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Linktone Ltd. (NASDAQ:LTON)

Q3 2008 Earnings Call Transcript

December 1, 2008, 8:00 pm ET

Executives

Serena Shi – Manager, IR

Michael Li – CEO

Jimmy Lai – CFO

Operator

Ladies and gentlemen, thank you standing by. Welcome to the Linktone Third Quarter 2008 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) This conference is being recorded today, Monday, December 1, 2008.

I would now like to turn the conference over to Serena Shi, IR Manager. Please go ahead ma'am.

Serena Shi

Thank you. Welcome to Linktone's third quarter conference call. With me here today are Michael Li, Chief Executive Officer, and Jimmy Lai, Chief Financial Officer. I am Serena Shi, the Manager of Investor Relations.

Earlier today, we announced our financial results for the third quarter ended September 30, 2008. Michael will begin today's call with a review of this quarter and a discussion of Linktone's strategy. Jimmy will review our income statement and the balance sheet for the third quarter. After that, we'll open the call 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. We do not undertake any obligation to update this forward-looking information, except as required under applicable laws.

Now, I'd like to introduce Michael Li, Linktone's Chief Executive Officer, for the summary of Linktone's business and operational results for the third quarter of 2008. Michael?

Michael Li

Thank you, Serena, and thanks for joining us on the call today. This quarter, we took additional steps to return the company to profitability, which is our number one priority. We terminated our exclusive advertising partnership with Tianjin Satellite TV following our decision to end our relationship with the Chinese Youth League Internet, Film and Television Center with regard to Qinghai Satellite TV. This further reduced our exposure to the traditional media business in Tianjin, which is facing strong head wind from the slowing global economy.

This quarter we took decisive action to further streamline our operations and increase our focus on core value added service activity. We took an impairment charge of $0.6 million related to the termination of our agreement with Tianjin Satellite TV this quarter. I'd like to talk a little bit about Linktone's WVAS business. Many of you who have followed the company for a while know that Linktone has one of the strongest distribution networks and integrated service platform for wireless services in the industry. We believe that Linktone is well positioned to leverage that WVAS growth opportunity in China and prepare for 3G wireless entertainment services.

We're also looking to expand into the ASEAN market starting with Indonesia, which is a relatively under penetrated mobile market with enormous growth opportunities. We're confident of our international expansion plans for Indonesia and plan to combine Linktone's expertise in the Chinese WVAS market with our majority shareholder, MNC's dominant position in Indonesia to create synergies and to position the company for long term growth and profitability.

We're hoping to start this operation soon and impacting tangible results in the early part of 2009. I would now like to turn the call over to Jimmy Lai, our CFO for more in-depth review of Linktone's financial results. Jimmy?

Jimmy Lai

Thank you, Michael. Linktone's third quarter gross revenue was $20.3 million compared with $19.1 million for the second quarter of 2008 and $13.3 million in the third quarter of 2007. The company recorded WVAS and other revenue of $16.6 million. That compares with $14.5 million in the second quarter of 2008 and $11.3 million in the third quarter of 2007. SMS revenue was $9.5 million for the third quarter compared with $4 million for the second quarter. Sales in our SMS services more than doubled quarter over quarter due to the seasonal popularity of SMS during the summer school vacation months, as well as increased sales and marketing efforts to promote SMS services during the quarter. This growth was only partially offset by the decrease in other data related services, which were not as heavily promoted this quarter due to the increased focus this quarter on the promotion of SMS to take advantage of heavier summer usage.

Revenue from our 2.5G products, namely MMS, WAP and Java totaled $0.7 million in the third quarter compared with $2.9 million in the second quarter. As explained, the revenue decrease was primarily due to the increased emphasis this quarter on SMS to take advantage of the seasonality, and the reduced promotion of other data related services this quarter. Data related services revenue for the third quarter totaled $10.2 million, representing 60% of the total amount, compared with $6.9 million or 36% for the second quarter of 2008.

Other related revenue IVR and CRBT were $5.8 million in the third quarter compared with $7 million for the prior quarter. Advertising service revenue was $3.7 million this quarter compared with $4.6 million for the second quarter of 2008. This sequential decrease in advertising service revenue was primarily due to the termination of partnership agreements with Qinghai Satellite TV in previous quarter.

Linktone's gross margin for the third quarter of 2008 was 32% of net revenue, or gross revenue minus business tax, compared with 9% for the second quarter of 2008 and 40% for the third quarter of 2007. The sequential increase in gross margin was due to two primary factors. Firstly, a reduction in the number of WVAS joint cooperation projects which lower the amount of revenue sharing with third parties. At the same time, company increased its advertising spending to promote its WVAS services which spending resulted in higher selling and marketing expenses, which we will discuss in a minute

Secondly, the gross loss from the company's advertising services declined following the termination of Qinghai Satellite TV Project. Operating loss was 12% of net revenue compared with operating loss of 58% for the second quarter of 2008, and operating loss of 22% in the third quarter of 2007. The sequential decrease in operating loss was primarily due to the asset impairment charge of $6 million in connection with the termination of partnership agreement with Qinghai Satellite TV in previous quarters.

Operating expenses totaled $8.7 million compared with $12.4 million in the second quarter of 2008 and $7.9 million for the third quarter 2007. Excluding the impairment charge of $0.6 million in the third quarter and $6 million for the second quarter, the company's other operating expenses for the third quarter and the second quarter totaled $8.1 million and $6.4 million respectively, which was 27% higher in the third quarter. The sequential increase in operating expense excluding the impairment charge was primarily due to the increased advertising spending on WVAS business in the third quarter.

Selling and marketing expenses were $4.7 million compared with $3.2 million in the second quarter 2008 and $3.2 million for the second quarter of 2007. The sequential increase was due to an increase in advertisement of traditional and new media to promote SMS services. Product development expenses was $0.9 million compared with $0.7 million for the second quarter of 2008 and $1.4 million for the second quarter of 2007. Other G&A expenses were $2.5 million compared with $2.5 million for the second quarter of 2008 and $3.3 million for the third quarter of 2007.

GAAP net loss was $2.3 million or $0.06 per diluted ADS share compared with a GAAP net loss of $10.6 million or $0.26 per diluted ADS share for the second quarter of 2008 and GAAP net loss of $2.8 million or $0.12 per diluted ADS share for third quarter of 2007. Non-GAAP loss was $1.6 million for the third quarter compared with non-GAAP net loss of $4.4 million in the second quarter of 2008 and net loss of $2.5 million in the third quarter of 2007. Non-net GAAP per fully diluted ADS was $0.04 compared with a net loss of $0.11 in the second quarter of 2008 and non-GAAP net loss of $0.10 in the third quarter of 2007.

Now I would like to review a few balance sheet related items. Cash and cash equivalents as well as short-term investments available for sales totaled $104.2 million compared with $105.3 million for the second quarter of 2008 and $41.6 million for the end of December 2007. The increase of $62.6 million from the end of December 2007 to end of Q3 was mainly due to the strategic investment of $68.4 million received from MNC in April 2008, offset by cash outflow into operations of Linktone's advertising business.

Days sales outstanding, the average length of time required for the company to receive payments for sales delivered were 77 days at the end of third quarter of 2008, compared with 69 days at the end of the second quarter. The sequential increase was due to lengthening collecting period from the company's telecom value added business.

Finally our business outlook for the fourth quarter, Linktone expects gross revenue to be approximately $16.5 million to $17.5 million. The lower revenue projection compared with total revenue for the third quarter is mainly due to the reduction of its advertising revenue.

At this point, we'll be happy to answer any questions that you might have. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we'll now begin the question and answer session. (Operator instructions). One moment please for our first question. And at this time, I'm showing no questions in the queue. I'd like to turn the call back over to the management for any closing remarks.

Serena Shi

Okay. Thank you everyone for joining us. This concludes today's teleconference for the third quarter 2008 financial results. Please contact us should you have any additional questions. Thanks again for joining us today. Bye.

Michael Li

Bye, bye.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and you may now disconnect.

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