China's Linktone (LTON) announced its financial results for the third quarter ended September 30, 2004. Linktone's gross revenues for the third quarter of 2004 were $13.3 million. This was up 171% from $4.9 million for the third quarter of 2003 and up 10% from $12.1 million for the second quarter of 2004.

Raymond Yang, CEO of Linktone, said, "We believe that the company's wireless focus and market expertise are driving the business forward faster than industry competitors. We are building a strong foundation and look forward to competing aggressively in order to increase our share of a healthier and more robust market for wireless value-added services in China in 2005."

Third-quarter 2004 net income under U.S. GAAP was $2.8 million, or $0.10 per fully diluted American Depositary Share (ADS). This compares with $1.1 million, or $0.05 per fully diluted ADS, for the third quarter of 2003 and with $3.5 million, or $0.13 per fully diluted ADS, for the second quarter of 2004.

Linktone's third-quarter 2004 net income under GAAP included a total of $0.8 million in one-time expenses associated with discontinued financing activities and office relocation, as well as non-cash stock-based compensation expense. Excluding the effect of these one-time or non-cash expenses, adjusted net income for the third quarter was $3.6 million, or $0.13 per fully diluted ADS. The reconciliation of GAAP financial measures with non-GAAP measures for net income and net income per ADS included in this press release is set forth below in the company's financial statements. All per-share computations for the third quarter were based on 27.2 million weighted average ADSs outstanding on a fully diluted basis.

Non-SMS (short messaging services) revenue, for 2.5G and audio-related services, was $2.7 million for the third quarter, up 145% sequentially from $1.1 million for the second quarter. Non-SMS services accounted for 20% of Linktone's third-quarter gross revenues, up from 9% for the second quarter. 2.5G services — including multimedia messaging services (MMS), wireless application protocol (WAP) services and Java games — contributed 11% of third-quarter gross revenues. Audio-related services, including ring-back services and interactive voice response (IVR) services, generated 9% of gross revenues.

Linktone's SMS revenue for the third quarter was $10.6 million, compared with $11.0 million for the prior quarter. The company attributed the sequential decline principally to implementation issues associated with mobile operators' roll-out of new service and billing management platforms, including China Mobile's Mobile Information Service Center (MISC). These new platforms are designed to improve compliance with the operators' policies in order to achieve higher customer service standards. In addition, the mobile operators have recently curtailed their cooperative marketing efforts with service providers such as Linktone, which has affected the company's marketing activities and SMS sales.

In the third quarter, the number of Linktone paying users per month averaged 7.2 million, up 4% from 6.9 million in the second quarter. The company's average revenue per user (ARPU) was $0.61 per month for the third quarter, up 5% from $0.58 per month for the previous quarter.

Linktone's gross margin for the third quarter was 68% of net revenues, or gross revenues minus business tax. This compares with 62% for the third- quarter of 2003 and with 68% for the second quarter of 2004.

Third-quarter operating expenses totaled $5.8 million, compared with $1.8 million for the same quarter a year ago and with $4.6 million for the prior quarter. The sequential increase reflected general business expansion and planned investments in marketing and sales, as well as one-time expenses.

Product development expenses for the third quarter were $0.7 million, compared with $0.2 million a year ago and with $0.7 million for the previous quarter.

Selling and marketing expenses were $2.5 million, compared with $0.6 million year-over-year and with $2.2 million sequentially. The sequential increase was due primarily to increased marketing expenses related to the 2004 Olympics and continued diversification of marketing channels.

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