KongZhong Corporation Reports Fourth Quarter 2014 Unaudited Financial Results

BEIJING, March 12, 2015 /PRNewswire/ -- KongZhong Corporation (NASDAQ: KZ), a leading online games publisher and developer in the PRC, today announced its unaudited financial results for the fourth quarter of 2014 and full year 2014.

Fourth Quarter 2014 Financial Highlights

• Total revenues for the fourth quarter of 2014 increased 3.4% from the third quarter of 2014 and increased 43.5% from the same period last year to US$ 61.64 mn, exceeding the guidance range of US$ 59 mn to US$ 60 mn.
• Total gross profit was US$ 26.68 mn, an increase of 11.9% from the third quarter of 2014 and 22.8% from the same period last year, exceeding the guidance range of US$ 24 mn to US$ 25 mn.
• Net income was US$ 9.07 mn, diluted net income per American Depositary Shares ("ADS") was US$ 0.19, in line with the guidance range of US$ 9 mn to US$ 10 mn.
• Non-GAAP net income was US$ 10.05 mn. Non-GAAP diluted net income per ADS was US$ 0.22(Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures"), in line with the guidance range of US$ 10 mn to US$ 11 mn.
• As of December 31 2014, the Company had US$ 188.20 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 4.06 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 42.4 mn short-term bank loan used to obtain US dollars to fund the one-time special dividend distributed in October 2014. The mark to fair value of the Company's strategic stake in Ourgame was priced as of December 31, 2014 at HK$ 2.64 per ordinary share (or US$ 20.01 mn) compared to the HK$ 3.59 per share price as of March 10, 2015(or US$ 27.20 mn), and the Company reclassified the investment as available-for-sale securities.

Full Year 2014 Financial Highlights

• Total revenues were US$ 227.60 mn for the full year of 2014 compared to US$ 173.65 mn in 2013 representing 31.1% YoY growth. Of which Internet games revenues were US$ 118.10 mn in 2014 compared to US$ 93.79 mn in 2013 representing 25.9% YoY growth, Mobile games revenues were US$ 45.04 mn in 2014 compared to US$ 16.91 mn in 2013 representing 166.4% YoY growth and WVAS revenues were US$ 64.46 mn in 2014 compared to US$ 62.95 mn in 2013 representing 2.4% YoY growth.
• Full year gross margin was 43.2% compared to 44.5% in 2013. Of which Internet games gross margin was 48.0%, Mobile games gross margin was 49.0% and WVAS gross margin was 30.4%.
• Net income in 2014 was US$ 22.59 mn compared to US$ 20.66 mn in 2013, representing 9.3% YoY growth. Net income in 2014 included a $1.32 mn impairment loss on intangible assets and US$ 2.0 mn impairment loss on long-term investments.
• Non-GAAP net income was US$ 29.90 mn compared to 2013 full year Non-GAAP net income of US$ 28.87 mn, representing 3.6% YoY growth. (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures").

The Company's Chairman and Chief Executive Officer, Leilei Wang said, "The Company reported stable cashflow performance while we returned capital to our shareholders in the form of a one-time special cash dividend in the fourth quarter of 2014. Looking towards 2015, we believe both our Internet and mobile game business are poised to see strong growth. In Internet games, we are actively working with our game development partners for the upcoming beta tests of the recently announced Guild Wars 2 expansion and the highly anticipated World of Warships as part of the War Sage series. In mobile games, we expect to increase the quantity of self-developed and licensed mobile games towards the middle of 2015 from current levels."

Business Highlights

• Internet Game Business Highlights

Key games under operations highlights

-- War Saga: World of Tanks is expected to be the primary contributor to Internet game revenues, supplemented by the 2nd War Saga game, World of Warplanes. World of Tanks is preparing to celebrate its 4th anniversary in China.

-- ArenaNet: The developer of Guild Wars 2, announced the first expansion for the game, "Hearts of Thorns", on January 24th 2015 with first playable demos of the expansion in early March 2015 at PAX East, with closed beta testing expected to follow in the near future.

Internet game pipeline highlights

-- World of Warships, the 3rd War Saga game, is expected to begin closed beta testing to Chinese players in 2Q15.

-- The Chronicles of Dragon Wing, a newly licensed 3D Turn-based Tactical Battle Game, will begin closed beta testing in 2Q15.

-- Auto Club Revolution, a free to play simulation auto racing game, will begin closed beta testing to Chinese players in 2Q15.

-- Blitzkrieg 3, an asymmetric real time strategy military game, will undertake alpha testing to Chinese players in 2Q15.

-- World of Tank Generals, a card based strategy cross platform military game, will begin its first alpha test to Chinese players in 2Q15.

• Mobile Game Business Highlights

1Q15 Overview

-- No new mobile game launches with smartphone game revenues driven mainly by 5 main games under operation including (1) Rush Three Kingdoms (Three Kingdoms themed Real Time Strategy) (2) My Princess is Cutest (Puzzle / Card RPG) and (3) General Three Kingdoms (Mobile Battle RPG)

For 2Q15 and beyond, we have the following mobile games in our pipeline.

-- Three Kingdoms themed 3D Action RPG from Chinese studio (Expected release 2Q15)

-- Western Fantasy themed Card Battle Game from Chinese studio (Expected release 2Q15)

-- Western Fantasy themed 3D mobile MOBA from Chinese studio (Expected release 2Q15)

-- Tank Battle Action RPG from Korean studio (Expected release 2Q15)

-- Western Fantasy themed 3D Action RPG co-development with Korean Studio 2nd half 2015 (Working name: Castle of Heroes)

-- Three Kingdoms themed Side-scrolling Action RPG co-development with Korean Studio 2nd half 2015 (Working name: Three Heroes)

-- Western Fantasy themed Real Time Strategy (RTS) and Tower Defense game (2Q15 or 3Q15)

-- Kuiba 3D Action RPG (Expected release 2nd half 2015)

-- At least 10 other mobile games under development internally, licensed or in discussions to license for 2nd half 2015 and 2016 release.

Revenues

Total revenues for the fourth quarter of 2014 were US$ 61.64 mn, a 3.4% increase from the third quarter of 2014 and 43.5% increase from the same period last year.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$ 29.45 mn in the fourth quarter of 2014, an increase of 20.1% from the same period of last year but a 8.4% QoQ decline, as although World of Tanks demonstrated continued stable performance, user activity and purchases in Guild Wars 2 and World of Warplanes declined. We expect performance and player purchases in Guild Wars 2 to remain moderated until the release of the upcoming expansion pack.

For the fourth quarter of 2014, mainland China online game operations achieved average monthly active users ("MAUs") of 1.8 mn and aggregated monthly paying accounts ("APAs") of 327k with monthly average revenue per user ("ARPU") of RMB 185.

Internet game revenues made up 47.8% of total revenues in the fourth quarter of 2014.

Mobile Games Revenues

Total mobile game revenues were US$ 15.18 mn, a 34.5% increase from the third quarter of 2014 and 210.9% increase from the same period of last year. The increase in mobile game revenues was due to the release of self-developed and licensed games on the iOS and Android smartphone platforms in the Chinese domestic market.

Total mobile game revenues made up 24.6% of total revenues in the third quarter of 2014.

WVAS Revenues

WVAS revenues were US$ 17.01 mn, a 5.0% increase from the third quarter of 2014 and 25.5% increase from the same period of last year.

WVAS made up 27.6% of total revenues in the fourth quarter of 2014.

Gross Profit

Total gross profit for the fourth quarter of 2014 was US$ 26.68 mn, an 11.9% increase from the third quarter of 2014 and 22.8% from the same period last year.

Total gross margin was 43.3% in the fourth quarter of 2014.

Internet Game Gross Profit

Internet game gross profit was US$ 13.55 mn, an 8.4% decrease from the third quarter of 2014 but flat compared to the same period last year. Internet game gross margin was 46.0% compared to 46.0% in the third quarter of 2014.

Mobile Game Gross Profit

Mobile games gross profit was US$ 8.03 mn, a 47.6% increase from the third quarter of 2014 and a 133.0% increased from the same period last year. Mobile games gross margin was 52.9% compared to 48.2% in the third quarter of 2014.

WVAS Gross Profit

WVAS gross profit was US$ 5.09 mn, a 41.6% increase from the third quarter of 2014 and 10.2% increase from the same period last year. WVAS gross margin was 29.9% compared to 22.2% in the third quarter of 2014.

Operating Expenses

Total operating expenses in the fourth quarter of 2014 were US$ 19.40 mn compared to US$ 21.11 mn which included US$ 1.32 mn impairment on intangible assets in the third quarter of 2014.

Product development expenses in the fourth quarter of 2014 were US$ 6.08 mn compared to US$ 6.58 mn in the third quarter of 2014.

Sales and marketing expenses in the fourth quarter of 2014 were US$ 9.08 mn compared to US$ 10.70 mn in the third quarter of 2014. Sales and marketing expenses moderated compared to prior period levels as we had no new major Internet game launches in the fourth quarter.

General and administrative expenses in the fourth quarter of 2014 were US$ 4.24 mn compared to US$ 2.50 mn in the third quarter of 2014. The increase in G&A was due to increase in consulting fees related to recent strategic investments, minor allocations to bad debt provision in our WVAS business and an increase in office expenses in 4Q14.

The Company's total headcount in the fourth quarter of 2014 was stable at 1,091 staff compared to 1,151 staff at the end of the third quarter of 2014.

Earnings

US GAAP net income and diluted income per ADS were US$ 9.07 mn and US$ 0.19, respectively. Non-GAAP net income and diluted income per ADS were US$ 10.05 mn and US$ 0.22, respectively.

Total ADS on a diluted basis outstanding during the fourth quarter of 2014 were 46.59 mn, compared to 46.64 mn outstanding during the third quarter of 2014.

Balance Sheet

As of December 31, 2014, the Company had US$ 188.20 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 4.06 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 42.4 mn short-term loan used to obtain US dollars to fund the one-time special dividend distributed in October 2014. The mark to market value of the Company's strategic stake in Ourgame was priced as of December 31, 2014 at HK$ 2.64 per ordinary share compared (or US$ 20.01 mn) compared to the HK$ 3.59 per share price as of March 10, 2015 (or US$ 27.20 mn).

The Company's strategic investment in Forgame Holdings Limited (Stock code: 00484.HK) was closed on January 23, 2015 and was funded from working capital.

Business Outlook (For the first quarter ending March 31, 2015)

The Company expects total revenues for the first quarter of 2015 to be within the range of US$ 46 mn to US$ 47 mn. The Company expects total gross profit to be within the range of US$ 17 mn to US$ 18 mn. We expect net income to be around US$ 4 mn and Non-GAAP net income is expected to be around US$ 5 mn.

Conference Call

KongZhong's management will hold a conference call and webcast to discuss the results at 7:30 PM Eastern Daylight Time (EDT) on Wednesday, March 11, 2015 (7:30 AM Beijing/Hong Kong time, Thursday, March 12, 2015)

The conference call will be available live via webcast 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.

The Company welcomes all interested parties to participate in the live conference call. The dial-in details are as below:

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.

A dial-in replay of the conference call will be available until March 19, 2015:

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. On May 15, 2014, KongZhong officially launched the most-anticipated 3D fantasy MMORPG Guild Wars 2 in China. KongZhong has the exclusive publishing rights for World of Tanks, World of Warplanes and World of Warships, Guild Wars 2, Auto Club Revolution, 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.

KongZhong Contacts

Investor Contact

Jay Chang
Chief Financial Officer

Liddy Li
Investor Relations
Tel.: (+86-10) 8857.6000
E-mail: ir@kongzhong.com

Media Contact

Xingran Chen
Public Relations
Tel.: (+86-10) 8857.6000
E-mail:chenxingran@kongzhong.com

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