The9 Limited (NASDAQ:NCTY) Q3 2008 Earnings Call November 18, 2008 8:00 PM ET
Executives
Richard Cai - Senior Manager, Investor Relations
Xiaowei Chen - President
George Lai - Chief Financial Officer
Huanxin Jiang - Vice President, Technical Operations
Analysts
Alicia Yap - Citigroup
Paul Wuh - Nomura
Adam Krejcik - Roth Capital
Analyst for Eddie Leung - Merrill Lynch
Tony Gikas - Piper Jaffray
Dick Wei - JP Morgan
Paul Keung - Oppenheimer
Analyst for C. Ming Zhao - Susquehanna
Atul Bagga - Thinkequity
Operator
Good day, ladies and gentlemen. Thank you for standing by. Welcome to The9 Limited 2008 third quarter earnings conference call. My name is Krista and I will be your coordinator for today. (Operator Instructions) Now I would like to turn the presentation over to your host for today’s conference, Mr. Richard Cai, Senior IR Manager for The9. Please proceed, sir.
Richard Cai
Thank you, Operator. Welcome, everyone, and thank you for joining us today for The9's 2008 third quarter earnings conference call. Management with me today are Xiaowei Chen, President; and Mr. George Lai, Chief Financial Officer. As always, I will start with a review of the Safe Harbor statement before management begins their prepared remarks.
During the course of today’s call, certain projections or forward-looking statements may be made regarding The9's future financial performance or future events. We wish to caution you that such statements or predictions are based on current information and expectations and actual results may differ materially from those projected in the forward-looking statements.
We would like to refer you to documents that the company filed with the U.S. Securities and Exchange Commission. Those documents contain additional information concerning factors that could cause actual results to differ materially from those contained in the management’s projections and forward-looking statements.
Now we would like to begin with our President, Ms. Xiaowei Chen, who will give you an overview of our financial results and operations report, followed by our CFO, Mr. George Lai, who will follow with a detailed discussion of our financials this quarter. Xiaowei.
Xiaowei Chen
Thank you, Richard. Good day and evening, ladies and gentlemen. Thank you for participating in our discussion of The9's 2008 third quarter results. In Q3 2008, our total net revenue increased 29.3% year over year and decreased 10.2% quarter over quarter to $60.2 million, net income was $14.5 million, representing 157.6% year-over-year growth and 15.1% quarter over quarter decrease. Earnings per ADS were $0.52.
Despite seasonal impacts typical of the third quarter, we reached record revenue and net income for this particular quarter. Key operational metrics, such as total registered users and new registered users, have been increasing steadily, demonstrating continuing strengthening of The9's operational execution.
Now let me provide you with highlights of our current games operations during the quarter, as well as how we are continuing with our execution of our core strategies.
First of all, World of Warcraft -- as for most Chinese online games, schools regular summer break from July to September tends to create seasonal downward pressure on PCCU, ACCU, and revenues. This summer, the 29th Olympic Games compounded the seasonal effects. For WoW, this effect is more prominent as when students disburse during summer, or when some of the guild members were watching the Olympics, it would be hard for the entire guild to play together. As a result, in the third quarter of 2008, WoW's performance was off its historical peak in Q2. However, we see these issues as seasonal and temporary and we believe the fundamentals of WoW remain strong and poised for continued growth over the long-term.
In the third quarter of 2008, WoW still achieved peak concurrent user level of approximately 995,000, and the average concurrent user, ACCU level, reached approximately 416,000. By offering more value-added services, such as paid character transfer and security tokens for WoW users to protect their game accounts, we improved WoW's average revenue per user hour, or ARPU, from RMB0.41 in the previous quarter to RMB0.43 in the third quarter of 2008.
As of September 2008, approximately 13.5 million accounts have been registered and activated for the WoW games in Mainland China.
On November 13th, Wrath of the Lich King, the second expansion for World of Warcraft, hit the shelves in North America and the rest of the world. We are now actively preparing to launch the expansion pack in Mainland China. We see anticipation for the game continue to mount and expect another substantial increase of WoW's concurrent user and usage level in conjunction with its rollout, just as we observed after launching The Burning Crusade.
In light of greater potential interest in the game, on October 9th, we launched the 10th site of World of Warcraft to provide more servers and high quality services for game plays in China. To date, we have opened 21 server realms on the ninth server site and 14 server realms on the 10th server site.
In order to increase the game’s exposure to a larger group of new users, as we mentioned in last quarter, a very important measure we are taking is to expand our ground promotion team. By the end of the third quarter of 2008, our ground promotion team grew to about 400 people. Our people are promoting our services to Internet cafes in hundreds of second and third-tier cities. Looking forward, we will continue to expand the ground promotion forces toward the end of this year and into 2009.
To further improve the efficiency of our distribution network, we have adopted a new distribution structure with which would directly work with 42 first-tier regional distributors rather than appoint only one nationwide general distributor. The new structure provides us direct access to distribution channels so that we can better motivate our end distributors and reach our goals to penetrate lower tier cities.
About Soul of the Ultimate Nation, or SUN, SUN’s performance in the third quarter remained stable. Because of seasonal fluctuation and impacts caused by the Olympics, SUN’s active paying accounts slightly declined. On the other hand, ARPU was improved as new content was offered in this quarter. We launched a special Olympic pack for SUN on July 30th, and SUN’s second expansion pack, Conquer the Top of Bloody Hills, on September 22nd.
More over, we plan to release a new expansion pack, Darkness is Coming: The Beginning of Shadow, in November. In addition, to further penetrate into the market of lower tier cities, SUN’s fifth regional server site, the Shandong site, was launched following the first four regional sites in [Zhengzhou] and [inaudible], [Guangdong] and [inaudible], Sichuan and [inaudible] and [inaudible] areas. We expect these content upgrades will help gradually raise the concurrent user and usage level of SUN.
Next, about Granado Espada, or GE -- GE's performance in the third quarter of 2008 was not up to our expectations. During the third quarter of 2008, the Korean game developer IMC focused its efforts on the launch of new Granado Espada or new GE. Therefore, only one content upgrade, the Battle of Kings, has been launched during Q3 in China. Also, GE was subject to the impacts caused by online game seasonality as well as the Beijing Olympic Games.
On November 13th, however, we started the open beta test for new GE in China. We are deeply committed to the success of the new GE. We closed the GE servers for seven days before the open beta test in order to make sure the transitional process is smooth. There is a great improvement in the game content of new GE to fit the demand of Chinese game players.
In order to better collect our players’ feedback about new GE, online players can send their feedback to my email directly so as to build a direct access to the insights into our game players needs. We believe new GE will assemble more users around the game and ARPU will begin to increase in Q4 2008.
On a combined basis, SUN and GE generated net revenues of $4.9 million in the third quarter of 2008, decreased by 12% compared to the previous quarter. As mentioned earlier, the sequential decrease was primarily due to GE’s performance. SUN and GE in aggregate had approximately 2.0 million active accounts in the third quarter of 2008, of which 129,000 were active paying accounts.
Let me now update you on our new game launches -- EA Sports FIFA Online 2 -- we launched a technical test for FIFA Online 2 on -- I apologize. I should have said EA Sports FIFA Online 2 -- we launched a technical test for FIFA Online 2 on September 12th and the game appears technically mature and stable, as we expected. We are currently working with EA to prepare for the localized version and apply for publication number for this game. We are targeting to launch a closed beta test for the game by the end of December.
Audition 2 -- to better distinguish Audition 2 out of various [inaudible] casual games in China, we are working very hard with T3, our developer partner of Audition 2, on further polishing the game. Recently, T3 has done an extensive internal testing, which allows further moves to the next step of preparation. With this, we expect to launch the open beta test of Audition 2 early next year. We believe we can bring the best dancing game experience to millions of Chinese game players.
Atlantica -- Atlantica is a 3D online time-based MMORPG we license from [Indoors], a leading game developer in Korea. The game was commercialized in Korea in January of this year. Since then, the game has been well received by players around the world as one of the most anticipated online game of the year.
On November 4th, the day on which Atlantica won the award of the best online game from abroad at China Joy 2008, we started a closed beta test for the game. We are now targeting open beta for the game by early 2009.
Now, let me talk about our proprietary game development -- The9 is proactively strengthening our proprietary game development capabilities. Our in-house R&D team has grown from 190 people last quarter to over 230 people this year and we expect it to further grow to over 250 people by the end of the year. Warriors of Fate Online commenced closed beta test in [Nantung] City on October 10th and has received very positive player feedback. The second round of closed beta test is scheduled at the end of this year or early next year. The open beta is set to be launched in the second quarter of 2009.
In addition to Warriors of Fate Online, we have four other games underway. These games include 3D MMORPG, 2D MMORPG, one casual game, and one web-based game in our proprietary game development pipeline.
Complementing our in-house development and given our strong cash position of over $330 million, or cash equivalents and short-term investments, we are actively looking for good game development studios to be our potential investment [targets].
Through all of the above approaches, we are increasingly enhancing our proprietary game development capabilities and going forward, we plan to launch two to three proprietary games each year to further diversify the company’s revenue sources.
With that, I would like now to turn the call to George Lai, our CFO. George.
George Lai
Thank you and hi, everyone. Let me now turn to our financial results for the third quarter of 2008. For the third quarter of 2008, The9 reported net revenues of $60.2 million, a 29.3% increase compared to the third quarter of 2007, and a 10.2% decrease quarter over quarter. [Schools semester break] tends to create seasonal downward pressure for our online games when students [inaudible] in the form of guilds. The Beijing Olympic Games held this summer created another center of attention for typical online game players, which increased the seasonal impact in this quarter.
Gross profit for the third quarter of 2008 increased by 36.8% year over year, from $19.5 million, and decreased by 15.5% quarter over quarter, from $31.5 million to $26.6 million. Since certain components of cost of services, such as server depreciation and Internet data center rental expense do not change in proportion to the lower sales levels, gross margin for the third quarter of 2008 was lower sequentially as revenue decreased quarter over quarter. Gross margin was 44.3% in the third quarter of 2008, up from 41.8% in the third quarter of 2007 and down from 47% in the second quarter of 2008.
For the third quarter of 2008, operating expenses were $15.2 million, remaining stable compared to $14.8 million in the previous quarter and representing an increase of 16.4% from $13 million in the same period of last year. The relative stable level of operating expenses compared with the previous quarter was [a direct] result of the increased product development expenses due to growth of our proprietary game development team and cost savings on sales and marketing expenses and general and administrative expenses.
For the third quarter of 2008, non-cash share-based compensation was $1.8 million, compared with $2.5 million in the third quarter of 2007 and $1.8 million in the second quarter of 2008. Share-based compensation expenses included in cost of services, product development, sales and marketing, and general and administrative expenses, were $0.01 million, $0.02 million, $0.06 million, and $1.7 million respectively.
Other income for the third quarter of 2008 was $1.7 million compared to other expenses of $2.4 million in the same period of 2007 and other expense of $0.7 million in the second quarter of 2008. The sequential decrease was primarily due to the [inaudible] effect of the increased government subsidy of $1.2 million, decreasing foreign exchange loss by $0.7 million, and decreasing [inaudible] expense by $0.4 million.
Income tax expenses for the third quarter of 2008 was $0.9 million, compared to the income tax expense of $1.0 million, both in the previous quarter and in the same period of 2007. There have been no significant change in effective tax rate on a quarter over quarter basis.
Net income for the third quarter of 2008 decreased 15.1% from $17.1 million in the second quarter of 2008 to $14.5 million. The change in net income was a result of the cumulative effect of the foregoing factors.
On a per share basis, fully diluted earnings per share and per ADS for the third quarter of 2008 was $0.52 compared to $0.62 in the previous quarter and $0.19 for the same period last year.
For the third quarter of 2008, adjusted EBITDA was $26.1 million, compared to the adjusted EBITDA of $29.4 million in the previous quarter and $19.8 million for the same period of last year.
On a per share basis, fully diluted adjusted EBITDA per share for the third quarter of 2008 was $0.94 compared to $1.06 for the second quarter of 2008 and $0.67 for the third quarter of 2007.
As of September 30, 2008, the company’s total cash and cash equivalents and short-term investment were $330 million, which increased actually compared to $305 million as of June 30, 2008, primarily due to the cash received from the sales of prepaid game cards.
So thank you for listening to our presentation today. At this point, we will take questions.
Question-and-Answer Session
Operator
(Operator Instructions) Alicia Yap with Citigroup.
Alicia Yap - Citigroup
I actually have a couple of quick questions -- first of all regarding your World of Warcraft renewal status. Can you share with us the latest status of your negotiation with Blizzard? As we all know, the negotiation actually has been going on for some time. What are some of the key issues that remain to be discussed that hold up the decision at this point and when do you expect to finalize the discussion and able to announce to the street? Could it be before the end of the year, maybe like early next year? Or do you think it could be as late as May next year?
Xiaowei Chen
Thank you, Alicia for your first question. Regarding the WoW renewal discussion, you are absolutely right -- we have been conducting the talks with Blizzard since actually May this year. At this point, we have to say we have no comment on the timing as well as the key issues under discussion in this regard. When the decision has been made, the announcement will be made publicly and at that time, everybody will know. At this point, we thank you for your patience and understanding for our remaining no comment on this issue.
Alicia Yap - Citigroup
Okay, and then my second question is regarding the Wrath of the Lich King launch -- when do you expect to launch the Chinese version in China? Do you anticipate some of the -- like the more the hardcore gamers may have temporarily divert to other servers around the world and thus impacting their engagement in the China servers that may cause a temporary impact to your revenues in the fourth quarter?
Xiaowei Chen
We are working very actively with Blizzard to prepare for the localized version of the China launch. Our testing staff and Blizzard developers are working day and night around the clock, over the weekend, to prepare for the localized version to be ready and as soon as that is ready, we will be submitting that to the Chinese authorities for a publication number issuance, and once that is done, we will be launching the China version of Wrath of the Lich King as soon as possible. And at this point, our players are very actively anticipating the game and so far we have not observed a drop in our PCCU or ACCU levels due to the North America and European launch of Wrath of the Lich King.
Alicia Yap - Citigroup
I see. Thank you and I’ll get back to the queue. Thanks.
Operator
Your next question comes from the line of Paul Wuh with Nomura.
Paul Wuh - Nomura
Just a quick question on your -- two questions. First on the publication and both the regulators, I know that the last upgrade took quite a long time with the regulators. What do you think you can do to make sure that the Wrath of the Lich King will not take as long as the last upgrade?
Xiaowei Chen
Well, the second time is always better than the first time, because we are more experienced. The first time we -- at first we didn’t even anticipate that an expansion pack would need a separate publication number and this is obviously no surprise to us this time. And also, knowing exactly what the government demanded last time, we also have better anticipation of what the government would deem as safe and suitable content for the Chinese players, so even before we submitted the material to the government for reviewing, we have already passed our request for certain changes to be made to Blizzard. So their developers are well aware of the content requirements in China and so both factors combined should make the application process a much speedier process than last time. Thank you.
Paul Wuh - Nomura
Thank you. Also, did you say World of Warcraft ACU was 460 or 416?
Xiaowei Chen
I believe it was 416,000.
Paul Wuh - Nomura
Okay. All right. Thank you.
Operator
Your next question comes from the line of Adam Krejcik with Roth Capital.
Adam Krejcik - Roth Capital
Thanks for taking my question. Also, I’m not sure if you are aware but we’re getting a lot of feedback on our line here and it’s making it pretty hard to hear some of your comments, so I’m not sure if you are aware of that.
My question is the Wrath of the Lich King expansion pack, have you submitted that at all to any of the GAPPs yet for submissions?
Xiaowei Chen
We are preparing for the submission to the local publishing -- the local Shanghai bureau under GAPP and we should be submitting the most recent localized version very, very soon, within the next few days, we hope.
Adam Krejcik - Roth Capital
And that would be followed by Beijing once you get approval from Shanghai?
Xiaowei Chen
Correct.
Adam Krejcik - Roth Capital
Okay. And then just really fast -- prepayments and other current assets on the balance sheet increased just over 2 million this quarter -- could you highlight what that increase was related to?
Xiaowei Chen
I’ll let George take that question.
George Lai
The prepayment mainly referred to our prepaid [inaudible] stuff, so normally this number will fluctuate because of the seasonal effect. But unfortunately, since we anticipated our Q4 revenue number will be higher because of some [inaudible] in our games, so we will prepay the [inaudible]. This is the main reason for the increase in this balance sheet item.
Adam Krejcik - Roth Capital
Okay, great. Also really fast, the government subsidy in this quarter, was that a one-time event or will there be any continuation in Q4?
George Lai
We believe this is a one-time government subsidy and we do not anticipate this amount will happen again in Q4.
Adam Krejcik - Roth Capital
Got it. Thank you very much.
Operator
Your next question comes from the line of Eddie Leung with Merrill Lynch.
Analyst for Eddie Leung - Merrill Lynch
I’m Thomas asking a question on behalf of Eddie Leung. Just one question -- will you give us some color on the growth trend for the games in the third quarter? Thank you.
Xiaowei Chen
I apologize -- color on growth trends for the games in third quarter?
Analyst for Eddie Leung - Merrill Lynch
Yes, or give an idea of which game grew the fastest in the third quarter in terms of ranking and give us the color of this.
Xiaowei Chen
Okay. As I went through in the earlier part of my report, during the third quarter, which is typically a quarter because of the summer break and also this summer it was compounded by the effect of the Olympics, generally all online games generally experienced downward pressure during the third quarter due to the summer break and for all of our games, we have observed this kind of effect. The effect is more pronounced in WoW because it’s based on guild wars, and so when you have one guild war member that’s either away from school or away from the games because he’s watching the Olympics, then the entire guild cannot play together. But we have quickly observed a quick bounce-back shortly after the Olympics ended and the students came back to school. So WoW's performance came back very quickly to normal performance after the summer break ended and compounded by the effects that we have, like I mentioned also earlier in the report, that we have doubled our ground promotion team members from 200 at the end of I believe Q1 and also the middle of Q2 to 400 by the end of Q3, and we specifically targeted areas outside campuses as the students came back to school. And so these have worked very, very well. I actually have some detailed data here that we have -- in Q3 we have covered close to 1800 college campuses and in many of these campuses, we have set up a system where old players or pre-existing players can bring in new players, so all of these ground promotion work has done very good positive effect to the PCCU and ACCU level of WoW after the summer break ended. So in Q3, we have observed WoW to be still very strong and healthy.
SUN’s performance remains very stable in Q3 and because we are opening the [Shandong] district site, we expect that the launch of the second expansion pack of SUN, as well as the [Shandong] district site, can give a healthy boost to our ACCU levels.
What happened to GE, Granado Espada in Q3 was disappointing to us. However, we are actively working with the IMC, the developer, to launch a new China-specific second pack of GE and what we call it, the new GE, and we most recently launched the open beta of new GE and that seemed to be working very well, and we most recently set up the President’s mailbox that’s open to all of our game players, not only GE, of course, but we started it in GE and to all of our game players, including WoW and SUN. And we are actively answering the questions that our game players are asking us, requests that they may have, through not only the customer service but also through a venue that our players can essentially tell us not necessarily when they have a problem but tell us how they feel.
So through all these operational strengthening, we hope that all of our games will be on a very positive trend continuing into Q4.
I hope that answers your question.
Analyst for Eddie Leung - Merrill Lynch
Thanks. Just one quick follow-up -- would you tell us about the percentage of revenue coming from tier one and tier two cities?
Xiaowei Chen
Do we have this data?
George Lai
This data has remained quite stable compared to [inaudible] -- currently around 4% of our revenue is coming from tier one cities and combining second-tier and third-tier cities, combined about 50% of our revenue.
Analyst for Eddie Leung - Merrill Lynch
Thanks. That was helpful. Thank you.
Operator
Your next question comes from the line of Tony Gikas with Piper Jaffray. Please proceed.
Tony Gikas - Piper Jaffray
Good morning, everyone. Thanks for taking my questions. A couple of things -- could you talk about your expectations for game trends as the economy slows in the coming year? And then the second question, could you talk a little bit about maybe just review the game trends of new users the last time we saw an expansion pack to World of Warcraft? How did that user base grow and how short of a time frame?
Xiaowei Chen
Thank you for your questions. In terms of the economic turmoil impact on game trends, hold on one second. In terms of the economic turmoil’s impact on game trends, we so far have not observed any negative impact brought by the financial turmoil that started in the U.S. and we believe that of all the industries, we think that the Internet gaming industry may be affected the least, for several reasons. Number one is that we charge, for instance, for WoW only RMB0.45 per hour, so that’s about $0.07 per hour, due to -- per hour because WoW is a time-based game. And this is at a very price insensitive point for even the low-income players within our player group. And we believe that even during the financial turmoil, this would not constitute a price sensitive point and more likely, as other media entertainment forms grew more and more expensive relatively, we think that online gaming would remain stable, if not stronger, during the financial turmoil.
In terms of growth trends of games when you launch an expansion pack, what we observed during Burning Crusade’s launch last time was that our PCCU grew about 20% to 40%, or around 30% in one month’s time post-launching, and we expect the Wrath of the Lich King to do the same.
Tony Gikas - Piper Jaffray
Okay, and then I have a couple of quick follow-ups -- was there any share repurchase during the quarter to date on the $50 million authorization? And then what tax rate should we be using for 2009?
Xiaowei Chen
In terms of share repurchase, we announced a $50 million share repurchase program but we have to wait for the window to open after our earnings call, and our window is I think scheduled to open on the 19th -- I’m sorry, what was your second question, Tony?
Tony Gikas - Piper Jaffray
The last question was just the tax rate we should be using going forward. Thank you.
George Lai
Of course, one of the major uses is for our share repurchase and other than that, we do not have any specific plan how to use our cash right now. But of course, if there is [inaudible] good and potential M&A [deal], we would consider that. So this is the answer for our use of cash question.
Tony Gikas - Piper Jaffray
And then the tax rate?
George Lai
The effective tax rate for 2008, we expect it will be between 6% to 10% and going forward, and I do not have an estimation now because as you know, the currency and the tax policy have been changed quite significantly, so we need to discuss with our auditors on that for 2009.
Tony Gikas - Piper Jaffray
Thank you.
Operator
Your next question comes from the line of Dick Wei with JP Morgan.
Dick Wei - JP Morgan
Thanks for taking my questions. I’ve got two questions -- first of all, can you talk about what is the percentage of students in your player community? And the second question, if you could give some guidance on capital expenditure for the rest of the year and 2009, that would be great. Thanks.
Xiaowei Chen
Dick, I do not -- thank you for the question. I do not believe we have the percentage of students among our players population. This is something that we should get back to you about and to be honest, everybody is a student at one point or another so -- I’m not trying to use a clever way to answer your question. So if you develop a college student today, say five or 10 years later, even after he leaves college, likely he would still remain a very valuable player and WoW has that effect, actually. So the second question, I will let George answer, capital expenditures for 2009.
George Lai
For the capital expenditures, we have been very stable starting with 2007 and just to give you an idea in 2007, the CapEx expenditure is $37 million and we expect this number will be stable and in the fourth quarter of 2008 and also into 2009.
Of course, this number will increase when we launch our new games like FIFA and Audition 2 in the first half of 2009 but these numbers, we believe that we will not increase significantly.
Dick Wei - JP Morgan
Okay, thanks.
Operator
Your next question comes from the line of Paul Keung with Oppenheimer.
Paul Keung - Oppenheimer
Good morning. Thanks for taking my question. Can you go over how much it cost to set up each server site, each full server site of 40 servers and how long that would take?
Xiaowei Chen
Thank you, Paul, for your question. The price of the server is not always the same. However, as hardware manufacturers come down in price, which is thankful for us, the previous cost is about $40 million per server site and now it’s about $30 million -- I’m sorry, I apologize -- RMB40 million per server site and now it has come down to about RMB30 million per server site. And it takes about generally two weeks to set up, from purchase to set up, three months.
Paul Keung - Oppenheimer
Right, and why did you set up server site 10 when server site 9 was not full?
Xiaowei Chen
The setting up of server site 10 is in anticipation of one, the -- so first of all, CN9 is in China Telecom -- I apologize. First of all, CN9 is with China Netcom and CN10 is in China Telecom, so the two are not overlapping with each other. And secondly, CN10 was set up in anticipation of two waves of player growth surge -- number one is after they come back from summer break and Olympics and more importantly, it’s in anticipation of player number growth for the launch of Wrath of the Lich King.
Paul Keung - Oppenheimer
So can I interpret that server 9 and 10 is for different regions?
Xiaowei Chen
Yes, correct. The two regions don’t connect, so you either enter server 9 or server 10, because one is with China Netcom in the north and the other is China Telecom in the south.
Paul Keung - Oppenheimer
Okay, and a second question is did you notice any difference in game playing style for World of Warcraft between when before Wrath of the Lich King launched and after Wrath of the Lich King launched, in terms of going on raids and long-term playing habits?
Xiaowei Chen
I will ask the operational VP, who is in charge of launching the World of Warcraft, to answer this question.
Huanxin Jiang
Actually, before Wrath of the Lich King, the [inaudible] [Black Temple], but after Wrath of the Lich King, I think the most game experience just level up from 70 to 80.
Xiaowei Chen
Paul, let me quickly give you what’s in Wrath of the Lich King so that you have a better idea about -- is that what you are asking for, Paul?
Paul Keung - Oppenheimer
Yes.
Xiaowei Chen
Okay. In Wrath of the Lich King, there are several major upgrades. Number one is that the necromantic powers of the death knight, it’s now the WoW's first hero class and the quest level from the maximum of 70 before has been increased to 80 and now players can also acquire new inscription professions. And there has been more maps that’s added to the expansion pack, and also obviously new character and customization options.
So what we would anticipate is yes, probably longer playing time, average playing time for our players and they would have more new levels to work up to and more new characters and inscription professions to work with.
Paul Keung - Oppenheimer
Okay. Thank you very much.
Operator
(Operator Instructions) Your follow-up question comes from the line of Paul Wuh with Nomura.
Paul Wuh - Nomura
I just want to double-check -- on the average concurrent users for WoW in the second quarter, it was 489, is that correct?
Xiaowei Chen
If my memory serves me correct, yes.
Paul Wuh - Nomura
And then you said it’s 416 in the third quarter, so that means we have seen about a 15% decline quarter for quarter and eight ACUs, is that how we should think about that?
Xiaowei Chen
I think you are correct but please bear in mind this is ACCU over the entire quarter and much of the third quarter again, like I said, was impacted by both the summer break and the Olympics, and when you have one person in the guild that’s out, then the entire guild cannot play together. So WoW is -- because of the guild war system, WoW is more impacted than most Chinese online games by the summer break and the Olympics.
Paul Wuh - Nomura
Okay, and also, for example, the third quarter last year, the ACUs were up actually 13%, I guess because of the expansion packs and all that. Actually your third quarter last year versus second quarter was actually quite strong. Your overall gaming revenues were up 16% quarter over quarter. Is it because, you know, the expansion packs and things like that happened during that period? Or --
Xiaowei Chen
Absolutely.
Paul Wuh - Nomura
-- you didn’t see the seasonality last year that you saw this year?
Xiaowei Chen
Last year we launched Burning Crusade in September and that gave the game a very strong boost and shortly before the launch, the players were already anticipating the launch. So I think the Burning Crusade was what contributed the strong boost which we didn’t have this Q3, so that was the major difference.
Paul Wuh - Nomura
But do you think that the Wrath of the Lich King should hit before the end of this year, right, or not?
Xiaowei Chen
That is a process -- at this point, we cannot give you a definitive answer but we are certainly working toward that goal.
Paul Wuh - Nomura
Okay. All right, thanks.
Operator
Your next question comes from the line of Ming Zhao with Susquehanna.
Analyst for C. Ming Zhao - Susquehanna
Good morning. This is [inaudible] calling in for Ming. Our question is regarding FIFA Online 2 -- based on your internal estimate, if FIFA Online 2 is able to enter the market, how do you think its ARPU will compare with other sports games, such as freestyle and [pop kart]? Thank you.
Xiaowei Chen
Thank you for your question. We think that FIFA Online 2 has several advantages -- number one, it’s a very well-made game. It’s success has been proven in Korea and other markets. Korea is probably the most relevant because for one, Neowiz was based in Korea and also it is the closest market in comparison with the Chinese market. And so FIFA has been proven to be successful in not only Korea but also the rest of the world where it has been launched. And number two thing is that in China, there have been a lot of game players who grew up playing the unfortunately illegally smuggled in pirated copies of the FIFA console game, so the game has a good user base that has already been cultivated and when we launch FIFA, we can build on top of that user base. So for both these two advantages, we believe FIFA will become one of the most successful casual games in China.
Analyst for C. Ming Zhao - Susquehanna
Thank you. That’s very helpful.
Operator
You have a follow-up question from the line of Alicia Yap.
Alicia Yap - Citigroup
Yes, thanks for taking my follow-up questions. It’s regarding to actually the World of Warcraft content update. From my understanding, there was an update prior to the launch of the Wrath of the Lich King in the U.S. Can you tell us whether this content update has been implemented to the Chinese version and if so, how have you monitored the user trends since the content update was released?
Xiaowei Chen
I apologize. The content update you are talking about, are you talking about version 3.0 that was launched in the United States and Europe, in addition to Wrath of the Lich King?
Alicia Yap - Citigroup
Yes, it’s something like they launched it prior to the Wrath of the Lich King. It’s the last update prior to the Wrath of the Lich King.
Xiaowei Chen
Yes, this has been planned for China and we -- our entire operational team has been very actively preparing for the launch of version 3.0. We think that it should meet the Chinese players very soon.
Alicia Yap - Citigroup
So would that come out in the fourth quarter, because --
Xiaowei Chen
We certainly hope so, yes. We certainly hope so.
Alicia Yap - Citigroup
And then you also mentioned that the user actually kind of like bounced back after the summer holidays is over. Can you give us some trends like what is the user level [inaudible] after the October Holiday level and also the November trend itself?
Xiaowei Chen
To avoid giving guidance by talking about October and November data, what we can tell you is that our user level shortly after the summer break is over and the Olympics were over, came very quickly back to pre-summer break and pre-Olympics levels.
Alicia Yap - Citigroup
I see. Okay, and then my next question is regarding your operating expenses -- so should we expect your R&D will continue to increase as you ramp up the in-house team? And what about your sales and marketing expectations? What is your planned budget for your Wrath of the Lich King promotion, as well as other new games pre-launch initiative?
Xiaowei Chen
Let me give you the general trend and then George can give you more specific color -- in Q4, we definitely expect our R&D costs to continue to increase compared to Q3. We believe this is for a good cause and we believe very strongly in the future of the [inaudible] or Warrior of Fate Online game. Of the closed beta that we have most recently launched in [Nantung], we have received very good player feedback and we believe that by building the R&D capabilities ourselves, we can continue to diversity our portfolio as well as revenue source, so we think that this is investment for a very good cause.
For our sales and marketing expenses, there are two reasons why we will see the sales and marketing expense continue to increase -- number one is the continuing expansion of the ground promotion forces that we were talking about earlier during my report to you, and that we will continue the expansion of through the end of this year and well into next year. We believe that we should continue with this expansion to capture the growth not only of all of our gamers but particularly in lower tier cities.
The other side of the additional increase of S&M expenses are due to three of our new games launched, as well as the Wrath of the Lich King’s launch, all anticipated if not in Q4 of this year then definitely by Q1 of next year. And these include in addition to Wrath of the Lich King, FIFA, which we have already, like I mentioned, completed technical testing and targeting of closed beta tests, and also Audition 2, which we are targeting for a launch early Q1 next year. And also Atlantica, which we have already completed a media test and we are actively preparing also for launches early next year, as well as our own proprietary game, Warrior of Fate Online.
So with all of these new games launching and to be launched in later Q4 and also early next year, we do expect our marketing expense to be increasing too. And George, if you have any more specific color to provide.
George Lai
I think [inaudible] expense is already a very detailed one and I do not have any more points to add.
Alicia Yap - Citigroup
Okay. Thank you very much.
Operator
Your next question comes from the line of Atul Bagga with Thinkequity.
Atul Bagga - Thinkequity
Thank you for taking my call. Can you talk a little bit about the competitive landscape? And if you think in terms of acquiring new customers, what is the cost of acquiring a new player? And also if you can share some trends, how they’ve been trending say over the last one year?
Xiaowei Chen
I apologize -- you would like me to talk about the competitive landscape in terms of who we are competing with for the players?
Atul Bagga - Thinkequity
Right, exactly.
Xiaowei Chen
And your second question was?
Atul Bagga - Thinkequity
Cost of acquisition for a new player.
Xiaowei Chen
The what? I’m sorry.
Atul Bagga - Thinkequity
The cost of acquiring a new player.
Xiaowei Chen
Oh, cost of acquisition for each new player -- in terms of competitive landscape for our new players, each game is different. For instance, for our new games such as FIFA to be launched, the new players that we are targeting are players who are into casual games and sports games. For instance, for Audition 2, then obviously the players we are targeting are players that are into casual dancing games, so it is hard to say. Even though game players are game players, for each of the operational team that is thinking very, very hard about where their next players are coming from, they actually are targeting different groups of players. And in terms of how to acquire a new player, we have a combined approach of both using say Internet advertising and also as well as ground promotion. These are the two biggest advertising or marketing approach that we are taking. Obviously we have also organized offline activities but these are the two biggest approaches.
I think we need to get back to you for data on -- George has gone to ask for data, so we can’t give you data about how much we spend on say acquiring a new user through advertising, such as say through search engines or through Internet portals. And we can also give you the data of acquiring each new player through ground promotions but I am afraid we don’t have this data available as of yet.
Atul Bagga - Thinkequity
And World of Warcraft, do you have any estimates, how many of your users might be [inaudible]?
Xiaowei Chen
Actually, we just got the data just now. So for different games of acquiring each new user, it’s different, obviously. Generally it ranges between $50 to $200 per player for acquiring a new gamer.
In terms of how many [gold farmers] we have in each account, we don’t encourage gold farming. And for illegal gold farming, if it is discovered in our account, they are warned once and twice and three times and if they don’t take the warning, we close their account.
Atul Bagga - Thinkequity
So in your estimate, pretty much the percentage of gold farming accounts on your total, ACU/PCU number is about nil?
Xiaowei Chen
The ones that we discover, we immediately warn them and then close the account following the warning.
Atul Bagga - Thinkequity
Okay and can you share any trend on the number of gold farming accounts which have been closed in the last few quarters?
Xiaowei Chen
That number -- do we have -- we don’t have this number and we do not disclose this number either.
Atul Bagga - Thinkequity
Thank you. Thank you for taking my calls.
Operator
At this point, there are no further questions. I would like to turn this presentation back over to Mr. Richard Cai for closing remarks.
Richard Cai
Thank you. We would like to thank again everyone for joining today’s call. I hope we have addressed all of your concerns. We look forward to communicating with you in the future should you have any additional questions. Thank you. This will conclude the presentation.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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