KongZhong Corporation Reports First Quarter 2016 Unaudited Financial Results

BEIJING, June 16, 2016 /PRNewswire/ -- KongZhong Corporation (NASDAQ: KZ), a leading online game publisher and developer in the PRC, today announced its unaudited financial results for the first quarter of 2016.

First Quarter 2016 Financial Highlights

• Total revenues for the first quarter of 2016 were US$ 51.44 mn, a 21.11% increase from the fourth quarter of 2015 and a 1.84% increase from the same period last year.
• Total gross profit was US$ 22.10 mn, a 16.18% increase from the fourth quarter of 2015 and a 15.62% increase from the same period last year.
• Net income was US$ 25.60 mn, a 319.72% increase from the fourth quarter of 2015 and a 510.03% increase from the same period last year, which included the realized gain of US$ 19.78 mn on a partial disposal of the shares in investment of Ourgame. Diluted net income per American Depositary Shares ("ADS") was US$ 0.54.
• Non-GAAP net income was US$ 6.73 mn, a 3.71% decrease from the fourth quarter of 2015 but a 30.07% increase from the same period last year, with Non-GAAP diluted net income per ADS of US$ 0.14 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures").
• As of March 31st 2016, the Company had US$ 163.49 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 3.47 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 65.44 mn short-term bank loan. The mark to fair value of the Company's investments in Ourgame and Forgame were priced at HK$ 4.35 and HK$ 11.44 per ordinary share, respectively (or US$ 11.63mn and US$ 17.78 mn, respectively) as of March 31st 2016, compared to the mark to fair value of the Company's investments in Ourgame and Forgame which were priced at HK$ 5.75 and HK$ 13.04 per ordinary share, respectively (or US$ 44.47 mn and US$ 20.29 mn, respectively) as of December 31st 2015.

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. The Company plans to test and release additional mobile and PC games around the War Saga theme in 2016,

Revenues

Total revenues for the first quarter of 2016 were US$ 51.44 mn, a 21.11% increase from the fourth quarter of 2015 and a 1.84% increase from the same period last year.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$ 37.01 mn in the first quarter of 2016, an increase of 21.45% from the fourth quarter of 2015 due to the release of World of Warships on November 27th 2015 and the release of the first expansion pack for Guild Wars 2: Heart of Thorns, to the mainland China market on November 20th 2015.

For the first quarter of 2016, mainland China online game operations achieved average monthly active users ("MAUs") of 2.74 mn and aggregated monthly paying accounts ("APAs") of 455k with monthly average revenue per user ("ARPU") of RMB 170.

Internet game revenues made up 72.0% of total revenues in the first quarter of 2016.

Mobile Games Revenues

Total mobile game revenues were US$ 4.50 mn, a 126.88% increase from the fourth quarter of 2015 but a 57.38% decrease from the same period last year. The increase in mobile game revenues was due to the newly launched mobile game, Rush Three Kingdoms in Japan on March 10th 2016, and the release of Rush Three Kingdoms in Southeast Asia on March 17th 2016. In the Chinese domestic market, we released the Battle of Warship on March 16th 2016 and Battleship Girl on April 20th 2016 on the IOS and Android smartphone platforms.

Total mobile game revenues made up 8.7% of total revenues in the first quarter of 2016.

WVAS Revenues

WVAS revenues were US$ 9.93mn, a 0.87% decrease from the fourth quarter of 2015 and a 26.96% decrease from the same period of last year.

WVAS made up 19.3% of total revenues in the first quarter of 2016.

Gross Profit

Total gross profit for the first quarter of 2016 was US$22.10 mn, a 16.18% increase from gross profit in the fourth quarter of 2015 and a 15.62% increase from the same period last year.

Total gross margin was 43.0% in the first quarter of 2016 compared to gross margins of 44.8% in the fourth quarter of 2015.

Internet Game Gross Profit

Internet game gross profit was US$ 19.20 mn, a 19.19% increase from gross profits in the fourth quarter of 2015 and a 59.49% increase from the same period last year. Internet game gross margin was 51.9% compared to 52.9% in the fourth quarter of 2015.

Mobile Game Gross Profit

Mobile games gross profit was US$ 0.41 mn, a 3.98% decrease from the fourth quarter of 2015 and an 89.45% decrease from the same period last year. The decrease in gross profit was due to recognition of prior prepaid license fees for offline mobile games that will not launched in future yet. Mobile games gross margin was 9.1% compared to 21.5% in the fourth quarter of 2015.

WVAS Gross Profit

WVAS gross profit was US$2.49 mn, a 0.12% increase from the fourth quarter of 2015 but a 21.92% decrease from the same period last year. WVAS gross margin was 25.0% compared to 24.8% in the fourth quarter of 2015.

Operating Expenses

Total operating expenses in the first quarter of 2016 were US$17.48 mn compared to US$16.80 mn in the fourth quarter of 2015.

Product development expenses in the first quarter of 2016 were US$ 6.16 mn compared to US$ 6.18 mn in the fourth quarter of 2015.

Sales and marketing expenses in the first quarter of 2016 were US$ 9.07 mn compared to US$6.35 mn in the fourth quarter of 2015. Sales and marketing expenses increased primarily due to the increased promotion activities of some of our Internet games and the newly launched smartphone games in 1Q 2016.

General and administrative expenses in the first quarter of 2016 were US$2.25 mn compared to US$4.27 mn in the fourth quarter of 2015. General and administrative expenses moderated primarily due to the decreased consulting and travel related expenses relating to our corporate investment activities, and bad debt provision relating to our WVAS business in 1Q16 compared to 4Q 2015.

The Company's total headcount in the first quarter of 2016 was 789 staff compared to 793 staff at the end of the fourth quarter of 2015.

Earnings

US GAAP net income and diluted income per ADS were US$ 25.60 mn and US$ 0.54, respectively. Non-GAAP net income and diluted income per ADS were US$ 6.73 mn and US$ 0.14, respectively.

Total ADS on a diluted basis outstanding during the first quarter of 2016 were 47.50 mn, compared to 47.30 mn outstanding during the fourth quarter of 2015.

Balance Sheet

As of March 31, 2016, the Company had US$ 163.49mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 3.47 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 65.44mn short-term bank loan. The mark to fair value of the Company's investments in Ourgame and Forgame were priced at HK$ 4.35 and HK$ 11.44 per ordinary share, respectively (or US$ 11.63mn and US$ 17.78mn, respectively) as of March 31,2016, compared to the mark to fair value of the Company's investments in Ourgame and Forgame which were priced at HK$ 5.75 and HK$ 13.04 per ordinary share, respectively (or US$ 44.47mn and US$ 20.29mn, respectively) as of December 31, 2015.

Investment in Ourgame

In November 2015, the Company entered into an agreement to partially dispose of its investment in Ourgame to Glassy Mind Holdings Limited, a third party, at a price of HK$6.1062 per share, for a total consideration of approximately HK$239.4 million (equivalent to approximately US$30.9 mn), with approximately 80% of the total consideration to be paid in cash immediately upon the completion of the sale and the remaining consideration to be paid in cash on September 30, 2016. The sale was completed in February 2016 and the Company received US$25.1 million in February 2016. The Company held a 2.63% interest in Ourgame thereafter. In the first quarter of 2016, the Company recognized a realized gain of US$19.78mn on the partial disposal of the shares in Ourgame in the statements of comprehensive income (loss). The cost of securities sold is determined based on specific identification method.

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.

The Board cautions the Company's shareholders and others considering trading in the Company's securities that no decisions have been made by the Special Committee or the Company with respect to the Company's response to the Going Private Proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other proposed transaction involving the Company, its securities and/or its assets will be approved or consummated. 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 Wednesday, June 15, 2016 (7:30 AM Beijing/Hong Kong time, Thursday, June 16, 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: 23951963

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 June 23, 2016 (EST):

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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