budget from the traditional media to the Internet media. And there will be other several growth areas, as well. The possibility of more domestic brands putting more budget from the traditional media into the Internet media.

Okay, the last question, if I may. You started to sell virtual items in your time-based models. How much growth in your game revenue was contributed by this part?

It is only a very small test, and we don't know if it is the right thing to do. So it is just for a small experiment.

Okay, thank you.

Alicia Yap, Citigroup Investment Research.

Thank you for taking my follow up question. My question was actually regarding the last question Hia asked about the item selling feature because we've heard about you introducing that but it is only a small test, right? And then going forward are you going to continue that?

We haven't decided yet.

Okay, and on the housekeeping question on the other line, can you help us understand what items are in there, and what were the reasons of an increased expense there?

You mean the other net in the P&L?

Yes, other net, below the operating.

It is mainly the exchange loss arising from our US dollar deposits.

Can you repeat that? Sorry.

Is mainly the exchange loss arising from our US dollars denominated time deposits.

Okay, FX. Okay, thank you.

There are no further questions at this time. I will turn it over to management for any closing remarks.

Thank you, everyone again for joining us today. Please feel free to contact us if you have any questions. Thank you.

Ladies and gentlemen, this concludes the NetEase.com fourth quarter 2007 earnings conference call. If you would like to listen to a replay of today's conference please dial 800-405-2236 or 303-590-3000 and enter pass code 11108212. ACT would like to thank you for your participation. You may now disconnect.