Linktone Q3 2009 Earnings Call Transcript

| About: Linktone Ltd. (LTON)

Linktone Ltd. (NASDAQ:LTON) Q3 2009 Earnings Call November 30, 2009 8:00 PM ET


Serena Shi - Manager of Investor Relations

Colin Sung - Deputy Chief Executive Officer, Chief Financial Officer

Muliawan P. Guptha - Chief Strategy Officer, Director


Stephen Monticelli - Mosaic Investments


Good evening, ladies and gentlemen, and thank you for standing by. Welcome to the Linktone third quarter 2009 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) I will now turn the conference over to our host, Serena Shi, Investor Relations for Linktone. Please go ahead, Madam.

Serena Shi

Thank you. Welcome to Linktone's third quarter 2009 conference call. With me today are Deputy Chief Executive Officer and the Financial Officer, Colin Sung, and our Chief Strategy Officer, Muliawan Guptha. I am Serena Shi, the Manager of Investor Relations.

Earlier today, we announced our financial results for the third quarter ended September 30, 2009. Muliawan will begin today's call with a review of this quarter and a discussion of Linktone's strategy. Colin will review our income statement and the balance sheet for this quarter. After that, we'll 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 these forward-looking statements, except as required under applicable laws.

Now, I'd like to turn the call over to Muliawan Guptha, Linktone's Chief Strategy Officer, for the summary of Linktone's business and operational results for the third quarter 2009. Muliawan.

Muliawan P. Guptha

Thank you, Serena and thanks to everyone for joining us on the call today. Linktone was able to continue its profitability despite lower than expected revenues for the third quarter. We attribute this to our accomplishment in broadening our value-added service platform to cultivate a higher margin revenue mix while also maintaining stringent cost controls.

During the third quarter, we recognized revenue and profit from our Indonesia VAS project, which represents the first phase of our Southeast Asia expansion strategy. In order to capitalize on extensive growth opportunities in the Southeast Asian market, we will continuously focus on building our core competitive strengths and cultivating strong partnerships in the region.

We have always been highly selective in pursuing strategic alliances and expansion opportunities. We believe that our ongoing focus on international expansion, enhanced content offerings and utilization of distribution channels will position us well on all fronts as we strive toward our goal of achieving sustainable profitability. Additionally, operational efficiencies and prudent cost management will also continue to be at the forefront of our agenda as we proceed into 2010.

Colin will now continue with his detailed review of our financial performance for the third quarter. Colin.

Colin Sung

Thank you, Muliawan. Linktone’s third quarter gross revenue from wireless value-added services and other revenue was $13.8 million compared with $18.3 million in the second quarter of 2009 and $16.6 million in the third quarter of 2008.

Following the termination of our partnership with Tienjing Satellite TV and Qinghai Satellite TV station in the second quarter and third quarter of 2008, our traditional media advertising revenue is now reported as discontinued operation and has been excluded from the reporting results for continuing operations in both the current and prior periods, in accordance with applicable accounting standards.

Data-related services revenue, SMS, MMS, and WAP totalled $7.8 million in the third quarter, representing 57% of gross revenue, compared with $10.6 million or 58% of gross revenue for the second quarter of 2009. The sequential decrease in revenue was primarily attributable to a decrease in revenue from SMS services resulting from fewer revenue sharing projects with mobile phone manufacturers, which was due to stricter policies as well as reduced revenue from promotional activities conducted via media channels.

Audio-related revenues, IVR and CRBT, were $4.9 million in the third quarter, representing 36% of total revenue, compared with $7.1 million or 39% for the second quarter of 2009. The sequential decrease was primarily related to a reduction in IVR revenues due to decreased media advertising during the quarter.

Now I will briefly review our key operating benchmarks.

Linktone's gross margin for the third quarter of 2009 was 39% of net revenues, or gross revenue minus business tax, compared with 34% for the second quarter of 2009 and 53% for the third quarter of 2008. The sequential increase was primarily related to higher gross profit margin service fees from our Indonesia VAS project. As we have mentioned, this project represents the first phase of our Southeast Asia expansion strategy.

Operating loss was 1% of net revenues, compared with operating profit of 1% for the second quarter of 2009 and 8% in the third quarter of 2008. The sequential decline was attributable to decreased returns from our promotional spending in traditional media channels.

Operating expenses decreased to $5.2 million, compared with $5.7 million in the second quarter of 2009 and $7.1 million for the third quarter of 2008.

Selling and marketing expenses were $3.1 million, compared with $2.3 million for the second quarter of 2009 and $4 million for the third quarter of 2008. The sequential increase was due primarily to increased promotional spending in traditional media channels.

Product development expenses were $0.9 million, down slightly from $1 million in the second quarter of 2009 and flat with the third quarter of 2008.

Other general and administrative expenses decreased to $1.6 million, compared with $2.4 million for the second quarter of 2009 and $2.2 million for the third quarter of 2008. The sequential decrease was primarily due to higher professional fees incurred in connection with annual reporting and filing for 2008 and severance costs paid to former officers in the second quarter of 2009 and a reversal of long aging provisions for certain liabilities.

GAAP net income was $0.7 million, or $0.02 per diluted American depository shares, ADS, compared with GAAP net income of $0.9 million or $0.02 per fully diluted ADS in the second quarter of 2009. This compared with the GAAP net loss of $2.3 million or $0.06 per fully diluted ADS in the third quarter of 2008.

Non-GAAP net income was $0.4 million in the third quarter of 2009, compared with non-GAAP net income of $0.9 million in the second quarter of 2009 and non-GAAP net loss of $1.6 million in the third quarter of 2008.

Non-GAAP net income per fully diluted ADS was $0.01 in the third quarter of 2009, compared with $0.02 in the second quarter of 2009 and a non-GAAP net loss of $0.04 in the third quarter of 2008.

Now turning to the balance sheet, cash and cash equivalents, as well as short-term investments available for sale, totaled $97.2 million on September 30, 2009, compared with $99.7 million on June 30, 2009. The slight sequential decrease was primarily due to an additional loan drawdown of $0.8 million made by a related party and a negative operating cash flow of $1.7 million. As of September 30, 2009, the new loan had an outstanding principal balance of $1.9 million, which was secured and earned an interest of 10% per annum, with interest is payable on a quarterly basis.

Days Sales Outstanding, DSO, for Continuing Operations, which is the average length of time required for the company to receive payment for services delivered, was 112 days at the end of the third quarter 2009. This compared with 83 days at the end of the second quarter 2009.

Looking ahead, our management team will be committed to working diligently for ongoing initiatives which will better position us for the coming year. We will continuously focus on profitability streamlining our operational efficiency and improving course management.

Finally, our business outlook, as Muliawan mentioned, for the fourth quarter ending December 31, 2009, we anticipate gross revenue to be between $14 million to $15 million.

With that, we would like to open the call to questions from the audience. Operator.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Stephen Monticelli with Mosaic Investments.

Stephen Monticelli - Mosaic Investments

Good morning. I have two questions. First regarding the results for the quarter, on August 25 when you reported Q2, you indicated that you expected revenues of $18 million to $20 million for Q3, which was when there were about five weeks left in the Q3 and you came in below that. Can you speak to what changed that caused the results to be so different.

Colin Sung

When we did the Q2 earnings release or earnings call, we looked at based on the outlook, based on July's figures, which is the real figure, traditionally summer time is the highest month for us for wireless revenue so when we looked at the July actual figure plus the two weeks estimation for August, that is the guidelines based on, which means we have a dramatic shortfall in the last two weeks in August as well as a very disappointment in September, as we mentioned during our release and our call, is due to certain [regulatory] policy and the regulation was imposed in the latter part of August and then throughout the remaining months of this year.

Stephen Monticelli - Mosaic Investments

Can you expand on the policy and regulation that changed?

Colin Sung

There is a certain policy China [other operators] or certain policy issue by the government related to the broadcasting related to the embedding services in the handset manufactures. That is quite a big impact for us.

Stephen Monticelli - Mosaic Investments

So you weren’t aware of that change on August 25?

Colin Sung

At that time, no.

Stephen Monticelli - Mosaic Investments

And it was implemented immediately and caused a significant shift in your business?

Colin Sung

Yes, because again, in the cost structure, we are planning to be spending the promotional expenditure related to our traditional media channel which related to the server embedding services in our offering due to the policy and due to the certain testing requirements and policy implementation, it's caused a dramatic slowdown of the revenue for the five or six weeks for the quarters.

Stephen Monticelli - Mosaic Investments

Okay, my next question has to do with use of cash and treatment of shareholder capital. You are not repurchasing stock despite the fact that your stock is trading below book value and below cash value and yet you are extending loans to a related party. Can you explain how that is a reasonable thing to do on behalf of shareholders?

Colin Sung

First of all, let me answer the latter part of the question regarding extending the loan -- that loan in place early this year. It is not a new loan nor any extension of the new facilities -- it is a continuation of the previous agreement. And second, to answer your question regarding the share purchase, the board has had several meetings and discussion of the purchasing of share buy-back but at the current stage, as we mentioned, both Muliwan and I, the company is [looking to start an] initiative for expansion to Southeast Asia, so still regarding the share purchasing program, it is still on the table. We will definitely look into that and we will continue to look at one option to protecting shareholder value as well.

Stephen Monticelli - Mosaic Investments

Well, if you weren’t lending money to affiliate parties, you would have an extra $10 million of cash on top of the 97 that you do have. I don’t think that loan is an appropriate act on behalf of shareholders and I believe you should be seeking to recover those funds and instead be directing it toward repurchasing stock.

Colin Sung

Noted, and I will definitely keep that in consideration.

Stephen Monticelli - Mosaic Investments

Thank you.


(Operator Instructions) At this time, there are no further questions. I will turn the call back to management for any closing remarks you may have.

Serena Shi

Thank you, everyone, for joining us. This concludes today's teleconference for our third quarter 2009. Please contact us should you have any additional questions. Thanks again for joining us today. Bye.

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