Interviews CNNfn: The N.E.W. Show October 31, 2000 Click Here For Video NetEase.com CEO Charles Molineaux CNNfn: The N.E.W. Show October 31, 2000 CHARLES MOLINEAUX, CNNfn ANCHOR, THE N.E.W. SHOW: Investors are still holding out a lot of hope for one of the biggest Internet frontiers in the world, China. Well, like a lot of frontiers, it's got plenty of danger to it. NetEase.com is shaping up as one of the biggest players there, and its newest results show how unpredictable a frontier can get -- better than expected sales, but a lower than expected bottom line. How does the future look? We're now joined by NetEase.com's CEO, King Lai. Sir, thank you very much for being with us, and congratulations on at least beating the expectations on the top line. Immediately, investors are likely to say, what happened to the bottom line, and why did that not meet the expectations? KING LAI, CEO, NetEase.com: Well, we were focusing on working to our business plan, and we're very happy with our results. Our revenues are up over 500 percent to $2.55 million. And our -- it was driven mainly by advertising revenue increase, which increased 666 percent versus the same period a year ago. What we've done is reallocated some of our advertising spend to the third quarter to support a launch of a new brand campaign. But while we shifted the dollars behind the advertising campaign in the third quarter, we still expect that our marketing spend for full year will be lower than we had budgeted. So the full year numbers are going to come in as planned, or, we believe, slightly better. MOLINEAUX: Your chief financial officer says that (inaudible) -- that NetEase's losses are probably about their worst right about now, and that it should get better from here. How? LAI: Well, our revenues are growing faster than our gross -- faster than our costs, so therefore we're getting an improvement in our gross margin, from 24 percent in second quarter to 34 percent this quarter. And we're looking ahead to fourth quarter, where the gross margin will continue to improve. MOLINEAUX: Last month, your Web site, 163.com, was named as the number one Web site in China. How do you become the number one Web site for a Chinese audience? LAI: Well, the study you refer to comes from Iamasia (ph), which measures the home Internet users in China from a sample that they formed, which is similar to the way they measure television. And we measure the ability to reach over 50 percent of the home Internet users in China based on unique users, as well as being -- having the most page views during the month of August. And in September, we actually increased the reach to over 70 percent of home Internet users in China. And we also have the fourth ranked site, Yay.net (ph), in August, and sixth position for Yay.net in September. MOLINEAUX: How do you navigate the environment for China -- for Chinese Internet companies when you've got concerns about, well, bans on subversive content? Doesn't that raise some challenges as you're trying to put together your content? LAI: Well, every country will have its regulations in terms of what a country permits or not permit. China's actually been -- always been pretty up front about what it's concerned about, and that is, it doesn't want any kind of content, whether it is offline or online, that is against the state. And of course pornography is another issue. So the recently released regulations on October 1 actually is a significant step forward, in that while the guidelines have always been there, now China's made it very clear exactly how the companies are to navigate forward. Now, having said that about the -- about regulations, about anything that may be subversive to the state, most of the content and most of participation on the Internet within China by Internet users is focused on significantly more things than politics. (CROSSTALK) MOLINEAUX: King Lai, we have just ran out of time, but thank you very much for being with us, and congratulations on your quarter. King Lai, CEO of NetEase.