KongZhong Corporation Reports Unaudited First Quarter 2009 Financial Results

BEIJING, May 13 /PRNewswire-Asia/ -- KongZhong Corporation ( KONG), a leading mobile Internet company in China, today announced its unaudited first quarter 2009 financial results.

First Quarter 2009 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 exceeded guidance - Total revenues for the first quarter of
       2009 ("1Q09") increased 38% year-over-year and increased 11%
       quarter-over-quarter to $ 29.6 million ("mn"), exceeding the Company's
       first-quarter revenue guidance of $27.5 mn to $28.5 mn.
    -- Gross margin stabilized - Total gross margin was 49% in 1Q09 or roughly
       the same level as in the fourth quarter of 2008 ("4Q08").
    -- Mobile game accounted for 17% of total revenue in 1Q09, compared to 10%
       in 4Q08
    -- Significant increase in net income - 1Q09 net income was $2.52 mn, a
       significant increase compared with 4Q08 net income of $ 0.52 mn.
       Diluted net income per ADS was $0.07 based on 36.74 mn ADS outstanding
       as of March 31, 2009.
    -- Non-GAAP net income was $3.73 mn and Non-GAAP diluted net income per
       ADS was $0.10.  (Non-GAAP Financial Measures are described and
       reconciled to the corresponding GAAP measures in the section titled
       "Non-GAAP Financial Measures.")
    -- $141.67 mn in cash and cash equivalents - As of March 31, 2009, the
       Company had $141.67 mn in cash and cash equivalents, including funds
       received from the issuance of US$6.78 mn in convertible senior notes
       to Nokia Growth Partners.

Commenting on the results, the Company's Chairman and Chief Executive Officer, Leilei Wang, said, "In my first full quarter as CEO of KongZhong, I'm pleased to report that we have returned the Company to a positive operating profit and positioned the Company for future growth opportunities.

"During the quarter, we estimate that KongZhong is now the No. 1 mobile game publisher/developer in the mainland China market based on revenues, as we continued to enhance our in-house development capabilities while expanding our mobile game distribution channels.

"In addition, while we continued to enhance our market leading mobile entertainment content offerings on Kong.net with leading media firms like Titan Sports, we have also been increasing our efforts to supplement Kong.net by developing new mobile game social networking services. With the benefit of having over 3.0 mn unique daily users on Kong.net today, our team has launched a number of new initiatives including China's first flash-lite mobile game community, a new mobile avatar system, China's first mobile social game, 'Nong Chang Da Heng' and more importantly, through these new initiatives we have begun to generate revenues based on our 'Traffic to Transaction' or 'T2T' strategy which leverages Kong.net's mobile-based virtual currency system. While we expect to continue to invest in Kong.net, the early results of monetisation are encouraging and we expect Kong.net's user base and revenues to grow rapidly this year.

"Lastly, our WVAS business performed in-line with our goal in providing a strong cashflow source for our mobile game and Kong.net businesses. Although there was some impact from mobile operator policies related to handset embedding and other marketing channels due to consumer day, KongZhong is well positioned as a top-3 service provider in each of the major WVAS categories, providing us with strong relationships with each of the Chinese mobile operators and positioning us well for 3G opportunities.

"Overall, I'm very pleased with our results for the 1st quarter of 2009 and look forward to building upon these achievements as we seek to become the pre-eminent leader of the mobile Internet industry in China."

Subsequent Developments:

On March 27, 2009, the Company entered into an agreement with Mailifang to acquire 100% of its equity interest. The acquisition was closed in April 2009. Please see financial footnotes for more detail.

Mailifang is engaged in the business of developing and publishing mobile games in mainland China. The acquisition is expected to strengthen the Company's technical competence in the area of mobile game development and broaden the Company's distribution channels for mobile games in mainland China.

    Financial Results:
                              For the Three    For the Three   For the Three
                               Months Ended     Months Ended    Months Ended
                                   March 31,     December 31,       March 31,
                                       2008             2008            2009
                             (US$ thousands)  (US$ thousands) (US$ thousands)
    Revenues                        $21,386          $26,736         $29,586
      WVAS                           19,921           23,246          23,658
      Mobile Games                    1,224            2,698           4,944
      Wireless Internet Service         241              792             984

    Cost of Revenue                 $11,820          $13,585         $15,010
      WVAS                           10,717           12,201          12,470
      Mobile Games                      870            1,053           2,045
      Wireless Internet Service         233              331             495

    Gross profit                     $9,566          $13,151         $14,576
      WVAS                            9,204           11,045          11,188
      Mobile Games                      354            1,645           2,899
      Wireless Internet Service           8              461             489

    Gross profit ratio                  45%              49%             49%
      WVAS                              46%              48%             47%
      Mobile Games                      29%              61%             59%
      Wireless Internet Service          3%              58%             50%

Revenues

WVAS revenues in 1Q09 increased 19% from 1Q08 and increased 2% from 4Q08 to $23.66 mn. Revenues from 2.5G services accounted for approximately 20% of total WVAS revenues and revenues from 2G services represented the remaining 80%, compared to 74% in 4Q08. The increase in 2G revenue as a percentage of total WVAS in 1Q09 was due to an increase in both IVR and CRBT revenues as we broadened our distribution channels for these 2G business lines while WAP and MMS each declined sequentially due to more stringent mobile operator policies leading up to and continuing after Consumer Day activities.

Total mobile games revenues in 1Q09 increased 304% from 1Q08 and 83% from 4Q08 to $4.94 mn. Revenue from mobile multi-player online games ("MMO") accounted for 15% of total game revenue, which was approximately $0.72 mn, an increase of 11% quarter-over-quarter and 379% over the same period last year. MMO revenues benefited from the continued popularity and growth in the user base of "Tian Jie", one of the leading mobile online games in China. Revenue from downloadable offline games accounted for 85% of total game revenue, which was approximately $4.22 mn, an increase of 106% quarter-over-quarter and 293% over the same period last year. Downloadable mobile game revenues increased significantly during the quarter as the Company continued to broaden our distribution channels, including our cooperation with Nokia.

Wireless internet service revenues were $0.98 mn in 1Q09, representing an increase of 24% from 4Q08 and 309% increase from the same period last year. For 1Q09, wireless internet service revenues included revenues from wireless advertising as well as from premium services on the Kong.net wireless Internet site, including virtual item sales and cross-selling of our mobile game and WVAS services. Previously, wireless Internet services revenues were mainly from wireless advertising.

Gross Profit

WVAS gross profit increased slightly in 1Q09 to $11.19 mn compared to $11.05 mn in 4Q08, a 22% increase compared to the same period last year or $9.20 mn. WVAS gross margin decreased slightly in the first quarter of 2009 to 47% compared with 48% in the fourth quarter of 2008, but was higher than the 46% WVAS gross margin level in 1Q08. The small sequential decline in WVAS gross margins was due to the increased contribution of 2G services in the first quarter as 2G services generally have a lower gross margin compared to 2.5G services.

Mobile games gross profit for 1Q09 was $2.90 mn compared to $1.65 mn in 4Q08 and $0.35 mn in 1Q08, or an increase of 76% and 721% respectively. Mobile games gross margins however decreased slightly in the first quarter to 59% compared to 61% in the fourth quarter, but were still higher compared to 29% gross margins in the first quarter of 2008. The slight decline in quarter over quarter gross margins was due to the higher mix of downloadable mobile games to online mobile games and some one-time content fees recognized during the quarter.

Wireless Internet gross profit for 1Q09 was $0.49 mn compared to $0.46 mn in 4Q08 and $8,000 in 1Q08. Wireless Internet gross margins declined to 50% in 1Q09 compared to 58% in 4Q08 due to a decrease in wireless advertising revenues due to seasonal factors, increased costs associated with higher traffic on Kong.net and partner revenue share associated with billing for virtual item sales and other premium services on Kong.net.

    Operating Expenses
                                For the Three  For the Three   For the Three
                                 Months Ended   Months Ended    Months Ended
                                    March 31,   December 31,       March 31,
                                         2008           2008            2009
    Product development                 3,576         $4,165          $4,848
    Sales and marketing                 5,422          5,816           4,077
    General and administrative          1,667          3,571           3,018
    Total Operating Expenses          $10,665        $13,552         $11,943

Product development expenses in 1Q09 were $4.85 million compared to $4.17 mn in 4Q08 or an increase of 16% quarter-over-quarter as we continued to invest in more product development resources during the quarter.

Sales and marketing expenses in 1Q09 were $4.08 million compared to $5.82 mn in 4Q08 and $5.42 mn in 1Q08, representing a decrease of 30% compared to 4Q08 and 25% from 1Q08. The decrease in sales and marketing represents our initiative to focus more of our operational capital towards product development resources compared to branding activities, but expect 1Q09 sales and marketing spending to have been at a seasonal low due to the Chinese New Year period.

General and administrative expenses in 1Q09 were $3.02 million compared to $3.57 mn in 4Q08, or a decrease of 16% quarter-over-quarter.

The Company's total headcount increased from 772 as of December 31, 2008 to 801 as of March 31, 2009 with the majority of our head count increase related to product development team increases.

Earnings

Net income and Non-GAAP net income in 1Q09 were $2.52 mn and $3.73 mn, respectively. Diluted earnings per ADS and diluted Non-GAAP earnings per ADS were $0.07 and $0.10 for the first quarter, respectively.

Total diluted ADS outstanding as of March 31, 2009 was 36.74 mn, compared to 35.93 mn as of December 31, 2008. The increase reflects newly granted restricted share units and options to employees under the equity incentive plan of the Company, with the dilutive impact being about 1.34 mn additional ADSs, compared with an additional 0.29 mn ADSs in 4Q08. However, this was offset by 0.35 mn ADS repurchased in 1Q09 as part of our share repurchase plan.

Balance Sheet

As of March 31, 2009, the Company had $141.67 million in cash and cash equivalents.

On March 18, 2009, the Company closed the agreement with Nokia Growth Partners to receive $6,775,400 investment in the form of senior convertible notes. We recognized $4,345,263 in the form of a debt discount, which will be amortized over five years. Correspondingly, based on the relative fair value allocation, we also recognized additional paid in capital from the simultaneously issued warrants in the amount of $677,331 and additional paid in capital from the note's beneficial conversion feature in the amount of $3,667,932. In the first quarter of 2009, the amortization of the debt discount was $13,631, and debt interest payable was $20,678.

Stock Repurchase Program:

As of March 31, 2009, a total of 568,994 ADSs of the Company (representing 22,759,760 ordinary shares), were repurchased at an average price of $4.0761 per ADS as part of the Company's share repurchase program, which began on November 18, 2008. This aggregate figure includes the 223,090 ADRs repurchased before December 31, 2008, (representing 8,923,600 ordinary shares).

Business Outlook:

Based on information available on May 14, 2009, the Company expects total revenues for the second quarter of 2009 to be between $30.5 million and $31.5 million.

Conference Call:

The Company's management team will conduct a conference call at 8:30 am Beijing time on May 14 (8:30 pm Eastern time and 5:30 pm Pacific time on May 13, 2009). A webcast of this conference call will be accessible on the Company's web site at http://ir.kongzhong.com .

    (Footnotes:
    On March 27, 2009, the Company entered into an agreement with Mailifang to
    acquire 100% of its equity interest for a total consideration of RMB 14 mn
    (approximately USD 2.07 mn), consisting of RMB 5.05 mn (approximately USD
    0.74 mn) in cash and RMB 9.08 mn (approximately USD 1.33 mn) satisfied by
    waiving receivables from former shareholders of Mailifang. In addition, at
    the time of acquisition, the Company estimates that Mailifang had
    approximately RMB 1.83 mn (approximately USD 0.27 mn) in cash and RMB 0.22
    mn (approximately USD 0.03 mn) in net current assets on its balance sheet
    and therefore estimates that the net cash outlay from the Company would be
    roughly RMB 3.0 mn (approximately USD 0.44 mn) taking into account waived
    receivables and available Mailifang cash and other current assets. The
    acquisition was closed on April 1, 2009.)



                                 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
                                     March 31,   December 31,      March 31,
                                          2008           2008           2009

    Revenues                           $21,386        $26,736        $29,586
    Cost of revenues                    11,820         13,585         15,010
    Gross profit                         9,566         13,151         14,576
    Operating expenses
      Product development                3,576          4,165          4,848
      Sales & marketing                  5,422          5,816          4,077
      General & administrative           1,667          3,571          3,018
      Total operating expenses          10,665         13,552         11,943
    Operating profit (loss)             (1,099)          (401)         2,633
    Interest income                      1,273          1,103          1,032
    Interest expense on
     convertible notes                      --             --             34
    Income before tax expense              174            702          3,631
    Income tax expense                      86            180          1,110
    Net income                             $88           $522         $2,521

    Basic earnings per ADS               $0.00          $0.01          $0.07
    Diluted earnings per ADS             $0.00          $0.01          $0.07
    Weighted average ADS
     outstanding (million)               35.58          35.64          35.40
    Weighted average ADS used in
     diluted
    EPS calculation (million)            35.93          35.93          36.74



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

                                              For the Three    For the Three
                                               Months Ended     Months Ended
                                             March 31, 2008   March 31, 2009

    Cash Flows From Operating Activities
    Net Income                                          $88           $2,521
    Adjustments to reconcile net income to
     net cash provided by operating activities
      Share-based compensation                          671            1,014
      Depreciation and amortization                     746              622
      Disposal of property and equipment                 --               (4)

      Amortization of the debt discount                  --               14
      Changes in operating assets and
       liabilities                                      810           (2,809)
    Net Cash Provided by Operating
     Activities                                       2,315            1,358

    Cash Flows From Investing Activities
    Purchases of subsidiaries, net of cash
     acquired                                            --             (729)
    Purchase of long-term investment                 (1,500)              --
    Purchase of property and equipment                 (328)            (281)
    Proceeds from disposal of property and
     equipment                                           --                4
    Net Cash Used in Investing Activities            (1,828)          (1,006)

    Cash Flows From Financing Activities
    Proceeds from issuance of Convertible Note           --            6,775
    Proceeds from exercise of share options              --               36
    Stock Repurchase                                     --           (1,559)
    Net Cash Provided by Financing
     Activities                                          --            5,252

    Effect of foreign exchange rate changes           3,981                7

    Net increase  in Cash and Cash
     Equivalents                                     $4,468           $5,611
    Cash and Cash Equivalents, Beginning of
     Period                                        $122,343         $136,054
    Cash and Cash Equivalents, End of
     Period                                        $126,811         $141,665



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

                                        March 31,  December 31,    March 31,
                                             2008         2008          2009
    Cash and cash equivalents            $126,811     $136,054      $141,665
    Accounts receivable (net)              15,874       16,196        19,216
    Other current assets                    4,381        3,389         3,700
    Total current assets                  147,066      155,639       164,581

    Rental deposits                           465          524           529
    Intangible assets (net)                 1,132          674           652
    Property and equipment (net)            3,357        3,368         3,159
    Long-term investments                   1,500        2,964         2,963
    Goodwill                               36,361       15,683        16,564
    Total assets                         $189,881     $178,852      $188,448

    Accounts payable                       $7,547      $10,792        $9,329
    Other current liabilities               5,420        7,316         9,556
    Total current liabilities              12,967       18,108        18,885

    Convertible notes                          --           --         2,464
    Non-current deferred tax liability        147           56            44
    Total liabilities                     $13,114      $18,164       $21,393

    Shareholders' equity                  176,767      160,688       167,055
    Total liabilities & shareholders'
     equity                              $189,881     $178,852      $188,448

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, 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 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
                                     March 31,    December 31,       March 31,
                                          2008            2008            2009
                                (US$ thousands) (US$ thousands) (US$ thousands)
    GAAP Net Income                        $88            $522          $2,521
    Share-based compensation               671             418           1,014
    Interest expense on
     convertible notes                      --              --              34
    Amortization of intangibles            189             152             159
    Non-GAAP Net Income                   $948          $1,092          $3,728

    Non-GAAP diluted net income
     per ADS (Note 1)                    $0.03           $0.03           $0.10

    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 employee share based compensation.

About KongZhong:

KongZhong Corporation is a leading mobile Internet company in China. The Company delivers wireless value-added services to consumers in China through multiple technology platforms including WAP, multimedia messaging service (MMS), JAVA(TM), short messaging service (SMS), interactive voice response (IVR), and color ring-back tone (CRBT). The Company operates three wireless Internet sites, Kong.net, Ko.cn and cn.NBA.com, which enable users to access media, entertainment and community content directly from their mobile phones. The Company also designs and operates mobile games, including mobile online games, JAVA games and WAP games.

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, as amended. Such forward-looking statements include, without limitation, statements regarding trends in the wireless value-added services, wireless media and mobile 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 and mobile games industries and the effect of such pressure on prices; unpredictable changes in technology, consumer demand and usage preferences in the market; 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 segment and mobile games segment; changes in the regulations or policies of the Ministry of Industry and Information Technology 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.

SOURCE KongZhong Corporation