For years, Chinese wireless value-added services firm Linktone (LTON) has had continuous problems in trying to find a revenue model, and its just-released unaudited financial results for the fourth quarter and fiscal year ended December 31, 2006 show the trend will continue.

Linktone's dismal results start with its recorded revenues of US$14.0 million, compared with US$19.6 million in the third quarter of 2006 and US$20.6 million in the fourth quarter of 2005. For the year, net income decreased 45% to US$6.8 million from US$12.4 million in fiscal 2005.

Chief Executive Officer Michael Li is doing his best to keep his ship afloat and said, "Although our revenues for the quarter were impacted by the regulatory environment for wireless service providers, we were able to generate positive net income of US$0.4 million for the quarter. In addition, during the quarter we made significant efforts to reduce operating expenditures and bring them in line with the current and near-term wireless value added services (WVAS) market environment. Towards the latter part of 2006, Linktone began aggressively pursuing key investments and partnerships in the entertainment and media space. Moving into 2007, we will continue to build on these initiatives and bolster Linktone's wireless leadership position in interactive multimedia entertainment. By combining the power of Linktone's wireless platform expertise with our partnerships with industry leaders in television, print media and radio, our goal is to deliver high quality services that will capitalize on Chinese consumers growing demand for interactive entertainment."

For the first quarter ending March 31, 2007, Linktone expects gross revenue to be approximately US$14.5 to US$15.5 million. The company anticipates GAAP net loss in the first quarter of 2007 to be approximately US$0.13 to US$0.15 per ADS, before considering the potential effect of any new accounting standards or tax regulations, such as FIN 48.

Li unfortunately also said, "In 2007, Linktone plans to invest approximately US$15 million in programming and distribution initiatives to bolster the company's interactive wireless cross media strategy. As a result of these investments, we expect to be operating at a loss for the next 2-3 quarters, but expect to return to earnings growth towards the end of the year and believe that this will result in long-term value and growth for our shareholders in 2008 and beyond."

Linktone's net income for the fourth quarter was US$0.4 million, or US$0.02 per fully diluted ADS, compared with US$1.0 million, or US$0.04 per ADS, for the third quarter of 2006 and US$1.5 million, or US$0.05 per fully diluted ADS, for the fourth quarter of 2005. Linktone attributes the decrease in GAAP net income for the fourth quarter compared with the previous quarter primarily to a decline in WVAS revenue, increased expenditures relating to cost sharing arrangements for production and third party distribution of television programs such as the TV Show "China Vision" with Zhongbang Culture Media, a subsidiary of Shandong Satellite TV Station, and certain marketing programs for its existing wireless services which failed to produce the anticipated top line revenue.

Data-related services revenue was US$9.2 million, representing 66% of total revenues, compared with US$13.0 million or 66% for the third quarter of 2006. Audio related services accounted for 29%, or US$4.1 million of total revenues, compared with 32% or US$6.3 million for the third quarter of 2006.

Non-MVAS revenue accounted for 5%, or US$0.7 million of total revenues in the fourth quarter of 2006 compared with 2%, or US$0.3 million for the third quarter of 2006. The increase is predominately due to advertising service revenues in the fourth quarter of 2006, and casual games related revenues in the third quarter of 2006.

Gross margin was 62.5% of net revenues, or gross revenues minus business tax, compared with 61% for the third quarter of 2006 and 58% for the fourth quarter of 2005. Operating loss was 0.6% of net revenues, compared with operating profit margin of 4% for the third quarter of 2006 and 7% in the fourth quarter of 2005.

Operating expenses totaled US$8.5 million, compared with US$10.8 million in the third quarter of 2006 and US$10.0 million for the fourth quarter of 2005.

Linktone says cash and cash equivalents, as well as short-term investments available for sale totaled US$52.5 million, compared with US$46.9 million for the third quarter of 2006. Cash flow generated from operations totaled US$5.1 million.

The company's gross revenues rose 8% for fiscal year 2006 to US$79.8 million, compared to the US$73.6 million reported for 2005. The increase was mainly achieved in the first half of the year. Revenue declined in the second half of the year following implementation of new mobile operator policies beginning in July of 2006. Gross profit margin remained unchanged at 62% in 2005 and 2006.

Full-year net income under GAAP was US$6.8 million, or US$0.26 per fully diluted ADS, compared with US$12.4 million, or US$0.45 per fully diluted ADS, for fiscal 2005. Excluding the effect of non-cash stock-based compensation, non-GAAP adjusted net income for 2006 was US$8.3 million, or US$0.32 per fully diluted ADS, compared with US$14.5 million, or US$0.53 per fully diluted ADS, for 2005.

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