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KongZhong Corporation Reports Unaudited First Quarter 2012 Financial Results
May 16, 2012 (06:05 PM EDT)


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:

  • Revenues 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.
  • Gross 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
  • Net 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.
  • Non-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.")
  • Cash 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:

  • World 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.
  • Kung 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.
  • Dragon'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.
  • Exclusive 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.
  • In 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.
  • Noumena 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.
  • KONG 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
Months
Ended  
March 31,

2011

(US$ thousands)

For the Three
Months
Ended 
December 31,

2011

(US$ in thousands)

For the Three
Months
Ended
March 31,

2012

(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 
Months Ended
March 31,
2011

For the Three 
Months Ended
December 31,
 
2011

For the Three 
Months Ended
March 31, 
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 thousands)


(US$ in thousands)

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

 

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 calculation

Number during three
months
ended
December 31, 2011

Number during three
months
ended
March 31, 2012

ADS (in mns)

41.08

41.03

Add: Dilution impact from options and nonvested shares

0.50

0.50

Convertible senior notes issued to Nokia Growth Partners ("NGP")

-

0.38

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)



For the Three
Months Ended
March 31,
2011


For the Three
Months Ended
December 31,
2011


For the Three
Months Ended 
March 31,
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 acquisition

(3,729)




-


-


Government subsidy

-


319


-

Operating income 

1,430


4,716


6,093

Interest income

686


1,338


1,276

Interest expense on convertible note 

230


88


63

Loss on extinguishment of debt upon prepayment of convertible senior note

1,567


-


-







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 (million)

37.58


41.08


41.03

Weighted average ADS used in diluted EPS calculation (million)

37.58


41.58


41.91







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

Months Ended


 Months Ended

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 consideration for business acquisition

3,729


-

   Share-based compensation

1,191


1,150

Amortization of the debt discount

144


36

Loss on extinguishment of debt upon prepayment of  convertible senior note

1,567


-

   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 equipment

4


6

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 subsidiaries

(14,578)


-

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

$11,989


$15,347


$13,052

   entities ("VIE")  without recourse to KongZhong Corporation of  $11,986, $15,344



   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

2,596


4,044


4,542

   to KongZhong Corporation of  $1,054 , $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

11,313


13,134


30,698

   recourse to KongZhong Corporation of $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 31,2011 and March 31, 2012,  respectively)

305


272


61

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
Months
 Ended
March 31,
 2011

(US$ thousands,
except per share
and share data)

For the Three
Months
 Ended
December 31,
2011

(US$ in thousands,
except per share
and share data)

For the Three
Months Ended
March 31,
2012

(US$ in thousands,
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 convertible note

230

88

63

Amortization of intangibles

619

537

585

Loss on extinguishment of debt upon
prepayment of convertible senior note

1,567

-

-

Change of contingent payable

3,730

-

-

Non-GAAP net income

$6,881

$7,467

$8,656





Weighted average ADS used in diluted

40.94

42.15

41.91

Non-GAAP diluted net income per ADS (Note 1)

$0.17

$0.18

$0.21

 

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