Tech Market WatchBy Perry Wu
This past week Linktone (LTON) delivered its third quarter results and it sounded promising. Linktone's gross revenues were up 171%; and profits rose to US$2.8 million from US$1.1 million in last year's third quarter. And amid all the turmoil in China's SMS market, Linktone's SMS revenue held steady at US$10.6 million, compared with US$11 million from the prior quarter. But with all this good news, Linktone's executives already have their eye on the exits.

CEO Raymond Yang delivered a lengthy conference call briefing. He said so far Linktone has stayed the course over the last three months. Its total cash of more than US$70 million has remained intact. And it has resisted the temptation to use this cash on ill-advised acquisitions (so far).

Some more attractive news for Linktone investors: The heads of Google, Yahoo, Intel and Cisco were interviewed this past week together on an overseas television station. The interviewer asked these CEOs to predict a company that two years from now might emerge from nowhere to take the tech world by storm. One of the CEOs (I think it was Paul Otellini of Intel) said that very likely it would not be an American company, perhaps a wireless company, and perhaps a Chinese wireless company. Ahhh…

At first glance, Linktone fits this bill. It is a fast-growing Chinese wireless company. Then again, probably not. Linktone still has underlying problems to overcome with its credibility as a listed company. For example, take a look at how it has treated its stock options.

You see, while you weren't looking the past three months, the company has quietly loosened its policy on how its executives can exercise stock options. From now on, an executive who leaves Linktone will lose fewer rights to exercise his stock options. Whereas before, a Linktone executive leaving the company early was penalized by losing a certain number of stock options, that penalty no longer applies. In essence, one of the main legitimate purposes of stock options–encouraging executives to stay–has now been thrown to the wayside. Why?!

Linktone mentions that if all executives were to leave the company and exercise their stock options, the compensation expense would amount to about US$4 million. That might not sound much for a larger company, but for a company whose quarterly net income is around US$3 million, this could be a material expense. Non-cash stock-based compensation expense already stands at US$0.5 million for the past quarter.

How ironic. Tech companies tend to be some of the biggest proponents of granting stock options, as they say options are one of the major human-resource motivators in a cash-poor company's arsenal. But if you have a stock option policy that does not encourage executives to stay, what's the use of stock options? And if the executives don't plan to remain with the company, why should a sane individual invest in that company?

About the author:
Perry Wu is a writer and correspondent for 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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