omniture

Linktone Reports Financial Results For Third Quarter 2006

Linktone Ltd.
2006-11-17 18:51 1426

-- Revenues and Earnings Exceed Company’s Previous Guidance --

SHANGHAI, China, Nov. 17 /Xinhua-PRNewswire/ -- Linktone Ltd. (Nasdaq:

LTON), a leading provider of wireless interactive entertainment services in

China, today announced its unaudited financial results for the three months

ended September 30, 2006.

(Logo: http://www.prnasia.com/sa/20061101171222-64.jpg )

FINANCIAL Highlights for the THIRD Quarter

-- The Company recorded revenues of $19.6 million, ahead of its prior

guidance of $17.5 to $18.5 million, and compared with $23.3 million in

the second quarter of 2006 and $20.5 million in the third quarter of

2005.

-- GAAP net income of $1.0 million, compared with $3.1 million in the

second quarter of 2006 and $4.1 million in the third quarter of 2005.

-- GAAP net income per fully diluted American Depositary Share (ADS) of

$0.04, exceeding the company’s prior guidance of $0.02 per fully

diluted ADS and compared with $0.12 for the second quarter of 2006 and

$0.15 for the third quarter of 2005.

-- Non-GAAP net income of $1.4 million, compared with $3.5 million in the

second quarter of 2006 and $4.6 million in the third quarter of 2005.

-- Non-GAAP net income per fully diluted ADS of $0.05 compared with $0.13

in the second quarter of 2006 and $0.17 in the third quarter of 2005.

Chief Executive Officer Michael Li stated, “We are pleased with our

results during the quarter, which exceeded expectations in a tough

environment, and reflect Linktone’s continued strength as one of China’s

leading wireless interactive entertainment and media service providers.

During the quarter and most recently, we continued to leverage and build our

leadership position in interactive media programming by expanding

relationships with partners in traditional media outlets such as television,

radio, and print.”

Mr. Li further added, “By remaining true to our vision of delivering the

highest quality wireless services to the interactive media market, Linktone

has continued to move forward as a leader in an increasingly healthy

industry. Our focus remains on the growing demand for interactive media and

entertainment event-driven programming, and by establishing partnerships that

leverage our expertise and expand our opportunities for additional revenue

streams such as advertising.”

Third Quarter Revenue Mix

Linktone’s third quarter revenue mix continued to show steady

diversification across multiple wireless product areas including data-related

services (SMS, MMS, WAP, and Java) and audio-related services, (IVR and

CBRT).

Data related services revenue were $13.0 million, representing 66% of

total revenues, compared with $16.9 million or 72% for the second quarter of

2006. The sequential revenue decrease was primarily due to new policy

changes introduced by China’s mobile operators during the second quarter of

2006. The policy changes impose a one-month free trial period for new users,

require double confirmations on new subscriptions, require that a reminder be

sent to existing monthly subscribers of their subscription and fee

information, and that inactive users are cancelled. These new policies have

had a substantial negative impact to the Company’s business, resulting in

substantial revenue and profit declines from prior quarters. Breakdowns are

as follows:

-- Short Messaging Services (SMS) revenue represented 52% of total gross

revenues, compared with 56% for the second quarter of 2006. SMS

revenue was $10.3 million for the third quarter 2006, compared with

$13.1 million for the second quarter of 2006.

-- Multimedia Messaging Services (MMS) revenue represented 7% of total

gross revenues compared with 7% for the second quarter of 2006. MMS

revenue was $1.3 million for the third quarter of 2006, compared with

$1.6 million for the second quarter of 2006.

-- Wireless Application Protocol (WAP) revenue represented 4% of total

gross revenues compared with 4% for the second quarter of 2006. WAP

revenue was $0.9 million for the third quarter of 2006, compared with

$1.0 million for the second quarter of 2006.

-- Java gaming (Java) revenue represented 3% of total gross revenues

compared with 5% for the second quarter of 2006. Java revenue was $0.5

million for the third quarter of 2006, compared with $1.2 million for

the second quarter of 2006.

Audio related services accounted for 32%, or $6.3 million of total

revenues, compared with 26% or $6.0 million for the second quarter of 2006.

Breakdowns are as follows:

-- Interactive Voice Response services (IVR) revenue increased to 24% of

total gross revenues compared with 16% for the second quarter of 2006.

IVR revenue was $4.8 million for the third quarter of 2006, compared

with $3.7 million for the second quarter of 2006, primarily due to

enhanced promotions and limited exposure to policy changes as IVR is

non-subscription based.

-- Color Ring-Back Tones (CRBT) revenue decreased to 8% of total gross

revenues compared with 10% for the second quarter of 2006. CRBT

revenue was $1.5 million for the third quarter of 2006, compared with

$2.3 million for the second quarter of 2006, primarily due to a drop in

sales promotions resulting in fewer new users.

Margins, Expenses and Balance Sheet

Linktone’s key operating benchmarks and balance sheet items for the

third quarter of 2006 include the following:

-- Gross margin was 61% of net revenues, or gross revenues minus business

tax, compared with 63% for the second quarter of 2006 and 61% for the

third quarter of 2005. The sequential decline was due to an increase

in transmission and agency costs.

-- Operating margin was 4% of net revenues, compared with 12% for the

second quarter of 2006 and 19% in the third quarter of 2005. The

sequential decrease was primarily due to the significant decline in

revenue as a result of the new policy changes.

-- Operating expenses totaled $10.8 million, compared with $11.3 million

in the second quarter of 2006 and $8.3 million for the third quarter of

2005. The sequential cost reduction was primarily attributed to a

reduction in headcount and other operating related expenses. The

increase in operating expenses compared with the same quarter in the

prior year was mainly due to higher marketing spending.

-- Selling and marketing expenses were $6.0 million, compared with $6.8

million for the second quarter of 2006 and $3.9 million for the third

quarter of 2005. The sequential decrease was primarily due to

reductions of sales promotion and marketing related expenses under the

Company’s continuing cost control program. The increase in selling and

marketing expenses compared with the same quarter in the prior year

reflects higher user acquisition costs in a competitively growing and

challenging operating environment.

-- Product development expenses were $1.8 million, compared with $1.8

million for the second quarter of 2006 and $1.7 million for the third

quarter of 2005.

-- Other general and administrative expenses were $3.0 million, compared

with $2.7 million for the second quarter of 2006 and $2.7 million for

the third quarter of 2005. The increase is primarily due to an

increase in severance pay and personnel related expenses, provisions

made on long aging accounts receivables, and higher stock compensation

charges due to stock options granted during the second quarter.

-- Cash and cash equivalents, as well as short-term investments available

for sale totaled $46.9 million, compared with $61.8 million for the

second quarter of 2006. Cash flow generated from operations totaled

$1.7 million. The decrease was due to investment activities related to

our share buyback program, payment for a business acquisition and

prepayment for establishing a joint venture with Chinese Youth League

to produce interactive and wireless entertainment programs.

-- Days of sales outstanding (DSOs), the average length of time required

for the Company to receive payment for services delivered, were 126

days as of the end of the third quarter, compared with 104 days at June

30, 2006.

Chief Financial Officer Colin Sung added, “Our results during the

quarter directly reflect the steps we took earlier this year to restructure

our cost base and increase operational efficiencies. As the wireless market

recovers and continues to grow, we believe Linktone is well-positioned to

achieve a stronger competitive position and achieve superior shareholder

returns.”

Recent Business Highlights

Linktone has proven to be a pioneer in the development and promotion of

successful interactive television programming initiatives. In addition,

Linktone continues to broaden its portfolio of proprietary content and

content acquired via partnerships to deliver new services to the market.

Examples of this include:

-- Joint Venture with Shandong Satellite TV Subsidiary. Linktone is in

the process of establishing a joint venture (JV) with Zhongbang Culture

Media (ZCM), a subsidiary of Shandong TV Station (“SDTV”), one of the

leading television stations in China. Linktone will exclusively

operate wireless value-added services for SDTV, as well as co-

production and distribution of programs.

-- Co-Production of New Reality TV Show “China Vision”. Linktone, along

with ZCM, has entered into the co-production of the "China Vision"

television show, a city-to-city, provincial-to-provincial singing

competition.

-- Strategic Investment in Beijing Center National Radio Media (BCNRM).

Linktone has made a strategic investment in Beijing Center National

Radio Media, a nationwide advertising company, as part of its ongoing

strategy to develop interactive programming with traditional media

outlets such as television, radio, and print. BCNRM is the largest

advertising agency for China National Radio-1 and 2, which boasts the

broadest audience in China and also delivers content to the United

States, Hong Kong, and Macau.

-- Partnership with MTV China for WAP Services. Linktone has signed an

exclusive partnership with MTV China, a subsidiary of Viacom, one of

the leading global entertainment content companies. Linktone will

operate wireless application protocol (WAP) services for MTV China on

China Unicom’s platform, one of the two major mobile operator

platforms in China.

-- Donation to the China Welfare Fund. Linktone has pledged to be a

corporate donor to the China Welfare Fund. The funds donated by

Linktone will be used to help assist, create and maintain proper

facilities for the handicapped and disabled. In addition, Linktone

will develop and operate WAP and IVR services for the handicapped and

disabled.

Share Repurchase Program

On August 7, 2006, the Company’s shareholders voted to approve a new $20

million stock repurchase program. During the third quarter, the Company

repurchased 1,683,590 ADSs in the open market for an aggregate purchase

amount of approximately $8.5 million. Ordinary shares with respect to ADSs

repurchased during the second and third quarters will be retired by the

Company. The Company may also anticipate making additional repurchases for

approximately 12-15 months in a manner consistent with market conditions, the

Company’s corporate strategy and the interests of its shareholders.

The timing and dollar amount of repurchase transactions will be

determined by the board and will be subject to Securities and Exchange

Commission Rule 10b-18 requirements. Purchases during “blackout periods”

under the company’s insider trading policy will be effected pursuant to Rule

10b5-1. Linktone plans to fund repurchases made under this program from

available working capital. As of September 30, 2006, Linktone had 24,202,394

ADSs outstanding.

Business Outlook

For the fourth quarter and year ending December 31, 2006, Linktone

expects gross revenue to be approximately $16.0 to $17.0 million due to

continuing impact of policy changes. The Company also anticipates GAAP net

income in the fourth quarter to result in approximately $0.02 to $0.03 per

ADS.

Use of Non-GAAP Financial Measures

The reconciliation of GAAP measures with non-GAAP measures for net income

and net income per fully-diluted ADS included in this press release is set

forth after the attached financial statements. All diluted per-share

computations for the third quarter 2006 were based on 25.8 million weighted

average ADSs outstanding on a fully-diluted basis. Linktone believes that

the supplemental presentation of adjusted net income and net income per fully

diluted ADS calculations, excluding the effect of non-cash stock-based

compensation expense, provides meaningful non-GAAP financial measures to help

investors understand and compare business trends among different reporting

periods on a consistent basis, independently of stock-based compensation

expenses. Please note that the non-GAAP adjustments do not include

restructuring charges as restructuring is no longer considered an infrequent

or unusual event. Thus, the non-GAAP financial measures provide investors

with another method for assessing Linktone’s operating results in a manner

that is focused on the performance of its ongoing operations. Linktone

management also uses non-GAAP financial measures to plan and forecast results

for future periods. Readers are cautioned not to view non-GAAP results on a

stand-alone basis or as a substitute for results under GAAP, or as being

comparable to results reported or forecasted by other companies, and should

refer to the reconciliation of GAAP results with non-GAAP results for the

three-month and nine-months ended September 30, 2005 and 2006 located after

the financial statements.

Today’s Conference Call

As previously announced, Linktone will host a conference call to discuss

second quarter 2006 financial results at 8:00 a.m. Eastern Time on November

17, 2006 (5:00 a.m. Pacific Time and 9:00 p.m. Beijing/Hong Kong Time). The

dial-in number for the call is 800-289-0572 for U.S. callers and 913-981-5543

for international callers. Chief Executive Officer Michael Li and Chief

Financial Officer Colin Sung will be on the call to discuss the quarterly

results and highlights and to answer questions from participants.

A replay of the call will be available through December 1, 2006. To

access the replay, U.S. callers should dial 888-203-1112 and enter passcode

8878648; international callers should dial 719-457-0820 and enter the same

passcode.

In addition, a live webcast of this call will be available on the

Linktone web site at http://english.linktone.com/aboutus/index.html . An

archived replay of the call will be available for 90 days.

About Linktone Ltd.

Linktone Ltd. is a leading provider of wireless interactive entertainment

products and services in China. Linktone provides a diverse portfolio of

services to wireless consumers, with a particular focus on media,

entertainment and communications. These services are promoted through the

Company’s own marketing channels and through the networks of the mobile

operators in China. Through in-house development and alliances with

international and local branded content partners, the Company develops,

aggregates, and distributes innovative and engaging products to maximize the

breadth, quality and diversity of its offerings. Linktone categorizes China’

s wireless services landscape as “MAGIC” -- Music, Advanced Gaming,

Graphics, Instant Messaging and Community.

FORWARD-LOOKING STATEMENTS

This press release contains statements of a forward-looking nature. These

statements are made under the "safe harbor" provisions of the U.S. Private

Securities Litigation Reform Act of 1995. You can identify these forward-

looking statements by terminology such

as "will," "expects," "anticipates," "future," "intends," "plans," "believes,"

"estimates," and similar statements. The accuracy of these statements may

be impacted by a number of business risks and uncertainties that could cause

actual results to differ materially from those projected or anticipated,

including risks related to: current or future changes in the policies of the

PRC Ministry of Information Industry and the mobile operators in China or in

the manner in which the operators enforce such policies; the risk that other

changes in Chinese laws and regulations, or in application thereof by other

relevant PRC governmental authorities, could adversely affect Linktone’s

financial condition and results of operations; the risk that Linktone will

not be able to compete effectively in the wireless value-added services

market in China for whatever reason, including competition from other service

providers or penalties or suspensions for violations of the policies of the

mobile operators in China; the risk that Linktone will not be able to develop

and effectively market innovative services; the risk that Linktone will not

be able to effectively control its operating expenses in future periods or

make expenditures that effectively differentiate Linktone’s services and

brand; and the risks outlined in Linktone’s filings with the Securities and

Exchange Commission, including its registration statement on Form F-1 and

annual report on Form 20-F. Linktone does not undertake any obligation to

update this forward-looking information, except as required under applicable

law.

LINKTONE LTD.

CONSOLIDATED BALANCE SHEETS

(In U.S. dollars, except share data)

December 31, September 30,

2005 2006

(audited) (unaudited)

Assets

Current assets:

Cash and cash equivalents 36,252,678 39,491,960

Short-term investments 41,580,530 7,403,197

Accounts receivable, net 15,945,662 19,762,010

Tax refund receivable 2,131,128 2,236,290

Deposits and other receivables 5,136,949 5,321,082

Deferred tax assets 811,014 718,578

Total current assets 101,857,961 74,933,117

Property and equipment, net 3,565,446 2,878,383

Intangible assets 2,234,185 2,569,724

Goodwill 10,171,219 16,477,056

Deferred tax assets 1,051,469 675,069

Other long-term assets -- 1,896,645

Total assets 118,880,280 99,429,994

Liabilities and shareholders’ equity

Current liabilities:

Tax payable 5,898,782 3,402,004

Accrued liabilities and other

payables 11,886,705 6,055,843

Deferred income 93,327 129,505

Deferred tax liabilities 881,279 588,050

Total current liabilities 18,760,093 10,175,402

Long-term liabilities

Other long term liabilities 30,276 59,779

Total liabilities 18,790,369 10,235,181

Shareholders’ equity

Ordinary shares ($0.0001 par value;

500,000,000 shares authorized,

257,317,900 and 242,023,940 shares

issued and outstanding as of

December 31, 2005 and September

30, 2006) 25,732 26,086

Additional paid-in capital 78,674,885 76,667,301

Treasury stock (0 and 18,835,900

ordinary shares outstanding of

December 31, 2005 and September

30, 2006) -- (9,914,363)

Statutory reserves 2,007,776 2,007,776

Accumulated other comprehensive

income (loss):

Unrealized loss on investment in

marketable securities (95,979) (162,462)

Cumulative translation

adjustments 822,816 1,743,911

Retained earnings 18,654,681 18,826,564

Total shareholders’ equity 100,089,911 89,194,813

Total liabilities and shareholders’

equity 118,880,280 99,429,994

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In U.S. dollars, except share data)

Three months ended 9 months ended

September September September

September 30, June 30, 30, 30, 30,

2005 2006 2006 2005 2006

(unaudited) (unaudited)(unaudited) (unaudited) (unaudited)

Gross

revenues 20,499,759 23,266,835 19,641,841 53,025,728 65,867,145

Business tax (757,859) (966,985) (789,984) (2,220,088) (2,825,527)

Net revenues 19,741,900 22,299,850 18,851,857 50,805,640 63,041,618

Cost of

services (7,620,935) (8,229,609) (7,262,223)(18,125,870)(23,927,655)

Gross profit 12,120,965 14,070,241 11,589,634 32,679,770 39,113,963

Operating

expenses:

Product

development (1,719,575) (1,773,164) (1,784,676) (4,277,996) (5,848,568)

Selling

and

marketing (3,879,607) (6,783,846) (5,952,193) (9,863,111)(18,021,248)

Other

general

and

adminis-

trative (2,700,432) (2,736,346) (3,033,535) (8,575,256) (9,498,580)

Total

operating

expenses (8,299,614)(11,293,356)(10,770,404)(22,716,363)(33,368,396)

Income from

operations 3,821,351 2,776,885 819,230 9,963,407 5,745,567

Interest

income 334,119 476,444 320,780 1,325,870 1,309,889

Other income 242,398 370,992 88,670 683,006 710,561

Income

before tax 4,397,868 3,624,321 1,228,680 11,972,283 7,766,017

Income tax

expense (347,067) (478,469) (283,623) (990,904) (1,322,466)

Minority

interest -- (57,554) 17,505 -- (54,595)

Net income 4,050,801 3,088,298 962,562 10,981,379 6,388,956

Other

comprehensive

income: 995,270 78,801 557,766 881,276 854,612

Comprehensive

income 5,046,071 3,167,099 1,520,328 11,862,655 7,243,568

Earning per

ordinary

share:

Basic 0.02 0.01 0.00 0.04 0.02

Diluted 0.01 0.01 0.00 0.04 0.02

Earning per

ordinary

ADS:

Basic 0.16 0.12 0.04 0.43 0.25

Diluted 0.15 0.12 0.04 0.40 0.24

Weighted

average

ordinary

shares:

Basic 257,936,653 262,413,947 255,841,065 256,479,385 258,748,345

Diluted 277,280,453 265,785,127 257,861,062 274,238,184 265,466,754

Weighted

average

ADSs:

Basic 25,793,665 26,241,395 25,584,107 25,647,939 25,874,835

Diluted 27,728,045 26,578,513 25,786,106 27,423,818 26,546,675

LINKTONE LTD.

NON-GAAP RECONCILIATION

(In U.S. dollars, except share data)

Three months ended Nine months ended

September June September September September

30, 2005 30, 2006 30, 2006 30, 2005 30, 2006

(unaudited) (unaudited) (unaudited) (unaudited)

(unaudited)

Net income 4,050,801 3,088,298 962,562 10,981,379 6,388,956

Stock based

compensation

expense 555,042 372,382 401,526 1,623,238 1,085,037

Adjusted net

income 4,605,843 3,460,680 1,364,088 12,604,617 7,473,993

Non-GAAP

diluted

earnings per

share 0.02 0.01 0.01 0.05 0.03

Non-GAAP

diluted

earnings per

ADS 0.17 0.13 0.05 0.46 0.28

Number of

shares used

in diluted

per-share

calculation 277,280,453 265,785,127 257,861,062 274,238,184 265,466,754

Number of ADSs

used in diluted

per-share

calculation 27,728,045 26,578,513 25,786,106 27,423,818 26,546,675

Source: Linktone Ltd.
collection