Chinese wireless value-added services provider Linktone (LTON) showed a decrease in profit in its second quarter financial results.

Short Messaging Services (SMS) revenue represented 56% of total gross revenues, compared to 65% for the first quarter of 2006. This represents a decrease to US$13.1 million, from US$14.9 million. Multimedia Messaging Services (MMS) increased to 7% of total gross revenues from 4% for the first quarter of 2006 rising to US$1.6 million from US$0.9 million.

Gross margin was 63% of net revenues, or gross revenues minus business tax, compared with 61% for the first quarter of 2006 and second quarter of 2005. The sequential increase was due primarily to the diversification of the company's product portfolio.

Operating expenses totaled US$11.3 million, unchanged compared with the first quarter of 2006 and compared with US$7.8 million for the second quarter of 2005.

Cash and cash equivalents, as well as short-term investments available for sale totaled US$61.8 million, compared with US$65.4 million for the first quarter of 2006. Cash flow generated from operations totaled US$3.5 million, but the decrease was due to investment activities related to Linktone's share buyback program and payments for business acquisitions.

Following the recent announcement of new policy changes introduced by China's mobile network operators, the company determined that this will likely have a material negative impact on the Company's results of operations for the remainder of 2006 principally. Linktone expects fewer new subscribers due to double confirmations, increasing cancellation rates by existing users due to billing reminders and required positive confirmations; and increased user acquisition costs.

For the third quarter ending September 30, 2006, Linktone expects gross revenue to be approximately US$17.5-$18.5 million. The company also anticipates GAAP net income to decrease in the third quarter to approximately US$0.02 per ADS.


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