Good day, everyone and welcome to the NetEase 2005 fourth quarter fiscal year 2005 earnings conference call. As a reminder, 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, Ma'am.

Thank you, Operator. Today you will first hear from Mr. William Ding, Chief Executive Officer, who will discuss some of the highlights of the quarter and for the full year 2005. Next will be Mr. Michael Tong, Chief Operating Officer who will review our online game business. Finally, Mr. Denny Lee, Chief Financial Officer will review the financials. Before we continue, please note that the discussion today will contain forward-looking statements relating to 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. Risks related to the fluctuations in the value of the renminbi with respect to other currencies could also adversely affect the Company’s business and financial results. 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 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 Mr. William Ding, Chief Executive Officer of NetEase.

Thank you, Brandi. Hello everyone, and thank you for joining us. I am very pleased to be here today to review NetEase's fourth quarter and the fiscal 2005 performance. 2005 was another strong year for NetEase, [with our rapidly growing] our online games and that was hard to dismiss. Total gross revenues for full year increased 76.8% and the net profits rose 111.1% from 2004. NetEase's is positioned in China as the number one online game operator and developer, and one of the most popular websites, receiving 786 million page views in December of 2005. Total gross revenues for the fourth quarter increase 5.3% over the prior quarter, and 75.3% over the fourth quarter of 2004. Net profit for the quarter grew 7% over the third quarter of 2005 and 112.6% over the corresponding period in 2004. Touching upon each segment, our online game business continued to outpace the industry in 2005 with the total gross revenue growing more than 119.3% from 2004. Compared to the [inaudible] those are 52.6% according to the IDP. Fourth quarter online game revenues were better than previously forecasted, and for the fourth quarter and grew 7.6% over the third quarter and 92.5% over the same period a year earlier. China's online game market is the largest in the world. There were 26 million users in 2005 compared to 20 million in 2004 with online game sales in China expected to grow by approximately 35.5% annually to reach $2.1 billion in 2010, according to IDP. Moreover, the gross margin of our online gaming business has remained strong [inaudible] which makes it the most profitable. Our success has been driven largely by our two leading, in-house developed games, Westward Journey and Journey Online II and the Fantasy Westward Journey, which once again experienced new [inaudible] and…

Thank you, Michael. I will go through some of the key highlights for the quarter and for the year 2005. All of the numbers are in U.S. dollars. Fourth quarter total gross revenues increased 5.3% quarter over quarter, and 75.3% year-over-year to $60.4 million. Total gross revenues for the full increased 76.8% to $210 million. Fourth quarter gross revenues in our online game business were better than the Company guidance, and increased 7.6% sequentially and 92.5% year-over-year to $49.7 million. Full year 2005 gross revenue increased 119.3% to $170.9 million, and was a main driver of our top line growth. Advertising service revenue was also better than the Company's guidance. Gross revenues decreased by 5.9% quarter on quarter, and increased 64.6% year-over-year to $8.6 million in the fourth quarter. For the full year, advertising revenue increased 41% to $29.9 million. Wireless value-added services and other revenue increased 4.4% quarter on quarter, and decreased 30.9% year-over-year to $2.1 million in the fourth quarter. For the full year, wireless value-added service and other revenues decreased 53.4% to $9.1 million. We believe the wireless value-added service market is subject to ongoing restructuring of the industry and margin erosion due to the increase of local competition. Our gross margins for the online game business remain relatively stable at 89.4% for the fourth quarter, compared to 89.7% in the prior quarter. Gross margins in our online advertising services business declined to 62.9% in the fourth quarter, mainly due to the seasonal decline in revenue. [inaudible] remain relatively stable. Gross margins for wireless value-added services and other business decreased to negative 1.3% in the fourth quarter from 11.3% gross profit in the prior quarter, mainly due to higher costs associated with the Company's services free of charge, such as free email services, which are included in…

Thank you so much. (Operator instructions) Your first question is from Safa Rashtchy - Piper Jaffray. Safa Rashtchy - Piper Jaffray : Hello?

Your line is open, please go ahead. Safa Rashtchy, your line is open. Please go ahead with your question. Safa Rashtchy - Piper Jaffray : Hello, can you hear me? Hello?

Hi, Safa. Michael Tong: Hi, Safa. Safa Rashtchy - Piper Jaffray : Congratulations on a great quarter. My question has to do with the competitive landscape. You mentioned that your games maintained their position, basically, both Fantasy and Westward Journey II. Last quarter you talked about the competition impacting your growth rate. Within that context, could you give us a sense of how do you see the competition from at least two angles. The competitive products from other companies, as well as the pricing issue, especially in light of what [Shanda] has instituted with their free to play. How do you think it had any impact in the quarter? As well as, what is your outlook for '06 in particular with your new games. Will you be following a similar pricing pattern or not? Thanks -- I am sorry for a complex question. Michael Tong: Thanks, Safa. This is Michael Tong. Safa Rashtchy - Piper Jaffray : Hi, Michael. Michael Tong: We had explained in the last quarter that the competitive landscape during the last quarter was a bit more serious than we had thought, especially with the launching of the [Juji Fantasy] from Tencent and in fact, has seemingly to be a little bit fading during the quarter. We see that our competitors' product continue to become a commercial product rather than a free product. You also see some of the changes during the quarter. But for '06, we believe that the competitive landscape continues to be just as competitive. We continue to expect new games coming out from different competitors, the likes of maybe Tencent or other players. Of course, obviously we are very confident with our new games, and also very confident with our team of the operation and also existing games. Did that answer your question. Safa Rashtchy - Piper Jaffray : Yes, that is fine. Thank you.

Thank you.

Next we will move to Wallace Cheung - CSFB. Wallace Cheung - CSFB : Hi, William, Denny and Michael. A very good quarter, congratulations. My one question is actually directed to William. May I just ask in Mandarin and then translate into English? [Question in Mandarin] My question is actually to William Ding. I am asking his question in the online game industry, in particular if the growth and any kind of a [inaudible] and any investments planned in the casual games. Thank you.

[Response in Mandarin] Michael Tong: Now I will translate William's answers to Wallace's question. First is that William believes that there are still a lot of opportunities in the online gaming market in the future in China. Especially in the casual games and also of course in [inaudible]. Our advantage, main advantage in this particular industry is that we have very good quality of research and development. We have also accumulated a lot of experience in terms of developing our good games. We also have a very good first position platform for distributing our games and also our [card] in the China markets. William's views on the government is that the government is very supportive and open to the industry. [Inaudible] we also agreed and also very supportive to the anti-theft systems which are targeted towards gamers who are underage and restricting them to play three hours for every section.

Thank you.

Thank you. Michael Tong: Thank you.

Moving on, we will take our next question from Richard Ji with Morgan Stanley. Richard Ji - Morgan Stanley : Hi William, Michael and Denny. A very strong quarter. I have one question directed for William. Allow me to ask my question in Cantonese. [Question in Cantonese]

[Response in Cantonese] Michael Tong: In translation, for Datang we started our internal [inaudible] in September of last year, 2005 and it is now actually under external code status. We have now around 100,000 accounts in terms of the total number of accounts for the external code status. Since last year, in September, we have got different kinds of information from our players for the game and we have been able to see the playability of the games are not as good as we had expected. This information from the players, we view that game life cycle might be short and the playability is not as good as what the players think. So during this period of time we have been adding different kinds of content into the game, including different maps, changing the characters different attributes, adding more stories and so on and so forth in order to make sure that the life cycle of the game will be very long. For example, in Westward Journey II our life cycle of the game is very long and it is critically longer in terms of market. So we are hoping by changing a lot of the attributes we can extend the life cycle when the game is being launched. We are looking forward to an open beta launch in the second quarter of '06 and our game is a little bit different because the open beta, with all of these changes our open beta will be comparatively shorter than other popular games out in open beta. Thank you. Richard Ji - Morgan Stanley : Thank you.

Moving on, we will take the next question from Frank Shi with CLSA. Frank Shi - CLSA: Hi, good morning, guys. Can you talk about the growth prospects for your online advertising business? [Translation not available]

For the advertising growth in '06, we think that we will be able to beat the market, the overall markets, because the advertising business, the base is actually a little bit smaller than our competitors. For 2005 we have been going up in the market. To give you some figures, we have in the branded advertising, we believe our market share has grown from 12% to around 14%, because we haven't gotten all of the numbers from [Ten Cents]. Definitely a growth from 12% to around 14% in 2005. We believe the growth of our company will continue to pick up a bit more market share in the overall branded advertising markets. So that is for the branded advertising markets. For the research market, I think we are still a very small player right now and we have yet to see how we can try to grab a bit more market share. Frank Shi - CLSA: Thank you.

Your next question is from Dick Wei - JP Morgan.

Hi, Dick. Dick Wei - JP Morgan : Hi, good morning, William. I have a question on [inaudible]. I wonder, what is the plan for NetEase in terms of search engine and the plans in the future? Michael Tong: Hi, Dick. We are now, for the search business obviously we are now partnering with Google. Our partnership with Google has been with us for more than one-and-a-half years right now, and we will continue to work with Google going forward. And of course, we will continue to seek different options on search when the time is right. Dick Wei - JP Morgan : Okay, thanks.

Thanks.

We will take our question from Lu Sun, Lehman Brothers.

Hi, William, Denny and Michael. I have a question on your longer term strategy with Internet entertainment. I think William actually mentioned at one of the industry conferences that NetEase is also interested in exploring the home entertainment market. Can you elaborate on that? [Question asked in Mandarin]

[Response in Mandarin] Michael Tong: I will translate on this. For the home entertainment, there has been some reports that William said in the industry conference that we have some plans for the home entertainment and this home entertainment, other people have implied that -- Fox or something -- but the truth is that the reporter has given a kind of misleading report, and the truth is that we have no clear plans to enter China's home entertainment company. We will continue to look at and be very serious in looking at this possibility of home entertainment. There is no definitive plan.

William and Michael, can I ask a follow-on question. It seems like your casual game business is not as strong as some of your competitors, let's say Tencent or even SINA. Are there any solid plans to really represent this business and really make it the top casual game platform in China? [Question asked in Mandarin]

[Response in Mandarin] Michael Tong: We believe that the casual game market has great potential in China, and we are actually also advertising and put quite an amount of resources in developing this market. In more specific terms, we are developing a second generation of the game engine that we are developing right now, and with this engine we believe that we will be able to develop better casual games in a much faster way than we have been and also compared to the market. We are still very confident that we will be able to do very well in the casual game market, just like the way we have done it in the MMORPG market. Thank you.

Your next question is from William Bean with Deutsche Bank.

A couple of questions. First off, just wondering whether you can give us an update on how your promoter network is doing, especially in the second tiered cities. Give an update on whether there are any changes there, whether you are seeing any competition from other players or your promoters? Michael Tong: Hi Bao, how are you? The game promoters I think you are talking about, the friends recommending friends systems that we have been using for the past two years, right?

Yes, I mean changes there, yes. Michael Tong: Actually during the past two or three years there has been a lot of people trying to kind of copy or get inside this business with other similar systems. So far, as far as we understand, none of our competitors have been able to develop such a program in the way we have developed it. Mainly because I think we have managed the program, we have put a lot of resources in defining the properties with the game promoters and we have also -- it is a system that we have been running for more than three years. The system has been very well developed and the policies, how we manage the promoters, how we educate them, teaching them to promote our games and all of these things are things that are difficult for our competitors to catch up.

Okay, thanks. Can you give us a sense of how we should think about your expenses over the course of '06 as you launch your game?

You mean marketing expenses, or --?

Yes, your marketing related expenses. Margin as well, if there is going to be any change there.

Actually, the launch of the games, of course in terms of the marketing expense there will be a small increase in terms of the marketing expense, but this small increase is actually a little bit immaterial to the overall Company picture. In the history of NetEase we have never put too much marketing expense or the launch of games, as you can see in the launch of Westward Journey or Fantasy Westward Journey. This will continue to be the same. The traffic is there because we are a portal. Actually a lot of the marketing and advertising can be done through our portal, all of this traffic that we have at basically no cost to us.

Moving on, we will take the next question from Antonio Tambunan with Bear Stearns.

Hi guys, congratulations on a great quarter. A quick question on follow-up to a couple of questions that were asked earlier. On the casual game platform, I know you mentioned your R&D development. When do you actually expect to see some kind of a meaningful revenue contribution? Is it going to be some time in late '06 or is it something that is going to happen in '07? Michael Tong: I think it is not right to answer in any meaningful way right now. We just cannot answer on this.

Okay not a problem. Also a follow-up on the cost question. 2.5 and 3D games you have mentioned before, generally are a lot more expensive to operate. So therefore the impact on gross margin, how big of a margin change or decrease in gross margin would you expect from something like that?

I will take the question. On the next generation games, the cost of branding the game is a little bit higher than the traditional 2D games. For example, the 2.5D and 3D games we expect that there will be a 1% to 2% higher margin, the cost of running the 2D game is 1% to 2% higher than the more traditional 3D game. So I would expect when the revenue contribution from the next generation game is more meaningful in our Company, then there will be a bigger margin impact. And if for 2006, because the majority of our revenue is contributing or coming from the existing two titles. There will be some scalability. I think 2006 the margin will not be impacted by much.

Okay, thanks. My last question is, in light of your plans to build up in your R&D, a lot of the Korean and American companies, especially in the most recent quarter, in calls, they have been talking about building out. Using China either as the creative development base or as the back end programming side. Do you see any kinds of problems on the recruitment side, especially since you are the top developer? Is there going to be any pressure to find talent and if there is, is there going to be any pricing pressure on the talent like we saw back in the original dot com days? Michael Tong: Recruitment has always been a very important area that we have been focusing on. We have already three years of recruitment, countrywide tours to different universities and colleges to recruit our game staff. We have a very good training program for all of these guys and we have quite a bit of experience in recruiting people and training them to become a very important vehicle to develop our games. I think with our presence in the online game industry, being the #1 in terms of MMORPG and the Company itself, I think we have been very competitive in being able to recruit very good people into our Company. I think the competition does not really come from what you said, the foreign competitors, partly it could be because of Google or Microsoft or something, who are extending their presence in China. We are very mindful on that and we will continue to work very hard recruiting the best people for the Company.

Next up is Ming Zhao; Susquehanna Financial Group.

Thank you. Good morning, gentlemen. I just have a question, could you give us some color on the life cycle of the existing two games? I remember, Michael, you said that the Westward Journey Online II would probably peak in the near term. I just wonder on an update of your thoughts about Fantasy and Westward Journey Online II. When would you think there would be a peak? Then I have a follow up. Michael Tong: Let me explain a little bit. From the experience that we have, of course as others I mentioned, it depends a lot on the content we are able to put into the game. If it is a good content, then we will be able to extend the life cycle a bit further. From past experience we have, for example like with Journey II Online, the growth of the fourth quarter has picked up again compared to the third quarter. It was just one quarter ago I think everybody said what they were going to do online, it is going in a down trend. So I think it depends on the content of the games, and so far we have been able to develop the good content and be able to extend the life cycle. But exactly when, it is difficult to say. We cannot guarantee anything.

I think there is time to take one more question.

Thank you. The last question will come from Tian Hou with C.E. Unterberg. Tian Hou - C.E. Unterberg : Hi, everybody. I have a question. Your --

Ma'am, pardon me. This is the operator. We are having some trouble hearing you. Tian Hou - C.E. Unterberg : I am here. First question, you have a lot of cash. Where do you plan to use it? [Question asked in Mandarin]

[Response in Mandarin] Tian Hou - C.E. Unterberg : [Question asked in Mandarin] I don't think I get it correctly. [Question asked in Mandarin]

[Response in Mandarin] Tian Hou - C.E. Unterberg : Okay.

[Response in Mandarin] Michael Tong: Let me do the translations. The question was, I think it was when are we going to have the commercial launch for Datang. The answer is that we just won't be able to answer exactly when it is going to have the commercial launch. William answer in a more indirect way. He said, from our previous experience that the Fantasy Westward Journey, we had spent about five months time in the open beta and also for Westward Journey Online II which was a previous product, we spent around three months in the open beta. The reason we have shortened the open beta for Datang is because the game itself has been very well refined when we set up the open beta, and it is a very short open beta. Tian Hou - C.E. Unterberg : I have a follow-on question. [Question asked in Mandarin]

[Response in Mandarin] Michael Tong: The question was if we didn't have any problems if we have such a close time in launching the open beta for the two games together. The answer is that because we are targeting a different demographics for the two games -- for example, for Datang it is similar to what users who have a lower hardware requirement. For Tianxia the hardware requirement is much higher and also in terms of, that we will target different geographics and also different profiles and users and players. So we believe that even that there is a very close period of time in launching open beta for both games, because they are different profiles we don't expect to have a lot of problems. For example, for Fantasy Westward Journey we also thought about that, as a matter of fact the user growth of Westward Journey II Online when we launched the game, but also because we are targeting at different profiles of users. The impact from Fantasy Westward Journey was very immaterial. We believe there shouldn't be any problem in launching the open beta for the two games at a very close time.

Okay, everyone. Again, thank you for joining us today. Please feel free to contact us if you have further questions. Have a good day.

Thank you. Michael Tong: Thank you very much.

Thank you.

Once again, everyone, this will conclude this NetEase fourth quarter fiscal year 2005 earnings conference call. Thank you all for joining us today.

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