BEIJING, Nov. 11 /PRNewswire-Asia/ -- KongZhong Corporation (Nasdaq: KONG), a leading mobile Internet company in China, today announced its unaudited third quarter 2009 financial results.

Third 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 Third Quarter of
       2009 ("3Q09") increased 40% year-over-year and increased 9%
       quarter-over-quarter to $35.1 million ("mn"), exceeding the Company's
       3Q09 revenue guidance of $34 mn to $35 mn.
    -- Gross margin stable - Total gross margin was 51% in the 3Q09, stable
       compared with 51% in 2Q09.
    -- Net income increased - Net income in 3Q09 was $4.50 mn, a 27% increase
       compared with 2Q09 net income of $3.55 mn and a net loss in 3Q08.
       Basic net income per ADS was $0.13 based on 34.08 mn ADS while diluted
       net income per ADS was $0.11 based on 39.24 mn ADS outstanding as of
       September 30, 2009.
    -- Non-GAAP net income increased - Non-GAAP net income was $6.28 mn, a 33%
       increase compared to 2Q09, while Non-GAAP diluted net income per ADS
       was $0.16 (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 September 30, 2009, the Company had
       $134 mn in cash and cash equivalents.

Commenting on the results, the Company's Chairman and Chief Executive Officer, Leilei Wang, said, "We continued to execute upon our strategy of delivering solid financial performance while continuing to the make long-term investments in KONG.net.

"Overall, our mobile games business continued to lead the China market with 20% sequential growth and over 200% year-over-year growth. We believe we are still in the early development phase of the Chinese mobile game market and through our strong game development capabilities, have become a preferred partner for all the Chinese mobile operators who are seeking to grow the mobile games market in the coming 3G era.

"Against the backdrop of stable 3Q financial performance at KONG.net (or WIS), the team has undertaken a number of initiatives, which position us well for strong user growth over the coming year. For example during the quarter, we announced a strategic alliance with CCTV that will leverage their audience of over 1.0 billion viewers to jointly develop mobile Internet services in China. Moreover, we also launched the new Ko.cn platform, which we plan to develop into the leading social mobile game platform in China.

"Lastly, our WVAS division continued to deliver stable cashflow growth helping to improve the overall profitability of KONG and providing us additional resources as we seek to extend our leadership in mobile games and invest in KONG.net"

    Subsequent Events:
    -- In October 2009, we acquired 100% of an online Chinese-language novel
       Company ("Zhulang") and its related party ("Success Blueprint"), for an
       aggregate price of $2.34 mn in cash and 1,000,000 ordinary shares
       (equivalent to 25,000 ADS). Zhulang is engaged in the management,
       aggregation and distribution of user-generated and professionally
       written Chinese novels, mainly focused on the contemporary and martial
       arts genres (URL: http://www.zhulang.com ). Success Blueprint, a BVI
       company, is engaged in the management of overseas Chinese novel
       copyright. The acquisition of Zhulang will support the development of
       KONG.net's mobile novel channel, already one of the leading mobile
       novel sites in China, to further develop its access to original content
       and the author community to develop new and more innovative publishing
       business models based on mobile platforms. Also, we expect Zhulang to
       support the development of our mobile games business as we leverage
       content and other copyrights on the Zhulang platform for future mobile
       game titles.



    Financial Results:
                              For the Three    For the Three   For the Three
                               Months Ended     Months Ended    Months Ended
                              September 30,         June 30,   September 30,
                                       2008             2009            2009
                             (US$ thousands)  (US$ thousands) (US$ thousands)
    Revenues                        $25,050          $32,287         $35,091
      WVAS                           22,070           23,925          25,387
      Mobile Games                    2,368            6,802           8,202
      Wireless Internet
       Service                          612            1,560           1,502

    Cost of Revenue                 $13,395          $15,733         $17,167
      WVAS                           12,135           12,173          13,074
      Mobile Games                      955            2,791           3,341
      Wireless Internet
       Service                          305              769             752

    Gross profit                    $11,655          $16,554         $17,924
      WVAS                            9,935           11,752          12,313
      Mobile Games                    1,413            4,011           4,861
      Wireless Internet
       Service                          307              791             750

    Gross profit ratio                  47%              51%             51%
      WVAS                              45%              49%             49%
      Mobile Games                      60%              59%             59%
      Wireless Internet
       Service                          50%              51%             50%

Revenues

WVAS revenues in 3Q09 increased 15% from 3Q08 and 6% from 2Q09 to $25.39 mn. Revenues from 2.5G services accounted for approximately 20% of total WVAS revenues while revenues from 2G services represented the remaining 80% in 3Q09.

Total mobile game revenues in 3Q09 were $8.2 mn, a 246% increase from the same period last year and a 21% increase from 2Q09.

Revenues from downloadable games were $7.09 mn or 86% of total mobile game revenues, representing a 274% increase from the same period last year and a 41% sequential increase. Revenues from downloadable games continued to perform well due to the overall growth of the mobile game market in China and closer partnership with Chinese mobile operators.

Revenues from mobile multi-player online games ("MMO") were $1.12 mn, an increase of 134% from the same period last year but a decrease of 37% from 2Q09. The sequential decline was due to a number of factors, including seasonal factors and promotional activities associated with the transition from our older, more established mobile online game, "Tian Jie", to our more recently launched mobile online game, "Feng Shen". Revenues from "Tian Jie" accounted for 97% mobile online game revenues, compared to "Feng Shen" which accounted for the remaining 3%.

In 3Q09, revenues from Mobile MMO made up 14% of total mobile game revenues compared to 26% in 2Q09.

Wireless Internet service ("WIS") revenues were $1.50 mn in 3Q09, representing an increase of 146% from the same period last year but a slight decrease of 4% from 2Q09. In 3Q09, 44% of WIS revenues were from wireless advertising with the remaining 56% from premium services on the Kong.net wireless Internet site, including virtual item sales and cross-selling of our mobile game and WVAS services.

Gross Profit

Total gross profit was $17.92 mn in 3Q09, an 8% increase compared to 2Q09 and a 54% increase compared to the same period last year. Total gross margin was stable in 3Q09 at 51% compared with 51% in 2Q09, and 4% higher compared with 47% in the same period last year.

WVAS gross profit in 3Q09 was $12.31 mn compared to $11.75 mn in 2Q09, a 24% increase compared to the same period last year and a 5% increase from 2Q09. 3Q09 WVAS gross margin was stable at 49% compared to 49% in 2Q09 but higher compared to 45% in the same quarter last year.

Mobile games gross profit for 3Q09 was $4.86 mn compared to $4.01 mn in 2Q09 and $1.41 mn in the same period last year, or an increase of 21% and 244% respectively. Mobile games gross margin was also stable at 59% compared with 59% in 2Q09 and 60% in 3Q08.

    Wireless Internet service gross profit for 3Q09 was $0.75 mn compared to
$0.79 mn in 2Q09 and $0.31 mn in the same period last year. Wireless Internet
gross margins were also relatively stable at 50% in 3Q09 compared to 51% in
2Q09.



    Operating Expenses
                             For the Three    For the Three    For the Three
                              Months Ended     Months Ended     Months Ended
                             September 30,         June 30,    September 30,
                                      2008             2009             2009

    Product development             $4,078           $4,373           $4,829
    Sales and marketing              5,018            4,453            4,338
    General and administrative       3,551            3,127            3,430
    Goodwill impairment loss        21,624               --               --
    Total Operating Expenses       $34,271          $11,953          $12,597

Total operating expenses increased 5% sequential to $12.60 mn in 3Q09 compared to $11.95 mn in 2Q09. We would expect total operating expenses to increase in the coming quarters as we continue to invest in product development and more actively promote KONG.net and other mobile Internet initiatives towards the end of the year.

Product development expenses in 3Q09 were $4.83 mn compared to $4.37 mn in 2Q09 or a 10% sequential increase as we continued to hire additional product development and technology staff for both our KONG.net and mobile game development teams.

Sales and marketing expenses in 3Q09 were $4.34 mn compared to $4.45 mn in 2Q09 and $5.02 mn in the same period last year. Sales and marketing expenses were lower due to a greater focus on more efficient marketing channels for Kong.net and our other businesses.

General and administrative expenses in 3Q09 were $3.43 mn compared to $3.13 mn in 2Q09, or an increase of 10% quarter-over-quarter.

The Company's total headcount increased to 922 as of September 30, 2009 compared to 841 as of June 30, 2009 with product development team increases making up the majority of overall headcount growth.

Earnings

Net income and Non-GAAP net income in 3Q09 were $4.50 mn and $6.28 mn, respectively. Diluted earnings per ADS and diluted Non-GAAP earnings per ADS were $0.11 and $0.16 for 3Q09, respectively.

Total diluted ADS outstanding as of September 30, 2009 was 39.24 mn, compared to 38.53 mn as of June 30, 2009.

    (In weighted average, mn)                      Basic ADS     Diluted ADS
    Balance as of June 30, 2009                        34.71           38.53
    Less: Share repurchase                             (0.73)          (0.73)
    Add: Vested shares and exercised options            0.10            0.10
      Warrant                                             --            0.48
      Outstanding options and nonvested shares            --            0.86
    Balance as of September 30, 2009                   34.08           39.24

Balance Sheet

As of September 30, 2009, the Company had $134 mn in cash and cash equivalents.

Stock Repurchase Program:

As of September 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.

Business Outlook (For the 3-month period ending December 31, 2009):

Based on information available on November 11, 2009, the Company expects total revenues for the fourth quarter of 2009 to be between $37 mn and $38 mn.

Conference Call:

The Company's management team will conduct a conference call at 8:00 am Beijing time on November 12 (7:00 pm Eastern time and 4:00 pm Pacific time on November 11, 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
                                 September 30,       June 30,  September 30,
                                          2008           2009           2009

    Revenues                           $25,050        $32,287        $35,091
    Cost of revenues                    13,395         15,733         17,167
    Gross profit                        11,655         16,554         17,924
    Operating expenses
      Product development                4,078          4,373          4,829
      Sales & marketing                  5,018          4,453          4,338
      General & administrative           3,551          3,127          3,430
      Goodwill impairment loss          21,624             --             --
      Total operating expenses          34,271         11,953         12,597
    Operating profit (loss)            (22,616)         4,601          5,327
    Interest income                      1,134            765            717
    Investment income                       --             --            117
    Interest expense on
     convertible notes                      --            223            234
    Income before tax expense          (21,482)         5,143          5,927
    Income tax expense                      89          1,594          1,431
    Net income (loss)                 ($21,571)        $3,549         $4,496

    Basic earnings (loss) per ADS       ($0.61)         $0.10          $0.13
    Diluted earnings (loss) per ADS     ($0.61)         $0.09          $0.11
    Weighted average ADS
     outstanding (mn)                    35.63          34.71          34.08
    Weighted average ADS used in
     diluted                             35.63          38.53          39.24
    EPS calculation (mn)



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

                                               For the Nine     For the Nine
                                               Months Ended     Months Ended
                                              September 30,    September 30,
                                                       2008             2009
    Cash Flows From Operating Activities
    Net Income (Loss)                              ($21,183)         $10,567
    Adjustments to reconcile net income to
     net cash provided by operating activities
      Share-based compensation                        1,862            2,963
      Depreciation and amortization                   2,204            2,058
      Disposal of property and equipment                 --               (4)
      Goodwill impairment loss                       21,624               --
      Amortization of the debt discount                  --              202
      Changes in operating assets and
       liabilities                                    5,236           (8,429)
    Net Cash Provided by Operating
     Activities                                       9,743            7,357

    Cash Flows From Investing Activities
    Purchases of subsidiaries, net of cash
     US$330 acquired                                     --           (4,433)
    Purchase of property and equipment               (1,277)          (1,167)
    Proceeds from disposal of property                   --                4
    Purchase of long-term investment                 (2,964)              --
    Net Cash Used in Investing Activities            (4,241)          (5,596)

    Cash Flows From Financing Activities
    Proceeds from issuance of Convertible Note           --            6,620
    Proceeds from exercise of share options              --              603
    Stock Repurchase                                     --          (11,107)
    Net Cash Used in Financing Activities                --           (3,884)

    Effect of foreign exchange rate changes           7,043               75

    Net increase in Cash and Cash
     Equivalents                                    $12,545          ($2,048)
    Cash and Cash Equivalents, Beginning
     of Period                                     $122,343         $136,054
    Cash and Cash Equivalents, End of
     Period                                        $134,888         $134,006



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

                                  September 30,       June 30,  September 30,
                                           2008           2009          2009

    Cash and cash equivalents          $134,888       $132,004      $134,006
    Accounts receivable (net)            16,457         21,386        23,463
    Other current assets                  2,742          6,121         6,745
    Total current assets                154,087        159,511       164,214

    Rental deposits                         525            568           582
    Intangible assets (net)                 831          2,165         1,849
    Property and equipment (net)          3,286          3,307         3,107
    Long-term investments                 2,964          2,964         2,964
    Goodwill                             15,776         21,244        21,262
    Total assets                       $177,469       $189,759      $193,978

    Accounts payable                    $10,529        $11,622       $11,161
    Other current liabilities             5,806         11,753        10,479
    Total current liabilities            16,335         23,375        21,640

    Convertible notes                        --          2,687         2,767
    Non-current deferred tax
     liability                              112            451           400
    Total liabilities                   $16,447        $26,513       $24,807

    Shareholders' equity                161,022        163,246       169,171
    Total liabilities &
     shareholders' equity              $177,469       $189,759      $193,978

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
                                 September 30,        June 30,   September 30,
                                          2008            2009            2009
                                (US$ thousands) (US$ thousands) (US$ thousands)

    GAAP Net Income (Loss)            ($21,571)        $3,549           $4,496
    Share-based compensation               604            721            1,229
    Financial expense on
     convertible notes                      --            223              234
    Goodwill impairment loss            21,624             --               --
    Amortization of intangibles            152            215              319
    Non-GAAP Net Income                   $809         $4,708           $6,278

    Non-GAAP diluted net income
     per ADS (Note 1)                    $0.02          $0.12            $0.16


    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 and warrant.

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.

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