Linktone Q3 2007 Earnings Call Transcript

Linktone Ltd. (LTON)

Q3 2007 Earnings Call

November 28, 2007 9:30 am ET

Executives

Brandi Piacente - The Piacente Group

Michael Li - Chief Executive Officer

Colin Sung - Chief Financial Officer

Hary Tanoesoedibjo - Group Chief Executive Officer, Media Nusantara Citra MNC

Analysts

Jason P. Tsai - Montgomery & Co.

Mike Olson - Piper Jaffray

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Linktone third quarter 2007 results conference call. (Operator Instructions) I would now like to turn the conference over to Brandi Piacente. Please go ahead.

Brandi Piacente

Hello everyone and thank you for your patience while waiting for us to initiate the call. Welcome to Linktone's quarterly conference call. With me here today are Mr. Michael Li, Chief Executive Officer; Mr. Colin Sung, Chief Financial Officer; Mr. Edward Liu, Director of Investor Relations; and Mr. Hary Tanoesoedibjo, Group Chief Executive Officer of Media Nusantara Citra MNC.

Earlier today, or just five minutes ago, we announced our financial results -- I’m sorry, yesterday we announced our financial results for the third quarter ended September 30, 2007. Michael will begin today’s call with a review of the quarterly results and operations. Colin will then review our income statement and balance sheet for the third quarter. Harry will then highlight some of the details of our most recent announcement of a strategic investment that we announced roughly five minutes ago. 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 introduce Michael Li, Linktone's Chief Executive Officer for a summary of Linktone's business and operational results for the third quarter of 2007 strategy. Michael.

Michael Li

Thank you, Brandi and thanks to everyone on the call for joining us today. Before a review of our third quarter results, I would like to briefly discuss our most recent press release today announcing that Media Nusantara Citra MNC will purchase a controlling interest in Linktone. We are most excited about this strategic sale, which is a milestone for Linktone and its employees and something all shareholders should be proud of.

Moving on to our third quarter results, like all wireless providers in China we continue to face volatile regulatory changes and a near-term weakening market environment for wireless value-added services in China.

However, we do expect the market to begin to gradually stabilize next year. Meanwhile, Linktone is realizing certain benefits of the investment we have made in our core cross-media strategy. These initiatives are based on bundling wireless Internet and other new media channels with traditional media to sell a packaged consumer reach to the advertisers. In this way, we are leveraging traditional media power to build our new media advertising revenue.

Our advertising revenue service revenue growth of 19% for the third quarter was driven by more advertising contract [leads]. For the third quarter of 2007, our reached consumers through satellite TV, such as QTV, were approximately 205 million viewers in 24 unique strategies and 40 advertisers. We continue to target 300 million viewers and 80 advertisers by brand in total by December 1, 2007.

Now let me summarize the results of our wireless non-media advertising product area. SMS revenues were $3.5 million for the third quarter compared with $4.3 million in the previous quarter and 26% of total gross revenue.

Revenues from our 2.5G product, MMS wireless application protocol, or WAP and Java, totaled $1.2 million compared to $1.4 million in the previous quarter. Java and MMS revenues were flat quarter over quarter. The sequential decrease in WAP was due to continuing effects of China Mobile policies introduced in May 2007, including sending fee reminders to users each time they download a WAP product.

Audio related revenues, IVR and CRBT, were $5.9 million compared to $4.2 million in the second quarter.

Looking at the bottom line, we are pleased that our financial loss decreased by $0.4 million compared with the second quarter of 2007.

Linktone maintains a strong balance sheet, including cash and cash equivalents and short-term investment available for sale of $47 million at September 30, 2007.

Finally, our forecast for the fourth quarter is for gross revenue to grow sequentially to approximately $13.5 million to $14.5 million. We maintain committed to seeking the best possible opportunities and outcomes for the benefit of our shareholders, including the pursuit of potential strategic investments and logistic collaboration.

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

Colin Sung

Thanks, Michael and thank you to everyone on today’s call. Linktone's third quarter gross revenue were $13.3 million compared to $11.7 million for the second quarter of 2007 and $19.6 million for the third quarter of 2006.

Revenues for the third quarter related to service offered to Chine Netcom and China Telecom, China Unicom, and China Mobile customers represent 23%, 4%, and 53% of total revenues respectively, compared to 16%, 9%, and 59% respectively for the second quarter of 2007, reflecting a diversified revenue stream.

We are making solid progress on our revenue diversification strategy by building a scaleable platform of new and traditional media channels, including interactive television initiative and innovative advertising and promotional services.

Linktone's gross margin for the third quarter was 40% of net revenue, or gross revenues minus business tax, compared with 39% for the second quarter and 61% for the third quarter of 2006.

Operating loss was 22% of net revenue compared with operating loss of 32% for the second quarter of 2007 and operating margin of 4% in the third quarter of 2006.

Operating expenses totaled $7.9 million compared to $8 million in the second quarter of 2007 and $10.8 million for the third quarter of 2006.

Selling and marketing expenses were $3.2 million compared with $3.9 million for the second quarter 2007 and $6 million for the third quarter of 2006. The sequential decreases were due to the more efficient use of marketing expenditures on profitable initiatives which result in the better managed growth in our revenue despite a decrease in such expenses.

Product development expenses were $1.4 million compared to $1.5 million for the second quarter of 2007 and $1.8 million for the third quarter of 2006.

Other general and administrative expenses were $3.3 million, compared with $2.6 million for the second quarter of 2007 and $3 million for the third quarter of 2006. The sequential increase was primarily due to higher professional services.

GAAP net loss was $2.8 million, compared with a net loss of $3.2 million for the second quarter of 2007 and net income of $1 million in the third quarter of 2006.

GAAP net loss per fully diluted American Depositary Share, ADS, was $0.12. This compared to net loss per fully diluted ADS of $0.13 for the second quarter of 2007 and compared to net income per fully diluted ADS of $0.04 for the third quarter of 2006.

Non-GAAP net loss was $2.5 million, compared with non-GAAP net loss of $2.9 million in the second quarter of 2007 and net income of $1.4 million in the third quarter of 2006.

Non-GAAP net loss per fully diluted ADS was $0.10, compared with non-GAAP net loss of $0.12 in the second quarter of 2007 and net income of $0.05 in the third quarter of 2006.

You will find the reconciliation of GAAP financial measures to non-GAAP financial measures in our press release and third quarter 2007 financial statements, which are posted on Linktone's corporate website at www.english.linktone.com.

Now, I would like to review a few balance sheet related items. We have cash and cash equivalents and short-term investments held to maturity totaling $47.0 million at September 30, 2007, compared to $47.4 million at June 30, 2007. In the third quarter of 2007, net cash used in operations was $0.7 million. The slight decrease in cash and cash equivalents was primarily due to the payment for our exclusive advertising agency right and management fee on QTV for 2007.

As of September 30, 2007, the number of weighted average ADS outstanding was 23.9 million, which remains unchanged from 23.9 million at June 30, 2007.

Days sales outstanding were 91 days at September 30, 2007, compared with 112 days at June 30, 2007.

At this stage, I would like now to turn the call over to Mr. Hary Tanoesoedibjo, Group CEO of MNC. Hary.

Hary Tanoesoedibjo

Good morning, ladies and gentlemen. My name is Hary Tanoesoedibjo. I am the Group CEO of Media Nusantara Citra MNC. I am very pleased to be here today to present to you the strategy [inaudible] Linktone, which we believe will create value for both MNC and Linktone shareholders.

Together with Michael and Colin, I will spend time discussing our strategic rationale for announcing this transaction and our future vision for Linktone. I will also provide you with some background on our company, MNC, and discuss how we see MNC working together with Linktone.

But for now, I will let Michael and Colin introduce this very important direction to you. Please, Michael, Colin.

Michael Li

MNC is the largest and only integrated media company in Indonesia, operating a range of three TV and radio stations, newspapers as well as wireless value-added services. Its revenue in 2006 was $232 million and achieved a net profit of $32 million, and in the first nine months of 2007, its revenue and net profit grew to $242 million and $36 million respectively.

MNC went public in June of 2007 and are listed on Jakarta’s exchange and has current market capitalization of $1.3 billion.

The detail of the investment is basically as follows: MNC will purchase no less than 51% of Linktone's outstanding shares using a combination of a tender offer [inaudible] and a subscription for newly issued shares. The price offered by MNC is $0.38 per ordinary share, or $3.80 per ADS, representing a 53.8% of premium over Linktone's closing price of $2.47 per ADS on November 27, 2007.

The tender offer will be for 6.1 million ADS, or approximately 25% of the total shares outstanding. MNC will subscribe for up to 25.2 million ADS and no less than 18 million ADS, representing up to approximately 57% or no less than 51% of total shares outstanding at the close of subscription and tender.

Again, both the tender and subscription have the same price of $3.80 per ADS and the total transaction consideration will be up to $91.2 million.

MNC believes Linktone provides a great partner to develop a successful media business in China, leveraging Linktone's existing WVAS and exclusive advertising rights with a nationwide satellite station.

We believe the China market for advertising will continue to grow rapidly and that our prior experience -- MNC’s prior expertise in building a successful multi-channel media business in Indonesia will enable Linktone to dramatically accelerate the growth of Linktone's emerging media platform; in particular, the advertising rights we have, under which Linktone effectively controls the content and the advertising rights for a nationwide satellite TV business and with a forecasting area in 24 provinces and a total viewership of over 200 million.

With that, we would like to open the floor for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Jason Tsai, Montgomery & Company. Please go ahead.

Jason P. Tsai - Montgomery & Co.

Just a quick question here on the acquisition of your shares by the MNC company, what’s the expected use of proceeds for you guys? What are you guys looking to do to expand --

Michael Li

This is a very good question. The increase of the cash balance will enable aggressive execution and implementation of our cross-media strategy in China. Together, both with the partnership with MNC and Linktone, we should have an opportunity to pursuing the advertising and the WVAS cross-selling initiative, both in China as well as in other Asian countries.

Jason P. Tsai - Montgomery & Co.

So does this mean that you’ll also be more proactive in places like Indonesia as well now, and that accelerates the timeline for those type of issues?

Michael Li

In our view, with the partnership with MNC, we believe MNC is the existing current platform or expertise in the WVAS market in the Asian region will enable Linktone to establish a player for the Asian region, especially in the WVAS market.

Jason P. Tsai - Montgomery & Co.

Okay, great. Thanks a lot.

Operator

(Operator Instructions) Our next question is from Mike Olson with Piper Jaffray. Please go ahead.

Mike Olson - Piper Jaffray

I just had a quick question. It looks like the WVAS side is fairly stable. Are you expecting that to continue to be stable over the next few quarters, potentially actually starting to see growth there? And then maybe more importantly on the non-WVAS side, it looks like we are seeing good growth, albeit off of a small base, but still good growth in the non-WVAS side. What do you expect non-WVAS revenues could be maybe in 2008?

Michael Li

Relatively speaking, I think as far as the whole WVAS, the bottom more or less in the Q2 of this year and obviously we see a moderated growth back in Q3 and also based on the guidance, we still see the trend is flat to a moderate growth for WVAS. Looking forward, barring any major mobile policy changes, we will see a moderate growth in 2008.

As for the non-WVAS market, again Linktone has the exclusive advertising rights, as well as the involvement in certain content distribution. You are absolutely correct -- we start relatively small base. It is an investment year for us in 2007 and with the help and with the strategic investments, such as MNC, we believe we can establish, be a player in the China cross-media market.

Mike Olson - Piper Jaffray

Okay. Thank you very much.

Operator

Management, there are no further questions. Please continue with any closing remarks you may have.

Michael Li

Operator, are there any other questions from the Indonesia side at this stage, or --

Operator

(Operator Instructions) There are no additional questions.

Michael Li

Thank you for your questions and thank you for participating in today’s call.

Operator

Thank you. Ladies and gentlemen, this concludes the Linktone third quarter 2007 results conference call. If you would like to listen to a replay of today’s conference call, please dial 303-590-3000 or 800-405-2236, with access code 11103658 followed by the pound sign. We thank you for your participation. You may now disconnect.

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