Good day everyone and welcome to the NetEase Fourth Quarter and Full Year-End 2006 Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Brandi Piacente. Please go ahead, ma'am.

Thank you, operator. Today you will first hear from Mr. William Ding, Chief Executive Officer and Mr. Michael Tong, Co-Chief Operating Officer, who will discuss some of the financial and operational highlights of the fourth quarter and fiscal year ended December 31, 2006. And 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 future performance of the company and are intended to qualify for the Safe Harbor from liability as established by the US 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 those 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 Mr. Michael Tong, Co-Chief Operating Officer, who will read the prepared remarks on behalf of Mr. William Ding, Michael. China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy. :

Thank you for joining us today. I will begin today with recent highlights from each of our service segments and an update on key business developments. Then Denny Lee will provide details on our financial results for the fourth quarter and fiscal year '06, followed by Q&A. Total revenues for the fourth quarter were $69.2 million, a decrease from $72.4 million for the third quarter of 2006 and an increase from $60.4 million for the fourth quarter of 2005. For the year ended December 31st 2006, total revenues grew to $284.1 million. Online game revenues were $57.9 million for the fourth quarter of 2006, down from $59.2 million for the third quarter of 2006, and up from $49.7 million for the fourth quarter of '05. For the year ended December 31, '06, online game revenues totaled $237.8 million, an increase from $170.9 million in fiscal '05, primarily attributable to the net growth in the popularity of Fantasy Westward Journey for the year. We made solid progress with Fantasy Westward Journey during the fourth quarter of '06. This game achieved record PCU metrics of approximately $1.3 million for the fourth quarter and ACU metrics of 444,000. This game continues to dominate the MMORPG titles in China. Westward Journey II Online also achieved record PCU for the fourth quarter reaching approximately 603,000 and ACU metrics of 173,000. Internal closed beta testing of the upgraded version of Westward Journey Online II, called Westward Journey Online III is on schedule to begin in the second quarter of 2007. An open beta testing will follow in the third quarter. We are planning the commercial launch for Westward Journey III this year, and are developing a plan to upgrade the existing players of Westward Journey II to the new game platform. Turning to Tianxia II. The…

Okay, thank you, Michael. I will now provide an overview of our financial highlights using numbers and percentage based on US dollars. I will begin with a review of the fourth quarter followed by a summary of fiscal year 2006 results. In order not to repeat what have been just explained by Michael on the revenue side, I will focus on explaining margins and expenses fluctuation along with net profits. Beginning with the fourth quarter, gross revenue was $58.5 million compared to $56.7 million in the preceding quarter and $47.9 million in the same period in 2005. The company's overall gross margin was 82.4% for the fourth quarter compared to 81.7% for the preceding quarter and 82.6% for the same period last year. The increase was primarily attributable to the increase in the gross margin for online games. Gross margin for the online game business for the fourth quarter of '06 was 90.3% compared to 89.4% for the preceding quarter and 89.4% for the fourth quarter of '05. The increase was primarily due to our business tax refund of $4.5 million which was approved by the relevant tax authority in the fourth quarter of '06. Gross margin for advertising business was 50.5% for the fourth quarter of '06 compared to 56.1% for the preceding quarter and 62.9% for the fourth quarter of '05. The quarter-over-quarter decrease was primarily due to seasonal decline in advertising services revenue in the fourth quarter while costs remained relatively stable. The year-over-year decrease was primarily due to the increase in salaries and other benefits paid to content editors and the increased costs associated with the online advertising business. This is to enhance the content and attractiveness of NetEase website. The gross margin for the wireless value-added services and other business for the fourth quarter of…

Yes sir. Thank you. (Operator Instructions). Our first question will come from Richard Ji with Morgan Stanley.

Hi William, Michael and Denny. Congratulations on a good quarter. I have actually two questions regarding your existing games Fantasy Westward Journey and Westward Journey II. Regarding Fantasy Westward Journey, when do we expect the rollout of the new expansion pack to ramp up the user volume. On Westward Journey II, especially I am curious about your plan to migrate your user base to Westward Journey III and do you have any concrete plan at this stage? Thanks.

Hi, Richard.

Hey

When you ask the question, do you mind to just translate it into Chinese as well?

(Foreign Language)

(Foreign Language).

So, let me put that in English. Our Fantasy Westward Journey has just released an expansion pack in January and we are preparing another new expansion pack that we have not fixed the time yet. For Westward Journey III, it is part of an upgrade to Westward Journey II and we will try to keep the existing users of the Westward Journey II into the new platform.

(Foreign Language)

(Foreign Language).

Just to summarize is that when all the users will be transferred into Westward Journey III then we will stop the operation of Westward Journey II. So, that’s the idea.

Yes. Thank you.

Thanks.

Moving on we will go with [Lin Shi] with Lehman Brothers.

(Foreign Language)

(Foreign Language)

Yes, why don't I do a very brief summary before we go on to the next one? So, the question was why was there growth in the ACU of Fantasy Westward Journey? The similar answer to that is that besides the Christmas and the New Year's activities that we have done for the marketing during that time, we have also put a lot of hard work in improving the security for the players. They used to have some stolen accounts and that makes them difficult to log into these games and so on. But we have improved on the security systems, so that more and more players come back to play the games. The second question was, how do we think about Tianxia? The answer is, no doubt that the competition is slightly fierce but as we have prepared the game for a long time and also that we have developed a game for the taste of Chinese users and culture and we are super confident about our game. Next question?

Moving on to our next question, we will take it from William Bean with Deutsche Bank.

(Foreign language)

(Foreign language)

Okay. I will just do it in English, it’s a lot easier. Could you just give us a sense of Tianxia II, your marketing plan as well as your marketing plan for Westward Journey Online III? And the second question is, what's your goal in terms of transfer of Westward Journey Online II users to Westward Journey Online III in terms of percentage? Thanks.

(Foreign Language)

The question was the marketing budget for Tianxia II, and the answer is that, we have a plan. It’s in progress but there’s not much to disclose right now actually.

(Foreign Language). How many users do you hope to get to moved from Westward Journey Online II to Westward Journey Online III?

No we don’t have any answers on this question actually.

Okay. Thank you.

Thanks.

Moving on, Ming Zhao with Susquehanna International Group, we will have our next question.

(Foreign Language)

(Foreign Language)

Okay. My second question is for Denny. Can you break down the revenue form, perhaps the Westward Journey Online, Westward Journey Online II and Datang in the fourth quarter?

Yes. The revenue breakdown for the online game business was roughly, for Westward Journey Online version II, the revenue in the fourth quarter was around 28%, whereas the Fantasy Westward Journey was around 70%, and the rest is from Datang.

Thank you.

Our next question will come from Alicia Yap with Bear Stearns.

Good morning William, Michael and Denny. I will try to ask my question in Mandarin first to follow the trend and then follow by English. (Foreign Language). This is my first question. For the Westward Journey III, will you guys change your business model? Will that continue as a subscription base or would you change to be an item base and I have one follow-up.

(Foreign Language).

Okay. (Foreign Language).

(Foreign Language).

(Foreign language). My second question is on the R&D costs. Are you seeing any rise per head cost in the games R&D as the industry is becoming more competitive, especially we are seeing in Korea and US? Thank you.

(Foreign Language).

Okay. Let me summarize this Q&A section, and Alicia's question is, is Westward Journey III going to be a free game or going to be a paid game. The similar answer is that, it's going to be a subscription based paid game rather than an item based game? The other question was how do we look at increase in the R&D cost, especially given the competition for talents in the markets right now? For NetEase, we believe that salary increase is not just one of the ways to keep our talents, in fact we have been doing a lot, providing better incentives and so on for our staff and also we have been hiring a lot of new staff as well and our reserve for talent. We can go on to the next question.

Okay. Thank you.

Next we will take Anthony Gikas with Piper Jaffray.

Hi, couple of questions on the new search engine. Could you quantify the potential revenue impact during the second half of this fiscal year, related to advertising due to the search engine? When will those revenues also become material? Second part of the question is, could you characterize your expenses that you have incurred in developing the new search engine and what will that be going forward? And then, I have a follow-up question.

Yes. Anthony, this is Denny Lee. Let me try to answer your questions. First of all I think the search engine is now under internal beta and we will start our open beta very soon. But on the revenue generation potential, this is too early, because we have our plan, we have milestone to achieve. First of all we want to make our game technically sound, before we try to think about the monetization. But definitely we will try to give a very good product, good quality of product to the users. But we are overall optimistic on the search's overall market growth in China. And your second question is regarding the expenses incurred and for your information all the R&D costs in relation to the search engine has already been recorded or reported in the financial statement.

Okay, and when will the revenues, should we be expecting some meaningful or measurable revenues from the search engine later this year. And then my last question would be, could you just address your plans for the use of excess cash. Do you have plans to complete the repurchase program that is in place today?

And regarding the revenue, it really depends on the result of the open beta which will be commenced very soon and we cannot comment right now. On the use of the surplus cash, as you know that in 2006, we started to execute the repurchase program. The first one was around $50 million and it was completed in the middle of the year. The second one was double than the size of the first one which was around $100 million and it will end soon. So far we have executed around 60% of the authorized top limit, and we will update the investors in our next conference call on the remaining potential purchase.

Okay. Thank you.

Thank you.

Moving on, we will go with Chang Qiu with Forun Technology Research.

Yes. Good morning. Denny, I guess maybe a question for you. There is some talk regarding potential tax change. I don’t know whether or how you see this? If there is a tax code change, what is the impact to companies like NetEase?

Yes, Chang Qiu. I think you are referring to the potential unification of the tax rates for foreign company and domestic company. I think the background is that, local companies are mostly paying around 30% plus income tax in China. The foreign companies, because they have the special tax exemption, they are either paying 50% of the domestic company's tax rate. So, if there is going to be unification then people estimate the tax rate. So, the unified tax rate will be around 25%. But this is well above our effective tax rate right now which is around 10% or so. But, I also understand that going forward, the PRC government will continue to give preferential tax treatment for those special industry that the government is encouraging. For example, high-tech, Software Company and advanced technology company etcetera. So, NetEase has always been enjoying this benefit of special industry which is encouraged by the government. I foresee that going forward we will continue to enjoy such preferential tax treatment. So, actually I don’t expect to see there will be any material or negative impact on the effective tax rate of the group because of the unification of tax rate.

Okay. Thank you, Denny.

Our next question will come from Tian Hou with Unterberg Towbin.

(Foreign Language)

This is Denny. Let me first answer your second question regarding the tax rebate. We have clearly indicated in our press release that this is a one-time, non-recurring event happening at the end of the year. And we should not expect the similar tax refund happening going forward.

Okay.

(Foreign Language)

Let me try to summarize this. The first question is that we have some strategic move on the current channels during the quarter of '06. In previous stats we have cancelled a few channels including travel, health and also cultural channels. For these channels we just moved, and the reason for this move is that we want to focus on major channels such as the news, entertainment and so on. And then for those channels that we have cancelled, I would want to add this that we continue to find partners to collaborate with us on those channels, so that we can focus on the major channels ourselves. And the second question is on the anti-addiction system for the games. For this it is simply that this system is implemented over all the game operators in China, and is a policy from the government. This is for the good of the industry. And the third question is --

The third question was regarding the tax rebate which is a one-time non-recurring event.

Alright, okay.

Thank you.

And our next question will come from Paul Keung with CIBC.

This is [Claire Ding] for Paul Keung. (Foreign Language).

(Foreign Language). And in English it is that the portal right now, basically, includes the e-mail, the blog, and the contents. Besides that, to improve our contents and the functionality of this product, we continue to integrate all these products together to establish a good community within the portals. At the same time, we are launching our new product, which is the search that is in open beta right now. All of this will continue to drive the growth of the traffic for '07 and also to increase the advertising revenue for '07.

Next question will come from Wendy Huang with Evolution Securities.

Good morning. I have two questions. One is a follow-up on the previous question regarding the effective tax rate. When will your tax holiday expire? I mean according to the current tax policy, do you expect the effective tax rate to remain at 10% level in 2007? And the second question is that currently you are sitting on a quite good cash position. Will you stick to the current in-house development strategy? Will you use this cash to license any games in the future, or will you use this cash to acquire any game studios in China to extend some of your R&D capabilities. (Foreign Language)

(Foreign Language)

Let me first of all translate the answer for the second question first. The question was how will you use the cash reserve? And the answer from William was actually, we will consider going forward to acquire R&D companies, and also to license games. But we have got to focus on the quality of the game and a reasonable price. And regarding the second question is actually the effective tax rate. At the moment, our effective tax rate was around 10% or a high single digit. And they tax exemption holiday, actually, the detail was summarized in our annual report last year. Different subsidiaries will have different tax holiday cycles. So the effective tax rate of the group, we consider going forward will be around the low teens. Okay. The next question?

Moving on to our next question, we will take Jason Brueschke with Citigroup.

Thank you, good morning gentlemen. Let me start with a follow-up question to the previous one. I asked the same question last quarter about the use of cash and whether you would consider doing any acquisitions or licensing third-party developed games. And I believe you said the answer then was no that you would not, that you believed in in-house development only. Am I hearing you guys correctly that there is now a change, at least potentially, in the strategic direction. That you would if you found the right game at the right price, developed by a third party, say a Korean or US company, that you would now consider licensing such a game?

Well why don't I just answer your question directly. I think for the last quarter, I think firstly there is basically no change in what we think. So, I think it is really a matter of how we present it. So, in the last quarter, I do remember when you asked us about the use of cash. We said no to the third-party licensing games. And that no actually means, it is not a definitively no. What we are saying is of course if there is a good game at the right price, the right terms, the right time, then of course we will also license the third-party game. But our priority continues to be in-house developed games. It is the same right now, where if there is a good game and at the right price, then we would continue, and it is not impossible for us to license it. But again, our priority is still on the in-house developed games.

Great, thanks Michael. A couple of other housekeeping question. Did you say during the prepared remarks that you expected to do commercial launch of Tianxia in the first quarter, or did you say the second quarter?

First.

First quarter. Okay. And then maybe one other question on Tianxia, and you may have said this in some of the answers to the previous questions, but if you did, I missed it and I apologize. Did you give us what the PCUs and ACUs were for Tianxia during the Phase I open beta?

(Foreign Language)

(Foreign Language)

Sorry, don't have the numbers for the PCU and ACU for this phase of the open beta right now for you to disclose. But once we start the open beta in the first of March, I think we will have some new numbers in the second stage of the open beta, and we will disclose that.

Alright, great. And maybe one last question. There has been a lot of talk, and this is on the advertising business, your portal, of kind of the market in China as elsewhere in the world, kind of heading more towards rich media and the video. Could you maybe give us an update on what your strategy is with respect to either video on demand or various forms of streaming video, as well as your rich media strategy? Thanks.

(Foreign Language) Actually, it is very simple. As I have just explained, we have the e-mails, we have the blogs, we have the common channels. The way we think about video is not a separate item, but it is how we can integrate video as part of the content into our current channels and also into our blogs and so on. But we don't have any specific plans right now, but when there is the right time, slowly by slowly, we will integrate different kinds of video content into the current product lines. So, this is basically our thinking.

Great, guys. And congratulations on a good quarter.

Okay. Thanks.

James Mitchell with Goldman Sachs, we will have our next question.

I apologize if the line isn't so great, but could you just run through the massive increase in deferred revenue during the quarter? Was there anything unusual behind that?

The deferred revenue was increased by the end of the year compared to September end. It was because starting from 2007 we have a new policy on pricing, on our current costs. So I think before the year end, people already anticipated a change in the policy, but they did not know the detail yet. So they have just got up a lot of the [open] cost at the end of the year.

Great, excellent. And then maybe a second question. If I look at your advertising growth year-on-year in the fourth quarter versus your competitors, do you feel that you are spending sufficiently on marketing and on product development for the portal and the associated properties? Or do you think that if you spent more aggressively in those areas you would get faster traffic growth and faster revenue growth?

I think your question is, is that the growth is not as strong as our competitor in the fourth quarter. And the reason it is not really because of the marketing or the investment in the content. I think I explained in the previous quarter conference call when we give our guidance is that, for one we have changed our front page, where we are accepting less text link advertisers. I think I mentioned it and that resulted in a bit less advertising in the fourth quarter. We have not increased the price on the other advertising space in the front page as yet. So there is kind of a time lag here. I think that is the main reason for the small growth over year-on-year in the advertising for the fourth quarter.

Okay, and since I am at the back end of the line, where did the minority interest item come from in the fourth quarter?

James, this is Denny. Because we have established a joint venture company, the NetEase group accounted for 75% of the interest and there is a 25% minority shareholder. And that joint venture company is set up mainly for the purpose of our new proprietary developer search engine business.

Alright. So, you have a 25% minority partner in the search engine business, and the $400,000 credit is because that business was losing, $1.6 million. Okay. Great. Those are all my questions.

That is all of the time we have for questions. Miss Piacente, I would like to turn the call back over to you for any further comments or closing remarks.

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

Thank you. Ladies and gentlemen, this does conclude today's NetEase conference call. We would like to thank everyone for their participation, and have a wonderful rest of your day.