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Linktone Ltd. (LTON)

Q1 2006 Earnings Conference Call

May 17, 2006, 8:00 a.m. EST

Executives

Michael Li - CEO

Colin Sung - CFO

Johnny Shen - Director, IR

Analysts

Michael Zhang - ThinkEquity Partners

Safa Rashtchy - Piper Jaffray

Paul Bieber - Piper Jaffray

William Bean - Deutsche Bank

Ming Zhao- Susquehanna Financial Group

Kip Lowe - Goldman Sachs

Chang Qiu - FORUN Technology Research

Andy Collier - New York Global Securities

Patrick Lin - Primarius Capital

Pamela Clarke -

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Linktone first quarter 2006 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Johnny Shen, Director of Investor Relations for Linktone. Please go ahead, sir.

Johnny Shen

Thank you and welcome to our quarterly conference call. With me here today are Mr. Michael Li, Chief Executive Officer; and Mr. Colin Sung, Chief Financial Officer.

Earlier today, we announced our financial results for the first quarter ended March 31 2006. Michael will begin today's call with a review of our recent business highlights. Colin will then review our financial statements and balance sheet for the first quarter, and then he will provide our business outlook for the second quarter. After that, we will open the floor for questions.

Before we begin, I would like to remind you that during the call we will make forward-looking statements which are subject to risks and uncertainties. These statements include, but are not limited to, statements regarding Linktone’s business objectives and plans for the remainder of 2006 and the anticipated impact of certain business events, such as new strategic partnerships, and our recent [strategic] efforts on LInktone's gross revenues and net income and outlook for second quarter of 2006 financial results.

You can also identify forward-looking statements by terminology such as will, expect, anticipate, future, intend, plan, believe, estimate and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. We do not undertake any obligation to update this forward-looking information, except as required under applicable laws.

Now, I would like to introduce Michael Li, Linktone's Chief Executive Officer for a summary of Linktone’s business and operational results for the first quarter of 2006.

Michael Li

Thank you, Johnny. Thanks to everyone on the call for joining us today. Let me begin by saying how excited I am to be part of Linktone's management team and leading the Company to better capture massive wireless opportunities that continue to grow at such a tremendous pace in China.

As many of you know, I am a member of LInktone's board and have also previously served as Linktone's COO from March 2003 to January 2006. My history with the Company demonstrates my dedication, commitment and confidence that Linktone is moving in the right direction to become a leading wireless interactive entertainment company in China.

The first quarter represented the first step in our 2006 action plan, in which we have taken Linktone to the next level. On the broadest level, this plan involves focusing more clearly on our core business, wireless services, and increasing efficiency in all aspects of our business and [accelerating] more rapidly to build market share in promising business lines.

More specifically, I am pleased to report that we have begun to execute on this plan in the first quarter, and our financial and operational results are clear testaments to this. Let me give you a brief overview of the first quarter 2006.

We have stated our expectations on both the top and bottom line, and achieved significant sequential growth in all of our business segments, as well as our profits and margins. Our gross revenues were $23 million, another record level, up 12% from the previous quarter and 52% from the same period last year.

US GAAP net income was $2.3 million, or $0.09 per fully diluted ADS. Adjusted net income, which is exclusive of certain one-time non-cash, stock-based compensation expenses, reached $3.5 million or $0.13 per fully diluted ADS. US GAAP and adjusted net income were up an impressive 59% and 90% respectively from the previous quarter.

In the first quarter, we saw a solid increase in revenue coming from all three of our core wireless services business segments: SMS, 2.5G and audio-related services. These strengths are attributable to our active product promotion, more expansive marketing programs and enhanced content offerings.

Let me highlight a few things we have done differently in the first quarter which are working well. First, after having a challenging fourth quarter of 2005, due in part to the ineffectiveness of certain major marketing campaigns, we have taken steps in the first quarter to better evaluate the returns of our marketing expenditures, which will be one of our top priorities going forward. As a result, we have seen a direct impact on the increasing effectiveness of our marketing and promotional efforts on the top line in the first quarter.

Second, as part of our cost restructuring plan, we incurred one-time severance costs which increased our G&A expenses in the first quarter. The reduction in head count was a necessary step to better streamline our operations and to increase our overall operational efficiency.

Third, we have positioned a significant number of key managers on a compensation plan with greater performance-based incentives. We believe these will be rewarding to both the Company and our stock. Our stock has reacted positively to these changes. I myself also have a significant bonus component into the Company's financial performance, as a part of my compensation package.

Having addressed our internal changes, I would like to give an overview of our various product areas. Our SMS revenues increased 16% from the previous quarter, primarily due to successful promotional efforts during the Spring festival, and the focused media promotional efforts. Looking forward, we believe SMS revenues will stabilize at its current levels for the second quarter, which is seasonally weak when compared with the first quarter.

Overall, revenue from our 2.5G product increased 20% from the previous quarter. The strongest growth came from Java revenue which experienced a threefold increase from the previous quarter, due to the success of our own internal Java product, including popular games such as Counter Strike, along with the financial consolidation of two months of revenues from Ojava, a leading mobile game developer and a publisher in China in which we made a strategic investment in the fourth quarter.

Looking forward, we continue to see significant growth potential in 2.5G services, especially in the areas of Java, WAP and MMS. While 2.5G services currently only represent a small percentage of total revenues, we see this area offering above-average growth potential going forward, and a large potential revenue contributor.

Audio-related product areas increased 4% from the previous quarter, primarily due to marketing programs, enhanced content offerings and adjusted revenue-sharing agreements with operators. Looking forward, we are confident we can attain sequential growth in our audio-related business.

Next, I would like to discuss some of the recent accomplishments highlighted in today's press release. Strategic relationships are important to our business, because they not only help drive our sales and expand our consumer reach, but also enhance Linktone as a leading wireless company in China.

As many of you know, Linktone was successful in providing wireless services in connection with an interactive series program last year. The success created a television-wireless business model where Linktone emerged as the clear leader. This has led to a strong new pipeline of initiatives with other interactive reality television shows.

We believe that new initiatives in this first quarter of 2006 demonstrates Linktone's continued leadership in this space. The first one is a Super Ringtone Contest TV program. Through this partnership, Linktone provides wireless value-added services to Super Ringtone Contest, an interactive television program hosted by China Mobile and Zhejiang Satellite TV. Super Ringtone Contest is a nationwide contest, and the largest of its kind to be held in the first half of 2006.

The second is Beautiful Shandong TV program cooperation. Linktone has signed an exclusive partnership with Shandong Satellite TV to provide wireless value-added services for its interactive program, Beautiful Shandong. The program is a beauty contest through which local residents will elect a spokesperson to represent 17 cities in Shandong Province. Beautiful Shandong is part of a 2006 Shandong International Cultural Industry Fair authorized by Shandong Provincial Government.

Linktone also continues to develop new strategic partnerships for exciting new services for the growing Chinese mobile user community. For example, Linktone and Kodak China recently signed a strategic partnership agreement for Linktone to operate a mobile imaging service tailored to Chinese consumers. This service will enable users to upload photos taken with their camera phone onto a WAP based mobile virtual photo album. In addition, physical photo prints can be ordered from the virtual album at Kodak branded retail outlets in China.

We believe that partnerships like this demonstrates Linktone's innovation in product offerings and business development capabilities.

In closing, I would like to say that even though I am pleased with what we have achieved during the first quarter of 2006, we still have many ongoing initiatives in place for the remainder of the year. Linktone will continue to seek to expand both organically and through strategic acquisitions and strive to be a clear leader in the wireless services industry in 2006.

With that said, I would like now to turn the call over to Colin Sung, CFO, for a more indepth review of our first quarter financial results.

Colin Sung

Thanks, Michael. I would like to give a quick rundown of certain financial highlights from today's earnings results. Linktone's first quarter gross revenue were $23 million, an increase of 12% for the fourth quarter of 2005. First quarter revenue resulted from a steady diversification across a wide variety of product areas, including SMS, WAP, Java, MMS, IVR and the ringback.

Linktone's gross margin for the first quarter was 61% of net revenue, or gross revenues minus business tax, compared with 58% for the fourth quarter of 2005 and 66% for the first quarter of 2005. The sequential increase was due primarily to our higher revenues as a result of the improved marketing strategy and efficiency.

Operating margin was 10% of net revenues, compared with 7% in the fourth quarter of 2005 and 21% in the first quarter of 2005. First quarter operating expenses were $11.3 million, compared with $10 million in the fourth quarter and $6.6 million in the first quarter of 2005. The sequential increase, reflecting higher marketing spending and charges related to the Company's cost and strategic restructuring plan.

Our first quarter net income under US GAAP was $2.3 million, up 59% from $1.5 million for the fourth quarter. Linktone's net margin was 11% in the first quarter, compared to 7% in the prior quarter. GAAP earnings per fully diluted ADS was $0.09, an increase from $0.05 in the fourth quarter. Adjusted net income in the first quarter was $3.5 million, or $0.13 per fully diluted ADS. This compared with adjusted net income in the fourth quarter of $1.9 million, or $0.07 per fully diluted ADS. You will find a reconciliation of GAAP financial measures to non-GAAP financial measures in our news release, and the financial statement of our first quarter results, which are posted on Linktone's corporate website at www.english.linktone.com.

I now want to run through a few balance sheet related items. We have cash and cash equivalents, as well as short-term investments held to maturity totaling $65.4 million in the first quarter. We generated positive cash flow from operations of $0.8 million. The number of weighted average ADS outstanding for the first quarter was $27.3 million, compared with $27.9 million for the previous quarter.

At March 31, 2006 DSO was 98 days compared with 105 days at December 31, 2005.

Next, I would like to discuss our ADS repurchase program. Having received shareholders' approval in September, 2005 to buy back up to $15 million worth of issued and outstanding ADS in open market transactions, the Company has purchased as of March 31, 2006 approximately $1.2 million ADS in an aggregate purchase amount of approximately $9.9 million, representing 66% of the total shares repurchased amount. These shares will be retired under [inaudible] law.

The Company expects to complete the full repurchase of the $15 million worth of ADS no later than the third quarter of 2006, subject to any legal and regulatory restrictions and the provision of the Company's Rule 10b5-1 plan, pursuant to which repurchases are effected.

Before providing our outlook on the second quarter of 2006, I would like to give some clarity regarding the expense-related initiatives discussed by Michael. The Company's current drive for efficiency has resulted in certain one-time expenses related to severance payments and other related costs, which we incur in the first quarter under G&A costs. We expect to see the effect of both cost savings and growth initiatives begin to make more of an impact in the second quarter of 2006.

Now, I will provide our business outlook for the next quarter. This outlook takes into account, among other factors, the continued and anticipated impact on net income of the increased sales and marketing expenses related to Linktone's long-term growth strategy, and assumes no adjustment for U.S. dollar and RMB exchange rate fluctuations from current levels.

Linktone's anticipated gross revenue will be approximately $23.5 million for the second quarter of 2006. Linktone expects GAAP net income of approximately $0.12 per ADS, and expects non-GAAP adjusted net income of approximately $0.13 per ADS. At this stage, I would like to open the floor for questions. Operator.

Question-and-Answer Period

Operator

(Operator Instructions) Your first question comes from Michael Zhang - ThinkEquity Partners.

Michael Zhang - ThinkEquity Partners

Hi guys, good evening.

Michael Li

Hi Michael, how are you?

Colin Sung

Michael, how are you?

Michael Zhang - ThinkEquity Partners

Congratulations on a solid quarter. Michael, I believe I have said this before but welcome back and congratulations on the promotion.

Michael Li

Thank you.

Michael Zhang - ThinkEquity Partners

My first question is related to the restructuring plan. I know you have cut some staff in the first quarter, maybe around 10% of the employees. Which departments were hit hard during the restructuring? Do you have enough resources to execute in the future? What are the top priorities on your list to drive the revenue growth and then grow margins in the current year and beyond?

Michael Li

I think the major initiatives in the fourth quarter we focused our business on the wireless business, so we cut our internal casual games division. I think that divisions includes -- how many people?

Colin Sung

It was about 50-60 people. Basically we discontinued the operation as well as we streamlined certain non-effective departments. So you are absolutely correct. In total workforce, we basically cut about 10% of the workforce.

As far as the focus for going forward on the coming quarters, we will be focused on our wireless services and try to be more focused and disciplined in our core spending.

Michael Zhang - ThinkEquity Partners

Thanks. My second question is related to the Super Ringtone program. It was a good one last year for you. I know the current contract is good until June 30. Could you give us some color on your contract renewal? What are the economics of the program, and what kind of impact do you expect if for any reason you decide to walk away from the second contract?

Michael Li

You are correct that the contract ends on June 30, but right now we are in discussion with Zhejiang Satellite TV to discuss a term for next year. But if the economics don't go through, it doesn't work for Linktone, there is a possibility we might walk away.

Michael Zhang - ThinkEquity Partners

But what kind of impact do you expect if that happens?

Michael Li

One of our strategies this year is to build a media platform, so Michael, as far as the TV program, we view this as part of our China development. Currently, we are talking to some satellite stations such as Shandong Satellite, Travel Channel. As far as the economics, we do not disclose that, in the previous quarter or going forward the Company will not provide any specific economics for any specific project association as well.

Michael Zhang - ThinkEquity Partners

My last question is about your music strategy. I know you have your strategic investment in the Company called 9Sky music portal, which is supposed to be the largest one in China. 9Sky was invited to China Mobile's music conference back in April in Chengdu. What is your take from the conference in terms of the impact on the industry value chain? How do you play the music card in the future?

Michael Li

We joined the conference hosted by China Mobile several weeks ago. Actually, we see 9Sky as part of our music strategy at Linktone. We are working closely with the carriers to refine our music strategy.

Michael Zhang - ThinkEquity Partners

Okay, thank you. Congratulations again on the solid quarter.

Michael Li

Thank you.

Colin Sung

Thank you, Michael.

Operator

Our next question comes from Safa Rashtchy - Piper Jaffray.

Paul Bieber - Piper Jaffray

Hello, this is Paul Bieber for Safa Rashtchy. Congratulations on a good quarter. I was hoping you could provide us with some color on improved margin strategy and marketing efficiencies. What are some of the things that you are doing differently this quarter compared to previous quarters?

Michael Li

As we mentioned in the press release and during the conference call, one thing we did is we focused on our core business, the wireless business. The second is we increased our efficiencies by our marketing strategies and media promotions, those kinds of things.

Colin Sung

Also, as well as be selective of the media itself. Instead of trying to cover many, we only focus on the most return on that marketing dollar spend.

Paul Bieber - Piper Jaffray

Has the channel partner strategy changed at all?

Michael Li

As far as the channel strategy, the way we view the media and TV interactive, it is our focus for the coming quarters. We will continue to develop and explore that particular channel at the same time.

Paul Bieber - Piper Jaffray

Thank you.

Michael Li

Thank you.

Operator

Our next question comes from William Bean - Deutsche Bank.

William Bean - Deutsche Bank

Can you give us a breakdown of the charges within the expense line?

Colin Sung

For China Mobile, we collected almost 80% and from China Unicom we had 8%. From the fixed line we had slightly more than 10%.

William Bean - Deutsche Bank

Sorry, I meant in terms of the severance payments and other charges, in terms of the cuts.

Colin Sung

You are talking about what is the total cost for the severance itself?

William Bean - Deutsche Bank

Yes, in terms of OpEx there were some charges in selling.

Colin Sung

The partner development, marketing expenses and the G&A expenses?

William Bean - Deutsche Bank

Can you just tell us what that was, excluding charges?

Colin Sung

If you are talking about the one-time charges, it was about $900,000 were the one-time charges in Q1. Then the other, about $300,000 is the cash compensation charges.

William Bean - Deutsche Bank

What can we expect for Q2? You said they were mostly done in Q1, but maybe a little bit more in Q2?

Colin Sung

We basically finished the restructuring, as we said earlier in the Q4 earnings release. We are finished in Q1, so 99% of the restructuring is finished in Q1, so the one-time costs are fully reflected in the financial statements.

William Bean - Deutsche Bank

Can you just give us a breakdown of revenue in the 2.5G segment, and also in audio? IVR versus caller ringback?

Colin Sung

For SMS we had 65% of our total revenue coming from SMS. For 2.5G it is 11% and for audio-related it is 22%. Then we have 2% coming from casual games and the other areas.

For a further breakdown on the 2.5G, we had MMS of 4%, WAP 4% and Java 4%. Under audio-related, we had 13% on IVR and 9% on ringback tones.

William Bean - Deutsche Bank

Okay. Audio was 22%, right?

Colin Sung

Audio is 22%.

William Bean - Deutsche Bank

I got all of that, I think. How much would games have been without Ojava?

Colin Sung

The Java is 3% this quarter, but without Ojava -- Ojava is half of the Java revenue.

William Bean - Deutsche Bank

Okay. Can you talk a little bit -- I think you mentioned something about content relationship renegotiations or some sort of a renegotiation having to do with your wire line splits or something? Can you just give us a little bit more color on that?

Michael Li

Basically without getting into any specifics, the major savings is we have basically negotiated on the contract basis with each record label. For example, we might pay certain minimum guarantees in the previous quarter, and basically we negotiated with the labels basically on a revenue-sharing basis going forward. So by doing so, we are basically saving on the cost of sale side.

William Bean - Deutsche Bank

Were those minimum guarantees you paid before, was it all applied towards that quarter or was it spread out over one or two quarters?

Michael Li

It has to be amortized over the contract period.

William Bean - Deutsche Bank

Was that more than one quarter?

Michael Li

Usually around three to six months, on average. So it varies, it could be one quarter encountered the most -- the longest may be one year.

William Bean - Deutsche Bank

Starting from Q2 you would basically be pretty much clean in terms of no minimum guarantees?

Michael Li

No, we are saying on some record labels we are negotiating with them, and some of those have already been accomplished in Q1. So on an ongoing basis, we have a mixture of that. But definitely we are looking at every single contract more carefully and trying to negotiate the best price on a per contract basis.

William Bean - Deutsche Bank

Can you just give us a little bit more color on exactly what you are doing in terms of more efficient media and promotion? Or are you focusing on any particular channel, or give us a little bit more color on exactly what you are doing to get a better ROI?

Michael Li

Yes, actually before we have two ways of doing the media promotion. One is the media buy, or what we call media purchase, to purchase advertisements. Another is the partnership. For the first one, in Q1 we started to do things to buy what we call, 'trash time' time slots so we can buy at a cheaper price and we can evaluate efficiencies and do better promotions. We have another focus to buy the 'trash time' time slots from the TV station.

William Bean - Deutsche Bank

Okay, and then in terms of partnerships, any change there?

Michael Li

We have several partnerships in the pipe. At this stage, we are negotiating. Some of those are getting very close to signing the deal, but we will disclose properly at the time when we accomplish that, maybe even in the next quarter.

William Bean - Deutsche Bank

So the idea is to go from fewer partnerships to more partnerships, as the partnerships give a better return?

Michael Li

Better return and better exclusivity, in a way.

William Bean - Deutsche Bank

Okay. I just have one last question. Before, you had a number of projects in the pipeline, like maybe a caller ringback jukebox or some other stuff. Are those still online, or did you scrap some of those projects?

Michael Li

Can you repeat that, William?

William Bean - Deutsche Bank

I think you had some projects in the pipeline, internally developed, to do a caller ringback jukebox or a subscription type service for caller ringback, or for music in order to create a stickier service. Have you rolled those out, or have you decided not to pursue those projects? If you could give us an update on some of the things that your former CTO was working on.

Michael Li

As for the project development team, we are always looking for new opportunities as well as new services. As far as those services you mentioned, as for the restructuring plan, we accomplished in Q1. For future business like this, it is always in our minds and in our process.

So as far as the answer to that question, that is still in development and we will consider it as part of our overall music strategy going forward.

William Bean - Deutsche Bank

Thanks guys, I appreciate it.

Michael Li

Thank you.

Operator

Our next question comes from Ming Zhao- Susquehanna Financial Group.

Ming Zhao- Susquehanna Financial Group

Thank you. Good evening, Michael and Colin. Congratulations on a good quarter. Could you give us the update on the total number of paying users and the monthly ARPU which you gave in the past?

Michael Li

We have a sequential growth of users, both on the user and ARPU side, in this quarter. Right now we have roughly over 8 million unique paying subscribers by March 31. Our ARPU is roughly around $0.71 ARPU.

Ming Zhao- Susquehanna Financial Group

And then, when I looked at your guidance, could you give us some color on your view about each segment i.e. what kind of growth trend do you see in SMS, MMS, WAP and other segments?

Michael Li

We do not give specific guidance on each product, but traditionally Q2 is relatively weak compared to Q1. So as far as our product line, I mean I think if anything, any above-average growth will be in our 2.5G services.

Ming Zhao- Susquehanna Financial Group

What income tax would you use in the first quarter, and what should we use in the future?

Colin Sung

I think as we previously mentioned, it is around 10% to 11%. I think going forward it will be more in the 12% to 14% effective tax rate.

Ming Zhao- Susquehanna Financial Group

In terms of the operating expenses, I guess William had just asked the question. What type of reduction should we see in the selling and marketing expense, as well as the G&A expense, compared with Q1?

Colin Sung

Basically the majority or the bulk of the restructuring cost is incurring in the G&A line. So going forward, we would see a major reduction in the G&A expenses. As far as marketing, we are probably going to see maybe a sequential increase on spending, it depends on the revenue growth during the quarters.

Ming Zhao- Susquehanna Financial Group

Thank you very much guys. Congratulations again.

Michael Li

Thank you.

Operator

Our next question comes from Kip Lowe - Goldman Sachs.

Kip Lowe - Goldman Sachs

Two questions. The first question is, if you could please comment on when you actually put ads up on the TV operators, from what I understand the TV operators have more capacity now as for IVRs and CRBT. Have you seen rates from the TV going up or going down? Can you comment on the trend and the sort of rates they are charging at the moment?

Michael Li

Again, we do not give any specific economics regarding our partnerships. In the general concept with the partnerships such as satellite TV, it will be on a revenue-sharing basis, with the content as well as the media outlets for those partnerships. So as far as the rate, high or low, it is all part of the economics when you do a cooperation.

Kip Lowe - Goldman Sachs

On the non-cooperation basis, how would that differ? If you want to put an ad on a special program for one night, on an ad-hoc basis?

Colin Sung

Well it all depends on the time slots. As Michael mentioned earlier, it is so [ineffective] you might want to have certain so-called 'trash times'. In fact, the return is better there economy-wise; it is much better. As far as those certain programs, like ad-hoc, it all depends on how much coverage you are able to cover. Also, we need to calculate what is the return for those investments we are making during those programs.

Kip Lowe - Goldman Sachs

Great, thank you.

Colin Sung

You are welcome.

Operator

Our next question comes from Chang Qiu - FORUN Technology Research.

Chang Qiu - FORUN Technology Research

Congratulations, Michael and Colin. Just a few questions. You have quite a good improvement in the gross profit margin. Going forward, if your revenues stay in excess of $23 million, should we expect the gross margin to also stay above current levels too?

Michael Li

The expectation going forward, as we said before, we like to maintain around the 60% range with the result like Q1, that is a good start. So we definitely would like to maintain that level for the coming quarters.

Chang Qiu - FORUN Technology Research

Okay. And in regard to your restructuring in the past few quarters, previously you bought companies doing MMORPG games. I just wonder, for that are you continuing or is that discontinued?

Michael Li

The internal casual games divisions, we said as part of the restructuring, we discontinued. As far as the whole focus on the gaming companies, we still have [online] gaming. But our focus will be mainly on the wireless. As we said, focus and discipline.

Colin Sung

And evaluating the synergies between the wireless and the casual games.

Chang Qiu - FORUN Technology Research

Thank you.

Operator

Our next question comes from Andy Collier - New York Global Securities.

Andy Collier - New York Global Securities

Thanks for your time. A couple of questions. The Supergirl charges, were they primarily in operating expenses or in cost of services?

Michael Li

Supergirl started after Q1. So as far as the Q1 results itself, we do not have any significant revenue contribution from that particular partnership.

Andy Collier - New York Global Securities

I see. And going forward, in terms of your negotiations for that, you are focusing on the revenue-sharing amount, essentially, with Hunan?

Colin Sung

Yes, the revenue-sharing and also the investment that may be needed for this project.

Andy Collier - New York Global Securities

Are you of the opinion that there needs to be more contribution by Hunan TV in terms of marketing for that project?

Michael Li

We do not provide that specific information regarding those particular partnerships. Again, we are talking about dealing with a [Shandong] television station.

Andy Collier - New York Global Securities

And you talked about focusing your marketing. Can you provide information on what your largest marketing channel or expenditure was in Q1? Was it a specific TV advertisement, was it billboard, newspapers? What was the main area?

Michael Li

Basically, when we say marketing we mainly focus on the media buy. That is including TV, magazines, newspapers as well as certain exclusive partnerships with the satellite television.

Colin Sung

We have several media promotions like print media, TV, radio stations and starting from later last year, we started to put resources in TV promotion.

Andy Collier - New York Global Securities

So the biggest bulk of the ad spend has been on television, then?

Colin Sung

Comparable to previous quarters, yes.

Andy Collier - New York Global Securities

And in Q2 are you trying to reduce that by doing joint promotions with various media outlets, instead of straight media buys?

Colin Sung

That depends, it depends on the efficiency.

Michael Li

We are evaluating by project.

Andy Collier - New York Global Securities

But the implication was you are less interested in a straight media buy, so I am trying to understand what the alternative would be for you?

Michael Li

Well the alternative, basically, you have a different channel and the different channel depends on the project itself. So everything is on the table when you are looking for partnerships.

Andy Collier - New York Global Securities

I see. And in terms of the music situation, how much of your revenue across all media is music related?

Michael Li

I think the industry average is about 30-40%. So we will have basically more or less in that range.

Andy Collier - New York Global Securities

And when you negotiate with the record labels, are those negotiations then impacting that contribution, the 30-40%?

Michael Li

Again, Linktone is working with all major labels, including International and domestic. At this stage we do not disclose any specific partnerships, economy wise.

Andy Collier - New York Global Securities

I am not looking for the specifics on the negotiations, I understand that. What I am trying to get at is if you renegotiate your relationships with the labels, would that have an impact across all forms of music, or would that only impact certain kinds of 2.5G services, for example, as opposed to say IVR?

Johnny Shen

I think the answer is yes, because we sign a contract with a content provider and then we are authorized to use their content. Most of the cases, we are allowed to use the content in whatever way we like within the terms, in all of our products.

We have three major lines, SMS, 2.5G, and audio-related. We can use it very flexibly.

Andy Collier - New York Global Securities

Last question relating to music. Have you had discussions directly with China Mobile about your relationship with them regarding music, following the Chengdu meeting?

Michael Li

We have been in close contact with them, close discussions with the carriers. So that is what we have been doing in the last several months.

Andy Collier - New York Global Securities

Okay. Thank you.

Michael Li

Thank you.

Operator

Your next question is a follow up from William Bean - Deutsche Bank.

William Bean - Deutsche Bank

Hi guys. You mentioned that you really wanted to focus on a media platform. Could you describe what’s that going to look like? What shape that’s going to take, and how you are going to go about it?

Michael Li

Well one example I can quickly give to you is interactive TV programs; maybe certain time slot during the primetime and the certain programs, such as Supergirl. This is a typical example as far as the wireless services we can provide to the Chinese consumers.

Colin Sung

We are also looking for long-term exclusive partnerships with the media.

William Bean - Deutsche Bank

Okay. So maybe you could just talk a little about your brand development? What percentage, do you think, of your customers, when they buy one of your services knows that it’s a Linktone service?

Michael Li

Well, as you know, this business is very commoditized. So we would like to develop the channel and content to build a brand for Linktone's long-term growth. At this stage it’s a little bit too early for branding.

Colin Sung

In a way, the cooperations we have with TV programs help build our Linktone brand among both consumers and the carriers and the other content providers. That is a very good thing for us.

William Bean - Deutsche Bank

Do you have any sense of your mix, in terms of pre-paid versus the post-paid customers?

Colin Sung

We can’t disclose that information nor did any of our peers.

William Bean - Deutsche Bank

I was just curious.

Michael Li

You can try though, nice try.

William Bean - Deutsche Bank

I think that’s it from me. Thanks guys.

Michael Li

Thank you.

Operator

We have a follow up question from Michael Zhang - ThinkEquity Partners.

Michael Zhang - ThinkEquity Partners

Hey, two questions on the service code unification, I think the implementation is supposed to start this year, late in June. What kind of impact will it be on Linktone, as well as on the industry as a whole?

Michael Li

In fact, we haven’t formally received any notice from MRI at this time. But there is a rumor that this kind of thing starts to implement in June, and may be expected to last for one year. I think this kind of unification of the service codes has an impact industrywide. But comparatively I think that it has less impact for big SPs compared with smaller SPs.

Colin Sung

For long-term growth in the future, I think it’s a healthy thing.

Michael Li

Yes, to [inaudible] market.

Michael Zhang - ThinkEquity Partners

Okay. Yes that makes sense. And lastly the cash flow from operations is less than $1 million. I am wondering, what’s the major use of the cash in the past quarter? Is it related to the stock repurchase or something else?

Colin Sung

Okay. The cash flow are reduced by over $10m in the last quarter. We paid for our acquisitions, including both the Brilliant Concept and Ojava; those we made last month, and in year 2005. Also, as you know, we have been buying back shares, which accounted for a big part of our reduction in the cash position.

Michael Zhang - ThinkEquity Partners

Okay. What was CapEx in last quarter?

Colin Sung

CapEx was around $200,000.

Michael Zhang - ThinkEquity Partners

Okay. Perfect. Thank you.

Colin Sung

Thank you.

Operator

(Operator Instructions) Your next question comes from Patrick Lin - Primarius Capital.

Patrick Lin - Primarius Capital

Hi good evening guys and congrats. It’s also nice to hear some laughter on the conference call this year, it’s been a while.

Michael Li

Hi Patrick.

Patrick Lin - Primarius Capital

Hi. I wanted to ask you a question just to follow up on some of your press releases regarding your presentations here in the U.S. for institutional and other investors.

Can you just give a real brief overview, in terms of what your plans are over the next several weeks, in terms of conferences you might be at? As well as what cities you might be meeting institutional fund managers, please?

Johnny Shen

Hi Patrick, this is Johnny Shen, the IR Director. We will do some local tours in Shanghai. Then we will go to New York City, arrive there on May 22 in the evening. Then we will stay there for a whole week until May 29. Then we will fly from New York City to Boston for May 30, and May 31. From there we will go to San Francisco for June 1, and June 2. In New York City, Deutsche Bank is doing our show, as well as ThinkEquity. In Boston Susquehanna is doing it. In San Francisco ThinkEquity and Piper Jaffray are doing it.

Patrick Lin - Primarius Capital

Great. And you are also speaking at the Lehman Conference in New York next week right?

Johnny Shen

Right that’s the first stop.

Patrick Lin - Primarius Capital

Okay. Great. Thank you very much, and congrats on the quarter.

Michael Li

Thank you, Patrick.

Operator

Our next question comes from Pamela Clarke.

Pamela Clarke -

Thank you. Good evening. I would just like to ask you if you could please provide a little bit more color on your music strategy?

Michael Li

As you know, that we have 9Sky we acquired two quarters ago. We are evaluating the music strategy at Linktone. We treated 9Sky as part of our music strategy. We are working closely with the carriers to refine our music strategy.

Pamela Clarke -

Can you provide any more information about exactly how you are working with the carriers to refine your music strategy? What discussions are you having with them?

Colin Sung

Even carriers, they are still evaluating what kind of strategy they will pursue with partners, with content providers, with music labels, and how they work with SP. I think that we will see what comes out in the next few quarters.

Michael Li

gain music is a very important part, and a very integral of our business, especially some of the wireless services. As the previous question before, in the average of the SP 30% to 40% is music related. There is no exception to Linktone. So we view music as important. We have traditionally worked very well with all the major labels, as well as the domestic labels. The music will be continued. It will be as part of our growth revenue in the coming quarters.

Operator

Ladies and gentlemen this does conclude our question and answer session. Mr. Li please continue with any closing remarks you may have.

Michael Li

Thanks for all of your questions, and for calling in today. We began 2006 with a clear vision to take Linktone to the next level and our first quarter proved that we are doing so. We are confident that our sales vision, and strategic initiatives, combined with our strong pipeline and execution ability will allow us to deliver a greater value to our shareholders in the coming quarters.

Johnny Shen

Thank you everyone, for joining us. This concludes today’s teleconference of our first quarter 2006 financial results. The management team will be in the U.S. meeting with investors in the last two weeks in May and we look forward to seeing many of you there. Please contact us should you have any additional questions. Thanks again for joining us today. Good bye.

Operator

Ladies and gentlemen this does conclude the Linktone first quarter 2006 earnings conference call. You may now disconnect.

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Source: Linktone Ltd. Q1 2006 Earnings Conference Call Transcript (LTON)
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