NetEase Inc (NTES) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the NetEase second-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. This conference is being recorded today, Wednesday, August 13, 2008.

I would now like to turn the conference over to Brandi Piacente of Investor Relations. 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 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 or this discussion.

A general discussion of the risk factors that could affect management's business and financial results is included in such certain filings 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 call 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, Brandi. Thanks everyone for joining us. In the second quarter of 2008, we continue to focus on our two main businesses, online games and advertising services. And we experienced a strong second quarter due to continued solid execution on both fronts. Total revenues for the second quarter of 2008 were $104.4 million compared to $95 million in the prior quarter, and $81.3 million for the second quarter of 2007.

For our online game business, our revenues this quarter totaled $86.8 million compared to $81 million in the previous quarter and $69.3 million for the second quarter of 2007.

China's online gaming industry is in the midst of unprecedented growth, and NetEase is very well positioned to benefit from these strong trends, mainly due to our broad range of product offerings, strong operating cash flow, and our ability to stay at the forefront of an evolving and dynamic markets. Our flagship game, Fantasy Westward Journey, continues to perform well, fueled by our continued focus on enhancing players' experience through periodic releases of expansion packs and successful in-game marketing activities. Fantasy Westward Journey remains amongst one of the most popular games in China.

For the second quarter, PCUs and ACUs were $2 million and $627,000 respectively, compared with $1.6 million and $583,000 for the first quarter of 2008. Fantasy Westward Journey set the record this quarter with PCUs of over $2 million in April. We will continue to maintain this upward trend by enhancing gameplay with new content and expanding our marketing promotions during the Chinese festivities for the remainder of the year.

Westward Journey II is attracting greater user interest, and we continue to see steady growth, and Westward Journey III is also progressing nicely. We are still on schedule to release an expansion pack aiming at enhancing game players' attraction to the game in the second half of 2008.

For the second quarter, PCUs and ACUs for Westward Journey Online II were $544,000 and $149,000 respectively, compared with $385,000 and $152,000 respectively for the first quarter. For Westward Journey II, PCUs hit a high of $544,000 in June. For the second quarter, PCUs and ACUs for Westward Journey III were $123,000 and $51,000 respectively, compared with $180,000 and $46,000 respectively in the first quarter.

We successfully completed the development of Tian Xia 2, our first 3-D item-based game, and launched open beta testing in June on schedule. By focusing on a step-by-step development approach, we were able to make continuous enhancements based on player feedback. We have also launched in July testing of our new item-based game Datang 2.

We have been also actively pursuing potential licensing opportunities, as well as other strategic arrangements to bring innovative games to our users as a way to supplement our in-house development. We announced yesterday the signing of a joint venture agreement with Blizzard Entertainment to license and introduce StarCraft II and Battle.net to our committed community of gamers.

With regard to the development of our search engine, Yoado.com, we launched several new features during the second quarter and remain on schedule with our internal plan. Our strategy is to first create the best Chinese-oriented search experience and then to drive traffic to it with effective marketing strategies and including leveraging our user base from our leading 163.com website.

Advertisers continue to experience the great potential and marketing value of our e-mail advertising space. The ad space on the free e-mail service is a premium ad to for many advertisers who want to reach out to consumers. We look to constantly enhance the quality of this service by incorporating new and helpful functionality to meet our users' constant changing preferences and attract more users to the website. NetEase maintains a position as the leading free e-mail provider in China.

Our emphasis on increasing the competitiveness of our portal has resulted in increased traffic to our site and additional growth to the number of e-mail users during the second quarter. As such, our advertisers have found our portal a more variable platform to market their products and services and we experienced a significant sequential growth in advertising this quarter. Advertising services revenues were US$15.2 million for the second quarter of 2008 compared to US$11.2 million and US$9.5 million for the preceding quarter and second quarter of 2007 respectively.

We continue to execute well against a backdrop of large and growing Internet markets. We have been further strengthening the content on our portal through new and enhanced content leading up to the 2008 Beijing Olympics and the interest in this event in conjunction with the enhanced use the Internet as a source of information has raised the user interface within the Chinese Internet markets.

We recently entered into an agreement with Sina and Tencent to acquire the video rights to live and on-demand broadcasts of the Olympics. We expect to grow our ad revenue through the creation of premium ad spaces on the video platforms. We also are working with third-party alliances to further enhance our brand recognitions and take advantage of the opportunities. We remain very competitive in the market and we continue to integrate our strength for further enhancing attractiveness to our advertisers during and after the Olympics.

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

Thank you, Michael. I will now provide an overview of our second-quarter financial highlights using numbers and percentages based on US dollars. In order to avoid repetitions, my remarks will be focused on the discussions of margins and expense fluctuations along with net profit results.

Starting with the second-quarter results, gross profit was $105.4 million compared to $77.6 million in the preceding quarter and $63.8 million for the same period in 2007. The quarter-over-quarter increase in gross profit was primarily driven by the receipt of a business tax refund of $21.4 million in June 2008 for certain excess amounts paid in previous years which was determined as a result of applications of the newly approved (inaudible) by allowing the deductions of revenues share with corporates before applying their business tax rates.

In addition, high demand for game advertising services in the second quarter of 2008 contributed to the high gross profit. The revenue from Fantasy Westward Journey continued to grow as a result of new designs and features introduced since late September 2007 and certain in-game marketing activities launched during Festival occasions.

High demand for advertising services in the second quarter of 2008 was primarily driven by increased advertising activities in connection with the Beijing Olympics.

Gross profit margins for the online game business for the second quarter of 2008 was 91.2% compared to 90.2% and 90.2% for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter and year-over-year increases in gross profit margin was primarily due to the higher revenue and the business tax refund received in June 2008, as explained earlier, partially offset by higher staff related costs as a result of an increase in headcount and increases of other cost of revenues.

Gross profit margins for the advertising business for the second quarter of 2008 was 52.6% compared to 45.8% and 47.2% for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter and year-over-year increases in gross margin were primarily driven by increased revenue partially offset by high staff related costs as a result of an increase in headcount, high content costs caused by price increases and increases in other cost of revenues driven by greater demand associated with the 2008 Beijing Olympics.

Gross profit margin for the WVAS services and others business for the second quarter of 2008 was 28.8% compared to a gross loss margin of 6.2% and 28.1% for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter and the year-over-year improvement in gross margin were mainly driven by the business tax refund received in June 2008 as explained earlier.

Total operating expenses for the second quarter of 2008 were $21.8 million compared to $18.6 million and $20.8 million for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter increase in selling and marketing expenses was primarily driven by higher marketing costs associated with the open beta testing of Tian Xia 2, higher marketing costs in connection with the 2008 Beijing Olympics and higher staff-related costs as a result of increased headcount.

The slight quarter-over-quarter increase in general and administrative expenses was mainly due to the receipt of a nonrecurring local government rent subsidies of $0.1 million by one of our subsidiaries which was recorded in the first quarter of 2008. The year-over-year increase in selling and marketing expenses was primarily due to higher staff-related costs resulting from increased headcount and increased incentive payments associated with the increased revenues. The year-over-year decrease in general and administrative expenses was primarily due to a reduction of professional services fees in the second quarter of 2008.

The quarter-over-quarter and year-over-year increases in research and development costs were primarily due to higher staff-related costs caused by increased headcount and new incentive payments.

Net profit for the second quarter of 2008 totaled $63.9 million compared to $39.3 million and $45.6 million for the preceding quarter and the second quarter of 2007 respectively. We reported basic and diluted earnings per ADS of $0.53 and $0.49 respectively for the second quarter of 2008 and our basic and diluted earnings per ADS of $0.32 and $0.30 versus $0.37 and $0.34 for the preceding quarter and the second quarters of 2007 respectively.

Let me now first give you an update on the issues of detailed reconciliations as well as guidelines for implementations of the new tax laws in China. Effective January 1, 2008, the Chinese Government adopted a new income tax law which unified the income tax payable by domestic and foreign investor enterprise 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 treatment. Our subsidiaries and variable interest entities are currently in the process of applying for the new and high technology enterprise tax treatment pursuant to the working guidelines for assessment of new and high-technology enterprises issued by the Chinese tax authorities on July 8, 2008.

Accordingly, we have followed the applicable accounting standards and adopted the statutory rate of 25% in making tax provisions for the second quarter ended June 30, 2008, except for entities still enjoying unexpired tax holidays.

The tax charge for the second quarter of 2008 was $20.4 million compared to the tax charge of $16.7 million and the tax charge of $0.3 million for the preceding quarters and the second quarter of 2007 respectively. The quarter-over-quarter increase in tax charge was mainly a result of an increase in revenue recognized for the second quarter of 2008. The year-over-year increase in tax charge was mainly due to the lower effective tax rate in effect under the pre-2008 tax laws and the receipt of an investment incentive tax refund of $3.6 million recorded in the second quarter of 2007.

Under the pre-2008 tax laws, our effective tax rate was well below 10% in the second quarter of 2007. We expect to reverse any excess tax provisions in subsequent periods when our subsidiaries and variable interest entities in China are granted the New/High Technology Enterprises preferential tax status which will be expected to be partially offset by the expected reductions to deferred tax assets recorded at the lower New/High Technology Enterprises preferred tax rates in future quarters.

Now turning to the balance sheet. As of June 30, 2008, our total cash and time deposit balance was $722.4 million compared to $606.3 million as of the December 31 of 2007. Cash flow generated from operating activities was about $74.8 million for the second quarter of 2008 compared to $72.2 million and $48.3 million for the preceding quarter and the second quarter of 2007 respectively.

On July 2, 2007, our Board authorized a share repurchase program of up to 120 million of our outstanding ADS. As of July 1, 2008 we had spent in aggregate a total purchase considerations of about $46.4 million including transaction costs. The share repurchase program ended on July 1, 2008.

On July 11, 2008, our outstanding serial coupon convertible subordinated notes due July 15, 2023 totaling $63.4 million as of June 30, 2008, were fully converted at the request of the noteholders pursuant to a redemption notice issued by us to the noteholders dated June 13, 2008. In the redemption notice, we called for the redemption of the notes and noteholders must surrender their notes for conversions at any time before the close of business on July 11, 2008 at a conversion price of $0.4815 per ordinary shares.

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

(Operator Instructions) Richard Ji, Morgan Stanley.

Congratulations on a great quarter. I have a question. I have two questions and first let's start with the recent development which is your licensing agreement with StarCraft and Warcraft. Can you help us understand a little better about the expected timeline for the launch of these games in China? And what is the underlying economics such as revenue sharing between you Blizzard? If possible?

Okay. Regarding Blizzard, since there has been a lot of different reports I saw from different analysts, why don't I go through from the most basic and then I will comment on questions from Richard. Obviously we have licensed the Warcrafts, the two Warcrafts, the Battle.net and also StarCraft II which is going to be a new game from Blizzard. And it is a licensing directly given to an affiliate of NetEase Group which is the Shanghai East Net Company and there will be a joint venture to be established between Blizzard and NetEase to support the operating of the platforms with Battle.net and the three games.

In general terms, the two Warcrafts have been very famous real-time strategy games -- they are not MMORPGs -- that has been launched ever since around 2003. And real-time strategy games in general, strategy games where users build different kinds of resources like gold mines and troops and weapons, of course, and to compete with computers and other players.

A typical multiplayer RTS games includes around two to eight players and lasts around could be at an hour to one hour to two hours. And the Battle.net has been the platform for players to seek other players on the Internet for competition and for games. And such a community has been very large both worldwide and also in China.

And of course, the deal or the licensing is most importantly is focusing on the platform and also the new game which is StarCraft II and StarCraft II of course is a continuation of the original StarCraft which has been hugely popular both worldwide and also in China as well.

Regarding to the timeline, I'm sorry that we won't be able to comment on that. And also the underlying economics in terms of how is the revenue sharing or how the business model is going to be, we also won't be able to comment on that.

Thank you, Michael. Just a clarification (inaudible) The two Warcraft games will be strategy games and StarCraft, would that be a MMORPG game (technical difficulty)?

The StarCraft is also a real time strategy game and of course, it's also -- there is multiplayer functions on that and players can play with other players through the Internet.

Okay, great. Very helpful. And then my second question is regarding your (inaudible) version of Tian Xia 2. And thus far what is the feedback you have collected from your gamers during the testing stage? And also if you can help us understand a little better about the launch schedule as well as the current user volumes data? I would highly appreciate that.

Richard, maybe I give you some updates on the developments of our Tian Xia 2 games developments. On the sixth of June, 2008, we have launched our open beta testing of this game and then initially, we have launched 15 servers across the board for the gamers to experience these games. And by now is about the middle of August, we have seen a satisfactory and progressively developments of this game both in terms of building up our servers numbers and also the gamers' feedback from games is also very helpful and constructive.

And in terms of the server capacity, I think basically each server can handle about 3500 to 4000 players at one time. And so I think the game is still going on quite well and I think we will upkeep this momentum in building up this game going forward.

Thank you. Great quarter.

Dick Wei, JPMorgan.

Good morning, Michael, Onward. I just have follow-up questions on regarding the recent JV. Can you comment on the potential market size of your real-time strategy games? I guess currently China I'm not sure which is the big one and would there be any competition (inaudible)?

Right. RTS game has always been pretty huge category in the single PC player games industry. And of coarse as an online game, or as a multiplayer, mass multiplayer online games and revenue making through the online elements, this is a new area both for Blizzard or for NetEase or for the industry. But we believe that it is going to be a huge market opportunity given that RTS game has always been huge. And also one of the possible reference that you can look at is real-time games being played in Internet [interface] and also being played in (inaudible) as you have referred. And those are very good reference points where you can see how the market actually could be.

Great. A question on advertising. If you can break down revenue by industry type and also how much revenue is now from e-mail?

Right. The three biggest industry in terms of advertising, number one is automobile; number two is Internet or e-commerce related industries; and third would be still ITs. And in terms of the productwise, e-mail continues to increase as a percentage of the total revenue of the advertising revenue and it is I think approaching around one-fourth of the total revenue of advertising. from we were talking about like 15% about a year ago and it is approaching about one-fourth right now.

Great, thanks a lot and good quarters on both advertising and (technical difficulty).

Thank you.

Alicia Yap, Citigroup.

Thank you. Good morning, Michael and Onward. Congratulations on a strong quarter as well as the recent joint venture. I have a couple of questions. My first question is with your JV with Blizzard, should we assume that this is just the beginning of a very long-term relationship? And will the JV potentially maybe obtain some game content from Activision console games as well as future Blizzard games?

Of course we always look at our partners with a very long-term potential with any of our partners. And of course, we are looking forward to that. But I think it is too early to comment where we are going to definitely going to get more franchises from Blizzard. And at the same time of course, we continue to actively pursue and look at any opportunities in the market where we believe games that will supplement with our whole game pipeline and any company we are also looking at as well.

Okay. And my second question is on the online advertising. To address back to the Olympics, so do you expect your content cost to be increased this quarter and perhaps will be temporarily affecting your gross margin for the third quarter?

Yes, of course. For the third quarter, there will definitely be some impact from the content cost of the Olympics but it would be a bit early to quantify exactly the amount but yes there will be an impact to the margin. But I believe that there will be more than -- more likely to be a one-time event and we will see more normal margin in Q4 forward.

Can you actually give us some guidance in terms of how much you expect to increase? Because your partners has actually have this processed.

I'm sorry, we won't be able to disclose that.

All right. And my last question is on the expectation on Tian Xia 2. So I understand that management actually has very high expectations on the game. However, a lot of investors feel very skeptical about the potential success of Tian Xia 2. So I was hoping that you can maybe you can share with us some of our misunderstanding so that investors will start to feel more comfortable regarding the potential growth opportunity of the game.

First we need to know where they are misunderstanding ours.

Can you just kind of tell us what your expectations will be from? Because I think CEO (inaudible) mentioned not really mentioned but is on the ChinaJoy conference call is about -- expects about 1 million PCU? So can you comment on that?

William?

Yes.

(Speaking in Chinese).

(Speaking in Chinese).

Let me quickly translate William's comments on Tian Xia 2. Tian Xia 2 has been a -- is a very important area for NetEase because it is a game very different from the products that we have been operating. It is 3-D action RPG games where it used to be our Fantasy Westward Journey and Westward Journey II turn-based RPG games. It is a market that has been growing very well. We can see a lot of our competitors have entered into this market. And it seems that this direction for us is correct where item based action games and 3-D is a new direction for us.

And we believe that we will continue with our development of more game content and we are looking at possible achievable targets of one million PCUs which we have stated in the ChinaJoy conference, we believe is possible although it's a long road but it's possible. And of course it's a very difficult target. There are only four to five products in the market where there has been such success. But we still believe it's possibly achievable although very difficult.

Thank you. And can you briefly comment on some of the operating metrics for the game during the quarter even with just one month of contribution?

In terms of the game operating metrics, I think basically we give you some idea by giving some overview because in terms of the revenue mix, I think most of the revenue of NetEase will be coming from the online games which accounts for over 80%. And then out of those game revenues, I think a significant portion of it would be currently being coming from our Fantasy Westward Journey and the rest will be coming from other game titles namely the Westward Journey II and III.

Can you actually give the percentage breakdown? You gave it last time.

We would suggest not to provide exact percentages of the revenue mix but rather you will get a feel of the revenue numbers by making a side reference to the ACU and PCU numbers that we have given out or described earlier in today's call. I think you would get a feel of our pictures of our game performance.

Thank you. And so you are not going to comment on the ARPU and the actual paying customer potential, right?

Yes, you are right.

Thank you so much.

Eddie Leung, Merrill Lynch.

Good morning, William, Onward, Michael. Just to start with a couple of housekeeping questions. Can you give us the number of advertising customers that you have for the quarter on the brand advertising site as well as the number of staff?

We will give you that off-line regarding to the advertised number because they are two different ways of calculating the agencies especially the real estate advertisers which is hard to [compound]. So I think we can that off-line. Regarding to the number of staff, maybe Onward can give you some points on that.

To supplement your questions I would just like to share with you, early, in terms of the headcount, are you referring to the total headcount of NetEase up to our second-quarter gross?

Yes. And the expansion plan for the second half of the year, if possible.

Maybe I will just give you an idea about the total headcount of our Companies as of the end of June 30, 2008. The total number will be around 2500 in total for our companies. Then of course going forward, the Company is making regular efforts in expanding our headcount but this very much depends on how to work with our current business development. And so there wouldn't be any exact numbers of how we are going to expand the numbers in terms of headcount but definitely this is something that we are currently working on.

Understood. My final question is could you also comment on the outlook of the [Internet] advertising market in China? Because last night we heard that one of your major competitors has some concerns on the advertising outlook.

Yes, I think we will also share some concern but of course the overall trend of the market continue to be very good mainly the good side of it is that there continue to be in lot of traditional advertisers that are putting their purchase into traditional media has been moving into Internet and that continues to be the trend. But on the other hand of course, there are concerns of course partly from if there an aftershock of the Olympic and also is the economy, of the overall economy is going down a little bit. That is something that I won't -- it is hard for me to comment on the overall economy.

But we feel that the domestic consumption for advertisers who are on the consumer side continue looking great. There might be more of a concern on maybe real estate which typically -- traditionally has been a smaller part of our advertising business. So these are pros and cons or the goods and bads of the advertising industry the way we look at it.

Have you seen any weakness in any of your advertiser categories in particular or in general they are still pretty resilient?

I would say that competition continue to be very fierce not just amounts to portal but I would say there is also competition also coming from critical portals that has been taking up higher market share in general for the past one or two years. But I am not sure if this trend will continue but they definitely have taken up a higher market share for the past one to two years. And these critical portals obviously, we are typically talking about ITs and automobiles. So these would be the two areas where we see huge competition and that is for us. But for portals in general, then there is of course the real aspect where we see very competitive vertical portals as well.

Okay. And my last question is how has the Olympic games affected your users, game users so far?

So far of course, I think in very general terms I think during the openings there might be some -- because the openings is a very big event where we see -- I think it is a worldwide (inaudible) on the number of people seeing it on TVs, there might be some effect on that during that particularly four hours or five hours. But other than that, I think we have been seeing very minimal effect. I think that would be -- (inaudible).

Okay, thank you very much.

Tian Hou, Pali Capital.

Hi, Michael and Onward. Congratulation on the good quarter. I just have one question. I would like to know more about your plan for the expansion plan for the second half? And I do know you mentioned that but is that possible to give us some details which game you are planning to have expansion probably at what time frame?

Still, Tian, I think basically just as what the Company has put on schedules and working on I think for the existing games that we are currently operating, we have plan to launch the expansion packs in the second half of this year. Still it is still too early or not at a very suitable time for us to comment a very exact date on when we are going to do so. But this is something we are currently working on and is still on schedule. Both for the Fantasy Westward Journey and our Westward Journey Series game titles.

Okay. I wasn't really capture what you said about the effective tax rate. So what is the -- when we model so what kind of an effective tax rate should we use?

In terms of the effective tax rate, similar to what we had mentioned in our last earnings calls, because currently we are still are in the process of applying for the New/High Technology Enterprises differential tax status and not until we get this I think the 25% which is the statutory tax rate after the unified tax reform would be the number. But going forward, once the respective authorities launch the platforms for the entities to proceed with the applications and getting their of blessings of the High/New Technology Enterprises status, I think the eventual tax rate would be moving down. We do expect that somewhere in the high teens range for our companies.

Okay, that is great. And one more question, the game from Blizzard, Warcraft, is it a computer game? It is not MMORPG game, right?

It's not an MMORPG game. It is not a role-playing game. It is a real-time strategy game and is played on computers same as other MMORPG games. It was launched in 2003 and has been very popular. It is a multi -- it is an RTS there is also -- it is an RTS game that there is also a multiplayer element where players are being grouped together through (inaudible) on the Internet and to compete with each other. on a where it typically lasts around half and one hour.

Okay. So for this game, I don't really know this game well but I've heard this game in the United States has lots of piracy issues because this computer based game it's not an MMORPG game. How do you -- what kind of comment do you have on that issue? If there could be a piracy issue, what are some measurements you think you would be able to put together to prevent that from happening in China market?

Right. What happens is that in the United States, the business model has always been very different. When the United States games are being sold on in the malls for the CDs for about US$39.99 per games right. And the online element has been free of charge in the past. I think I would say the only thing I would say is that this is a new area, it is not an MMORPG.

We have thought obviously we had thought about that. There are a lot of ways that we can prevent piracy. We won't be able to guarantee there will be zero piracy, but we believe that there a lot of ways for us and there are a lot of value-adding functionalities when they play online, when they play the licensed games. And we definitely have put a lot of thought together with Blizzard on that. So that is how I comment on that.

So, you are not going to convert it into an MMORPG game? You are just going to use the existing game and then just play in the tandem market. Is that correct?

For the Warcraft, those are two old games and obviously we won't convert to that. For StarCraft II, it's also going to be an RTS game that it will be a bit different. And I won't be able to comment on that and it will not be turned into an MMORPG. It will continue to be an RTS game.

Okay. That is it, thank you.

Haiya Gou, SIG.

Good morning. Congratulations. I just have a quick follow-up question for the (inaudible) question. So so far, do you see any operation impact through the (inaudible) network?

I don't understand the question. But things have been going smooth and during the Olympics where we have seen new records of the number of paid for use and users or the traffic being directed to our website. And things went smoothly. We have been preparing for it for a while.

Okay, thank you.

Paul Keung, Oppenheimer.

Good morning. Our question is on Westward Journey II. We noticed that next few months (technical difficulty). Can you comment (technical difficulty) Can you comment on what your expectations are for that expansion and how (technical difficulty)

Sorry, the reception is not that clear. Can you kindly repeat your questions again?

Can you comment on your (technical difficulty) and also the resource allocation between Westward Journey II, Westward Journey III and I guess (technical difficulty)

Operator, we can't hear Paul clearly. It is breaking up.

It is totally broken up actually.

Brandi, we are having problems hearing the questions being --

Operator.

I am here.

Would you mind to have the next one to ask the question first and ask Paul Keung to requeue. And then we will answer his question after the next one.

Tony Gikas, Piper Jaffray.

Good morning guys and thanks for taking my question. I wanted to follow up on the Activision Blizzard announcement. Is this license for only StarCraft and Warcraft? Are there any other properties attached to that agreement at all?

The license is only to Warcraft II -- I'm sorry, the StarCraft II, the two Warcrafts and so that is the next platform.

Are there no other games that have any involvement with that contract at this point?

No.

Okay. And then could you just comment on -- I know you don't want to comment specifically on the timing of StarCraft. Will the release be next year?

We won't be able to comment on that.

Okay.

I'm sorry, no.

Okay two other quick questions then. Could you clarify the one-time charge to the G&A during the quarter, the size of the charge and what it was for? I missed that on the call. And then are you seeing any changes to spending on a per user basis?

Sorry, what do you mean by the charge to the G&A expenses?

I thought when you were going through the expense items there was a small one-time item on the G&A expense during the quarter.

Oh, you mean the one that we are charging last year or the same (technical difficulty) 0.1 million local government rent subsidies. Yes, this was being received in the first quarter of 2008 and this only happens once and so this wouldn't be a recurring item in our second quarter. So the major differences would be mainly attributable to this month. Everything, all the other things remains quite stable.

Any changes to spending on a per user basis?

No. What do you mean by any changes to the user basis? You mean the players?

Yes, on a per player basis, have you noticed any change to their spending patterns?

We do not any -- --

It has been very similar in terms of the spending patterns of our users.

Okay.

For the different kind of games on time-based games are very similar and for the structured items games, obviously it's a new area for us and so we are yet to see a very consistent trend as yet.

Okay, thank you.

James Lee, Sterne Agee.

Thanks for taking my question. I was hoping you guys would comment about the growth in advertising revenues in Q2 and the number is very impressive. I would say you guys are really leveraging your position in the e-mail offering that you have (technical difficulty). Can you talk about your monetization effort between now and that will allow you to enhance (technical difficulty) your investments in new product (technical difficulty)?

Okay, why don't I try to answer the question first though it hasn't been very exactly clear -- I mean in the reception. Anyway, for the e-mail, as I have commented about a year ago, it was contributing around 15% of our total advertising revenue and it is now approaching around 25%. And obviously we have done a lot in this front. On one hand, it is that we have been increasing the advertising inventory and at the same time providing different kind of functionalities to the e-mail users. And there has to be a balance of that. And we are adding different functionalities for the few quarters ago when the Asia market was very hot, we added personalized financial [stock] information inside the e-mail interface. And now because of -- and now we are also expanding on that. We are adding different kind of news information. We are adding interesting functionalities like stamp collections for the e-mail users and all this as a result has increased the advertising inventory without affecting the users experience to the e-mail users.

So that is one of the reason why that we are able to increase the advertising for e-mails. And secondly, because we have continued to add a lots of e-mail users and we are also be able to educate the market where e-mail is a very important part of the whole media industry.

As you might know that in the past, it is easier for traditional advertisers to move their budgets to the news portal -- the portal in the news channels, the finance channels because it is easier for them to understand new media. But advertisers obviously becoming more open and they are moving their budgets toward different kinds of new media assets including the e-mails and also in the future includes the likes of blogs and so on. Does that answer your question?

He has dropped off the call. At this time, I would like to turn the call back over to Brandi Piacente.

Great, thank you. Thank you everyone for joining us today. Please feel free to contact us if you have any questions. And have a great day.

Ladies and gentlemen, this concludes the NetEase second-quarter 2008 earnings conference call. You may now disconnect.