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Linktone Ltd. (NASDAQ:LTON)

Q3 2006 Earnings Call

November 17, 2006 8:00 am ET

Executives

Brandi Piacente - IR

Michael Li - CEO

Colin Sung - CFO

Analysts

Paul Bieber - Piper Jaffray

William Bean - Deutsche Bank

Wallace Cheung - Credit Suisse

Dick Wei - JP Morgan

Ming Zhao - Susquehanna Financial Group

Tian Hou - Unterberg

Chang Qiu - Forun Technology Research

Wendy Huang - Evolution Securities

Leah Hao - Thomas Weisel Partners

Patrick Lin - Primarius Capital

Presentation

Operator

Good day, everyone, and welcome to the Linktone Q3 2006 Earnings Call. Today's conference is being recorded. At this time, I will turn the conference over to Brandi Piacente. Please go ahead.

Brandi Piacente

Thank you, operator and welcome to Linktone's quarterly conference call. With me here today are Mr. Michael Li, Chief Executive Officer; Mr. Colin Sung, Chief Financial Officer; and Mr. Edward Liu, Director of Investor Relations.

Earlier today, we announced our financial results for the third quarter ended September 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 third quarter and provide our business outlook for the fourth quarter. After that we will 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 risk and uncertainties. We do not undertake any obligation to update this forward-looking information except as required under applicable law.

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

Michael Li

Thank you, Brandi, and thanks to everyone on the call for joining us today. Today, we are pleased to report that our revenues and earnings for the third quarter exceeded our expectations. Revenue attributable to China Unicom, to Netcom and China Telecom customers accounted for 26% of the total revenues this quarter, up from 21% last quarter and 14% last year.

Let me give you a brief overview of the third quarter highlights. Our gross revenue was $19.6 million, above our previous guidance of $17.5 million to $18.5 million for the third quarter. Nine months revenues totaled $65.9 million, a 24.4 -- 24.5% increase from the same period last year, when we recorded $53 million in revenues.

US GAAP net income was $1 million or $0.04 per fully diluted ADS, above our previous guidance of $0.02 per fully diluted ADS. Non-GAAP net income reached $1.4 million or $0.05 per fully diluted ADS. Nine months GAAP net income was $6.4 million or $0.24 per fully diluted ADS compared with a GAAP net income of $11 million or $0.40 per fully diluted ADS in the same period last year.

As anticipated, our results in the third quarter reflected industry-wide policy changes that took effect in early July. Similar to our competitors, we have experienced a short-term impact for our revenues and earnings. We are confident that in the long term, these policies will create a healthier marketplace.

More importantly, we believe, Linktone is well positioned to become a top leader in this evolving and rapidly expanding market as we continue to position ourselves as one of the top wireless leaders in China by leveraging our strength in content, product and distribution.

During the third quarter, we continued to establish strategic relationships and joint ventures with leading entertainment and media providers. Strategic relationships are important to grow our business, because they not only help drive our sales and expand our consumer reach, but also are key in enhancing the Linktone brand as the leading wireless company in China.

As many of you know, Linktone is the pioneer and the leader in successfully providing wireless services to popular interactive TV programs in China. During the first half of 2006, we added four co-operative television initiatives. In the third quarter and most of recently this last months, we continued to add more of these interactive media partnerships which included branding out -- branching out to radio and advertising as well. This includes a joint venture with Shandong TV station, SDTV to operate as the exclusive wireless value-added services for SDTV, established in 1960 and reaching an audience of more than 700 million viewers. As some of you may recall, Linktone provided wireless value-added services for SDTV's successful Beautiful Shandong series and this new joint venture with them allows us to capitalize on each other's strengths.

One of the first initiatives to evolve from our closer partnership with SDTV is our partnership with Zhongbang Culture Media, an SDTV subsidiary, to co-produce China Vision, a reality television singing competition. Similar to the popular reality television series, American Idol and EuroVision, China Vision will feature a competition among the best singers from China's 12 provinces and will highlight Chinese culture. 45 episodes were broadcasted throughout mainland China, Hong Kong and Macau. In addition to providing exclusive wireless services for the show, the joint venture will also hold the right to the China Vision brand, brand name and advertising and copyrights.

In the future, our focus will include establishing co-production and a strategic investment partnership as SDTV and other satellite stations that provide platforms for expanding demand for our products and services and can deliver additional revenue opportunities through constant ownership.

Finally, last month we announced a partnership with MTV China, one of the most popular television stations for China's youth demographic, to exclusively provide our increasingly popular WAP services through China Unicom's platform. This partnership provides another example of how we are partnering with popular interactive media providers to achieve stronger penetration and demand for Linktone's products and services.

Now, let me provide an overview of various product areas. SMS revenues declined to $10.3 million from $13.1 million in the previous quarter primarily as a result of the policy changes that we are implementing in July.

Revenue from our 2.5G products, MMS, wireless application protocol or WAP and Java, decreased to $2.7 million from $7.8 million in the previous quarter. We believe that this is a short-term result of the industry policy changes that took place in July. In the long term, we continue to see significant growth potential in 2.5G services, especially WAP and Java, and expect this area of business to become a large potential revenue contributor.

Audio related revenues, IVR and CRBT grew 5% from the second quarter, due mainly to strong demand led by IVR as a result of marketing programs and enhanced content offerings. We continue to expect to see sequential growth coming from these segments.

Despite some industry growing pains, we are pleased with the progress we made in the current year and we believe our long-term outlook remains very positive. Linktone will continue to seek to extend both organically and through strategic acquisitions and joint ventures in order to grow its position as a wireless leading interactive entertainment company in China.

With that said, I would like now to turn the call to Colin Sung, CFO, for more in depth review of Linktone's third quarter financial results and our expectations for the fourth quarter.

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 third quarter gross revenues were $19.6 million, exceeding our guidance. Third quarter revenue resulted from a steady diversification across a wide variety of product areas including SMS, WAP, Java, MMS, IVR and RBT.

Revenues related to services offered to China Netcom, China Telecom, China Unicom and China Mobile customers represent 16%, 10% and 72% of total revenue respectively, compared to 13%, 8% and 77% 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 61% of net revenues or gross revenue minus business tax, compared with 63% for the second quarter of 2006 and 61% for the third quarter of 2005. As stated in our news release today, the decline was due primarily to an increase in transmission and agency costs. Operating margin was 4% of net revenue compared with 12% in the second quarter of 2006 and 19% in the third quarter of 2005.

Third quarter operating expenses were $10.8 million compared to $11.3 million in the second quarter, and $8.3 million in the third quarter of 2005. The cost reduction was primarily attributed to a reduction in headcount and other business related expenses. We continue to closely monitor our cost structure. The increase in operating expenses compared with the third quarter -- compared with the same quarter in the prior year was mainly due to higher marketing spending.

Our third quarter net income under U.S. Generally Accepted Accounting Principles, GAAP, was $1 million, from $3.1 million for the second quarter. Linktone's net margin was 5% in the third quarter compared to 14% in the prior quarter.

GAAP net -- GAAP earnings per fully diluted ADS was $0.04, exceeding our guidance. Adjusted net income in the third quarter was $1.4 million or $0.05 per fully diluted ADS. This compares with adjusted net income in the second quarter of 2006 of $3.5 million or $0.13 per fully diluted ADS, and adjusted net income of $4.6 million or $0.17 per fully diluted ADS for the third quarter of 2005.

You will find the reconciliation of GAAP financial measures to non-GAAP financial measures in our press release and the financial statement on our third 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 had cash and cash equivalents as well as short-term investments held to maturity totaling $46.9 million compared to $61.8 million at the end of the prior quarter. In the third quarter, we generated positive cash flow on operations of $1.7 million. The decrease in cash was due to investment activities related to our share buy-back program, payment for a business acquisition and pre-payment for establishing a joint venture with Chinese Youth League to produce interactive and wireless entertainment programs.

For the third quarter ending September 30, 2006 the number of weighted average ADS outstanding on a fully diluted basis was $25.8 million compared with $26.6 million for the previous quarter. At September 30th, 2006 days outstanding -- days sales outstanding was 126 days compared with 104 days at June 30th, 2006.

I would like to now give an update with regards to our new 20 million shares -- $20 million share repurchasing program that was approved by the shareholders in August. In August, the company shareholders approved a new stock repurchasing program authorizing Linktone to repurchase up to $20 million worth of its issue in outstanding ADS, in open market transaction on the NASDAQ global market. At the end of the third quarter, the Company has repurchased approximately 1.7 million ADS or approximately $8.5 million in stock under this buy-back program. At September 30, 2006 Linktone have 24.2 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 continues to anticipate impact on net income, of increased sales and marketing expenses related to Linktone's long-term growth strategy, assuming no adjustment for U.S. dollar and RMB exchange rate fluctuations on current levels. Linktone anticipates gross revenue for the fourth quarter to be in the range of $16 million to $17 million. Linktone also expect GAAP net income for the fourth quarter of approximately $0.02 to $0.03 per fully diluted ADS.

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

Question-and-Answer Session

Operator

(Operator Instructions). And we'll go first to Safa Rashtchy with Piper Jaffray.

Paul Bieber - Piper Jaffray

Hi Mike and Colin, this is Paul Bieber for Safa.

Michael Li

Hi, Paul.

Paul Bieber - Piper Jaffray

How are you? I have two questions. Can you provide an overview, how the different TV partnerships will affect the seasonality? And then secondly, when do you think the revenue will bottom out and Linktone will be able to resume revenue growth?

Michael Li

Let me ask you -- let me answer the second question first, regarding what the revenue bottoming out. With still some residual impact up on the policy changes in Q4, that's why we are giving a guidance is roughly about 15% down from the previous quarter. And at this current stage, we expect Q4 will be the bottom of the policy changes at this current stage. As far as the first question regarding seasonality of TV programs, I think the TV as you know is very popular in China. It's very hard to expect a seasonality at current stage. The viewer-ship itself, it depends up to on holidays, it's no different than the other. We expect the season itself, it will be -- majority depends on the school year, as well as a solo major holidays for the Chinese.

Paul Bieber - Piper Jaffray

And a quick housekeeping question, I didn't see it in the press release. Can you provide a breakdown of the stock-based compensation?

Michael Li

A what breakdown?

Paul Bieber - Piper Jaffray

Yes.

Michael Li

I'm sorry, I missed your question?

Paul Bieber - Piper Jaffray

Can you provide a breakdown of the stock -- how stock-based compensation is allocated between the different line items?

Michael Li

The current stock compensation charge is basically, roughly around $400,000 for the current stock compensation in this quarter.

Paul Bieber - Piper Jaffray

But can you provide how it's broken down between G&A, sales and marketing, et cetera?

Michael Li

As roughly selling and marketing is 26%, product development 20%, and general and administration is about 54%.

Paul Bieber - Piper Jaffray

Okay, thank you.

Michael Li

You're welcome.

Operator

We'll go next to William Bean with Deutsche Bank.

William Bean - Deutsche Bank

Hi, guys, just stepping back a bit, maybe you could give a sense of where you think you guys are going to be in 2008 to 2009 and sort of the steps you're thinking about to get there?

Michael Li

You're saying what the outlook for 2008/2009?

William Bean - Deutsche Bank

No, no, no, where are your thoughts on different targets? How are you thinking about long-term strategy, where you'd like to be positioned, going out a couple of years?

Colin Sung

I think that regarding the prospect in the next two or three years, we are still very confident about the wireless. I think that we can still grow the wireless business in terms of the current WAP revenues. And also that we are confident that we can grow the revenues that may be from other channels, provided maybe in other carriers, directly related revenues such as advertising or interactive media revenues.

Michael Li

As well as position the media.

William Bean - Deutsche Bank

Okay. Could you talk a little about your 2.5G business in Q3 and how you expect it to roll in Q4? I think the -- your mix is a little bit different from some of the other players, so the outcome should be a little bit different. But I'd like to have a bit of color there, thanks.

Michael Li

The 2.5G business, mainly the WAP and MMS and also the Java business, in third quarter of 2006 is quite a disappointment in our view. First of all it is due to the -- mainly the policy changes, especially on the Java, the wireless gaming side, is due to the China Mobile platform changes. So we have not achieved the goal we set up for Q3. Looking ahead for Q4, the platform is a little bit more stable and we were assuming the growth in the 2.5G business, especially in the Java gaming business.

William Bean - Deutsche Bank

Okay, thanks guys.

Michael Li

Thank you.

Operator

We will go next to Wallace Cheung with Credit Suisse.

Michael Li

Hey, Wallace.

Wallace Cheung - Credit Suisse

Hey, how are you, Michael, Colin and Edward? I actually wanted to have a couple of questions about the media strategy. So do you have a friend, like some (inaudible) with develop a joint venture with Shandong Satellite TV, and would develop some interactive wireless content? Can you elaborate a little more how can you -- should we rather say -- go through that active platform -- but how is overall execution of that joint venture, who's going to run it, and what's the product pipeline, things like that? Could you give us more highlights?

Michael Li

Could you speak up a little bit, I think your phone was cutting in and out a little bit. I did not hear the later part of the question.

Wallace Cheung - Credit Suisse

I'm so sorry. Yes, problem with my phone. I repeat again, actually can you give us a little more highlight about how the execution of this joint venture, how can you monetize, how can you develop the revenue, what's the product pipeline, things like that?

Colin Sung

I think that regarding the joint venture with Shandong Satellite TV, actually that we formed a partnership, a joint venture with Shandong TV station, which the joint venture is called Zhongbang Culture. I think that this joint venture holds exclusive partnership, exclusive rights to all the wireless application services to the satellite TV programs, and also have the right to -- like to be mentioned has brand name, the copyright of all the events for the interactive media shows.

Michael Li

The difference is -- as you know, Linktone is the pioneer in the interactive TV media partnership. The old way, or the traditional way is based on program-to-program basis, which you share in revenue or share in certain profit. The new -- the way Linktone is doing it more actively is going into exclusive partnership with media platform, which is not only on a program basis, but more a long-term basis. Not only can receive or get the revenue contribution from the wireless piece, but also we're able to generate our own content as well as general advertising revenues. And, also these kind of joint ventures that can give us a long-term partnership to co-operate with TV, satellite TV station, such as one-year contract or a couple of years' contract. So we just want to see these kind of long-term relationships there.

Wallace Cheung - Credit Suisse

So in the future whenever this joint venture going to generate any kind of wireless revenue that it would not reflect in the top line?

Michael Li

I'm sorry, repeat the question one more time, Wallace?

Wallace Cheung - Credit Suisse

So, when this joint venture generate some wireless revenue, it would not be reflected in the top line of Linktone?

Michael Li

Right now, the setup -- again even though we are keeping confidential, but we will be showing a part of this revenue on the top line revenue, both for the wireless piece as well as advertising piece as well.

Wallace Cheung - Credit Suisse

Okay, thank you. I think it's just maybe step back a little bit, Michael, can you elaborate a little more on the overall media strategy right now? So are you trying to partner with more TV stations or radio or some other kind of media? Do you have a specialty in terms of partnership?

Michael Li

Right now the partnership with media is not just related with the TV and not just related with the satellite TV. We also partner -- try to find -- resolve the partnership with local TVs and also other radio stations, the media, traditional print medias. I think that this kind of marketing program can give us consumer reach at a reasonable cost.

And, also you can see from our past quarters that almost half of our new users coming from these new media or media promotions, or media partnerships. So I think that we -- the partnership with media is one of our key strategies in terms of going forward.

Wallace Cheung - Credit Suisse

Okay. Just maybe a final question, on the revenue guidance, can you give us a little bit of color on how some of this different wireless business will change in the fourth quarter?

Michael Li

Again, as we said earlier, we still foresee some residual policy impact in the coming -- in the Q4, and that's why we guide the way we are. And some of those policy was implemented quite late in Q3, and we do not see the full impact yet. So, we are taking very conservative and a more reasonable guidance.

Wallace Cheung - Credit Suisse

But do we expect much severe pressure on business, like they say the MMS and say like WAP, things like that, especially 2.5G business?

Michael Li

We're still probably going to see overall reflection on the majority of services come to SMS, and also some residual impact on the MMS as well.

Wallace Cheung - Credit Suisse

So mainly on SMS and MMS?

Michael Li

That's current forecast, yes.

Wallace Cheung - Credit Suisse

And, the wireless related business should maybe flat a little bit?

Michael Li

Should be flat.

Wallace Cheung - Credit Suisse

Because the IVR is doing quite well in first quarter.

Colin Sung

Yes, we still think IVR is quite stable and maybe has some sequential growth in IVR, the audio related services.

Wallace Cheung - Credit Suisse

And, are you doing any kind of new promotion in fourth quarter that, I don't know, maybe media products, a few things like that, that may have a positive impact on the wireless business, as well in (inaudible)?

Michael Li

Like all the business lines, we have to closely monitor our cost structure to make sure we have the efficiency to deliver the bottom line.

Wallace Cheung - Credit Suisse

Okay. Thank you.

Michael Li

You're welcome.

Operator

We'll go next to Dick Wei with JP Morgan.

Dick Wei - JP Morgan

Hi Michael and Colin.

Michael Li

Hello.

Dick Wei - JP Morgan

Good morning. Just one question, it's a longer term strategy question. With the investments in joint ventures in radio station and TV stations, do you think in the long term you'll actually bring those investments, actually bring it up to 100% investment? Or in other words, just bring those radio stations and TV stations actually operated under Linktone. And so that those are not quite your media partner or just depending on for them to distribute your wireless content, but you actually can generate own content and have the media influence in China.

Colin Sung

I think in your question I think you answer most of the things you are asking. The whole intention is for Linktone to use these channels effectively, not only to distribute our wireless services but also to use the channel to produce our more diversified product line. And also in addition we want to generate some advertising revenue and to own certain content while we're doing this partnership.

Dick Wei - JP Morgan

For the Beijing radio station, do you think a couple of years time, you'll be 100% owning this radio station?

Colin Sung

I don't think at this stage that's the intention for the Company to own 100% agency.

Michael Li

Yes, I think that -- I did mention that we feel when we try to form partnership with traditional media. Sometimes we need to leverage the partner's strength to do this kind of strong channel experiment, right? So that's why we form these kinds of partnerships. But it's where [we said], that they might now be acquired by the partner, but just a co-partnering to explore new partnerships, new channels.

Dick Wei - JP Morgan

All right, great. That's the only question I have.

Michael Li

Dick, thank you.

Operator

We'll go next to Ming Zhao with Susquehanna Financial Group.

Ming Zhao - Susquehanna Financial Group

Thank you. Good morning, Michael and Colin.

Michael Li

Hi, Ming.

Ming Zhao - Susquehanna Financial Group

Yes, a couple of questions. The first question's on the gross margins. It seems like it's pretty well maintained, not dropping as much as expected. Can you give us some color on what future quarters -- what the future quarter will be like in terms of gross margin?

Colin Sung

As all, we are all saying, we want to maintain the gross margin in the high 50s. So let's put it this way, between 55 to 60. And we say all along before and we would like to see the margin maintain that level in the coming quarters.

Ming Zhao - Susquehanna Financial Group

Okay. The second question is, I see your goodwill increased by about $4 million, is this related to the radio investment?

Colin Sung

No, this is related to the completion of the acquisition of our Java gaming company.

Ming Zhao - Susquehanna Financial Group

Java gaming company, okay. So the investments in the Shandong TV joint venture and the [opportunity] it hasn't shown up in the balance sheet yet, is that right?

Colin Sung

Not yet.

Ming Zhao - Susquehanna Financial Group

Okay, I understand. And then also, this Beijing Central Radio Station partnership, do we see any benefit on this radio station entering 2008 Beijing Olympics?

Colin Sung

At this stage, we -- they do not have a contract exclusively right yet. Now we are basically looking ahead for the 2007 or maybe a little bit in 2008, as our part of the China channels building. And even on a more bigger scale, we are looking forward to distribute the content for the partnership to a more local level radio stations.

Ming Zhao - Susquehanna Financial Group

Okay. All right, thank you very much.

Colin Sung

Welcome.

Operator

We'll go to Tian Hou with Unterberg.

Tian Hou - Unterberg

Good quarter, Michael and Colin, Tian.

Michael Li

Thank you.

Colin Sung

Hi, Tian.

Tian Hou - Unterberg

Just a couple of questions. The one -- the first one is, as you mentioned your joint venture or partnership with TV station and radio stations, and when do you expect to see advertising revenue contribution to your top line?

Colin Sung

In this current evaluation, we may see some meaningful contribution from advertising in coming quarter. And then as far as in the long run, we will see some material contribution in the coming year.

Tian Hou - Unterberg

What do you mean by meaningful contribution?

Colin Sung

Well, it's some percentage of revenue mix, will come in as our advertising revenue.

Tian Hou - Unterberg

So, the advertising revenue is supposed to have a much higher growth margin, right?

Colin Sung

In theory, yes.

Tian Hou - Unterberg

Okay. The other one would be the tax rate and it feel your tax rate is like is really high. So how should we expect the tax rate going forward, or of Q4?

Colin Sung

I think the tax rate is between 11% to 13% for the Q4 because there's a certain reflection of a tax rebate in the prior quarter.

Tian Hou - Unterberg

Okay. I see. That's all my questions.

Colin Sung

Thank you, Tian.

Michael Li

Okay.

Operator

We'll go next to Chang Qiu with Forun Technology Research.

Chang Qiu - Forun Technology Research

Yeah. Good evening, Michael and Colin.

Michael Li

Hi, Chang.

Chang Qiu - Forun Technology Research

Yeah. One question for you. With this kind of a joint venture with the TV station or radio station, I just wonder, how much asset does the TV station and the radio station they put forward into this joint venture?

Michael Li

I think as we said earlier, when we look at these partnerships such as radio, satellite TV or TV station, we are looking at more a channel and also as well as the content and the time slot and then the regional rights or the rights they are able to provide to Linktone as part of the asset, is more looking at the intangible and for the resources for Linktone able to utilize those assets to produce interactive media programs.

Chang Qiu - Forun Technology Research

I see. But (inaudible) operation, so if somebody went to those TV station or to the radio station and then see, how much of their effort is in this joint venture program? How should we see it? They spend 5% of their effort in this joint venture program and they spend 50% effort?

Michael Li

Well, if using Shandong TV as an example, basically Linktone formed a joint venture with the Shandong TV subsidiary. In return, we have exclusive right for all wireless service provider to incorporate it in their content and TV show. So, if you ask me what is the percentage effort is all a joint effort together with the Shandong TV.

Chang Qiu - Forun Technology Research

I see, okay. So, if this merger is successful, it looks like it's going to be that way, if you want to expand this kind of a joint venture we would say other provincial TV stations or radio stations, if you go into say one extra province, how much incremental cost to you?

Colin Sung

We have to look at case-by-case study, and to see what the benefits to produce. We'll definitely have to look at ROI, our return on investment to justify these partnership or joint venture.

Michael Li

Yeah. It's case-by-case, so it all depends on what kind of resources the different partners have put in these kind of joint ventures.

Chang Qiu - Forun Technology Research

Or maybe I can ask it the other way. Because you've best investment you have one program to use your cash, your value impact, your stock, and another way is that if such joint ventures with some of the local TV stations, if you don't really put much -- put out much of cash but you can have a sizeable or considerable return and obviously you have a choice here. So, I just wonder, maybe I can ask it this way, how you choose here in this situation?

Colin Sung

As you know, we approve the buyback program for 20 million, we almost used up almost 10 million already. Either way, we do choose the continued buyback or by joint venture or strategic partnership, the ultimate goal is to build value for the shareholders. So, it is a strategic decision we have to make internally.

Chang Qiu - Forun Technology Research

Okay. So, so far with the joint venture with the Shandong TV or Beijing Radio Station, what's your impression working with those? My understanding they are more or less government owned enterprise. Are they quite enthusiastic or quite motivated or what's your characterization?

Colin Sung

(inaudible) the partnership with Shandong TV. The China Vision's has already started, like two weeks ago. It's kind of live broadcasting on a weekly time slot between I think 10 to 11 pm every night, and they are very motivated and they are very excited about this partnership with Linktone. And they are looking forward to more programs we're able to produce in the coming year.

Chang Qiu - Forun Technology Research

Okay, all right. That's great. Thanks.

Colin Sung

Thank you.

Michael Li

Thank you.

Operator

We'll go to Wendy Huang with Evolution Securities.

Wendy Huang - Evolution Securities

Hi, thanks for taking my question. I have a couple of questions. First, how do you expect the China Vision TV show affect your Q4 top-line?

Colin Sung

Okay, as far as right now, we -- again China Vision in the very first year, TV show. And we do not see any significant contribution in top-line in the Q4 for this particular TV partner -- I mean this joint venture, yet.

Wendy Huang - Evolution Securities

Then what percentage of your wireless revenue comes from the subscription based service and what percentage comes from the transaction based service?

Colin Sung

As far end of Q3 the base for transitional and subscriptions is quite evenly split. I would say probably 50-50 or a little bit higher on the transitional side.

Wendy Huang - Evolution Securities

Okay. In the third quarter your ring-back tone revenue declined 35%. Was that because of both the policy changes and pricing competition?

Michael Li

You mean, the fourth quarter?

Colin Sung

The third quarter.

Wendy Huang - Evolution Securities

No, the third quarter ring-back tones.

Colin Sung

As far as the ring-back itself, because the efficiency and also the marketing and selling expenses, we kind of scaled down in that particular services, because as you know, ring-back service has the lowest margin among all our service lines. So, in order to stretch for efficiency and cost control, we quite scaled down the promotional related to that particular product line.

Michael Li

Also in the last quarter and also in the next maybe few quarters there's few uncertainty regarding those policies or the carriers regulations, of CPs [added] attitude toward these kind of partnerships regarding the ring-back tone. So, in terms of a cost control issue, that we still control the promotion on ring-back tones.

Wendy Huang - Evolution Securities

And so did you see any price pressure obviously in this?

Colin Sung

You say price issue regarding the ring-back tone or the cost?

Wendy Huang - Evolution Securities

With ring-back tone, I mean.

Colin Sung

Pricing pressure, I would say yes, in a way the ring-back, as I said earlier, is the lowest margin amongst all our product lines. It all depends on what the return on the spending or investment related to the ring-back services. And we definitely have to choose wisely where and when to do the promotion for the ring-back.

Wendy Huang - Evolution Securities

I have the last question. Some wireless companies mentioned in their earnings calls that China Mobile and China Unicom is giving some quality services to some top service providers. They asked top 36 service providers to bid for these services. So I wonder have you involved in this bidding process or did you get any one of them?

Michael Li

Yes, I think that especially that Linktone that's because we work closely with carriers before. So for these kind of promotions or joint partnerships, we always explore the potential to work together. But in some cases, we also calculate the cost for each joint program. We make [sure] to participate if special program or not. But I think for that program mentioned, we participate but maybe we're decided to maybe not get involved (inaudible).

Wendy Huang - Evolution Securities

Okay, thank you.

Michael Li

Okay, thank you.

Operator

We'll go next to Leah Hao with Thomas Weisel Partners.

Leah Hao - Thomas Weisel Partners

Hi, good morning.

Michael Li

Hi, Leah.

Leah Hao - Thomas Weisel Partners

Hi, how are you?

Colin Sung

Doing fine.

Leah Hao - Thomas Weisel Partners

Michael and Colin? Just a quick question regarding, I was wondering if you could some granularity during Q3 and so far into Q4 in terms of your month-on-month revenue trajectory, and which months do you think your revenue will be bottom out?

Michael Li

Well, if anything I would expect in November would be the bottom month. Everyone in the market at this time expect December will see some improvement in terms of revenue prospect, so we [agree] with the view.

Leah Hao - Thomas Weisel Partners

Okay. So, is August revenue down as much as July or are we seeing some stabilization in September as well?

Colin Sung

I would say August is not that much impact. As you know, the policy was implemented in either early July or late July. So August is not a compared to a month -- all the months in Q3, is not the worst month. I think the worst month if compared to in Q3 probably September will be the hardest hit related to the policy changes.

Leah Hao - Thomas Weisel Partners

Sure. And do you -- what kind of recovery, degree of recovery, if you will, that you would expect from December?

Colin Sung

It's a very tricky question to answer.

Michael Li

Yes, at least I think that we see or we expect that the revenue will stabilize starting from next quarter. We still see it's the top period maybe next quarter, just like the third quarter this year. So, we expect to see the improvement next quarter.

Colin Sung

And our view is in line with our peers. Basically, we will see some stabilization in Q4 and then maybe see some -- maybe some potential for sequential growth in 2007.

Leah Hao - Thomas Weisel Partners

Okay, thank you.

Colin Sung

Thank you.

Michael Li

Thank you, Leah.

Operator

We'll go to Patrick Lin with Primarius Capital.

Patrick Lin - Primarius Capital

Hi there. Congratulations on the quarter, guys. I just have a great -- a few quick questions here. First of all, I want to say thanks for getting that stock buyback executed. I think shrinking the float by 2 million shares, especially as you guys recover on the EPS line, I think will be very, very accretive to all the shareholders, so I feel encouraged by that.

I wanted to just step back a little bit and ask you about the potential for the television advertising revenues. I know you hinted to the meaningful statement but maybe if we go longer term in terms of revenue mix, since you guys are a next-generation wireless company, what could the range of advertising revenues be as part of your overall business as you look out for longer term?

Michael Li

In the longer term, foreseeable we like to see non-carrier related, including advertising revenue, would be contributing in double digits of our overall revenue mix of Linktone's business.

Patrick Lin - Primarius Capital

But if you go out, one, two, three years, could that advertising peak out there or are you thinking that it could become a 20%, 30%, 40% part of your the total revenues?

Michael Li

As far as we know, it really be the short term, we have already mentioned in the Q4, we're probably will see some meaningful contributions in advertising revenue.

Patrick Lin - Primarius Capital

Okay.

Michael Li

In the longer term, it could be, as I say, and I'm not going to give a figure, particular specific figure, but yes, we do see a material or even double digit contribution by the end of next year.

Patrick Lin - Primarius Capital

Okay, great. And just in terms of some of the conferences you guys have attended in the past, do you guys have anything on the calendar year over the next 90 to 120 days?

Colin Sung

I'm sorry, one more time?

Patrick Lin - Primarius Capital

As far as Linktone management being at various investment conferences over the next 90 to 120 days, do you have anything on the calendar yet?

Michael Li

So far we do not have a definite calendar, but definitely we'll be in the 90 days range, yes.

Brandi Piacente

Patrick, it's Brandi. We're putting together the '07 calendar in December.

Patrick Lin - Primarius Capital

Great. Well, congrats you guys, and Michael and Colin, we'll look forward to your future updates.

Michael Li

Thank you.

Colin Sung

Thank you, Patrick.

Operator

And at this time we have no other questions in our queue. Mr. Li, I'll turn it back over to you for any additional or closing comments.

Michael Li

Thank you all for your attention, and for participating in today's call. We are excited about our pipeline for growth. We are confident that in spite of recent developments that will impact our industry during this year and in the near term, our knowledge, commitment and foresight into the wireless market dynamics will allow Linktone 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 third quarter 2006 financial results. Please contact us if you have any additional questions. Thanks again.

Operator

And once again, this does conclude today's conference. Thank you for your participation, you may disconnect at this time.

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