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NetEase.com, Inc. (NASDAQ:NTES)

Q2 2007 Earnings Call

August 13, 2007 9:00 pm ET

Executives

Brandi Piacente - The Piacente Group

Michael Tong - Co-Chief Operating Officer, Director

Onward Choi - Acting Chief Financial Officer

William Ding - Chief Executive Officer, Director

Analysts

Richard Ji - Morgan Stanley

Wallace Cheung - Credit Suisse

Dick Wei - J.P. Morgan

Eddie Leung - Deutsche Bank

Alicia Yapp - Citigroup

C. Ming Zhao - Susquehanna Financial Group

Tian Hou - Pali Capital

James Mitchell - Goldman Sachs

Presentation

Operator

Good day, everyone and welcome to the NetEase.com second quarter 2007 earnings results conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Brandi Piacente. Please go ahead, Madam.

Brandi Piacente

Thank you, Operator. Please note that the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify under the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks, 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 corp.netease.com.

I will now turn the conference call over to Michael Tong, Co-Chief Operating Officer, who will read the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

Michael Tong

Thank you, Brandi. Thanks everyone for joining us. Total revenues for the second quarter were $73.3 million, compared to $72.9 million for the first quarter of 2007 and $75.6 million for the second quarter of 2006.

Online game revenues were $62.4 million for the second quarter, compared to $63.3 million for the first quarter of 2007 and $63.8 million for the second quarter of 2006.

Despite relatively flat gaming revenues quarter over quarter, we believe we are aligning the right balance of resources with our longstanding MMORPG expertise and market leadership to build and diversify our game portfolio for near-term growth.

Open beta testing for Westward Journey Online III, the upgraded version of Westward Journey Online II, is scheduled for this month and the development process has gone smoothly. Our current plan is to enable players to continue with their existing characters in Westward Journey II while completing a one-time automatic migration of existing characters to Westward Journey III. Customers will have the choice of playing their characters under both games. After the migration dates, all of our future developments for this game will be related to Westward Journey III only.

For the second quarter, PCUs and ACUs were 505,000 and 162,000 respectively for Westward Journey II compared with 480,000 and 169,000 respectively for the first quarter.

Fantasy Westward Journey had another strong quarter, although not quite as strong as the first quarter. This reflects our typical seasonal pattern where the first quarter is typically the strongest quarter for game usage. PCUs and ACUs were 1.47 million and 491,000 respectively for Fantasy Westward Journey during the second quarter compared with 1.5 million and 511,000 respectively for the first quarter. We are planning to release an expansion pack for Fantasy Westward Journey during the fourth quarter of 2007.

We are also making positive progress with our programming and design improvements for Tianxia II. Our testing showed that the game was heavily scaled towards advanced game players. We are working to improve the programming and design of the game to appeal to a broader user audience. Since the open beta in March, we have added some developers that have great insight in how to make the game more attractively to entry level and mid-range gamers.

Our overall game development pipeline for the next 12 months includes revamping Tianxia II, the migration of Westward Journey II users to Westward Journey III, and launching Datang II and Fly for Fun both as free-to-play item-based games.

Now, turning to our portal business, our efforts in expanding the content channels, including our new sports and entertainment channels, has enabled us to maintain our momentum in traffic growth and as a result, traffic for these channels has grown over 40% on a quarter-to-quarter basis and overall advertising revenues increased 16% to $8.6 million for the second quarter of 2007, compared to $7.4 million for the first quarter of 2007.

In addition to expanding our channel content, we are continuing to enhance the functionality of our e-mail services. We are working to better monetize our e-mail offering by showcasing the effectiveness and broad reach of our enhanced e-mail portal services to advertisers.

With 217 million e-mail users, we remain the leading free e-mail provider in China and we will continue to work with advertising agencies on increasing the advertising revenue potential of e-mail.

We also joined an Olympic alliance with Sina and Tencent during the second quarter. Through this alliance, we will be able to leverage each company’s respective strength in the preparation for the Beijing 2008 Olympic Games.

Overall, we remain confident about our future opportunity through our focused channel content and e-mail services strategies.

During the second quarter, we continued to work on our self-developed search engine. The domestic search market is relatively small, since the e-commerce market in China is still emerging. We believe our investment in this area, an early market entry with a highly competitive service, presents a compelling opportunity for NetEase. We will continue to keep you focused on our progress in search.

With that, I would like to turn the call over to Onward Choi for his review of our second quarter financial results.

Onward Choi

Thank you, Michael. I will now provide an overview of our financial highlights using numbers and percentages based on U.S. dollars. In order not to repeat what has just been explained by Michael on the revenue side, I will focus on explaining margins and expense fluctuations along with net profits.

Second quarter gross profit was $57.5 million compared to $56.5 million in the preceding quarter and $60.1 million for the same period in 2006. The quarter-over-quarter increase in gross profit was primarily due to higher advertising service revenue in the second quarter of 2007. The year-over-year decrease was mainly due to a decrease in all revenue segments as a result of more intense competition in the internet industry in China.

Gross margin for the online game business for the second quarter of 2007 was 90.2%, compared to 89.6% and 90.7% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase primarily resulted from operational cost savings which more than offset a decrease in online game revenues in the second quarter of 2007. The year-over-year decrease was primarily driven by a decrease in online game services revenue from Westward Journey Online II and higher staff-related costs as a result of an increase in headcount.

Gross margin for the advertising business for the second quarter of 2007 was 47.2%, compared to 35.7% and 49.8% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter increase in gross margin was primarily driven by the seasonal increase in advertising spending coupled with savings in content costs in the second quarter of 2007. The year-over-year decline in gross margin was primarily due to decreased advertising services revenue as a result of increased competition.

Gross loss margin for the wireless value-added services and others business for the second quarter of 2007 was 28.1%, compared to gross loss margin of 36.1% and 2.3% for the preceding quarter and the second quarter of 2006, respectively. The quarter-over-quarter improved gross loss margin was primarily due to increased revenues from our online fee-based premium services supplied to registered users of the NetEase websites, including premium matchmaking and dating services and product sales generated from our registered users. The year-over-year decline in gross loss margin was primarily driven by a decrease in revenue from wireless services.

Total operating expenses for the second quarter of 2007 were $18.8 million, compared to $15.5 million and $17.6 million for the preceding quarter and the second quarter of 2006 respectively. The quarter-over-quarter increase was primarily due to an additional provision for doubtful debts of $0.3 million made during the second quarter of 2007, compared to a reversal of provision for doubtful debts of approximately $1.1 million as a result of the collection of outstanding accounts receivables with respect to the advertising business during the first quarter of 2007.

The increase was also due to increased selling and marketing costs of $0.9 million related to the marketing of Tianxia II, Westward Journey III and seasonal promotional activities during the second quarter of 2007.

Higher operating expense was also due to an increase in research and development costs of $0.6 million associated with the increased staffing for enhancing existing products and developing new products. The year-over-year increase was mainly due to an increase in selling and marketing costs, higher staff-related costs as a result of an increase in headcount, and increased depreciation charges.

Net profit for the second quarter of 2007 totaled $41.1 million, compared to $39.6 million and $41.3 million for the preceding quarter and the second quarter of 2006, respectively. In June 2007, we received a reinvestment incentive tax refund of $3.2 million, which significantly reduced the company's income tax expense for the second quarter of 2007.

Our basic and diluted earnings per ADS were of $0.33 and $0.31 for the second quarter of 2007, respectively. This compared to basic and diluted earnings per ADS of $0.31 and $0.29 for the preceding quarter and $0.32 and $0.29 for the second quarter of 2006.

As of June 30, 2007, our total cash and time deposit balance was $391.5 million, compared to $517.3 million at December 31, 2006, and $474.4 million as of June 30, 2006. In addition, there was a restricted cash balance of $100.1 million as of June 30, 2007 primarily related to the company's committed revolving loan facility.

The loan facility can be used by NetEase at its discretion to fund any redemption requests made by the holders of its zero coupon convertible subordinated notes in accordance with the terms of those notes.

Cash flow generated from operating activities was approximately $43.5 million, compared to $37.2 million and $39 million for the first quarter of 2007 and second quarter of 2006, respectively.

On March 13, 2007, our board authorized a share repurchase program of up to $100 million of the company's outstanding ADS for a period not to exceed three months. When the share repurchase program ended on June 12, 2007, we had spent in aggregate a total purchase consideration of approximately $95.7 million, including transaction costs.

With respect to the separate share repurchase program of up to $120 million authorized by the board on July 2, 2007, at July 31, 2007 we had spent in aggregate a total purchase consideration of approximately $5.6 million, including transaction costs. The share repurchase program will end on July 1, 2008.

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

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Richard Ji with Morgan Stanley.

Richard Ji - Morgan Stanley

Hello, William, Michael, Onward. I have two questions and they have to do with Fantasy Westward Journey. Obviously Fantasy Westward Journey is the bread and butter for your company. Other than the seasonal weakness in 2Q, have you seen this game stabilize? Regarding the expansion pack in 4Q, what will be the expansion pack mainly about? And I have a follow-up.

Michael Tong

Yes, the expansion pack in going to be released in the fourth quarter but we are not going to disclose the exact contents. The official announcement of the exact contents for the fourth quarter expansion pack will be announced when we are ready to do it.

We believe that this is a seasonal trend for Fantasy Westward Journey in the second quarter, where we see a flat or very little drop in usage, and which we have been seeing that in the last year or the year before that, and especially that in the first quarter because of the winter holiday and also because of the Chinese Valentine’s Day, as we have explained during the last quarter, I think it is normal to see that it is a flat quarter for the second quarter.

We believe the momentum for the game continues to be very strong.

Richard Ji - Morgan Stanley

Okay, thank you, Michael. My second question is again, your company is likely the most cash-rich company among the Chinese Internet peers. Apart from share buy-backs to enhance shareholder value, are you looking for a licensing opportunity as you guys have publicly announced several times? And if you are looking for a licensing opportunity, will you be focusing more on the overseas opportunity or more likely the local game titles?

Michael Tong

Again, besides share buy-back, we have been looking for different kinds of opportunities, especially including licensing new games for NetEase. The games could be from domestic and a game from overseas. Unfortunately, we don’t have anything that we can publicly announce right now but we have been working very hard and dealing with several companies in the licensing games area.

Richard Ji - Morgan Stanley

Thank you.

Operator

Thank you. Moving on, we will take our next question from Wallace Cheung with Credit Suisse.

Wallace Cheung - Credit Suisse

Good morning, William, Michael and Onward. Just two quick questions; I think first of all, can you give a little guidance on the operating expenses trend? Because it seems there’s been a bit of growth in the three line segments. How is the trend facing quarter -- is this R&D cost that is -- will there be much further growth in the headcount and the salary hike? Thank you.

Michael Tong

I think the research and development costs, the increase would be in line with the company’s plan of doing the developments of the new products and how to strengthen the existing products. So I think the existing trends of the R&D expenses would be basically in line with what the company has set in the overall directions. Because if you look in the previous quarters, I think we have also maintained the percentage of the R&D costs to the net revenues within, down below the 10% lines. So I think it would be still along this line.

Wallace Cheung - Credit Suisse

So how about the marketing spend as well?

Michael Tong

Regarding the marketing expenses, I think for this quarter the major increase would be mainly due to the enhanced or increased efforts on promoting the Tianxia II and also the Westward Journey III and the seasonal promotional activities. So basically the levels of the SMS of course would be more or less dependent on how we are to match with our rollout of the products and how we are to match with our promotional programs for the other game products.

Wallace Cheung - Credit Suisse

Okay, may I have a second question, actually on the search engine side. I would like to ask William about this question. (Translation not Available) My question is mainly on the insight about the search engine of the [inaudible].

William Ding (Translation)

The search engine has been developing. The progress has been well and we are working on a number of functions of the search engine right now and we are going to put more marketing efforts in the fourth quarter of this year for the search engine when we are ready.

Wallace Cheung - Credit Suisse

May I have one follow-up question on the search engine side? (Translation not Available)

William Ding (Translation)

Let me explain briefly. Because NetEase is very different compared to our competitors and we have a massive user base in our products like the e-mail, the portals and so on, and we believe that we can utilize the user base to market our search engine.

Wallace Cheung - Credit Suisse

Thank you very much.

Operator

Thank you. Our next question will come from Dick Wei with J.P. Morgan.

Dick Wei - J.P. Morgan

Good morning. Thanks for taking my questions. I have a couple of questions. The first one is for Westward Journey III, the free open beta testing I guess is going to start this month. What kind of revenue impact do you expect to have for Westward Journey II revenue for the quarter?

Michael Tong

Let me explain this. I don’t think we would be able to quantify the effect on the revenue for Westward Journey II but we can of course confirm or explain the plan is to have the users to have both characters in Westward Journey II and Westward Journey III and of course, while Westward Journey II is charging RMB0.40 per hour and Westward Journey III will be free to play during the open beta period. Of course, when we go commercial for Westward Journey III, it will be the same as Westward Journey II and will be charged on an hourly basis.

So obviously the users, when they have two characters to play on both games, we are trying to attract the players to migrate to Westward Journey III and to try out on the open beta. During this period of time, it is likely that they will spend less money on NetEase, so we can confirm that but we won’t be able to quantify exactly the revenue impact on such a plan. We believe the open beta will be short and the impact could be minimized but we will be happy to see more and more users to try out the new games in Westward Journey III.

Dick Wei - J.P. Morgan

Great. My second question is can you give me the latest number of R&D staff you have for the online games division? Beyond the couple of games you mentioned in your prepared remarks for the next 12 months, were there any other games that you are developing now but have not announced that are in the pipeline yet?

Michael Tong

Okay, sure. Dick, let me answer the second question first. Again, during the script, the previous script we have just mentioned that during the next 12 month period, it will be the most important for us to continue revamping Tianxia II and launching our Westward Journey III. We have also announced during this conference call that we are working on Datang II and also Fly for Fun, and both are going to be free-to-play item-based games.

I think we did mention that we have been working on some other advanced casual games before and we are still working on this but we don’t have a title and we don’t have an exact launch time for those yet. So I think I would be more conservative to save those for an official announcement on those games.

I will let Onward answer your first question.

Onward Choi

With regard to the headcount of the R&D staff in the online game department, our headcount for the second quarter of ’07 would be around 890 and the same numbers for the previous year would be about 670.

Dick Wei - J.P. Morgan

Great. My last question is I remember in the third quarter of 2004, NetEase had a big brand advertising campaign with TV promotions, billboards, et cetera. I believe at that time you guys mentioned that you guys will do it every three years for large brand marketing campaigns. I wonder if there are any plans for this year.

Michael Tong

It is unlikely for us to have a big marketing campaign for this year but we are working on different possibilities. But frankly, there is nothing that we can announce yet but we are working on that.

Dick Wei - J.P. Morgan

Great. Thanks so much for taking my questions.

Michael Tong

On different ways of the marketing campaign for NetEase as a brand.

Operator

Thank you. Moving on, we will take Eddie Leung with Deutsche Bank.

Eddie Leung - Deutsche Bank

Good morning, guys. Can you talk about the trend in your banner advertising versus last year and where do you see the growth come from in terms of our customer mix and inventory?

Michael Tong

For the banner advertising, this quarter we have an increase of close to 20% -- I mean, the overall advertising is increased 16%, while the banner advertising -- I mean, the branded advertising is around like closer to 20% quarter over quarter.

But on a year-to-year, it is still kind of flat or a small drop. The reason is basically the same as the first quarter, where we have lost some important e-commerce related clients and the growth of that excluding those is actually very healthy. We believe that the growth of the advertising, the branded advertising will continue in the following quarters, mainly because of one, the general growth of the industry of advertising on the online advertising and more specifically, it will continue to be more in automobile, FMCG, as we see more and more traditional companies putting more money into an online medium.

In terms of the inventory, I think it is an overall growth of the industry where we continue to see the growth of our traffic in both the current channels, the front page and also the e-mails as well.

Eddie Leung - Deutsche Bank

Thank you. No more questions. Thank you very much.

Operator

Thank you. Our next question will come from Alicia Yapp with Citigroup.

Alicia Yapp - Citigroup

Good morning. Thank you for taking my questions. I have a couple of questions. One is regarding your Datang II. Last year when you launched your Datang II and experienced media coverage, you attributed to the game like never intended to be a blockbuster game, and then with Datang II this time in the free-to-play model has the same quality, or you kind of use these as an experience to test on your free-to-play model, or should we expect this to be a much improved, much more robust game? And then I have one follow-up.

Michael Tong

Okay -- actually, I don’t know how to answer your question. I think of course we want to target high for Datang II and the game quality, I think because of the improvement, it will be probably the same team that developed Datang I. And because of the -- as they get more experience, we believe that the team will be able to develop better games and of course, we want to target high growth games but it is going to be one of the very first games for us to trial on the free item-based model, so that is how we look at it.

Alicia Yapp - Citigroup

Okay, and then can I follow up with the licensing games, on your commitment. We understand that it may take some time before you actually find a good game that you want to license. It usually takes some time for the bidding process to go through. But since many investors have actually started to doubt whether you are going to do it, since it has been so long when you first talked about that, can you just give us an update regarding the process? Based on your best knowledge or your best expectations, what can we expect such an announcement -- when can we expect such an announcement and would it be more advanced casual games or MMO? Thank you.

Michael Tong

As we have said, we won’t be able to publicly announce anything on the titles that we are working on. All I can say is that we’ve been dealing with several interested parties on licensing their games to us and it includes actually advanced casual games and different kinds of games, actually. It includes all different kinds of games and it also includes domestic and international game developers as well.

Alicia Yapp - Citigroup

Thank you. I’ll get back in the queue. Thank you.

Operator

Thank you. Ming Zhao will have our next question from SIG.

C. Ming Zhao - Susquehanna Financial Group

Thank you very much for taking my questions. I guess first two questions for Onward; can you give us a breakdown of the revenue from Fantasy Westward Journey and Westward Journey Online II? A percentage is fine, I think. Also, what percentage of the advertising revenue is from the search this quarter? Does that mean it is going to be gone entirely in the second half of this year after you terminate the contract with Google?

Onward Choi

First of all, maybe I’ll just give you the revenue mix of our online games for the second quarter. For Westward Journey II, it contributed to about 25% of our total online game revenues, whereas the Fantasy Westward Journey contributed about 74% of our online game revenues.

With regard to your second question about the advertising revenue, the search engine part of the revenue would contribute about not more than 4% -- approximately 4% of our total advertising revenue.

And this is --

C. Ming Zhao - Susquehanna Financial Group

Let me just ask a quick question; your alliance with Sina and Tencent, how exactly does that work? Are you going to share content? What about the advertiser side? Can you elaborate there, please? Thank you.

Michael Tong

As we understand and as you understand, the Olympics is a very important event to China for this year. It is very important for the Internet industry to promote itself as an industry, as a very strong industry to influence the users, to have a very big, a vast coverage of audiences, and the alliance between Sina, Tencent and ourselves is actually open to all Internet players. So far, we have I believe around 16 companies have joined the alliance.

We are actually working on how we can align together and the topics would be mostly including how we can share the reporters and how we can share some of the content resources. It is mainly an alliance for the reporting of the event rather than any alliances on like advertising or so on. So it is mainly on the reporting of the events.

In fact, to update you, we just had a meeting with all the allied parties last week.

C. Ming Zhao - Susquehanna Financial Group

Okay, so let’s do an example. For example, you are going to buy content from some of the news agencies. Is that cost share among all the alliance members so that your margin could actually improve a little bit?

Michael Tong

That could be one of the possibilities and we are working on this.

C. Ming Zhao - Susquehanna Financial Group

Okay. Thank you very much.

Operator

Thank you. Our next question will come from Tian Hou with Pali Capital.

Tian Hou - Pali Capital

Thanks for taking my questions. My question is regarding the e-mail advertising. What exactly do you do? Do you put the advertising in the frame of your e-mail page or do you send e-mail out to the end users? Which way is the way you do advertising?

Michael Tong

Those are already included in our e-mail products where you can see a small frame of advertisements when you login to the e-mail or when you successfully send out an e-mail and so on. So there are a few advertising spaces on our e-mail products.

I think one of the things that we are working on right now which I can explain further is to continue to add, partly to add some of the content in our e-mails or services in our e-mails. For example, we are working on one product where we can allow the e-mail users to look at stock prices that they can customize so they can be working on their e-mail and at the same time working on reading the stock prices. So these are like additional services for the e-mail accounts. We believe that can continue to attract more users and actually be able to have a better understanding on the demographics of the e-mail users as well.

Tian Hou - Pali Capital

How do you envision your advertising business to grow in 2008?

Michael Tong

I’m sorry, your question is -- ?

Tian Hou - Pali Capital

I was just asking -- I think in ’07 because we have games and also this Olympics Games alliance, so your advertising business will start to pick up. Do you think in ’08 you will also enjoy the growth in line with the industry? Do you see the trends continue?

Michael Tong

We won’t be able to tell you if we are going to outgrow the industry or be in line with the industry or under-perform with the industry but we can tell you that we will definitely be able to enjoy the growth of the advertising industry as a whole because of the Olympic Games that are going to be held in 2008.

Tian Hou - Pali Capital

Thank you. That answers my question. Thank you.

Operator

Thank you. Moving on, we will have a follow-up question from Alicia Yapp.

Alicia Yapp - Citigroup

[inaudible]

Brandi Piacente

Alicia, we can’t hear you. Operator, can you move to the next question?

Operator

Pardon the interruption, Ms. Yapp, I’m sorry, but we are unable to hear you.

Alicia Yapp - Citigroup

Hello? Sorry about that. My question is regarding the Westward Journey III migration. How long are you going to plan to keep the Westward Journey II once Westward Journey III is launched? Do you have some details regarding how many copies of the open beta version of the game has been downloaded so far and in terms of the user registration accounts you have received so far? Thank you.

Michael Tong

We don’t have an official expectation that we can disclose on exactly how long that the open beta is going to be so that you can look at the track records. Some of the open beta is as short as one month while some others could be like two months or so. So it should be around this range but we don’t have an official expectation on that. So that is for the open beta period of time.

On the number of downloads or the number of CD-roms that we have sold, so far we have -- again, we don’t have the official numbers to disclose right now because we are still -- the official date is going to be tomorrow but the CD-roms we have distributed to a lot of new channels that we have not worked before and we believe it is going to be one of the bigger distributions as we have done with previous products. That is all I can say.

Alicia Yapp - Citigroup

And what about the marketing costs? I’ve seen a lot of activity going on on that. What do you expect the marketing cost for, specifically just for Westward Journey III to be increased in Q3?

Michael Tong

Alicia, you would like to know about -- can you repeat your question about the marketing cost? You would like to know what is our upcoming plans or -- what is it?

Alicia Yapp - Citigroup

Yes, the general idea of what will be the increase in sales and marketing costs as related to your promotion in the Westward Journey III.

Michael Tong

Regarding the increase in the marketing costs with regard to the Westward Journey III, it will include some on the online advertising and offline advertising that we would like to promote the new products and also we will launch some more promotional activities or events to promote this new game and we will consider other opportunities, even for the TV commercials.

All the opportunities we will take into consideration and see how to blend it into a good mix and to put forward to the market.

Alicia Yapp - Citigroup

Okay, I guess it is just for a comparison like during Q2, the increase of the sales and marketing cost is about $0.9 million. What should we expect in terms of -- should we expect a higher number in Q3?

Michael Tong

I think it is still too early to make an estimation on this number. We are still working on it and this is all -- what I said just now would be the possible program that we will be doing and so we still need to see.

Operator

Thank you. Our next question will come from James Mitchell with Goldman Sachs.

James Mitchell - Goldman Sachs

Thank you very much for letting me into the queue. Two questions on your pipeline. First, a rough timetable for the other three new games you mentioned. You don’t have to get into days and dates -- maybe just whether you see Fly for Fun, Datang II, Tianxia coming out in the second half of ’07 or in the first half of ’08.

And then a related question to that; it looks like all four of the new games you’ve mentioned belong to franchisers that you’ve already tried once or twice, which I can fully understand for Westward Journey but for the other franchises, I’m surprised that you aren’t interested in taking the game engines and building new brands around them, rather than rehashing the Fly for Fun, Datang, and Tianxia brands. So maybe if you could talk about your policy in terms of brand and new games a little bit, that would be very helpful for me, too.

Michael Tong

Actually, for the launch of Datang II and Fly for Fun, I think very roughly I can say for both games we are looking at the next 12-month period of time. Of course, I’m not saying both games will be launched by the end of the next 12 months but somewhere around six months for one of the games and the other near to the close of the next 12 month period of time.

And then, James, I actually don’t really understand your second question.

James Mitchell - Goldman Sachs

Just in terms of Tianxia as well, do you have a rough timetable for Tianxia?

Michael Tong

As we mentioned before, Tianxia II we w are looking at around the end of this year for the relaunching of the open beta.

James Mitchell - Goldman Sachs

Open beta in 2007. Okay, and then when I look at the games, it’s pretty obvious why you would want to release another Westward Journey game because that franchise has been spectacularly successful. If I look at your other three games, I can understand why you would want to take the code you have built and expand that code and improve that code and release a game, but I think in most countries when you have a first game that is not so successful then sometimes the second game built on the same code will have a different brand or a different franchise. When you refer to these games as Datang II and Tianxia II and Fly for Fun, is it going to be positioned the same way as the previous games? Is it going to be the same --

Michael Tong

Okay, I totally understand. You are actually exactly right. In some ways, when we are explaining these games’ names as Datang II of Fly for Fun, the way we are going to market or position these games might not be exactly -- like Datang II, while we might be doing something like for example, like Fly for Fun, the Chinese name, we might actually have a totally different name for Fly for Fun but the reason why we named this game as this product is because the code, as you mentioned, is actually built on those old codes, to rework on those old codes. So this is how we name the projects.

But when we are actually going to launch the game, the positioning of these games will be quite -- might be quite different from the original games. In fact, for Fly for Fun, I think the Chinese name that we are looking at is probably going to be totally different from the first game.

James Mitchell - Goldman Sachs

Right, so the message won’t be you enjoyed Fly for Fun 1 so much, you are going to love Fly for Fun II --

Michael Tong

No, no, not at all. Actually, it will be very different.

James Mitchell - Goldman Sachs

-- holding a different target around. Okay, great. Thank you.

Operator

Thank you. Our final question will come from Wallace Cheung with Credit Suisse.

Wallace Cheung - Credit Suisse

Just one follow-up question on the game side as well. I just recognized you guys have launched a game called Fu Jia Xi You Online. Can you talk a little bit more and what is the strategy for the advanced casual games and the mini casual games as well? Thank you.

Michael Tong

Sure. I think for the mini casual game, it is really that we are trying to drive the traffic from the users but we don’t intend to see material revenue contributed to mini casual games. But for the advanced casual games, as you have just mentioned, actually we are trying out different kinds of so-called more advanced casual games. For example, this Fu Jia Xi You is more like a monopoly game and in fact, we have two other advanced casual games but one more which we have launched, which is kind of a restaurant operation type of game.

I think we are really still testing the waters on this so-called more advanced casual games and we believe that we will be both looking at driving the traffic of the users and also trying to monetize through the selling of virtual items on advanced casual games. But I could say that we are still early in this stage but we are definitely looking at both driving traffic and revenue for advanced casual games.

Wallace Cheung - Credit Suisse

Is the restaurant kind of game similar to the Cookie Momma online version?

Michael Tong

Not so much. It’s more the operation of the restaurants to drive traffic for the restaurants.

Wallace Cheung - Credit Suisse

Okay. Thank you very much.

Operator

Thank you. It does appear that that is all the time we have for questions. Ms. Piacente, I would like to turn the call back over to your for any further comments or closing remarks.

Brandi Piacente

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

Operator

Thank you. Ladies and gentlemen, that does conclude today’s NetEase conference call. We would like to thank everyone for their participation in today’s call. Have a great rest of your day.

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Source: NetEase.com Q2 2007 Earnings Call Transcript
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