KongZhong Corporation Reports Unaudited First Quarter 2012 Financial Results

 KongZhong Corporation Reports Unaudited First Quarter 2012 Financial Results

PR Newswire

BEIJING, May 16, 2012

BEIJING, May 16, 2012 /PRNewswire-Asia/ -- KongZhong Corporation (NASDAQ:
KONG), a leading provider of digital entertainment services for consumers in
the PRC, today announced its unaudited financial results for the first quarter
2012 financial results.

First Quarter 2012 Financial Highlights:

  oRevenues exceeds guidance – Total revenues for the first quarter of 2012
    increased 12% from the fourth quarter of 2011 to US$ 43.84 mn, exceeding
    the Company's 1Q12 revenue guidance range of US$ 41.5 mn to US$ 42.5 mn.
  oGross profit exceeds guidance – Total gross profit was US$ 18.75 mn for
    1Q12, exceeding the Company's 1Q12 guidance range of US$ 17 mn to US$ 18
    mn.
  oNet income exceeds guidance – Net income in 1Q12 was US$ 6.86 mn,
    exceeding the Company's guidance range of US$ 4.5 mn to US$ 5.5 mn, a 21%
    increase compared to net income of US$ 5.67 mn in 4Q11. Basic net income
    per American Depositary Shares ("ADS") was US$ 0.17.
  oNon-GAAP net income exceeds guidance – Non-GAAP net income was US$ 8.66
    mn, exceeding the Company's guidance range of US$ 6.5 mn to US$ 7.5 mn,
    while Non-GAAP diluted net income per ADS was US$ 0.21 (Non-GAAP Financial
    Measures are described and reconciled to the corresponding GAAP measures
    in the section titled "Non-GAAP Financial Measures.")
  oCash and cash equivalents – As of March 31, 2012, the Company had US$
    178.19 mn in cash and cash equivalents, held-to-maturity securities and
    trading securities or US$ 4.34 per ADS in cash and cash equivalents,
    held-to-maturity securities and trading securities, compared to US$ 154.57
    mn at the end of 4Q11.

Commenting on the results, the Company's Chairman and Chief Executive Officer,
Leilei Wang said, "The Company achieved record revenues and non-GAAP Net
Profit After Tax ("NPAT") in the first quarter of 2012 and more importantly,
we continue to build a strong foundation for future growth in our Internet and
mobile game businesses."

Business Highlights:

  oWorld of Tanks (wot.kongzhong.com) - World of Tanks ("WoT") was a key
    driver of the Company's 1Q12 results and continued to demonstrate our
    strong partnership with Wargaming. More importantly, on May 14, we
    announced a strategic partnership agreement with Wargaming.net which have
    fully aligned our long-term interests to maximize the success of all of
    Wargaming.net's games in the China market for many years to come. As part
    of these agreements, we have extended our original term of World of Tanks
    (and future Wargaming.net games) from 3-years to no limit, long-term
    agreements. We expect strong continued performance for World of Tanks in
    China in the coming quarter, and believe the continuation of
    Wargaming.net's "War Saga", World of Warplanes and World of Battleships,
    have similar potential for success in the China market.
  oKung Fu Hero (hero.kongzhong.com) - We launched our self-developed 3D
    MMORPG game Kung Fu Hero ("Hero"), in March 2012, to small scale public
    test. We expect to more actively promote Hero to a wider user base during
    the 3Q12 period.
  oDragon's Inn (lm.kongzhong.com) - We have began internal testing of our
    first domestically licensed online game, called Dragon's Inn, a 3D
    side-scrolling fighting online game which we expect to bring to small
    scale public test sometime towards the end of 3Q12.
  oExclusive Mainland China Rights for Offensive Combat™ from U4iA Games
    (u4iagames.com) - The Company entered into a definitive agreement with
    U4iA's Games (pronounced "euphoria") to bring Offensive Combat™ to the
    China online game market. Offensive Combat™ from U4iA Games is the
    world's first browser-based, free-to-play, first person social shooter
    game playable on every device (from PC to mobile), launching sometime in
    the 2nd half of 2012 in North America / Europe and with a preliminary 1st
    half 2013 launch date for China. Offensive Combat™ will also offer
    console quality graphics and it's own unique multi-genre style of
    breakthrough first person shooter gameplay to differentiate itself from
    other FPS games in the market.
  oIn addition, the Company has made a US$ 2.0 mn investment in U4iA Game's
    most recent Series B investment round for a small minority stake. U4iA
    Games, based in Bellevue, WA, was founded in 2011 by former Activision and
    Call of Duty veterans Dusty Welch (CEO) and Chris Archer (Chief Creative
    Officer). Dusty Welch, CEO and co-founder, is a 13-year Activision veteran
    and the key executive credited with the creation and growth of the #1
    worldwide franchise Call of Duty.
  oNoumena Acquisition Completed - The Company completed its acquisition of
    Noumena on March 20, 2012 as part of its strategy to expand our smartphone
    game business. Please see our February 15, 2012 press release for more
    details.
  oKONG Smartphone game strategy - With the acquisition of Noumena completed,
    in 2Q12 KONG has begun the migration of our existing 100+ staff
    feature-phone mobile game development team onto, Handymo, a cross-platform
    smartphone mobile game engine. We expect to gradually increase the
    introduction of new smartphone games to both the overseas and China
    smartphone game markets towards the end of 2Q12.

Financial Results:



                   For the Three   For the Three      For the Three
                   Months Ended  Months Ended      Months Ended
                   March 31,       December 31,       March 31,
                   2011
                                   2011               2012
                   (US$ thousands)
                                   (US$ in thousands) (US$ in thousands)
Revenues           $40,127         $39,285            $43,841
WVAS               21,358          18,442             19,116
Mobile Games       12,269          7,612              5,560
Internet Games     6,500           13,231             19,165
Sales Tax          $839            $1,062             $1,381
WVAS               381             272                277
Mobile Games       178             124                86
Internet Games     280             666                1,018
Cost of Revenue    $22,753         $21,553            $23,713
WVAS               13,111          11,276             12,699
Mobile Games       7,760           4,565              3,133
Internet Games     1,882           5,712              7,881
Gross profit       $16,535         $16,670            $18,747
WVAS               7,866           6,894              6,140
Mobile Games       4,331           2,923              2,341
Internet Games     4,338           6,853              10,266
Gross profit ratio 41%             42%                43%
WVAS               37%             37%                32%
Mobile Games       35%             38%                42%
Internet Games     67%             52%                54%

Revenues

WVAS Revenues

WVAS revenues in 1Q12 were US$ 19.12 mn, a 4% increase from 4Q11. WVAS
revenues were relatively stable compared to prior periods although the WVAS
operating environment remains difficult.

WVAS made up 43.6% of total revenues in 1Q12.

Mobile Games Revenues

Total mobile game revenues in 1Q12 were US$ 5.56 mn, a 27% decrease from
4Q11. Mobile games continued to underperform our expectations as our mobile
operator partners implemented more strict operating policies and continued to
adjust its mobile game marketing strategies. We see these difficulties
continuing in 2Q12 for our legacy feature-phone mobile game business.

However, with the acquisition of Noumena, the Company will begin new efforts
to develop our mobile game business on new, less mobile operator dependent
smartphone mobile game platforms and expect to break out mobile game revenues
which come from smartphone mobile game platforms separate from feature-phone
mobile game revenues in future periods.

Mobile game revenues made up 12.7% of total revenues in 1Q12.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$ 19.17 mn in 1Q12, a 45% increase
from 4Q11. Net Game revenues were driven by the continued strong performance
of World of Tanks ("WoT").

Domestic Net game revenues were US$ 18.11 mn, a 48% increase from 4Q11 due to
the continued growth of the WoT community. Overseas Net game revenues were
US$ 1.06 mn, a 13% increase from 4Q11. Total overseas revenues as a percentage
of total Net game revenues in 1Q12 were 6% compared to 7% in 4Q11.

For the 1Q12 3-month period, domestic mainland China online game operations
achieved average concurrent users ("ACUs") of 228k and aggregate paying
accounts ("APAs") of 744k with quarterly average revenue per user ("ARPU") of
RMB153.

            For the Three For the Three For the Three
            Months Ended   Months Ended   Months Ended
            March 31,      December 31,  March 31,
            2011           2011           2012
ACU         145k           194k           228k
APA         218k           570k           744k
ARPU(RMB/Q) 150            137            153

Net game revenues made up 43.7% of total revenues in 1Q12.

Gross Profit

Total gross profit was US$18.75 mn in 1Q12, a 12% increase compared to 4Q11.
Total gross margin was 43% in 1Q12 and an increase compared to 42% in 4Q11.

WVAS Gross Profit

WVAS gross profit in 1Q12 was US$ 6.14 mn, an 11% decrease from 4Q11. 1Q12
WVAS gross margin was 32%. 

Mobile Game Gross Profit

Mobile games gross profit in 1Q12 was US$ 2.34 mn, a 20% decrease from 4Q11
as policies from our mobile operator partners in our mobile game monthly
subscription business continued to lead to higher churn and lower
profitability. 1Q12 mobile games gross margin was 42%.

Internet Game Gross Profit

Internet game gross profit in 1Q12 was US$ 10.27 mn, a 50% increase from
4Q11. 1Q12 internet game gross margin was 54%.

Operating Expenses

                         For the Three    For the Three      For the Three
                         Months Ended    Months Ended      Months Ended
                         March 31,       December 31,      March 31,
                         2011             2011               2012
                         (US$ thousands)  (US$ in            (US$ in
                                          thousands)         thousands)
Product development      $3,606           $3,899             $4,080
Sales and marketing      4,831            5,636              5,712
General and              2,939            2,738              2,862
administrative
Total operating expenses $11,376          $12,273            $12,654



Total operating expenses in 1Q12 were US$ 12.65 mn compared to US$12.27 mn in
4Q11 or a 3% increase.

Product development expenses in 1Q12 were US$ 4.08 mn compared to US$3.90 mn
in 4Q11 or a 5% increase.

Sales and marketing expenses in 1Q12 were US$ 5.71 mn compared to US$ 5.64 mn
in 4Q11 and US$ 4.83 mn in the same period last year. The increase in sales
and marketing was driven by activities related to the marketing of World of
Tanks and the small scale public test for Kung Fu Hero. We expect to see
increases in our marketing activities for WoT, Hero and other new Net games in
the following quarters.

General and administrative ("G&A") expenses in 1Q12 were US$ 2.86 mn compared
to US$ 2.74 mn in 4Q11. We expect G&A expenses to be maintained at the 1Q12
levels in the coming periods.

The Company's total headcount remained relatively stable in 1Q12 at 982
compared to 961 at the end of 4Q11.

Operating income

Operating income for 1Q12 was US$ 6.09 mn compared to operating profit US$
4.72 mn in 4Q11.

Earnings

Net income and Non-GAAP net income in 1Q12 were US$ 6.86 mn and US$ 8.66 mn,
respectively. Diluted income per ADS and diluted Non-GAAP earnings per ADS
were US$ 0.16 and US$ 0.21 in 1Q12, respectively.

Total ADS on a diluted basis outstanding during 1Q12 were 41.91 mn, compared
to 41.58 mn outstanding during 4Q11.

For the purpose of earnings per share  Number during three Number during three
calculation                            months ended        months ended
                                       December 31, 2011   March 31, 2012
ADS (in mns)                           41.08               41.03
Add: Dilution impact from options and  0.50                0.50
nonvested shares
Convertible senior notes issued to     -                   0.38
Nokia Growth Partners ("NGP")
ADS on diluted basis                   41.58               41.91

Note 1: The convertible senior notes outstanding were excluded from the
computation of diluted net loss per share for three months ended December 31,
2011 because their effect would be anti-dilutive.

Balance Sheet

As of March 31, 2012, the Company had $178.19 mn in cash and cash equivalents,
held-to-maturity and trading securities or US$ 4.34 per basic ADS in cash and
cash equivalents, held-to-maturity and trading securities compared to US$
154.57 mn at the end of 4Q11.

In March 2012, NGP converted the convertible senior notes into 22,800,000
ordinary shares.

Stock Repurchase Program:

The Company began to repurchase its ADSs in the open market on September 30,
2011. As of May 16, 2012, 964k ADSs, representing 38.58 mn ordinary shares of
the Company, were repurchased at an average price of $4.4408 per ADS.

Business Outlook (For the 3-month period ending June 30, 2012):

The Company expects total revenues for 2Q12 to be within the range of US$ 49
mn to US$ 50 mn, with business unit revenues at the mid-point expected to
roughly consist of WVAS revenues of US$ 20.5 mn, mobile game revenues of US$
6.0 mn and Net Game revenues of US$ 23 mn.

The Company expects total gross profit to be within the range of US$ 21.5 mn
to US$ 22.5 mn, total operating profit to be US$ 6.5 mn to US$ 7.5 mn, net
profit to be US$ 6.5 mn to US$ 7.5 mn, and Non-GAAP net profit is expected to
be US$ 9 mn to US$ 10 mn.

Conference Call:

The Company's management team will conduct a conference call at 7:30 am
Beijing time on May 17, 2012 (7:30 pm Eastern time and 4:30 pm Pacific time on
May 16, 2012). 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 Comprehensive Income
(US$ in thousands, except per share and share data)
(Unaudited)
                                   FortheThree  For the Three  For the Three
                                   MonthsEnded   Months Ended   Months Ended
                                   March 31,      December 31,   March 31,
                                   2011           2011           2012
Revenues                           $40,127        $39,285        $43,841
Sales tax                          839            1,062          1,381
Cost of revenues                   22,753         21,553         23,713
Gross profit                       16,535         16,670         18,747
Operating expenses
 Product development             3,606          3,899          4,080
 Sales and marketing             4,831          5,636          5,712
 General and administrative      2,939          2,738          2,862
Total operating expenses           11,376         12,273         12,654
Change in fair value of contingent
consideration for business         (3,729)        -              -
acquisition
Government subsidy                 -              319            -
Operating income                  1,430          4,716          6,093
Interest income                    686            1,338          1,276
Interest expense on convertible    230            88             63
note
Loss on extinguishment of debt
upon prepayment of convertible     1,567          -              -
senior note
Investment income                 292            486            589
Income before tax expense          611            6,452          7,895
Income tax expense                 1,067          784            1,037
Net (loss) income                 $(456)         $5,668         $6,858
Basic (loss) earnings per ADS      $(0.01)        $0.14          $0.17
Diluted (loss) earnings per ADS    $(0.01)        $0.14          $0.16
Weighted average ADS outstanding   37.58          41.08          41.03
(million)
Weighted average ADS used in       37.58          41.58          41.91
diluted EPS calculation (million)
Net (loss) income                 $(456)         $5,668         $6,858
Other comprehensive income         2,701          3,549          209
Total comprehensive income         $2,245         $9,217         $7,067



KongZhong Corporation
Condensed Consolidated Statements of Cash Flows
(US$ in thousands)
(Unaudited)
                                               For the Three   For the Three
                                               MonthsEnded     MonthsEnded
                                               March 31, 2011   March 31, 2012
Cash Flows From Operating Activities
Net (loss) income                              $(456)           $6,858
Adjustments to reconcile net (loss) income to
net cash
provided by operating activities
 Depreciation and amortization               1,159            1,136
Loss on disposal of property and equipment     (4)              (6)
Provision of bad debt                          222              -
Change in fair value of contingent             3,729            -
consideration for business acquisition
 Share-based compensation                    1,191            1,150
Amortization of the debt discount              144              36
Loss on extinguishment of debt upon prepayment 1,567            -
of convertible senior note
 Changes in operating assets and liabilities (2,075)          6,050
Net Cash Provided by Operating Activities      5,477            15,224
Cash Flows From Investing Activities
Acquisition of business                        -                (3,000)
Purchase of property and equipment             (676)            (313)
Loans to third party                           (21,228)         22,190
Held-to-maturity securities                    -                (59,886)
Long-term investment                           -                (2,000)
Proceeds from disposal of property and         4                6
equipment
Net Cash Used in Investing Activities          (21,900)         (43,003)
Cash Flows From Financing Activities
Proceeds from exercise of share options        105              49
Deferred payments for acquisition of           (14,578)         -
subsidiaries
Stock repurchase                               -                (1,587)
Prepayment for convertible senior note         (9,310)          -
Net Cash Used in Financing Activities          (23,783)         (1,538)
Effect of foreign exchange rate changes        1,355            739
Net decrease in Cash and Cash Equivalents      (38,851)         (28,578)
Cash and Cash Equivalents, Beginning of Period 157,171          129,512
Cash and Cash Equivalents, End of Period       118,320          100,934





KongZhong Corporation
Condensed Consolidated Balance Sheets
(US$ in thousands)
(Unaudited)
                                            March 31,  December 31,  March 31,
                                            2011       2011          2012
Cash and cash equivalents                   $118,320   $129,512      $100,934
Held-to-maturity securities                 -          17,299        77,259
Trading securities                          29         7,754         2
Loans to third party                        21,357     22,187        -
Accounts receivable (net)                   28,143     19,903        20,722
Other current assets                        3,779      4,147         4,948
Total current assets                        171,628    200,802       203,865
Rental deposits                             525        511           512
Intangible assets (net)                     3,872      2,348         5,260
Property and equipment (net)                3,910      3,620         3,384
Long-term investments                       -          -             2,000
Goodwill                                    88,764     72,967        87,456
Total assets                                $268,699   $280,248      $302,477
Accounts payable(including accounts payable
of the consolidated variable interest
 entities ("VIE") without recourse to
KongZhong Corporation of $11,986, $15,344  $11,989    $15,347       $13,052
 and $13,049 as of March 31, 2011,
December 31, 2011 and March 31,2012,
respectively)
Deferred revenue(including deferred revenue
of the consolidated VIE without recourse
 to KongZhong Corporation of $1,054 ,    2,596      4,044         4,542
$2,796 and $3,530 as of March 31, 2011,
 December 31,2011 and March 31, 2012,
respectively)
Other current liabilities(including other
current liabilities of the consolidated VIE
without
 recourse to KongZhong Corporation of     11,313     13,134        30,698
$7,463, $7,628 and $9,375 as of March 31,
 2011, December 31,2011 and March 31,
2012, respectively)
Total current liabilities                   25,898     32,525        48,292
Convertible note                            1,063      1,273         -
Non-current deferred tax
liability(including non-current deferred
tax liability of the
 consolidated VIE without recourse to
KongZhong Corporation of $305, $272 and
 $61 as of March 31, 2011, December       305        272           61
31,2011 and March 31, 2012, respectively)
Total liabilities                           $27,266    $34,070       $48,353
Shareholders' equity                        241,433    246,178       254,124
Total liabilities and shareholders' equity  $268,699   $280,248      $302,477

Non-GAAP Financial Measures

To supplement the unaudited condensed statements of comprehensive 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, interest expense on convertible
note, loss on extinguishment of debt upon prepayment of convertible senior
note and change of contingent payable, as well as is adjusted for the dilution
impact on ADS numbers of the options, nonvested shares and convertible note.

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
                          MonthsEnded     MonthsEnded       Months Ended
                          March 31,        December 31,       March 31,
                          2011            2011               2012

                          (US$ thousands,  (US$ in thousands, (US$ in
                          except per share except per share   thousands,
                          and share data)  and share data)    except per share
                                                              and share data)
GAAP net (loss) income    $(456)           $5,668             $6,858
Share-based compensation  1,191            1,174              1,150
Interest expense on       230              88                 63
convertible note
Amortization of           619              537                585
intangibles
Loss on extinguishment of
debt upon                 1,567            -                  -
prepayment of convertible
senior note
Change of contingent      3,730            -                  -
payable
Non-GAAP net income       $6,881           $7,467             $8,656
Weighted average ADS used 40.94            42.15              41.91
in diluted
Non-GAAP diluted net      $0.17            $0.18              $0.21
income per ADS (Note 1)



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 options, nonvested shares and
convertible note issued to Nokia Growth Partners.

About KongZhong:

We are one of the leading providers of digital entertainment services for
consumers in the PRC. We operate three main business units, namely WVAS,
mobile games and Internet games. We are one of the leading providers of WVAS
to mobile phone users and have been in cooperation with all major
telecommunications operators in the PRC since 2002. In 2005, we began
providing feature-phone mobile games on the networks of China Mobile with the
acquisition of Tianjin Mammoth, a mobile games developer. To further expand
our mobile games development capabilities, we acquired Noumena in 2012 in
order to develop smartphone mobile games on smartphone mobile operating
systems, such as iOS and Android. We commenced our Internet games business in
2010 through our acquisition of Dacheng, a developer and operator of Internet
games in the PRC. In addition to developing and operating our self-developed
Internet games, such as Loong, Demon Code and Kung Fu Hero, we are the
exclusive operator of the popular World of Tanks game for the PRC Internet
games market.

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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