Linktone (LTON) beats consensus on non-SMS service growth, guides in-line, stock up (4Q04 earnings)

by: Ezra Marbach

Linktone (ticker: LTON), a Chinese wireless value-added service company, beat Q4 2004 EPS estimates by $0.02. Details:

Q4 Results
(all percentage changes and comparisons are sequential, unless stated otherwise)

  • Gross revenues increased 17% to $15.5 million.

  • Net income increased 18% to $3.3 million.
  • GAAP fully diluted earnings per ADS were $0.12 vs average consensus estimate of $0.10.
  • Adjusted fully diluted earnings per ADS (excluding the effects of certain one-time and non-cash expenses) were $0.15.
  • All per-share computations for Q4 were based on 27.3 million weighted average ADSs outstanding on a fully diluted basis.


  • SMS sales decreased to $9.1 million from $10.6 million in Q3.
  • The company attributed the sequential decline to ongoing effects of China Mobile's implementation of a new platform for
    customer service and billing management.
  • Non-SMS sales of 2.5G and audio-related services increased 137% to $6.4 million.
  • Non-SMS sales contributed 41% of gross revenues, up from 20% in Q3.
  • 2.5G services contributed 29% of gross revenues, up from 11% in Q3.
  • Audio-related services contributed 12% of gross revenues, up from 9% in Q3.
  • The company estimates it averaged 7.1 million paying users per month for Q4, compared with estimates of approximately 7.2 million for Q3.
  • The company estimates that average revenue per user (ARPU) rose to approximately $0.74 per month for Q4, up 21% from estimates of approximately $0.61 per month in Q3.
  • This reflects the migration of users from basic SMS products to high-end 2.5G products.
  • Operating expenses increased to $6.8 million in Q4 from $5.8 million in Q3.
  • The company attributed the sequential increase to increased higher personnel-related expenses including senior management additions, product development, and sales and marketing, as well as legal and accounting fees associated with Sarbanes-Oxley compliance.

Tax Concern:

Linktone was recently informed that the local Shanghai government is
investigating certain tax refunds which the company is expecting to
receive. If the entire refund is withdrawn, the result would reduce net
income by $2.2 million and fully diluted earnings per ADS by $0.08 for
the year ended December 31, 2004.

CEO sums up Q4:

"During the quarter, sequential sales growth for 2.5G and
audio-related services exceeded our expectations and more than offset
an anticipated decline for short messaging services (SMS)."

(Estimates for Q1 2005)

  • Company expects GAAP earnings of $0.11 per fully diluted ADS resulting from a decrease in gross revenues. This is inline with concensus estimates.
  • Excluding the anticipated effect of non-cash stock-based compensation expense in the amount of $0.5 million, the company expects Q1 earnings of $0.13 per fully diluted ADS.

CEO comments on 2005:

"In 2005 and beyond, we expect continued strong growth in the market for 2.5G services in China, as well as an acceleration of market consolidation. As a result, we expect to continue expanding Linktone's 2.5G product portfolio, marketing programs and user base toward the transition to 3G networks, and to develop new revenue streams that complement wireless value-added services. We are also committed to enhancing our long-standing relationship with China Mobile, increase our volume with China Unicom, and develop our new channels with China Netcom and China Telecom. With the effective execution of our M&A and partnership strategies, we believe that this will be a pivotal year for Linktone's evolution to an interactive entertainment company serving consumers throughout the world's largest and fastest growing digital economy."

LTON stock market performance:

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