Telecom & Wireless

Linktone Reports Weak Wireless Revenue, Widening Operating Loss In China

Chinese wireless value-added services company Linktone (LTON) is fighting the tide of sinking wireless fortune as its unaudited financial results for the second quarter ended June 30, 2008 show it only recorded revenues of USD19.1 million, compared with USD20.5 million in the first quarter of 2008, and an operating loss was 58% of net revenues, compared with operating loss of 20% for the first quarter of 2008.

The company had a GAAP net loss of USD10.6 million, compared with net loss of USD4.2 million in the first quarter of 2008 and net loss of USD3.2 million in the second quarter of 2007.

Data-related services revenue was USD6.9 million, representing 36% of total revenues, compared with USD7.3 million or 36% for the first quarter of 2008. SMS revenue represented 21% of total gross revenues, compared with 26% for the first quarter of 2008. SMS revenue was USD4.0 million for the second quarter of 2008, compared with USD5.4 million for the first quarter of 2008. The reduction in SMS revenue was due to a restriction on the service fees that the company can charge to customers as a result of the implementation of a performance ranking policy by one of the telecom operators, effective in April 2008. Under the policy, service providers are ranked quarterly according to certain performance criteria that determine the maximum service fees they may charge. Linktone's initial ranking resulted in reduced fees that Linktone can charge its customers during the quarter.

MMS revenue represented 10% of total gross revenues, compared with 6% for the first quarter of 2008. MMS revenue was USD2.0 million for the second quarter of 2008, compared with USD1.2 million for the first quarter of 2008. WAP revenue represented 3% of total gross revenues, compared with 2% for the first quarter of 2008. WAP revenue was USD0.6 million for the second quarter of 2008, compared with USD0.4 million for the first quarter of 2008. Java revenue represented 2% of total gross revenues in both the first and second quarter of 2008, with revenue in each quarter of USD0.3 million — barely enough to even bother reporting.

Advertising service revenue accounted for 24%, or USD4.6 million, of total revenues in the second quarter of 2008, compared with 20%, or USD4.0 million, for the first quarter of 2008.

Linktone's affiliated companies terminated their agreements with Chinese Youth League Internet, Film and Television Centre with regard to Qinghai Satellite Television effective July 1, 2008. The termination of these agreements resulted in an impairment charge of USD6.0 million with respect to the company's investment in QSTV, which has been fully reserved in the second quarter.

Gross margin was 9% of net revenues, or gross revenues minus business tax, compared with 17% for the first quarter of 2008 and 39% for the second quarter of 2007. Operating loss was 58% of net revenues, compared with operating loss of 20% for the first quarter of 2008 and operating margin of 32% in the second quarter of 2007. The sequential increase in operating loss was primarily attributed to an impairment charge of USD6.0 million during the quarter.

Cash and cash equivalents, as well as short-term investments available for sale, totaled USD105.3 million, compared with USD39.7 million for the first quarter of 2008. The increase in cash and cash equivalents was primarily due to an outside strategic investment of USD68.4 million received in April 2008.

For the third quarter ending September 30, 2008, Linktone expects gross revenue to be approximately USD18.0 to USD19.5 million, with WVAS and game revenues to be between USD14.0 and USD15.0 million and advertising revenues to be between USD4.0 and USD4.5 million.

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