NetEase's (NTES) CEO William Ding on Q2 2014 Results - Earnings Call Transcript

Aug.14.14 | About: NetEase, Inc (NTES)

NetEase, Inc. (NASDAQ:NTES)

Q2 2014 Earnings Conference Call

August 13, 2014 09:00 PM ET

Executives

Brandi Piacente – Investor Relations

Onward Choi – Acting Chief Financial Officer

William Ding – Chief Executive Officer

Analysts

Alicia Yap – Barclays Capital

Jialong Shi – Credit Suisse

Eddie Leung – Bank Of America Merrill Lynch

George Meng – Morgan Stanley

Tian Hou – T. H. Capital, LLC

Thomas Chong – Citigroup Inc.

Natalie Wu – China International Capital Corporation

Vivian Hao – Deutsche Bank

Operator

Good day and welcome to the NetEase Second Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Brandi Piacente. Please go ahead, ma'am.

Brandi Piacente

Thank you, operator. Please note the discussion today will contain forward-looking statements, relating to future performance of the company and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigations 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 this 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 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 over to Mr. 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

Okay. Thank you, Brandi. Before I begin, please note that for the purposes of this discussion, all percentages are based on renminbi. We are making excellent rise in China's thriving online marketplace. The trends in online gaming continue to demonstrate that growth with mobile usage increasing at an exciting pace. With our longstanding history of technological innovations, our core business lines continue to drive in this expanding marketplace that is increasingly focused on quality and a comprehensive user experience.

During the second quarter we saw robust growth across our online and mobile games, advertising services and e-commerce businesses with total revenue increasing by 17.2% sequentially and 22.3% year-over-year. Compared with the second quarter of 2013 revenues from our online games business increased by 13.1%, revenues from advertising services increased by 42.9%, and revenues from e-mail, e-commerce, and other segments increased by 201.5%, the heavy games from our self-developed and licensed online games were driven by standout performances from our flagship online games, Fantasy Westward Journey II, its mobile versions and Mini Westward Journey, as well as Blizzard Entertainment's Hearthstone: Heroes of Warcraft.

Following the launch of the iPad versions in April, Hearthstone continued to fly during the same quarter. And we released Curse of Naxxramas, the first single player adventure for this game, which we began to roll-out in July.

We are also working closely with Blizzard Entertainment, to bring their free-to-play online team brawler Heroes of the Storm and their award-winning action role-playing game, Diablo III to audiences in China. The introductions of the expansion packs and new original content, remains an integral part of our strategies to advance the popularity of our games and brand new playing experiences to our users.

To further this strategy we introduced expansion packs in the second quarter for a number of our popular games, including Ghost II, Tianxia III, Legend of Fairy and Kung Fu Master. We will continue to introduce flash storylines and characters to attract new users and further engage those currently playing our games. To that end our upcoming plans call for expansion packs and updates later this year for Fantasy Westward Journey II, New Westward Journey Online II, New Westward Journey Online III, Tianxia III, Heroes of Tang Dynasty II and Heroes of Three Kingdoms.

Bringing new games to market and expand and diversify our portfolio is also an important thing for us. We expect to launch two new games before the end of the year: Crisis 2015, our first person shooter game, as well as Revelation, our 3-D Oriental fantasy MMORPG. The initial user feedback we have received from small group testing of Revelation has been positive and we are planning to begin second round testing in late August.

Our complementary mobile portfolio is also growing in addition to our first mobile card battle game, Mini Westward Journey, delivering an excellent performance during the second quarter. We also released two new licensed mobile games, Ninja Must Die 2 and KONAMI World Soccer Collections. The introductions of these games were followed by the launch of our self-developed mobile farm business game NetEase Farm in July.

We will continue to introduce new and exciting mobile games in the coming months that further build out our portfolio as we work to diversify our mobile offerings and increase revenue contributions from our growing mobile platforms.

We are already seeing these opportunities take shape through our social networking platforms where the early integrations of our – of some of our mobile games with YiChat has been well received. Our thing for YiChat is presenting our community with a Fresh Social Life. This strategy focuses on integrating unique and innovative social networking functions into YiChat like Crowd Ask and Rideshare to help users stay connected and bring ease and simplicity to their lives on the go, and the increasing mobile news. These advancements are proven attractive to our community, drawing in new and existing users. And we are on track to launch other key services such as an online payment system to our YiChat users later this year.

Our advertising business also continues to perform well. During the second quarter we saw growth of sequentially and year-over-year with automobile internet services, and food and beverages as the top performing sectors. This growth was supported by strong industry demand as well as monetization associated with our mobile applications and the 2014 FIFA World Cup.

The popularity of our mobile news applications continue to grow and according to our research, this app was ranked as the leading news application used by consumers in China in terms of time spent.

The development of our e-mail services is encouraging, attaining 680 million e-mail users and about 200 million phone mail box users by the end of the period. Our e-commerce services also demonstrate a remarkable revenue growth in the second quarter. As we look through the year, we will continue to pursue opportunities that diversify our traditional online and mobile platforms, by leveraging our in-house development capabilities, as well as exploring offices' licensing and expansion opportunities that fill our growth.

This concludes William's updates. Now, I will provide a review of our second quarter financial results. I will primarily focus on the discussions of margin and expand fluctuations along with net profit.

Total sales tax for the second quarter of 2014 were RMB184.4 million or US$29.7 million, compared to RMB153.5 million and RMB149.3 million for the preceding quarter and the second quarter of 2013 respectively.

The year-over-year and quarter-over-quarter increase in sales tax was mainly due to the increase in our total revenues. Gross profit for the second quarter of 2014 was RMB2 billion or US$322.3 million compared to RMB1.7 billion for the preceding quarter and US$1.7 billion for the second quarters of 2013. The year-over-year and quarter-over-quarter increase in online games gross profit was primarily driven by increased revenues from seven of our self-developed games such as Fantasy Westward Journey II and its mobile versions, Mini Westward Journey, our first mobile card battle game, launched in March 2014 as well as Blizzard Entertainment's Hearthstone and its iPad versions.

The year-over-year increase in advertising services' revenues and gross profit was primarily the results of strong demand from the automobile internet services, and food and beverage sectors and our monetization efforts for its mobile applications. As well as our partnerships with the national football teams of Brazil and Spain to broadcast the 2014 FIFA World Cup on our portal and mobile news applications.

The quarter-over-quarter increase in advertising services' revenues and gross profit were primarily due to the 2014 FIFA World Cup as well as seasonality. The year-over-year and quarter-over-quarter increase in e-mail, e-commerce and others gross profit was primarily attributable to revenue increase from our e-commerce business, which was led by e-commerce services related to third-party lottery products.

Gross profit margins for our online games business for the second quarter of 2014 was 77.6% compared to a gross profit margins of 78.5% and 80.9% for the preceding quarter and the second quarter of 2013 respectively. The changes in gross profit margins were mainly due to the increased revenue contributions from latest games, such as a percentage of our total online game revenues.

Gross profit margins for our advertising services business for the second quarter of 2014 was 60.9% compared to a gross profit margins of 47.8% and 55.5% for the preceding quarter and the second quarter of 2013, respectively.

The year-over-year and quarter-over-quarter increase in gross profit margins was mainly due to revenue growth. Gross profit margins for our e-mail, e-commerce and others business for the second quarter of 2014 was 35.7%, compared to a gross profit margins of 6.7% and a gross loss margins of 21% for the preceding quarter and the second quarters of 2013, respectively.

The year-over-year and quarter-over-quarter improvements in gross profit margins were mainly due to increased revenue from our e-commerce services related to third-party lottery and insurance products, which has a relatively high gross profit margins.

Total operating expenses for the second quarter of 2014 were RMB823.7 million or US$132.8 million, compared to RMB563.6 million and RMB626 million for the preceding quarter and the second quarter of 2013, respectively.

The year-over-year increase in operating expenses was mainly due to increased selling and marketing expenses for e-commerce services related to third-party lottery products as well as advertising services promotions, some of which were related to our mobile news applications and 2014 FIFA World Cup and staff-related costs resulting from an increase in the number of employees and average compensations.

The quarter-over-quarter increase was mainly due to increased selling and marketing expenses for e-commerce services related to third-party lottery products, advertising services, Ghost II, and Mini Westward Journey, as well as high research and development expenditures.

We recorded a net income tax charge of RMB97.9 million or US$15.8 million for the second quarter of 2014 compared to RMB179.6 million and RMB131.8 million for the preceding quarter and the second quarter of 2013, respectively.

The effective tax rate for the second quarter of 2014 was 7.4%, compared to 13.8% and 10.8% for the preceding quarter and the second quarter of 2013, respectively. The year-over-year decrease in the effective tax rate was mainly due to the fact that certain of our subsidiaries were approved as Key Software Enterprises in the fourth quarter of 2013 and are subject to a preferential tax rate of 10% for 2014.

The quarter-over-quarter decrease in the effective tax rate was mainly due to the recognitions of RMB58.4 million in tax credits in the second quarter of 2014 related to our annual tax filing benefits, most of which comprised extra tax deductions for research and development expenses, approved by the tax authorities.

During the second quarter of 2014, we have a net foreign exchange loss of RMB20.2 million or US$3.3 million, compared to a net foreign exchange gain of RMB7.1 million and RMB5.6 million for the preceding quarter and the second quarter of 2013, respectively.

The quarter-over-quarter and year-over-year changes were mainly due to exchange gains arising from our foreign currency-denominated bank deposits and short-term loan balances as the exchange rates of the U.S. dollar against the RMB fluctuated over the periods.

Our net profit for the second quarter of 2014 totaled RMB1.2 billion or US$193.8 million, compared to RMB1.1 billion and RMB1.1 billion for the preceding quarter and the second quarter of 2013, respectively.

We reported basic and diluted earnings per ADS of US$1.48 each for the second quarter of 2014. Our basic and diluted earnings per ADS were US$1.39 each for the preceding quarter, and basic and diluted earnings per ADS were US$1.36 each for the second quarter of 2013.

As of June 30, 2014, our total cash and time deposits balance were RMB19.9 billion or US$3.2 billion, compared to RMB18.6 billion as of December 31, 2013. Our cash flow generated from operating activities was RMB1.2 billion or US$186.5 million for the second quarter of 2014, compared to RMB1.7 billion and RMB1 billion for the preceding quarter and the second quarter of 2013, respectively.

In addition, as of June 30, 2014, we had a loan from an offshore bank in the principal amount of US$90 million, which was secured by RMB deposits of the company in an onshore branch of this bank in the amount of RMB605.1 million, which was recognized as a short-term investment.

We continued to return value to our shareholders and are pleased to announce that in line with our quarterly dividend policy, the Board of Directors has approved a dividend of US$0.37 per ADS, we expect to pay this on September 5, 2014, to shareholders of record as of the close of business on August 29, 2014.

Thank you for your attention. And we would now like to take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We'll go first to Alicia Yap with Barclays.

Alicia Yap – Barclays Capital

Hi. Thank you. Good morning. William, Onward, Brandi and Cassia, thanks for taking my questions. I have a couple of questions, number one is on your Diablo 3 License, so while it is run on global franchise and attractive good global sales, however, I think the tractions that we have in some of the Asian market was not as high as expected and the interest level dropped shortly after the launch. So just wonder for the kind of versions that we have. Are we making any game play or content adjustment with Blizzard as part of our localization in order to ensure these IP is well captured for the Chinese gamer. And then related to that also is that, given we also had another Blizzard game, Heroes of Storm. How are we plan and schedule to launch the timing of these two beta games?

Onward Choi

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So with regard to the first question from relations regarding the Diablo 3 License, definitely the channel is working with some new changes that we would be incorporated into it. And as for the exact details of it we would suggest you to wait until we get a formal announcement little point of time. With regard to the Heroes of the Storm, basically, same as what the Diablo 3 would be doing as well as best as they're doing with our future announcement, and we will give you more updates in terms of the plan and schedules of launching this new game.

William Ding

[Foreign Language – Chinese]

Onward Choi

Okay, another supplement that William would like to highlight just regard to the challenges that has just finished lately. There has been quite a lot of players that bring up us the positive feedback and expectations of possibly upcoming launch of the Diablo 3 and Heroes of the Storm. And along this line, we are quite happy and looking forward to the launch of this game.

Alicia Yap – Barclays Capital

Thank you. [Foreign Language] My question is on the launch timing, yes?

William Ding

[Foreign Language]

Onward Choi

So with regards to the probable launch time of those new game titles, basically, we would find the most optimal timing of doing so keeping the fact that we have quite a lot of rich pro experiences in this market.

Alicia Yap – Barclays Capital

Thank you. And my second question is related to the e-commerce lottery business. So can you help us understand your marketing spend expenses that related to the lottery products, is that commissions that we pay to the agents or revenue sharing, or is it something on the promotion of spend that we are spending to drive the user awareness of the product and these – how well this be always a coloration to the revenue growth?

Onward Choi

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So basically with regard to our e-commerce businesses based – this is a platform strategy that we have been adopting and operating. And along these platforms what we are doing is not just the lottery or products that we mentioned just now. And apart from that, we would also be doing stuff in other areas like the (inaudible) and the stuff, perhaps, even including the insurance policy and stuff like that.

And, basically, for the company that we have been very serious and conservative in setting our strategies and executing of this business strategies, and for well as marketing dollars that we're going to spend in promoting our various business activities, where we would be looking forward to the businesses that are not going to achieve. And we would make sure that the overall business model would work out in a very well planned and managed.

Alicia Yap – Barclays Capital

Okay, great. Thank you, William, thank you, Onward. Congrats on the solid results.

Onward Choi

Okay. Thank you.

Operator

We'll take the next question from Jialong Shi with Credit Suisse.

Jialong Shi – Credit Suisse

Good morning, William and Onward, thanks for taking my question. I just wonder if management can provide some colors on the size of your mobile business, particularly I wonder how much of your gaming and (inaudible) new revenue was contributed by mobile. And also wonder if – just wonder if management can update us the latest top line for mobile entity games and for mobile how much of – how many of the games, new games are in-house developed and how many are from third-party licensing?

[Foreign Language – Chinese]

Onward Choi

So with regard to your first question, Jialong, about our mobile games and revenue contributions, I think at this point, perhaps, we wouldn’t give us the very specific numbers on how big it is, but based on what we have observed, based on the past year, we do see that there has been a very minimum growth in terms of our revenue contributions from our mobile games initiatives.

Okay. And for the second question about the pipelines on – for our PC and mobile games, basically, for the PC games, that’s what we have already mentioned in today earnings, we are looking forward to the launch of games, one is called the Crisis 2015, which is our first-person shooter game, now the other one is Revelation, which is our 3-D oriental fantasy MMORPG game, both of which are having good initial user feedback and we are looking forward to go out of those games in the second-half of the year.

And with regards to the pipelines or the numbers of those new games for the – on the mobile fronts, basically, we would be rolling (inaudible) of new mobile games with different kind of game types of genres in the market. And we would also be totally mixed of both the self-developments and the license games ones. And obviously...

William Ding

[Foreign Language – Chinese]

Onward Choi

Okay. So what William would also like to supplement is apart from the self-developments on the license front, first of all, what we have discussed earlier the Diablo 3 and the Heroes of the Storm would be also others current in the pipelines game titles that we're going to launch.

Jialong Shi – Credit Suisse

Thanks, William and Onward for the answer. And my second question is about the tax rate. The Q2 tax rate was substantially lower than in previous quarters due to the tax rebate, just wondered if this kind of tax rate is sustainable over the next few quarters?

[Foreign Language – Chinese]

Onward Choi

Okay. Jialong, basically, I think the simple answer to it is that, our current anticipations or the expectations on the analyzed ETR would still be around 15% for this year. And the fact that, we have a relatively low effective tax rate for the second quarter is due to the fact that we have recognized certain tax credits in the second quarter related to the annual tax filing benefits and most of which would be comprised of the extra tax deductions for R&D expenses approved by the tax authorities.

Jialong Shi – Credit Suisse

Thank you.

Operator

And, we'll move to the next question. It comes from Eddie Leung with Merrill Lynch.

Eddie Leung – Bank Of America Merrill Lynch

Hi, good morning. Thank you for taking my question. Just have two questions. The first one is about mobile games. After the launch of some of these successful mobile games, I'm just wondering if you can comment on the product life cycle of mobile games versus PC games. And then secondly, just a housekeeping question, I'm wondering if, Onward, you can update on the total number of headcounts at the moment and what's the planned for the rest of the year? Thanks.

Onward Choi

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So with regard to the first question you asked me, life cycles of the mobile games and what was the PC games, and basically we do intend and also want to see that life cycles will not count as long as what our apparently PC game has been doing. But frankly speaking we are still in the stage of exploring on how we could effectively achieving this goal, this aim. And apart from that currently what we are doing is that we are trying to work-out a more comprehensive surface delivery in order to arrange the user experiences and such that it would be able to give a good life cycles for those games.

And at the same time, we do also see that this would also be a challenging task for us to work-out in the upcoming periods.

And with regard to your second question on the total headcount of the company, the total headcount would be around 8,000 by the end of the quarters – second quarters of 2014.

William Ding

[Foreign Language – Chinese]

Onward Choi

So, another supplement that William would like to highlight is that for our launch of the various mobile games what we are doing is not just a single type or a single genre, so if you call. In fact, we would be trying to make it into a more comprehensive offering with different kind of game types and game genres to take in the demand or the expectations from the market.

At the same time for the companies on operating various game in – whether it is the mobile games or PC games. We have different kind of achievement systems to keep track on how the players would be doing in a particular game and we are also using a group concepts in order to offset the impact on how the people would be doing on a particular game. We do see that with all this kind of initiatives we would be working out a much better ecosystem for our various mobile games initiatives.

Eddie Leung – Bank Of America Merrill Lynch

Thank you.

Operator

We'll go next to George Meng with Morgan Stanley.

George Meng – Morgan Stanley

Hi, good morning, everyone. Thank you very much for taking my question. Congratulations on a good – on the second and third quarter. So my first question is regarding your – the overall mobile games number in China and also NetEase strategy. It seems that the industry is turning towards more sophisticated games as compared to casual games. I think this trend already happened in Korea and even (inaudible) is talking about introducing more mid-core games.

But for NetEase you have already tried quite a lot of mobile games in all kinds of different genres already and I believe – but I believe that most of the money actually comes from Mini Westward Journey and also iPad version. But do you think that this trend, meaning trending towards more sophisticated games is valid, and going forward you will focus more on more heavier games such as Tianxia HD.

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

Okay. So basically, William do share your view about how you looked upon on the mobile game strategies, then there's currently players in the market to supplement on your view. Basically, we also see that for the casual type mobile games, those games would be quite easy to pick-up and to learn and to play. But in terms of monetization this would be the area that would be more challenging.

Whereas, if we are looking on so called the sophisticated mobile games or so called the mid- to hard-core mobile games, those games would rely on the strength and the competitiveness of the companies in order to define and to plan how the games would be working out. Then it also depends on how strong become this R&D capabilities would be, and with list for NetEase so far we have been able to position ourself to work into this area quite effectively and are quite successful so far.

And overall, in terms of our mobile game strategies, so to go, we would be making use of a blended or a mixed strategy by rolling out both the casual, card and the mid- to hard-core type mobile games to the market in order to make a more (inaudible) experiences to our pocket of audiences. And at the same time, we do view that with a more comprehensive card lines, where we would also be able to take into the markets to fit into the different types of demands from the markets as such.

George Meng – Morgan Stanley

Okay. Thank you. And my second question is regarding your PC games, the game in your pipeline Crisis 2015. I noticed that you introduced like a hero system in a traditional FPS game. So do you think that you can take market share from competitors with this innovation capacity especially your – the competitors FPS game is already aging?

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

Okay. With regard to the FPS game, basically, we do feel that it has got a huge market there. But so far from our observations, we do see that most of the relatively successful game titles would be coming from overseas, like those games from Korea, or the U.S. And even on the other hand for another game mode like the PlayStation, FPS game is also very important components of the business model.

And by taking a step back on how NetEase would be doing in working out in the FPS market, we would be doing kind of a new innovation inside the games, such that we would be able to effectively attract our targeted audiences or the players and with the fact that we have also feature some systems like to be social features and also the achievements features. We do see that those would be quite interesting elements that we are projecting to our audiences in the China market.

Operator

We'll move to the next question. It comes from Tian Hou with T.H. Capital.

Tian Hou – T. H. Capital, LLC

Hi, William and Onward, congratulations on the quarter. I have a couple of questions to you. And on the mobile front, I believe, you just had done a great job and there is a press release coming from you and talking about in terms of YiChat users has been reaching 100 million user bases, and also your mobile news application and a lot of people use it, I also use it, it’s really good app.

And also you have the dictionaries and so many mobile users use your mobile product and now you have the mobile games. So I wonder how all of those things are going to be integrated together? And is there anyways that to defend them what you did on PC game and the PC, how to say like your e-mail, your photos. And on PC, it seems like it’s not really that integrated. So, on mobile, are you going to have a different strategy?

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So with regard to your questions about the integrations of our various mobile initiatives, basically, we are still marketing, our momentum stays blow and trying out new stuff. And, basically, we are quite confident that we would be able to find a very good way, in order to employ the different kind of mobile products and services alike.

And just as what William has highlighted earlier for the dictionaries, our Cloudnote and the Cloud Music and even in mobile news applications, those would be kind of products or services related to the contents, whereas for the YiChat, this will be more related to the communications or the social kind of stuff. And we do see that. We would be able to – in the upcoming periods to find out some new and interesting ways to integrate different kind of products in a good manner.

And to supplement on the latest performances of the YiChat, basically, we do see that apart from a very encouraging user base that we have been seeing, we also see that the activity levels has been coming up as well. And we do see that, those would be quite positive initiatives that we're seeing so far in order to bring about a positive impact to our mobile strategies going forward.

Tian Hou – T. H. Capital, LLC

Okay, that’s good. And the second question related to the Hearthstone, and I realized this game has the (inaudible) in China and is well received by gamers. So I would like to know some colors, some more details on this game such as how many reverse and what's the trend and how – what's the payment to be paid here, is that different than PC and so others, whatever you can tell you can share with us?

Onward Choi

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So, basically, with regard to the performances of Hearthstone, basically, on a global basis China will get the panel. And we also see that in terms of the – of this type of card games. This also got a very good attraction to the audiences or the players in the market. And with regard to more details about the exact numbers and such like that, I think we wouldn't disclose as such.

Operator

We'll move next to Thomas Chong with Citigroup.

Thomas Chong – Citigroup Inc.

Hi, good morning. I have two questions. My first question is about console games. Does management any plan to enter into these segments and whether our management consider console games is the big potential in the future?

And my second question is about mobile games. Should we see that – how should we think about the competitive landscape of the mobile games in the second-half compared to the first-half and on the other hand is there any color about the mobile games revenue contribution over the long term? Thanks.

Onward Choi

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So, with regard to your first question about our will and strategies upon the console game, basically, we are still in the – of certain (inaudible) and basically the major differences about the console games versus the mobile games is the screen size or the display size because with console game maybe they would be playing using the TV, whereas for the mobile games they will be using the applet or the smartphones, the handsets as such.

And very much of those will depend on how the players would determine on the experiences while playing those games. If the players will still find that experiences while they are playing the mobile games is very good, we do not see that there is much initiative for us to go for the console game areas. But as gently speaking, we are still observing how the market would be doing as such.

And with regard to the competitive landscape in the second-half of this year, on the mobile games area, basically what we will be doing is that on the monthly-basis, we will still up keep our current momentum of rolling out some new mobile game titles to the market in order to pick into the potential demands and this potentials from the market.

Thomas Chong – Citigroup Inc.

Thanks, William. Thanks, Onward.

Operator

We'll go next to Natalie Wu with CICC.

Natalie Wu – China International Capital Corporation

Hi, good morning. Thanks for taking my question and congratulations on solid quarter. I have two questions. The first one, can you give us some color on the licensing agreement with World Soccer, Ninja Must Die 2, et cetera.

Is there a revenue sharing, a lump sum licensing fee, and what will be the revenue sharing scheme and how would the mobile game business development affect your margin?

And I will follow-up with another question.

William Ding

[Foreign Language – Chinese]

Natalie Wu – China International Capital Corporation

[Foreign Language – Chinese]

William Ding

[Foreign Language – Chinese]

Onward Choi

So basically, with regard to the licensing arrangements, basically there would be some license fees there and some royalties and minimum guarantee stuff like that. And basically when we are working out these specific terms on the various licensing agreements we would be seriously to look into it by making reference to the potential return on investments and we – but because of the business intelligence regarding various licensing agreements we are not going to disclose as such.

Operator

We have time for one final question. We'll go next to Vivian Hao with Deutsche Bank.

Vivian Hao – Deutsche Bank

Hi, thank you for taking my question. Hi, my question is regarding our other revenues. What was the lottery and internet finance revenue as a percentage of other revenue and for each elaborate? And also do we plan to establish a dedicated department focusing on transaction business? Thank you.

Onward Choi

Okay. With regard to your questions about the revenue contributions from lottery in our e-commerce, e-mail, and other business segments, what we would share with you is that, we do see that – those be made up of a reasonable proportions of our segments. And but for the sake of our disclosures we have nothing to do so as much, but from a year-over-year growth we do see that there has been a nice growth in terms of the revenue contributions in this area.

Operator

And this does conclude today's question-and-answer session. I would like to turn the call conference back to our speakers for any additional or closing remarks.

Brandi Piacente

Thank you once again for joining us today. If you have further questions, please feel free to contact Cassia Curran, NetEase's IR manager, based in Hangzhou or The Piacente Group. Thank you and have a wonderful day.

Operator

Again, that does conclude today's presentation. Thank you for your participation.

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