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The9 Limited (NCTY)
Q1 2006 Earnings Conference Call
May 24th 2006, 9:00 pm EST

Executives

Jun Zhu, Chairman and Chief Executive Officer
Hannah Lee, Vice President and Chief Financial Officer
Dahlia Wei, Investor Relations Senior Manager

Analysts

Dick Wei - JP Morgan
Wallace Cheung - Credit Suisse
Antonio Tambunan - Bear Stearns Asia Ltd.
Len Chi – Lehman Brothers
Ming Zhao - SIG
Jason Brueschke - Citigroup
Chang Qui – Forun Technology Research.
William Bao Bean – Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2006 The9 Limited Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to Miss Dahlia Wei. Please proceed.

Dahlia Wei

Thank you, operator. Hello, everyone and thank you for joining us today for The9 First Quarter 2006 Financial Results Conference Call. The management with me today are Mr. Jun Zhu, Chairman and Chief Executive Officer, and Miss Hannah Lee, Vice President and Chief Financial Officer.

Before we start, I would like to review the safe harbor statement. 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 also like to refer you to documents that the Company has filed with the U.S. Securities and Exchange Commission. Those documents contain additional information, including factors that could cause actual results to differ materially from those contained in the management’s projections or forward-looking statements.

Right now, I will turn the call over to Mr. Zhu, our CEO, to provide you with an overview for the quarter.

Jun Zhu

(Translation)

Good morning, ladies and gentlemen. I would like to thank you for joining us today for the discussion of The9 first quarter 2006 earnings.

First, let me present a quick overview of the key financial and operational highlights for the first quarter of 2006. Net revenue for the first quarter was $26.5 million. Net income was $7.3 million, while earnings of $0.30 per ADS.

For the first quarter of 2006, we attained WoW peak concurrent users of approximately 610,000 and average concurrent users of about 290,000; up 15% and 7% respectively compared to the previous quarter.

As of March 31, 2006, there were approximately 4.3 million paid accounts and [inaudible] has been activated for the WoW game. We are pleased that we have achieved solid financial results in the first quarter and our concurrent user number regained growth momentum shortly after the Chinese New Year holiday during the quarter.

We sell prepaid WoW playing time and recognize revenues from such sales based upon the actual usage of WoW playing time by end users. We are provided with data on end users' actual usage of WoW playing time by the licensor of WoW, from which we derive the revenues to be recognized in relation to the WoW game.

In the first quarter of 2006, we saw WoW revenue remain relatively stable compared to the previous quarter, and average revenue per user, or ARPU, decreased slightly to RMB0.35 from RMB0.36 in the previous quarter.

This one-time slight ARPU decrease is mainly due to the unfortunate drop of certain data of end users actual usage of WoW playing time, which prevented us from recognizing a higher revenue. We believe that while the ACU and PCU data are accurate, the WoW revenue, hence our ARPU, would have been somewhat higher but for the soft data loss. It would be inappropriate for me to quantify this difference. Suffice it to say that we believe that this is a one-time event and that we are actively working with the relevant parties to prevent the recurrence of this kind of event.

The continued unit growth of WoW in the first quarter is a combined result of game content upgrades as well as our national and local promotional activities. On the content upgrade side, we launched WoW 1.9 version The Gates of Ahn'Qiraj in January and attracted significant user attention.

On the marketing and sales side, in the first quarter of 2006, we successfully executed our Internet Café hardware upgrade plans, where more than 50,000 computers in 2,000 WoW-themed Internet Cafés all around the country have been upgraded, mostly in the second and third tier cities. In addition, our member-get-member program, continued to attract new users to join the WoW game.

Recently, we also launched a marketing campaign called “World of Warcraft National Tournament”, which allows players from all over the country to compete against each other in terms of game play skills. So far, we have attracted more than 7,000 Internet cafés, or guilds, from over 40 cities to send their participating team. The tournament started in April and the final contest will take place in June, with players winning various big prizes, including popular automobiles, sponsored by our marketing partners. We expect this marketing initiative to boost unit growth of WoW.

I also would like to highlight that with commercialization in November 2005, a joint venture of which we have 30% active interest that operates WoW in other regions of greater China achieved profitability in the first quarter of 2006.

Turning now to our strong game pipeline, in April 2006, we added another leading RPG game title, Guild Wars, to our game portfolio. We obtained the exclusive license from NCsoft to operate the Guild Wars game in China for three years after commercialization. Guild Wars has been a very popular game worldwide since launched globally in late April of last year. Its second chapter, Guild Wars: Factions, was just launched globally on April 28, 2006, and has seen encouraging feedback. Recently, Guild Wars: Factions was ranked No.1 on the U.K. PC Chart, one of Europe's most authoritative game ranking billboards.

We now have three RPG games in our pipeline, Granado Espada, Soul of the Ultimate Nation, and Guild Wars. We believe our game pipeline is very strong.

We will designate specialized operational teams for each individual game product, responsible for strategy formulation, resource allocation, project management and implementation. Each product team will cover five key operational functions. Each game product team will be relatively independent, while at the same time they share company resources and management experiences, hence we will enjoy co-product synergy. We believe we have accumulated valuable experiences from our successful operation of MU and WoW in China, and our team has the vast expertise and top-tier talent to support the execution of these new games.

For Guild Wars, we plan to launch open beta testing in Q4 and commercialize again by the end of 2006. For Zun and GE, currently the two games are both in open beta testing in Korea, with Zun just starting open beta testing yesterday on May 24th.

In the meantime, we have started early stage preparations for these games. For example, we announced the official Chinese name for Zun as [inaudible] in April, and we launched Zun official Chinese website on May 11, 2006.

With successful operations of WoW and MU, as well as the ability to obtain exclusive operating licenses of high-caliber RPG games from overseas, including SUN, GE, and Guild Wars, we believe The9’s position as the vendor of choice in China to foreign developers is further proven. We believe the company is very well-positioned for future growth.

Now I would like to turn the call over to Hannah Lee, our CFO, to provide you with a more detailed discussion of our first quarter 2006 analysis financial results.

Hannah Lee

Thank you, Jun, and hi, everyone. I will now take you through a review of our first quarter 2006 results. Rather than going through piecemeal over each line item, I will focus on the key points.

In the first quarter of 2006, we saw WoW’s revenue remained relatively stable when compared to the previous quarter. Average revenue per user hour, ARPU, decreased slightly from RMB0.36 in the last quarter to RMB0.35 in this quarter. For the first quarter of 2006, The9 reported net revenue of $26.5 million remained at a stable level compared to the previous quarter and grew substantially from the same period in the last year.

The sequential stable level of revenue was due to a combination of reasons discussed earlier by our CEO, which includes the unfortunate loss of consumption data, the fact that the Chinese New Year during the first quarter, and the fact that there was only 90 days in the first quarter, whereas normally in a quarter there would be 92 days.

Net revenues attributable to WoW, which include revenues from game-playing time, merchandise sales, and other related revenues, was $26.2 million and accounted for 99% of total net revenues in the first quarter.

For the first quarter of 2006, gross profit slightly decreased to $11.9 million from $12.1 million in the previous quarter, while gross margin remained steady at 45% compared to 46% in the previous quarter. This is primarily due to the opening of the six service sites for the Warcraft in January, 2006. Additional server depreciation and internet data center rentals were included in the cost of services for almost the entire first quarter of 2006.

Operating expenses for the first quarter of 2006 decreased by 14% to $4.8 million from $5.6 million in the fourth quarter of 2005. This was a combined result of more targeted and focused use of sales and marketing expenses and certain year-end related general and administrative expenses in the fourth quarter of 2005, which are no longer expensed, and it was partially offset by the slight increase in the product development expenses and the inclusion of share-based compensation expenses for the adoption of FAS 123-R, stock-based payment, commencing January 1, 2006.

At the operating level, we recorded a profit from operations of $7.1 million, an 8% improvement from $6.6 million in the fourth quarter.

Net income for the first quarter was $7.3 million, a 14% decrease from the $8.5 million in the fourth quarter of 2005.

Fully diluted earnings per ADS were $0.30 for the first quarter of 2006, compared to $0.35 for the previous quarter. It should be noted that in the fourth quarter of 2005, we did recognize a financial subsidy from the local government, which amounted to $1.7 million, and recognized a $0.8 million gain from investment disposal of 21% of our equity interest in 9Webzen, a joint venture between The9 and Webzen that currently operates the 2.5D MMORPG game, MU.

If excluding the impact of these two items from the fourth quarter results, net income for the first quarter of 2006 should have increased 22% sequentially from the previous quarter.

Adjusted EBITDA for the first quarter of 2006 was $13.0 million compared with adjusted EBITDA of $13.6 million in the previous quarter. On a per-share basis, adjusted EBITDA per share was $0.53 for the first quarter of 2006 compared to $0.56 for the previous quarter.

As of March 31, 2006, the Company’s total cash and cash-equivalent balance was $76.3 million.

I would like to thank you for your attention. This concludes our presentation and we are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you.

(Operator Instructions)

Your first question comes from the line of Dick Wei of JP Morgan. Please proceed.

Dick Wei - JP Morgan

Good morning. I just have a question on the ARPU trend going forward. Do you expect the ARPU to maintain this level going into the second half? Is it going to go up or go down?

Hannah Lee

We do not give out financial projections into our future quarters. However, we are not planning to reduce our distributor discount. As described in our earnings call, there are several reasons why ARPU has slightly decreased from the RMB$0.36 to RMB$0.35. Those three reasons contributed to the slight decrease. On a go-forward basis, we will continue as part of our promotional campaign to offer free hours in certain campaigns that we do in the future. Also, we will continue to have our member-get-members referral program. Those would be on a continuous basis, but in terms of distributor discounts, we do not plan to increase the distributor discount, which we are not planning to do in the next few quarters.

Dick Wei - JP Morgan

Great, thank you.

Operator

Your next question comes from the line of Wallace Cheung of Credit Suisse. Please proceed.

Wallace Cheung - Credit Suisse

Good morning. Questions on the data loss issue. Can you explain a little bit more? If the user data is lost, can you actually receive the cash and deduct the amounts from the prepaid card? Also, can you give us a range as to the revenue actually lost, or your estimate you have lost in the first quarter? Thank you.

Jun Zhu

(Translation)

The data loss is actually due to the -- we did not recognize the actual usage by some end users who actually consumed the playing time, but it is not recognized in our system. At this stage, we cannot disclose more details for this data loss.

Let me further summarize what we have said, and also what Hannah has said. The reasons for why our revenue remains stable compared to previous quarter and our ARPU slightly decreased is due to four reasons:

One is, as we mentioned, there is a data loss of certain consumer usage of WoW playing time.

Secondly, in January, there is a preface to the Chinese New Year holiday, whereby many of our users were traveling back to their hometowns or definitely scattered, so we saw a slowdown in PCU growth during that period.

The third reason is in February, there is only 28 days -- two days shorter than other months.

The fourth point is I want to highlight that after the spring festival, we have seen our concurrent user level continue to grow and regain user momentum. Our PCU, as we have said, has reached 610,000.

Hannah Lee

I want to add the fact that there is nothing wrong with the collection that we have from the distributors. It has nothing to do with the deduction with respect to Pass 9, how much we collect from the system.

As we said before, we are provided with data on end users actual usage of WoW playing time by the licensor of WoW, from which we derive the revenue to be recognized in relation to WoW, and that is the main reason with respect to the data loss. It has nothing to do with the Pass 9 system. The Pass 9 system is functioning very well. It is adding value as to how much the players are actually adding value to the account.

So we are very confident that this is a one-time issue, and as Mr. Zhu has said in his earlier presentations, we are working with the relevant party to ensure that this will not happen again.

Wallace Cheung - Credit Suisse

So has the issue been resolved right now?

Hannah Lee

As far as we know, it has been resolved.

Wallace Cheung - Credit Suisse

Okay, thank you.

Operator

Your next question comes from the line of Antonio Tambunan with Bear Stearns. Please proceed.

Antonio Tambunan - Bear Stearns

I am a little bit more curious about the Super Girl game that came out, which is supposedly a pretty big deal, so I am kind of curious. If you gave details, I missed it. When are you expecting this game to beta, either closed or open beta, or launch? Are there any expectations for that?

Jun Zhu

(Translation)

The Super Girl Online is actually another try-out product for us for the virtual entertainment platform. We currently have plans to launch this game around July or August of this year.

This game will be the free pay model, and we at The9 are always looking at new applications of Internet technologies. For example, the WAP 2.0 and the blog, the new system. So this is our try-out to this new technology.

Antonio Tambunan - Bear Stearns

So when you say free to play, do you mean you will be selling avatar-based items or character-based items, that kind of thing?

Jun Zhu

The game play and the community itself will be free, but we will charge for some in-game add-ins. The purpose of this game is more to accumulate the users.

Antonio Tambunan - Bear Stearns

Thank you.

Operator

Your next question comes from the line of Lu Sun of Lehman Brothers. Please proceed.

Len Chi - Lehman Brothers

I have a question on behalf of Lu Sun. Our question is related to your equity and profit of [other] companies. I just wonder, would you please share a little bit of operational data in your greater China WoW operation? Also, whether it is possible to give a breakdown of the profit in Object and the [Attaway] initiative? Thank you.

Hannah Lee

The biggest line item within the equity pick-up line includes the joint venture we have for the greater China regions operations of World of Warcraft. For quarter 1, it includes $516,000 profit. The second biggest line item would be equity loss pick-up from 9Webzen, which is about $167,000 loss. We have a 20% investment in Object and our equity pick-up from that venture is $88,000. We do have an interest in the big game portal, called [Beijing Wangway], which is about $127,000. That nets out to around $134,000, which we report on a net basis in our financial statements.

Len Chi - Lehman Brothers

Thank you.

Operator

Your next question comes from the line of Ming Zhao of SIG. Please proceed.

Ming Zhao - SIG

Thank you, good morning, everyone. A couple of questions. Could you give us an update on the growth of the game with Warcraft into the second quarter? Do we see further growth in the PCU? Do we see the ACU versus PCU ratio rebound because the Chinese New Year factor was in Q1?

Jun Zhu

(Translation)

Sorry, Ming, I am afraid we cannot disclose any detailed trends into the second quarter. What I want to highlight is that after the spring festival, we have seen in February and March the PCU continue to see healthy growth. In March, the PCU number hit 610,000.

Ming Zhao - SIG

So how about the ratio of ACU versus PCU?

Jun Zhu

(Translation)

The ACU versus PCU ratio has always been a stable level. The 610,000 PCU number was reached in March.

Ming Zhao - SIG

Last question, could you give us an update about your negotiation with Blizzard regarding the expansion package, The Burning Crusade?

Jun Zhu

Let me comment on the Burning Crusade issue. As mentioned and explained in all the Blizzard media alerts, we call the Burning Crusade an expansion pack. That is very clear. Secondly, we are currently already in discussion with Blizzard regarding this expansion pack. Thirdly, all of our discussions will be based on the original licensing agreements between the two parties.

Ming Zhao - SIG

Thank you.

Operator

Your next question comes from the line of Dick Wei of JP Morgan. Please proceed.

Dick Wei - JP Morgan

Yes, I have some questions regarding the G&A expense, which went down quite a lot sequentially, despite the 123-R expenses. Can you give some of your reasons why it came down sequentially? Is that the level that we can expect to see in the future?

Hannah Lee

As I said in the presentation, there are mainly two reasons. We did have a year-end bonus, although it is not significant, in quarter 4 which did not occur in Q1. We do have year-end expenses with respect to professional fees that we accrued -- audit fees, legal fees, sorting out the consulting fees, which we did in last quarter. These expenses were not of the same magnitude in Q1 compared to Q4. On the other hand, we do have some option related costs incurred in Q1, and that was not incurred in Q4 of last year.

Dick Wei - JP Morgan

Will we see around this level down the road?

Hannah Lee

I’m sorry?

Dick Wei - JP Morgan

So we expect to see this level down the road, in the future, maybe around this kind of level?

Hannah Lee

I cannot give you detailed projection as to how the G&A will increase, but I would comment that in Q1, it is slightly lower because of very tight, cost-controlled mechanisms that we imposed. However, we do have a lot of regulatory related costs, such as sorting out the consultant fees, audit fees, legal fees that we do have to incur. In 2006, especially with Sarbanes-Oxley, we do expect G&A to, compared to Q1, there will be additional costs related to regulatory-related costs.

Dick Wei - JP Morgan

Just one quick final question -- your net PP&E, has dropped it a bit. I just wonder, what is the reason? I think in the first quarter you may also have a new server for World of Warcraft as well?

Hannah Lee

The main reason, although we added the site in Q4, part of the costs we started to incur in late Q4 of last year, and we do have depreciation for almost the entire quarter in Q1. So on a net basis, there is a slight decrease of the net book value of PP&E.

Dick Wei - JP Morgan

Great, thank you.

Operator

Your next question comes from the line of Jason Brueschke of Citigroup. Please proceed.

Jason Brueschke - Citigroup

Thank you and good morning. I had trouble getting on the call, probably some of the other people from Hong Kong did as well, so if this was given in the prepared remarks, I apologize. Could you give us an update on your expected timing of the open beta commercial launch for GE and Zun, and comment on the level of marketing spend that you plant to do for each of these games?

I think what I am interested in is maybe relative to the amount of marketing that you have done for World of Warcraft. Is it going to be on par, more, or less? With the marketing spend, I am also interested in that with respect to Guild Wars. Thank you.

Jun Zhu

(Translation)

For Guild Wars, we intend to launch open beta testing for the game in Q4 this year and commercialize this game before the end of this year. For Zun [Country] the strategy is the open beta testing will be around December of this year or January of next year. For GE we plan to open beta testing of that game in Q3 of 2007.

Jason Brueschke - Citigroup

Great. And the marketing spend that you are planning?

Jun Zhu

(Translation)

We will efficiently and effectively do the marketing for these games. As you may know, the competition of online games has gotten very heated, so marketing is a very important factor for us.

Jason Brueschke - Citigroup

Qualitatively, you have more games coming on the market; World of Warcraft is already on the market and competitors should have some games on the market. Just in general, does marketing spend across the industry need to go up or are there some efficiencies? The strength of the game, the success that you expect from Korea, that will help you hold the line on marketing?

It is really a general question about how we should be thinking about a number of games coming out in a similar time period and how we should model the marketing spend. So it is a qualitative question, but it is important.

Hannah Lee

We cannot comment on what the trends will be for the entire industry, but for us because we have several games to come on to the market in our pipeline, we will definitely time our marketing spend to be in line with what stage of the push out we are at.

For example, in the pre-open beta testing stage we will definitely spend a different marketing spend on different modes of marketing. We will, of course -- as we did in the past with renowned companies -- do cooperation, joint activities with other companies whereby we will have innovative marketing strategies to be implemented.

We did it for World of Warcraft. We believe that in the future we will also do the same for GE, Zun, Burning Crusades when it comes out, and Guild Wars. We will continue to do that.

In terms of the total marketing dollars, of course on an absolute basis for our company it will increase because we do have so many games to push out. However, we do have the advantage of economies of scale because we are spending, on an aggregate basis, more. We do believe we have more bargaining power in terms of discussing with the suppliers for online and offline advertising on an aggregate basis.

In terms of when we spend our dollars, it will definitely depend on when upgrades come out. We will time it very efficiently and effectively to ensure that the maximum impact will be achieved when a certain campaign is launched.

Jason Brueschke - Citigroup

Thanks, Hannah. That is what I was looking for.

Operator

Our next question comes from Chang Qui – Forun Technology Research.

Chang Qui – Forun Technology Research

Good morning. I will ask a more detailed question. Looking at your operation, it looks like Zone 5 and Zone 6 are much more popular than other zones. I just wonder why? Also whether other zones can learn something from Zone 5 and Zone 6.

Hannah Lee

Thanks for your questions. With respect to the level of users in each server site, we do not specifically comment as to which server site at what point in time has more people. On an overall basis, we believe our six servers are relatively the same. There is not one particular server where there are substantially more people in one particular server compared to the others.

It depends on what time of the day you are looking at it. At one point in time certain server sites might have more people compared to other sites, but on an average basis we believe the capacity usage of each server site are quite stable amongst all six servers.

Chang Qui – Forun Technology Research

Thank you.

Hannah Lee

Thank you.

Operator

Our next question comes from William Bao Bean – Deutsche Bank.

William Bao Bean – Deutsche Bank

Yes, most of my questions have been answered. Could you give me a sense of the stock comp by operating margin and operating metrics?

Hannah Lee

I am sorry, William. I couldn’t hear your questions.

William Bao Bean – Deutsche Bank

I was wondering whether you could give us a breakdown of stock comp by operating metrics? By SG&A, selling as well as R&D and gross margin? Did you get that?

Hannah Lee

SG&A and R&D, stock-based compensation, right?

William Bao Bean – Deutsche Bank

Yes.

Hannah Lee

Hold on, William. Let me find this information. It is too detailed. Hold on.

William Bao Bean – Deutsche Bank

While you are doing that, I was just wondering if you could give us a sense of the timing for the launch for open beta, closed beta launch for Burning Crusades and the other licensed games? I am sorry if you already went through this, but I also got on late.

Jun Zhu

(Translation)

The launch schedule of Burning Crusades is still under discussions. The Zun games we plan to start open beta testing around year end of this year; and the Guild Wars games we plan to open it in Q4 of this year. GE, the open beta schedule is currently in Q3 of 2007.

Hannah Lee

Under cost of services, it would be about [$0.05] million. Under sales and marketing, it would be [$0.305] million too. Under G&A, about $0.35 million and R&D about $0.1 million. So it adds up to about $0.6 million.

William Bao Bean – Deutsche Bank

Thanks.

Hannah Lee

Thank you.

Operator

(Operator Instructions) Our next question comes from Wallace Cheung – Credit Suisse.

Wallace Cheung – Credit Suisse

Hi. I wanted to ask about the Burning Crusades game. Maybe you have more details on the recent discussions during E3? Could you make some comment about your confidence in the game’s potential success in China? Are you actually going to be planning to launch it in China next year? Thank you.

Jun Zhu

(Translation)

The [WoW] has been very successful in China and I believe the extension pack of the Burning Crusades will be also very successful on top of the [Wow].

We are also in discussions with Vivendi, Universal Games and also [Greater] Entertainment regarding the Burning Crusades. Even after the E3 event we are in very detailed discussions with them. Thank you.

Operator

Our next question comes from Len Chi - Lehman Brothers.

Len Chi – Lehman Brothers

Hi, I have a couple of follow-up questions. One is related to the general expansion of World of Warcraft in China. We noted that The9 has been very good at doing creative marketing, like your co-marketing campaign with Coca-Cola and your partnership with the Internet cafes.

Now we see the game is slightly different from its peers. It did not benefit from the Chinese New Year season. We see a slowdown there. Also, the user base is a bit different as well. At the same time, we see your sales and marketing expense coming down gradually over time.

I just wonder, going forward what kind of marketing strategy are you going to adopt to push this game, besides the expansion packs?

Jun Zhu

(Translation)

The success of the game is mainly depending on the following two factors: one is the content upgrades and the creative nature of the content. Second is the marketing we do in the market.

The decrease of marketing and sales expenses in Q1 is not an unplanned decrease, it is under our careful and – it is actually the planning of marketing. With the penetration into second the third tier cities, we believe the level of marketing and the expenses will tend to be more reasonable.

Len Chi – Lehman Brothers

How much of the total marketing is specifically related to WoW in this quarter?

Jun Zhu

(Translation)

Basically about 90% of it.

Len Chi – Lehman Brothers

Also, can you give the detail of the revenue breakdown from tier 1 and other cities?

Hannah Lee

As I said in the presentation, 99% of that relates to World of Warcraft. The other 1% relates to basically Mystina Online, the other game that we still operate and some revenue that we got from technical operating supports that we provide to [inaudible]. Because it is a percentage of end user revenue and end user revenue has been on a decline in the last few quarters, the corresponding technical support fees that we have got has also decreased over the last few quarters.

Len Chi – Lehman Brothers

Thanks, Hannah. My question was actually the breakdown of WoW revenue from tier 1 cities and tier 2 cities. Just wanted to get an idea about the effectiveness of your expansion in the inlands area.

Hannah Lee

We do not have a number as to how it is split between the first tier cities, second tier or third tier cities, mainly because our user statistics are provided by the users. The only method that we can use to track where the users are coming from are either from the user statistics which we have no way of verifying whether it is true or not; or through the tracking of the IP addresses.

We do know that based on our sales team and our marketing team’s day-to-day interaction with the distributors and the other suppliers that we have, there is an increase in the usage of the second and third tier cities, but we do not have the exact percentage as to the composition of our revenue.

Len Chi – Lehman Brothers

Great, that is helpful. One final question about the Super Girl community games. Would that incur a lot of R&D expense in the next one or two quarters?

Jun Zhu

(Translation)

We don’t have a very detailed plan as to what we will spend in the advertising component on these Super Girl games. We can disclose it in more detail later. The R&D effort for Super Girl online is not under The9’s umbrella.

Len Chi – Lehman Brothers

It will be on a license basis?

Jun Zhu

(Translation)

The operation of this Super Girl game will be on a licensing basis.

Len Chi – Lehman Brothers

Great, thanks.

Operator

Our next question comes from Jason Brueschke – Citigroup.

Jason Brueschke - Citigroup

Thank you. Again, this may have also been in the prepared remarks, but I think Wallace actually had asked a question as a follow-up. This is about the loss of the player usage data. I am trying to understand if you can tell us how much revenues you think this caused an impact in the quarter? We can easily calculate 90 versus 92 days, what that equates to.

The Chinese New Year is something that is going to happen every year. In terms of a one-off, to understand what the quarter would have looked like, could you maybe estimate for us or if you know the exact number, what is the amount of revenue that you think you lost in the quarter because of this event? Thanks.

Jun Zhu

(Translation)

Jason, as I said before and it is clearly pointed out in the press release, we are provided with the data of the actual usage or playing time by the licensor of World of Warcraft from which we calculate our revenue to be recognized in our P&L. Because the data is actually lost, we do not know how many minutes were consumed by the players.

We do know the average concurrent user, the concurrent user level is accurate and we do not have the ability to exactly quantify how much the number should be. The amount I would say it would not be more than the two days, compared to the two days if you compare the number of days in Q1 versus Q2. So we are very certain that this incident will not occur in the future.

Jason Brueschke - Citigroup

I understand it won’t occur and that’s fine. My question is, are we talking $500,000? $1 million? $3 million? Just in rough estimates. I think you may have just said it is about similar to the two days difference, which is somewhere around $600,000.

Hannah Lee

I would say it would be no more than two days. It would be no more than a two-day impact, compared to the two-day impact that we will have in Q4 where we have 90 days and Q1 we have 90 days.

Jason Brueschke - Citigroup

Great, thank you Hannah. That is very, very helpful.

Hannah Lee

Thank you.

Operator

Our final question comes from Chang Qui - Forun Technology Research. Please proceed.

Chang Qui – Forun Technology Research

Also a follow-up. For the new users you added in Q1, can you give us some idea of what is the [competition]? Are they new users or are they users from MU or users from other games?

Jun Zhu

(Translation)

We think the new user [information] in Q1 comes from the natural growth of the online game industry, and also from attracting new gamers from other games as well.

Chang Qui – Forun Technology Research

Thank you.

Operator

There are no further questions in the queue at this time. I would like to turn the call back over to Dahlia Lee for closing remarks.

Dahlia Lee

Thank you, everybody. If you have any further questions you can feel free to contact us. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: The9 Limited Q1 2006 Earnings Conference Call Transcript (NCTY)