2007'02.11.Sun
KongZhong Corporation Reports Third Quarter 2006 Unaudited Financial Results
November 09, 2006
Revenue Up 24% Year-over-year
BEIJING, Nov. 9 /Xinhua-PRNewswire/ -- KongZhong
Corporation (Nasdaq: KONG), a leading provider of wireless
value-added services and the operator of a leading wireless
Internet portal in China, today announced its unaudited
third quarter 2006 financial results.
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Third Quarter 2006 Financial Highlights:
-- Total revenues in the third quarter of 2006 grew 24%
year-over-year to
$25.08 million, exceeding the Company's third
quarter revenue guidance
of $23 million to $24 million.
-- Total advertising revenue generated from KongZhong's
wireless internet
portal Kong.net increased from $22,000 in the second
quarter of 2006 to
$59,000 in the third quarter of 2006.
-- US GAAP net income grew 41% year-over-year but
decreased 37%
sequentially to $4.82 million. Diluted earnings per
ADS in the third
quarter were $0.14. The Company made a one-time
provision of $3.5
million related to the settlement of a class action
lawsuit during the
third quarter of 2005.
-- Non-GAAP net income in the third quarter of 2006
grew 57% from same
period last year but decreased 33% from the second
quarter of 2006 to
$5.53 million. Non-GAAP diluted earnings per ADS
were $0.16. Non-GAAP
Financial Measures are described and reconciled to
the corresponding
GAAP measures in the section titled "Non-GAAP
Financial Measures".
Commenting on the results, Yunfan Zhou, Chairman and
Chief Executive Officer, said, "As we anticipated, due
to some regulatory changes introduced by the
telecommunication operators in the third quarter, our
revenue in the third quarter declined from the previous
quarter. However, we are pleased that our revenue exceeded
our third quarter guidance. As previously announced, we
still anticipate challenges in the wireless value-added
business during the remainder of 2006. On the other hand,
we continue to make progress in our wireless internet
portal business. Although the wireless internet portal is
in the early development stage, we have begun to see the
growth of our mobile advertising revenue. We will continue
to invest in the wireless internet portal Kong.net and we
are confident about its future."
Business Highlights:
-- KongZhong signed an agreement with Beijing Mapabc, a
digital map
provider, to provide local search services on
Kong.net.
-- Kong.net was named ``Media with the Highest
Potential'' at the 2006
China Advertising Summit.
-- On October 17, 2006 KongZhong's in-house developed
mobile networking
game "e 3-Kingdom" was named "Most
Popular Mobile Networking Game"
at the 2006 China Joy Best Games Contest. In
addition KongZhong and
KongZhong Mammoth, KongZhong's wireless game
subsidiary, received the
following awards:
-- Best Mobile Game Developer
-- Best Mobile Game Publisher
-- Best Mobile Networking Game Operator
Financial Results:
(Note: Unless otherwise stated, all financial statement
amounts used in this press release are based on US GAAP and
denominated in US dollars.)
Revenues
Total revenues for the third quarter increased 24% from
the same quarter of 2005 to $25.08 million but decreased 17%
from the second quarter of 2006. Revenue from 2.5G services
accounted for approximately 44% of total revenues and
revenue from 2G services represented the remaining 56%.
Revenue from 2.5G services, which include services
delivered using wireless application protocol (WAP),
multimedia messaging service (MMS), and Java technologies,
decreased 24% from the same period in 2005 and decreased
20% from the second quarter of 2006 to $10.97 million. The
sequential revenue decrease was primarily due to new
regulatory changes introduced by China Mobile during the
third quarter that, among other things, imposed a one-month
free trial period for new users, required that subscription
reminders be sent to existing users and cancelled the
billing of WAP subscriptions that have not been active for
more than four months. WAP revenue in the third quarter of
2006 was $5.79 million, a decrease of 39% from the same
quarter of 2005 and a decrease of 13% from the second
quarter of 2006. MMS revenue in the third quarter of 2006
was $4.76 million, an increase of 27% from the same period
of 2005, but a decrease of 27% from the second quarter of
2006. Java revenue in the third quarter was $0.43 million,
a 60% decrease from the third quarter of 2005 and a 27%
decrease sequentially.
Revenue from 2G services, including short messaging
service (SMS), interactive voice response (IVR), and color
ring back tone (CRBT), grew 139% year-over-year but
decreased 14% quarter-over-quarter to $14.04 million in the
third quarter of 2006. Year-over-year growth in 2G revenue
was primarily driven by the acquisition of Sharp Edge,
which was completed in the first quarter of 2006. The
sequential revenue decrease was primarily due to the
regulatory changes described above as well as new
requirements by telecommunication operators that new users
confirm subscriptions twice. SMS revenue in the third
quarter of 2006 was $10.88 million, which was 165% higher
than the same period of 2005 and 14% lower than the
previous quarter. IVR revenue in the third quarter of 2006
was $1.72 million, a 22% increase
year-over-year but a 21% decrease sequentially. CRBT
revenue grew by 324% year-over-year, but decreased 1%
sequentially to $1.44 million in the third quarter of 2006.
The table below sets forth the revenue breakdown by
technology platforms.
3Q05 Q405 1Q06
2Q06 3Q06
2.5G: 71 % 67 % 64 %
46 % 44 %
WAP 47 % 40 % 32 %
22 % 23 %
MMS 19 % 22 % 28 %
22 % 19 %
Java 5 % 5 % 4 %
2 % 2 %
2G: 29 % 33 % 36 %
54 % 56 %
SMS 20 % 25 % 29 %
42 % 43 %
IVR 7 % 6 % 4 %
7 % 7 %
CRBT and others 2 % 2 % 3 %
5 % 6 %
Total 100 % 100 % 100 %
100 % 100 %
The Company continues to make progress in diversifying
operator relationships. Total revenues from China Unicom,
China Telecom, and China Netcom accounted for approximately
25% of the total third quarter revenues, compared to 23% in
the second quarter of 2006.
Total advertising revenue generated from KongZhong's
wireless internet portal Kong.net increased from $22,000 in
the second quarter of 2006 to $59,000 in the third quarter
of 2006.
Expenses
The cost of revenue in the third quarter of 2006
totaled $11.39 million, an increase of 40% from the third
quarter of 2005 and a decrease of 12% from the second
quarter of 2006. Gross margin in the third quarter of 2006
was 55% compared to 57% in the previous quarter. The lower
gross margin was primarily due to the fixed nature of
certain costs of revenue despite the decline in revenue.
Total operating expenses in the third quarter of 2006
were $9.77 million, an increase of 6% year-over-year but a
decrease of 3% quarter-over-quarter. Product development
expenses increased by 7% quarter-over-quarter and
represented 13% of revenue. General and administrative
expenses decreased by 15% from the second quarter of 2006
and represented 8% of revenue. Sales and marketing
expenses decreased by 4% quarter-over-quarter and
represented 18% of revenue. The increase in product
development expenses was primarily due to a one-time
expense related to the headcount reduction program.
Total cost associated with the Company's wireless
internet portal business in the third quarter 2006 was
approximately $2.7 million, slightly lower than previous
quarter. It included $1.2 million in marketing expenses.
The Company recorded $0.52 million in non-cash
share-based compensation expenses in the third quarter,
compared to $0.47 million in the second quarter of 2006.
On July 31, 2006, the Company announced a headcount
reduction program, which has been completed. The Company's
total headcount declined from 1,016 as of June 30, 2006 to
816 as of September 30, 2006. The Company estimated that
the headcount reduction will result in a cost savings of
approximately $500,000 in the fourth quarter of 2006.
Earnings
US GAAP net income totaled $4.82 million in the third
quarter of 2006, an increase of 41% from the same period of
last year but a decrease of 37% from the second quarter of
2006. The Company made a one-time provision of $3.5
million related to the settlement of a class action lawsuit
during the third quarter of 2005. Diluted US GAAP earnings
per ADS were $0.14 for the third quarter.
Non-GAAP income in the third quarter of 2006 was $5.53
million, a 57% increase from the same period in 2005 but a
33% decrease from the previous quarter. Diluted Non-GAAP
earnings per ADS were $0.16.
Balance Sheet and Cash Flow
As of September 30, 2006, the Company had $118.61
million in cash and cash equivalents. Cash flow from
operating activities totaled $7.74 million in the third
quarter of 2006.
Business Outlook:
As a result of the continuing impact of regulatory
changes introduced by telecommunication operators and
Ministry of Information Industry, and based on information
available on November 9, 2006, the Company expects total
revenues for the fourth quarter of 2006 to be between $20.5
million and $21.5 million.
Conference Call:
The Company's management team will conduct a conference
call at 8:30 am Beijing time on November 9, (7:30 pm Eastern
time and 4:30 pm Pacific time on November 8, 2006). A
webcast of this conference call will be accessible on the
Company's web site at http://ir.kongzhong.com .
KongZhong Corporation
Condensed Consolidated Statements of Income
(US$ thousands, except percentages, per share data, and
share count)
(Unaudited)
For the Three For the
Three For the Three
Months Ended Months
Ended Months Ended
Sep. 30, 2005 Jun. 30,
2006 Sep. 30, 2006
(Note 1) (Note
2) (Note 3)
Revenues $20,255
$30,068 $25,082
Cost of revenues 8,120
12,943 11,394
Gross profit 12,135
17,125 13,688
Operating expenses
Product development 2,315
2,970 3,186
Sales & marketing 1,326
4,712 4,531
General & administrative 5,608
2,417 2,053
Subtotal 9,249
10,099 9,770
Operating income 2,886
7,026 3,918
Non-operating expenses (income)
Interest expenses (income) (689)
(915) (1,036)
Other expenses (income) --
87 4
Subtotal (689)
(828) (1,032)
Income before tax expense 3,575
7,854 4,950
Income tax expense 149
255 131
Net income 3,426
7,599 4,819
Basic earnings per ADS $0.10
$0.22 $0.14
Diluted earnings per ADS $0.10
$0.21 $0.14
Margin Analysis:
Gross margin 60 % 57
% 55 %
Operating margin 14 % 23
% 16 %
Net margin 17 % 25
% 19 %
Additional Data:
2.5G revenue $14,366
$13,773 $10,974
2G revenue 5,866
16,256 14,043
ADS outstanding (million) 34.45
34.89 35.15
ADS used in diluted EPS
Calculation (million) 35.64
35.67 35.66
Note 1: The conversion of Renminbi (RMB) into US
dollar (USD) for the
third quarter of 2005 is based on the weighted
average rate of
USD 1.00=RMB 8.1391 (the exchange rate quoted
by the People's
Bank of China).
Note 2: The conversion of Renminbi (RMB) into US
dollar (USD) for the
second quarter of 2006 is based on the
weighted average rate of
USD 1.00=RMB 8.0130 (the exchange rate quoted
by the People's
Bank of China).
Note 3: The conversion of Renminbi (RMB) into US
dollar (USD) for the
third quarter of 2006 is based on the weighted
average rate of
USD 1.00=RMB 7.9678 (the exchange rate quoted
by the People's
Bank of China).
KongZhong Corporation
Condensed Consolidated Statements of Cash Flows
(US$ thousands)
(Unaudited)
For the 9
Months For the 9 Months
Ended
Ended
Sep. 30 2005
Sep. 30, 2006
(Note 1)
(Note 2)
Cash Flows From Operating Activities
Net Income $15,911
$21,028
Adjustments
Share-based compensation expenses 270
1,337
Depreciation and amortization 1,265
2,284
Loss on disposal of property and
equipment 3
4
Gain on sales of investment --
(1,241)
Changes in operating assets and
liabilities 6,059
(6,862)
Net Cash Provided by Operating
Activities 23,508
16,550
Cash Flows From Investing Activities
Proceeds from sales of investment --
1,741
Purchase of property and equipment (1,820)
(2,164)
Acquisition of long-term investments (500)
--
Acquisition of subsidiaries (819)
(17,325)
Net Cash Used in Investing Activities (3,139)
(17,748)
Cash Flows From Financing Activities
Exercise of employee share options 109
1,538
Decrease in minority interest (97)
--
Net Cash Provided by Financing
Activities 12
1,538
Foreign Currency Translation Adjustments 630
1,125
Net increase in Cash and Cash
Equivalents 21,011
1,465
Cash and Cash Equivalents, Beginning of
Year 90,714
117,142
Cash and Cash Equivalents, End of Year 111,725
118,607
Note 1: The conversion of Renminbi (RMB) into US
dollar (USD) for the
first 9 months of 2005 is based on the
weighted average rate of
USD 1.00=RMB 8.2307 (the exchange rate quoted
by the People's
Bank of China).
Note 2: The conversion of Renminbi (RMB) into US
dollar (USD) for the
first 9 months of 2006 is based on the
weighted average rate of
USD 1.00=RMB 8.0106 (the exchange rate quoted
by the People's
Bank of China).
KongZhong Corporation
Condensed Consolidated Balance Sheets
(US$ thousands)
(Unaudited)
Sep. 30, 2005 Jun. 30,
2006 Sep. 30, 2006
(Note 1) (Note
2) (Note 3)
Cash and cash equivalents $111,725
$122,285 $118,607
Accounts receivable (net) 10,243
18,900 17,471
Other current assets 1,504
2,424 2,110
Total current assets 123,472
143,609 138,188
Rental deposits 392
556 565
Intangible assets 276
2,226 2,078
Property and equipment (net) 3,089
3,080 3,426
Long-term investment 500
-- --
Goodwill 646
4,434 15,751
Total assets $128,375
$153,905 $160,008
Accounts payable $4,048
$5,009 $5,625
Other current liabilities 7,248
5,849 4,712
Minority interest 24
24 24
Total liabilities 11,320
10,882 10,361
Shareholders' equity 117,055
143,023 149,647
Total liabilities & shareholders'
equity $128,375
$153,905 $160,008
Note 1: The conversion of Renminbi (RMB) into US
dollar (USD) is based on
the exchange rate of Sep 30, 2005 USD1.00=RMB
8.0920 (the
exchange rate quoted by the People's Bank of
China).
Note 2: The conversion of Renminbi (RMB) into US
dollar (USD) is based on
the exchange rate of Jun 30, 2006 USD1.00=RMB
7.9956 (the
exchange rate quoted by the People's Bank of
China).
Note 3: The conversion of Renminbi (RMB) into US
dollar (USD) is based on
the exchange rate of Sep 30, 2006 USD1.00=RMB
7.9087 (the
exchange rate quoted by the People's Bank of
China).
Non-GAAP Financial Measures
To supplement the unaudited condensed statements of
income presented in accordance with United States Generally
Accepted Accounting Principles ("GAAP"), the
Company uses non-GAAP financial measures ("Non-GAAP
Financial Measures") of net income and net income per
diluted ADS, which are adjusted from results based on GAAP
to exclude certain infrequent or unusual or
non-cash based expenses, gains and losses. The Non-GAAP
Financial Measures are provided as additional information
to help both management and investors compare business
trends among different reporting periods on a consistent
and more meaningful basis and enhance investors' overall
understanding of the Company's current financial
performance and prospects for the future.
The Non-GAAP Financial Measures should be considered in
addition to results prepared in accordance with GAAP, but
should not be considered a substitute for or superior to
GAAP results. In addition, our calculation of the Non-GAAP
Financial Measures may be different from the calculation
used by other companies, and therefore comparability may be
limited.
For the periods presented, the Company's non-GAAP net
income and non-GAAP net income per diluted ADS exclude, as
applicable, the amortization or
write-off of intangibles, and non-cash share-based
compensation expense.
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
Sep. 30, 2005 Jun. 30,
2006 Sep. 30, 2006
GAAP Net Income $3,426
$7,599 $4,819
Non-cash share-based
compensation 80
469 521
Amortization or write-off of
intangibles 26
167 192
Non-GAAP Net Income $3,532
$8,235 $5,532
Non-GAAP diluted net income per
ADS 0.10
0.23 0.16
About KongZhong
KongZhong Corporation is a leading provider of wireless
value-added services and also operates one of the leading
wireless Internet portals in China. The Company delivers
wireless value-added services to consumers in China through
multiple technology platforms including wireless application
protocol (WAP), multimedia messaging service (MMS), JAVA,
short messaging service (SMS), interactive voice response
(IVR), and color ring back tone (CRBT). The Company also
operates a wireless internet portal, Kong.net, which
enables users to access media and entertainment content
directly from their mobile phones.
Safe Harbor Statement
This press release contains "forward-looking
statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements
include, without limitation, statements regarding trends in
the wireless value-added services market 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 market and the effect of such pressure
on prices; unpredictable changes in technology, consumer
demand and usage preferences in this market; the state of
and any change in our relationship with China's
telecommunications operators; our dependence on the billing
systems of telecommunication operators for our performance;
changes in the regulations or policies of the Ministry of
Information Industry and other relevant government
authorities; and changes in political, economic, legal and
social conditions in China, including the Chinese
government's policies with respect to economic growth,
foreign exchange, foreign investment and entry by foreign
companies into China's telecommunications market. For
additional discussion of these risks and uncertainties and
other factors, please see the documents we file from time
to time with the Securities and Exchange Commission. We
assume no obligation to update any forward-looking
statements, which apply only as of the date of this press
release.
For more information, please contact:
KongZhong Contacts:
Investor Contact:
Jillian Wang
SVP of Corporate Development and IR
Tel: +86-10-8857-6000
Fax: +86-10-8857-5893
Email: ir@kongzhong.com
Media Contact:
Mike Fang
VP of Marketing
Tel: +86-10-8857-6000
Fax: +86-10-8857-5900
Email: mikefang@kongzhong.com
SOURCE KongZhong Corporation
PR
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