Commentary

Linktone Tries Connecting With Investors

Tech Market WatchBy Perry Wu
This past week was Linktone's turn to shine. China's leading provider of mobile phone services had its first full quarter as a publicly-traded company and it was time to deliver the results. So how did it do?

The reception of Linktone's second quarter earnings did not seem to go over so well in the stock market. Linktone's stock slid 25% on the day after its release, making Linktone's stock the third biggest decliner on the entire NASDAQ for the day. Since debuting on NASDAQ at a price north of $15, Linktone's stock has slid to less than $10.

But this past week's slide in Linktone's stock price is probably due to something trivial like Linktone's quarterly profits being slightly lower than how certain analysts forecasted. The market is not a short-term arbiter of value. So let's look beyond this and see what Linktone actually reported last week.

It was long-winded. The CEO, Raymond Yang, read from a long-prepared text that he clearly didn't write. It is not uncommon for CEOs of publicly-traded companies to read texts that other people write during conference calls, but at least they usually keep up appearances.

In Mr. Yang's case, his performance was stilted. No problem, he's a CEO because he presumably knows how to do business in China successfully, not because of his public speaking skills. But by sticking to a script, Mr. Yang did not come across as a confident CEO with a grasp of the issues.

Then how should Mr. Yang have handled the conference call? Just be a straight-shooter. A CEO is more than just a puppet who reads speeches. He should treat his fellow shareholders of Linktone like any other business partners who have invested in his company. Just talk about the business as he sees it without a script, and answer questions honestly. That kind of behavior would certainly be worthy of respect.

In any case, the results themselves seemed quite favorable. Linktone reported earnings for the second quarter of US$3.5 million, a four-fold increase from the same period last year of US$0.8 million. And revenues were also up four times, to US$12.1 million from US$3.3 million last year.

And give the company some credit for reporting their earnings on a fully diluted basis, thereby including the effects of stock-based compensation, the only basis that should be used. As time marches forward from Linktone's IPO, and Linktone's executives are able to issue stock options, let's hope that they will continue to emphasize fully-diluted earnings in their press releases.

But while earnings were reported as $3.5 million for the quarter, the company reported cash flow from operations as being 37% less at $2.2 million. It would be helpful to reconcile where these differences come from. But curiously, Linktone did not release a cash flow statement. Why?

Fresh from its IPO, Linktone currently has more than US$73 million on its balance sheet. Now that the Chinese technology world knows Linktone has money to spend, Linktone's executives probably get pitched companies to buy everyday by bankers, venture capitalists, accountants and perhaps even the ayi who comes by in the morning to clean. Sooner or later, this cash will be used. The question is how wisely it will be used.

For the time being, Linktone has avoided the temptation to use its cash. Unlike another recently-listed mobile service provider, Shanda, which has just in the past week announced two acquisitions, Linktone has so far kept its cash in its pocket. But it is surely only a matter of time before that changes.

The temptation to use this cash must be overwhelming for the folks on the Linktone management team in Shanghai. The CFO, Mark Begert, is a former Merrill Lynch vice-president. Undoubtedly, he would much prefer spending his days talking about possible deals with his fellow bankers (if he's not already), rather than poring over the day-to-day accounting drudgery that is, after all, the primary work of the CFO. Character is fate.

In the last quarter, other Chinese Internet companies like Sina, Sohu, and Netease have recorded drops in revenue from mobile services. But this should be no surprise as we have heard warnings for the last 9 months of increased government censorship of certain mobile services and delayed China Mobile payments to mobile service providers like Linktone and Sina.

But Sohu, Sina, and Netease have a big advantage over companies like Linktone. Those three companies can rely on non-mobile revenue like advertising and design services to help them through bad times. But what does Linktone have? It relies almost entirely on mobile services and the majority of its China revenue comes from one source: China Mobile. And of its mobile revenue, a majority comes from SMS–the company needs to think about monetizing its other wireless services. It feels almost like both ends of the bridge are burning and Linktone is standing in the middle.

Tom.com faces a similar fate even though its CEO is gasping for air in the stratosphere and foreseeing dramatic growth in SMS. Note to Tom.com CEO and its investors: SMS will continue to grow, yes, but mostly in peer-to-peer messaging where China Mobile picks up cash and not so much in the secondary SMS relationships and value-added services that Linktone, Tom.com, Sina, et alia reside. We've heard the warnings, and now we are looking at the results.

Sohu.com started 7 years ago as a mere gossamer thread search directory (not even a search engine) and diversified into all number of different online services. Netease.com started as a hotmail-like email service for mainland Chinese and the company now runs dozens of disparate services. Linktone, and other mobile-only businesses, have no substantial user base–they must contend with making services for other companies that have large user bases to utilize Linktone's services. This type of business is fine, but the amount of competitors in this space is astronomically high. There are companies from Singapore, Korea, Japan, India, and the rest of China bustling in the mobile-services space in China.

Linktone must diversify quickly and–here's an idea–it might go for non-mobile investments. Just as it's not sacrilegious for McDonalds to introduce pizza and chicken to its diners, so should Linktone realize that investors will not balk at the company making more money. Linktone should look for more partnerships with services that allow for both greater marketing reach as well as growth of user base. Acquiring other mobile services companies is also viable, but only if it is to gain the clients of that other business. Buying another mobile business because of its technology or platform or other marketing baloney is duplicative–Linktone has the ability to create any mobile technology it wants.

Anyway, Mr. Yang, next time try just telling it straight without the script. Don't forget that you now have command over a listed company and your job is to build value for your investors–not just your management team or yourself. Your company is in an enviable position with a good wad of cash, so don't try issuing debt or performing other backdoor accounting tricks. Just run your business from here on out as if the CNY note in your wallet is the last one you'll ever see; your management team's actions and your accounting books are now under daily scrutiny. They'll be writing how-to books about your company and your sector in China one day and you want to shine in the post mortem. Welcome to the Public.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.

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