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NetEase, Inc. (NASDAQ:NTES)

Q3 2012 Earnings Call

November 14, 2012 8:00 p.m. EST

Executives

Brandi Piacente – IR, The Piacente Group

Onward Choi – Acting Chief Financial Officer

William Ding – CEO and Director

Analysts

Richard Ji – Morgan Stanley

Dick Wei – JP Morgan

Alicia Yap – Barclays Capital

Eddie Leung – Bank of America Merrill Lynch

Mark Marostica – Piper Jaffray

Tian Hou – T.H. Capital

Jialong Shi – CLSA

Thomas Chong – BOCI

Alex Yao – Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the NetEase Incorporated's third quarter 2012 earnings call.

[Operator Instructions]. This conference is being recorded today.

And I would now like to turn the conference over to Brandi Piacente. Please go ahead.

Brandi Piacente

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 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 discussion. A general discussion of the risk factors that could affect NetEase's business and financial results is included in certain filings of the company with the SEC, 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 ir.netease.com.

I will now turn the conference call 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.

Onward Choi

Thank you, Brandi. Before I begin, please note that for the purposes of this discussion, all percentages are based on renminbi.

For the third quarter of 2012 we reported total revenues of RMB2 billion, driven by our online games and increasing advertising revenue contribution. During the third quarter we continued to advance our growth strategy for our self-developed games by introducing expansion packs that extend the lifecycles of our games and attract new users and by launching new games that broaden and diversify our portfolio. As we continue to focus on improving game content and quality, the popularity of our self-developed games is escalating, coupled with our successful promotional activities to better serve our players. NetEase brand-new games are contributing an increasing amount to our online game revenues mix.

Total online game revenues for the third quarter were RMB1.7 billion, driven by increased revenue contribution from our self-developed games. We have steady performances from Fantasy Westward Journey, Westward Journey Online II, and our two new games, Kung Fu Master and Soul of the Fighter. Tianxia III and Ghost also achieved steady performance during the third quarter.

Following the release of expansion packs and new content in the second quarter as well as associated promotional activities, both Fantasy Westward Journey and Westward Journey Online II achieved record-high PCUs in August. In the third quarter we introduced new expansion packs for Fantasy Westward Journey, Westward Journey Online III and Tianxia III, including a 3D version for Tianxia III that offers even more exciting 3D events.

We are also very pleased with the performance of both our two new action games, the high-quality fighting experience provided by Kung Fu Master and Soul of the Fighter has been well-received by players. We followed this positive reception and user feedback by launching unlimited beta testing for games on September 13 and October 18, respectively. We were met with equal enthusiasm.

The October 2nd release of the highly anticipated fourth expansion pack of Blizzard Entertainment's World of Warcraft, Mists of Pandaria in mainland was another important milestone during this period. With elements that appeal to Chinese culture, Mists of Pandaria has proven to be especially engaging, and we believe that it is being widely embraced by China's gaming community.

As we look to the final quarter of 2012 and move into 2013, we will continue to focus on providing premium quality and addressing user demand through our best-in-class feedback channels. We are pleased to announce that we will launch Heroes of Tang Dynasty II on November 16. This will be a comprehensive update of our popular and long-running game Heroes of Tang Dynasty, to further build on the success of this game. Our plans for the coming months also include introducing two new games to broaden our portfolio and game styles, Heroes of Three Kingdoms, our 3D action real-time strategy game, and Dragon Sword, our next-generation 3D MMORPG.

Turning to our portal business, we continue to enhance our portal content which helps to strengthen our community and drive our advertising services revenues through the loyalty of our current advertisers and by attracting new advertisers to our leading portal. Advertising sales continue to improve in the third quarter with automobile, fast-moving consumer goods, and financial services as the top-performing verticals. In the first quarter, our advertising sales grew 10.2% year over year and 19% sequentially. Our advertising business benefited from the popularity of our leading mobile news applications as well as our broadcast of the London Olympics. Our London Olympics coverage was extremely successful this year, resulting in an unprecedented number of downloads and portal activity that exceeded our results from the Beijing Olympics in 2008.

Our email services are also continuing to gain momentum, and as of September 30, 2012, we had approximately 510 million registered email users. Ongoing integration of mobile internet services remains one of our top initiatives. We now have more than 60 million registered mobile email users and 27 million installations for our mobile news application. We continue to build on this community with enhancements that meet the needs of our users.

China's internet community is rising, and we are dedicated to furthering our leadership position in this expansive opportunity where we have developed some of the most long-lasting and popular online games in China. Our large community of loyal users continues to grow and we are working to achieve healthy growth across our business segments, while advancing our leadership and maintaining our competitive advantage.

Lastly, we greatly value our users and community as well as our shareholders. Shareholder value has always been of great importance to us. Our business has been strong with increasing revenues and robust operating cash flow. As such, we believe now is a due time to return value to our shareholders. We are happy to announce that our Board of Directors has approved a special cash dividend of USD1 per ADS along with a USD100 million share repurchase program to enhance the return we provide to our shareholders as we work to further grow the company.

This concludes William's update. Now I will provide a review of our third quarter 2012 financial results. I will primarily focus on the discussions of margins and expense fluctuations along with net profit.

Gross profit for the third quarter of 2012, was RMB1.4 billion or USD216.7 million. This compares to RMB1.3 billion for both the preceding quarter and the third quarter of 2011. The quarter-over-quarter increase in gross profit was primarily attributable to increased revenues from advertising services, primarily attributable to seasonality and our broadcast of the London Olympics, and increase of revenues from our self-developed online games, primarily Fantasy Westward Journey, Westward Journey Online II, and our two new games, Kung Fu Master and Soul of the Fighter. The increase was was partially offset by increased content cost related to the Olympics and by decreased revenue from Blizzard Entertainment's World of Warcraft.

The year-over-year increase in gross profit was primarily attributable to increased revenue contributions from our self-developed games, Fantasy Westward Journey, Ghost, Tianxia III, Westward Journey Online II and Kung Fu Master as well as the Soul of the Fighter. The increase was partially offset by decline in revenue from Blizzard Entertainment's World of Warcraft and increased advertising costs, including headcount-related costs and content costs.

Gross profit margin for our online game business was 74.2% compared to 73.3% and 71.5% for the preceding quarter and the third quarter of 2011, respectively. The improvement in gross profit margin was primarily due to the increased revenue contributions from our self-developed games as a percentage of our total online game revenues. Gross profit margins for our advertising business was 36.2% compared to 33% and 48.4% for the preceding quarter and the third quarter of 2011, respectively.

The quarter-over-quarter increase in gross profit margin was primarily due to the economies of scale as advertising revenue increased in the third quarter of 2012. The year-over-year decrease in gross profit margin was primarily due to increased headcount-related costs and content costs incurred for the London Olympics.

Gross profit margin for our email, WVAS and other business was 6%, compared to gross loss margin of 11.6% and 13.2% for the preceding quarter and the third quarter of 2011, respectively. The improvement in gross margin was mainly due to increased sales of our game-related accessories such as limited edition packages of several online games.

Total operating expenses were RMB537.5 million or USD85.5 million, compared to RMB437.7 million and RMB406.2 million for the preceding quarter and third quarter of 2011, respectively. The quarter-over-quarter and year-over-year increases in operating expenses were mainly due to increased selling and marketing expenses. Major marketing and promotional activities included the summer vacation promotions of Fantasy Westward Journey, the 10th anniversary ceremony of Westward Journey Online II, unlimited beta testing for Soul of the Fighter, and promotions for Blizzard Entertainment's World of Warcraft, Mists of Pandaria, as well as high staff-related costs due to increased headcount and increased investments in our product development pipeline.

Net profit for the third quarter of 2012 totaled RMB811.9 million or USD129.2 million, compared to RMB875.3 million and RMB825.8 million for the preceding quarter and the third quarter of 2011, respectively.

During the third quarter of 2012, we reported a net foreign exchange gain of RMB23.7 million or USD3.8 million, compared to net foreign exchange losses of RMB26 million and RMB65 million for the preceding quarter and the third quarter of 2011, respectively. The quarter-over-quarter and year-over-year changes in foreign exchange gains and losses were mainly due to the translation gains and losses arising from the company's euro-denominated bank deposit balances as of September 30, 2012 as the exchange rate of the euro against RMB fluctuated over the period.

We reported basic and diluted earnings per ADS of USD0.98 each for the third quarter of 2012. This compares with basic and diluted earnings per ADS of USD1.06 each for the preceding quarter and basic and diluted earnings per ADS of USD1.01 and USD1.00, respectively, for the third quarter of 2011. Basic and diluted earnings per ADS for the third quarter of 2012 reflects the accrued withholding tax associated with the offshore remittance of cash from China in anticipation of the declaration of the special cash dividend.

We reported a net income tax charge of RMB194.8 million or USD31 million for the third quarter of 2012 compared to RMB149.5 million and RMB140.5 million for the preceding quarter and the third quarter of 2011, respectively. The effective tax rate for the third quarter of 2012 was 19.9% compared to 14.8% and 14.7% for the preceding quarter and the third quarter of 2011, respectively. The increase in net income tax charge was due to the occurrence of an accrued withholding tax of RMB40 million associated with the offshore remittance of cash from China in anticipation of the declaration of our special cash dividend.

Our various principal subsidiaries renewed their qualifications as high and new technology enterprise in 2011 and therefore enjoy a preferential enterprise income tax rate of 15% from 2011 to 2013, subject to annual review by the relevant tax authorities in China.

As of September 30, 2012, our total cash and time deposit balance was RMB14.9 billion or USD2.4 billion, compared to RMB11.9 billion as of December 31, 2011. Cash flow generated from operating activities was RMB670.1 million or USD106.6 million for the third quarter of 2012, compared to RMB880.9 million and RMB864.9 million for the preceding quarter and the third quarter of 2011, respectively.

Finally, on November 13, 2012, our Board authorized a share repurchase program of up USD100 million for a period not to exceed 12 months, as well as a special cash dividend of USD0.04 per ordinary share, which is equivalent to USD1.00 per ADS. Each ADS represents 25 ordinary shares. And the special cash dividend is payable to shareholders on record as of January 15, 2013. The special dividend is expected to be paid on January 18, 2013 with the total amount of cash distributed expected approximately USD131 million.

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

Question-Answer Session

Operator

[Operator Instructions].

Our first question comes from the line of Richard Ji from Morgan Stanley. Please go ahead.

Richard Ji – Morgan Stanley

Hi, William, Onward, good morning. Thanks for taking my call. I have two questions.

First of all, can you help us to shed some color on the flattish year-on-year online game revenue growth? And was it largely due to the weakness in World of Warcraft? And also, after the reasonably successful launch of Mist of Pandaria, Soul of Fighter and Kung Fu Master, should we expect online game sales to reaccelerate?

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

So with regard to Richard's first question regarding the performance of the online game's flattish trend in the third quarter. I think basically this is actually attributed to the decrease in the revenue contribution from the World of Warcraft. But given the fact that the fourth expansion pack for World of Warcraft which is the Mist of Pandaria that has been launched in the second half of October, we have seen that there has been an upward trend both in terms of the user and also the performance of the game itself as such. And specifically, because the launch of -- the launch date for this game falls in the fourth quarter, and so this would not bring any positive impact in the third quarter. And although there has been a downward trend or [inaudible] contribution from the World of Warcraft in the third quarter, we believe that going forward that this would be a positive initiative to us.

And on the other hand, with regard to our self-developed games, we do see that the game itself is still having a growing trend and we do experience a double-digit growth as well for our own games. And for the Soul of the Fighter, the Kung Fu Master, those games that have been launched on the 13th of September and the 18th of October, respectively, the initial feedback from the games have also been very positive. And this would also be a reflection of the fact that NetEase got a very strong self-development capabilities and the fact that we always focus and emphasize on the importance of the user experience with -- as well as to be excel and succeed in this business. Thank you.

Richard Ji – Morgan Stanley

Yeah, thank you. My second question is regarding your mobile internet initiative. Can you give us some color on what's your future plans to further ramp-up your mobile internet user base? And also we are particularly interested in your mobile game development plan.

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

So, with regard to our own views on the mobile internet, first of all, William also looked at that, there has been a very strong development in terms of the smartphone market and there is an example regarding the Google Nexus phone which is currently sold at a very competitive price of RMB1,888 which is very competitive in the [inaudible] China market, and also pay due attention to the trend in this area. And on the other hand, NetEase [inaudible] very strong and successful launch of the mobile applications on those smartphones, and there are quite a lot of different categories that we're currently offering. Other than the mobile news applications, we also got some [inaudible] and also [inaudible] and things like that. And in fact, there are many, many areas that we are currently working on as well in order to build up our mobile offering.

And one point that we can rest assured is that we would further invest in this area in order to tap into the development of this new trend. And we would also make good use of the experiences that we have accumulated so far in order to enhance our user experience in this sense.

And moving on to the mobile games area, currently the company has also got some ideas and working on how to better enhance the user experience of playing those games on the mobile platforms. And we are also finding ways to have a -- to better transit the best-of-its-kind experience using the PC platforms to the mobile platform as well. And at the same time, we would also be finding ways and thinking on how we could better make good use of [inaudible] times of the mobile users in this sense. And going forward to next year, hopefully in the first or second quarter of 2013, maybe we would also launch some new initiatives in this area to the market. Thank you.

Richard Ji – Morgan Stanley

Yeah, that's very helpful. Thank you.

Operator

Thank you. And as a reminder, ladies and gentlemen, please ask one question, one follow-up question, and then re-queue for additional questions.

Our next question comes from the line of Dick Wei from JP Morgan. Please go ahead.

Dick Wei – JP Morgan

Hi. My question is on advertising. Can you discuss how much of your advertising revenue is coming from video and what is the trend currently for video advertising? Thank you.

Onward Choi

So with regard to the advertising revenues, I think for now we do not have a further breakout on how much it would be coming out from our video. But what I can share with you is that our major revenue contribution would still be coming from our [inaudible].

Dick Wei – JP Morgan

I wonder if you can tell me the growth number that you [inaudible] this year and maybe some of the outlook that you can share. Thank you.

Onward Choi

So your question is asking about our outlook about advertising business, isn't it?

Dick Wei – JP Morgan

Particularly on online video, yeah.

Onward Choi

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

So with regard to our view about the video -- the portal video development, first of all, we appreciate that the video content business is very, in terms of the competition, it is very fierce and also intense. And at the same time, the investment is also very costly. And for NetEase, we do believe that we do offer quite a lot of -- quite unique content or features, just like what we have been doing on our mobile platforms where we have been deploying new resources to roll out the applications that can meet the expectations of the users alike.

And in terms of the video content development, I think for now NetEase got its own open education applications on the mobile platforms and we have already translated over [a thousand] courses from [inaudible] globally. And going forward I think our strategy is to find out some differentiators [inaudible] from our peers and try to work out something very unique of ourselves to put out to the market.

Operator

Thank you. And our next question comes from the line of Alicia Yap from Barclays. Please go ahead.

Alicia Yap – Barclays Capital

Hi, good morning, William, Onward and Brandi. Thanks for taking my questions.

My first question is also related to your advertising business. Wanted to follow up, can you comment if you have seen any impact from the Japan auto OEM and whether that will impact your fourth quarter revenues, and if you can also share the view on the latest advertiser sentiment on the overall budget.

William Ding

[Chinese language spoken]

Onward Choi

Okay. Thank you, William. So with regard to the potential impact of the auto OEM from the Japanese manufacturers, of course this will be not be a standalone impact to just NetEase alone but this applies to the whole industry and impacting the whole media businesses.

And there's also something that I would supplement on William's behalf, because we do see that those would be an impact to us in terms of the automobile's contribution, so there would also be something that we need to pay attention to, especially in the fourth quarter in terms of the revenue contribution. And although we still hold a cautiously optimistic view of the general outlook of the advertising business, but I think given the fact that the Japanese factors and also the fact that the overall economy is not very warm for now, and so we would see that perhaps there would be a more stable performance going forward.

Alicia Yap – Barclays Capital

I see. Very helpful. And second question is on your newly launched games, [Dan Hun] and [Wu Hun], I wanted to get your view on how are the games' performance so far. And among the two games, which game that you think will deliver higher expectation? Thank you.

Onward Choi

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

So, basically with regard to the initial performance or the feedback from the market since the launch of our two new games, namely the Soul of the Fighter and the Kung Fu Master, I think we are very happy to say that the position of rolling out this kind of game channel has been very successful. And we do also take into the interest of the market of people who are looking for some fast-paced action games in this respect. But at the same time, we would also make good use of our existing R&D capabilities and resources to better enhance or to add in some new game features to those games.

And in particular, with regard to our launch of the Kung Fu Master, although the launch time is not very long, because it has just been launched on the 18th of October and for now today is just the 15th of November, but so far its performance is also over our original expectations, which is very encouraging. And at the same time, we would make good use of our experience that has been accumulated for so many years for now to make sure that we would be able to launch out some more new games and bigger games and even more diverse game channels to meet the market expectations. Thank you.

Alicia Yap – Barclays Capital

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

Eddie Leung – Bank of America Merrill Lynch

Good morning. Thank you for taking my questions. I have two questions about the cost side. The first one is about taxes. Could you give us some color on the fourth quarter tax rate? Because I know you just got the -- renewed the high tech status. So is there going to be any one-time tax incentive or tax rebate in the fourth quarter?

And then secondly, could you give us some color on the operating expenses trending into the fourth quarter? Usually I know that there could be graduates from colleges joining the company. So, would that affect the fourth quarter expenses? Thank you.

Onward Choi

So, Eddie, this is Onward. Would you mind to repeat your first question? Because I can't hear --

Eddie Leung – Bank of America Merrill Lynch

Just wondering whether there is any one-time tax incentive or tax rebate in the fourth quarter after the renewal of high tech status?

Onward Choi

Okay. For the first question, I think for now we do not think there would be any special tax rebate or so coming in the fourth quarter. But what I have to clarify with you is that the high and new technology enterprises tax status has been granted in 2011, which means that the company will be able to enjoy the 15% preferential tax rate in paying our income tax in this respect. And so I think basically taking out all the other special events that would be happening. We do see that the tax rate for the company would be somewhere around the 15% range. And this would be our feedback on the first question.

And with regard to your question on the operating expenses, I think you're quite right in saying that the company would be doing its annual university [inaudible] intact in the third quarter, and I think those impact has already been somehow reflected in the third quarter financials. And going forward, I think we would see that the cost level would be somewhere around what we have been experiencing in the third quarter.

Operator

Thank you. And our next question comes from the line of Mark Marostica from Piper Jaffray. Please go ahead.

Mark Marostica – Piper Jaffray

Yes. Thank you for taking my question. Appreciate the earlier color on the performance of Mist, which seems to be improving in the quarter, current quarter. My question is in relation to the performance of Mist and receptivity of Mist by gamers compared to prior World of Warcraft expansion packs, namely Cataclysm, and I wonder if you can kind of give us a sense, at the same point in time we are today compared to when Mist was launched, how Mist is performing relative to Cataclysm at that same point in time. Thank you.

Onward Choi

Thank you, Mark.

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

Thank you.

So, Mark, basically I think in terms of the performance of the Mist of Pandaria that we have launched on the 2nd of October, so far we are happy, quite a satisfactory comments, feedback. I think the major differences between the launch of Mist of Pandaria versus the Cataclysm is that in this new expansion pack we have added in much more oriental elements, where not only the existing players but also quite a lot of new players would also find them very appealing and would like to play and experience this game. And going forward, we would look forward that there would be some enhancement versions, say, for example, 5.1, 5.2 versions for the Mist of Pandaria, where we would pay more attention on the needs especially of the China market and also to make sure that the demand has been really addressed.

Operator

Thank you. And our next question comes from the line of Tian Hou from T.H. Capital. Please go ahead.

Tian Hou – T.H. Capital

William and Onward, my question is regarding what could your pipeline into 2013. And also regarding the web game, what's your thoughts in that front, how NetEase is going to position itself in the web game sector?

Onward Choi

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

First of all, with regard to the pipeline in 2013, I think hopefully the Dragon Sword, which is next-generation 3D MMORPG will be coming out hopefully in the first half of 2013. And at the moment we have also got some -- or a few new games under development, and which is in the process of having some special [course] at the moment. But we do feel that all of our pipelines are in a very stable condition, and we do that given we have accumulated a very good experience of doing the development of online games, we will continue our efforts to make sure that we can grow out the new game titles that can get a better experience both to our users and enhance the experiences. And at the same time, we will also try to find ways to further enhance our marketing and promotional activities in order to make our game more successful in this area.

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

Now, with regard to our other game developments, including things like the web games kind of stuff, we will take a more conservative and a more cautious approach in dealing with that.

Operator

Thank you. And our next question comes from the line of Jialong Shi from CLSA. Please go ahead.

Jialong Shi – CLSA

Hi, good morning, William and Onward. Thanks for taking my call. And I have a couple of questions.

And the first question is about your game pipeline. We know NetEase has a very big -- as you mentioned, that it has a very big game pipeline. Could you give some color on the performance of Heroes of Tang Dynasty II new expansion pack and also Dragon Sword during your previous testing?

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

So first of all, with regard to the Heroes of Tang Dynasty II expansion pack, first of all, the development of this or the [inaudible] upgrade for this game title would be based on our experiences on operating the Heroes of Tang Dynasty before. And in this new version of the game, we will also try to enhance the pace or the user experience as such in order to bring a better experience to our players. And this new version of the game would be open for the testing by tomorrow. And we are very confident on this game and believe this would also bring in another good impact on both the user experience and performance.

With regard to the Dragon Sword pipeline, for the time being, the game itself is in the testing phase. And we have also enhanced the experience and the game play within the game, like the fighting kind of experience. And although we have a very successful experience of operating Tianxia III in the market, but we would also make good points by learning from operating those successful games in order to bring some new initiatives to the market by rolling out the Dragon Sword in the upcoming future.

Operator

Thank you. And our next question comes from the line of Thomas Chong from BOCI. Please go ahead.

Thomas Chong – BOCI

Hi, William and Onward, good morning. I have a question regarding the R&D headcount. Can management give us a sense of how many R&D people in third quarter? And how many do you expect to reach by the end of next year? And which area will they be focusing on? You said on client-based game, web games or mobile games or other areas? Thank you.

Onward Choi

[Chinese language spoken]

William Ding

[Chinese language spoken]

Onward Choi

So with regard to William's on the various game developments, including the client-based games, the web games or mobile games, first of all, I think NetEase would take an initiative to analyze the market and also understand what the peers are currently doing, their conditions, their performance and things like that, in order to identify what we'll be doing in the future. But having said that, we always believe that the client-based game is a long-lasting theme to us and we always believe that there is still room for us to further make our existing client-based game to a much high quality and to build a much better user experience alike.

And we do see that there would be a good opportunity to make good use of our existing client-based experience to try out in the mobile games area. But I think we said there's no need for us to distract our attention too much on areas like web games. But at the same time I think we would always a very proactive approach in observing what's the market is currently doing and aware what our peers are currently doing and see when there would be something that we would consider worth to do in this respect.

And with regard to the mobile games initiative, I think it will be better for us to think of some new ways of doing so and also offer something that would be having its unique features to take into the demands of the market. Thank you.

And this would be one of the questions that Thomas has raised, and the other question would be regarding the R&D headcount of our company in the third quarter and our expectations that would be looking forward going to the fourth quarter.

For the internal developers number in the third quarter, we have around 2,000 for now. And we do not set up any specific target on how many people that we're going to reach for a particular moment, but most of the time the increase or the changes in our headcount very much depends on how our business is going, and we will try to make sure that we would recruit and hire sufficient number of R&D people in order to meet with the company's business development plans as such.

Operator

Thank you. And our last question comes from the line of Alex Yao from Deutsche Bank. Please go ahead.

Alex Yao – Deutsche Bank

Hi. Good morning, everyone, and thank you very much for taking my question. My first question is on the usage side, so, from financial perspective, the gaming revenue was largely flat Q-over-Q or year over year. But from the usage side, are we seeing the active gamer base increase or decrease from Q-o-Q or year-over-year basis? Thank you.

Onward Choi

I think with regards to our gaming revenues performance, I think in the third quarter basically the overall result is that this has been flattish. And basically from what we had highlighted before, our self-developed games have also experienced a very good growth in the third quarter, even a double-digit increase. So you would see that in this plan the number of the users has been progressing quite well, especially in the third quarter. And you would also be aware that in the third quarter, for our Fantasy Westward Journey or Westward Journey Online II, both those games have also got some new hit records of the PCU numbers of 2.7 million and 1.27 million, respectively, for those two games, which is quite encouraging.

And by taking the performance of the third quarter into account, I think the decrease or the flattish result was mainly brought about by the decline in the revenue contribution from the World of Warcraft, as we have mentioned also earlier, because the fourth expansion pack has just been launched on the 2nd of October and so there wouldn't be any revenue contribution as such or incremental revenue contributions that brought about a satisfactory performance [inaudible] area.

Operator

And do you have any closing comments at this time?

Brandi Piacente

Yes. Thank you everyone for joining us today. Please note that Cassia Curran, NetEase's IR Manager based in Hangzhou is also available for follow-up questions if you have any, or you can always contact the Piacente Group for further information. The information for contact is located on the website and on the press release.

Have a great day, and thank you.

Operator

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference, you may do so by dialing 1-800-406-7325, or international participants may dial 303-590-3030, and entering the access code of 4569784-pound. We thank you all for your participation. And at this time, you may now disconnect.

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Source: NetEase's CEO Discusses Q3 2012 Results - Earnings Call Transcript
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