KongZhong Corporation Reports Unaudited Second Quarter 2009 Financial Results

BEIJING, Aug. 10 /PRNewswire-Asia/ -- KongZhong Corporation ( KONG), a leading mobile Internet company in China, today announced its unaudited second quarter 2009 financial results.

Second 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 Second Quarter of
       2009 ("2Q09") increased 37% year-over-year and increased 9%
       quarter-over-quarter to $32.3 million ("mn"), exceeding the Company's
       2Q09 revenue guidance of $30.5 mn to $31.5 mn.
    -- Gross margin increased - Total gross margin improved to 51% in the 2Q09
       from 49% in the 1Q09.
    -- Net income increased - Net income in 2Q09 was $3.55 mn, a 41% increase
       compared with 1Q09 net income of $2.52 mn.  Basic net income per ADS
       was $0.10 based on 34.71 mn ADS while diluted net income per ADS was
       $0.09 based on 38.53 mn ADS outstanding as of June 30, 2009.
    -- Non-GAAP net income increased - Non-GAAP net income was $4.71 mn and
       Non-GAAP diluted net income per ADS was $0.12  (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, 2009, the Company had $132
       mn in cash and cash equivalents.

Commenting on the results, the Company's Chairman and Chief Executive Officer, Leilei Wang, said, "I'm pleased to report that in the second quarter of 2009, KongZhong continued to grow overall profits driven by strong growth in our mobile games business, while at the same time, we were still able to maintain our long-term investment in Kong.net.

"In 2Q09, KongZhong maintained our leading position in the Chinese mobile game market and further strengthened our internal R&D game development capabilities through the acquisition of Simlife. We believe that Simlife's strong development capabilities, combined with our existing Tianjin Mammoth game development team, will extend our leadership in the Chinese mobile games market.

"We continued to make long-term investments in Kong.net, as we evolved Kong.net into a next-generation 3G mobile portal and social networking service. Although we believe we are still in the early development phase of the 3G market in China, during the quarter we attracted over 500,000 registered users to our first self-developed mobile social game, 'Nong Chang Da Heng" and have plans to launch additional social gaming and other community services over the next year.

"Once again, I'm very pleased with our results for 2Q09. More importantly, I believe KongZhong remains well positioned in the Chinese 3G market for future growth opportunities."

    Financial Results:

                              For the Three    For the Three   For the Three
                               Months Ended     Months Ended    Months Ended
                                   June 30,        March 31,        June 30,
                                       2008             2009            2009
                             (US$ thousands)  (US$ thousands) (US$ thousands)
    Revenues                        $23,518          $29,586         $32,287
      WVAS                           21,675           23,658          23,925
      Mobile Games                    1,453            4,944           6,802
      Wireless Internet Service         390              984           1,560

    Cost of Revenue                 $12,812          $15,010         $15,733
      WVAS                           11,934           12,470          12,173
      Mobile Games                      600            2,045           2,791
      Wireless Internet Service         278              495             769

    Gross profit                    $10,706          $14,576         $16,554
      WVAS                            9,741           11,188          11,752
      Mobile Games                      853            2,899           4,011
      Wireless Internet Service         112              489             791

    Gross profit ratio                  46%              49%             51%
      WVAS                              45%              47%             49%
      Mobile Games                      59%              59%             59%
      Wireless Internet Service         29%              50%             51%

Revenues

WVAS revenues in 2Q09 increased 10% from 2Q08 and increased 1% from 1Q09 to $23.93 mn. Revenues from 2.5G services accounted for approximately 21% of total WVAS revenues and revenues from 2G services represented the remaining 79% in 2Q09.

Total mobile game revenues in 2Q09 were $6.8 mn, a 368% increase from the same period last year and a 38% increase from 1Q09.

Revenues from downloadable games were $5.04 mn, an increase of 335% from the same period last year and a 19% sequential increase. Revenues from downloadable games continued to perform well due to the overall growth of the mobile game market in China. In addition, as we continued to leverage our relationships with existing distribution partners and develop mobile games tailored for the local market, we were able to maintain our leadership in the Chinese market.

Revenues from our mobile multi-player online games ("MMO") were $1.76 mn, an increase of 497% from the same period last year and a 144% sequential increase. The bulk of these revenues were from "Tian Jie", one of the most popular mobile MMOs in the China market. The year-over-year and sequential strong performance in mobile MMO was driven by the increased marketing activities and optimized game operations which led to an increase in Tian Jie users and a higher percentage of users purchasing in-game virtual items, compared to previous periods. Our new game, Feng Shen online did not contribute any significant revenues during 2Q09. However, due to a large portion of our mobile MMO users being students, we do not expect similar sequential performance in 3Q09 for our mobile MMO business as we enter the summer holiday season.

In 2Q09, revenues from mobile MMO made up 26% of total mobile game revenues compared to 15% in 1Q09.

Wireless Internet service revenues were $1.56 mn in 2Q09, representing an increase of 300% from the same period last year and an increase of 58% from 1Q09. In 2Q09, 41% of WIS revenues were from wireless advertising with the remaining 59% 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

Total gross profit was $16.55 mn in 2Q09, a 14% increase compared to 1Q09 and a 55% increase compared to the same period last year. Gross margin increased slightly in 2Q09 to 51% compared with 49% in 1Q09, and with 46% in the same period last year.

WVAS gross profit increased slightly in 2Q09 to $11.75 mn compared to $11.19 mn in 1Q09, a 21% increase compared to the same period last year or $9.74 mn. WVAS gross margin increased slightly in 2Q09 to 49% compared with 47% in 1Q09 and 45% in the same quarter last year.

Mobile games gross profit for 2Q09 was $4.01 mn compared to $2.90 mn in 1Q09 and $0.85 mn in the same period last year, or an increase of 38% and 370% respectively. Mobile games gross margin was 59%, or roughly the same level as in 1Q09.

Wireless Internet gross profit for 2Q09 was $0.79 mn compared to $0.49 mn in 1Q09 and $0.11 mn in the same period last year. Wireless Internet gross margins increased to 51% in 2Q09 compared to 50% in 1Q09.

    Operating Expenses

                             For the Three    For the Three    For the Three
                              Months Ended     Months Ended     Months Ended
                                  June 30,        March 31,         June 30,
                                      2008             2009             2009
    Product development             $3,363           $4,848           $4,373
    Sales and marketing              5,083            4,077            4,453
    General and administrative       2,851            3,018            3,127
    Total Operating Expenses       $11,297          $11,943          $11,953

Product development expenses in 2Q09 were $4.37 mn compared to $4.85 mn in 1Q09 or a 10% sequential decrease. While our overall headcount in product development increased in the quarter, as the mobile game division did not experience the same strong sequential growth in 2Q09 as compared to 1Q09, there was a slightly lower level of performance bonuses accrued. However, we would expect product development expenses to increase going forward as we continue expand and invest in our R&D team.

Sales and marketing expenses in 2Q09 were $4.45 mn compared to $4.08 mn in 1Q09 and $5.08 mn in the same period last year, representing an increase of 9% compared to 1Q09 but a decrease of 12% from the same period last year.

General and administrative expenses in 2Q09 were $3.13 mn compared to $3.02 mn in 1Q09, or an increase of 4% quarter-over-quarter.

The Company's total headcount increased from 801 as of March 31, 2009 to 841 as of June 30, 2009 with the majority of our headcount increase related to product development team increases.

Earnings

Net income and Non-GAAP net income in 2Q09 were $3.55 mn and $4.71 mn, respectively. Diluted earnings per ADS and diluted Non-GAAP earnings per ADS were $0.09 and $0.12 for 2Q09, respectively.

Total diluted ADS outstanding as of June 30, 2009 was 38.53 mn, compared to 36.74 mn as of March 31, 2009. The increase reflects changes of the dilutive effect resulted from warrants issued to Nokia Growth Partners II, L.P., and nonvested shares and stock options issued to employees under the equity incentive plan of the Company.

    (In weighted average, mn)                      Basic ADS     Diluted ADS
    Balance as of March 31, 2009                       35.40           36.74
    Less: Share repurchase (Note)                       0.77            0.77
    Add:  Vested shares and exercised options           0.08            0.08
          Warrant                                         --            0.72
          Outstanding options and nonvested shares        --            1.76
    Balance as of June 30, 2009                        34.71           38.53

    (Note: The number represents the weighted average of repurchase of 1.3 mn
    ADS in May, 2009 as part of our Share Repurchase Plan.)

Balance Sheet

As of June 30, 2009, the Company had $132 mn in cash and cash equivalents. The decrease of our cash balance in 2Q09 was mainly due to the $9.55 mn in cash used to repurchase shares as part of the Company Share Repurchase Plan during the second quarter.

Stock Repurchase Program:

As of June 30, 2009, a total of 1,868,994 ADS of the Company (representing 74,759,760 ordinary shares), were repurchased at an average price of $6.3501 per ADS as part of the Company's share repurchase program, which began on November 18, 2008. This aggregate figure includes the 568,994 ADS repurchased before March 31, 2009 (representing 22,759,760 ordinary shares).

Business Outlook (For the 3-month period ending September 30, 2009):

Based on information available on August 11, 2009, the Company expects total revenues for the third quarter of 2009 to be between $34 mn and $35 mn.

Conference Call:

The Company's management team will conduct a conference call at 8:30 am Beijing time on August 11 (8:30 pm Eastern time and 5:30 pm Pacific time on August 10, 2009). 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,
                                          2008           2009           2009

    Revenues                           $23,518        $29,586        $32,287
    Cost of revenues                    12,812         15,010         15,733
    Gross profit                        10,706         14,576         16,554
    Operating expenses
      Product development                3,363          4,848          4,373
      Sales & marketing                  5,083          4,077          4,453
      General & administrative           2,851          3,018          3,127
      Total operating expenses          11,297         11,943         11,953
    Operating profit (loss)               (591)         2,633          4,601
    Interest income                      1,388          1,032            765
    Interest expense on
     convertible notes                      --             34            223
    Income before tax expense              797          3,631          5,143
    Income tax expense                     497          1,110          1,594
    Net income                            $300         $2,521         $3,549

    Basic earnings  per ADS              $0.01          $0.07          $0.10
    Diluted earnings  per ADS            $0.01          $0.07          $0.09
    Weighted average ADS
     outstanding (mn)                    35.62          35.40          34.71
    Weighted average ADS used in
     diluted EPS calculation (mn)        35.93          36.74          38.53



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

                                                For the Six      For the Six
                                               Months Ended     Months Ended
                                              June 30, 2008    June 30, 2009
    Cash Flows From Operating Activities
    Net Income                                         $388           $6,070
    Adjustments to reconcile net income to
     net cash provided by operating activities
      Share-based compensation                        1,258            1,735
      Depreciation and amortization                   1,475            1,303
      Disposal of property and equipment                 --               (4)
      Amortization of the debt discount                  --              102
      Changes in operating assets and liabilities     1,525           (3,898)
    Net Cash Provided by Operating Activities         4,646            5,308

    Cash Flows From Investing Activities
    Purchases of subsidiaries, net of cash
     US$330 acquired                                     --           (4,433)
    Purchase of property and equipment               (1,205)            (855)
    Proceeds from disposal of property                   --                4
    Purchase of long-term investment                 (1,500)              --
    Net Cash Used in Investing Activities            (2,705)          (5,284)

    Cash Flows From Financing Activities
    Proceeds from issuance of Convertible Note           --            6,775
    Proceeds from exercise of share options              --              221
    Stock Repurchase                                     --          (11,107)
    Net Cash Used in Financing Activities                --           (4,111)

    Effect of foreign exchange rate changes           6,344               37

    Net increase in Cash and Cash Equivalents        $8,285          ($4,050)
    Cash and Cash Equivalents, Beginning of
     Period                                        $122,343         $136,054
    Cash and Cash Equivalents, End of Period       $130,628         $132,004



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

                                        June 30,     March 31,      June 30,
                                            2008          2009          2009

    Cash and cash equivalents           $130,628       $141,665     $132,004
    Accounts receivable (net)             18,368         19,216       21,386
    Other current assets                   3,535          3,700        6,121
    Total current assets                 152,531        164,581      159,511

    Rental deposits                          522            529          568
    Intangible assets (net)                  982            652        2,165
    Property and equipment (net)           3,760          3,159        3,307
    Long-term investments                  1,500          2,963        2,964
    Goodwill                              37,167         16,564       21,244
    Total assets                        $196,462       $188,448     $189,759

    Accounts payable                      $8,543         $9,329      $11,622
    Other current liabilities              6,689          9,556       11,753
    Total current liabilities             15,232         18,885       23,375

    Convertible notes                         --          2,464        2,687
    Non-current deferred tax
     liability                               131             44          451
    Total liabilities                    $15,363        $21,393      $26,513

    Shareholders' equity                 181,099        167,055      163,246
    Total liabilities &
     shareholders' equity               $196,462       $188,448     $189,759

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
                                        June 30,      March 31,       June 30,
                                            2008           2009           2009
                                  (US$ thousands)(US$ thousands)(US$ thousands)
    GAAP Net Income                         $300         $2,521         $3,549
    Share-based compensation                 587          1,014            721
    Financial expense on
     convertible notes                        --             34            223
    Amortization of intangibles              169            159            215
    Non-GAAP Net Income                   $1,056         $3,728         $4,708

    Non-GAAP diluted net income
     per ADS (Note 1)                      $0.03          $0.10          $0.12

    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