Tom Online's (TOMO) total revenues for the third quarter ended September 30, 2006 were US$38.95 million, a decrease of 15.2% from the same period last year and 22.3% from last quarter.

Wang Lei Lei, Chief Executive Officer and an Executive Director, said: "Although the current regulatory environment has severely impacted Tom Online's operational efficiency and financial performance in the third quarter, I believe the company remains as strong as ever in terms of its abilities to grow and expand our position in the wireless Internet space, strengthen our close working relationships with industry partners as well as continue to lead the market with our operational capabilities. With an outstanding workforce, I am confident Tom Online will be able to successfully navigate through this difficult period together with our partners."

Wireless Internet revenues were US$34.71 million, representing a 19.6% decrease from the same period last year and a 24.1% decrease from the previous quarter due to the impact from recently implemented operator and government policies. Wireless Internet revenues made up 89.1% of the company's total quarterly revenues.

Online advertising revenues were US$3.53 million, representing a 36.3% increase from the same period last year but a 9.2% decrease from the previous quarter. Online advertising revenues made up 9.1% of the company's total quarterly revenues.

Wireless Internet revenues made up 89.1% of the company's total quarterly revenues compared to 91.2% in the second quarter. Online advertising revenues made up 9.1% of Tom Online's total quarterly revenues, up from 7.8% in the second quarter.

Gross profit was US$12.77 million representing a decrease of 37.0% compared to the same period last year and a 33.0% decline QoQ. Gross margins declined to 32.8% in 3Q06 from 38.0% in the 2Q06 and 44.1% in the 3Q05. The sequential decline in gross margins was due to the steep decline in revenues while a portion of the company's cost of sales are fixed in nature, such as staff compensations, depreciation, bandwidth and some marketing costs, amongst others. Total cost of sales in 3Q06 was US$26.18 million compared to US$31.05 million in 2Q06, or a QoQ decline of 15.7%. Total revenues dropped 22.3% QoQ.

Total operating expenses were US$8.55 million in 3Q06, 6.8% higher than 2Q06 and roughly flat compared to the same period last year.

In addition, during the third quarter, the company recognized US$0.74 million in SBC expenses which are excluded from the company's non-GAAP presentation of earnings. Operating income was US$4.22 million, down 63.3% from the same period last year and 61.8% from the previous quarter. Excluding SBC expenses, Non-GAAP operating income would have been US$4.96 million. Operating margins were 10.8% in the third quarter, compared to 22.1% in the previous quarter.

Looking forward, the company continues to believe that its mobile operator partners will consolidate their value added service business towards a smaller group of large scale wireless Internet service providers and believes this will benefit business in the long run.

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