KongZhong Corporation Reports Unaudited Fourth Quarter 2013 Financial Results

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:

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

• Total 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.
• Full 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%.
• Net 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.
• Non-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."

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 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.

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

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.

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.

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.

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

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