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Executives

Dahlia Wei - Senior Manager, Investor Relations

Jun Zhu - Chairman of the Board, Chief Executive Officer

Hannah Lee - Chief Financial Officer, Vice President

Analysts

Jason Brueschke - Citigroup

Paul Keung - CIBC World Markets

Dick Wei - JP Morgan

Evan Wilson - Pacific Crest Securities

C.Ming Zhao - Susquehanna

Andrey Glukhov - Brean Murray, Carret

The9 Limited (NCTY) Q3 2007 Earnings Call November 15, 2007 8:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the The9 Limited’s third quarter earnings conference call. My name is Antoine and I’ll be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today’s conference, Ms. Dahlia Wei, Senior IR Manager of The9 Limited. Please proceed, Madam.

Dahlia Wei

Thank you, Operator. Hello, everyone and thank you for joining us today for The9's third quarter 2007 financial results conference call. The management with me today are Mr. Jun Zhu, Chairman and Chief Executive Officer, and Ms. Hannah Lee, Senior Vice President and Chief Financial Officer.

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

Let me now turn the call over to Mr. Zhu, our CEO, to provide you with an overview of our business for the quarter.

Jun Zhu (Translation)

Good morning and good evening, ladies and gentlemen. I would like to thank you for participating in our discussion of The9's third quarter 2007 results. First, I would like to present a quick overview of the key financial highlights for the third quarter of 2007.

The9 revenues for the third quarter was $42.2 million. Net income was $5.1 million, or earnings of $0.17 per ADS.

Now let me go over some highlights of our games during the quarter. First of all, World of Warcraft; after a series of detailed preparations, we launched WoW: The Burning Crusade expansion on September 6th and have seen significant user interest from both existing users and new users, with WoW’s concurrent user level hitting new heights.

In the third quarter of 2007, WoW attained peak concurrent users, PCU, of approximately 809,000 and for the third quarter, average concurrent users, ACU, was over 340,000. As of September 30, 2007, approximately 9.2 million accounts have been registered and activated for the WoW game in Mainland China. Subsequent to the third quarter, in November we have achieved 900,000 PCUs for WoW.

With a heightened user demand for the WoW game after the launch of The Burning Crusade expansion pack, we have been gradually opening server realms in the most recently built eighth server site to meet players’ needs. So far, 25 server realms on the number eight server site have been opened and we expect to open the remaining realms in the eight server site by the end of the year. Meanwhile, we have started to plan for a new server site, i.e. the ninth server site, for WoW to satisfy anticipated players’ demand.

We are now preparing for the launch of the version 2.3 content upgrade, called The Gods of Zul'Aman. This upgrade is the biggest upgrade patch after The Burning Crusade. This upgrade was just launched in the U.S. several days ago and we plan to launch it in China in late November. We expect the continuous content upgrades will help further boost WoW’s concurrent user and usage level.

Starting from November 6th, we kicked off our 2007 WoW tournament. This campaign will last approximately five months and will cover major cities all across China, targeted to promote a new fascinating game feature called Arena. Based on players’ response in other regions around the world, we anticipate this arena feature will boost existing users’ gameplay time. On the other hand, we started another round of member-get-member program, using our existing player base to attract new players to join the exciting and adventurous WoW game.

To further enhance players’ experience, on November 8th we started to offer a new value-added service, WoW Capture Transfer on a fee-paid basis.

Now, about Soul of the Ultimate Nation, SUN. After a strong debut in the second quarter, SUN continued to bring additional users and revenue in the third quarter of 2007. On July 11th, we launched a content upgrade patch for SUN called [Fadrick] Valley. We are now working closely with Webzen, SUN’s developer, in preparation for another upgrade call Tower of Trial, which will be launched soon. We expect the content upgrade to further improve gameplay experience and players’ in-game consumption.

In addition, we are conducting a series of targeted sales and marketing campaigns to improve SUN’s market penetration to lower tier regional markets and have seen encouraging progress so far.

Next about Granado Espada, GE, we commenced limited open beta testing on September 5th, followed by [inaudible] open beta testing on October 31st. So far, user feedback is quite promising. With our two existing server sites fully utilized, we plan to open the third server site for GE soon and have already received overwhelming user pre-activation for the new server site.

Like SUN, GE will adopt to free-to-play and items-sales model. Yesterday, we have allowed users to start adding value to their GE accounts in anticipation for the commercialization in late November 2007.

Now let me give you some updates on other licensed games in our portfolio. With respect to EA Sports FIFA Online, the game content has been significantly upgraded and now EA Sports FIFA Online II is out in Korea and currently ranked among the top favorites among Korean players.

Localization and other relevant preparation for this game are in the final stage and the FIFA Online Chinese language official website is also ready to debut. Two days ago, on November 14th, we announced that we will commence full beta testing for EA Sports FIFA Online II in Mainland China by the end of this year.

Hellgate: London; Hellgate: London was launched in the U.S. and Europe on October 31st and November 2nd respectively. We will continue to monitor the game’s performance in other regions to determine a more detailed launch plan for Mainland China. We currently estimate Hellgate: London to commence beta testing in Mainland China by mid 2008.

With respect to Huxley, in September Webzen conducted the first round of closed beta testing in Korea and have received favorable user comments upon the game’s dynamic and the differentiated first person shooting gameplay. Based on our understanding, Webzen will conduct further closed beta testing in Korea in December. We will closely monitor Huxley’s progress in Korea to determine its launch schedule in Mainland China.

Audition 2 and Field of Honor Online are currently under development in their respective regions and they will be our 2008 pipeline.

Now let me briefly talk about our proprietary game development. Joyful Journey West, JJW, our first in-house developed game, has been generating a small but stable revenue stream for us since commercialized in September 2006 under the free play plus item sales model.

In the third quarter of 2007, we have achieved an important milestone regarding our overseas license initiative. We have signed a license agreement for Joyful Journey West, granting a game operator in Malaysia the right to operate a game in the Malaysian market for a specified period.

This is important for the The9 as it proves other overseas operators could [inaudible] in the quality of The9's proprietary product. We will continue to market our self-developed products to game operators overseas and to further explore licensing opportunities for JJW and other proprietary games currently under development and slated to be launched in the coming year.

For Warriors of Fate Online, also know as [inaudible], a truly action MMORPG that we are developing in-house, the development is progressing smoothly and is currently scheduled to launch beta testing in the first half of 2008.

In regard to Fantastic Melody Online, a 3D round action based MMORPG that we are developing through outsourcing arrangements, the development progress has been delayed as we are refining the game play and the various features. It is currently scheduled to be launched in late 2008.

To summarize, with GE entering into commercial operation and the FIFA Online II commencing beta testing under The9's platform in the fourth quarter, we believe we have further sharpened our management capabilities for multi-game operation. I would like to emphasize that The9 possesses one of the strongest and most diversified game portfolios that consists of various premium titles covering a wide spectrum of game [inaudible].

With our focused game licensing strategy complemented by our proprietary development efforts, we will continue to offer the best quality game to Chinese online gamers and we believe The9 is well-positioned to deliver sustainable growth in the future.

Now I would like to turn the call over to Hannah Lee, our CFO, to provide you with a more detailed discussion of our third quarter 2007 financial results.

Hannah Lee

Thanks, Dahlia. Thanks, Jun. For the third quarter 2007, The9 reported net revenues of $42.2 million, a 17% increase compared to the previous quarter and a 35% increase year over year. The revenue increase was primarily because of higher revenue from World of Warcraft, especially after the launch of The Burning Crusade expansion pack in early September and full quarter revenue contribution from Soul of the Ultimate Nation.

Net revenues attributable to the operations of subscription-based games, which included revenues from game playing time, merchandise, and installation package sales, increased by 13% quarter over quarter and by 21% year over year to $37.2 million. The increase in such revenues was mainly due to higher concurrent user level as well as user usage level after the launch of World of Warcraft: The Burning Crusade expansion pack in early September.

During the third quarter of 2007, ARPU, average revenue per user hour for World of Warcraft remained relatively stable at RMB0.38.

Net revenues attributable to the operations of items sales based games, which included revenues from in-game item sales and installation package sales, increased by 97% quarter over quarter to $4.3 million in the third quarter of 2007, mainly due to the commercialization of SUN in May 2007, which contributed full quarter revenue in the third quarter compared to less than half a quarter revenue contribution in the second quarter.

In the third quarter 2007, SUN generated approximately $4.2 million of revenue and has approximately 4.3 million active accounts, of which 180,000 were active paying accounts. On average, on a monthly basis each paying account generated revenue of approximately RMB62.

For the third quarter 2007, gross profit increased by 15% quarter over quarter and 23% year over year to $17.6 million. This sequential increase of gross profit was in line with the increase in net revenues.

Gross profit margin for the third quarter 2007 remained stable at 42% compared to the previous quarter, but decreased from 46% in the same period of last year. In the third quarter 2007, considering the nature of the assets, server specification of games to be launched, and industry practice, the depreciation lives of servers were changed to a consistent period of four years. This is accounted for as a change in accounting estimate and prospectively from July 1, 2007, quarterly depreciation charge relating to servers is estimated to decrease by approximately $1.7 million.

Operating expenses for the third quarter of 2007 were $11.8 million, representing a 19% increase from $9.9 million in the previous quarter and a 99% increase from $5.9 million in the same period of last year.

The sequential increase in operating expenses were primarily due to increased sales and marketing expenses relating to the launch of the World of Warcraft The Burning Crusade expansion pack, increased general and administrative expenses, mainly due to full quarter effect of share-based compensation expenses for options granted in May, 2007, offset in part by decreased product development expenses relating to SUN post commercialization, whereby direct costs relating to pre-commercialization of the game are classified under product development.

In the third quarter 2007, non-cash share-based compensation expense was $2.3 million compared to $1.2 million in the second quarter of 2007 and $0.6 million in the third quarter of ’06. The increase of share-based compensation compared to the second quarter of ’07 was mainly due to options granted in May 2007.

At the operating level, we recorded a profit from operations of $5.8 million, increased by 9% compared to $5.4 million in the previous quarter, but decreased 31% compared to $8.4 million in the same period of last year.

Operating margin for the third quarter of 2007 was 14%, remained at a stable level compared to 15% in the previous quarter, but decreased year over year from 27% in third quarter of 2006. The decline of operating margin was primarily due to increased operating expenses, as mentioned just now.

Operating profit margin excluding share-based compensation expenses of $2.3 million was 19% for the third quarter ’07 compared to 18% in the second quarter of ’07, excluding share-based compensation expenses of $1.2 million, and 29% in the third quarter ’06 excluding share-based compensation of $0.6 million.

Other expenses for the third quarter ’07 was $2.2 million compared to other income of $0.6 million in the previous quarter and other expenses of $0.1 million in the same period of last year.

The sequential difference of other income or expenses was primarily due to the combined results of increased foreign exchange loss with a U.S. dollar deposit increase after Electronics Arts cash investment, as well as the lack of any financial subsidy as compared to the previous quarter.

Foreign exchange loss for the third quarter ’07 was $2.1 million compared to $1.0 million in the previous quarter. In the second quarter of 2007, $1.6 million of financial subsidy related to the second half of 2006 was received, whereas no such subsidy was received in the third quarter.

Loss on equity investments net of taxes amounted to $0.1 million in the third quarter of ’07 compared to a loss of $0.3 million in the second quarter of ’07 and a loss of $0.2 million in the third quarter of ’06.

The sequential decrease in loss on equity investment was primarily due to a decrease of loss from certain joint ventures and an increase of profit from certain joint ventures as they generated net income in the third quarter.

Net income for the third quarter of ’07 was $5.1 million, a 25% sequential decrease from $6.8 million in the previous quarter and a 41% decrease year over year compared to $8.6 million in the third quarter of ’06.

Fully diluted earnings per share and per ADS for the third quarter of ’07 was $0.17 compared to $0.25 in the second quarter of ’07, versus $0.35 in the third quarter of ’06.

Adjusted EBITDA, non-GAAP, for the third quarter ’07 was $15.8 million compared to adjusted EBITDA of $15.7 million for the previous quarter and $14.7 million for the same period of last year.

On a per share basis, fully diluted adjusted EBITDA per share was $0.53 for the third quarter of ’07 compared to $0.59 for the previous quarter and $0.60 for the same period of last year.

At September 30, 2007, the company’s total cash and cash equivalent balance was $277.1 million. A stable level of cash and cash equivalents was maintained compared to $278.5 million as of June 30, 2007. This was primarily due to the combined results of cash receipts from sales of prepaid game coins offset by prepaid royalty payments to the licensor relating to World of Warcraft and SUN, capital expenditures relating to Granado Espada, as well as licensee payments for several licensed games.

With this, I would like to thank you for your attention and this concludes our presentation.

Operator, you can open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Brueschke with Citigroup. Please proceed with your question.

Jason Brueschke - Citigroup

Thank you. Good morning, everyone. I actually have two questions but I will respect the request and only ask one and get back in queue. Hannah, can you help us think about the model and the leverage? You’ve had really good growth over the last year. You grew revenues 35% year over year this quarter but your earnings declined around 50%. I understand that you are in expansion mode and you are launching new games and what have, but it also seems like to me there’s a lot of associated costs with the business model as we go forward.

I’m just wondering, when can we expect the margins to get back to where they were a year ago? The pro forma margins are around 29% versus 19%. Just conceptually, is this a permanent hit to margins or is this something that over a year or 18 months or whatever that we should see those margins coming back? Thanks.

Hannah Lee

Thanks for your question. Your question about the growth, last year if you looked at 2006, we basically were only operating one game, which has been -- we have taken advantage of the economy of scale and we do not have any games to be launched. This year, as we said, we are in expansion mode and almost every single quarter, last quarter were launching SUN, this quarter we were launching GE, and as our CEO has just said in his presentation, we are going to start the closed beta testing of FIFA Online by the end of ’07.

And coming up in our pipeline, we will have more games to be launched in the future. If you really dissect our P&L in the operating costs, unavoidably there will be product development costs because we are putting more efforts into developing our own games. We are also increasing sales and marketing for future games that we are pushing out to the market.

In terms of the general and administrative expense, as I said on the call, since the second quarter, since May, because of certain options that we granted, the non-cash share-based compensation expense has increased and the amount that, the comparable amount in 2006 is actually very immaterial. That’s why I encourage everyone to actually look at the last page where we actually disclose all these non-cash expenses.

The depreciation charge is also a big expense within cost of services, share-based compensation, and foreign exchange loss is also a new item because of the U.S. dollar deposit that we have received from the investment that we have from EA in late Q2. The foreign exchange loss basically doubled in Q3 versus Q2. So that also has an impact on the net revenue line.

But from a game-by-game perspective, we are still -- if you are still just looking at World of Warcraft by itself, we are still trying to maintain at least a mid-25% level of margin by itself. But you have to take into account adding the additional pieces of other games like SUN, GE, and other pre-launch costs that we need to take into account to in the quarters that we are planning to launch these games.

Jason Brueschke - Citigroup

Okay. Thanks, Hannah. I’ll get back in the queue.

Operator

Your next question comes from the line of Paul Keung with CIBC World Markets. Please proceed with your question.

Paul Keung - CIBC World Markets

Just a question on the World of Warcraft; what was the timing of the -- that you have in your CapEx forecast for the next couple of servers for the game? And second, related to that, are you in active discussions with Blizzard to maybe perhaps extend the contract? Or is this something you tend to just -- you would partner your discussions later in the year?

Hannah Lee

I’ll answer the first part of your question regarding capital expenditure for World of Warcraft and I will leave to for Mr. Zhu to answer your second question about the attempt to renew the contract.

We are planning, already planning to add another new server site for World of Warcraft because with the anticipated demand we have and we are also aware that there is going to be a new expansion pack, which we are anticipating also, so in Q1 most likely we will be launching a new server site for World of Warcraft, i.e. the ninth server site. And a server site for World of Warcraft would cost about $7 million.

Jun Zhu (Translation)

Before Q3, we had been concentrating on the operation and discussion with Blizzard regarding the launch of The Burning Crusade, but after that was launched, we started discussions with them regarding the renewal of the contract, as you mentioned. So far, we don’t have any comment in that regard. But we are very confident to eventually renew the contract of WoW with Blizzard.

As there is a second expansion pack for WoW called Wrath of the Lich King, that launch scheduled is not yet announced by Blizzard. If that were to be launched before June ’09, according to the contract that is still entitled to The9.

This expansion pack has a lot of features, such as increased the maximum level from 70 to 80 and also adding a new career of characters and also some character customization services, things like that. We think this is very good content upgrade. Both The9 and Blizzard hope that this expansion pack will be launched globally at the same time.

Operator

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

Dick Wei - JP Morgan

Thanks for taking my questions. I want to ask more about SUN. If you can tell us more about the PCU that you saw in the third quarter and what kind of trend is looking for the fourth quarter, that would be great. Thanks.

Hannah Lee

The PCU for SUN for the third quarter is about 170,000. The trend for the fourth quarter because, as we said in the presentation, we are planning to push out further expansion packs and further new features for SUN and we are working very closely with Webzen on that. We anticipate that the PCU and also the average revenue per paying account will increase.

Operator

Your next question comes from the line of Evan Wilson with Pacific Crest Securities. Please proceed with your question.

Evan Wilson - Pacific Crest Securities

I would also like to ask a little more on SUN. Hannah, would it be fair to say that in the quarter, SUN wasn’t profitable on a standalone basis?

Hannah Lee

I wouldn’t say that. SUN is actually still profitable in the third quarter on a standalone basis. Of course, the biggest expense that we will have is the royalty and the royalty is actually calculated as a proportion of the revenue, and the other expenses would be depreciation and the server costs for SUN is actually much, much smaller compared to World of Warcraft, so the fixed cost that we need to cover in order to break even for SUN is actually much lower than World of Warcraft.

I can say that for Q3, it is still making money for us.

Evan Wilson - Pacific Crest Securities

And a follow-up to that point then, as you look at the build-out of the server infrastructure for SUN and potentially raising the cost of that break-even point, now that we have a pretty good gauge of how the game is trending in terms of popularity, what are your plans on the server infrastructure growth for SUN in particular?

Hannah Lee

Currently and for the last month or so, we have already started merging servers within the existing server infrastructure we have to increase the utilization of the server. So from one hand, we are increasing the user, enhancing the user experience where on the other hand, from a capital expenditure perspective, we are not incurring any additional costs.

So from looking out for Q1 or for the rest of Q4, we do not anticipate we will need to add additional server infrastructure to increase the existing capacity, whereby we are actually merging the existing server so we can increase the user experience, where on the other hand, we can free up some hardware so we can open up new realms for new players to go in and for existing players to move over to other realms and build new characters that way.

Evan Wilson - Pacific Crest Securities

Great. Thanks.

Operator

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

C. Ming Zhao - Susquehanna

Thanks for taking my question. Good morning. Just a quick question; in the Chinese media, it’s reported that The9 may take some stake in MSN China. Could you comment on that?

Jun Zhu (Translation)

Sorry, we cannot comment on the rumors.

C. Ming Zhao - Susquehanna

Thank you.

Operator

Your next question comes from the line of Andrey Glukhov with Brean Murray.

Andrey Glukhov - Brean Murray, Carret

Thanks for taking the question. Hannah, it sounds like World of Warcraft is bouncing up very nicely and you guys are talking about good momentum in Granado Espada. Can you talk us through the near-term dynamic in sales and marketing? Do you need to step it up to strike the iron while it’s hot?

Hannah Lee

I guess it would be helpful if I give you a breakdown of the marketing expense that we had for Q3, and I can talk about Q4 and give you some color on Q4. We incurred about $4.3 million of marketing costs for Q3 and about $2.6 million of that relates to World of Warcraft. We had about $1 million of that related to SUN, with the rest of that being spread around Guild Wars, Granado Espada, and Hellgate: London, and that comprised of the rest of the -- about $0.6 million.

For Q4, I think we are continuing to market for The Burning Crusade and also with the new version 2.3 that we will be launching soon. We will continue to market that and also increase our penetration to the interior cities, the second and third tier cities. We are expecting a similar level of expense in Q4 for the World of Warcraft game and also similar for SUN.

In addition to that, because for GE, we actually have started closed beta testing in October and we will be starting commercialization of Granado Espada by the end of this month, so in that respect we will be spending a bit more of marketing costs for GE itself.

With FIFA Online, because we are also starting closed beta testing by the end of this year, we will be spending some money on promoting FIFA Online.

Jun Zhu (Translation)

I would like to add some comments. In the third quarter, WoW rebounded very strongly and we have achieved a very healthy top line, but the bottom line is kind of weak because -- I think there are several reasons. First, we have concentrated on some new game launches, so there are some additional sales and marketing expenses, and also we expanded our operational team to prepare for this new game launch. That also contributes to the cost increase.

So in the fourth quarter and the coming Q1 of next year, I believe those new game launches will be [building through], which means we’ll enter into commercialization, so that will prove that that initial investment that we made in Q3 is very well justified.

Andrey Glukhov - Brean Murray, Carret

Okay, that’s helpful. Thank you.

Operator

Your next question is a follow-up question from the line of Jason Brueschke with Citigroup. Please proceed with your question.

Jason Brueschke - Citigroup

Thank you. My question involves Hellgate: London. In the U.S., it got off to a little bit of a bumpy start. I think in some ways, it appears that they tried to rush it out to get it out by Halloween. It also seems that a lot of those problems are temporary and most likely get fixed. Could you maybe give us your views on the launch and maybe what needs to happen, if anything, between now and when you bring it into China? Thanks.

Jun Zhu (Translation)

We will continue to keep an eye on the continuous and ongoing development effort on Hellgate: London, and we will continue to monitor the progress in international markets to decide the launch plan in China.

Based on our understanding, we have a very high confidence in the development team of Hellgate: London flagship studio. We believe their development capability is very strong.

Jason Brueschke - Citigroup

And maybe can I have one follow-up, since I’m at the back of the queue, can you give us an update on the status of Audition 1? There’s some I think confusion in the market, or at least I’m confused, as to whether you have the rights to this game or whether [Nineu] has the rights to Audition 1. Thanks.

Jun Zhu (Translation)

We have actually received notice of termination from the Korean developer. We think their termination is wrongful and we would like to reserve our rights in this matter and may consider commencing legal action.

But recently, we have been in talks with the current developer regarding the long-term operation plans for the Audition series game. We hope that we can announce this series of plans of this game very soon.

Jason Brueschke - Citigroup

Great, and maybe one final question; there’s been some reports in the press that the Chinese Government may limit the number of foreign games, foreign-developed games it allows into China. Could you comment on that? It would also seem to me that given the fact that you have such a strong pipeline now, that if there were any restriction, that you would actually be favored because of your existing pipeline and it would hurt other people trying to bring games in. Could you maybe comment if that’s the right way to look at that, that if in fact the Chinese Government were to limit the number of games coming in? Thanks.

Jun Zhu (Translation)

First of all, we have not received any [inaudible] from the government so far, and second, we haven’t even heard any rumors about this.

But you are right in saying that The9 is one of the strongest and most experienced operators for foreign licensed games. I will take this opportunity to further elaborate our licensing strategy.

With the rebound of WoW and actually, I believe with the launch of the second expansion pack, WoW can achieve another very high level milestone. But sales and marketing for WoW will keep a relatively stable range.

In addition, we also have a very strong pipeline in the casual games area. The FIFA Online II, based on our understanding from EA, I think this game will be very good for the China market. FIFA Online is kind of similar to WoW’s situation in some extent.

First of all, it has a very big user base for the PC version of FIFA games. And second, FIFA Online II has achieved a very huge success in Korea, so that’s why we think there will be a big -- FIFA Online II will be very successful in China.

Second, regarding the Audition series game, we are very confident of the games because the existing Audition 1 game has proved to be very successful and popular in China. Like WoW once The Burning Crusade expansion pack was launched, the PCU was immediately boosted to 900,000 from the old 500,000, 600,000 level. That’s why we think the Audition series game will also have a very big chance to be successful next year.

As I mentioned just now, we hope we will announce the series of plans for the Audition series of games in Mainland China.

Regarding the other MMORPG like SUN and GE, the existing performance is very good and we are very confident in the future performance of this game. So all in all, although we incurred relatively high cost and expenses for this game in the third quarter, we believe the future outcome of these games will prove to be very worthwhile.

Jason Brueschke - Citigroup

Thank you.

Operator

Your next question is a follow-up question from the line of Evan Wilson from Pacific Crest. Please proceed with your question.

Evan Wilson - Pacific Crest Securities

Hannah, could you remind us what the up-front license fee you’ll record on the P&L when Granado Espada is commercialized in Q4? And then, now that we’ve seen some of the data on Granado Espada’s beta, could you give us some sense or direction on your feeling for what the initial success of that game will be in Q4? Thanks.

Hannah Lee

For Granado Espada, the total license fee was $2 million in total, of which $300,000 was paid in 2004 when we signed the game on and $700,000 has to be paid when the game goes open beta testing, and when the games go commercialization, we have to pay another $500,000. Upon the game reaching an average concurrent user level of 100,000, we would be obligated to pay another $500,000. So that’s how the $2 million is made up.

So far, we have opened two server sites for Granado Espada and these server sites are pretty full. They are currently in open beta testing. Like we just said in the presentation, we will be adding a third server site and we have already started allowing people to register to activate for an account in the third server site. And the response that we have received so far, we are quite happy about that.

Like we said, we will be starting commercialization, i.e. starting to sell items for Granado Espada, by the end of this month and the exact date will be announced very soon.

Evan Wilson - Pacific Crest Securities

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back to Dahlia Wei for a closing remark on behalf of the company.

Dahlia Wei

Thank you, everybody, again for participating in today’s call. If you have any additional questions, please 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.

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