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Linktone Ltd. (NASDAQ:LTON)

Q4 2006 Earnings Call

March 8, 2007 8:00 am ET

Executives

Brandi Piacente - The Piacente Group

Michael Li - Chief Executive Officer, Chief Operating Officer

Colin Sung - Chief Financial Officer

Analysts

Wendy Huang - Evolution Securities

Eddie Leung - Deutsche Bank

James Lee - WR Hambrecht+Co

Wallace Cheung - Credit Suisse

Dick Wei - JP Morgan

Patrick Lin - Primarius Capital

Tian X. Hou - C.E. Unterberg, Towbin

Jason Tsai - Montgomery & Company

Chang Qiu - Forun Technology Research

Presentation

Operator

Good day, everyone and welcome to the Linktone fourth quarter and full year 2006 earnings financial results conference call. Today’s conference is being recorded. At this time, I will turn the conference over to Ms. Brandi Piacente. Please go ahead, Madam.

Brandi Piacente

Thank you and welcome to Linktone's quarterly conference call. With me here today are Mr. Michael Li, Chief Executive Office, and Mr. Colin Sung, Chief Financial Officer. Earlier today we announced our financial results for the fourth quarter and year ended December 31, 2006. Michael will begin today’s call with a review of the quarter and year-end results and a summary of Linktone's strategy for 2007. Colin will then review our income statement and balance sheet for the fourth quarter and provide our business outlook for the first quarter of 2007. After that, we will 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 would like to introduce Michael Li, Linktone's Chief Executive Officer, for a summary of Linktone's business and operational results for the fourth quarter and year ended December 31, 2006 and 2007 strategy. Michael.

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Michael Li

Thank you, Brandi, and thanks to everyone on the call for joining us today. Our results for the fourth quarter reflected the impact of a continuing challenging regulatory environment for the wireless service providers that have resulted in increased operating costs and declining margins industry-wide.

As a result of our earlier cost-cutting measures, the company recorded net income of $0.4 million, or $0.02 per fully diluted ADS, notwithstanding disappointing revenues of $14 million in the fourth quarter. Our gross revenues of $14 million were below our previous guidance of $16 million to $17 million for the fourth quarter.

Full year revenues totaled $79.8 million, an 8% increase from $73.6 million in 2005.

U.S. GAAP net income was $0.4 million, or $0.02 per fully diluted ADS for the quarter ended December 31, 2006, compared with $0.04 in the third quarter of 2006 and $0.05 in the fourth quarter of 2005.

Non-GAAP net income was $0.8 million, or $0.03 per fully diluted ADS, for the fourth quarter of 2006.

12-month GAAP net income was $6.8 million or $0.26 per fully diluted ADS, compared with GAAP net income of $12.4 million, or $0.45 per fully diluted ADS in 2005.

Now, let me provide an overview of our wireless product areas.

SMS revenues declined to $6.4 million from $10.3 million in the previous quarter, primarily as a result of changes in mobile operators’ policies that were implemented beginning in July, 2006.

Revenues from our 2.5G products, MMS, wireless application protocol or WAP, and Java increased slightly to $2.8 million from $2.7 million in the previous quarter. MMS revenues increased slightly from the third quarter. Java revenues declined slightly and WAP revenues were flat from the previous quarter.

Audio-related revenues, IVR and CRBT, declined from $6.3 million in the third quarter to $4.1 million in the fourth quarter, due primarily to reduction in promotional activities.

Despite the disappointing result in the fourth quarter and the continuing industry-wide pressure resulting from the mobile operators’ policies, we believe that we have made progress on several fronts that position the company for long-term growth and inherent value for our shareholders.

Nearly a year ago, we shared with you a plan that we called “Taking Linktone to the Next Level”. In 2006, that plan called for actions to focus more clearly on the core business, increased efficiencies in all aspects of the business and focus on developing additional promising business lines.

In 2006, we executed on this strategy. We took aggressive action to bring our operating costs down and created greater efficiencies across all departments within the company.

Although none of us could have anticipated the increased regulations that emerged in the second-half of 2006 and so profoundly impacted the entire industry, Linktone, compared with many of our competitors, was better prepared in this sense to weaken the downward pressure that has resulted.

In 2007, we expect the pressure in the wireless space will continue, as the application of the mobile operators’ policies continues and with the anticipated increase in revenue sharing fees from mobile operators, such as China Unicom.

At the same time, while we were reducing costs in our wireless business, we began to invest in key media partnerships and assets that we believe when coupled with Linktone's established leadership and expertise in wireless interactive entertainment will be fundamental to the transaction to the next level in Linktone's evolution.

These investments include: an exclusive partnership with Hainan Satellite, Travel Channel China, providing interactive wireless value-added services for all its television programs. In addition, Linktone will provide product development, technical support, as well as 24-hour customer service support for Hainan Satellite; and the strategic agreement with the Chinese Youth League Internet Film and Television Center, the CYL, to create a new company to provide advertising agency services. Linktone will have exclusive rights to sell advertising for Qinghai Satellite Television.

We are currently working on the pipeline for additional cross-media partnerships and we will be able to provide more details in the coming months.

Since its inception, Linktone has built a reputation as the leader in providing the wireless bridge between old and new media. With successes in interactive programming for shows such as Super Girl and others. As consumers are increasingly seeking entertainment that reaches them through all outlets, whether through their cell phone, television set or iPod, Linktone is in a unique position to capitalize on these trends and deliver enhanced value-added services and integrate product offerings in the high growth areas of interactive services advertising in the mobile media through the strengths of its platform and best-of-breed relationships we have already established with leading entertainment and broadcast content providers.

Today, our cross-media partners’ viewer demographics are very strong and combined with our existing core competencies and other key partnerships, Linktone today can penetrate a large group of households in China, providing us with a strategic entry point to build our advertising revenue based on our cross-media strategy.

In 2007, we will deepen and broaden our reach into the China entertainment market with increased investment in the acquisition or establishment of strategic partnerships and equity investment with broadcasting, print and other media.

In addition, we will invest our resources in developing new products and services that leverage the strengths of these partnerships and assets with the expertise we have developed over the years, delivering interactive new media entertainment services. At the same time, we will continue to search for revenue generating opportunities, both within China and internationally.

As Colin will explain in more detail in a moment, our investment in the future has cost money and we anticipate that in the near-term, we will invest a further significant amount of financial and other resources to execute on this long-term strategy. We expect to invest approximately $15 million in building cross-media platforms and distribution initiatives in 2007 to further develop the company’s interactive wireless cross-media strategy.

While we expect this investment to result in losses for the company over the next two to three quarters, the management team, Board and I believe strongly that this strategy is one that will create significant long-term growth and value to our shareholders. The new media space comprised of cross-media services, advertising and mobile media, continues to grow as China’s consumers and consumers worldwide increasingly are seeking out entertainment and quality content in all of its forms; television, the Internet, et cetera.

Linktone, with a strong balance sheet, established leadership in the wireless space, and more importantly, strong relationships with leading entertainment and media content providers, is uniquely positioned to leverage these opportunities.

With that said, I would like to now turn the call over to Colin Sung for a more in-depth review of Linktone's 2006 financial results and some insight into our expectations for the first quarter and 2007.

Colin Sung

Thanks, Michael, and thank you to everyone on today’s call. Linktone's fourth quarter gross revenue was $14 million, below our previous guidance of $16 million to $17 million. Fourth quarter revenues were impacted by the continuing rollout of operator policies and increased marketing costs associated with attracting new acquisitions.

Gross revenue for 2006 was $79.8 million, compared with $73.6 million in 2005. Revenues for the fourth quarter related to services offered to China Netcom, China Telecom and China Mobile customers represent 14%, 11%, and 71% of total revenue, compared with 16%, 10%, and 72% respectively in the prior quarter.

In the fourth quarter 2006, the company recorded advertising service revenue of $0.3 million compared with $0 million in the third quarter of 2006 and fourth quarter of 2005, reflecting the company’s initiative in the second-half of 2006 for cross-media strategies.

Linktone's gross margin for this quarter was 62.5% of net revenue -- that is gross revenue minus business tax, compared with 61% for the third quarter of 2006 and 58% for the fourth quarter of 2005.

Operating margin was negative 1% of net revenue compared with 4% in the third quarter of 2006 and 7% in the fourth quarter of 2005.

Fourth quarter operating expenses were $8.5 million compared to $10.8 million in the third quarter and $10 million in the fourth 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 structures.

Our fourth quarter net income under GAAP was $0.4 million from $1 million for the third quarter. Linktone's net margin was 3% in the fourth quarter compared to 5% in the prior quarter.

GAAP earnings per fully diluted ADS was $0.02, in line with guidance.

Adjusted net income in the fourth quarter was $0.8 million, or $0.03 per fully diluted ADS. This compared with adjusted net income in the third quarter of 2006 of $1.4 million or $0.05 per fully diluted ADS, and adjusted net income of $1.9 million or $0.07 per fully diluted ADS for the fourth quarter 2005.

GAAP earnings per fully diluted ADS for the 2006 year was $0.26. Adjusted net income for 2006 was $8.3 million, or $0.32 per fully diluted ADS. This compared with adjusted net income in 2005 of $14.5 million, or $0.53 per fully diluted ADS.

You will find a reconciliation of GAAP financial measures to non-GAAP financial measures in our press release and financial statement on our fourth 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 investment held to maturity totaling $52.5 million compared to $46.9 million at the end of the prior quarter. In the fourth quarter, we generated positive cash flow from operations of $5.1 million.

As of December 31, 2006, the number of weighted average ADS outstanding was $23.9 million compared with $24.2 million for the previous quarter.

At December 31, 2006, days sales outstanding were 142 days compared with 126 days at September 30, 2006.

Now, I would like to give you an update with regard to the new $20 million share repurchasing program that was approved by the shareholders in August, 2006. In August, 2006, the company shareholders approved a new stock repurchase program, authorizing Linktone to repurchase up to $20 million worth of its issue in outstanding ADS in open market transactions on the NASDAQ global market.

In the fourth quarter, the company has repurchased approximately 282,000 ADS for an aggregate purchase amount of $1.4 million. As of December 31, 2006, Linktone had 23.9 million ADS outstanding.

Finally, our business outlook for the next quarter. This outlook takes into account other factors, the anticipated impact of continued mobile operator policy initiatives 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 Renminbi exchange rate fluctuation from current level and no adjustment from the adoption of FIN 48, Accounting for Uncertainty in Income Taxes.

As Michael mentioned earlier, in the first few quarters of 2007, we expect to continue to invest in new media assets and partnerships. In addition, due to the continued rollout of the mobile operator policies, as well as an anticipated increase in revenue-sharing fees to mobile operators beginning in the second quarter 2007, we expect to operate at a net loss for the next two to three quarters. We expect to return to earnings growth towards the end of the year.

Linktone anticipates gross revenue for the first quarter to be in the range of $14.5 to $15.5 million. Linktone expects a GAAP net loss of approximately $0.13 to $0.15 per fully diluted ADS in the first quarter 2007.

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

Question-and-Answer Session

Operator

(Operator Instructions)

We will go to Wendy Huang with Evolution Securities.

Wendy Huang - Evolution Securities

Thanks for taking my questions. I have two questions. First, could you give me a breakdown for the next quarter’s revenue guidance? Now you have guided next quarter’s revenue will slightly go up. Is that you expect this quarter will be -- and starting from next quarter, the second will becoming better?

My second question is, you started to generate advertising revenue in the fourth quarter. What revenue growth do you expect from this segment in 2007? Thanks.

Colin Sung

The first quarter guidance for the $14.5 million to $15.5 million of top line revenue is approximately relatively flat in the wireless revenue, and we expect to generate around $1 million advertising service revenue in Q1.

And to your second question regarding the advertising service revenue, we expect a slow start in early 2007 and we will see an accelerated revenue growth towards the later part of 2007.

Wendy Huang - Evolution Securities

Could you give me more color on the SMS and the MMS revenue growth for the next quarter?

Colin Sung

Due to the policy and also the uncertainty of the mobile policy, and also related to certain revenue-sharing potential changes, our forecast at the current stage, we still forecast relatively flat for Q1. We will give you more clear guidance or indication when we have the full quarter concluded in March.

Operator

We will go next to Eddie Leung with Deutsche Bank.

Eddie Leung - Deutsche Bank

Can you talk about the pipeline of your TV production business in the first-half of ’07?

Colin Sung

Our strategy to partner with the traditional media, including mostly the satellite TV stations and local TV stations, these kinds of partnerships will include the major satellite TV stations in China, almost around 40 satellite stations in total. Also, the local TV stations will partner mostly through a couple of channels; one through the content providers distribution channel, another from the advertising agencies. Also, we partnered together with local TV stations directly.

Michael Li

In addition to that, we also will partner with the radio in the previous announcement we made already, as well as the local radio broadcasting stations around the city and the provincial level as well.

Eddie Leung - Deutsche Bank

In these partnerships, do you have to pay an up-front fee to your partners?

Michael Li

The partnership or the investment structure is in different forms. Some of them, yes, we do pay an up-front fee to guarantee the service contract over the years.

Operator

We’ll go next to James Lee with WR Hambrecht.

James Lee - WR Hambrecht+Co

Good morning. This is Sean calling in for James Lee. I just have a quick question; what is the percentage of the revenue coming from carrier channels now and what percentage of revenue do you expect to come from carriers by the end of ’07?

Colin Sung

Currently, it depends on how you define the channel. Are you talking about pure wireless or are you talking about pure cross-media platform, if I may ask that way?

James Lee - WR Hambrecht+Co

Carrier-dependent channels.

Colin Sung

Carrier-dependent channels -- right now, Linktone is always a pioneer, develop a different channel -- in January, our wireless revenue is almost I would say coming from the channel -- almost 95% is coming from the different channels related to the carriers and about 5% is coming from non-carrier related channels.

Michael Li

Also, if you want to break down the channels, the wireless, more than half of the wireless WVS revenue is coming from non-carrier resources.

Operator

We will go next to Wallace Cheung with Credit Suisse.

Wallace Cheung - Credit Suisse

Just a quick question; I wanted to learn a little bit how to build the model on the advertising services side. Should we assume that as long as the advertising revenue is going up, that will also incur quite a substantial amount of costs, which will be recognized in the cost of revenue?

Colin Sung

As I mentioned earlier, some of those partnerships or the relationship is due to certain different forms of payment. The reason we are recording so small in the next two to three quarters is due to the payment we paid for earlier for this kind of advertising over the duration of the year. Before the maturing of the cross-media revenue, we will have a loss from the beginning. We hope and we expect the revenue will be accelerated in the later part of this year, and we expect to continue our revenue growth in the later part of 2007.

Wallace Cheung - Credit Suisse

Right, just a follow-up question; so what I assume what you are investing is on the TV advertising spaces, the primetime advertising spaces?

Colin Sung

This is only one form of the partnership. As I mentioned, and Michael earlier, we have different forms. In some of those, it could be equity investment. Some of those could be exclusive and some could be strategic. It depends on what level the channel, and we have three tiers, the levels Michael mentioned earlier. One is the nationwide satellite station, one is provincial carrier station, and also the lowest is the local level radio and television station. So all kinds of investment we are in consideration. Some of those are already signed, some already in the pipeline and some of those we are in the negotiation stage.

Michael Li

Although, our strategy in the future is to monetize the mobile phones and how to leverage or take advantage of the integration of this new media with the traditional media to target China’s advertising space.

Wallace Cheung - Credit Suisse

My final question is so we should simply assume that there will be a fixed cost close to depreciation expenses, that will be amortized in the next few quarters time, but your revenue pick-up will take time because you are building your sales force, your customer base, things like that? So that is why we will see the costs earlier, then we will have more revenue in the future?

Michael Li

Yes, correct.

Colin Sung

Your understanding is correct.

Operator

We will go next to Dick Wei with JP Morgan.

Dick Wei - JP Morgan

I have a couple of questions on the media side. As you remember, I am quite interested in that side of the business. First, in the fourth quarter, can you explain what was the advertising service revenue? Mainly, where was that coming from, please?

Colin Sung

In the fourth quarter, mainly it is coming from the satellite station advertising agency, or advertising service revenue. This constitutes almost 90% of that part of the revenue.

Dick Wei - JP Morgan

Was that from the programs that you provide to the satellite TV station, or was it mainly you act as an agency?

Colin Sung

Both, in both. There are two different revenue or expenditures in Q4. One is, you are correct, it is related to the programming, content production itself. However, that particular investment, that program itself with satellite TV is a two-year investment on that one. We do not see the immediate benefit in Q4. The other side is exclusive advertising services or advertising agency revenue.

Dick Wei - JP Morgan

And that is with Qinghai Satellite TV station?

Colin Sung

The majority part, yes.

Michael Li

In China, less than 5% of the total advertising revenue is coming from new media. Our strategy to tap into the advertising market is to combine or integrate the new media with the traditional media to take advantage of 95% of the market. So that is why we need to combine these mobile phones media with traditional media like TV and radio.

Dick Wei - JP Morgan

I think that is a very positive strategy. May I also ask you about your agreement with Qinghai Satellite TV station? Is that exclusively for all the time slots for the satellite TV station? How much do you have to pay or how long is the contract going to be?

Colin Sung

At this time, we disclosed we have an exclusive advertising selling rights for Qinghai satellite television. That is correct, for the whole satellite station itself. However, at this time, we will disclose more when we more finalize the agreement in the coming weeks.

Dick Wei - JP Morgan

Is it like one year or 10 years, or is it going to be like $1 million fee or $10 million fee? You will not disclose at this time?

Colin Sung

Well, at this time, it is about a longer five to 10 years term. We would like to renew that up-front, so that is the reason we still try to finalize the final term.

Dick Wei - JP Morgan

Sorry for taking so much time, but I remember Qinghai Satellite TV station has some issues with the Star TV, also tried to form a partnership with them and there are some regulatory issues with satellite TV. Do you expect any regulatory issues?

Colin Sung

Right now, we have signed an exclusive only for advertising agency services for the time being. The issue you raised is not part of the issue we have any concern about right now. Of course, it is all subject to Chinese regulatory impact as well. We will fully disclose in our 20-F filing for the year-end.

Michael Li

Also, to take advantage of the traditional media like TV advertising, we are not just going to sign these kind of advertising agreements with Qinghai. We also have this kind of agreement with several other TV stations and radio stations also, including magazines and also some newspapers. So we just want to take advantage of traditional media to tap into the enterprise advertising budget.

Dick Wei - JP Morgan

My last question is what kind of expertise or have you been deferring expertise in terms of program production?

Colin Sung

Currently, we have formed a joint partnership with the experts in those fields, so that is with learning and developing our own resources as well.

Dick Wei - JP Morgan

Great, and I asked too many questions, but I am finished. I just wanted to hear more of the media related developments for Linktone.

Colin Sung

One quick note, since you were asking the question, in early April, we will probably organize a certain road show to the U.S. as well as in Hong Kong or Southeast Asia to explain more our strategy and our vision and also our financial forecast during those road shows.

Operator

We will take our next question from Patrick Lin with Primarius Capital.

Patrick Lin - Primarius Capital

Hi, guys, and congrats to Colin on being a new board member here.

Colin Sung

Thank you.

Patrick Lin - Primarius Capital

In terms of some of the commentary you have on the press release, you talk about the favorable demographics that you are able to address now, particularly in the TV and advertising side. I was wondering if you could give some background in terms of what exactly is your current addressable market in terms of the audience and what does the demographic look like, since you are talking favorably about it?

Colin Sung

You know, as far as Linktone over the past few years, our main concentration or demographic would be the young adult, between 15 to 25 or 30 age group. By attaching to the traditional media with the cross-platform, we are able to tap into a larger household, including a demographic group to a larger scale. In order to expand our revenue base to those age groups which we were not tapping into before.

Patrick Lin - Primarius Capital

So in terms of the number of people for these TV shows that you can actually address, is there any way to quantify what it looks like for last quarter, what the first half or even in the next year or two might look like in terms of the numbers?

Colin Sung

Well, the current announcement we have regarding the exclusivity for the advertising for Qinghai Satellite itself, we are already looking to the hundreds of millions audience already. With the upcoming conclusion of certain investment or equity investment of strategic partnerships, we would like to be able to tap in to more of those households as well.

But specific quantity itself right now, we are able to discuss more once we finalize those transactions.

Patrick Lin - Primarius Capital

I think that would be a really key data for investors to understand, given your market cap is less than $50 million right now here, net of cash, and as your addressable market gets to become a larger number, people can look to Focus Media and how many people they can address versus what you can address and try to make their own assessments on what it takes to get there. That would be great and I will look forward to hearing more, I guess, on your early April road show.

Can you also talk about on this guidance that you gave, on the GAAP guidance, I think it was a little confusing because of some of the accounting laws I think are still unclear, but non-GAAP, what does that look like in terms of fiscal guidance?

Colin Sung

Non-GAAP, it is probably maybe a couple of cents, maybe $0.02 to $0.03 difference between the GAAP and non-GAAP, and related to accounting issue of FIN 48, it is because the new installment by the SEC related to the income tax, basically you have to take some uncertainty over the five-year period, taking at the quarter. You pay the reasonable estimation. So still, some companies are still resisting to that particular FIN 48, but at the current stage, we have to take all the policy and uncertainty into account. We definitely can send you a publication regarding FIN 48 if you would like to read that.

Patrick Lin - Primarius Capital

Actually, what I would be more interested in is for some of the shows that you guys are doing in terms of TV shows and/or the cross promotion, from an investor standpoint, it would be real nice if you could actually have some clips of that on your website, so that the non-China based investors can get a glimpse of what some of the local people might be seeing.

Colin Sung

I will take your advice or suggestion. We would like to bring a DVD along, if next time we are in the States, to explain to our investors. Definitely we will bring along a demo to show to the audience.

Patrick Lin - Primarius Capital

That sounds great. We’ll look forward to it. Thanks.

Operator

We’ll go next to Tian Hou with Unterberg, Towbin.

Tian X. Hou - C.E. Unterberg, Towbin

Most of my questions were asked by other callers. My question is really currently you have a Shandong Satellite TV, Hainan TV, Qinghai TV -- the Qinghai TV cooperation, you have announced it, right? Okay, so would you please just repeat it one more time what kind of cooperation format do you have with each of them, and what is your role in this advanced facility as defined in that cooperation agreement?

Colin Sung

First of all, Hainan Satellite, we have the exclusive right for all WVS revenue, also as well as technical support and customer services related to WVS, part of a cooperation.

Shandong, we announced earlier in late 2006, is a JV format with the Shandong subisidiary, which that particular JV we have the right not only to the WVS but we have certain production rights, content distribution, as well as the programming associated with that particular JV. So this is on top of what we have on the WVS.

As far as Qinghai, for the time being, we only disclosed we have the exclusive advertising agency rights, which is for all programming of Qinghai Satellite TV. As Michael mentioned earlier, we were able to announce some of the pipeline we currently are working on, and some of those are getting close to signed, but by the time comes, I would say we will be probably able to announce some of those before we go on the road show in April.

Michael Li

Yes, but our target is to get a deepened market share of China’s TV viewership.

Colin Sung

Viewership as far as the traditional media is concerned.

Tian X. Hou - C.E. Unterberg, Towbin

So when you talk about advertising, are those advertising purely TV advertising, or does it also include mobile phone advertising?

Colin Sung

It is for the -- mobile advertising is early stage. Some of those programs we are in negotiations or discussions with certain advertisers. Advertisers are definitely interested. However, there is a certain policy and regulation we have to resolve first before we are able to provide that platform.

As far as Linktone is concerned, we do have that ready, to provide services to the advertisers, but due to the policy itself, we need to work out a reasonable solution to do that. We believe that will be another focus toward later 2007.

Tian X. Hou - C.E. Unterberg, Towbin

In terms of your operating expense, and you did mention that you guys are going to strictly put in some measurements to control your expense. Can you just give us some specifics in which way you are going to control expense?

Colin Sung

If we have to break down the revenue to a WVS and non-WVS segment of the revenue, definitely related to costs, we have to maintain a positive margin on the WVS side for the segment. Our continuing investment or expenditure will be incurred mostly or especially the most resources for cash expenditure will be on the cross-media platform or cross-media strategy.

Tian X. Hou - C.E. Unterberg, Towbin

So are you going to have any lay-offs?

Colin Sung

I think over the past six to seven months, the company was in a continually monitoring cost control mode. We do look at what is the justification for the cost of the HR related expenses related to our current WVS revenue. Over the next coming weeks, we will probably still be in a cost-controlling, cost reduction in the wireless side.

Tian X. Hou - C.E. Unterberg, Towbin

So for the production development and selling the market, do you expect expense to go up?

Colin Sung

Well, this probably positive development probably will go up, only related to our cross-media platform, not related to any of our wireless services.

Tian X. Hou - C.E. Unterberg, Towbin

How about sales and marketing?

Colin Sung

Well, sales and marketing, as you know, is the efficiency or the return is getting very slim. It is very expensive to acquire new users, especially with a new policy in store related to the subscription model. So that expense has to be justified to the return. So it has to be largely in control to justify the revenue as well as the bottom line.

Tian X. Hou - C.E. Unterberg, Towbin

Okay, that sounds good. That is all of my questions. Thank you.

Operator

We will go next to Jason Tsai of Montgomery & Company.

Jason Tsai - Montgomery & Company

Good morning to you guys, or I guess good evening. A couple of quick questions here. On the advertising side, when you guys did $300,000 in revenues last quarter, about $1 million expected for the March quarter, when is that really going to become a 10% portion of revenue going forward, consistently?

Colin Sung

I would say it is probably into the later, the second-half of 2007.

Jason Tsai - Montgomery & Company

Okay. And then, you had also talked about margins for the advertising side, how there was some initial investment and that was going to probably create lower gross margin as some of those fixed costs are worked through. What is your expectation for short-term versus long-term gross margin on advertising, relative to the low 60% that you guys are at now?

Operator

This is the conference operator. Please stand by while we reconnect our speakers.

Colin Sung

Hello?

Brandi Piacente

Jason?

Jason Tsai - Montgomery & Company

Can you guys hear me?

Colin Sung

Yes, sorry, Jason.

Brandi Piacente

We had a slight power issue. Go ahead, please.

Jason Tsai - Montgomery & Company

No problem. Just talking about gross margin for advertising. We had thought that there was some fixed costs that you had to work through over the short-term, but can you give us a sense as to what you expect gross margins over the short-term and long-term for advertising, relative to where your current gross margin levels are of the low 60%?

Colin Sung

Right now, the best estimation we can give regarding the revenue related to advertising services is around 60 to 55 margin, gross margin.

Jason Tsai - Montgomery & Company

Do you expect the operating margin for advertising to be slightly better than wireless value-added service?

Colin Sung

Not in the first year of the operation.

Jason Tsai - Montgomery & Company

Okay, fair enough. Last question here, you guys are obviously spending a fair bit of money here over the next two to three quarters, investing in cross-marketing, cross-development. Any sort of new businesses that you expect to emerge? Any kind of significant changes to your operating model over the next let’s call it 12 months?

Colin Sung

Well, the idea, as Michael mentioned earlier, is Linktone's long-term business strategy is trying to merge the old media with the new media. If there are any catch words we would like to use, it will be the cross-media platform, which combined with the traditional media, with the wireless technology, as well as the Internet.

Michael Li

Before that, almost all of our revenues coming from consumers directly. In the future, we can expect some revenues coming from enterprise, what we call enterprise revenues.

Operator

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

Chang Qiu - Forun Technology Research

Good evening, Colin and Michael. Hello?

Colin Sung

Yes, we’re here.

Chang Qiu - Forun Technology Research

[inaudible]

Colin Sung

We can barely hear you, Chang. Could you -- your voice is coming in and out.

Chang Qiu - Forun Technology Research

Okay, I would like to ask Jason’s question. For the long-term, what is your expectation for the gross margin and also the profit margin for your advertising revenue stream?

Colin Sung

Are you asking what is the gross margin for the advertising revenue? I’m sorry. I can barely hear you.

Chang Qiu - Forun Technology Research

Right, for longer-term.

Colin Sung

I cannot hear you.

Chang Qiu - Forun Technology Research

For the longer term, what is your expectation for the advertising revenue stream?

Brandi Piacente

Chang, could you just repeat the question? I think the phone line is cutting out.

Chang Qiu - Forun Technology Research

Okay.

Colin Sung

That’s better.

Chang Qiu - Forun Technology Research

I would like to ask, what is the long-term gross margin and operating profit margin for the advertising revenue stream?

Colin Sung

In the long term, again, we look at the gross margin for the advertising services revenue to maintain around above 50, and then as far as the long-term net margin, we probably would be looking around maybe the 10% range.

Chang Qiu - Forun Technology Research

Okay. All right. Thank you.

Operator

That does conclude our question-and-answer session. I would like to turn the call back over to Michael Li for any additional or closing remarks.

Michael Li

Thank you all for your questions and for participating in today’s call. We began 2006 with a well-defined mission and a clear strategy of how to take Linktone to the next level. During 2006, despite significant turmoil in the industry, we took significant steps to move Linktone toward this objective. As we enter into 2007, our goal is to finish executing on these strategies with our effort clearly focused on creating long-term value and profitability for our shareholders. We look forward to reporting to you on our progress as we move forward.

Brandi Piacente

Thank you, everyone, for joining us. This concludes today’s conference call for our fourth quarter and 2006 financial results. Please feel free to contact us should you have any additional questions. Thank you.

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