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Linktone Ltd. (NASDAQ:LTON)

Q1 2007 Earnings Call

May 24, 2007 8:00 pm ET

Executives

Brandi Piacente - The Piacente Group

Michael Li - Chief Executive Officer

Colin Sung - Chief Financial Officer, Director

Analysts

Tian Hou - Unterberg Tobin

Ming Zhao - Susquehanna Financial Group

Eddie Leung - Deutsche Bank

Jason P. Tsai - Montgomery & Company

Patrick Lin - Primarius Capital

Michael Olson - Piper Jaffray

James Lee - WR Hambrecht+Co.

John Schwartz - Arvest Asset Management

Presentation

Operator

Good day, everyone, and welcome to the Linktone first quarter 2007 financial results conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Brandi Piacente. Please go ahead.

Brandi Piacente

Thank you 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 first quarter ended March 31, 2007. Michael will begin today’s call with a review of the quarterly results and operations. Colin will then review our income statement balance sheet for the first quarter and provide our business outlook. After that, we will open the call up for your 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 turn the call over to Mr. Michael Li, Linktone's Chief Executive Officer, for a summary of Linktone's business and operational results for the first quarter 2007. Michael.

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Michael Li

Thank you, Brandi and thanks to everyone on the call for joining us today. We continue to face a challenging regulatory environment in our wireless value-added service business, which has primarily caused our financial under-performance over the past several quarters. However, we are beginning to see the benefits of the investment we are making in our cross-media strategy. Our cross-media strategy is to invest in key media partnerships and assets that, when coupled with Linktone's established leadership and expertise in wireless interactive entertainment will be fundamental to our transition to the next stage of Linktone's evolution.

To capitalize on these opportunities, we are undergoing a fundamental company build-out that will take quarters. By focusing on the development of new and traditional media channels while using our core wireless platform to reach a broader audience, we believe there’s a great opportunity for Linktone in China’s new media space.

Also, we have a strong balance sheet to support the implementation of our initiative. In order to help you track our progress, we will discuss certain milestones to watch for that will help you gauge our activities.

As these examples show, this is an optimistic time for Linktone as we continue to make positive strides in China’s booming television and advertising market. Our focus is on the development of new and traditional media channels while using our core wireless platform to reach a broader audience.

Advertising spending in China continues to be an exceptional growth story, with total advertising expenditures driving over 20% in 2006 from 2005, with no signs of slowing in 2007.

The Chinese advertising market ranked third worldwide and will soon pass Japan as the second-largest advertising market. Over the past five years, China’s ad spending has grown in the high teens each year and has increased as a percentage of GDP. Strong growth is expected at least through 2010 and spending will continue to grow as a percentage of GDP.

A number of key factors are driving this growth. The 2008 Beijing Olympics and 2010 World Expo, more liberal trade policies through the WTO, strong economic disposable income and consumption numbers and a full scale rollout of 3G wireless standard in China, to name a few.

As such, the market for new and traditional media is tremendous. China’s traditional media market, such as TV and print, continues to show strong growth and remains the most widely used ad medium in China. Compared to markets like the U.S., the TV and media is still relatively young in China. The growth outlook is very healthy, even as new media like the Internet accelerates more rapidly. Although the Internet reaches only 10% of the Chinese population, TV now reaches 96%, so it makes sense for us to pursue these advertising mediums aggressively.

The new media are those still in its infancy. The market growth is much faster than traditional media and by leveraging our platform such as the wireless portal, we are able to reap the benefits of both types of media channels.

Linktone fully intends to participate in the growth of China’s media and advertising industry through the build-up of our cross-media strategy. We believe that building our wireless value-added services with new and traditional media creates enormous cross-spending opportunities and further diversifies our revenue stream.

Although modest, we recorded advertising services revenue growth to $600,000 for the first quarter, compared with $300,000 in the fourth quarter of 2006 and $0 a year ago, prior to our entry into the advertising market. For the first quarter of 2007, our reach to consumers through satellite TVs, such as QTV and Travel TV, were approximately 200 million viewers in 23 unique packages and 20 advertisers.

TV signals reached approximately 14% of the general population in 2006 and 15% at March 31, 2007. We are targeting 300 million viewers and 80 advertisers by brand in total by December 31, 2007.

Now, let me summarize the results of our wireless non-media advertising product areas.

SMS revenues were $7.1 million, up from $6.4 million in the previous quarter to 50% of total gross revenues.

Revenues from our 2.5G product, MMS, wireless application protocol, or WAP, and Java totaled $2 million compared to $2.8 million in the previous quarter. Decreases in MMS and WAP revenue were offset by a strong increase in Java revenues of 150% from the previous quarter, due to its enhanced product portfolio and effective marketing promotion after the reorganization between our original Java team and the team we acquired from Ojava.

Audio-related revenues, IVR and CRBT, increased slightly to $4.3 million compared to $4.1 million in the fourth quarter.

During the fourth quarter, we established a cooperative agreement with Shanghai Media Group’s new media service subsidiary, Shanghai Dong Fang Long New Media Corporation Limited (DFL), providing them interactive WVAS services for selected television and radio stations and the related Internet portals under the Shanghai Media Group umbrella. Under the contract, DFL is committed to provide a range of content and resources from Shanghai Media Group to Linktone. This is a good example of our efforts to broaden our reach into the China entertainment market by establishing strategic partnerships with key media brands.

Linktone has a strong balance sheet, including cash and cash equivalents, as well as short-term investments available for sale, of $48.4 million at March 31, 2007. We also have well-established relationships with leading entertainment and media content providers, such as MTV, Sony, EMI, and BMG. Using our partnerships and new media entertainment assets to build upon our solid wireless foundation, we are confident in our ability to drive value to our shareholders through our cross-media strategy.

Finally, a recent development that I am pleased to announce is our appointment of a wireless and Internet veteran, Allan Kwan, to our Board of Directors effective May 14th. Mr. Kwan is a venture partner on behalf of Oak Investment Partners, where he consults on investment opportunities and portfolio company operations in Asia. Prior to joining Oak, Kwan served in various executive roles at Yahoo! spanning six years. He is a great addition to our Board and succeeds Larry Wong, who has resigned from the Board due to other commitments. Mr. Wong has been part of Linktone since its IPO and has been a crucial asset in helping Linktone through its various stages of growth as a public company. We thank Mr. Wong for his service and wish him all the best.

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

Colin Sung

Thanks, Michael, and thank you to everyone on today’s call. Before I summarize the financial results of the quarter, I would like to provide some insight into two key areas of focus as Chief Financial Officer of Linktone.

First, our main objective is to continue to manage Linktone's financial resources with tight control and continue to focus on extracting efficiency out of the existing resources. Several quarters ago, we implemented a series of cut-backs in the business and I want to emphasize to our shareholders that this continues to be an ongoing process and one that I spend a significant amount of time managing.

Second, our wireless business continues to be the building blocks of our business and our greatest asset as an interactive media company. Our priorities are still to maintain this business at a critical mass and continue to drive its profitability.

Now, a breakdown of our financial results for the first quarter 2007: Linktone's first quarter gross revenue was $14.2 million, slightly under our guidance of $14.5 million to $15.5 million, and up slightly from $14 million for the fourth quarter of 2006.

Revenues for the first quarter related to services offered to China Netcom and China Telecom, China Unicom, and China Mobile customers represent 21%, 11% and 62% of total revenue, compared to 14%, 11%, and 71% respectively in the fourth quarter of 2006, reflecting a diversified revenue stream.

Linktone's gross margin for this quarter was 44.2% of net revenue, or gross revenue minus business tax, compared with 62.5% for the fourth quarter of 2006 and 61% for the first quarter of 2006. The sequential decrease was due to costs in connection with being the exclusive advertising agent for Qinghai Satellite Television and acquisition costs related to the cooperation project with Shanghai Dong Fang Long New Media Company Limited.

The corresponding revenue from this project, since it was at the initial phase, was still low in the first quarter of 2007 compared with the related costs.

Operating loss was 30% of net revenue, compared with operating loss of 0.6% for the fourth quarter of 2006 and operating margin of 10% in the first quarter 2006. The sequential decrease was primarily related to costs for our new media investment and reduced WVAS revenue generation from the company’s promotional activities and the adverse impact of increasing competition and mobile policies.

Operating expenses totaled $10.1 million, compared with $8.5 million in the fourth quarter of 2006 and $11.3 million for the first quarter of 2006. The sequential increase was primarily attributed to increased promotion spending, spending via our satellite TV channels for our WVAS services.

Selling and marketing expenses were $5.6 million compared with $4.7 million for the fourth quarter 2006 and $5.3 million for the first quarter of 2006. The sequential increase was due to high costs related to promotional expenses and marketing initiatives during the spring festival and school holidays in China.

Product development expenses were $1.5 million, equivalent to $1.5 million for the fourth quarter of 2006 and compared to $2.3 million for the first quarter of 2006. These expenses remained unchanged sequentially due to management's continued effort to control headcounts and expenses.

Other general and administrative expenses were $2.9 million, compared with $2.3 million for the fourth quarter of 2006 and $3.7 million for the first quarter of 2006. The sequential increase was primarily due to consulting fees related to our cross-media initiative and an increase in provision for doubtful accounts receivable.

Income tax benefit was $0.3 million for the first quarter of 2007, compared with $0.1 million for the fourth quarter of 2006 and a tax expense of $0.6 million for the first quarter of 2006. The income tax benefit for the first quarter related to the recognition of deferred tax assets from net operating losses incurred by certain affiliated companies of Linktone for the quarter which will be utilized to offset taxable income in future quarters.

GAAP net loss was $3.4 million, compared with net income of $0.4 million in the fourth quarter of 2006 and $2.3 million in the first quarter of 2006.

GAAP net loss per fully diluted American Depositary Share (NYSE:ADS) was $0.14, beating our guidance for the quarter, which included the impact of the new accounting standard FIN-48 of $120,000. This compared with net income per fully diluted ADS of $0.02 for the fourth quarter of 2006 and $0.09 for the first quarter of 2006.

Non-GAAP losses was $2.6 million, compared with net income of $0.8 million in the fourth quarter of 2006 and $3.5 million in the first quarter of 2006.

Non-GAAP losses per fully diluted ADS was $0.13, compared with non-GAAP net income of $0.03 in the fourth quarter of 2006 and $0.10 in the first quarter of 2006.

You will find a reconciliation of GAAP financial measures to non-GAAP financial measures in our press release and financial statement on our first 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 for maturity, totaling $48.4 million at March 31, 2007, compared to $52.5 million at year-end 2006. In the first quarter, net cash outflow from operations was $3.9 million, mainly for cash paid for cross-media strategy investment.

As of March 31, 2007, the number of weighted average ADS outstanding was 23.9 million, unchanged from year-end 2006.

Days sales outstanding improved to 107 days at March 31, 2007, compared with 142 days at December 31, 2006.

Finally, our business outlook for the second quarter: we currently expect gross revenue to be approximately $13 million to $14 million for the quarter ending June 30, 2007. The company anticipates GAAP net loss in the second quarter of 2007 to be approximately $0.13 to $0.15 per fully diluted ADS, with growth in revenue expected from advertising.

We continue to expect to invest in new media partnerships. In addition, because of the continued rollout of MRI, mobile operator policy and regulations, as well as an anticipated increase in fees to mobile operators beginning in the current quarter, we expect to operate at a net loss for the next few quarters.

At this stage, we would like to open the floor to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions)

The first question comes from Tian Hou with Unterberg Tobin.

Tian Hou - Unterberg Tobin

I have a couple of questions. The first one is how much more capital outflow do you expect to happen in Q2, Q3, Q4? Then I will ask the second question.

Colin Sung

The net cash outflow for the coming quarters, we are expecting to be around $3 million to $4 million.

Tian Hou - Unterberg Tobin

Okay, so for the next three quarters, each quarter I should expect $3 million to $4 million?

Colin Sung

$3 million to $4 million net cash outflow.

Tian Hou - Unterberg Tobin

Each quarter, right?

Colin Sung

Yes, in Q2 and Q3.

Tian Hou - Unterberg Tobin

Okay. The second question will be gross margin; is it possible for you to break down the wireless and advertising?

Colin Sung

Yes, the WVAS in the region, around 55% to 60% for WVAS. The advertising services revenue, due to the initial investment and costs up-front, we spent in the near quarters, at least for the next few quarters, is in the range of 40% to 45%.

Tian Hou - Unterberg Tobin

Okay. So the gross margin, do you expect the second quarter, third quarter, going forward to improve gradually or stay where it is?

Colin Sung

We are expecting the gross margin will be improving over the next few quarters at a gradual pace from Q2 to Q3, and we will see a little bit more improvement by the year-end.

Tian Hou - Unterberg Tobin

Okay, that’s good. Thank you. That’s it.

Operator

Your next question comes from Ming Zhao with SIG.

Ming Zhao - Susquehanna Financial Group

Good morning. First question is if I look at your cross-media strategy, partnering with TV especially, how much of your WVAS revenue in the Q1 comes from these interactive programs?

Colin Sung

In Q1, so far the partnership we have is in the single digits as far as the percentage goes in total revenue. Again, because of the contractual agreement, we do not disclose specifics.

Ming Zhao - Susquehanna Financial Group

I guess the reason why I am asking is I understand the situation for your non-TV related revenue growth for the quarter, is it just like single digit down?

Colin Sung

In overall WVAS, yes, it is single digit down compared to Q4 of 2006, yes.

Ming Zhao - Susquehanna Financial Group

Okay, can you help me understand how much this portion could go up to in the future? Is it going to be very significant? It seems like this is a more stable revenue, but it did not pick up yet. Is my understanding right?

Colin Sung

Are you talking about the WVAS in total or are you talking about particularly only TV-related WVAS?

Ming Zhao - Susquehanna Financial Group

No, I’m talking about TV-related WVAS.

Colin Sung

As far as we are making key investments in those key partnerships, we like to hope as the month goes by, especially coming to the summer months of 2007, we will see some changes, i.e. the pick-up in the revenue stream in the coming Q2 and also in Q3 as well.

Ming Zhao - Susquehanna Financial Group

Okay and my last question is on your advertising business. Help me understand; you basically do some partnerships with one subsidiary of the TV stations, and then that agent starts to get advertising revenue. So was that advertising revenue there before you do the partnership? Or is this just some new advertising revenue?

Michael Li

In Linktone's case, for the affiliate, this is a brand new revenue stream for us related to the advertising services. It was not there before.

Ming Zhao - Susquehanna Financial Group

Yes, but for the TV stations, is that new revenue or old revenue?

Michael Li

It is for the current stage. The revenue stream they were able to generate before was relatively very small and through the partnership, through our cross-media platform we are able to generate substantial revenue from the starting point. We would like to see revenue grow steadily in the coming months.

Ming Zhao - Susquehanna Financial Group

I guess what I don’t understand is, is that advertising revenue just a small portion of the TV station’s entire pie? Is that right? Or do you just get some certain timeslots to do the advertising?

Colin Sung

Currently, as we disclosed in the previous quarter Linktone, through the affiliates, we have the exclusive right to sell all the advertising space for their satellite TV, excluding the news network.

Michael Li

Also, our advertising revenues are not just coming from one TV station. Actually, our cross-media strategy related with our partnership with several Shanghai TV stations here in China, not just a -- maybe at this stage that --

Colin Sung

But the majority is coming from --

Michael Li

The majority is coming from a certain satellite TV station, but our strategy is actually based on our partnership with several satellite TV stations, not just satellite TV stations but it also includes local TV stations.

Ming Zhao - Susquehanna Financial Group

All right. Thank you.

Operator

Moving on, we’ll take a question from Eddie Leung, Deutsche Bank.

Eddie Leung - Deutsche Bank

Good morning. Could you give us a breakdown of your advertiser mix, how many of them are coming from certain particular industries? Could you also talk about when you negotiate with advertisers, do you see any advertising campaigns related to the Olympics coming in yet or not?

Colin Sung

Could you ask the last question one more time, please?

Eddie Leung - Deutsche Bank

It’s about Olympic advertising -- do you see any Olympic-related ads coming in yet?

Colin Sung

Okay, let me answer the last question first. Related to advertising of the Olympics, currently some of those advertisers do have certain sponsorship for the Olympics, and also Linktone is also working on certain vendors to do some promotional event related to the Olympics in the second-half of this year.

In answer to the first question regarding the mix of the advertisers, most of the advertising, currently half is related to consumers, such as health food, juice, for example, cosmetics, shampoo. So I would say the majority is probably related to those kinds of merchandising companies.

Eddie Leung - Deutsche Bank

Great, and my last question is, is there any advertising based on -- was there any advertising generated from your wireless portals in the first quarter, and what is the outlook for that?

Colin Sung

Right now, it is relatively very small in the wireless advertising, but in bundling with our platform such as we wireless, WAP portal, and traditional media as well as our new media, we are able to do a promotional event, such as Jack Daniels in the first quarter. I think that promotional event just wrapped up last week, if I’m not mistaken. Through that, we are able to generate both for the traditional media as well as new media for the advertising dollar.

Eddie Leung - Deutsche Bank

So basically, you sell to your advertisers as a package, a bundling package instead of individual inventory?

Colin Sung

That is in our plan and it is our goal as well.

Michael Li

That is why that our advertising strategy is a little bit different from our peers. We are not selling our wireless portals advertising space only. We are, just like you said, we bundle these wireless and Internet and other new media channels with our traditional media to sell a package or consumer reach to the advertisers. We think in this way we can leverage the traditional media power to build out new media advertising revenue.

Eddie Leung - Deutsche Bank

Right, I do see a demand there. Okay, sounds good. Thank you.

Operator

Your next question comes from Jason Tsai from Montgomery & Company.

Jason P. Tsai - Montgomery & Company

Good morning over there, guys. Just a few quick questions here; first of all, can you talk a little bit about what you anticipate the revenue split to be between traditional wireless value added services and advertising, say looking out into 2008?

Colin Sung

We will see an accelerated growth in the advertising service revenue in the second-half of this year and looking forward to 2008, we believe our revenue mix from non-WVAS probably looks around 30% to 40% in the total revenue mix.

Jason P. Tsai - Montgomery & Company

Okay, great and then, with the gross margins for the advertising, you said about 40% to 45% but I suspect that that is, you’ve got a lot of costs up front. When should we see an expected ramp in the gross margins for advertising and when should we see that gross margin level reach a normalized level?

Colin Sung

I think that Tian asked me that question earlier. Our response to that is we are looking for an improving of the gross margin for the next few quarters and then we will see a break-even scenario as far as the bottom line goes related to advertising services by year-end, and then we show a profitability in Q1 of 2008.

Jason P. Tsai - Montgomery & Company

So what is your target for kind of a normalized gross margin level after all the costs have been taken out?

Colin Sung

You are asking for forward guidance beyond Q4 now, Jason. I think I answered that question earlier, so --

Jason P. Tsai - Montgomery & Company

Okay. All right, well, thanks a lot, guys.

Operator

Moving on, the next question comes from Patrick Lin.

Patrick Lin - Primarius Capital

Good morning, guys. Thanks for doing this earlier.

Colin Sung

You’re welcome.

Patrick Lin - Primarius Capital

First, congratulations on getting Allan on the Board. I think that’s a great coup and I think he will be a great value-add for you guys.

Colin Sung

Thank you.

Patrick Lin - Primarius Capital

The second thing is I wanted to find out a little bit more about how you guys are selling the advertisement. I know you gave some examples earlier but can you give some examples in terms of are you doing a lot of small deals, are you doing larger deals? Are you having to expand sales force? Could you tell us a little bit more about how you are generating revenue?

Michael Li

I’ll just give you one specific example. You know the recent NYSE listing company, Acorn Television, ATV? ATV is one of our advertisers so far. Beside Acorn, we also have Seven Star, the Hong Kong listed company, as well as another company, [inaudible]. So they are looking at our channels, looking at our platform to promote their merchandise. In a way, for the interactive side, both for the wireless as well as the new media, we are able to attract the advertiser even with a relative low rating at each page. But when the program picks up, when the viewership increases, we believe the revenue will pick up as well.

Patrick Lin - Primarius Capital

So right now, how does it look in terms of the inventory that you have and how much you guys are able to sell? What’s the constraint here? Is it the demand side or the supply side?

Michael Li

It is more towards the demand side at this stage because again, when it comes to traditional media, viewership and audience still play a major part, and we discover so far based on a major partnership with key media, we are still only in the low teens for the coverage, so we need to improve viewership as well increase the household in order to pick up more major brands to advertise.

Patrick Lin - Primarius Capital

Great, and then for your investors and potential customers outside the China area, I’m wondering -- can you guys put some of these programs or examples on your website so we can see what the interactions look like?

Michael Li

We will take that as notice. We will do so.

Patrick Lin - Primarius Capital

Okay, that would be great. And then just finally, what is your plan in terms of possibly meeting with investors in the U.S. in the next one to two quarters?

Michael Li

We will look at the schedule and also we are working with our IR, Brandi, to see what is the availability in the coming months.

Patrick Lin - Primarius Capital

Great, thanks a lot, guys.

Operator

The next question comes from Mike Olson with Piper Jaffray.

Michael Olson - Piper Jaffray

Good morning. I think previously you talked about spending $15 million on growing the cross-media platform in ’07. Do you still expect that we are going to be in that $15 million range, or will it be more or less?

Michael Li

I beg your pardon? You said $15 million is -- yes, that is still on track as total investment for this year.

Michael Olson - Piper Jaffray

That’s still on track for the total for this year?

Michael Li

Yes.

Michael Olson - Piper Jaffray

Okay, and on the WVAS side, do you think -- are you going to be impacted by the changes at China Mobile that one of your competitors talked about earlier this week? Are you seeing China Mobile competing with you with in-house WVAS offerings?

Colin Sung

I think to us, we still see some minor impact but as far as the revenue impact in total, we probably will not see anything significant in Linktone's case. Because as far as we know, for the past two quarters Linktone has been the most impacted related to the WVAS policies over the past few quarters.

Michael Li

Yes, as you know, in the past few quarters, the major impact from the carrier’s policies actually is mostly on SMS, and Linktone's major revenue is SMS. That’s why we are [inaudible] to make it the most in this industry the past quarter. From what we can see, in the next few quarters the new policies will be more on the WAP and Java side, so in this sense we see less impact than our competitors.

Colin Sung

Yes, maybe the only impact will be limiting our growth related to those two service areas.

Michael Olson - Piper Jaffray

Okay, that’s good to know. Thanks a lot.

Operator

(Operator Instructions) We have a question from James Lee with WR Hambrecht.

James Lee - WR Hambrecht+Co.

Good morning. A quick question here; can we just elaborate a little bit more about the deal with Shanghai Media Group? Can you talk about that a little bit more? Exactly how many programs are you guys involved with? Which television station or which radio station? If you could provide some additional color, that would be very helpful.

Colin Sung

I would like to, unfortunately the contract we signed with the SMG, we are not allowed to disclose any specifics at this time. We are still working with SMG. We started the partnership in Q1 of this year. When we have a more proven partnership and also with more services we can provide and then we are able to provide more details. But at this stage, due to the contractual limitations, we are not able to do so.

James Lee - WR Hambrecht+Co.

Colin, can you give us a better sense of what kind of agreement this is financially in terms of whether you are paying up front for this particular deal, or there’s a minimum guarantee or any sort of revenue sharing? Any color you can give there would be so helpful.

Colin Sung

James, I would really love to share that with you but when we issued the press release, as well as when we have the conference call, those statements we are making is approved by SMG, so that is all we can allow to be disclosed at this stage.

James Lee - WR Hambrecht+Co.

Lastly, regarding guidance for the second quarter, can you just comment about the trends by business segment a little bit? Looking at SMS, WAP and all the business segments?

Colin Sung

We give guidance relatively compared to Q1. We still see a slight decrease or flat related to the 2G services. As far as 2.5G, we may see a moderate pick-up but the advertising service revenue will see quite a growth in the revenue.

James Lee - WR Hambrecht+Co.

Okay, great, thank you, Colin.

Operator

This question comes from John Schwartz, Arvest Asset Management.

John Schwartz - Arvest Asset Management

Just a couple of quick questions; I just want to make sure that I understood when you were talking earlier about gross margins in WVAS and advertising. Your overall gross margins were 44% this quarter. The ranges I heard you say were 55% to 60% for WVAS and 40% to 45% for advertising. That does not really get you to an overall 44%.

Colin Sung

When I say 40% to 45%, I mean overall margins 40% to 45%. The gross margin for the WVAS is 55% to 60%.

John Schwartz - Arvest Asset Management

Okay, and margins for advertising?

Colin Sung

Would be a loss, a gross loss until at least the late second half of 2007.

John Schwartz - Arvest Asset Management

Can you quantify that gross loss in advertising? I guess I could probably back into it with the numbers you gave, but --

Colin Sung

You can back into it. I don’t have that number right now.

John Schwartz - Arvest Asset Management

Okay, that’s fine. I can back into it. And then, are you able to break out, as far as the incremental cross-media spending goes in Q1, how much was spent sort of incremental advertising of your WVAS services versus incremental investment to drive advertising revenues?

Colin Sung

You are looking for the breakdown of each category, right?

John Schwartz - Arvest Asset Management

Yes.

Colin Sung

I believe in our financial statement in the press release, I think we disclosed that in the breakdown in the revenue segment. If you look in our press release -- let me just --

John Schwartz - Arvest Asset Management

I’m not talking about revenue segments. I’m talking about your incremental spending.

Colin Sung

You mean the cost investment side, right? At this stage, we do not disclose any specifics. With the coming quarters, we may choose to disclose that, each specific, but at the current stage we do not disclose that.

John Schwartz - Arvest Asset Management

Okay, and then just finally, can you just talk about how you are thinking about the ROI from your incremental cross-media spending this year? You’ve said last quarter and this quarter that you see spending $15 million this year on that investment. How are you thinking about the ROI for that investment?

Colin Sung

We believe the ROI related to the investment we are making this year, and obviously this year would be overall total at a loss for the whole complete year. As far as the investment we are making, we believe we may be able to recapture or recuperate in the next two to three years.

John Schwartz - Arvest Asset Management

Okay, so you are thinking you’d get the $15 million back within two to three years?

Colin Sung

This is a basic, pure forward-looking statement here -- yes, that’s what we believe so.

John Schwartz - Arvest Asset Management

Okay, but you have sort of thought that process through to the point that you are convinced that there is a very attractive ROI to these investments?

Colin Sung

Based on where we make the investment, when we calculate the ROI as well as the expectation of the revenue and the bottom line, that is what look at right now.

John Schwartz - Arvest Asset Management

Okay, great. Thanks a lot, guys.

Michael Li

Thank you for your questions and for participating in today’s call. We are just beginning to execute on our cross-media strategy, which we are confident will propel Linktone for future growth in China’s new media place. This is a period of great opportunity and we appreciate your interest in Linktone. Thanks again.

Brandi Piacente

Okay, that concludes the call today, everyone. If you have any additional questions, management does have some availability after the call to answer investor calls, so please let us know. Thank you.

Operator

That concludes today’s conference. Thank you for your participation.

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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