NCTY

The9 Limited (NCTY)

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The9 Limited (NCTY)

Q3 2008 Earnings Call

November 18, 2008 8:00 pm ET

Executives

Richard Cai - Senior Manager, Investor Relations

Xiaowei Chen - President

George Lai - Chief Financial Officer

Huanxin Jiang - Vice President, Technical Operations

Analysts

Alicia Yap - Citigroup

Paul Wuh - Nomura

Adam Krejcik - Roth Capital

Analyst for Eddie Leung - Merrill Lynch

Tony Gikas - Piper Jaffray

Dick Wei - JP Morgan

Paul Keung - Oppenheimer

Analyst for C. Ming Zhao - Susquehanna

Atul Bagga - Thinkequity

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to The9 Limited 2008 third quarter earnings conference call. My name is Krista and I will be your coordinator for today. (Operator Instructions) Now I would like to turn the presentation over to your host for today’s conference, Mr. Richard Cai, Senior IR Manager for The9. Please proceed, sir.

Richard Cai

Thank you, Operator. Welcome, everyone, and thank you for joining us today for The9's 2008 third quarter earnings conference call. Management with me today are Xiaowei Chen, President; and Mr. George Lai, Chief Financial Officer. As always, I will start with a review of the Safe Harbor statement before management begins their prepared remarks.

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 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 and forward-looking statements.

Now we would like to begin with our President, Ms. Xiaowei Chen, who will give you an overview of our financial results and operations report, followed by our CFO, Mr. George Lai, who will follow with a detailed discussion of our financials this quarter. Xiaowei.

Xiaowei Chen

Thank you, Richard. Good day and evening, ladies and gentlemen. Thank you for participating in our discussion of The9's 2008 third quarter results. In Q3 2008, our total net revenue increased 29.3% year over year and decreased 10.2% quarter over quarter to $60.2 million, net income was $14.5 million, representing 157.6% year-over-year growth and 15.1% quarter over quarter decrease. Earnings per ADS were $0.52.

Despite seasonal impacts typical of the third quarter, we reached record revenue and net income for this particular quarter. Key operational metrics, such as total registered users and new registered users, have been increasing steadily, demonstrating continuing strengthening of The9's operational execution.

Now let me provide you with highlights of our current games operations during the quarter, as well as how we are continuing with our execution of our core strategies.

First of all, World of Warcraft -- as for most Chinese online games, schools regular summer break from July to September tends to create seasonal downward pressure on PCCU, ACCU, and revenues. This summer, the 29th Olympic Games compounded the seasonal effects. For WoW, this effect is more prominent as when students disburse during summer, or when some of the guild members were watching the Olympics, it would be hard for the entire guild to play together. As a result, in the third quarter of 2008, WoW's performance was off its historical peak in Q2. However, we see these issues as seasonal and temporary and we believe the fundamentals of WoW remain strong and poised for continued growth over the long-term.

In the third quarter of 2008, WoW still achieved peak concurrent user level of approximately 995,000, and the average concurrent user, ACCU level, reached approximately 416,000. By offering more value-added services, such as paid character transfer and security tokens for WoW users to protect their game accounts, we improved WoW's average revenue per user hour, or ARPU, from RMB0.41 in the previous quarter to RMB0.43 in the third quarter of 2008.

As of September 2008, approximately 13.5 million accounts have been registered and activated for the WoW games in Mainland China.

On November 13th, Wrath of the Lich King, the second expansion for World of Warcraft, hit the shelves in North America and the rest of the world. We are now actively preparing to launch the expansion pack in Mainland China. We see anticipation for the game continue to mount and expect another substantial increase of WoW's concurrent user and usage level in conjunction with its rollout, just as we observed after launching The Burning Crusade.

In light of greater potential interest in the game, on October 9th, we launched the 10th site of World of Warcraft to provide more servers and high quality services for game plays in China. To date, we have opened 21 server realms on the ninth server site and 14 server realms on the 10th server site.

In order to increase the game’s exposure to a larger group of new users, as we mentioned in last quarter, a very important measure we are taking is to expand our ground promotion team. By the end of the third quarter of 2008, our ground promotion team grew to about 400 people. Our people are promoting our services to Internet cafes in hundreds of second and third-tier cities. Looking forward, we will continue to expand the ground promotion forces toward the end of this year and into 2009.

To further improve the efficiency of our distribution network, we have adopted a new distribution structure with which would directly work with 42 first-tier regional distributors rather than appoint only one nationwide general distributor. The new structure provides us direct access to distribution channels so that we can better motivate our end distributors and reach our goals to penetrate lower tier cities.

Read the rest of this transcript for free on seekingalpha.com