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Linktone Ltd. (LTON)

Q2 2006 Earnings Conference Call

August 17, 2006 8:00 am ET

Executives

Michael Li - CEO

Colin Sung - CFO

Him Tiem Foo - Financial Controller

Edward Leo – IR Manager

Brandi Piacente - IR

Analysts

Ming Zhao - Susquehanna Financial Group

Paul Bieber – Piper Jaffray

William Bean - Deutsche Bank

Michael Zhang - ThinkEquity Partners

Tian Hou - C.E. Unterberg Towbin

Mark Slashowler – Jay Hawk China Fund

Wendy Wong - Solution Securities

Patrick Lin - Primarius Capital

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Linktone second quarter 2006 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Brandi Piacente, Investor Relations for Linktone. Please go ahead.

Brandi Piacente

Thank you. Welcome to Linktone's quarterly conference call. With me here today are Mr. Michael Li, Chief Executive Officer; and Mr. Colin Sung, Chief Financial Officer. Also with us are Him Tiem Foo, Linktone's Financial Controller and Edward Leo, Linktone's newly appointed Ii-house Investor Relations Manager.

Earlier today, we announced our financial results for the second quarter ended June 30, 2006. Michael will begin today's call with a review of our recent business highlights. Colin will then review our income statement and balance sheet for the second quarter and provide our business outlook for the third quarter. After that, we'll open the call up 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 would like to introduce Michael Li, Linktone's Chief Executive Officer, for a summary of Linktone's business and operational results for the second quarter of 2006. Michael?

Michael Li

Thank you, Brandi and thanks to everyone on this call for joining us today. Let me begin by first highlighting our strong second quarter 2006 financial results. We're pleased to be able to report our fifth consecutive quarter of record revenue growth of $23.3 million. Revenues attributable to China Unicom, China Netcom and China Telecom customers accounted for 21% of total revenues this quarter, up from 19% last quarter and 16% last year. These reflect the growing importance of our four major carriers in China; the three I just mentioned as well as China Mobile.

In addition, we were able to achieve a 32% sequential GAAP net income improvement as we begin to realize the positive impact of our restructuring and cost control initiatives, which we began during the first quarter of this year. Let me give you a brief overview of the second quarter highlights.

Our gross revenues were in line with our expectations, while our bottom line came in above our expectations as we experienced strong sequential improvement in our operating margin. Our gross revenues were $23.3 million, another record level, up 1% from the previous quarter and 33% from the second quarter of 2005.

U.S. GAAP net income was $3.1 million or $0.12 per fully diluted ADS, up an impressive 32% from the first quarter of 2006. Non-GAAP net income had reached $3.5 million, or $0.13 per fully diluted ADS. U.S. non-GAAP remained unchanged from the prior quarter.

In the second quarter, we experienced strong growth in our 2.5G and audio-related services, which included Java, MMS, WAP, IVR, and CRBT after we strategically reallocated our marketing resources from SMS to non-SMS services. In particular, our audio-related services, IVR and CRBT were especially strong, with revenues increasing 15% and 10% respectively quarter-over-quarter.

I would like to now take this opportunity to comment on the industry policy changes which were announced in July by several mobile operators and the significance of this for service providers and the overall wireless industry in China.

First, I believe that these policy changes represent a growing trend that investors should expect as the wireless market evolves and as a small group of focused market leaders emerge. We are confident that Linktone will emerge as one of the top leaders in these rapidly growing markets. Longer term, we expect these policies will result in a fewer number of large service providers focusing on strength in content, product and distribution. We also believe this will result in a better operating environment for Linktone as well as for the overall SP market.

Recently, we have observed key trends in our own business that point towards a healthier marketplace in the future and a clear potential increase in the demand for wireless services by Chinese consumers, due to the high quality of service. Some examples include the following:

First, a significant reduction in customer complaints. Over the past year, the number of calls received by Linktone's call centers has risen from approximately 180,000 per month to 300,000 per month. However, the number of calls classified as complaints, billing errors or criticisms during this period has dropped from approximately 8% to 3%. These reductions shows an improvement in our ability to provide premium and high quality services to our customers. Our relationship with our customers is very important to us and these improvements demonstrates the positive impact of these policy changes.

Next, a stronger demand for new wireless services by Chinese consumers. Linktone believes that there is a long-term upward trend in the demand for wireless services in China, especially those representing the next product cycle. Linktone has seen consistent increases in user participation of interactive television services, growth in Java gaming and increasing usage by customers of China Unicom, China Netcom and China Telecom.

Lastly, we expect there to be an increasing number of new marketing channels. Linktone sees a wide scope for new marketing channels via satellite, provincial and city television. By way of example, Linktone currently runs approximately 450 hours of interactive television programming per month, directly marketing services to consumers in a televised, entertainment-oriented format.

Linktone has flourished under similar challenges in the past by remaining to its vision of being a focus pioneer in the wireless sector. The demand for wireless services by Chinese consumers will continue to grow from today's level and Linktone’s focus as this market evolves will help to ensure its leadership position.

China's wireless industry remains impressive and is growing at a rapid pace. With the number of mobile users projected to reach over 500 million by 2007, we do not see this trend changing. If anything, we view these recent policy changes as a part of the natural growing trend of any new and rapidly developing market segment. Although, we do expect these to impact our revenue stream and overall, the service providers short-term growth, in the long-term, we believe these will benefit the wireless industry by having a smaller group of focused market leaders emerge.

With the restructuring now behind us and our cost control matters already in place, I believe we are well positioned to not only weather the near-term challenges, but emerge with an even stronger competitive position in the wireless market.

Now, let me note several areas of progress in our operations during the second quarter. After taking steps early in the year to better evaluate the return on marketing spend, which has been and will continue to be one of our core focus areas, we have seen the direct positive result of the effectiveness of our marketing and promotional effort towards our top line in the first and second quarter. We are very pleased with this progress.

Second, we have continued to closely monitor our headcount in order to maximize our operational efficiencies going forward and to seek additional cost-cutting reduction opportunities without sacrificing execution. For example, we combine the functions of sales strategy and operations under our newly appointed SVP Mr. Ping Mei, who comes to us with an extensive background of over 15 years of experience in the telecommunications industry. In doing so, we were able to combine two formerly separate zones to further streamline the organization. This is all a part of the company's ongoing initiative to control operating expenses for the third and fourth quarters of 2006 and contribute to the company's bottom line.

Let me provide an overview of our various product areas. SMS revenues declined 12% from the previous quarter, primarily due to the re-allocation of marketing resources from SMS to non-SMS areas. Revenues from our 2.5G products, MMS, Wireless Application Protocol or WAP, and Java, increased an impressive 58% from the previous quarter. Looking forward, we continue to see significant growth potential in 2.5G services, especially WAP and Java. While 2.5G currently only represents a small percentage of our total revenue, we clearly see this as a WAP average growth trend going forward, and a lot of potential revenue contributed.

Audio-related revenues, IVR and CRBT increased 17% from the prior quarter due to strong demand led by IVR as a result of our marketing programs and enhanced content offerings. We continue to expect to see double-digit sequential growth coming from this segment.

Next, I would like to discuss some of the recent partnerships highlighted in our earlier press release. Strategic relationships are important to our business because they not only help drive our sales and extend our consumer reach, but also a key in enhancing the Linktone brand as a leading wireless company in China.

As many of you know, Linktone is a pioneer and a leader in successfully providing wireless services to popular interactive TV programs in China. As a result, these have led to a strong pipeline of initiatives with other interactive reality television shows. We are adding two cooperative television initiatives during the first quarter of 2006 and for the second quarter we were pleased to add several more.

These include Super Boy, a TV program in cooperation with Shanghai TV Broadcasting Group. Linktone has entered into a contract to provide wireless value-added services in connection with Super Boy, an interactive television program hosted by Shanghai Media Group. Super Boy is a nationwide contest for the next male pop star, similar to the Super Girl concept. These weekly program began in May and will last through the end of August. Linktone supports the television program with SMS and IVR services.

The second is an exclusive partnership with Channel Young to provide wireless value-added services for a new interactive television program. This program airs daily and features interactive television, games, and chat rooms.

Linktone has entered into an agreement to launch a wireless Java version of the popular MMORPG game Counter-Strike from its mobile version developer, Greatelsoft Shanghai. Other Java games launched in the quarter were Guilty Gear X and Hammer & Sickle.

The release of our animated content, which includes graphic, video, and audio, related services based on our own in-house developed BTPig, an animated cartoon character. This initiative is currently being featured in mobile operator promotions in the Shanghai region.

Lastly, I'm pleased with what we have achieved during the first half of 2006 and ongoing initiatives we have in place for the remainder of the year. Linktone will continue to seek to expand both organically and through strategic acquisitions in order to grow its position as a leading, wireless interactive entertainment company in China.

With that said, I would like now to turn the call over to Colin Sung, CFO for more in-depth review of Linktone's second quarter financial results.

Colin Sung

Thanks, Michael. I am pleased to be here today to give a more detailed breakdown of certain financial highlights from today's earning results. Linktone's second quarter gross revenue was $23.3 million, an increase of 1% on the first quarter. Second quarter revenue resulted from a steady diversification across a wide variety of product areas including SMS, WAP, Java, MMS, IBR, and RBT.

Revenue related to services offered to China Netcom and China Telecom, China Unicom and the China Mobile customers represent 13%, 8%, and 77% of total revenue compared to 11%, 8%, and 79% respectively in the prior quarter, reflecting continued diversification and especially increased business with China Unicom, Netcom, and Telecom.

Linktone's gross margin for this quarter was 63% of net revenue or gross revenues minus business tax, compared with 61% for the first quarter of 2006 and 66% for the second quarter of 2005. The sequential increase was due primarily to the to the diversification of our product portfolio.

Operating margin was 12% of net revenue compared with 10% in the first quarter of 2006 and 19% in the second quarter of 2005. Second quarter operating expenses were $11.3 million, Unchanged upon the first quarter and $7.8 million in the second quarter of 2005. We continue to closely monitor our cost structures.

Our second quarter net income under U.S. Generally Accepted Accounting Principles, GAAP, was $3.1 million, up 32% from $2.3 million for the first quarter. Linktone's net margin was 14% in the second quarter compared to 11% in prior quarter.

GAAP earnings per fully diluted ADS was $0.12, an increase from $0.09 in the first quarter. Adjusted net income in the second quarter was $3.5 million, or $0.13 per fully diluted ADS. This compares with adjusted net income in the first quarter of $3.5 million or $0.13 per fully diluted ADS.

You will find the reconciliation of GAAP financial measures to non-GAAP financial measures in our press release and the financial statement of our second quarter results, which are now posted on Linktone's corporate website at www.english.linktone.com.

Next, I would like to review a few balance sheet-related items. We have cash and cash equivalents as well as short-term investments held to maturity totaling $61.8 million, compared to $65.4 million at the end of the prior quarter. In the second quarter, we generated positive cash flow from operations of $3.5 million, but the decrease was due to the investment activities related to our share buyback program and payments of our business acquisitions.

As of June 30th, 2006, the number of weighted average ADS outstanding was 26.6 million compared with 27.3 million for the previous quarter. At June 30th, 2006, days sales outstanding was 104 days compared with 98 days at March 31st, 2006.

I would like to now give an update with regards to our share repurchasing program. On June 23, 2006 Linktone announced the completion of a $15 million stock repurchase program that had been previously implemented beginning in September 2005. The company purchased 1,866,600 ADS in open markets for an aggregate purchase amount of approximately $15 million, completing the entire share repurchasing program.

In addition, the company's Board of Directors also approved a new $20 million stock repurchase program in which Linktone may repurchase up to $20 million worth of its issued and outstanding ADS in open market transactions on the NASDAQ Global Market. On August 7, 2006, the company's shareholders voted to approve the new repurchase program. The company anticipates consummating share repurchases shortly following the release of second quarter results and making repurchases for approximately 12 to 18 months in a manner consistent with market conditions, the company's corporate strategy and the interest of its shareholders.

At June 30, 2006 Linktone had 25 million ADS outstanding. As Michael mentioned earlier, we remain confident about the long-term outlook for the company and believe we are well positioned to continue to maintain our leadership position in the rapidly growing wireless market in China.

Finally, our business outlook for the next quarter. This outlook takes into account, among other factors, anticipated impact of new mobile operator policy changes and the continued anticipated impact on net income, of increased sales and marketable expenses related to Linktone's long-term growth strategy, assuming no adjustment for U.S. dollar and RMB exchange rates fluctuation on quarter levels.

Linktone anticipates gross revenue for the third quarter to be in the range of $17.5 million to $18.5 million. Linktone expects GAAP net income of approximately $0.02 per fully diluted ADS.

While most companies in our peer group do to provide EPS guidance, Linktone believes that we should continue to do so, wherever possible in order to provide shareholders with as much color as possible and also to give an indication of the near-term impact of next quarter anticipated revenue decline. While these factors noted above resulting our forecast for Q3 for $0.02, we are comfortable that profitability will improve in the fourth quarter of this year.

At this stage, I would like to open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ming Zhao - Susquehanna Financial Group.

Ming Zhao - Susquehanna Financial Group

Thank you. Good evening, Michael and Colin.

Michael Li

Hello.

Ming Zhao - Susquehanna Financial Group

Looking at your Q3 guidance, I just wanted to have color in terms of the timing of the implementation of the policy, because it sounds like there are some provincial branches that haven't implement the policy, but they will implement the policies starting from mid-August. Does your guidance only include half of the quarter policy and should we expect more impact going into the fourth quarter?

Colin Sung

The guidance is taking into account the first month of the Q3 so far this year. As far as the Q4 guidance, our company does not give any guidance beyond the third quarter at this stage. We are still evaluating and monitoring the situation. As you said earlier that some provincial carriers implemented the policy changes already. We believe more provinces will implement the policy in the late August or early September.

Also some of the policy changes, the new policies are already actually starting from July. We already see some of the impacts for the new users since most of the policy execution is at – notification for the old user base. So, we are guiding for the impact and we have projections internally, the guidance for Q3.

Ming Zhao - Susquehanna Financial Group

Also relate to the question, I've heard that China Mobile may have a meeting with its local branches maybe in September to review the policies impact. It seems like if there are some policies impacts with the partner, would rethink about those policies. So, can we assume that maybe some policies will be cancelled by the end of this year and probably Q4 will be the bottom and you guys will see growth again in the first quarter of next year?

Michael Li

I think that it is likely that there will be some changes in the policy when it is actually implemented all over China. Also that China Mobile has talked with SPs, including the Linktone about our thoughts on the new policies. There might be some changes in the future.

Ming Zhao - Susquehanna Financial Group

Thank you very much.

Operator

Our next question comes from Safa Rashtchy - Piper Jaffray.

Michael Li

Hi, Safa.

Paul Bieber – Piper Jaffray

Hi, this is Paul Bieber for Safa, Colin and Michael. Two quick questions. The gross margin showed some strong improvement. Where can we expect gross margins to grow given the new policies? Secondly, what portion of your SMS messaging is subscription-based versus message-based charges?

Colin Sung

Regarding the gross margin question, currently for Q1 we are at 61% and for Q2 is 63%. We anticipate with the new policy, our gross margin anticipates to maintain between range of 55% to 60% for the coming quarters.

For the second question, regarding the breakdown of the subscription and user base, currently companies do not disclose the information at the current stage. But however, we have a balance of the user base at this stage.

Paul Bieber – Piper Jaffray

Thank you.

Operator

Our next question comes from William Bean - Deutsche Bank.

William Bean - Deutsche Bank

Hi, guys.

Michael Li

Hi, William.

William Bean - Deutsche Bank

Just wondering whether you could just give us a little bit more color, I mean you talked about gross margins already, but also on the operating margin side or operating expense side, give us a sense of fixed versus variable costs. What's the threshold there and how should we think about it going forward?

Colin Sung

As Michael said earlier, the company saw the restructuring in Q1 of this year and a great deal of it, we completed the restructuring in the end of Q1 and the early part of Q2. On an ongoing basis, we will continue to monitor and improve our cost structure. The biggest variable will be related to selling and marketing expenses. By emphasizing on efficiency and the return on those marketing dollars, the company will adjust accordingly to the revenue level and also the user experience as well. So, going forward, the net profit margin we anticipate is in the 10% to 15% range.

William Bean - Deutsche Bank

Could you just give us a little bit more color on the TV promos? The two that you did in Q1 is that Super Boy and Channel Young? Then you said you got several more in Q2, can you just walk us through those?

Michael Li

In Q1, one is a Beautiful Shandong which finished in the early part of Q2. The Super Boy started with the local selection in Q1 and continuing in Q2 and will be finishing in late August. Then also, the company itself; we have a partnership with Channel Young which is the Shanghai Media Group produces an interactive gaming, chat room as well as the IVR services between 4 pm through 6 pm on a weekly basis.

William Bean - Deutsche Bank

So, there's several more in Q2, or mostly Channel Young then? There is nothing beyond that?

Michael Li

Also in Q2, we still have the Super Girl selection started in late April and the program will be continued to September or October.

Colin Sung

Also we have two other programs with other TV stations in the pipeline in Q3 starting from that.

William Bean - Deutsche Bank

You are going to continue with Super Girl?

Colin Sung

We still have the contract to run that program.

William Bean - Deutsche Bank

Okay great. I’ll let somebody else have a chance and maybe come back. Thanks.

Operator

Our next question comes from Michael Zhang - ThinkEquity Partners.

Michael Li

Hi Michael, good morning.

Michael Zhang - ThinkEquity Partners

Good morning and welcome on board, Edward. While we understand the current policy changes have very huge pressure on all SPs including Linktone, let's look beyond the next few months. Where do you think in the industry will go in 2007 and beyond? What would you like to do to avoid being squeezed more by those mobile carriers and the content providers?

Michael Li

I think that at this point we are very confident that the wireless market has a huge potential going forward, especially when the 3G is coming in the next one or two years. I think the new policy changes might have some negative impact in the short-term, but in the longer term when the mobile phone users grow in, as we mentioned in the press release, that goes up maybe 500 million users by the end of this year and still growing maybe another 10% to 20% going forward in the coming years.

So, we believe that the increase, the demand for the wireless services those still are picking up when we are delivering the interactive services through television, so we see that the bar is going up very quickly. When the market is cleaned up and maybe becoming more healthier we believe that the wireless market, there is a huge potential there.

Colin Sung

Also another thing is the policy regarding the changes and the cleaning up will result in a number of the largest service providers focusing on strength in content, wireless and distribution.

Michael Zhang - ThinkEquity Partners

Okay. But going forward, what is your focus? The content or distribution or both?

Michael Li

I think that in China we are focused more on the channels and through channels we can lock in some of the content. That is our focus in the next half year, this year or next year will be more on channels.

Michael Zhang - ThinkEquity Partners

That helps. Also for the remainder of the year, could you add more color on the growth points of your business and the areas of the weakness? Also Colin you just mentioned your net margin target is 10% to 15%, but for 3Q it looks lower than what you want to be, so how long does it take to get from the lower level to where you want to be?

Michael Li

I think most of the potential going forward is coming from two areas. One is from the diversification of the new channels that is our focus at this time. The other area is the development of new applications such as mobile gaming, audio/video related applications, mobile advertisements or those kinds.

Michael Zhang - ThinkEquity Partners

And Colin?

Colin Sung

You are talking about what area are we focusing on?

Michael Zhang - ThinkEquity Partners

No, about the margin goals, you just mentioned --

Colin Sung

In the short-term for the next quarter or two, I mean our margin probably will be very depressed. I mean we are probably looking at Q3 or even in the Q4, a low 10% rate. But going forward with the stabilization of the business as well as the competition and with the growing demand of the wireless services for 2007 or even beyond, we would like to monitor strictly cost control with the right mix of partners and portfolio, we would like to achieve back to the margin between 10% to 15%.

Michael Zhang - ThinkEquity Partners

Do we expect more restructuring activities in 3Q?

Colin Sung

Clearly we did the bulk of our restructuring costs in Q1 and some in Q2. We need to have the right cost structure to match with the right revenue. So, in upcoming months, the company will continue to monitor our costs, monitoring and control our variable costs.

So in anticipation for the next few months, the company will still try to cut certain variable costs as well as the headcount costs as well.

Michael Zhang - ThinkEquity Partners

Great. Lastly, a housekeeping question. Can you breakdown the stock-based compensation by the operating expense line? Like how much is in product development and how much is in general administration?

Colin Sung

Compared to our revenue or just total percentage of our costs?

Michael Zhang - ThinkEquity Partners

I think you have 300,000 stock-based compensation, I just want to know what percentage is in the sales and marketing and what percentage is in product development?

Colin Sung

Our product development is about 20%, selling and marketing about 30% and the G&A is about 50%.

Michael Zhang - ThinkEquity Partners

Okay. Thank you very much.

Operator

Our next question comes from Tian Hou - C.E. Unterberg Towbin.

Tian Hou - C.E. Unterberg Towbin

Hi, Colin and Michael how are you?

Michael Li

Hi, Tian, how are you?

Tian Hou - C.E. Unterberg Towbin

Good. I just have two questions, very easy, simple. The first one is tax rate and if I look at tax rate and this quarter is 17% compared to last quarter 26%. So how should I expect tax rate will be in the third quarter, fourth quarter, or next year?

Colin Sung

Well, for the next few quarters, our tax rate probably in the range around 15% to 18%.

Tian Hou - C.E. Unterberg Towbin

So, the other issue is you will continue to grow the business through organic growth and acquisitions? So, can you just elaborate on acquisitions?

Michael Li

First of all, the Linktone's growth for the past few years is almost 100% achieved through organic growth. With the policy changes and with the landscape changes, we do see some potential, but the company needs to make the right strategic acquisition in complementary products, our revenue mix and also as well as to our services.

Tian Hou - C.E. Unterberg Towbin

Are you currently talking with some acquisition targets?

Michael Li

We have been evaluating our targets starting in the second quarter of this year. That's an ongoing process.

Tian Hou - C.E. Unterberg Towbin

Okay. That concludes my questions.

Operator

Our next question comes from Wallace Chung - Credit Suisse.

Wallace Chung - Credit Suisse

Hi, Michael and Colin.

Michael Li

Hi, Wallace.

Wallace Chung - Credit Suisse

Actually two questions. Firstly is based on your first quarter guidance, it implies around 20% to 25% quarter-on-quarter decline. It sounds already slightly better than your peers. But given the fact that your peers actually have some acquisition impact, that means if you [inaudible] several of these, the sequential decline expense is much higher. Can you give us more highlights of why you expect your decline is actually less than some of your peers?

Second question is, if we just simply add back your interest income and other income divided by the diluted EPS, actually we get around $0.03 per ADS. That means if you give us guidance $0.02 that means maybe your operating level, you expect a lot, am I correct?

Colin Sung

We believe we will be positive on the operation level, probably around maybe single digits, 1% to 2% operating margin. As far as the less decrease or less impact compared to our peers -- because our peers, as you pointed out correctly, some of those revenue contributions they have recently is coming from acquisitions. As far as Linktone, we have a more diversified channel and we do believe our organization’s scale, I mean, organization on selling, operations have a better main focus and a better execution for the past month.

By saying so, going forward Linktone needs to maintain the focus, maintain the execution to continue to grow our product and services with our diversified and also our newly acquired channels. That's why we believe our impact of the policy will be little bit less than our peers.

Him Tiem Foo

In fact that I think that Linktone actually should be one of the companies that will feel the most impact of the new policies in Q3 because we have larger revenues coming from SMS. But I've seen that through the diversification, with the new development of new applications we can manage that, maybe control the revenue.

Wallace Chung - Credit Suisse

Well, maybe if you don't mind, this is a final question, if the fourth quarter environment is still fairly more difficult should we expect that because Linktone management still wants to create shareholder value, they achieved further cost savings?

Colin Sung

It's always our company's point of view to create value for shareholders. So, as we said earlier, we need to have a right cost mixture and the cost structure to support the corresponding revenue and continue to deliver the results and the ultimate shareholder value.

Wallace Chung - Credit Suisse

So, you would cut cost further?

Colin Sung

Yes. In order to maintain the profitability, yes.

Wallace Chung - Credit Suisse

Thank you very much.

Operator

Our next question comes from Mark Slashowler – Jay Hawk China Fund. Please go ahead.

Mark Slashowler – Jay Hawk China Fund

Hi, guys. I guess just in terms of what I have heard, it sounds like the negative impact of all of the policy changes should cause a bottoming out in the business, probably in the fourth quarter, is that accurate?

Michael Li

Linktone, we saw most of the impact we are having in Q3, but like we mentioned earlier before, that might be for the definition of finding users, for example for WAP, there are still four months of definition for finding users. But as we have a lesser percentage of revenues coming from WAP so we should see a bigger impact in Q3 because the new policies almost excluded for SMS, for MMS, already in Q3.

Mark Slashowler – Jay Hawk China Fund

So, can we start to look for sequential growth beginning in the fourth quarter?

Michael Li

At this stage, it is a little bit too early. For this the revenue growth in Q4. As Michael said earlier, we believe that our major impact will be absorbed in Q3. There might be some residual impact in Q4, but we will have to wait to see what the final policy changes with the mobile operators decide what to do in the next phase.

Mark Slashowler – Jay Hawk China Fund

Given your ability to maintain profitability during this time, and your longer term positive outlook, a comment and question here. Why would you wait 12 to 18 months to complete your share repurchase? Just following up on the previous question about shareholder value, it seems given the strong cash position, having plenty of cash for acquisitions or what not, that it would be best for all of us as shareholders to buy back as much stock as cheaply as possible as quickly as possible.

Michael Li

As you know, Mark, the shareholder repurchase was August 7, and by the legal counsel advice, the company is better to start the repurchasing once the window opens, which is the second day after announcing the results today. That is just a legal issue.

Mark Slashowler – Jay Hawk China Fund

Well, I would encourage you to start buying when that window opens, and buy as much as you can. Thanks a lot.

Operator

Our next question comes from Wendy Wong - Solution Securities.

Wendy Wong - Solution Securities

Thanks for taking my question. I have just one short question. Your reported guidance implies 25% revenue decline, so could you give us a breakdown of your sequential decline in each business line?

Michael Li

Companies do not give any particular guidance on each particular product at this stage, Wendy.

Wendy Wong - Solution Securities

It seems that in the second quarter, your SMS revenue declined by 12% while your MMS revenue increased by 77%. So, my understanding of the double confirmation products is that each will have their equal impact on both SMS and MMS, am I correct?

Michael Li

That’s correct. The MMS increase for us in second quarter is due to certain promotional and the marketing efforts in the early stage of Q2. We do see a sudden decline already in the month of June in the MMS revenue due to the policy implementation.

Wendy Wong - Solution Securities

The policy changing regarding the WAP then, the shortening of the inactive from Q4 will also affect WAP revenue?

Michael Li

First of all, as far as the revenue mix, and the Linktone still has a very small percentage of revenue coming from WAP. Also the policy, you just mentioned, shorten to four months, so the major impact come to WAP revenue in our peer group and ourselves, probably we will we see some impact in late Q3 or early Q4.

Wendy Wong - Solution Securities

Thank you. That concludes my questions.

Michael Li

Thank you.

Operator

Our next question comes from Patrick Lin - Primarius Capital. Please go ahead.

Michael Li

Hi Patrick.

Patrick Lin - Primarius Capital

Hi guys. Good job here on navigating all the stuff in the press release. Wanted to just find out, what's your current plan with regard to investor contacts; I know usually you guys go to conferences in the US and so on, in terms of the next quarter or so.

Michael Li

We are preliminary planning as we are planning to attend a couple of the conference in the States. One is the Roth Capital and I believe the other one is either JP Morgan and Morgan Stanley. Currently, we do not have a definite schedule made up yet and that we will make the schedule in the next week.

Patrick Lin - Primarius Capital

Okay, great. Can you give a little bit more color in terms of some of the things you are working on, particularly on the television side? You talked about mobile advertising. I know for competitive reasons, you can't give too much detail, but just to give investors an idea why you guys are so confident about the future growth opportunity of the company?

Colin Sung

Yes. If you look at our other markets, like the Japanese market, the mobile advertisement or mobile commerce maybe accounts for more than 10% compared to some of the leading competitors in the Japanese market, they have 16% of their revenues coming from mobile advertisement.

So that's why we believe that in this market, there is a huge potential for a company like Linktone to grow the revenues in this area. But if you are talking about mobile advertisement and mobile commerce, we believe that the best way to do it is through data mining. So, we did some projects focused on the database marketing. We will see the revenue potentials in the next few quarters.

Patrick Lin - Primarius Capital

And on the television programs?

Michael Li

Quite a bit of programs in China; there are three layers of TV programs, TV stations. The first top layer is free TV, the second layer is satellite TVs, and some of the provincial TV stations, and the third layer is provisional or city level service stations.

We have done a lot of promotion through our partnership with satellite TV stations before. Right now that is starting from the last quarter, we have started these kind of partnerships or marketing with the provincial and city level TV stations.

Patrick Lin - Primarius Capital

So, are these mostly promotional stuff or are you actually working on some proprietary content? I am a little bit confused.

Michael Li

Some of those program, it is proprietary such as Channel Young cooperation, we do partnership with them to produce our own program such as gaming, chat rooms and also interactive TV for sponsors through IVR services and SMS services. More and more with the know-how and with the SP, we believe that's the channel that we would be more to a local level in, from a provincial to a local level to cooperate more closely beyond the advertising model.

Patrick Lin - Primarius Capital

Great. Thank you.

Michael Li

Thank you.

Operator

Our next question comes from William Bean with Deutsche Bank . Please go ahead.

Colin Sung

Hi William.

William Bean - Deutsche Bank

Hi, just had a couple of more follow-ups. You talked a little about MMS through the quarter and into June. Could you just give us a sense of what happened on Java Gaming as well?

Colin Sung

Well, Java you know, we acquired earlier in this year, we acquired Ojava, which is a publisher, CP as well as SP. They did contribute and also with our internal Java team, our basically Java revenue was able to almost a 100%, double our revenue in the Q2 versus Q1.

William Bean - Deutsche Bank

Can you give us a sense of why? Some of the other guys got cut in half down 50% in the same quarter, what was giving you the tailwind there?

Michael Li

I guess quality and quantity of work, and also the focus.

William Bean - Deutsche Bank

Congratulations on that. Just in terms of IVR, could you give us a sense of what happened there?

Michael Li

Seasonally IVR is always stable when it comes to revenue contribution. However, IVR is the one least impacted by the recent policy. So our marketing effort was able to shift in the latter part of Q2 to promote IVR and the ringback services.

William Bean - Deutsche Bank

Caller ringback tones, finally?

Colin Sung

This is the same category, yes.

William Bean - Deutsche Bank

Basically you were pushing MMS in the beginning of the quarter and then you switched over to IVR and caller ringback in the end?

Colin Sung

Well, that's one way to look at it, yes.

Michael Li

We adjusted our strategies according to the market policies from China Mobile and also according to the market conditions, demand.

William Bean - Deutsche Bank

Did you continue to do a lot of promotion on the TV side, in terms of TV ads?

Michael Li

Since the announcement of the new policy in the late May or early June, makes the company able to scale back certain of those promotions and the marketing effort. As we mentioned earlier, that we closely monitor the efficiency of each promotional activity and here we think that we might lose money; we cut that off.

William Bean - Deutsche Bank

What's your schedule in terms of earn outs for your acquisitions like Ojava? I believe they are two years, so you still have a way to go, right?

Michael Li

In the Q2, we started negotiations with Ojava to shorten the overall period and the Company will make an announcement in the near future to announce the progress of the negotiation.

William Bean - Deutsche Bank

Why you are doing that?

Michael Li

Doing what, shorten the period?

William Bean - Deutsche Bank

Shortening the period?

Michael Li

Well, I think in the first step is a price issue. Second, we believe Ojava is the one main growth area in the 2.5G business. For the company, we'd like to grow the area organically and also we want to maintain the focus by shortening the earn-out period. With the recent policies, we are protecting our company interest as well as try to lower our risk.

William Bean - Deutsche Bank

Okay, I understand. Thanks, guys.

Michael Li

Thank you.

Operator

Our next question comes from the line of Safa Rashtchy, please go ahead.

Paul Bieber – Piper Jaffray

Two quick housekeeping questions. I think you mentioned this on the call, but what were the shares outstanding at the end of the quarter, not just weighted shares outstanding?

Colin Sung

25 million roughly.

Paul Bieber – Piper Jaffray

Can you just give the breakdown by carrier again? I think you did that on the call as well.

Colin Sung

The carrier breakdown is 13% for China Netcom and Telecom. 8% for Unicom and 77% for Mobile.

Paul Bieber – Piper Jaffray

Okay, thank you.

Operator

Mr. Li, at this time, there are no further questions. Please continue with your presentation.

Michael Li

Okay, thank you all for your questions and for participating in today's call. We began 2006 with a well-defined vision and a clear strategy of how to take Linktone to the next level and our first half results have proven that our efforts are making an impact.

We are confident that despite certain challenges that our industry is facing in the near-term, our knowledge, commitment and the foresight into the wireless market will allow us to remain a long-term leader in this high growth industry.

Brandi Piacente

Thank you everyone for joining us. This concludes today's teleconference for our second quarter 2006 financial results. The management team will be in the United States participating in several financial conferences coming up in the fall, we look forward to seeing many of you then. Please contact us if you do have any additional questions. Thanks again for joining us.

Operator

Ladies and gentlemen, this does conclude the Linktone second quarter 2006 earnings conference call. You may now disconnect and thank you for using AT&T Teleconferencing.

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