Revenue Up 24% Year-over-year
BEIJING, Nov. 9 /Xinhua-PRNewswire/ -- KongZhong Corporation
(Nasdaq: KONG), a leading provider of wireless value-added services and the
operator of a leading wireless Internet portal in China, today announced its
unaudited third quarter 2006 financial results.
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Third Quarter 2006 Financial Highlights:
-- Total revenues in the third quarter of 2006 grew 24% year-over-year to
$25.08 million, exceeding the Company's third quarter revenue guidance
of $23 million to $24 million.
-- Total advertising revenue generated from KongZhong’s wireless internet
portal Kong.net increased from $22,000 in the second quarter of 2006 to
$59,000 in the third quarter of 2006.
-- US GAAP net income grew 41% year-over-year but decreased 37%
sequentially to $4.82 million. Diluted earnings per ADS in the third
quarter were $0.14. The Company made a one-time provision of $3.5
million related to the settlement of a class action lawsuit during the
third quarter of 2005.
-- Non-GAAP net income in the third quarter of 2006 grew 57% from same
period last year but decreased 33% from the second quarter of 2006 to
$5.53 million. Non-GAAP diluted earnings per ADS were $0.16. Non-GAAP
Financial Measures are described and reconciled to the corresponding
GAAP measures in the section titled “Non-GAAP Financial Measures”.
Commenting on the results, Yunfan Zhou, Chairman and Chief Executive
Officer, said, “As we anticipated, due to some regulatory changes introduced
by the telecommunication operators in the third quarter, our revenue in the
third quarter declined from the previous quarter. However, we are pleased
that our revenue exceeded our third quarter guidance. As previously
announced, we still anticipate challenges in the wireless value-added
business during the remainder of 2006. On the other hand, we continue to
make progress in our wireless internet portal business. Although the wireless
internet portal is in the early development stage, we have begun to see the
growth of our mobile advertising revenue. We will continue to invest in the
wireless internet portal Kong.net and we are confident about its future.”
Business Highlights:
-- KongZhong signed an agreement with Beijing Mapabc, a digital map
provider, to provide local search services on Kong.net.
-- Kong.net was named ‘‘Media with the Highest Potential’’ at the 2006
China Advertising Summit.
-- On October 17, 2006 KongZhong’s in-house developed mobile networking
game “e 3-Kingdom” was named “Most Popular Mobile Networking Game”
at the 2006 China Joy Best Games Contest. In addition KongZhong and
KongZhong Mammoth, KongZhong’s wireless game subsidiary, received the
following awards:
-- Best Mobile Game Developer
-- Best Mobile Game Publisher
-- Best Mobile Networking Game Operator
Financial Results:
(Note: Unless otherwise stated, all financial statement amounts used in
this press release are based on US GAAP and denominated in US dollars.)
Revenues
Total revenues for the third quarter increased 24% from the same quarter
of 2005 to $25.08 million but decreased 17% from the second quarter of 2006.
Revenue from 2.5G services accounted for approximately 44% of total revenues
and revenue from 2G services represented the remaining 56%.
Revenue from 2.5G services, which include services delivered using
wireless application protocol (WAP), multimedia messaging service (MMS), and
Java technologies, decreased 24% from the same period in 2005 and decreased
20% from the second quarter of 2006 to $10.97 million. The sequential
revenue decrease was primarily due to new regulatory changes introduced by
China Mobile during the third quarter that, among other things, imposed a one-
month free trial period for new users, required that subscription reminders
be sent to existing users and cancelled the billing of WAP subscriptions that
have not been active for more than four months. WAP revenue in the third
quarter of 2006 was $5.79 million, a decrease of 39% from the same quarter of
2005 and a decrease of 13% from the second quarter of 2006. MMS revenue in
the third quarter of 2006 was $4.76 million, an increase of 27% from the same
period of 2005, but a decrease of 27% from the second quarter of 2006. Java
revenue in the third quarter was $0.43 million, a 60% decrease from the third
quarter of 2005 and a 27% decrease sequentially.
Revenue from 2G services, including short messaging service (SMS),
interactive voice response (IVR), and color ring back tone (CRBT), grew 139%
year-over-year but decreased 14% quarter-over-quarter to $14.04 million in
the third quarter of 2006. Year-over-year growth in 2G revenue was primarily
driven by the acquisition of Sharp Edge, which was completed in the first
quarter of 2006. The sequential revenue decrease was primarily due to the
regulatory changes described above as well as new requirements by
telecommunication operators that new users confirm subscriptions twice. SMS
revenue in the third quarter of 2006 was $10.88 million, which was 165%
higher than the same period of 2005 and 14% lower than the previous quarter.
IVR revenue in the third quarter of 2006 was $1.72 million, a 22% increase
year-over-year but a 21% decrease sequentially. CRBT revenue grew by 324%
year-over-year, but decreased 1% sequentially to $1.44 million in the third
quarter of 2006.
The table below sets forth the revenue breakdown by technology
platforms.
3Q05 Q405 1Q06 2Q06 3Q06
2.5G: 71 % 67 % 64 % 46 % 44 %
WAP 47 % 40 % 32 % 22 % 23 %
MMS 19 % 22 % 28 % 22 % 19 %
Java 5 % 5 % 4 % 2 % 2 %
2G: 29 % 33 % 36 % 54 % 56 %
SMS 20 % 25 % 29 % 42 % 43 %
IVR 7 % 6 % 4 % 7 % 7 %
CRBT and others 2 % 2 % 3 % 5 % 6 %
Total 100 % 100 % 100 % 100 % 100 %
The Company continues to make progress in diversifying operator
relationships. Total revenues from China Unicom, China Telecom, and China
Netcom accounted for approximately 25% of the total third quarter revenues,
compared to 23% in the second quarter of 2006.
Total advertising revenue generated from KongZhong’s wireless internet
portal Kong.net increased from $22,000 in the second quarter of 2006 to
$59,000 in the third quarter of 2006.
Expenses
The cost of revenue in the third quarter of 2006 totaled $11.39 million,
an increase of 40% from the third quarter of 2005 and a decrease of 12% from
the second quarter of 2006. Gross margin in the third quarter of 2006 was
55% compared to 57% in the previous quarter. The lower gross margin was
primarily due to the fixed nature of certain costs of revenue despite the
decline in revenue.
Total operating expenses in the third quarter of 2006 were $9.77 million,
an increase of 6% year-over-year but a decrease of 3% quarter-over-quarter.
Product development expenses increased by 7% quarter-over-quarter and
represented 13% of revenue. General and administrative expenses decreased by
15% from the second quarter of 2006 and represented 8% of revenue. Sales and
marketing expenses decreased by 4% quarter-over-quarter and represented 18%
of revenue. The increase in product development expenses was primarily due
to a one-time expense related to the headcount reduction program.
Total cost associated with the Company’s wireless internet portal
business in the third quarter 2006 was approximately $2.7 million, slightly
lower than previous quarter. It included $1.2 million in marketing expenses.
The Company recorded $0.52 million in non-cash share-based compensation
expenses in the third quarter, compared to $0.47 million in the second
quarter of 2006. On July 31, 2006, the Company announced a headcount
reduction program, which has been completed. The Company’s total headcount
declined from 1,016 as of June 30, 2006 to 816 as of September 30, 2006. The
Company estimated that the headcount reduction will result in a cost savings
of approximately $500,000 in the fourth quarter of 2006.
Earnings
US GAAP net income totaled $4.82 million in the third quarter of 2006, an
increase of 41% from the same period of last year but a decrease of 37% from
the second quarter of 2006. The Company made a one-time provision of $3.5
million related to the settlement of a class action lawsuit during the third
quarter of 2005. Diluted US GAAP earnings per ADS were $0.14 for the third
quarter.
Non-GAAP income in the third quarter of 2006 was $5.53 million, a 57%
increase from the same period in 2005 but a 33% decrease from the previous
quarter. Diluted Non-GAAP earnings per ADS were $0.16.
Balance Sheet and Cash Flow
As of September 30, 2006, the Company had $118.61 million in cash and
cash equivalents. Cash flow from operating activities totaled $7.74 million
in the third quarter of 2006.
Business Outlook:
As a result of the continuing impact of regulatory changes introduced by
telecommunication operators and Ministry of Information Industry, and based
on information available on November 9, 2006, the Company expects total
revenues for the fourth quarter of 2006 to be between $20.5 million and $21.5
million.
Conference Call:
The Company’s management team will conduct a conference call at 8:30 am
Beijing time on November 9, (7:30 pm Eastern time and 4:30 pm Pacific time on
November 8, 2006). A webcast of this conference call will be accessible on
the Company’s web site at http://ir.kongzhong.com .
KongZhong Corporation
Condensed Consolidated Statements of Income
(US$ thousands, except percentages, per share data, and share count)
(Unaudited)
For the Three For the Three For the Three
Months Ended Months Ended Months Ended
Sep. 30, 2005 Jun. 30, 2006 Sep. 30, 2006
(Note 1) (Note 2) (Note 3)
Revenues $20,255 $30,068 $25,082
Cost of revenues 8,120 12,943 11,394
Gross profit 12,135 17,125 13,688
Operating expenses
Product development 2,315 2,970 3,186
Sales & marketing 1,326 4,712 4,531
General & administrative 5,608 2,417 2,053
Subtotal 9,249 10,099 9,770
Operating income 2,886 7,026 3,918
Non-operating expenses (income)
Interest expenses (income) (689) (915) (1,036)
Other expenses (income) -- 87 4
Subtotal (689) (828) (1,032)
Income before tax expense 3,575 7,854 4,950
Income tax expense 149 255 131
Net income 3,426 7,599 4,819
Basic earnings per ADS $0.10 $0.22 $0.14
Diluted earnings per ADS $0.10 $0.21 $0.14
Margin Analysis:
Gross margin 60 % 57 % 55 %
Operating margin 14 % 23 % 16 %
Net margin 17 % 25 % 19 %
Additional Data:
2.5G revenue $14,366 $13,773 $10,974
2G revenue 5,866 16,256 14,043
ADS outstanding (million) 34.45 34.89 35.15
ADS used in diluted EPS
Calculation (million) 35.64 35.67 35.66
Note 1: The conversion of Renminbi (RMB) into US dollar (USD) for the
third quarter of 2005 is based on the weighted average rate of
USD 1.00=RMB 8.1391 (the exchange rate quoted by the People’s
Bank of China).
Note 2: The conversion of Renminbi (RMB) into US dollar (USD) for the
second quarter of 2006 is based on the weighted average rate of
USD 1.00=RMB 8.0130 (the exchange rate quoted by the People’s
Bank of China).
Note 3: The conversion of Renminbi (RMB) into US dollar (USD) for the
third quarter of 2006 is based on the weighted average rate of
USD 1.00=RMB 7.9678 (the exchange rate quoted by the People’s
Bank of China).
KongZhong Corporation
Condensed Consolidated Statements of Cash Flows
(US$ thousands)
(Unaudited)
For the 9 Months For the 9 Months
Ended Ended
Sep. 30 2005 Sep. 30, 2006
(Note 1) (Note 2)
Cash Flows From Operating Activities
Net Income $15,911 $21,028
Adjustments
Share-based compensation expenses 270 1,337
Depreciation and amortization 1,265 2,284
Loss on disposal of property and
equipment 3 4
Gain on sales of investment -- (1,241)
Changes in operating assets and
liabilities 6,059 (6,862)
Net Cash Provided by Operating
Activities 23,508 16,550
Cash Flows From Investing Activities
Proceeds from sales of investment -- 1,741
Purchase of property and equipment (1,820) (2,164)
Acquisition of long-term investments (500) --
Acquisition of subsidiaries (819) (17,325)
Net Cash Used in Investing Activities (3,139) (17,748)
Cash Flows From Financing Activities
Exercise of employee share options 109 1,538
Decrease in minority interest (97) --
Net Cash Provided by Financing
Activities 12 1,538
Foreign Currency Translation Adjustments 630 1,125
Net increase in Cash and Cash
Equivalents 21,011 1,465
Cash and Cash Equivalents, Beginning of
Year 90,714 117,142
Cash and Cash Equivalents, End of Year 111,725 118,607
Note 1: The conversion of Renminbi (RMB) into US dollar (USD) for the
first 9 months of 2005 is based on the weighted average rate of
USD 1.00=RMB 8.2307 (the exchange rate quoted by the People’s
Bank of China).
Note 2: The conversion of Renminbi (RMB) into US dollar (USD) for the
first 9 months of 2006 is based on the weighted average rate of
USD 1.00=RMB 8.0106 (the exchange rate quoted by the People’s
Bank of China).
KongZhong Corporation
Condensed Consolidated Balance Sheets
(US$ thousands)
(Unaudited)
Sep. 30, 2005 Jun. 30, 2006 Sep. 30, 2006
(Note 1) (Note 2) (Note 3)
Cash and cash equivalents $111,725 $122,285 $118,607
Accounts receivable (net) 10,243 18,900 17,471
Other current assets 1,504 2,424 2,110
Total current assets 123,472 143,609 138,188
Rental deposits 392 556 565
Intangible assets 276 2,226 2,078
Property and equipment (net) 3,089 3,080 3,426
Long-term investment 500 -- --
Goodwill 646 4,434 15,751
Total assets $128,375 $153,905 $160,008
Accounts payable $4,048 $5,009 $5,625
Other current liabilities 7,248 5,849 4,712
Minority interest 24 24 24
Total liabilities 11,320 10,882 10,361
Shareholders’ equity 117,055 143,023 149,647
Total liabilities & shareholders’
equity $128,375 $153,905 $160,008
Note 1: The conversion of Renminbi (RMB) into US dollar (USD) is based on
the exchange rate of Sep 30, 2005 USD1.00=RMB 8.0920 (the
exchange rate quoted by the People’s Bank of China).
Note 2: The conversion of Renminbi (RMB) into US dollar (USD) is based on
the exchange rate of Jun 30, 2006 USD1.00=RMB 7.9956 (the
exchange rate quoted by the People’s Bank of China).
Note 3: The conversion of Renminbi (RMB) into US dollar (USD) is based on
the exchange rate of Sep 30, 2006 USD1.00=RMB 7.9087 (the
exchange rate quoted by the People’s Bank of China).
Non-GAAP Financial Measures
To supplement the unaudited condensed statements of income presented in
accordance with United States Generally Accepted Accounting Principles
("GAAP"), the Company uses non-GAAP financial measures (“Non-GAAP Financial
Measures”) of net income and net income per diluted ADS, which are adjusted
from results based on GAAP to exclude certain infrequent or unusual or
non-cash based expenses, gains and losses. The Non-GAAP Financial Measures
are provided as additional information to help both management and investors
compare business trends among different reporting periods on a consistent and
more meaningful basis and enhance investors’ overall understanding of the
Company’s current financial performance and prospects for the future.
The Non-GAAP Financial Measures should be considered in addition to
results prepared in accordance with GAAP, but should not be considered a
substitute for or superior to GAAP results. In addition, our calculation of
the Non-GAAP Financial Measures may be different from the calculation used by
other companies, and therefore comparability may be limited.
For the periods presented, the Company’s non-GAAP net income and non-
GAAP net income per diluted ADS exclude, as applicable, the amortization or
write-off of intangibles, and non-cash share-based compensation expense.
Reconciliation of the Company’s Non-GAAP Financial Measures to the GAAP
financial measures is set forth below.
For the Three For the Three For the Three
Months Ended Months Ended Months Ended
Sep. 30, 2005 Jun. 30, 2006 Sep. 30, 2006
GAAP Net Income $3,426 $7,599 $4,819
Non-cash share-based
compensation 80 469 521
Amortization or write-off of
intangibles 26 167 192
Non-GAAP Net Income $3,532 $8,235 $5,532
Non-GAAP diluted net income per
ADS 0.10 0.23 0.16
About KongZhong
KongZhong Corporation is a leading provider of wireless value-added
services and also operates one of the leading wireless Internet portals in
China. The Company delivers wireless value-added services to consumers in
China through multiple technology platforms including wireless application
protocol (WAP), multimedia messaging service (MMS), JAVA, short messaging
service (SMS), interactive voice response (IVR), and color ring back tone
(CRBT). The Company also operates a wireless internet portal, Kong.net,
which enables users to access media and entertainment content directly from
their mobile phones.
Safe Harbor Statement
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. Such forward-looking statements include,
without limitation, statements regarding trends in the wireless value-added
services market 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 market and the effect of such pressure on prices; unpredictable
changes in technology, consumer demand and usage preferences in this market;
the state of and any change in our relationship with China’s
telecommunications operators; our dependence on the billing systems of
telecommunication operators for our performance; changes in the regulations
or policies of the Ministry of Information Industry and other relevant
government authorities; 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 market. 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.
