NetEase Inc (NTES) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the NetEase.com first quarter 2008 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). As a reminder this conference is being recorded today Wednesday May 21, 2008. I would now 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 the 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. A general discussion of the risk factors that could affect NetEase's business and financial results are included in certain filings of the Company with the Securities and Exchange Commission including its annual report on Form 20F. The Company does not undertake any obligation to update this information or 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 for 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 first quarter of 2008 were $93m compared to $88.7m for the fourth quarter of 2007 and $79.1m for the first quarter of 2007.

Online game revenues were $79.3m for the first quarter compared to $72.3m for the fourth quarter of 2007 and $68.7m for the first quarter of 2007. Aside from the top line growth of the business, the first quarter was one in which we set the tone for the remainder of the year. It was a quarter where we intensified our focus on the development of item or fee based games. It's clear to us that the key to our success in 2008 and beyond will be our continued ability to evolve as we anticipate the ever-changing dynamics of the Chinese Internet market.

Diversifications in our product offerings will allow us to achieve our goals. Starting with the gaming side of our business, a particular focus was placed on Fantasy Westward Journey as well as Westward Journey Online II and III during the quarter and our efforts were all aimed at boosting the game contents.

For the first quarter PCUs and ACUs for Fantasy Westward Journey were 1.6m and 583,000 respectively compared with 1.5m and 514,000 respectively for the fourth quarter. As you know, PCUs for Fantasy Westward Journey surpassed 1.6m in March 2008 and after the first quarter reached another new high of over 2m in April. We are encouraged by the ever growing business in the online gaming space and satisfied with our efforts in serving our players with quality and enriched in-game contents.

As part of our expanded research and development for new games we have added new game features in Westward Journey III -- Online III. We are continuing to implement ways to enhance the appeal of this game and plan to release an expansion pack aimed at enhancing game player stickiness in the second half of 2008. Since deciding to run Westward Journey Online II and III in tandem, we have seen the number of game players stabilize and display steady growth and expect to see continued healthy growth this year. We also plan to release an expansion pack for Westward Journey Online II within this year.

For the first quarter PCUs and ACUs for Westward Journey Online II were 385,000 and 152,000 respectively compared with 387,000 and 133,000 respectively for the fourth quarter. PCUs and ACUs for Westward Journey Online III were 108,000 and 46,000 compared with 153,000 and 53,000 respectively for the fourth quarter.

In other games we commenced closed beta testing of Tianxia II in March in our first attempt to operate a 3D game on item based basis and expect the open beta testing will occur in early June.

On the portal side of our business we continue to see increase in our traffic in the content channels as we improve the quality.

Our free email service continued to dominate the Chinese market as we continued to raise the bar by improving the quality of our products and by incorporating additional new and helpful functions to meet our new and existing users. We remain relentless in our efforts to continually provide users with the best experience and technology available.

Our blog services continue to serve both as a platform for distributing personal information and as a community service platform. We plan to improve our blog services through integration with our other Internet services which will enhance the experience of our users and provide us with the opportunity to create more premium ad space for advertisers.

Overall, our advertising services during the first quarter brought in revenues of $11m compared to $14m for the previous quarter and $8m for the first quarter of 2007. We continue to see strong growth in the remainder of 2008 for the online advertising industry. And as we see the popularity of our portal continue to grow we are confident in this particular market.

We believe that we have the talent, technology and user base to continue capitalizing on the various opportunities surrounding the strong growth trends of the Internet in China and solidify our lead in the Chinese MMORPG market in 2008 and beyond.

With that I would like to turn the call over to Onward Choi, our Acting Chief Financial Officer for his review of our first quarter 2008 results.

Thank you Michael. I will now provide an overview of our first quarter financial highlights using numbers and percentages based on U.S. dollars. In order to avoid repetitions my remarks will be focused on the discussions of margin and expense fluctuations along with net profits results.

Starting with the first quarter results gross profit was $75.9m compared to $69.6m in the preceding quarter and $61.3m for the same period in 2007. The quarter-over-quarter increase in gross profit was primarily driven by the continued growth in revenues from Fantasy Westward Journey and the granting of preferential business tax treatment to one of our variable interest entities related to revenue generated by online games and wireless services by the relevant local tax authority in the first quarter of 2008. Unless there is a change in the applicable tax rules we expect to continue enjoying such preferential business tax treatment in the foreseeable future.

The year-over-year increase in gross profit was mainly due to higher revenues from the online game and advertising businesses in the first quarter of 2008. Gross margin for the online game business for the first quarter of 2008 was 90.2% compared to 90.7% and 89.6% for the preceding quarter and the first quarter of 2007 respectively. The quarter-over-quarter decrease was primarily due to increase in salary and staff related costs in the first quarter of 2008 as a result of increased headcount which was partially offset by increased revenue. The year-over-year increase was primarily attributable to higher revenue partially offset by increased salary and staff related costs due to increase the headcount for the development and enhancement of games during the first quarter of 2008.

Gross margin for the advertising business for the first quarter of 2008 was 45.8% compared to 52% and 35.7% for the fourth and first quarter of 2007 respectively. The quarter-over-quarter decrease in gross margin was primarily due to the typical soft demand for our advertising services during the first quarter each year. The year-over-year increase in gross margin was primarily driven by an increase in brand advertising revenue resulting from our successful creations of new premium ad spaces for advertisers, partially offset by increased staff salary costs as a result of an increase in headcount during the first quarter of 2008.

Gross loss margin for the wireless value added services and others business for the first quarter of 2008 was 6.2% compared to 19.5% and 36.1% for the fourth and first quarter of 2007 respectively. The quarter-over-quarter and the year-over-year improvement in gross margin were mainly due to an increase in revenue during the first quarter of 2008, while the related cost of revenue remained relatively stable. The increase in wireless value added services and others revenue was primarily driven by the increases in revenues from various fee-based services and the savings in business tax.

Total operating expenses for the first quarter of 2008 were $18.2m compared to $21.8m and $16.8m for the preceding quarter and the first quarter of 2007 respectively.

The quarter-over-quarter decrease in selling and marketing expenses was primarily due to decreased promotion costs for the online games and advertising businesses during the first quarter of 2008. The quarter-over-quarter decrease in general and administrative expenses was due to the receipt of the local government rent subsidy of $0.1m by one of our subsidiaries during the first quarter of 2008. The quarter-over-quarter decrease in research and development expenses was mainly due to lower stock-based compensation costs and other staff related costs during the first quarter of 2008. The year-over-year decrease in selling and marketing expenses was primarily due to the reduced promotion costs for the online game business during the first quarter of 2008.

The year-over-year increase in general and administrative expenses was primarily due to the reversal of provisions for bad debt made in the first quarter of 2007 which resulted in a net increase in bad debt expense of $1m in the first quarter of 2008. The year-over-year increase in research and development expenses was mainly attributable to increased staff salary and staff related costs total $0.8m resulted from an increase in headcount and increased depreciation charges of $0.1m related to newly acquired fixed assets for the search engines and free email services.

Net profit for the first quarter of 2008 totaled $38.4m compared to $55.6m and $43m for the fourth and first quarter of 2007 respectively. The quarter-over-quarter and year-over-year decrease in net profit were primarily due to the increase in tax charges reported for the first quarter of 2008.

Our reported basic and diluted earnings per ADS were $0.32 and $0.30 for the first quarter of 2008 respectively. Our reported basic and diluted earnings per ADS were $0.46 and $0.43 for the fourth quarter of 2007 and $0.34 and $0.32 for the first quarter of 2007 respectively.

Effective as of January 1, 2008 the Chinese government adopted a new income tax law which unified the enterprise income tax payable by domestic and foreign investor enterprises at 25%. Prior to the adoptions of the new law a number of our subsidiaries and variable interest entities were entitled to various preferential tax treatments. The Chinese tax authorities are currently in the process of establishing a framework to receive and process applications from domestic and foreign investor enterprises for the qualifications of high and new technology enterprise and the granting of the high and new technology enterprise preferential tax basis under the new tax laws. Therefore we are required under applicable accounting standards to report our tax provisions at the new statutory income tax rate of 25% except for certain of our subsidiaries which are subject to a tax holiday.

The tax charge for the first quarter of 2008 was $16.4m compared to the tax benefit of $7.5m and tax charge of $4.8m for the fourth and first quarter of 2007 respectively. Our tax charge for the first quarter of 2008 was higher than the previous quarter primarily due to the adoptions of the new tax law in China. We expect that in future quarters when our subsidiaries and variable interest entities in China are granted the high and new technology enterprise preferential tax status, the effective tax charge will be reversed.

The tax benefit reported for the fourth quarter of 2007 was primarily attributable to the reporting of deferred tax assets at the new statutory income tax rate. We expect that we will report a higher tax charge in future quarters as and when the high and new technology enterprise preferential tax treatments are granted by the Chinese tax authorities as a result of the reductions to the deferred tax assets to reflect the lower preferred tax rates. For the first quarter of 2007 our net tax expense was reduced as a result of the preferential tax treatments enjoyed prior to the adoptions of the new tax laws.

As of March 31, 2008 our total cash and time deposit balance was $639.8m compared to $593.1m as of December 31, 2007. Cash flow generated from operating activities was $70.6m for the first quarter of 2008 compared to $60.8m and $40.4m for the preceding quarter and the fourth quarter of 2007 respectively.

On July 2, 2007 our Board authorized a share repurchase program of up to $120m of our outstanding ADS. As March 31, 2008 we have spent in aggregate a total purchase consideration of approximately $46.4m including transaction costs. The share repurchase program will end on July 1, 2008.

Lastly, on May 19, 2008 we suspended our online games services to observe a three day national mourning for earthquake victims from May 19 to May 21.

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

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Richard Ji with Morgan Stanley. Please go ahead.

Hi, William and Michael and Onward, good morning. I have two questions. And let me start the first one which goes into two parts. Of course we recently saw your leading game Fantasy Westward Journey hit a record high of 2m peak concurrent users which implies at least 30% quarter-on-quarter growth over your 1Q high. And should we expect similar revenue growth ahead quarter-on-quarter?

And then on the other hand obviously we all experienced this tragic event due to the earthquake in China. And apart from the three day national mourning, what are -- can you elaborate a little more on whether there's any impact on your Company's [execution]?

Hi Richard, this is Michael. Let me answer you the questions -- on your two questions. First, yes, we have reached a new high of 2m in April after the reporting of this -- after this reporting quarter. But I have to explain that again we do not give any guidance on any of our future quarters. And I also have to explain that the reason for the peak that we have reached is partly because of a special weekly event that we have done. And so it has -- I would not say that it has any reflections or indications on the growth of the revenues for the second quarter.

And on the earthquake I think I would first like to say that it is a very tragic event and we are all very sad about it. The Company has been focused in trying to see how we can aid and help. But to answer your questions I think there are a few reference points that I want to give you. First of all is that we also observed a three day stoppage of all our game service as we observed the national mourning. Besides that I can tell you the percentage of users we have in Sichuan Province which is around 2% to 3% before the earthquake.

And the other thing we can say is on the advertising I believe that some of the other advertisers also because they observed the national mourning then they have delayed their advertising -- their original planning during those days into later days. And I think these are some of the reference points I want to give you. And other than that we don't see other elements that would affect the overall business of NetEase.

Thank you, Michael. And my last question is regarding your pipeline. Beyond Tianxia could you elaborate a bit more on your pipeline, especially your self-developed games and potential licensing of those?

Maybe I will take these questions. Regarding the pipelines I think currently we are already doing the closed beta for our new Tianxia II, whereas for this year we have planned to launch out the Fly for Fun. And hopefully we'll have the Datang II for this year. But the exact timelines -- we cannot comment any further on the exact timelines for the time being. But our current schedule is to get it launched out within this year.

Regarding the licensing front that you have been discussed, the updates that we can give you is to -- is that we are still actively discussing and closing the necessary arrangement with our potential operators. And so I think for the time being there's not much more we can comment, for the time being. And I hope I can -- those informations will be helpful for you to have understanding on our pipeline programs.

Thank you, Onward. Thank you, Michael.

Thank you, sir. And our next question comes from the line of Wallace Cheung with Credit Suisse. Please go ahead.

Hi, good morning. (spoken in foreign language).

(spoken in foreign language).

Okay, firstly, on two questions. First a lot of investor will be quite interested to listen to what further guidance on the tax rate issue. Definitely most of your peers have actually have report the tax rate more or less at, likely at around [15%] range. And assuming your Company can get any kind of high tech company status any time soon like in the second quarter are we going to see any substantial decline in the effective tax rate?

And my second question is more on the paid search area. Can you give us a bit more guidance on what's going on in that, business development and any latest updates on the products?

And as far as -- regarding you mentioned on the operating expenses side, relating acquired fixed asset, the Company's the search engine. Maybe I have a bad memory. Can you elaborate a bit more about that front? Thank you.

Okay Wallace, maybe I'll just answer you about the tax rate issues. For this quarter basically our effective tax rate is a bit high which reach the level of about [30%]. I think the main reason is that we have been adopting the new statutory tax rate in accordance with the new tax laws being imposed for 2008, the tax rate being 25%.

And then going forward in -- as an overall view of the development of the effective tax rate I think there are a few points that I would like to bring up for your attention. First of all, if you recall in our four quarters 2007 earnings we have been having a tax benefit on deferred tax assets using the new statutory tax rates in the amount of about $22m. And so as soon as we -- in 2008 we are still in the process of applying the high and new technology enterprise differential status being granted by the relevant tax authorities. Not until we get it we have to use the unified tax rate of 25% in accruing our tax provisions.

But as soon as we can get the certifications from the tax authority and then the -- hopefully the tax rate would -- that we could get would be 15%. And by that time there would be an impact that the previously [thought] the tax benefits of the deferred tax assets would be reversed at that time to reflect the lower preferred tax rate. And so -- and going forward I think the effective tax rate would be somewhere around in the regions of 18% to 23% for this year.

Onward, sorry. Have you got it, Wallace on the tax? Then I'll answer on the paid search.

Yes.

Okay, on the paid search side simply it's that -- it's the yodao.com, which is a search product that we have self developed. And right now it's not fully launched yet. We have -- the product is there we can use it. You can use it on the Internet and the technology is powered. And when you use the search engine in the 123.com it is powered by yodao. But at this moment we are not fully marketing this search engine yet. So it's still early days right now.

But on the other hand with this search engine one way of differentiating is that there's an online dictionary that we have developed with this technology, with the search technology, which is different to the other kinds of traditional dictionary where we get updates all the time from the online content. And it is also a client site where we have seen millions of people downloading it and use it, and it is the way for us to differentiate our search in general.

And Wallace, can you explain again your question on -- you mentioned about operating expenses related to the search engine.

Sorry about that. Just in the result announcement there is a paragraph mentioning -- the title at the beginning of the paragraph is total operating expenses, and at the end of the paragraph it's mentioned like CNY0.8m depreciation charges related to the acquired assets of search engine free email services. I just want to understand a bit more about the acquisition of the search engine and free email services, help me on that.

Basically the amounts that were -- because as -- with a view to further develop our business in terms of the free email and also the search engines, we have planned to acquire additional fixed assets to boost up our technical capabilities in this regard. And so what you are mentioning is that -- are you asking why we are deploying monies to procure those fixed assets or --

Could you describe a little more like the search engine and free email service that you have acquired?

It's a very small amount. It's only CNY0.8m and I think it's the general reflection of the increase in the capacity of our emails and also the capacity of our search engine. So it's --

Okay. So just one quick follow up on the effective tax rate issue, because Onward mentioned 18% to 23%, right?

Yes.

That is -- when you mentioned in that range have you factored in the share based compensation expense as well as exchange loss in your calculation of the effective tax rate?

Yes. Basically yes. We have already catered for these factors into account.

Okay. Thank you.

Thank you sir. Our next question is from the line of Dick Wei with JP Morgan. Please go ahead.

Hi. Morning Onward and Michael. Thanks for taking my question. The first question is regarding the item-based model. You mentioned in your remark that this year will be driven by item-based model. I wonder how is the -- I believe there was some testing for item based model in Fantasy as well. Can you update on that?

And then I have another question as well. Thanks.

So testing has continued to be a very small and isolated testing. So again we don't plan to have -- to extend or expand in any ways on the item-based model for Fantasy Westward Journey. The strategy for us continued to be developing new games that will become an item-based model rather than to change the existing games.

Okay, great. And then can you give the breakdown between various games like percentage wise or the actual amount?

Yes, sure, of course. In terms of the percentage, in terms of the revenue from those games for the first quarters I -- let me see. Around, over 70% of our revenue would be coming from the Fantasy Westward Journey, whereas about 20% of those are from the Westward Journey Online II. And the rest would be mainly comes to the Westward Journey Online III.

Great. My last question is regarding marketing expense. I'm wondering if you could -- what kind of budget that is for your Tianxia II launch?

And just in general, how is marketing expense trend for the market regarding the on-ground promotion as well as the fee for marketing on the website as well, on the game website. Yes.

Sure, of course. On one hand is you see there is a drop in the selling and marketing expense during this quarter. And the main reason, I would say, is that there's -- because the launch for Tianxia II is mainly to be in the second quarter. So I think -- and also you will see the coming of the Olympics on the advertising side. So I think a lot of the budget will be set in -- more in the later part of the year rather than in the first quarter. And so that's why there is a drop in the first quarter. But I think overall, in the annual basis, the percentage of the marketing and selling expense as a percentage of the revenue should be comparable to previous years.

And I think the trend for the online game business in terms of the marketing side, of course on one hand, it depends on the product launch. And on the other hand is you asked about different channels. First of all, again we are very focused on the on-ground marketing channels. We have hundreds of peoples that everyday, in different cities, in different provinces, to market our games are cooperating with Internet cafes, cooperating with different local ISPs. That's continued to be a very important part of the marketing of online games.

In terms of the online part of the marketing, again because we are one of the biggest portal, I think, even though if there is an increase in the overall cost of the online advertising, especially in the game area, I think we will still be more beneficiary rather than we have to increase a lot of our costs, because a lot of the marketing of our own online game can be done on our own portal, which we continue to see a lot of traffic growth.

Great. That's very helpful. Thanks.

Thank you.

Thank you sir. Our next question comes from the line Alicia Yapp with Citigroup. Please go ahead.

Hi. Yes, thank you. Good morning William, Michael and Onward. I have a couple of questions. My first question is regarding your preferential business tax treatment as one of the variable interest entities. So on the press release you mentioned that you expect to continue enjoying the preferential business tax treatment in the future, in the foreseeable future. So can you give a little bit color on that?

And should we be modeling about only 0.1% business tax for the online games going forward? Was this the 3.3% historically?

With regard to the business tax preferential treatment that you are mentioning, I think basically we do believe that, unless there will be a change in the tax law interpretations by the relevant tax authority, the current status quos that are of the tax that we're paying would be more or less at the same levels that we are doing. And so I think it is fair for you to model this based on these percentages.

Sorry, can you hear me Alicia?

She has dropped out of the queue. Our next question comes from the line of Eddie Leung with Merrill Lynch. Please go ahead.

Hi, good morning William, Onward, Michael and Brandi. I have a few questions. My first one is regarding the advertisement mix. Could you give us the top advertising industries, perhaps even the top three or top five, as well as the fastest growing advertising industries for the quarter?

Yes, of course. The top industries would be automobiles, Internet related, and IT. Those are our top industries. In terms of the fastest growth on a year-to-year basis, those would be financials, apparel or clothing, and telecommunications.

Got that. And then I do have a question on your R&D team. How many R&D staff are you guys employing right now? And how many of them are actually working on games versus other projects?

Also, could you also talk a little bit about the salary pressure that we have seen for some of the other Internet companies?

I think in terms of the R&D people that we are currently having, I will give you a brief overview that the people the headcount would be around 1,000 at this level.

And with regard to the salary pressures, I think definitely, given that the competitions in the industry is getting more intensified and more competitive, and so there would be sort of a pressures on the salary levels. But of course this should not be taken as the sole reason or the sole factors in determining the entire packages, because employees, or the staff that would like to work for a particular enterprises or a company would also consider other fringe benefits, or other career development factors into account.

But we do believe that, given that our companies have a very good positioning within the industry, I think in this regard we can work this out quite in a reasonable manner.

Right. But did you increase salaries by the end of the year or in first quarter or in upcoming second quarter?

Normally the salary would be reviewed on an annual basis and would be start off in the first quarter of each year.

Okay, thank you. No more questions.

Thank you.

Thank you sir. Our next question comes from the line of Evan Wilson with Pacific Crest. Please go ahead.

Thanks for taking the questions. I was hoping you could discuss the ARPU for Westward Journey III on item basis. Where you saw it in Q1 and what the trend has been on that game so far?

Then also what your perspective is on future for ARPU for the game. Do you think there is still a lot of potential for ARPU growth in Westward Journey III as you exit the year?

Right. First of all Westward Journey III is a time-based game. And the ARPU that you are talking about, I would believe is that you're talking about the monthly use of, the monthly usage of each of the player for that game. And, in this regard, we are talking about somewhere around, should be around CNY15 per month. So that's really it. I mean it's not like an item-based games where you can see by doing different kinds of events we can increase the ARPU by selling different kinds of special items. But it's really on the time usage of the game.

I just want to clarify, how would that CNY15 then relate to Westward Journey II?

Which is about similar. Hello, operator?

Yes sir. I'm sorry I didn't know you had -- I wondered if you had any further questions. Our next question is a follow-up question from the line of Alicia Yapp. Her line disconnected during her last question. Please go ahead ma'am.

Hi, yes. Thank you. My line was actually got cut off. So I didn't hear the answer. So if possible, can you repeat the first question that I had on the preferential tax treatment?

Yes, sure. Of course. We -- just now I mentioned that with regard to the preferential tax treatment for the business tax that we are having, unless there would be a different interpretations by the tax authorities, we do believe that the current status quo, or the new business tax that we are going to pay would continue to last for. And so the percentages that you are suggesting would be a reference point for you to build into your model.

I see. Okay. Thank you. And then my second question is on the server shutdown. I know it's still too early in the morning and you may not have the information with you, but just want to get your sense that since you reopened your server overnight, how are the user response so far? Have you seen user jump right into the game, or do you expect a more gradual recovery in the user momentum?

I don't have the figure right now on that.

Okay. Alright. And then my last question is on your latest [MM Special] games. I believe the name is [Car Magic Fire Gun]. So it is currently in closed beta testing. How is the game progressing and when do you plan to start open beta testing and commercial launch? And what is your expectation for the game?

Right. First of all it is in closed beta right now and we are going to -- we don't have a specific schedule for the open beta of this game. It is a casual game. It's a casual game where there will be tens or twenties of people to play together in 2D dimensional kind of shooting game. And it's a casual game. It's a trial for us to enter into this market. But we don't have a schedule for the open beta or for the commercialization. But personally I think this is a very interesting game and someday I've got to take you to it as well.

Okay. Great. Thank you so much.

Okay, thanks.

Thank you ma'am. Our next question is from the line of Andrey Glukhov with Brean Murray. Please go ahead.

Hi. Yes, thanks for taking the question. Onward if I may, [you were talking about] -- one change -- I think your other income loss, so this $7m basically all foreign exchange loss, it's significantly higher than in the previous quarter. Is there anything else going on there that we should be aware of?

I think basically the relatively higher amount of exchange loss that we are reporting for this quarter as compared with the last, is mainly attributable to the continued appreciation of the renminbi versus the U.S. dollar. But of course, given that the Company still has in a cash rich position, what the management is currently doing is to explore various possible ways of utilizing the surplus funds denominated in the U.S.D. This is one of the general items that we are seriously and actively discussing. And hopefully we will try to get those issues -- get over as soon as possible.

Okay. And if I may follow up on the tax question, do you guys anticipate getting the preferential tax treatment within this year, or do you think there's a scenario under which it drags on all the way until '09?

Although the exact framework of applying and getting the granting of those preferential tax treatments have yet to be issued by the relevant tax authorities, we do believe that those guidelines or instructions will be coming out very shortly. And so we do anticipate that the granting or getting of those preferential tax treatment will hopefully be done within this year rather than carrying forward to the next year.

Okay. And then, just so that I understand the mechanics, the moment that happens, you basically recognize a reversal of all the taxes that are on the P&L?

Correct.

Okay, thank you.

Okay. Thank you very much.

Thank you sir. Our next question comes from the line of Leah Hao with Goldman Sachs. Please go ahead.

Hi, good morning. I have a question regarding your advertising side of the business. Can you give us a sense of your outlook or the expectation for the full year advertising growth?

And also, related to that, I think you mentioned that the three day mourning period could push out the advertising spending. Do you expect a recovery within the same quarter or is that more of a pushing out to the next quarter kind of thing?

Let me answer your first. I think again we don't give guidance for the next quarter or for the year basis, but I can give you again some reference points. I think, on one hand, it's that for this quarter, yes it might be a little bit disappointing to see that it's a drop from the fourth quarter for around 20%. But on a year-to-year basis, it is still growing at 37%, and especially where branded advertising is growing at a even higher percentage, which is around 48% -- 47% on the branded advertising.

So we continue to be very confident and very optimistic about the whole year. And especially where, in the second quarter and third quarter, because there is the Olympics, we are seeing more and more advertisers. And also we see more advertisers who were interested in traditional media like TV and magazines or newspaper converting their dollars into online advertising. So for example, the automobile we see a growth of around 93% on the year-to-year basis, purely just on the automobile industry clients.

And then on the three day mourning, most of what -- most of the clients what happened is they decided to delay their advertisings rather than to cut their budgets. So I would believe it's just a delay.

Okay. Thanks Michael. And also I have a second question if I may. Do you have any update on the game licensing front that you can share with us?

No. Again we -- I think Onward has already commented on the game licensing front and this is as much as we can say.

Okay. Thank you.

Thank you.

Our next question comes from the line of Paul Keung with Oppenheimer. Please go ahead.

Good morning. Can you give us a little bit more color on the (inaudible) virtual item sales in Fantasy Westward Journey? And what revenue contribution that has and where you see that going at the end of '08?

Again, it's totally immaterial in terms of the revenue contribution. It's just that quarter or two ago we have done some experiments on only two or three servers where we sell some items to the users and see how's the reaction, how's -- that's all. So again our strategy is to work on the item and fee-based games on new games and not on existing games.

Okay. In that case, for each server can you give us an idea of the transaction volume for virtual item sales?

It's too immaterial to count.

Okay, great. Thank you.

Thank you sir. And our next question comes from the line of Paul Wu with Lehman Brothers. Please go ahead.

Hi. I have a quick question for you. On your comment on the automobile advertising revenues up 93% year-over-year, I just want a clarification. Is that for the first quarter?

Yes, for the first quarter.

For the first quarter. And what about some of these other areas that you're seeing the -- perhaps you could give us the same kind of statistics for the Internet related and IT related, what type of year-over-year growth are you seeing in those industries?

For the Internet related and the IT related, we don't have the specific figures right now, okay. But we are talking about -- for the Internet related, it's definitely growing more than 50%, whereas for IT it's a bit flat or a bit dropped actually.

Okay. And the other question is that you had mentioned that you expect to see some growth in advertising for the Olympics. Do you have any sense in your budgeting, how much impact the Olympics will have on your advertising revenues for this year?

Frankly it would be very difficult to separate out exactly what budget is totally related to the Olympics because, on one hand, if it is from the Olympic sponsor, then it will be clear that it is related to the Olympics. But if it is from other advertisers who just want to ride on the increase in traffic during this time, we would -- it's very difficult to define if it is related to Olympic or not. But I would say, generally, because of the Olympics there will be an increase in the traffic on the online. And a lot of advertisers are trying to catch this specific time and opportunities.

Also on your share repurchase program, could you give us an idea about how many shares were repurchased?

Basically we did not disclose the number of shares that we repurchased in those quarters. But all we can say that our authorized amount of the program is $120m. And up to -- by the end of our first quarter of 2008 the amounts that we have been repurchased total $46.4m.

Okay. And my final question is you have quite a bit of cash on your balance sheet. You're generating $70m or almost $71m in cash flow. Do you plan to start paying dividends any time soon? Or what are you going to use with -- you have over $640m in cash on your balance sheet. How are you going to start returning this to shareholders, either through dividend, or what do you plan to do with the money?

This is a very good question. I think whether or not the Company would be declaring or paying dividends would be one of the issues we would be considering. But there is not much we can comment for the time being. And there is no such decision as such at that time. But of course, based on the current status of the Company's, I think the cash, that hopefully we would be using, would be setting aside for continuing to repurchase our shares before the expiry of the current share buyback programs. This is one of the areas that we would be able to use the cash. And then for the convertible notes, there would be a chance for us to do redemptions. That would be another area that we would be able to utilize our cash. And of course, one of the area of you guys are very interested is about our game licensing front that we are currently discussing and making progress with the potential partners. And so this will be another area that we will be utilizing some of our funds as well. Given all those areas I think this is the current plan of how we are going to utilize our cash.

Okay. Right. Thank you.

thank you.

Thank you sir. And our final question comes from the line of James Lee with Sterne Agee Capital Markets. Please go ahead.

Hi. Can you guys give more color about your advertising business a little bit? I'm curious to know that what initiatives you guys have taken to drive that part of the business. Maybe if you guys can give some example about what kind of new products you created on the advertising side to match your content better.

And how you go about monetizing all the different properties within your Internet site. And how do you go about better communicating with the agencies that you do get a better branded wins versus larger peers like the (inaudible). Thank you.

Yes. Well basically the way you put the question is almost like the answers, correctly that, I think first I will talk about the content channels. We have seen increase in the traffic of content channels by huge amount for the past of '07 and also going into Q1. In some of the content channels, for example, news, finance, entertainment, and women we have been seeing growth above the markets by a huge -- by quite a huge margin, we see from third party reports.

And then, on the other hand, is we -- the other part of it is integration, integration meaning the integration of all our products including the blogs, the emails and the content channels. By integrating it together we're increasing the stickiness and also the traffic of our users and obviously the convenience for, and the customer satisfaction of the users as well. And in this we are able to generate more spaces, especially in the cases of, like of emails where some of our users would customize their email and some of the pages in the email interface to read, for example, their stock news and so on. And those pages can be inventory for the advertising.

And on the brand awareness side, I think on one hand is we work more closely with our agencies where they become a channel to increase our brand awareness amongst the advertisers. And at the same time we have working with different newspapers and so on where we see more and more traditional media people would, for example, quote NetEase as the source on the voting, for example online voting on different things, so generally to increase our brand awareness.

Thank you sir. And ladies and gentlemen, unfortunately we have run out of time for the question and answer session. I would now like to turn the conference back over to Brandi Piacente for any closing remarks.

Thank you once again for joining us today. Please feel free to contact us if you have any further questions. Have a great day.

Ladies and gentlemen, this concludes the NetEase.com first quarter 2008 earnings conference call. Thank you for your participation. You may now disconnect. Thank you for using ATT Teleconferencing and have a good day.