NetEase, Inc.

NetEase, Inc.

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Electronic Gaming & Multimedia

NetEase, Inc. (9999.HK) Q2 2008 Earnings Call Transcript

Published at 2008-08-14 03:12:11
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 Dick Wei - J.P. Morgan Alicia Yapp - Citigroup Eddie Leung - Merrill Lynch Tian Hou - Pali Capital Hia Gou - SIG Paul Keung - Oppenheimer Tony Gikas - Piper Jaffray James Lee - Sterne, Agee & Leach
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the NetEase second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Brandi Piacente of Investor Relations. 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 for 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. In the second quarter of 2008, we continued to focus on our two main businesses, online games and advertising services, and we experienced a strong second quarter due to continued solid execution on both fronts. Total revenues for the for the second quarter of 2008 were $104.4 million, compared to $95 million in the prior quarter and $81.3 million for the second quarter of 2007. For our online games business, our revenues this quarter totaled $86.8 million, compared to $81 million in the previous quarter and $69.3 million for the second quarter of 2007. China’s online gaming industry is in the midst is in the midst of unprecedented growth and NetEase is very well positioned to benefit from these strong trends, mainly to our broad range of product offerings, strong operating cash flow, and our ability to stay at the forefront of an evolving and dynamic market. Our flagship game, Fantasy Westward Journey, continues to perform well, fueled by our continued focus on enhancing player experience through periodic releases of expansion packs and successful in-game marketing activities. Fantasy Westward Journey remains amongst one of the most popular games in China. For the second quarter, PCUs and ACUs were 2 million and 627,000 respectively, compared with 1.6 million and 583,000 for the first quarter of 2008. Fantasy Westward Journey set a record this quarter with PCUs of over 2 million in April. We will continue to maintain this upward trend by enhancing game play with new content and expanding our marketing promotions during the Chinese festivities for the remainder of the year. Westward Journey II is attracting greater user interest and we continue to see steady growth, and Westward Journey III is also progressing nicely. We are still on schedule to release an expansion pack aiming at enhancing game play attraction to the game in the second half of 2008. For the second quarter, PCUs and ACUs for Westward Journey Online II were 544,000 and 149,000 respectively, compared with 385,000 and 152,000 respectively for the first quarter. For Westward Journey II, PCUs hit a high of 544,000 in June. For the second quarter, PCUs and ACUs for Westward Journey III were 123,000 and 51,000 respectively, compared with 108,000 and 46,000 respectively in the first quarter. We successfully completed the development of Tianxia II, our first 3D item-based game, and launched open beta testing in June on schedule. By focusing on a step-by-step development approach, we were able to make continuous enhancements based on player feedback. We have also launched in July testing of our new item-based game, Datang II. We have also been actively pursuing potential licensing opportunities as well as other strategic arrangements to bring innovative games to our users as a way to supplement our in-house development. We announced yesterday the signing of the joint venture agreement with Blizzard Entertainment to license and introduce Starcarft II and BattleNet to our community of gamers. With regard to the development of our search engine, yodao.com, we launched several new features during the second quarter and remain on schedule with our internal plan. Our strategy is to first create the best Chinese oriented search experience and then to drive traffic to it with effective marketing strategies, including leveraging our user base from our leading 163.com website. Advertiser continue to experience the great potential and marketing value of our e-mail advertising space. The ad space on the free e-mail service is a premium ad tool for many advertisers who want to reach out to consumers. We look to constantly enhance the quality of this service by incorporating new and helpful functionality to meet our users’ constant changing preferences and attract more users to the website. NetEase maintains its position as the leading free e-mail provider in China. Our emphasis on increasing the competitiveness of our portal has resulted in increased traffic to our sites and additional growth to the number of [users] during the second quarter. As such, our advertisers [count] our portal as a more valuable platform to market their products and services. We experienced a significant sequential growth in advertising this quarter. Advertising services revenues were $15.2 million for the second quarter of 2008, compared to $11.2 million and $9.5 million for the preceding quarter and second quarter of 2007 respectively. We continue to execute well against a backdrop of large and growing Internet markets. We have been further strengthening the content on our portal through new and enhanced content, leading up to the 2008 Beijing Olympics and the interest in this event in conjunction with the enhanced use of Internet as a source of information has raised the user interface within the entire Chinese Internet market. We recently entered into an agreement with Sina and Tencent to acquire the videos to live and on-demand broadcast of the Olympics. We expect to grow our ad revenue through the creation of premium ad spaces on the video platforms. We also are working with third party alliances to further enhance our brand recognition and take advantage of the opportunities. We remain very competitive in the market and we continue to integrate our strength for further enhancing attractiveness to our advertisers during and after the Olympics. With that, I would like to turn the call over to Onward Choi, Acting Chief Financial Officer, for his review of our second quarter 2008 financial results.
Onward Choi
Thank you, Michael. I will now provide an overview of our second quarter financial highlights using numbers and percentages based on U.S. dollars. In order to avoid repetition, my remarks will be focused on the discussion of margins and expense fluctuations, along with net profit results. Starting with the second quarter results, gross profit was $105.4 million, compared to $77.6 million in the preceding quarter and $63.8 million for the same period in 2007. The quarter-over-quarter increase in gross profit were primarily driven by the receipt of a business tax refund of $21.4 million in June 2008 for certain excess amounts paid in previous years, which was determined as a result of application of the newly approved basis by allowing the deduction of revenues shared with co-operators before applying the business tax rate. In addition, higher demand for game and advertising services in the second quarter of 2008 contributed to the higher gross profit. The revenue from Fantasy Westward Journey continued to grow as a result of new designs and features introduced since late September 2007 and certain in-game marketing activities launched during festival occasions. Higher demand for advertising services in the second quarter of 2008 was primarily driven by increased advertising activities in connection with the Beijing Olympics. Gross profit margin for the online game business for the second quarter of 2008 was 91.2%, compared to 90.2% and 90.2% for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter and year-over-year increases in gross profit margin were primarily due to the higher revenue and the business tax refund received in June 2008 as explained earlier, partially offset by higher staff-related costs as a result of an increase in headcount and increases of other cost of revenues. Gross profit margin for the advertising business for the second quarter of 2008 was 52.6%, compared to 45.8% and 47.2% for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter and year-over-year increases in gross profit margin were primarily driven by increased revenue, partially offset by higher staff-related costs as a result of an increase in headcount, higher content cost caused by price increases and increases in other cost of revenues driven by greater demand associated with the 2008 Beijing Olympics. Gross profit margin for the wireless value-added services and others business for the second quarter of 2008 was 28.8%, compared to the gross loss margin of 6.2% and 28.1% for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter and the year-over-year improvements in gross margin were mainly driven by the business tax refund received in June 2008 as explained earlier. Total operating expenses for the second quarter of 2008 were $21.8 million, compared to $18.6 million and $20.8 million for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter increase in selling and marketing expenses was primarily driven by higher marketing cost associated with the open beta testing of Tianxia II, higher marketing cost in connection with the 2008 Beijing Olympics, and higher staff-related costs as a result of increased headcount. The slight quarter-over-quarter increase in general and administration expenses was mainly due to the receipt of a non-recurring local government rent subsidy of $0.1 million by one of our subsidiaries, which was recorded in the first quarter of 2008. The year-over-year increase in selling and marketing expenses was primarily due to higher staff-related costs resulting from increased headcount and increased incentive payments associated with the increased revenues. The year-over-year decrease in general and administrative expenses was primarily due to a reduction of professional service fees in the second quarter of 2008. The quarter-over-quarter and year-over-year increases in research and development cost were primarily due to higher staff-related costs caused by increased headcount and new incentive payments. Net profit for the second quarter of 2008 totaled $63.9 million, compared to $39.3 million and $45.6 million for the preceding quarter and the second quarter of 2007 respectively. We reported basic and diluted earnings per ADS of $0.53 and $0.49 respectively for the second quarter of 2008. And our basic and diluted earnings per ADS of $0.32 and $0.30 versus $0.37 and $0.34 for the preceding quarter and the second quarter of 2007 respectively. Let me now first give you an update on the issues of detailed regulations as well as guidelines for implementation of the new tax law in China. Effective January 1, 2008, the Chinese government adopted a new income tax law which unified the enterprise income tax payable by domestic and foreign-invested enterprises at 25%. Prior to the adoption of the new law, a number of the our subsidiaries and variable interest entities were entitled to various preferential tax treatments. Our subsidiaries and variable interest entities are currently in the process of applying for the new and high technology enterprises tax treatment pursuant to the "Working Guidelines for Assessment of New/High Technology Enterprises" issued by the Chinese tax authorities on July 8, 2008. Accordingly, we followed the applicable accounting standards and adopted the statutory rate of 25% in making tax provisions for the second quarter ended June 30, 2008, except for entities still enjoying unexpired tax holidays. The tax charge for the second quarter of 2008 was $20.4 million, compared to the tax charge of $16.7 million and the tax charge of $0.3 million for the preceding quarter and the second quarter of 2007 respectively. The quarter-over-quarter increase in tax charge was mainly a result of an increase in revenue recognized for the second quarter of 2008. The year-over-year increase in tax charge was mainly due to the lower effective tax rate in effect under the pre-2008 tax laws and the receipt of an investment incentive tax refund of $3.6 million recorded in the second quarter of 2007. Under the pre-2008 tax laws, our effective tax rate was well below 10% in the second quarter of 2007. We expect to reverse any excess tax provisions in subsequent periods when our subsidiaries and variable interest entities in China are granted the new and high technology enterprises preferential tax status, which will be expected to be partially offset by the expected reduction to deferred tax assets recorded at the lower new and high technology enterprises preferred tax rates in the future quarters. Now turning to the balance sheet, as of June 30, 2008 our total cash and time deposit balance was $722.4 million, compared to $606.3 million as of December 31, 2007. Cash flow generated from operating activities was about $74.8 million for the second quarter of 2008, compared to $72.2 million and $48.3 million for the preceding quarter and the second quarter of 2007, respectively. On July 2, 2007, our board authorized a share repurchase program of up to $120 million of our outstanding ADSs. As of July 1, 2008 we had spent in aggregate a total purchase consideration of about $46.4 million, including transaction costs. The share repurchase program ended on July 1, 2008. By July 11, 2008, our outstanding zero-coupon convertible subordinated notes due July 15, 2023 totaling $63.4 million as of June 30, 2008 were fully converted at the request of the note holders pursuant to a redemption notice issued by us to the note holders dated June 13, 2008. In the redemption notice, we called for the redemption of the notes and note holders might surrender their notes for conversion at any time before the close of business on July 11, 2008 at the conversion price of $0.4815 per ordinary share. Thank you for your attention. We will now be happy to take your questions. Operator, please go ahead.
Operator
(Operator Instructions) Our first question comes from the line of Richard Ji from Morgan Stanley. Please go ahead. Richard Ji - Morgan Stanley: Good morning. Congratulations on a great quarter. I have two questions. First, let’s start with your recent development, which is your licensing agreement with Blizzard for Starcraft II. Can you help us to understand a little better about the expected timeline for the launch of this game in China and what is the underlying economics, such as revenue sharing between you and Blizzard, if possible?
Michael Tong
Regarding Blizzard, since there have been a lot of different reports I saw from different analysts, why don’t I go through from the more basic and then we will comment on questions from Richard. Obviously we have licensed the Warcrafts, the two Warcrafts, the BattleNet, and also Starcraft II, which is going to be a new game, from Blizzard. And it is licensing directly given to an affiliate of NetEase Group, which is the Shanghai Internet Company, and there will be a joint venture to be established between Blizzard and NetEase to support the operating of the platforms, the BattleNet and the three games. In very general terms, the two Warcrafts are very famous real-time strategy games -- they are not MMORPGs -- that have been launched ever since around 2003. And real-time strategy games in general are strategy games where users build different kinds of resources, like gold and mines and troops and weapons, of course, and to compete with computers and other players. A typical multi-player RTS game includes around two to eight players and last around -- it could be half an hour to one hour to two hours. And the BattleNet has been the platform for players to seek other players on the Internet for competition and for games. And such a community has been very large, both worldwide and also in China. And of course, the deal or the licensing is most importantly focusing on the platform and also the new game, which was Starcraft II, and Starcraft II of course is a continuation of the original Starcraft, which has been hugely popular both worldwide and also in China as well. Regarding the timeline, I’m sorry that we won’t be able to comment on that, and also the underlying economics in terms of how is the revenue sharing or how the business model is going to be, we also won’t be able to comment on that. Richard Ji - Morgan Stanley: Thank you. Just a clarification -- the two Warcraft games are strategy games and Starcraft, will that be an MMORPG?
Michael Tong
Starcraft is also a real-time strategy game and of course, also there’s multi-player functions on that and players can play with other players through the Internet. Richard Ji - Morgan Stanley: Okay, great, very helpful. And my second question is regarding your free-to-play version of Tianxia II. Thus far, what is the feedback you have collected from your gamers during the testing stage? And also, if you can help us to understand a little better about the launch schedule as well as the current user volumes, that would be highly appreciated.
Michael Tong
I’ll give you some updates on the development of our Tianxia II game development. On the sixth of June 2008, we launched our open beta testing of this game and then initially, we have launched our 15 servers across the board for the gamers to experience these games, and by now it is about the middle of August. We have seen a satisfactory and progressively developments of this game, both in terms of building up our service numbers and also the gamer feedback on the game is also very helpful and constructive. In terms of the server capacity, I think basically each server can handle about 3,500 to 4,000 players at one time and so I think the game is still going on quite well and I think we will keep this momentum in building up this game going forward. Richard Ji - Morgan Stanley: Thank you. Great quarter.
Operator
Your next question comes from the line of Dick Wei from J.P. Morgan. Please go ahead. Dick Wei - J.P. Morgan: Just follow-up questions regarding the Blizzard JV -- can you comment on the potential market size of the real time strategy games? I guess currently China, I’m not sure which is the big one, and would there be any competition with [inaudible] as well? That would be great.
Michael Tong
RTS games have always been a pretty huge category in the single PC player games industry and of course, as an online game or as a mass multi-player online game and revenue making through the online element, this is a new area both for Blizzard, for NetEase, or for the industry. But we believe that it’s going to be a huge market opportunity given that the RTA game has always been huge. And also one of the possible references that you can look at is real-time games being played in Internet cafés and also being played in [inaudible], as you have referred. And those are very good reference points where you can see how big that market actually could be. Dick Wei - J.P. Morgan: Great. And a question on advertising, if you can break down the revenue by industry type and also how much revenue is now from the e-mail platform, that would be great.
Michael Tong
Right. The three biggest industries in terms of advertising, number one is automobile; number two is Internet or e-commerce related industries; and third would be still IT. And in terms of the products, e-mail continued to increase as a percentage of the total revenue of the advertising revenue and it is I think approaching around one-fourth of the total revenue of advertising from -- we were talking about like 15% about a year ago and it’s approaching about one-fourth right now. Dick Wei - J.P. Morgan: Great. Thanks a lot and good quarter.
Operator
Your next question comes from the line of Alicia Yapp from Citigroup. Please go ahead. Alicia Yapp - Citigroup: Thank you. Good morning, Michael and Onward. Congratulations on the strong quarter, as well as the Blizzard joint venture. I just have a couple of questions. My first question is with your JV with Blizzard, should we assume that this is just the beginning of a very long-term relationship? And with the JV potentially maybe obtain some game content from Activision’s console games as well as future [inaudible] games?
Michael Tong
Of course, we always look at our partners with a very long-term potential, with any of our partners and of course we are looking forward to that and -- but I think it is too early to comment where we are going to -- I mean, definitely going to get more franchises from Blizzard and at the same time, of course, we continue to actively pursue and look at any opportunities in the market where we believe a game that will supplement or that is -- supplements with our whole game pipeline, and any company we are also looking at as well. Alicia Yapp - Citigroup: I see. And my second question is on the online advertising. With respect to the Olympics, so do you expect your content costs to increase this quarter and perhaps will be temporarily affecting your gross margins in the third quarter?
Michael Tong
Yes, of course -- for the third quarter, there will definitely be some impact from the content costs of the Olympics. It would be a bit early to quantify exactly the amount but yes, there would be an impact to the margin. But I believe that would be more likely to be a one-time event and we will see more normal margin in Q4 forward. Alicia Yapp - Citigroup: Can you actually give us some guidance in terms of how much you expect to increase? Because your partners actually have disclosed that.
Michael Tong
I’m sorry, we won’t be able to disclose that. Alicia Yapp - Citigroup: All right, and my last question is on the expectation of Tianxia II -- so I understand that management actually has very high expectations on the game. However, a lot of investors are still very skeptical about the potential success of Tianxia II. So I was hoping that maybe you can share with us some of our misunderstanding so that investors will start to feel more comfortable regarding the potential growth opportunities of the game.
Michael Tong
Well, we first need to know why [they are misunderstanding us]. Alicia Yapp - Citigroup: But can you just kind of tell us what your expectations would be? Because I think CEO William Ding kind of mentioned -- not really mentioned but it’s on the ChinaJoy conference call is about, you know, they expect about 1 million PCUs, so can you comment on that?
William Ding
Tianxia II has been -- is a very important area for NetEase because it is a game that is very different from the products that we have been operating. It is a 3D action RPG game where it used to be our Fantasy Westward Journey and Westward Journey II are turn-based RPG games. It is a market that has been growing very well. We can see a lot of our competitors have entered into this market and it seems that this direction for us is correct, where item-based action games and 3D is a new direction for us. And we believe that we will continue with our development of more game content and we are looking at possible achievable targets of 1 million PCUs, which we have stated in the ChinaJoy conference. We believe it is possible although it is a long road but it is possible, and of course it is a very difficult target. There are only four to five products in the market where there has been such a success. But we still believe it is possible and achievable, although very difficult. Alicia Yapp - Citigroup: Thank you, and can you briefly comment on some of the operating metrics of the game during the quarter, even if it’s just one month of contribution?
Michael Tong
In terms of the game operating metrics, I think basically we will give you some idea by giving you an overview, because in terms of the revenue mix, I think most of the revenue of NetEase will be coming from the online games, which accounts for over 80%. And then out of those game revenues, I think a significant portion of it would be currently be coming from our Fantasy Westward Journey and then the rest would be coming out from other game titles, namely the Westward Journey II and III. Alicia Yapp - Citigroup: Can you actually give the percentage breakdown? You gave it last time.
Michael Tong
We would suggest not to provide exact percentages of the revenue mix but rather you would get the feel of the revenue numbers by making a slight reference to the ACUs and PCUs numbers that we have given out or described earlier in today’s call. I think you would get a feel on the overall pictures of our game performance. Alicia Yapp - Citigroup: I see. Okay, thank you -- so you are not going to comment on the ARPU and the exiting customer for Tianxia, right?
Michael Tong
Yes, you are right. Alicia Yapp - Citigroup: All right. Thank you so much.
Operator
Your next question comes from the line of Eddie Leung from Merrill Lynch. Eddie Leung - Merrill Lynch: Just to start with a couple of housekeeping questions -- can you give us the number of advertising customers that you have for the quarter on the brand advertising side, as well as the number of [inaudible]?
Michael Tong
We will give you that offline, regarding the advertising number because there are a few different ways of calculating that, the agencies, especially the real estate advertisers, which is hard to compound. So I think we can take that offline. And regarding the number of staff, maybe Onward can give you some help on that.
Onward Choi
To supplement your questions, I would just like to check with you -- in terms of the headcount, are you referring to the total headcount of NetEase up to our second quarter growth? Eddie Leung - Merrill Lynch: Yes, and the expansion plan for the second half of the year, if possible.
Onward Choi
Maybe I will just give you an idea about the total headcount of our companies as of the end of June 30, 2008. The total number would be around 2,500 in total for our companies. And of course, going forward the company is making regular efforts in expanding our headcount but this very much depends on how to work with our current business developments and so there wouldn’t be any exact numbers of how we are going to expand the numbers in terms of headcount but definitely this is something that we are currently working on. Eddie Leung - Merrill Lynch: Understood. My second question is could you also comment on the outlook of the advertising market in China? Because last night, we heard that one of your major competitors has some concerns on the advertising outlook.
Michael Tong
Yes, I think we would also share some concern but of course the overall trend of the markets continue to be very good. Mainly the good side of it is that there continues to be a lot of traditional advertisers that are putting their budget into traditional media has been moving into the Internet, and that continues to be the trend. But on the other hand, of course, there are concerns, of course partly from is there an aftershock of the Olympics and also it’s the economy, the overall economy is going down a little bit. That is something that it is hard for me to comment on, the overall economy, but we feel that the domestic consumption or the advertisers who are on the consumer side continue looking great. There might be more concerns on maybe real estate but -- which traditionally has been a smaller part of our advertising business. So these are the pros and cons of the advertising industry. That’s the way we look at it. Eddie Leung - Merrill Lynch: Have you seen any weakness in any of your advertiser categories in particular, or in general they are still pretty resilient?
Michael Tong
I would say that competitions continue to be very fierce, not just amongst the portal but I would say there is also competition coming from vertical portals. That has been taking up a higher market share in general for the past one or two years. But I am not sure if this trend will continue but they definitely have taken up a higher market share for the past one or two years, and these vertical portals, obviously we are typically talking about IT and automobiles, so these would be the two areas where we see huge competition. That’s for us, but for portals in general, then there is of course the real estate, where we see very competitive vertical portals as well. Eddie Leung - Merrill Lynch: Okay, and my last question is how has the Olympic Games affected your users, game users so far?
Michael Tong
So far we -- of course, I think in very general terms, I think during the openings, there might be some, because the opening was a very big event where we see I think it was a world record on the number of people seeing it on TV. There might be some effect on that during that particular four hours or five hours. But other than that, I think we have been seeing very minimal effects. Eddie Leung - Merrill Lynch: Thank you very much.
Operator
Your next question comes from the line of Tian Hou from Pali Capital. Please go ahead. Tian Hou - Pali Capital: I just have one question -- I would like to know more about your plans for the expansion plan for the second half. I do know you mentioned that but is it possible to give us some basic details as to which game you are planning to have expansion packs, probably as to what timeframe?
Michael Tong
I think basically, just as what the company has put on schedules and working for, I think for the existing games that we are currently operating, we plan to launch the expansion packs in the second half of this year. But it is still too early or not a very suitable time for us to comment on the exact date when we are going to do so but this is something we are currently working on and it is still on schedule, both for the Fantasy Westward Journey and our Westward Journey series game titles. Tian Hou - Pali Capital: Okay. And I wasn’t really quite sure what you said about the effective tax rate, so what is the -- when we model, what kid of effective tax rate should we lose?
Michael Tong
In terms of the effective tax rate, similar to what we mentioned in our last earnings calls, because currently we are still in the process of applying for the high and new technology enterprises preferential tax status and not until we get this, I think the 25% which is a statutory tax rate after the unifying tax reform would be the numbers. But going forward, once the respective tax authorities launch the platforms for the entities to proceed with the applications and getting the blessings of the high and new technology enterprises status, I think the eventual effective tax rate would be moving down. And we do expect that somewhere in the high teens range for our companies. Tian Hou - Pali Capital: Okay, that’s great and one more question -- the game from Blizzard, Warcraft, is this a computer game? It is not an MMORPG game, right?
Michael Tong
It’s not an MMORPG game. It’s not a role-playing game. It’s a real-time strategy game and it’s played on computers, the same as other MMORPG games. And it was launched in 2003 and has been very popular, and is a multi -- it is an RTS game that has also a multi-player element in it, where players are being grouped together through the BattleNet on the Internet and to compete with each other on a game where it typically lasts around half and one hour. Tian Hou - Pali Capital: Okay, so for this game, I don’t really know this game well but I heard this in the United States has lots of privacy issues because the computers, this game is not an MMORPG game. How do you -- what kind of comment do you have on that issue? If there could be a privacy issue, what are some measurements you think you would be able to put together to prevent that from happening in the China market?
Michael Tong
What happens is that in the United States, the business model has always been very different, where in the United States games are being sold on -- in the malls, you know, on CDs for about $39.99 per game. And the online element has been free of charge in the past. I think the only thing I would say is that it is a new area. It is not an MMORPG. Obviously we have thought about that. There are a lot of ways that we can prevent piracy. We won’t be able to guarantee there will be zero piracy but we believe that there are a lot of ways for us and there are a lot of value-adding functionalities when they play online, when they play the licensed games, and we definitely have put a lot of thought together with Blizzard on that. So that’s how I comment on that. Tian Hou - Pali Capital: So you are not going to convert it into an MMORPG game -- you are just going to use the existing game and then just play in the China market. Is that correct?
Michael Tong
For the Warcrafts, those are two old games and obviously we won’t convert that. For Starcraft II, it’s also going to be an RTS game but it would be a bit different, and I won’t be able to comment on that. And it will not be turned into an MMORPG. It will continue to be an RTS game. Tian Hou - Pali Capital: Okay. Thank you.
Operator
Your next question comes from the line of [Hia Gou] from SIG. Please go ahead. Hia Gou - SIG: I just have a quick follow-up question for the [inaudible]. So far, do you see any operation impacts through the Olympic network [inaudible]?
Michael Tong
I don’t understand your question but things have been going smooth and during the Olympics, where we have seen new records of the number of page view and users, or the traffic being directed to our websites. And things have went smoothly. We have been preparing for it for a while. Hia Gou - SIG: Thank you.
Operator
Your next question comes from the line of Paul Keung from Oppenheimer. Paul Keung - Oppenheimer: Good morning. My question is on Westward Journey II. We noticed that -- next few months. Can you comment -- can you comment on what your expectations are for that expansion and how --
Michael Tong
Sorry, the reception is not that clear. Can you kindly repeat your questions again? Paul Keung - Oppenheimer: Can you comment on your -- and also the resource allocation between Westward Journey II, Westward Journey III, and I guess [inaudible].
Michael Tong
Operator, we can’t hear Paul clearly. It’s breaking up. It’s totally broken up, actually. Paul Keung - Oppenheimer: Sorry. I’ll --
Michael Tong
Brandi, we are having problems hearing the questions being raised. Operator?
Operator
I’m here.
Michael Tong
Would you mind to have the next one to ask a question first and ask Paul Keung to re-queue, and then we will answer his question after the next one.
Operator
Your next question comes from the line of Tony Gikas from Piper Jaffray. Tony Gikas - Piper Jaffray: I wanted to follow-up on the Activision Blizzard announcement. Is this license for only Starcraft and the Warcraft? Are there any other properties attached to that agreement at all?
Michael Tong
The license is only to the Starcraft II, the two Warcrafts, and the BattleNet platform. Tony Gikas - Piper Jaffray: Okay, so there are no other games that have any involvement with that contract at this point?
Michael Tong
No. Tony Gikas - Piper Jaffray: Okay, and then could you just comment on -- I know you don’t want to comment specifically on the timing of Starcraft. Will the release be next year?
Michael Tong
We won’t be able to comment on that. Tony Gikas - Piper Jaffray: Okay, two other quick questions then -- could you clarify the one-time charge to the G&A during the quarter, the size of the charge and what it was for? I missed that on the call. And then, are you seeing any changes to spending on a per user basis?
Michael Tong
Sorry, what do you mean by the one-time charge to the G&A expenses? Tony Gikas - Piper Jaffray: I thought when you were going through the expense items, there was a small one-time item in the G&A expense during the quarter.
Michael Tong
You mean the one that was charged in last year or -- the same quarter last year? The $1 million local government rent subsidies? Yes, this has been received in the first quarter of 2008 and this only happens once and so this wouldn’t be a recurring item in our second quarter, so the major differences would be mainly attributable to this amount. All the other things remain quite stable. Tony Gikas - Piper Jaffray: And then any changes to spending on a per user basis?
Michael Tong
No -- what do you mean by any changes to the user basis? Do you mean the players or -- Tony Gikas - Piper Jaffray: Yes, on a per player basis, have you noticed any change to their spending patterns?
Michael Tong
We don’t note any --
Onward Choi
It has been very similar in terms of the spending patterns of our users for the different kinds of games. On a time-based game, it has been very similar and for the [search for items] games, obviously it’s a new area for us and so we have yet to see a very consistent trend as yet. Tony Gikas - Piper Jaffray: Okay. Thank you.
Operator
Your next question comes from the line of James Lee from Sterne Agee. James Lee - Sterne, Agee & Leach: I was hoping you guys could comment about the growth in advertising revenues in 2Q. The numbers were impressive. It seems like you guys are really leveraging your position in the e-mail offering when you have the [number one] in the country. Can you talk about your monetization efforts in the e-mail that allow you [inaudible], maybe new formats, including e-mail [that drive additional revenue]?
Michael Tong
Okay. Why don’t I try to answer the question first, although it wasn’t been exactly clear in the reception, but anyway for the e-mail, as I have commented, about a year ago it was contributing around 15% of our total advertising revenue and it is now approaching around 25%. And obviously we have done a lot in this front. On one hand is that we have been increasing the advertising inventory and at the same time, providing a different kind of functionalities to the e-mail users, and there has to be a balance of that and we are adding different functionalities for the few quarters ago, you know, when Asia’s market was very hot, we added personalized financial stock information inside the e-mail interface. And now because of -- and now we are also expanding on that. We are adding different kind of news information. We are adding interesting functionalities like stamp collections for the e-mail users and all this as a result has increased the advertising inventory without affecting the user’s experience to the e-mail users. So that is one of the reasons why that we are able to increase the advertising for e-mails. And secondly, because we have continued to add a lot of e-mail users and we will also be able to educate the market where e-mail is a very important part of the whole media industry. As you might know, that in the past it is easier for traditional advertisers to move their budgets to the news portal, you know, the portal in the news channels, the finance channels, because it’s easier for them to understand as the new media. But advertisers are obviously becoming more open and they are moving their budgets towards different kinds of new media assets, including the e-mails and also in the future it might include the likes of blogs and so on. Does that answer your question?
Operator
He has dropped off the call. At this time, I would like to turn the call back over to Brandi Piacente.
Brandi Piacente
Great. Thank you. Thank you, everyone, for joining us today. Please feel free to contact us if you have any questions, and have a great day.
Operator
Ladies and gentlemen, this concludes the NetEase second quarter 2008 earnings conference call. You may now disconnect.