KongZhong Corporation Reports Unaudited Fourth Quarter 2013 Financial Results PR Newswire BEIJING, Feb. 24, 2014 BEIJING, Feb. 24, 2014 /PRNewswire/ -- KongZhong Corporation (NASDAQ: KONG), a leading provider of digital entertainment services for consumers in the PRC, today announced its unaudited financial results for the fourth quarter of 2013 and full year 2013. Fourth Quarter 2013 Financial Highlights: oRevenues exceed guidance- Total revenues for the fourth quarter of 2013 decreased 0.6% from the third quarter of 2013 but increased 2.8% from the same period last year to US$ 43.84 mn, exceeding the guidance range of US$ 41.0 mn to US$ 42.0 mn. oGross profit exceed guidance- Total gross profit increased 13.7% from the third quarter of 2013 and 20.6% increase from the same period last year to US$ 21.72 mn, exceeding the guidance range of US$ 20.0 mn to US$ 21.0 mn. oNet income exceed guidance and a record high for Company- Net income increased from the third quarter of 2013 to US$ 10.03 mn, exceeding the guidance range of US$ 8.0 mn to US$ 9.0 mn. Net loss in 3Q13 was US$2.68 mn, which included a $1.56 mn impairment loss on intangible assets and $ 2.0 mn impairment loss on long term investments. Basic net income per American Depositary Shares ("ADS") was US$ 0.22. oNon-GAAP net income exceed guidance and a record high for Company- Non-GAAP net income was US$ 10.65 mn, exceeding the guidance range of US$ 9.0 mn to US$ 10.0 mn. Non-GAAP diluted net income per ADS was US$ 0.23 (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 December 31, 2013, the Company had US$ 216.61 mn in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash or US$ 4.78 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash. Full Year 2013 Financial Highlights oTotal revenues were US$ 179.44 million for the full year 2013. Of which WVAS revenues were US$ 63.92 mn in 2013 compared to US$ 77.77 mn in 2012, mobile games revenues were US$ 17.07 mn in 2013 compared to US$ 21.19 mn in 2012 and Internet games revenues were US$ 98.45 mn in 2013 compared to US$ 87.42 mn in 2012. oFull year gross margin was 43.1% compared to 41.6% in 2012. Of which WVAS gross margin was 31.1%, Mobile games gross margin was 53.5% and Internet games gross margin was 49.0%. oNet income in 2013 was US$ 20.66 mn compared to US$ 25.74 mn in 2012. However, net income in 2013 included a $1.56 mn impairment loss on intangible assets and $ 2.0 mn impairment loss on long term investments. oNon-GAAP net income was US$ 28.87 mn compared to 2012 full year Non-GAAP net income of US$ 35.92 mn. The Company's Chairman and Chief Executive Officer, Leilei Wang said, "In 2013, the Company spent great efforts preparing for the upcoming the official launch of Guild Wars 2 and World of War Plane, as well as the development of our smartphone games. Through in-house self-development and the licensing of overseas games, we will continue to develop our strong pipeline in both mobile and Internet games. Our goals in 2014 are to maintain stable cashflow from our WVAS business, capture fast growth in our mobile game business and in Internet games, achieving sustained growth in World of Tanks while having successful launches of Guild Wars 2 and World of Warplanes. I believe 2014 is the year the Company has the opportunity to see great performance." For the Three For the Three For the Three Months Ended Months Ended Months Ended December 31, September 30, December 31, 2012 2013 2013 (US$ in thousands) (US$ in thousands) (US$ in thousands) Revenues $42,631 $44,084 $43,838 WVAS 14,620 18,012 13,832 Mobile Games 4,169 4,702 4,924 Internet Games 23,842 21,370 25,082 Sales Tax $1,412 $1,506 $876 WVAS 178 278 276 Mobile Games 30 37 42 Internet Games 1,204 1,191 558 Cost of Revenue $23,218 $23,483 $21,246 WVAS 10,286 11,277 8,937 Mobile Games 1,737 2,355 1,436 Internet Games 11,195 9,851 10,873 Gross Profit $18,001 $19,095 $21,716 WVAS 4,156 6,457 4,619 Mobile Games 2,402 2,310 3,446 Internet Games 11,443 10,328 13,651 Gross Profit ratio 42% 43% 50% WVAS 28% 36% 33% Mobile Games 58% 49% 70% Internet Games 48% 48% 54% Revenues WVAS Revenues WVAS revenues in 4Q13 were US$ 13.83 mn, a 23.2% decrease from 3Q13, and a 5.4% decrease from the same period of last year. As discussed previously, our WVAS business generally sees seasonal weakness at the end of each calendar year based on our mobile operator policy and business practices. However, we expect the WVAS operating environment to stabilize in 2014 from 2013 levels. WVAS made up 31.6 % of total revenues in 4Q13. Mobile Games Revenues Total mobile game revenues in 4Q13 were US$ 4.92 mn, a 18.1% increase from the same period last year and a 4.7% increase from 3Q13. Feature phone mobile games revenues in 4Q13 were US$ 1.81 mn, compared to US$ 3.21 mn in 3Q13. Our mobile operator partners continued to implement strict operating policies and continued their de-emphasis of marketing feature phone mobile games. Smartphone mobile game revenues in 4Q13 were US$ 3.11 mn, a 108.4% increase from 3Q13, and representing 63.2% of total mobile game revenues. For the Three For the Three Months Ended Months Ended September 30, December 31, 2013 2013 MAUs 1,030k 1,320k APA 46k 86k ARPU(RMB/Q) 198 222 For the 4Q13 3-month period, smartphone game operations achieved average monthly active users ("MAUs") of 1.32 mn and aggregated paying accounts ("APAs") of 86k with quarterly average revenue per user ("ARPU") of RMB 222. Total mobile game revenues made up 11.2% of total revenues in 4Q13. Internet Games Revenues Internet Game ("Net Game") revenues were US$ 25.08 mn in 4Q13, a 17.4% increase from 3Q13 and a 5.2% increase from the same period last year. Domestic Net Game revenues were US$ 24.22 mn, a 16.6% increase from 3Q13 and a 6.0% increase from the same period last year. Domestic Net game revenues consisted primarily of revenues from World of Tanks. Overseas net game revenues were US$ 0.86 mn, a 44.6% increase from 3Q13 but a 13.1% decrease from the same period last year. Overseas net game revenues increased due to Kungfu hero license revenues contribution from South Korea business partners. For the 4Q13 3-month period, mainland China online game operations achieved average concurrent users ("ACUs") of 467k and aggregated paying accounts ("APAs") of 774k with quarterly average revenue per user ("ARPU") of RMB 192. ACUs in 4Q13 were up 11.0% from the same period last year and a 14.2% increase from 3Q13. For the Three For the Three For the Three Months Ended Months Ended Months Ended December 31, September 30, December 31, 2012 2013 2013 ACU 300k 399k 467k APA 832k 763k 774k ARPU(RMB/Q) 173 168 192 Internet game revenues made up 57.2% of total revenues in 4Q13. Gross Profit Total gross profit was US$ 21.72 mn in 4Q13, an increase of 13.7% from 3Q13 and an increase of 20.6% from the same period last year. Total gross margin was 49.5% in 4Q13. WVAS Gross Profit WVAS gross profit in 4Q13 was US$ 4.62 mn, a 28.5% decrease from 3Q13. 4Q13 WVAS gross margin was 33.4% compared to 35.9% in 3Q13. Mobile Game Gross Profit Mobile games gross profit in 4Q13 was US$ 3.45 mn, a 49.2% increase from 3Q13 and a 43.5% increase from the same period last year. The increase in mobile games gross profits was due to the increase in our higher gross margin smartphone games revenue compared to feature phone game revenues in 4Q13. We expect to launch a number of new smartphone games in the 1Q 2014 / 2Q 2014 period. 4Q13 mobile games gross margin was 70.0% compared to 57.6% in the same period last year and 49.1% in 3Q13. Internet Game Gross Profit Internet game gross profit in 4Q13 was US$ 13.65 mn, a 32.2% increase from 3Q13 and an 19.3% increase from the same period last year. 4Q13 Internet game gross margin was 54.4% compared to 48.0% in the same period last year and 48.3% in 3Q13. Operating Expenses For the Three For the Three For the Three Months Ended Months Ended Months Ended December 31, December 31, September 30, 2012 2013 2013 (US$ in (US$ in thousands) thousands) (US$ in thousands) Product development $5,325 $6,991 $6,819 Sales and marketing 5,926 10,942 6,520 General and 3,179 2,029 2,356 administrative Impairment loss on - 1,562 - intangible assets Total operating expenses $14,430 $21,524 $15,695 Total operating expenses in 4Q13 were US$ 15.70 mn compared to US$ 21.5 mn in 3Q13. Product development expenses in 4Q13 were US$ 6.82 mn compared to US$ 6.99 mn in 3Q13. Sales and marketing expenses in 4Q13 were US$ 6.52 mn compared to US$ 10.94 mn in 3Q13. As previously discussed, 3Q13 sales and marketing activities were elevated due to increased promotion our smartphone games and WoT. The decline in sales and marketing expenses in 4Q13 was a moderation of those activities. General and administrative expenses in 4Q13 were US$ 2.36 mn compared to US$ 2.03 mn in 3Q13. The Company's total headcount remained stable in 4Q13 to 1,153 compared to 1,166 at the end of 3Q13. Earnings Net income and Non-GAAP net income in 4Q13 were US$ 10.03 mn and US$ 10.65 mn, respectively. Diluted income per ADS and diluted Non-GAAP earnings per ADS were US$ 0.21 and US$ 0.23 in 4Q13, respectively. Total ADS on a diluted basis outstanding during 4Q13 were 46.85 mn, compared to 43.50 mn outstanding during 3Q13. Number during three Number during three For the purpose of earnings months ended months ended per share calculation September 30, 2013 December 31,2013 ADS (in mns) 43.50 45.32 Add: Dilution impact from - 0.58 options and nonvested shares Warrants issued to business - 0.95 partners ADS on diluted basis 43.50 46.85 Note: The options, warrants, non-vested shares were excluded from the computation of diluted net loss per share for three months ended September 30, 2013 because their effect would be anti-dilutive. Balance Sheet As of December 31, 2013, the Company had US$ 216.61 mn in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash or US$ 4.78 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash. Business Outlook (For the 3-month period ending March 31, 2014): The Company expects total revenues for 1Q14 to be within the range of US$ 45.5 mn to US$ 46.5 mn, with business unit revenues at the mid-point expected to roughly consist of WVAS revenues of US$ 13.5 mn, mobile game revenues of US$ 8.5 mn and Net Game revenues of US$ 24.0 mn. The Company expects total gross profit to be within the range of US$ 22.5 mn to US$ 23.5 mn, net profit to be US$ 9.5 mn to US$ 10.5mn, and Non-GAAP net profit is expected to be US$ 10.5 mn to US$ 11.5 mn. Regarding Internet Game revenue guidance, beginning in September 2013, with further implementation beginning on January 1, 2014, the Company began to account for the majority part of Internet Game revenues under VAT. Under VAT, the revenue is calculated excluding VAT that has to be paid to tax authority, while under business tax in the prior periods, the revenue is fully recorded including the business tax amount as per Chinese government tax policies. As such, although our Internet Game revenues guidance for domestic Internet games implies a slight decrease in revenues in 1Q14 compared to 4Q13, we expect gross profits from domestic Internet games to remain stable after taking into account the change from business tax to VAT. Conference Call: The Company's management team will conduct a conference call at 8:30 am Beijing time on February 25, 2014 (19:30 pm Eastern time and 16:30 pm Pacific time on February 24, 2014). 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) For the For the FortheThree Three Three MonthsEnded Months Months Ended Ended December 31, September December 2012 30, 31, 2013 2013 Revenues $42,631 $44,084 $43,838 Sales tax 1,412 1,506 876 Cost of revenue 23,218 23,483 21,246 Gross profit 18,001 19,095 21,716 Operating expenses Product development 5,325 6,991 6,819 Sales and marketing 5,926 10,942 6,520 General and administrative 3,179 2,029 2,356 Impairment loss on intangible - 1,562 - assets Total operating expenses 14,430 21,524 15,695 Government subsidy 143 - 1,371 Interest income 1,176 1,685 2,170 Impairment loss on cost method - 2,000 - investment Imputed interest on long-term 150 150 150 payables Exchange gain 388 236 898 Investment income 42 - - Income(loss)beforetaxexpense 5,170 (2,658) 10,310 Income tax expense 400 23 284 Net income (loss) $4,770 ($2,681) 10,026 Basic earnings (loss) per ADS $0.11 ($0.06) $0.22 Diluted earnings (loss) per ADS $0.11 ($0.06) $0.21 Weighted average ADS 41.58 43.50 45.32 outstanding (million) Weighted average ADS used in 42.43 43.50 46.85 diluted EPS calculation (million) Net income (loss) $4,770 ($2,681) $10,026 Other comprehensive income 2,195 1,915 2,043 Total comprehensive income $6,965 $(766) $12,069 (loss) KongZhong Corporation Condensed Consolidated Statements of Comprehensive Income (US$ in thousands, except per share and share data) (Unaudited) FortheTwelve For the Twelve Months Ended Months Ended December 31, December 31, 2012 2013 Revenues $186,380 $179,440 Sales tax 5,794 5,786 Cost of revenues 103,130 96,400 Gross profit 77,456 77,254 Operating expenses Product development 18,382 26,402 Sales and marketing 24,586 26,674 General and administrative 11,629 8,976 Impairment loss on intangible assets - 1,562 Total operating expenses 54,597 63,614 Government subsidy 301 2,176 Interest income 5,231 6,764 Interest income from loans to third party 454 - Interest expense 263 693 Impairment loss on cost method investment - 2,000 Exchange gain 388 1,487 Investment income 261 - Income before tax expense 29,231 21,374 Income tax expense 3,491 712 Net income $25,740 $20,662 Basic earnings per ADS $0.62 $0.48 Diluted earnings per ADS $0.60 $0.47 Weighted average ADS outstanding (million) 41.55 42.87 Weighted average ADS used in diluted EPS 43.04 43.79 calculation (million) Net income $25,740 $20,662 Other comprehensive income 432 8,945 Total comprehensive income $26,172 $29,607 KongZhong Corporation Condensed Consolidated Statements of Cash Flows (US$ in thousands) (Unaudited) For the Year Ended For the Year Ended December 31, 2012 December 31, 2013 Cash Flows From Operating Activities Net income $25,740 $20,662 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 7,628 4,988 (Gain) loss on disposal of property and (7) 31 equipment Provision of bad debt 6 342 Intangible assets impairment loss - 1,813 Impairment loss on cost method - 2,000 investment Imputed interest on long-term payables - 600 Share-based compensation 4,464 1,574 Amortization of the debt discount 36 - Changes in operating assets and 8,788 3,720 liabilities Net Cash Provided by Operating 46,655 35,730 Activities Cash Flows From Investing Activities Acquisition of business (8,413) - Purchase of intangible assets (13,667) (1,565) Long-term investments (4,000) - Loan repayment from third party 22,190 - Purchase term deposits - (20,824) Proceeds from disposal of term deposits - 16,711 Purchase of held-to-maturity securities (319,590) (259,864) Proceeds from disposal 319,294 226,240 held-to-maturity securities Purchase of property and equipment (1,516) (4,969) Proceeds from disposal of property and 7 - equipment Restricted cash (35,511) 247 Net Cash Used in Investing Activities (41,206) (44,024) Cash Flows From Financing Activities Proceeds from exercise of employee 277 849 stock options Proceeds for exercise of warrants - 27,820 Deferred payments for acquisition of - (3,000) business Deferred payments for intangible asset - (6,588) Repurchase of ordinary shares (14,590) (10,124) Proceeds from bank borrowing - 9,000 Repayment of bank borrowing - (9,057) Net Cash (Used in) Provided by (14,313) 8,900 Financing Activities Effect of foreign exchange rate changes 47 1,799 Net (decrease) increase in Cash and (8,817) 2,405 Cash Equivalents Cash and Cash Equivalents, Beginning of 129,512 120,695 Period Cash and Cash Equivalents, End of 120,695 123,100 Period KongZhong Corporation Condensed Consolidated Balance Sheets (US$ in thousands) (Unaudited) As of As of As of December 31, September 30, December 31, 2012 2013 2013 Cash and cash equivalents $120,695 $104,528 $123,100 Term deposits - 3,873 4,449 Held-to-maturity securities 17,465 49,248 52,194 Accounts receivable (net) 23,700 22,690 17,231 Restricted cash - 10,570 0 Other current assets 4,718 6,993 7,762 Total current assets 166,578 197,902 204,736 Rental deposits 748 557 796 Intangible assets (net) 75,069 78,545 78,727 Property and equipment (net) 3,065 6,498 5,843 Long-term investments 4,000 2,000 2,000 Goodwill 87,551 89,568 90,267 Restricted cash 35,773 36,588 36,871 Total assets $372,784 $411,658 $419,240 Accounts payable (including accounts payable of the consolidated variable interest entities ("VIE") without recourse to KongZhong Corporation of $42,327, $42,612 $43,307 $39,514 $43,198 and $39,488 as of December 31, 2012, September 30, 2013 and December 31, 2013, respectively) Deferred revenue (including deferred revenue of the consolidated VIE without recourse to KongZhong Corporation of $3,585, $3,212 and $ 2,262 as of 3,785 3,245 2,262 December 31, 2012, September 30, 2013 and December 31,2013, respectively) Other current liabilities (including other current liabilities of the consolidated VIE without recourse to KongZhong 24,833 25,790 25,595 Corporation of $9,935, $13,478 and $15,437 as of December 31, 2012, September 30, 2013 and December 31, 2013, respectively) Total current liabilities 71,230 72,342 67,371 Non-current deferred tax liability (including non-current deferred tax liability of the consolidated VIE without recourse to KongZhong Corporation of $10, nil 10 - - and nil as of December 31, 2012, September 30, 2013 and December 31,2013, respectively) Other long-term liabilities (including other long-term liabilities of the consolidated VIE without recourse to KongZhong Corporation of $18,660, 19,110 19,260 $19,110 and $19,260 as of December 18,660 31, 2012, September 30, 2013 and December 31,2013, respectively) Total liabilities $89,900 $91,452 $86,631 Shareholders' equity $282,884 $320,206 $332,609 Total liabilities and shareholders' $372,784 $411,658 $419,240 equity Non-GAAP Financial Measures To supplement the unaudited condensed statements of comprehensive income presented in accordance with US GAAP, the Company uses non-GAAP financial measures (Non-GAAP Financial Measures) of net income and net income per diluted ADS, which are adjusted from results based on GAAP to exclude certain infrequent or unusual or non-cash based expenses, gains and losses. The Non-GAAP Financial Measures are provided as additional information to help both management and investors compare business trends among different reporting periods on a consistent and more meaningful basis and enhance investors' overall understanding of the Company's current financial performance and prospects for the future. The Non-GAAP Financial Measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. In addition, the Company's calculation of the Non-GAAP Financial Measures may be different from the calculation used by other companies, and therefore comparability may be limited. For the periods presented, the Company's non-GAAP net income and non-GAAP net income per diluted ADS exclude, as applicable, the amortization of intangibles, share-based compensation expense, impairment loss on cost method investment, impairment loss on intangible assets, imputed interest on long-term payables, as well as is adjusted for the dilution impact on ADS numbers from stock options, non-vested shares and warrants. Reconciliation of the Company's Non-GAAP financial measures to the GAAP financial measures is set forth below. For the Three For the Three For the Three Months Ended Months Ended Months Ended December 31, September 30, December 31, 2012 2013 2013 (US$inthousands, (US$inthousands, (US$inthousands, except per share exceptpershare and share data) except per share andshare data) and share data) GAAP net income $4,770 ($2,681) $10,026 (loss) Share-based 1,022 284 290 compensation Impairment loss on cost - 2,000 - method investment Impairment loss on 150 1,562 - intangible assets Imputed interest on - 150 150 long-term payables Amortization of 1,798 185 187 intangibles Non-GAAP net income $7,740 $1,500 $10,653 Weighted average ADS 43.50 46.85 42.43 used in diluted Non-GAAP diluted net $0.18 $0.03 $0.23 income per ADS For the Twelve Months FortheTwelveMonths Ended December 31, Ended 2012 December 31, (US$ in thousands, 2013 except per share (US$ in thousands, and share data) exceptper share and share data) GAAP net income (loss) $25,740 $20,662 Share-based compensation 4,465 1,574 Impairment loss on cost method - 2,000 investment Impairment loss on intangible - 1,562 assets Imputed interest on long-term 262 600 payables Amortization of intangibles 5,453 2,475 Non-GAAP net income $35,920 $28,873 Weighted average ADS used in 43.04 43.79 diluted Non-GAAP diluted net income per ADS $0.66 $0.83 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 feature phone mobile games developer. To further expand our mobile games development capabilities, we acquired Noumena in 2013 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. In May 2013, KONG entered into a strategic partnership with Wargaming.net's granting KONG exclusive rights to all of Wargaming.net's future games in mainland China, including but not limited to World of Tanks, World of Warplanes and World of Warships. In addition, KONG is also the the exclusive China partner for Guild War 2 from ArenaNet and Hawken from Meteor Entertainment. 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 Website: http://www.kongzhong.com Website: http://ir.kongzhong.com Contact: Investor Contact: Jay Chang, Chief Financial Officer, Tel.: (+86-10) 8857 6000, Fax: (+86-10) 8857 5891, firstname.lastname@example.org; or Media Contact: Yuan Liu, Manager, Tel: (+86-10) 8857 6000, Fax: (+86-10) 8857 5900, email@example.com
KongZhong Corporation Reports Unaudited Fourth Quarter 2013 Financial Results
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