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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