KongZhong Corporation Reports Third Quarter 2016 Unaudited Financial Results

BEIJING, Dec. 6, 2016 /PRNewswire/ -- KongZhong Corporation (NASDAQ: KZ), a leading online game publisher and developer in the PRC, today announced its unaudited financial results for the third quarter of 2016.

Third Quarter 2016 Financial Highlights

• Total revenues for the third quarter of 2016 were US$40.97 mn, an 11.61% decrease from the second quarter of 2016 but a 6.19% increase from the same period last year.
• Total gross profit was US$18.97 mn, a 16.32% decrease from the second quarter of 2016 but a 12.24% increase from the same period last year.
• Net income was US$5.34 mn, with diluted net income per American Depositary Shares ("ADS") of US$0.11.
• Non-GAAP net income was US$6.17 mn, a 24.91% decrease from the second quarter of 2016 but a 35.90% increase from the same period last year, with Non-GAAP diluted net income per ADS of US$ 0.13 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures").
• As of September 30th 2016, the Company had US$147.08 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash net of a US$64.94 mn short-term bank loan. The mark to fair value of the Company's investments in Ourgame and Forgame were priced at HK$3.96 and HK$8.81 per ordinary share, respectively (or US$10.59 mn and US$13.70 mn, respectively) as of September 30th 2016, compared to the mark to fair value of the Company's investments in Ourgame and Forgame which were priced at HK$3.47 and HK$10.10 per ordinary share, respectively (or US$9.27 mn and US$15.70 mn, respectively) as of June 30th 2016.

Business Highlights

• The Company will continue to concentrate its efforts in Internet Games and Mobile games around its War Saga game platform, China's leading military genre online game platform.

Revenues

Total revenues for the third quarter of 2016 were US$40.97mn, an 11.61% decrease from the second quarter of 2016 but a 6.19% increase from the same period last year.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$29.95 mn in the third quarter of 2016, a 9.04% decrease from the second quarter of 2016 but a 26.14% increase from the same period last year.

For the third quarter of 2016, mainland China online game operations achieved average monthly active users ("MAUs") of 2.14 mn and aggregated monthly paying accounts ("APAs") of 340k with monthly average revenue per user ("ARPU") of RMB 192.

Internet game revenues made up 73.1% of total revenues in the third quarter of 2016.

Mobile Games Revenues

Total mobile game revenues were US$5.33 mn, a 1.86% decrease from the second quarter of 2016 but a 98.92% increase from the same period last year. The increase in mobile game revenues was due to the newly launched mobile games in the Chinese domestic market and overseas.

Total mobile game revenues made up 13.0% of total revenues in the third quarter of 2016.

WVAS Revenues

WVAS revenues were US$5.69 mn, a 28.81% decrease from the second quarter of 2016 and a 53.21% decrease from the same period of last year.

WVAS made up 13.9% of total revenues in the third quarter of 2016.

Gross Profit

Total gross profit for the third quarter of 2016 was US$18.97 mn, a 16.32% decrease from gross profit in the second quarter of 2016 but a 12.25% increase from gross profit in the same period last year.

Total gross margin was 46.3% in the third quarter of 2016 compared to gross margins of 48.9% in the second quarter of 2016.

Internet Game Gross Profit

Internet game gross profit was US$16.15 mn, a 14.46% decrease from gross profits in the second quarter of 2016 but a 27.07% increase from gross profit in the same period last year. Internet game gross margin was 53.9% compared to 57.3% in the second quarter of 2016.

Mobile Game Gross Profit

Mobile games gross profit was US$1.76 mn, a 23.29% decrease from the second quarter of 2016 but a 64.37% increase from the same period last year. Mobile games gross margin was 33.1% compared to 42.3% in the second quarter of 2016.

WVAS Gross Profit

WVAS gross profit was US$1.06 mn, a 29.07% decrease from the second quarter of 2016 and a 65.94% decrease from the same period last year. WVAS gross margin was 18.7% compared to 18.8% in the second quarter of 2016.

Operating Expenses

Total operating expenses in the third quarter of 2016 were US$15.10 mn compared to US$18.68 mn in the second quarter of 2016.

Product development expenses in the third quarter of 2016 were US$5.47 mn compared to US$5.61 mn in the second quarter of 2016.

Sales and marketing expenses in the third quarter of 2016 were US$6.63 mn compared to US$9.12 mn in the second quarter of 2016. Sales and marketing expenses decreased primarily due to the decreased promotion activities of some of our Internet games in the third quarter.

General and administrative expenses in the third quarter of 2016 were US$3.00 mn compared to US$2.23 mn in the second quarter of 2016.

The Company's total headcount in the third quarter of 2016 was 837 staff compared to 822 staff at the end of the second quarter of 2016.

Earnings

US GAAP net income and diluted income per ADS were US$5.34 mn and US$ 0.11, respectively. Non-GAAP net income and diluted income per ADS were US$6.17 mn and US$ 0.13, respectively.

Total ADS on a diluted basis outstanding during the third quarter of 2016 were 47.30 mn, compared to 47.32 mn outstanding during the second quarter of 2016.

Recent Developments

On June 29, 2015, the Company announced that its board of directors (the "Board") had received a preliminary non-binding proposal letter from Leilei Wang, chairman and chief executive officer of the Company, and IDG-Accel China Growth Fund II L.P. to acquire all of the outstanding ordinary shares of the Company not owned by them or their affiliates for US$8.56 in cash per American depositary share (the "ADS", each representing forty ordinary shares) (the "Going Private Proposal").

On July 8, 2015, the Company announced that the Board has formed a special committee (the "Special Committee") consisting of two independent directors, Hope Ni and Xiaolong Li, and delegated to the Special Committee the exclusive power and authority of the Board to, among other things, evaluate and respond to the Going Private Proposal. Ms. Ni is serving as the chair of the Special Committee.

On November 3, 2015, the Company announced that the Special Committee has retained Duff & Phelps, LLC and Duff & Phelps Securities LLC as its financial advisors and Skadden, Arps, Slate, Meagher & Flom as its legal counsel in connection with its review and evaluation of the Going Private Proposal.

On August 25, 2016, the Company announced the Board received a revised non-binding proposal letter, dated August 25, 2016, from Mr. Leilei Wang, and IDG-Accel China Growth Fund II L.P., who, together with certain other parties, formed a buyer group (the "Buyer Group") to acquire all of the outstanding ordinary shares of the Company not owned by them or their affiliates for US$7.18 in cash per ADS, or approximately US$0.1795 per ordinary share.

On December 1, 2016, following the unanimous recommendation of the Special Committee and the approval by the Board, the Company entered into a definitive agreement and plan of merger (the "Merger Agreement") with affiliates of the Buyer Group. Pursuant to the terms of the Merger Agreement, at the effective time of the merger, each ordinary share of the Company issued and outstanding immediately prior to the effective time of the merger will be cancelled in exchange for the right to receive $0.18875 in cash, and each ADS will be cancelled in exchange for the right to receive $7.55 in cash, except for shares owned by certain affiliates of the Buyer Group and dissenting shares.

The merger is subject to customary closing conditions, including the approval of the Merger Agreement by the affirmative vote of holders of ordinary shares representing at least two-thirds of the voting power of the ordinary shares present and voting in person or by proxy at a meeting of the Company's shareholders convened to consider the approval of the Merger Agreement and the merger.

The Company does not undertake any obligation to provide any updates with respect to this or any other proposed transaction, except as required under applicable law.

Conference Call

KongZhong's management will hold a conference call and live webcast to discuss the results at 7:30 PM Eastern Standard Time (EST) on Monday, December 5, 2016 (8:30 AM Beijing/Hong Kong time, Tuesday, December 6, 2016)

The Company welcomes all interested parties to participate in the live conference call. An Operator will greet you and ask for the Conference ID shown as following.

Conference ID: 24978558

The dial-in details are as below:

- U.S. Toll Free Dial-in Number: +1 866 519 4004
- U.S. Dial-in Number: +1 845 675 0437
- Hong Kong Toll Free Dial-in Number: 800 906 601
- Hong Kong Dial-in Number: +852 3018 6771
- Mainland China Dial-in Number: 800 819 0121, 400 620 8038
- International Dial-in Number: +65 6713 5090

The live conference call via webcast and archive replay will be available on the Investor Relations section of KongZhong's website at http://ir.kongzhong.com. The archive replay will be available on the website shortly after the call.

A dial-in replay of the conference call will be available until December 13, 2016 (EST):

- U.S. Toll Free Dial-in Number: +1 855 452 5696
- U.S. Dial-in Number: +1 646 254 3697
- Hong Kong Toll Free Dial-in Number: 800 963 117
- Hong Kong Dial-in Number: +852 3051 2780
- Mainland China Toll Free Dial-in Number: 800 870 0206, 400 602 2065
- International Dial-in Number: +61 2 8199 0299

About KongZhong

KongZhong Corporation (NASDAQ: KZ), listed on Nasdaq in 2004, is a leading online game developer and operator in China. KongZhong operates three main business units, namely Internet Games, Mobile Games and WVAS. Under Internet Games, KongZhong operates the largest Chinese military gaming platform under the "WAR SAGA" brand, which includes games such as World of Tanks, World of Warplanes and World of Warships. KongZhong has the exclusive publishing rights for World of Tanks, World of Warplanes, World of Warships, Guild Wars 2, Blitzkrieg 3 and other titles in Mainland China.

KongZhong entered the smartphone game industry in 2011 through an acquisition of smartphone game engine and has expanded its mobile game development team across 4 cities across Mainland China. KongZhong offers popular mobile games in China and overseas with over 10 smartphone games across various genres being under development, including RPG, RTS, military, fantasy and etc. For more information, please visit http://ir.kongzhong.com.

Safe Harbor Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding trends in the wireless value-added services, wireless media, mobile games and online games industries and our future results of operations, financial condition and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in China's wireless value-added services, wireless media, mobile games and online games industries and the effect of such pressure on revenues; our ability to develop new products that are commercially successful; unpredictable changes in technology, consumer demand and usage preferences in the markets we operate; our ability to protect our intellectual property rights; the short operating history of certain of our business segments, in particular the online games segment; the state of and any change in our relationship with China's telecommunications operators; our dependence on the billing systems of telecommunications operators for our performance; the outcome of our investment of operating income generated from the WVAS segment into the development of our wireless Internet, mobile games and online games segments; changes in the regulations or policies of the Ministry of Industry and Information Technology and other government authorities relevant to our businesses; and changes in political, economic, legal and social conditions in China, including the Chinese government's policies with respect to economic growth, foreign exchange, foreign investment and entry by foreign companies into China's telecommunications and online games markets. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this press release.

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