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Linktone Ltd. (NASDAQ:LTON)

Q2 2009 Earnings Call

August 25, 2009 9:00 pm ET

Executives

Serena Shi - Manager of Investor Relations

Hary Tanoesoedibjo - CEO

Colin Sung - Deputy Chief Executive Officer and CFO

Analysts

Stephen Monticelli - Mosaic Investments

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Linktone Second Quarter 2009 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)

At this time, I would like to turn the conference over to Serena Shi of Investor Relations.

Serena Shi

Welcome to Linktone's second quarter 2009 conference call. With me here today; our Chief Executive Officer, Hary Tanoesoedibjo; and Deputy Chief Executive Officer, and the Financial Officer, Colin Sung. I am Serena Shi, the Manager of Investor Relations.

Earlier today, we announced our financial results for the second quarter ended June 30, 2009. Hary will begin today's call with a review of this quarter and a discussion of Linktone's strategy. Colin will review our income statement and the balance sheet for the second 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 hand the call to Hary Tanoesoedibjo, Linktone's Chief Executive Officer, for the summary of Linktone's business and operational results for the second quarter 2009.

Hary Tanoesoedibjo

We are pleased to report our third consecutive quarter of profitability despite the challenging environment. We remain petulant about controlling cost while working diligently to execute our growth strategy and strengthen our operational and financial performance. Specifically, we focus on utilizing distribution channels and developing new partnerships to deliver superior and unique content offerings.

Meanwhile, we are continuing to actively monitor the competitive landscape for strategic acquisitions and alliance opportunities. Our overseas development efforts are progressing positively. Given the large population size and the high mobile penetration ratio in Southeast Asian markets and demand for high value and performance, our business development strategy has positioned us to capitalize on the growth and expansion of potential emerging markets.

With this initiative in place and the synergy in the customer base and operating experience in the Chinese and Southeast Asian mobile services markets, I’m confident that Linktone is well positioned to develop another sizable and scalable revenue source over the long-term as we strive towards our goal of achieving sustainable healthy growth in profitability.

We were pleased to announce the addition of two new important appointments in July to further solidify the management and leadership changes we have presumably made to the company. We welcome Mr. Oerianto Guyandi, as a member of the company, and Board of Directors; and Dr. Agus Mulyanto as an Advisor to the Board. Mr. Guyandi is currently the Director of PT Media Nusantara Citra, our MNC; the largest and non-integrated media company in Indonesia as well as the Chief Financial Officer of PT Global Mediacom.

Mr. Agus Mulyanto has been the Director of MNC since 2006. He is also a member of Board of Commissioners of PT Rajawali Citra Televisi Indonesia or RCTI and PT MNC Sky Vision and TPI. These appointments are especially important and valuable as we pursue our product in China and Indonesian expansion strategies and accelerate our good prospects. We are continuing to search for additional qualified independent directors, liberal of our experience and skills to further build out our spot leadership.

Thank you and I will now turn the floor over to Colin Sung for his financial review.

Colin Sung

Linktone's second quarter gross revenue from wireless value-added services and other revenues were $18.3 million, compared with $14.8 million on the first quarter of 2009 and $14.5 million in the second quarter of 2008.

Following the termination of our partnership with Tianjin Satellite TV and Qinghai Satellite TV in the second and third quarter of 2008, our traditional media advertising revenue is now reported as discontinue operation and has been excluded from the reporting results for continued operations in both the current and the prior periods in accordance with applicable accounting standards.

SMS revenue was $10.1 million for the second quarter of 2009, compared with $5.6 million for the first quarter of 2009. SMS revenue represented 55% of gross revenue, compared with 38% for the first quarter 2009. Revenue from our [true and FG] products namely MMS, WAP, and Java totaled 0.5 million in the second quarter compared with 0.4 million in the first quarter of 2009.

Data-related services revenue for the second quarter totaled 10.6 million representing 58% of gross revenue, compared with six million or 41% for the first quarter of 2009. The sequential increase in revenue was primarily attributable to an increase in revenue from SMS services as we increase the number of strategic partnerships and content providers.

Audio-related revenue IVR and CRBT were 7.1 million in the second quarter representing 39% of total revenue, compared with 8.3 million or 56% for the first quarter of 2009. The sequential decrease was due to fewer promotional activities in the quarter, compared with active promotion during the spring festival season in the first quarter of 2009.

Now, I will briefly review our key operating benchmarks. Linktone’s gross margin for the second quarter of 2009 was 34% of net revenue or gross revenue minus business tax, compared with 35% for the first quarter of 2009 and 40% for the second quarter of 2008.

Operating profit was 1.3% of net revenue, compared with operating profits of 0.4% for the first quarter of 2009 and 2.5% in the second quarter of 2008. The sequential improvement in operating profits was due to the increase in revenue for the quarter, which grew 24% over the first quarter of 2009.

Operating expenses totaled $5.7 million, compared with $4.9 million in the first quarter of 2009 and $5.3 million in the second quarter of 2008. The sequential increase was due to higher selling, marketing, and other general and administrative expenses.

Selling and marketing expenses were $2.3 million, compared with $1.9 million for the first quarter of 2009 and $2.2 million for the second quarter of 2008. The sequential increase was due to higher spending on media buys to promote SMS services. Product development expenses were $1 million, equivalent to the first quarter and up slightly $1.7 million for the second quarter of 2008.

Other general and administrative expenses were $2.4 million, compared with $2 million for the first quarter of 2009 and $2.4 million for the second quarter of 2008. The sequential increase was primarily due to the higher professional services incurred in connection with annual reporting and filing for 2008, and severance costs paid to former officers.

GAAP net income was $0.9 million or $0.02 per fully diluted American Depositary Shares, ADS, compared with GAAP net income of $0.3 million or $0.01 per fully diluted ADS in the first quarter of 2009 and a GAAP net loss of $10.6 million or $0.26 per diluted ADS in the second quarter of 2008.

Non-GAAP net income was $0.9 million in the second quarter, compared with non-GAAP net income of $0.5 million in the first quarter of 2009 and a non-GAAP net loss of $4.4 million in the second quarter of 2008. Non-GAAP net income per fully diluted ADS was $0.02 in the second quarter, compared with a non-GAAP net income of $0.01 in the first quarter of 2009 and a non-GAAP net loss of $0.11 in the second quarter of 2008.

Now turning to the balance sheet, cash and cash equivalents as well as short-term investments available for sale, totaled $99.7 million at June 30, 2009, compared with $101 million at the end of March 31, 2009. The slight sequential decrease was primarily due to an additional loan of $1.1 million made to a related party. This new loan is secured and earns an interest of 10% per annum. Interest is payable on the loan on a quarterly basis.

Days sales outstanding, DSO, for the continuing operations, the average length of time required for the company to receive payment for services delivered, were 83 days as of the end of second quarter, compared with 109 days at the end of the first quarter of 2009.

Finally, our business outlook. For the third quarter ending September 30, 2009, we anticipate gross revenue of $18 million through $20 million. With that, we would like to open the call to questions from the audience. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Stephen Monticelli with Mosaic Investments. Please go ahead.

Stephen Monticelli - Mosaic Investments

I have two questions regarding the business. First, in your guidance for Q3, you talk about revenues of $18 million to $20 million, which would represent healthy growth versus the Q2, as well as the Q3, from a year ago. According to my notes you did 16 million on a comparable basis in Q3 of ’08. My question is this, is it fair to expect that you would be profitable at that level of revenues given your current cost structure, and presumably the absence of ongoing severance payments?

Colin Sung

At the current level, giving the guidance of $18 million to $20 million for Q3 and also comparable with the current revenue based on Q2, so far we announced, yes, the question from you regarding profitability; as a company it will be profitable even though we are not giving the guidance related to our net income yet, but at this current level company anticipate will be continued profitability going forward.

Stephen Monticelli - Mosaic Investments

My second question has to do with the market in competition. There are many companies that are your competitors both large and small; can you talk about how you see yourself positioned with respect to those competitors in the Mainland?

Colin Sung

You’re correct. There are still many competitors in our space, but relatively speaking the environment is much healthier compared to 2008. I mean healthier is the competition, the product and services is much more in a healthy competition. The Linktone strategy [as Hary] our Chairman and CEO mentioned, the company is not only focusing on domestic, but also we are looking at international landscape. The strategy or the important focus for us going forward it will be more concentrating on strategic partnership related to our services as well as the content-related services.

Stephen Monticelli - Mosaic Investments

Can you talk about why the competition is less severe?

Colin Sung

Because the carries impose of deploy, it’s all in regulation and policy right, which regulate the industry in a much more healthier environment by means of people used to be doing a lot of great area operation was limited, which in turn give us a better health for company like, a public company like Linktone and [KongZhong, such as].

Stephen Monticelli - Mosaic Investments

I have other questions, but I’ll get back in the queue.

Operator

(Operator Instructions). Management, it looks like there are no further questions. I’ll turn the conference back over to you for any closing comments you might have.

Serena Shi

Okay. Thank you, everyone for joining us. This concludes today’s teleconference of our second quarter 2009. Please contact us should you have any additional questions. Thanks again for joining us today. Bye.

Operator

Ladies and gentlemen, that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial into 303-590-3030 or 1800-406-7325 and enter the access code of 4131163 followed by the pound sign. We thank you again for your participation, and at this time you may disconnect.

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