Linktone Ltd. (NASDAQ:LTON)
Q3 2007 Earnings Call
November 28, 2007 9:30 am ET
Brandi Piacente - The Piacente Group
Michael Li - Chief Executive Officer
Colin Sung - Chief Financial Officer
Hary Tanoesoedibjo - Group Chief Executive Officer, MediaNusantara Citra MNC
Jason P. Tsai - Montgomery & Co.
Mike Olson - Piper Jaffray
Good day, ladies and gentlemen, and thank you for standingby. Welcome to the Linktone third quarter 2007 results conference call.(Operator Instructions) I would now like to turn the conference over to BrandiPiacente. Please go ahead.
Hello everyone and thank you for your patience while waitingfor 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; andMr. Hary Tanoesoedibjo, Group Chief Executive Officer of Media Nusantara Citra MNC.
Earlier today, or just five minutes ago, we announced ourfinancial results -- I’m sorry, yesterday we announced our financial resultsfor the third quarter ended September 30, 2007. Michael will begin today’s callwith a review of the quarterly results and operations. Colin will then review ourincome statement and balance sheet for the third quarter. Harry will thenhighlight some of the details of our most recent announcement of a strategicinvestment that we announced roughly five minutes ago. After that, we will openthe call up for your questions.
Before we begin, I would like to remind you that during thecall, we will make forward-looking statements which are subject to risks anduncertainties. We do not undertake any obligation to update thisforward-looking information except as required under applicable laws. Now Iwould like to introduce Michael Li, Linktone's Chief Executive Officer for asummary of Linktone's business and operational results for the third quarter of2007 strategy. Michael.
Thank you, Brandi and thanks to everyone on the call forjoining us today. Before a review of our third quarter results, I would like tobriefly discuss our most recent press release today announcing that MediaNusantara Citra MNC will purchase a controlling interest in Linktone. We aremost excited about this strategic sale, which is a milestone for Linktone andits employees and something all shareholders should be proud of.
Moving on to our third quarter results, like all wirelessproviders in China we continue to face volatile regulatory changes and anear-term weakening market environment for wireless value-added services inChina.
However, we do expect the market to begin to graduallystabilize next year. Meanwhile, Linktone is realizing certain benefits of theinvestment we have made in our core cross-media strategy. These initiatives arebased on bundling wireless Internet and other new media channels withtraditional media to sell a packaged consumer reach to the advertisers. In thisway, we are leveraging traditional media power to build our new mediaadvertising revenue.
Our advertising revenue service revenue growth of 19% forthe third quarter was driven by more advertising contract [leads]. For thethird quarter of 2007, our reached consumers through satellite TV, such as QTV,were approximately 205 million viewers in 24 unique strategies and 40advertisers. We continue to target 300 million viewers and 80 advertisers bybrand in total by December 1, 2007.
Now let me summarize the results of our wireless non-mediaadvertising product area. SMS revenues were $3.5 million for the third quartercompared with $4.3 million in the previous quarter and 26% of total grossrevenue.
Revenues from our 2.5G product, MMS wireless applicationprotocol, or WAP and Java, totaled $1.2 million compared to $1.4 million in theprevious quarter. Java and MMS revenues were flat quarter over quarter. Thesequential decrease in WAP was due to continuing effects of China Mobilepolicies introduced in May 2007, including sending fee reminders to users eachtime they download a WAP product.
Audio related revenues, IVR and CRBT, were $5.9 millioncompared to $4.2 million in the second quarter.
Looking at the bottom line, we are pleased that ourfinancial loss decreased by $0.4 million compared with the second quarter of2007.
Linktone maintains a strong balance sheet, including cashand cash equivalents and short-term investment available for sale of $47 millionat September 30, 2007.
Finally, our forecast for the fourth quarter is for grossrevenue to grow sequentially to approximately $13.5 million to $14.5 million.We maintain committed to seeking the best possible opportunities and outcomesfor the benefit of our shareholders, including the pursuit of potentialstrategic investments and logistic collaboration.
With that, I would like to now turn the call over to ColinSung, CFO, for a more in-depth review of Linktone's third quarter financialresults and some insight in our expectations for the fourth quarter of 2007.
Thanks, Michael and thank you to everyone on today’s call.Linktone's third quarter gross revenue were $13.3 million compared to $11.7million for the second quarter of 2007 and $19.6 million for the third quarterof 2006.
Revenues for the third quarter related to service offered toChine Netcom and China Telecom, China Unicom, and China Mobile customersrepresent 23%, 4%, and 53% of total revenues respectively, compared to 16%, 9%,and 59% respectively for the second quarter of 2007, reflecting a diversifiedrevenue stream.
We are making solid progress on our revenue diversificationstrategy by building a scaleable platform of new and traditional mediachannels, including interactive television initiative and innovativeadvertising and promotional services.
Linktone's gross margin for the third quarter was 40% of netrevenue, or gross revenues minus business tax, compared with 39% for the secondquarter and 61% for the third quarter of 2006.
Operating loss was 22% of net revenue compared withoperating 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 $8million in the second quarter of 2007 and $10.8 million for the third quarterof 2006.
Selling and marketing expenses were $3.2 million comparedwith $3.9 million for the second quarter 2007 and $6 million for the thirdquarter of 2006. The sequential decreases were due to the more efficient use ofmarketing expenditures on profitable initiatives which result in the bettermanaged 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 thirdquarter 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 forthe third quarter of 2006. The sequential increase was primarily due to higherprofessional 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 thethird 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 forthe 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-GAAPnet loss of $2.9 million in the second quarter of 2007 and net income of $1.4million in the third quarter of 2006.
Non-GAAP net loss per fully diluted ADS was $0.10, comparedwith 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 measuresto non-GAAP financial measures in our press release and third quarter 2007financial statements, which are posted on Linktone's corporate website atwww.english.linktone.com.
Now, I would like to review a few balance sheet relateditems. We have cash and cash equivalents and short-term investments held tomaturity totaling $47.0 million at September 30, 2007, compared to $47.4million at June 30, 2007. In the third quarter of 2007, net cash used inoperations was $0.7 million. The slight decrease in cash and cash equivalentswas primarily due to the payment for our exclusive advertising agency right andmanagement fee on QTV for 2007.
As of September 30, 2007, the number of weighted average ADSoutstanding was 23.9 million, which remains unchanged from 23.9 million at June30, 2007.
Days sales outstanding were 91 days at September 30, 2007, comparedwith 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.
Good morning, ladies and gentlemen. My name is HaryTanoesoedibjo. I am the Group CEO of Media Nusantara Citra MNC. I am verypleased 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 timediscussing our strategic rationale for announcing this transaction and ourfuture vision for Linktone. I will also provide you with some background on ourcompany, MNC, and discuss how we see MNC working together with Linktone.
But for now, I will let Michael and Colin introduce thisvery important direction to you. Please, Michael, Colin.
MNC is the largest and only integrated media company inIndonesia, operating a range of three TV and radio stations, newspapers as wellas wireless value-added services. Its revenue in 2006 was $232 million and achieveda net profit of $32 million, and in the first nine months of 2007, its revenueand net profit grew to $242 million and $36 million respectively.
MNC went public in June of 2007 and are listed on Jakarta’sexchange and has current market capitalization of $1.3 billion.
The detail of the investment is basically as follows: MNCwill purchase no less than 51% of Linktone's outstanding shares using acombination of a tender offer [inaudible] and a subscription for newly issuedshares. 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 ADSon November 27, 2007.
The tender offer will be for 6.1 million ADS, orapproximately 25% of the total shares outstanding. MNC will subscribe for up to25.2 million ADS and no less than 18 million ADS, representing up toapproximately 57% or no less than 51% of total shares outstanding at the closeof subscription and tender.
Again, both the tender and subscription have the same priceof $3.80 per ADS and the total transaction consideration will be up to $91.2million.
MNC believes Linktone provides a great partner to develop asuccessful media business in China, leveraging Linktone's existing WVAS andexclusive advertising rights with a nationwide satellite station.
We believe the China market for advertising will continue togrow rapidly and that our prior experience -- MNC’s prior expertise in buildinga successful multi-channel media business in Indonesia will enable Linktone todramatically accelerate the growth of Linktone's emerging media platform; inparticular, the advertising rights we have, under which Linktone effectivelycontrols the content and the advertising rights for a nationwide satellite TVbusiness and with a forecasting area in 24 provinces and a total viewership ofover 200 million.
With that, we would like to open the floor for questions.Operator, please go ahead.
(Operator Instructions) Our first question is from JasonTsai, Montgomery & Company. Please go ahead.
Jason P. Tsai -Montgomery & Co.
Just a quick question here on the acquisition of your sharesby the MNC company, what’s the expected use of proceeds for you guys? What areyou guys looking to do to expand --
This is a very good question. The increase of the cashbalance will enable aggressive execution and implementation of our cross-mediastrategy in China. Together, both with the partnership with MNC and Linktone,we should have an opportunity to pursuing the advertising and the WVAScross-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 inplaces like Indonesia as well now, and that accelerates the timeline for thosetype of issues?
In our view, with the partnership with MNC, we believe MNCis the existing current platform or expertise in the WVAS market in the Asianregion 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 Instructions) Our next question is from Mike Olsonwith Piper Jaffray. Please go ahead.
Mike Olson - PiperJaffray
I just had a quick question. It looks like the WVAS side isfairly stable. Are you expecting that to continue to be stable over the nextfew quarters, potentially actually starting to see growth there? And then maybemore 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 doyou expect non-WVAS revenues could be maybe in 2008?
Relatively speaking, I think as far as the whole WVAS, thebottom more or less in the Q2 of this year and obviously we see a moderatedgrowth back in Q3 and also based on the guidance, we still see the trend isflat to a moderate growth for WVAS. Looking forward, barring any major mobilepolicy changes, we will see a moderate growth in 2008.
As for the non-WVAS market, again Linktone has the exclusiveadvertising rights, as well as the involvement in certain content distribution.You are absolutely correct -- we start relatively small base. It is aninvestment year for us in 2007 and with the help and with the strategicinvestments, such as MNC, we believe we can establish, be a player in the Chinacross-media market.
Mike Olson - PiperJaffray
Okay. Thank you very much.
Management, there are no further questions. Please continuewith any closing remarks you may have.
Operator, are there any other questions from the Indonesiaside at this stage, or --
(Operator Instructions) There are no additional questions.
Thank you for your questions and thank you for participatingin today’s call.
Thank you. Ladies and gentlemen, this concludes the Linktonethird quarter 2007 results conference call. If you would like to listen to areplay 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 yourparticipation. You may now disconnect.
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