Multimedia firm reports 27pc drop in third-quarter profit Tom Online's net profit dived in the third quarter as gross margins declined due to investment costs and a slowdown in wireless services. The Beijing-based company saw its net profit for the three months to September drop by 27.61 per cent to US$7.28 million from the second quarter. Total revenue grew only 1.67 per cent to US$31.39 million. The gross margin was down at 43 per cent in the third quarter - against 51 per cent in the previous quarter and 48 per cent a year ago - as a result of the slowdown in interactive voice response (IVR) service due to higher content costs and tighter industry controls. 'The third quarter was a very difficult quarter,' said Tom Online chief executive Wang Leilei. 'Gross margin had hit the bottom after our acquisition and investment. We expect to have a better [gross margin] in the fourth quarter.' Mr Wang said the IVR offering experienced a recovery last month as the company resumed co-promotion with China Mobile. The firm in August announced a deal to buy wireless entertainment company Treasure Base Investments for 550 million yuan - its first acquisition since its March dual listing in Hong Kong and New York - to pave the way for its entry into the lucrative television short-message business. In the same month, it invested jointly in a US$3.5 million deal with Qualcomm and IDG in Sichuan Great Wall Software Group to develop wireless mobile software applications. Meanwhile, it had a soft launch last month of its instant-messaging services in partnership with Luxembourg-based Skype Technologies. Mr Wang expected the business to make a significant contribution to the company in the second quarter next year with revenue mainly from advertising sales. The firm would continue to seek acquisition opportunities especially in internet assets with rich content and high traffic, Mr Wang said. Shares in Tom Online closed up 3.42 per cent at $1.21 yesterday before the results announcement, still lower than the initial public offering price of $1.50. The company expects total revenue to increase 5 to 8 per cent in the fourth quarter. Sales from its cash-cow short-messaging service will drop to less than 50 per cent of total turnover in this quarter from 52 per cent in the third quarter. Revenue from wireless application protocol and 2.5G service will grow 5 to 10 per cent quarter to quarter and it will contribute more than 50 per cent of the top line by June next year. Online advertising - which had sales of US$2.41 million in the third quarter - will stay flat until the end of the year due to seasonal factors, according to the firm. It said it had no plan to stop operating commercial enterprise solutions, despite low sales, of US$719,000, in the third quarter.