NetEase Inc (NTES) 2009 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the NetEase second quarter fiscal 2009 earnings conference call. (Operator Instructions). This conference is being recorded Wednesday, August 12, 2009. I would now like to turn the conference over to Brandi Piacente, Investor Relations for NetEase. Please go ahead.

Thank you operator. Please note 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 risks, certain risks and 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 include in 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 over to Onward Choi, Acting Chief Financial Officer, who will read the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Thank you, Brandi. Total revenues for the second quarter of 2009 increased to $127.7m, compared to $114.4m in the prior quarter and $104.8m in the second quarter of 2008. Revenues for our Online Game business totaled $114.4m for the second quarter, compared to $106m in the first quarter and $87.1m for the second quarter of 2008.

The forefront of our Online Game business strategy has always been the ongoing in-house development and licensing of high-quality games that will continually diversify our user base. Our most significant developments in this area during the second quarter were with respect to our strategic licensing strategy and the much anticipated re-launch of World of Warcraft in China.

A few updates on our progress. First, we completed technical support configurations and server rollouts on schedule. Second, China's Ministry of Culture approved the contents of the game and it is now under the approval process with the General Administration of Press and Publications, or GAPP. Third, beta testing of the game began on July 30, 2009 and we are well prepared to start the commercial launch upon receiving the approval from GAPP.

All together, we increased our technical and customer service staff by approximately 500 during the second quarter to support Blizzard Entertainment's Battle.net platform and the relaunch of World of Warcraft.

For our portfolio of in-house developed games, new user statistics were particularly strong for Westward Journey II, Datang, and New Fly for Fun during the second quarter. PCUs and ACUs for Westward Journey II were 591,000 and 207,000 in the second quarter, respectively, compared with 606,000 and 217,000 in the first quarter, respectively. New registered users jumped [15%] quarter-over-quarter. And we recently released a new expansion pack for this game called [Ten Gun Kai Wu]. The expansion pack is currently in open beta testing and will be officially released on August 15.

Fantasy Westward Journey continued its steady course through the second quarter. PCUs and ACUs were 1.7m and 575,000, respectively, compared with 1.75m and 640,000 in the first quarter, respectively. We have conducted a number of well-received promotional activities via diversified channels over the summer season so far, to reinforce the longstanding popularity of Fantasy Westward Journey and promote its appeal to new gamers. Subsequent to the second quarter, we hit record PCUs of 2.56m on August 2. Our previous PCU record for Fantasy Westward Journey was 2.32m achieved in August last year.

For Tianxia II, we will launch a grand scale open beta marketing plan in September and release a new expansion pack in the third quarter. Our development team is currently working on further enhancing the game play design to increase player satisfaction and raise the confidence in spending. Tianxia II's development is proceeding according to our internal plan and we expect that this game's performance will be further strengthened following our upcoming marketing initiatives in September.

We launched two new item-based games commercially in the second quarter, Buibui and TF Online. Buibui is a casual game, offering players magic gun-firing experiences. And TF Online is a 3D game, offers star-war heroic role experiences.

In May, we held a nationwide promotions for the open beta testing of New Flight of Fun. A number of promotional channels were deployed. And by the end of June, we gained over 3m new registered users for New Flight of Fun, meeting our target performance statistics.

We are also continuing to progress through closed beta testing of Heroes of Tang Dynasty and continued to target the fourth quarter for commercial launch.

Overall this was an exciting quarter four our online games and game development. And as of June 30, we had approximately 1,000 game developers supporting our ongoing game top lines. We are continuing to focus on our core strengths to maintain our dominance in China's online game market. And we look forward to a solid second half of the year, as our newest licensed and in-house games come to market.

Turning to advertising, revenues for Advertising Services were $10.7m for the second quarter of 2009, compared to $6m and $15.2m for the preceding quarter and the second quarter of 2008, respectively. The quarter-over-quarter improvement was due to improved advertising spending, as a result of the domestic economic stimulus. This, coupled with our efforts to upgrade our portal channels and add premium content, resulted in better metrics in terms of both sales of our product and numbers of advertising customers.

In terms of total revenue, the top-performing record setters for the second quarter were automobiles, Internet, and food and beverage. In terms of the percentage in revenue growth, it comes to finance, food and beverage, and automobiles. We are continuing to work on adding great new content. We launched several new content channels, covering education, travel and real estate in July and early this month. We also plan to launch a book search and review channels in September, which we expect will be well-received.

In search, Youdao Desktop Dictionary software total user downloads increased 50% over the first quarter, continuing the trend of steady growth in Youdao's usage over time. Youdao's shopping search continues to gain acceptance and we are pleased with the user feedback to-date.

As China's economy continues its path to recovery, we're expanding our sales force to enhance our industry and customer coverage, which we believe will help us drive further advertising revenue growth during the first -- the next six months.

That concludes William's remarks.

Now I will provide a review of our second quarter 2009 financial results, using numbers and percentages based on US dollars. In order to avoid repetitions with the press release, I will primarily focus on the discussions of margin and explain fluctuations, along with net profits.

Gross profit for the second quarter of 2009 was $101.3m, compared to $93.9m and $105.8m for the first quarter of 2009 and the second quarter of 2008, respectively. The quarter-over-quarter increase in gross profit was primarily attributable to the recognitions of $12.2m of revenue from the cleanup of dormant accounts of Online Games in June of 2009, partially offset by an increase in business tax resulting from high revenue and increased staff-related cost, resulting from increased headcount in the second quarter of 2009.

The recognitions of revenue from dormant accounts of online games resulted from a change in our user agreement with online game players in May 2009, whereby outstanding points in accounts that remain dormant for a period of 540 days or more will be removed after 30 days of our public notice issued on May 20, 2009. Going forward, we expect to recognize revenue related to the outstanding points removed from dormant accounts of online games on a quarterly basis.

The year-over-year decrease in gross profit was primarily attributable to the receipt of a business tax refund of $21.5m in June 2008 and increased cost of revenues in the second quarter of 2009, as a result of increased staff-related cost resulting from increased headcount and increased business tax due to higher revenues in the second quarter of 2009, partially offset by increased game revenues in the second quarter of 2009.

The increase in game revenue in the second quarter of 2009 was primarily due to revenue recognized from dormant accounts in June 2009, and as explained about, an increase of revenue from Westward Journey II and Tanxia II. Increased revenue from Westward Journey II was mainly due to enhanced game play introduced in the expansion pack released in August 2008. We reported a full second quarter revenue for Tanxia II in 2009, compared to only one month revenue for the second quarter of 2008, as the game entered unlimited closed beta testing on June 6, 2008.

Gross profit margins for the Online Game business for the second quarter of 2009 was 88.3%, compared to 90% and 91.2% for the preceding quarter and the second quarter of 2008, respectively. The quarter-over-quarter and year-over-year decreases in gross profit margin were primarily due to increased staff-related cost in the same quarter of 2009.

Gross profit margin for the Advertising business for the second quarter of 2009 was 16.6%, compared to gross loss margins of 13.1% and gross profit margins of 52.6% for the preceding quarter and the second quarter of 2008, respectively.

The quarter-over-quarter improvement in gross profit margin was primarily due to increased revenue brought about by certain economic stimulus measures implemented by the Chinese government in the past few months, especially with respect to the automobiles and electrical home appliances sectors. The year-over-year decrease in gross profit margin was primarily attributable to significantly reduced advertising revenues in the current quarter, as demand for advertising services remained relatively low with advertisers remaining cautious and still looking ahead for clear signs of economic recovery.

Gross loss margins for the Wireless Value-Added Services and Others business for the second quarter 2009 was 43%, compared to 22.3% for the preceding quarter and gross profit margins of 28.8% for the second quarter of 2008. The quarter-over-quarter increase in gross loss margins was primarily due to increased staff-related cost and increased bandwidth and custody fees resulting from increased traffic. The year-over-year increase in gross loss margin was mainly attributable to the receipt of the business tax refund in June 2008 and increased staff-related cost resulting from increased headcount in the second quarter of 2009.

Total operating expenses for the second quarter of 2009 were $25.6m, compared to $22m and $21.9m for the preceding quarter and the second quarter of 2008, respectively. The quarter-over-quarter increase in operating expenses was primarily due to nationwide marketing costs for promoting the open beta testing of New Flight of Fun in May and June of 2009, and costs associated with other promotional activities as well as increased research and development expenses resulting from increased staff-related costs.

The year-over-year increase in selling and marketing expenses was mainly due to increased staff-related costs resulting from increased salaries and wage levels and real headcounts in 2009, and increased marketing costs for promoting online games and advertising services in the current quarter.

The year-over-year increase in general and administrative expenses was mainly caused by increased provisions for bad debts, resulting from an increase in the accounts receivable balance aged over six months as of June 30, 2009 and increased office rental and property management fees resulting from increased office space in Beijing, China.

Net profit for the second quarter of 2009 was $68.5m, compared to $61m and $64.2m for the preceding quarter and the second quarter of 2008, respectively. During the current quarter, we reported a net foreign exchange gain of $6.9m under Other, net, compared to losses of $7m and $3.9m for the preceding quarter and the second quarter of 2008, respectively.

The quarter-over-quarter and year-over year decrease in foreign exchange loss was mainly due to the reversal of translation loss with respect to our euro-denominated bank deposit balances, as of June 30, 2009, as the exchange rate of the euro against the CNY fluctuated over the periods.

We reported basic and diluted earnings per ADS of $0.53 each for the second quarter of 2009. This compares to basic and diluted earnings per share -- per ADS of $0.48 and $0.47, and $0.53 and $0.50 for the preceding quarter and the second quarter of 2008, respectively.

We recorded income tax charge of $16.9m, $9m and $20.5m for the current quarter, the preceding quarter and the second quarter of 2008, respectively. The quarter-over-quarter increase in tax charge was primarily due to increased revenue in the second quarter of 2009 and payment of and extra tax charge of $5.6m in June 2009, related to the tax assessments of 2008 and the first quarter of 2009 on one of our subsidiaries, as explained below. The year-over-year decrease in tax charge was primarily due to the applications of the statutory tax rate of 25% on the income of our subsidiaries in the second quarter of 2008 as approval for the preferred tax status of high and new technology enterprises was not received until December 2008.

This subsidiary with both high and new technology enterprises and software enterprises status, paid its corporate income tax at a rate of 12.5% for the first three quarters of 2008 while also with the understanding that if it was granted the high and new technology enterprises tax status in 2008, this subsidiary would be entitled to a preferential tax rate of 7.5% in 2008, based on the interpretations of the grandfather provisions under the corporate income tax law and the related implementations guidelines.

The preferential tax rate of 7.5% was calculated by applying the 50% tax rate reductions for software enterprises against 15%, which is the preferred tax rate applicable to this subsidiary's high and new technology enterprises status. When this subsidiary was granted the high and new technology enterprises tax status in December 2008, the relevant local tax authority refunded the excess corporate income tax paid for the first three quarters of 2008 when applying the differential tax rate of 7.5% in these quarters.

Following the issuance of a new tax circular by the State Administration of Taxations in 2009, the local tax authority notified this subsidiary in June 2009 that it should pay its corporate income tax liability for 2008 and the first three -- and the first quarter of 2009 at the rate of 12.5% instead of 7.5%. This decisions was based on the interpretations of the new circular issued by the State Administration of Taxations in April 2009 that the 50% tax rate reductions for software enterprises should be made against the uniform corporate income tax rate at 25%, not the 15% preferred tax rate applicable to this subsidiary's high and new technology enterprises status.

Cash flows generated from operating activities totaled $79.7m for the second quarter of 2009, compared to $83.1m and $75.2m for the preceding quarter and the second quarter of 2008, respectively. In addition, the Company has a restricted cash balance of $12m. We maintain a very strong balance sheet with ample cash resources to fund our ongoing development of world-class online games and premium online content and our third-party licensing arrangements. As of June 30, 2009, cash and time deposits totaled $909.4m, compared to $821.5m(Sic-see press release) as of December 31, 2008. As of June 30, 2009 we have spent in aggregate a total purchase considerations of approximately $13.1m, including transaction costs for our share repurchase program.

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). One moment, please, for our first question. First question comes from the line of Richard Ji with Morgan Stanley. Please go ahead.

Sure. Hi, William and Onward. And congrats on the very strong quarter. I have two question.

Hi.

First, starting with your Online Game and given that your company has one of the deepest pipeline in the industry. And how would you balance the marketing initiative for the various games, given that you only have limited marketing resource?

And also, so far, have you seen an intra-game cannibalization for the gamers among your different games?

And also, can you rank the expected ARPU and for your new item-based games? Thank you.

Okay. Richard, I think regarding our first questions, regarding our marketing initiatives to boost our games, I think basically we already have plans set aside to commence off with our marketing program and promotion activities in the coming quarters. And we believe that we do have ample resources to reach those plans that have already been scheduled. And so there shouldn't be any big problems for us to promote our games. And of course, there would be quite a number of new games or pipelines currently in the markets that we're currently operating, but still we will organize ourselves and try to make it in a smooth manner.

And with regard to your second questions regarding the cannibalizations issues, I think, basically, from so far the games that we are currently operating, there wouldn't be any obvious signs or any issues regarding cannibalizations because we feel that different players would have different appetites in playing the games. And usually, if they are playing particular games, they would still continue their interest and stay to play those games. And this wouldn't be a very big problem to us.

Thank you. And my follow up question is regarding your ARPU expectation.

And also, ever since you start retest World of Warcraft, can you give us some color on what portion of the gamers come from the older gamers of World of Warcraft?

And also, among the new gamers, have you been able to capture new gamers from other popular games in China?

Thank you, Richard. Maybe I will translate these question regarding World of Warcraft into Chinese and for William to add some colors on. William, (spoken in Chinese).

(Spoken in Chinese).

Okay. Maybe I summarize William's remarks in English. Regarding the game itself, because the World of Warcraft is currently under the closed beta testing phase and so we are not in a very good positions to comment whether this -- how this compares with the performance as compared with the previous transitions. And basically, for the current closed beta testing, most of the players would be those old players who have played games of World of Warcraft.

And with regard to the ARPU expectations question, because the game itself, World of Warcraft, is a time-based game and not an item-based game, and so basically there will be very hard limitations on the timeframe in terms of the revenue base. And so basically, this stuff initially will not be a very comparable basis to compare the revenue contributions as compared with the item-based games. But having said that, I think, basically, from the Company's perspective, it was important to understand how well we can deliver the product or services to our players and customers, and make sure that they are actually satisfied with our games and the services. This is what is more important than how much the revenue are going to contribute, at the moment. Thank you.

Sure. Thanks for the clarification. And again, thanks.

Thank you. Our next question comes from the line of Wallace Cheung with Credit Suisse. Please go ahead.

Hi. Morning, William and Onward. I have two questions. Number one is, regarding the dormant account cleanup, can you -- I know it's not that easy, but can you identify like which particular games it's related to? So is it more related to Westward Journey II or Fantasy Westward Journey? And when we talk about, going forward, there could be more cleanup of the accounts, so can we quantify the potential impact?

And my second question will be regarding the Advertising growth. I think it's pretty strong. Can we -- can you explain like what is the percentage of the Advertising revenue generated from the email-related promotion services? And do we -- are we going to see similar kind of growth trend in the next two quarters' time? Thank you.

Okay. Thank you, Wallace. Regarding your first questions, regarding the dormant accounts cleanups, I think basically for this quarter, this would be a one-off cleanup to clear all those unconsumed points, outstanding points previously that have been accumulated so far.

But with regard to how many of those would be diverted to what particular games, I think basically the analogy would be that because this would apply across all the games that we have operated so far. But in view that the significant amounts of our revenue will be coming from the Fantasy Westward Journey and the Westward Journey II, I think basically that this would be the lines for you to think about this.

But I'm sorry that there is not much that we can quantify for the time being about what it would happen going forward because this would very much depends on how the players' behavior would be in the coming quarters, because we have already set up our rules and for those accounts that have been inactive for 540 days or more. And then we have already make the announcement and make notice to the users and the players alike. And so we will have the right to clean up those outstanding points as we see fit.

And with regard to your second questions about our Advertising growth, in terms of the percentage of the revenue contributing from our email services or email channels, basically the amount, the percentage will be -- around 25% of our advertising revenues will be coming from the email content channels.

And going ahead, with regard to our views about the outlook of the Advertising business for the rest of this year, what we'll say is that given that there has been some economic stimulus measures being implemented by the local Chinese governments and there has been also -- we have also seen some signs that the advertisers are getting more confident in their spending and so we still hold a positive view about the developments of the Advertising business. And given the fact that the portal business has received a better recognition as an effective and efficient means to promote and advertise the products or services and so we still hold a positive view about the growth in this sector of the business.

Thank you, Onward. Just two quick follow-ups. So regarding dormant account cleanup, so is it the key reason behind the decline on the deferred revenue balance sheet item on Q-on-Q basis?

Then the second question will be on the Advertising growth. Is there any relationship with the maybe Youdao as well because you mentioned that you have a lot of incentives and online dictionary downloads seems very good. So how is the Youdao contributing to advertising growth? Thank you.

Okay. I think basically, I think from time to time this is the Company management's ongoing process to review our operations and see whether it is an appropriate time to formalize and to organize our operations in a better manner. So I think there is no direct correlations with whether there -- because of the fact that there's some decline in our deferred revenues or so, or the game revenues, and as such we would do these kind of things. This is just a usual thing. And it just comes to the point that we consider that it would be a good timing actually to organize ourselves and to clean up those dormant accounts and to make it an ongoing processes to manage our business better.

And with regard to your second, follow up question regarding the advertising growth, at this stage I think our search is still in our reinforcement development stage and the product itself has not yet come into commercialization. And so basically our Advertising revenue basically would be coming from our traditional portal advertising business.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Dick Wei. Please go ahead.

Good morning. Two questions. First of all, first question is that just second half you have a couple more new games going to be launched like Ghost like [Pet World]. Any one of those games you expect to be like a bigger hit?

And my second question is for the longer term plan. How many in-house games do you plan to develop or launch per year?

William, (spoken in Chinese).

(Spoken in Chinese).

(Spoken in Chinese).

(Spoken in Chinese).

(Spoken in Chinese).

Perhaps I will just summarize some highlights as made by William just now. Regarding Dick's first question, regarding about our game launch in the second half of this year, basically there will be some Web based games. 2.5D games, some 3D games. Regarding the Tianxia II, and also the 3D, the Q version games, and also we would have two casual games called the TF Online and the [Pet] online games.

And basically our Company's business strategy is that we will try to roll out and launch different kind of products to meet the different demands and needs in the market. But more important is that we focus very much on the qualities of the games itself in order to make sure that it can really fit the needs and expectations of the gamers. And for all the games that we have launched so far, we would equally believe that they would be of the best qualities to meet the market needs.

And for the second question about whether we have any special plan about the game launch for each year, I think from William's remarks, basically our strategy is that we are not focusing on any specific numbers of games that we are going to launch in each year. But rather we focus more on the quality that we are going to deliver to the market, because we believe that this is more important than the quantity of the games that we are going to roll out. Thank you.

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

Thank you. I have three questions. Number one regarding your growth margin for online games, can you help us understand if the 26% sequential increase in the cost of revenue is mainly due to the new and additional cost, staff costs associated with operating World of Warcraft?

And maybe can you explain whether you will start amortizing the upfront license payment costs in 3Q? Or you need to wait until you officially launch the game, then you will start incurring the amortization as part of your cost of services.

And how should we be looking at gross margins for Online Games going forward, especially in the third quarter as you are supporting the closed beta testing without the top line contribution?

Okay. I think basically Alicia's questions would be surrounding our gross margin performance with regard to our online game business. For the sequential growth in our cost of revenue, I think basically those would be attributed to our increased staff-related costs and of course there would be some related to the -- in preparations of our World of Warcraft staff as well.

And in terms of the amortizations of the license fees, I think basically it will happen as soon as we start off our commercial launch of the game. And there is no special timelines that we would comment on for the time being because you may well aware that the whole thing is still under well progress. And we are still awaiting the approval from the relevant government authorities.

And with regard to the outlook of the gross margin profiles going forward, of course, given that we would have the introductions of the licensed games to our overall game portfolios, this definitely would have a downward impact to our overall gross margin's performance. But at this stage, I think, basically we are still focusing on what we are currently doing in making sure that everything will be in place to make sure that the launch of the games would be come as soon as possible.

Thank you. And I have a follow up in terms of your sales and marketing costs. What should we be expecting for the third quarter and fourth quarter as you're likely to increase your cost associated with the launch of the World of Warcraft and the promotion, and also increase your branding campaign on your advertising portal?

I think basically in the third quarter of course there would be more sales and marketing expenses that we are going to spend off to cater our various marketing programs and the launch of various games, and also for the portal business as well of course. But I think we, what we will say is that we would plan our resources and make sure that those spending would be made according to our schedules and plans. And we do not have any particular numbers that we would say for the time being, but definitely more these kind of expenses would happen in the third quarter.

Okay, thank you. And lastly regarding the status of Wrath of Lich King, have you submitted the contents for the government review? And when do you expect that will likely be launched? Thank you.

Maybe I will translate your questions in Chinese. And maybe William can add some colors on this.

(Spoken in Chinese).

(Spoken in Chinese)

Okay. And so basically this is very concise, and that basically everything would be based on our notice. As soon as we get any new updates, we would then notice everyone accordingly.

Thank you. Our next question comes from the line of Ming Zhao with SIG. Please go ahead.

Thank you for taking my question. Good morning William and Onward. I just have a quick question on Fantasy Westward Journey. It seems that there was some weakness in the second quarter. Can you tell us whether that weakness is mostly due to seasonality?

And into the summer season we've heard that there are big numbers in PCU you just mentioned. Should we expect this game to perform better in the third quarter?

(Spoken in Chinese).

(Spoken in Chinese).

Basically -- a quick recap. Basically the relatively low performance for Fantasy Westward Journey in second quarter is mainly due to the seasonality issues. But going forward, especially in the third quarter, we would definitely increase more game play and the contents of this game to making sure that the gamers would have more to play in this game.

Alright. Thank you.

Thank you. Our next question comes from the line of Eddie Leung with Bank of America - Merrill Lynch. Please go ahead.

Good morning William and Onward. I have a few questions. The first one is related to the recognition of dormant accounts as well. Did you guys recognize any costs related to these dormant accounts in the second quarter or all the revenues basically dropping to the bottom line?

Yes.

Hello?

Hello. Eddie can you hear me? Basically you're right in saying that all the related costs will be going below the lines.

Okay, got that. And the second question is on the pipeline of some of your major expansion packs for Fantasy Westward Journey as well as WW2. Could you give us an update on the potential launch date of the expansion packs?

I think sure, of course. For the expansion packs for the Fantasy Westward Journey, I think basically this would definitely come out in the second half of this year, maybe in the third or fourth quarters.

And for the Westward Journey II, we already have one called the [Ten Gun Kai Wu], a new expansion pack called the [Ten Gun Kai Wu] currently in the testing phase. And we are going to release this expansion packs on the August 15.

Got that. And my final question is about your licensing strategy. Do you plan to work with other overseas developers besides Blizzard?

Of course. I think basically with regard to the Company's licensing strategy, the Company is always open, holds an open attitude in exploring potential and probable opportunities. But of course this very much depends on whether we can find out something that we would actually think of good qualities and good reputations. And also everything would be aligned with all the parties consensus and agreements.

Understood. Thanks.

Thank you. Our next question comes from the line of Tian Hou with Pali Capital. Please go ahead.

Hi William and Onward. I have several questions. The first question is regarding this $12.2m dormant accounts revenue recognition. And could you give some color on how far back -- when you cleaned the accounts, those accounts they open how far back? Is it five years ago? And if you could just give me the timelines so I can have a better picture on that. So that's the first question. I will follow up on the second and the third.

Okay. With regard to your first question regarding the dormant accounts I think the timelines would be date back to from the very beginning. And there is no particular cut off point on whether -- on the starting timelines of this, but from the very beginning.

I see. Okay, good. I got it. The second question is in your cost and expense have you incorporated the cost and expense related to the operation, the future operation of World of Warcraft? And if so, how much? Can you give us some detail?

Definitely. For the current quarter there would be some costs and expenses that we have already incurred or spent related to -- in preparations of our coming launch of the World of Warcraft. But for the time being, I think what we'll say is that we have spent monies on the procurements, on the service that needs to be required to service the operations of the game itself. And also we also have incurred some license fees that have to pay to the Blizzard sites. And also we have also, during the second quarter we have also recruited more technical and customer service staff in preparations to service this game.

So I just want to make clear. You're saying not only you have staffing cost in the (inaudible) accounts, also you have depreciation, licensing fee and technical support expense. Is that right in second quarter?

I think basically, if you are talking about the depreciation expenses, because those would only be happen in the second quarter. So I think there is not much that would happen so far. But for the time being I think basically what we have spent was basically some CapEx on the surface and some license fees, and also some staff costs in building up our service teams.

Okay. So the question follow up had was going forward you probably come out World of Warcraft, you will have revenue, and so going forward I think we need some direction in terms of how we're going to model, how we're going to do the model. Are we going to have a lump sum revenue like Fantasy Westward Journey and World of Warcraft together, and so that's the cost and expense, or we're going to have a separate line of World of Warcraft? So which direction we should go? How should we model?

I think basically this is something the Company would be working on for the time being. And we would update you as soon as we have a better position to let you know about it.

Okay. The last question is you have $900m cash. Every quarter we saw the fluctuation in your exchange gains and loss. And so I just wonder if you guys think about any better ways to use your cash?

Sure of course. Just as what we have always been highlighting, I think basically for those cash balances that we have so far, there would be a couple of ways that we would be considering including potential share buybacks and some cooperation opportunities. And also some new to building up a stronger business. Say, for example, our current portal business that we are currently investing more resources to strengthen our competitive edge in this respect. And so I think basically that there would still be many areas that the Company is always looking into and considering seriously whether to -- how to use our cash in a very effective and managed.

Thank you. That's very helpful.

Thank you. Our next question comes from the line of Cathy Chen with Goldman Sachs. Please go ahead.

Hi. Thanks for the call. I just have one follow up question, again on Fantasy Westward Journey trends during the quarter. If I looked at the numbers correctly, it looks like the ACUs were down about 8% year-on-year in the -- during the quarter. And this is the first time that we have seen a year-on-year decline. So -- and I understand earlier you said there's some seasonality impact here. But I would just like to get more color on what other trends are going on, because it looks like it might not just be seasonality. Thank you.

Thank you. I think seasonality is definitely one of the reasons that attributed to the relatively low ACUs performance that we have seen for the second quarter, because we would traditionally be -- for the second quarter there would be less holidays in there. And also it would always be the exam season. And for most of our gamers their age group would be relatively lower, which means that most of them would still be attending school. And so at this time frame basically they won't be able to spend much time playing those games.

And also, just as what William had just highlighted as well for the -- in the coming quarters we definitely would introduce more game play and contents in the games to make sure that there would be more fun and more stuff up for the players to play on and to spend. And also in the coming quarter, in the third quarter we would also carry out more marketing and promotional activities to further promote our games.

And given the fact that in August 2 this year the game itself also made another new hit record in terms of the PCU numbers, which is very encouraging. And also, in some ways also makes us believe that our games is also very popular amongst the gamers world. And also they are still very -- feel very interest to play our games and stick to our games as well.

Okay, thank you. But just to clarify on the seasonality comment, actually the decline is on a year-on-year basis. So it should be similar seasonal impacts for your growth numbers, right.

I think basically still basically the seasonality would attributed to the reason of the drop. But if you're talking about the year-over-year patterns, then perhaps other things that we will add on maybe that you would appreciate that in terms of the Online Gaming business or the industry alike generally, the competition is getting more and more intense. And basically what we would see is that it would create a more challenging task for each of those players in this market to get in more new players of the games. But so far of course this would be an issue to all the players across the industry.

But what is important is that is we see that our existing players in our games, or the old gamers are still very happy playing our games because of the contents of the games, because of the services, the qualities and the game play, everything that we have already offered in this game, and the reputation as well. And so we believe that going forward there would also be room for us to further build up the momentum of this game.

And another remark is that, I would also like to repeat this, that you will see that in August 2 this year we have also made another, new hit on the PCU numbers. And which is a very encouraging information to prove that this game is still very popular amongst the gamers.

Okay. Thank you.

Thank you. Ladies and gentlemen, that is all the time that we have for questions. I would like to turn the call back over to Brandi Piacente. Please go ahead.

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

Ladies and gentlemen, this concludes the NetEase second quarter fiscal 2009 earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1 303 590 3030 or 1 800 406 7325 and enter the access code 4118093. Those numbers again are 303 590 3030 or 1 800 406 7325. And the access code is 4118093. We'd like to thank you for your participation. You may now disconnect.