omniture

KongZhong Corporation Reports Unaudited Second Quarter 2010 Financial Results

2010-08-25 21:52 1153
    BEIJING, Aug. 26 /PRNewswire-Asia/ -- KongZhong Corporation (Nasdaq: KONG), a leading mobile Internet company in China, today announced its unaudited second quarter 2010 financial results. 
 
    Second Quarter 2010 Financial Highlights:

    (Note: Unless otherwise indicated, all financial statement amounts used in this press release are based on United States Generally Accepted Accounting Principles (GAAP) and denominated in US dollars)

    -- Revenues in-line with the guidance - Total revenues for the Second 
       Quarter of 2010 ("2Q10") increased 9% year-over-year to US$ 35.3 
       million ("mn"), in line with the Company's 2Q10 revenue guidance range 
       of US$ 34.5 mn to US$ 35.5 mn.
    -- Gross margin improved- Total gross margin was 48% in 2Q10, an increase 
       compared with 44% in 1Q10.
    -- Net income in-line with guidance - Net income in 2Q10 was US$ 2.6 mn, 
       in-line with 2Q10 guidance range of US$ 2.5 mn to US$ 3.0 mn.  Basic 
       net income per ADS was US$ 0.07 based on 36.76 mn ADS while diluted net 
       income per ADS was US$ 0.07 based on 38.65 mn ADS outstanding as of 
       June 30, 2010.
    -- Non-GAAP net income - Non-GAAP net income was US$ 5.4 mn, a 14% 
       increase compared to 2Q09 Non-GAAP net income of US$ 4.7 mn, while Non- 
       GAAP diluted net income per ADS was US$ 0.13 (Non-GAAP Financial 
       Measures are described and reconciled to the corresponding GAAP 
       measures in the section titled "Non-GAAP Financial Measures.") 
    -- Cash and cash equivalents - As of June 30, 2010, the Company had US$  
       135 mn in cash and cash equivalents or US$ 3.7 per basic ADS in cash 
       and cash equivalents.

    Commenting on the results, the Company's Chairman and Chief Executive Officer, Leilei Wang, said, "Despite a difficult operating environment for WVAS and WIS, KongZhong continued to generate positive cashflow and execute our plans to be the leading mobile game player in the China market and become a leading 3D online game developer with both a strong domestic and international presence.

    "In addition, for the first time since I arrived at KongZhong at the end of 2008, our non-WVAS businesses now make up a majority of our revenues and more importantly gross profits.  We expect our mobile and online game businesses to be the key drivers of our business in the coming years.

    "In partnership with China Mobile, we continued to grow our mobile game subscription business, which during 2Q averaged roughly 2.0 mn monthly subscribers.  Moreover, as our mobile online game business has recently stabilized, we have increased our efforts to develop high quality downloadable and online mobile games for the China market, while recently building iPhone and Android mobile game development capabilities.

    "At the end of May, we successfully launched our second 3D online game "EMoFaZe" (or Demon Code Online) to complement our first 3D online game, Loong.  We plan to launch two additional self-developed 3D online games in the second half of this year with the first game, Xia Ke Xing was launched commercially at the end of August, and the second game, Sheng Mo Zhi Xue, to be commercially launched at the beginning of 4Q.  With these games and at least another three 3D online games slated in our development pipeline for 2011, we believe there is opportunity for KONG to become an important player in the Chinese online game market in the coming years.

    "In addition, I'm pleased with the performance of our overseas online game licensing business which has shown the potential for KONG to become one of the leading Chinese 3D online game exporters, based on our proprietary 3D game development capabilities.

    "Whilst our overall performance in the domestic online game business has room for improvement, I continue to believe that online game is now an important and key strategic area for KONG and expect us to continue to make significant efforts and investments in this business line to complement our mobile businesses."


    Financial Results:
                               For the Three    For the Three   For the Three 
                                Months Ended     Months Ended    Months Ended 
                                   June 30,        March 31,        June 30, 
                                     2009             2010            2010 
                               (US$ thousands) (US$ thousands) (US$ thousands)
    Revenues                        $32,287          $40,636         $35,270 
      WVAS                           23,925           25,900          17,365 
      Mobile Games                    6,802            9,476          13,002 
      Wireless Internet Service       1,560            1,021             893 
      Online Games                       --            4,239           4,010 
                                                                         
    Sales Tax                          $881             $825            $794 
      WVAS                              642              420             436 
      Mobile Games                      188              252             253 
      Wireless Internet Service          51               55              38 
      Online Games                       --               98              67 
                                                                         
    Cost of Revenue                 $15,733          $22,097         $17,619 
      WVAS                           12,173           15,356           9,031 
      Mobile Games                    2,791            5,601           7,203 
      Wireless Internet Service         769              686             920 
      Online Games                       --              454             465 
                                                                         
    Gross profit                    $15,673          $17,714         $16,857 
      WVAS                           11,110           10,124           7,898 
      Mobile Games                    3,823            3,623           5,546 
      Wireless Internet Service         740              280             (65)
      Online Games                       --            3,687           3,478 
                                                                         
    Gross profit ratio                  49%              44%             48%
      WVAS                              46%              39%             45%
      Mobile Games                      56%              38%             43%
      Wireless Internet Service         47%              27%             (7%)
      Online Games                       --              87%             87%



    Revenues

    WVAS

    WVAS revenues in 2Q10 were US$ 17.4 mn, a 33% decrease from 1Q10 and a 27% decrease from the same period last year.  As expected, due to the first full quarter of impact from new and ongoing policy restrictions from our mobile operator partners, the overall operating environment for our WVAS business remained difficult.  In addition, IVR revenues were more significantly impacted on a sequential basis as IVR revenues benefited seasonally in 1Q from various Chinese New Year promotions and in 2Q the overall operating environment became more restrictive towards IVR and other WVAS traditional media promotions. As a result, 2G revenues represented 85% of total WVAS revenues compared to 91% in 1Q10, while 2.5G services made up 15% of total WVAS revenues.
 
    Mobile Games

    Total mobile game revenues in 2Q10 were US$ 13.0 mn, a 91% increase from the same period last year and a 37% increase from 1Q10.  

    Revenues from downloadable mobile games were US$ 12.4 mn representing a 145% increase from the same period last year and an increase of 38% from 1Q10.  The continued strong performance in the Company's downloadable mobile game revenues was driven by monthly mobile game subscription packages with China Mobile.  In 2Q10, average monthly mobile game subscribers were roughly 2.0 mn per month.

    Revenues from mobile multi-player online games ("MMO" or "online mobile games") were US$ 0.7 mn, an increase of 24% from 1Q10, but a decrease of 63% from the same period last year. At the end of 2Q10, a new expansion pack for Feng Shen was launched which led to a small improvement in overall online mobile game revenues, although revenues from Tian Jie continued to decline as that game is approaching the end of its 3-year game lifecycle.  We expect our online mobile game business to stabilize in future periods as we recently launched "Fantasy Tianjie" a turn-based 2D mobile MMO at the beginning of July and the second generation version of Tian Jie, currently called Tian Jie 2, is slated to be launched sometime in early 2011.

    Revenues from "Tian Jie" accounted for about 49% of the Company's online mobile game revenues while revenues from "Feng Shen" accounted for the remaining 51%, compared to 4% in 1Q10.  

    Revenues from downloadable mobile games made up 95% of total mobile game revenues compared to 94% in 1Q10.  Revenues from online mobile games made up roughly 5% of total mobile game revenues compared to 6% in 1Q10.

    WIS

    Wireless Internet service ("WIS") revenues were US$ 0.9 mn in 2Q10, representing a decrease of 43% from the same period last year and a decrease of 13% from 1Q10.  The decline in WIS revenues was due to the suspension of the WAP billing platform across the Company's mobile operator partners. In 2Q10, 18% of WIS revenues were from wireless advertising with the remaining 82% of revenues from premium services on the Kong.net mobile Internet site and more importantly revenues coming from the Company's Internet literature site, Zhulang.com. 

    Online Games

    Online Game business ("Online Game") revenues were US$ 4.0 mn in 2Q10, representing a decrease of 5% from 1Q10.  Although we launched our second 3D MMORPG game, EMoFaZe (or Demon Code Online) at the end of May, domestic revenues for Loong declined from 1Q10. However in addition to revenue contribution from EMoFaZe, the lower level of operating revenues for Loong was compensated by overseas licensing and operations of Loong, primarily in Taiwan, where total overseas revenues in 2Q made up 37% of total online game revenues compared to 7% in 1Q10.

    For the 2nd quarter 3-month period, mainland China online game operations achieved average concurrent users ("ACUs") of 75k, aggregate paying accounts of 115k with quarterly ARPU of RMB 149. The lower ARPUs in 2Q10 compared 1Q10 reflects the initial commercial launch period of EMoFaZe occurring during the quarter.

    Gross Profit

    Total gross profit was US$ 16.9 mn in 2Q10, an 8% increase compared to the same period last year but a 5% decrease compared to 1Q10, as our WVAS business declined due to the restrictive regulatory environment offset by growth in our mobile game business. Total gross margin was 48% in 2Q10 compared to 44% in 1Q10. 

    WVAS gross profit in 2Q10 was US$ 7.9 mn, a 29% decrease compared to the same period last year and a 22% decrease from 1Q10.  However, 2Q10 WVAS gross margin was 45% compared to 39% in 1Q10 as we focused our efforts on higher margin distribution channels and partnerships, albeit off a lower base.

    Mobile games gross profit in 2Q10 was US$ 5.5 mn, a 45% increase compared to the same period last year and a 53% increase from 1Q10.  2Q10 Mobile games gross margin was 43% compared to 38% in 1Q10.  Mobile game gross margins normalized in 2Q from somewhat depressed levels in 1Q as we continue to transition our mobile game business to monthly mobile game subscription services which has a higher revenue share with China Mobile compared to the transaction-based downloadable mobile game business model.

    Wireless Internet service gross loss for 2Q10 was US$ 0.1 mn, compared to gross profit of $0.3 mn in 1Q10 and $0.7 mn in the same period last year.  The decline in WIS gross profit is related to the suspension of WAP billing across the Company's mobile operator partners. Wireless Internet gross margins were negative 7%, a decrease from the 27% gross margin level in 1Q10.

    Online Game gross profit in 2Q10 was US$ 3.5 mn, a 6% decrease from 1Q10. Online Game gross margin was stable at 87% in 2Q10 compared to 1Q10 as infrastructure costs for our domestic online game operations remained at a relatively higher level as we prepare for future period online game launches.


    Operating Expenses
                               For the Three    For the Three    For the Three 
                                Months Ended     Months Ended     Months Ended 
                                  June 30,         March 31,         June 30, 
                                     2009             2010             2010 
                              (US$ thousands)  (US$ thousands) (US$ thousands)
    Product development             $4,373           $6,841           $6,144 
    Sales and marketing              4,453            4,406            5,143 
    General and administrative       2,246            2,796            2,692 
    Total Operating Expenses       $11,072          $14,043          $13,979 


    Total operating expenses were roughly flat sequentially at US$ 14.0 mn as we implemented cost controls due to the restrictive WVAS policy environment.

    Product development expenses in 2Q10 were US$ 6.1 mn compared to US$ 6.8 mn in 1Q10 or a 10% decrease. Although we expect product and development to remain a key focus for the Company in future periods, in 2Q we undertook cost saving measures which included streamlining our wireless Internet and WVAS teams that led to a reduction in stock based compensation expenses in 2Q10.

    Sales and marketing expenses in 2Q10 were US$ 5.1 mn compared to US$ 4.4 mn in 1Q10 and US$ 4.5 mn in the same period last year. The increase in sales and marketing is due to the commercial launch of EMoFaZe (Demon Code Online) at the end of May and continuing throughout June.

    General and administrative expenses in 2Q10 were US$ 2.7 mn compared to US$ 2.8 mn in 1Q10, or a decrease of roughly 4% quarter-over-quarter.  

    The Company's total headcount decreased to 1,209 at the end of 2Q compared to 1,330 at the end of 1Q.  Due to the continued restrictive WVAS regulatory environment, we implemented cost saving measures which led to the streamlining of our WIS and WVAS teams.  As a result, headcount in mobile and online games, now represents 50% of total headcount compared to only 22% at the end of 2009, prior to our acquisition of Dacheng.

    Operating Profit and Earnings

    Operating profit for 2Q10 was US$ 2.9 mn compared to US$ 3.7 mn in 1Q10.  Operating margins were 8% in 2Q10 compared to 9% in 1Q10. 

    Net income and Non-GAAP net income in 2Q10 were US$ 2.6 mn and US$ 5.4 mn, respectively.  Diluted earnings per ADS and diluted Non-GAAP earnings per ADS were US$ 0.07 and US$ 0.13 in 2Q10, respectively.  

    Total diluted ADS outstanding as of June 30, 2010 were 38.65mn, compared to 38.77 mn as of March 31, 2010.  


                                       Balance as of           Balance as of 
    2010                              March 31, 2010           June 30, 2010 
    Basic ADS                                  35.57                   36.76 
    Add: Outstanding options and                                             
     nonvested shares                           2.27                    1.36 
              Warrant to NGP                    0.93                    0.53 
    Diluted ADS                                38.77                   38.65 

    Note: the increase in 2Q10 basic ADS reflects the issuance of 1.07 mn ADS 
           on March 12th 2010.


    Balance Sheet

    As of June 30, 2010, the Company had $135 mn in cash and cash equivalents or US$ 3.7 per basic ADS in cash and cash equivalents.

    Business Outlook (For the 3-month period ending September 30, 2010):

    The Company expects total revenues for 3Q10 to be within the range of US$  35.0 mn to 36.0 mn, with business unit revenues at the mid-point expected to roughly consist of WVAS revenues of US$ 17.0 mn, mobile game revenues of US$ 14.0 mn, WIS revenues of US$ 1.0 mn and Online Game revenues of US$ 3.5 mn.  

    The Company expects total gross profit to be within the range of US$ 14.5 mn to 15.5 mn, total operating profit and net profit to be US$ 1.0 mn to 1.5 mn, while Non-GAAP net profit to be roughly US$ 3.5 mn to US$ 4.5 mn.

    Conference Call:

    The Company's management team will conduct a conference call at 7:30 am Beijing time on August 26th, 2010 (7:30 pm Eastern time and 4:30 pm Pacific time on August 25th 2010).  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 per share data, and share count)
                               (Unaudited)

                               For the Three    For the Three    For the Three 
                                Months Ended     Months Ended     Months Ended 
                                  June 30,        March 31,         June 30, 
                                    2009             2010             2010 
                                                                         
    Revenues                       $32,287          $40,636          $35,270 
    Sales Tax                          881              825              794 
    Cost of revenues                15,733           22,097           17,619 
    Gross profit                    15,673           17,714           16,857 
    Operating expenses                                                   
       Product development           4,373            6,841            6,144 
       Sales & marketing             4,453            4,406            5,143 
       General & administrative      2,246            2,796            2,692 
      Total operating expenses      11,072           14,043           13,979 
    Operating profit                 4,601            3,671            2,878 
    Interest income                    765              406              557 
    Investment income                   --              132              254 
    Loss from impairment of              
     cost method investment             --               --               --      
    Interest expense on convertible                                                 
     notes                             223              253              253 
    Income before tax expense        5,143            3,956            3,436 
    Income tax expense               1,594              791              859 
    Net income                      $3,549           $3,165           $2,577 
                                                                         
    Basic earnings per ADS           $0.10            $0.09            $0.07 
    Diluted earnings per ADS         $0.09            $0.08            $0.07 
    Weighted average ADS             
     outstanding (mn)                34.71            35.57            36.76      
    Weighted average ADS used                                      
     in diluted EPS calculation                                    
     (mn)                            38.53            38.77            38.65   
                                                                         
 

                             KongZhong Corporation
                   Condensed Consolidated Statements of Cash Flows
                                 (US$ thousands)
                                    (Unaudited)

                                               For the Six      For the Six 
                                               Months Ended     Months Ended 
                                              June 30, 2009    June 30, 2010 
    Cash Flows From Operating Activities                                 
    Net Income                                       $6,070           $5,742 
    Adjustments to reconcile net income to                               
     net cash provided by operating activities                                     
      Share-based compensation                        1,735            2,401 
       Depreciation and amortization                  1,303            3,872 
       Disposal of property and equipment                (4)              -- 
    Investment Income                                    --              370 
    Amortization of the debt discount                   102              268 
      Changes in operating assets and                                    
       liabilities                                   (3,898)          (5,159)
    Net Cash Provided by Operating                                       
     Activities                                       5,308            7,494 
                                                                         
    Cash Flows From Investing Activities                                 
    Purchases of subsidiaries                        (4,433)          (9,853)
    Purchase of property and equipment                 (855)          (1,489)
    Proceeds from disposal of property                    4               -- 
    Net Cash Used in Investing Activities            (5,284)         (11,342)
                                                                         
    Cash Flows From Financing Activities                                 
    Proceeds from issuance of convertible                                
     notes                                            6,775               --
    Interest paid for convertible notes                  --             (271)
    Proceeds from exercise of share options             221              176 
    Stock Repurchase                                (11,107)              -- 
    Net Cash Used in Financing Activities            (4,111)             (95)
                                                                         
    Effect of foreign exchange rate changes              37             (576)
                                                                         
    Net increase in Cash and Cash                                       
     Equivalents                                    ($4,050)         ($4,519)
    Cash and Cash Equivalents, Beginning of                              
     Period                                        $136,054         $139,290 
    Cash and Cash Equivalents, End of                                    
     Period                                        $132,004         $134,771 



                            KongZhong Corporation
                   Condensed Consolidated Balance Sheets
                                (US$ thousands)
                                 (Unaudited)

                                       June 30,     March 31,    June 30, 
                                         2009          2010        2010 
                                                                         
    Cash and cash equivalents          $132,004      $130,294    $134,771 
    Short-term investments                   --            47          --
    Accounts receivable (net)            21,386        29,747      32,416 
    Other current assets                  6,121         5,010       3,423 
    Total current assets                159,511       165,098     170,610 
                                                                         
    Rental deposits                         568           651         615 
    Intangible assets (net)               2,165        13,986      12,675 
    Property and equipment (net)          3,307         4,239       4,496 
    Long-term investments                 2,964         1,465       1,473 
    Goodwill                             21,244        90,095      90,671 
    Total assets                       $189,759      $275,534    $280,540 
                                                                         
    Accounts payable (including          
     accounts payable of the                                                   
     consolidated VIE without                                        
     recourse to KongZhong                                                 
     Corporation of  $11,607,                                            
     $11,810 and $10,918 as of                                           
     June 30, 2009 and March 31 and                                      
     June 30, 2010, respectively)       $11,622       $11,838     $10,945 
    Deferred revenue (including                
     deferred revenue of the                                                   
     consolidated VIE without                                        
     recourse to KongZhong                                               
     Corporation of  $0, $2,196 and                                       
     $3,040 as of June 30, 2009 and                                               
     March 31 and June 30, 2010,                                        
     respectively)                           --         2,196      $3,040    
    Other current liabilities 
     (including other current                                           
     liabilities of the                                                   
     consolidated VIE without                                             
     recourse to KongZhong                                                         
     Corporation of $8,116,                                              
     $6,770 and $7,261 as of June                                                  
     30, 2009 and March 31 and                                       
     June 30, 2010, respectively)        11,753        65,828      67,011     
    Total current liabilities            23,375        79,862      80,996 
                                                                         
    Convertible notes                     2,687         2,983       3,235 
    Non-current deferred tax                
     liability (including non-                                                 
     current deferred tax liability                                            
     of the consolidated VIE without                                     
     recourse to KongZhong Corporation                                            
     of $451, $3,415 and $3,094 as of                                        
     June 30, 2009 and March 31 and                                            
     June 30, 2010, respectively)           451         3,415       3,094        
    Total liabilities                   $26,513       $86,260     $87,325 
                                                                         
    Shareholders' equity                163,246       189,274     193,215 
    Total liabilities &                                                  
     shareholders' equity              $189,759      $275,534    $280,540 
               

                                                          
    Non-GAAP Financial Measures 

    To supplement the unaudited condensed statements of income presented in accordance with US 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, the Company's 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 of intangibles, share-based compensation expense and interest expense on convertible notes. 

    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 
                                       June 30,      March 31,       June 30, 
                                          2009           2010           2010 
                                 (US$ thousands)(US$ thousands)(US$ thousands)
                                                         
    GAAP Net Income (Loss)                $3,549        $3,165         $2,577 
    Share-based compensation                 721         1,241          1,161 
    Financial expense on convertible 
     notes                                   223           253            253 
    Amortization of intangibles              215         1,423          1,377 
    Non-GAAP Net Income                   $4,708        $6,082         $5,368 
                                                                         
    Non-GAAP diluted net income per    
     ADS (Note 1)                          $0.12         $0.15          $0.13       

    Note 1: The non-GAAP adjusted net income per ADS is computed using non-
            GAAP net income and number of ADS used in GAAP diluted EPS 
            calculation, where the number of ADS is adjusted for dilution due 
            to convertible notes issued to Nokia Growth Partners, or 
            equivalent to 40.55 million ADS.


    About KongZhong:
    We are one of the leading providers of digital entertainment services for consumers in the PRC. We operate four main business units, namely WVAS, WIS, mobile games and online games. We are one of the leading providers of WVAS to mobile phone users. We began providing WVAS on the networks of China Mobile in 2002. Since 2004, we have provided WVAS on the networks of China Unicom, China Telecom, China Netcom and the other major telecommunications operators in the PRC. Since 2004, we have been offering news, entertainment, community and mobile advertising services through our wireless Internet sites, including Kong.net, ko.cn and ct.cn. In 2008, we began reporting our mobile games business as a stand-alone operating segment, while it was previously reported as part of our WVAS business. We began our online games business in 2010, through our acquisition of Dacheng Networks, a developer and operator of online games.

    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.

Source: KongZhong Corporation
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