KongZhong Corporation Reports Third Quarter 2015 Unaudited Financial Results

BEIJING, Nov. 23, 2015 /PRNewswire/ -- KongZhong Corporation (NASDAQ: KZ), a leading online games publisher and developer in the PRC, today announced its unaudited financial results for the third quarter of 2015.

Third Quarter 2015 Financial Highlights

• Total revenues for the third quarter of 2015 were US$ 38.58mn.
• Total gross profit was US$ 16.90mn.
• Net income was US$ 3.90mn, with diluted net income per American Depositary Shares ("ADS") of US$ 0.08.
• Non-GAAP net income was US$ 4.54mn, with Non-GAAP diluted net income per ADS of US$ 0.10 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures").
• As of September 30, 2015, the Company had US$ 137.97mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 2.95 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 49.96mn bank loan. The mark to fair value of the Company's investments in Ourgame and Forgame were priced at HK$ 3.94 and HK$ 14.20 per ordinary share, respectively (or US$ 30.47mn and US$ 22.09mn, respectively) as of September 30, 2015, compared to the mark to fair value of the Company's investments in Ourgame and Forgame which were priced at HK$ 6.49 and HK$ 22.25 per ordinary share, respectively (or US$ 50.18mn and US$ 34.61mn, respectively) as of June 30, 2015.

Business Highlights

• Moving forward, the Company intends to concentrate it's efforts in Internet Games and Mobile games around it's War Saga game platform, China's leading military genre online game platform.
• As part of War Saga, we expect to release World of Warships to Open Beta Test on November 27, 2015, which is currently one of the most anticipated new PC games in China per mainstream media rankings.
• The Company released Heart of Thorns, the first expansion pack for Guild Wars 2 to the mainland China market on November 20, 2015. 
• The Company recently licensed it's self-developed martial arts MOBA PC game, Master of Meteor Blades, to Tencent Games, with beta testing to begin in the near future.
• The Company continues to internally test Blitzkrieg 3 and other PC and mobile military genre games for potential release in 2016.
• The Company's co-developed mobile game with a Korean studio partner, Castle of Heroes, a Western Fantasy themed 3D Action RPG, is expected to begin open beta testing during the fourth quarter of 2015.

Revenues

Total revenues for the third quarter of 2015 were US$ 38.58mn, an 18.9% decline from the second quarter of 2015 and a 35.3% decline from the same period last year.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$ 23.74mn in the third quarter of 2015, a decrease of 2.9% from the second quarter of 2015. Although World of Tanks demonstrated continued stable performance, user activity and purchases in Guild Wars 2 and World of Warplanes continued to moderate during the period.

For the third quarter of 2015, mainland China online game operations achieved average monthly active users ("MAUs") of 1.8mn and aggregated monthly paying accounts ("APAs") of 307k with monthly average revenue per user ("ARPU") of RMB 160.

Internet game revenues made up 61.5% of total revenues in the third quarter of 2015.

Mobile Games Revenues

Total mobile game revenues were US$ 2.68mn, a 71.6% decrease from the second quarter of 2015 and a 76.3% decrease from the same period last year. The sharp reduction in mobile game revenues was due to the shorter life cycle and high churn of recently launched smartphone games and the Company's recent pivot to concentrate mobile game development and licensing towards primarily military genre mobile games to bolster the War Saga brand. We expect this transition to influence mobile game revenues for the foreseeable future.

Total mobile game revenues made up 7.0% of total revenues in the third quarter of 2015.

WVAS Revenues

WVAS revenues were US$ 12.16mn, an 11.0% decrease from the second quarter of 2015 and a 25.0% decrease from the same period of last year.

WVAS made up 31.5% of total revenues in the third quarter of 2015.

Gross Profit

Total gross profit for the third quarter of 2015 was US$ 16.90mn, a 15.2% decrease from Non-GAAP gross profit in the second quarter of 2015 and a 29.1% decrease from the same period last year.

Total gross margin was 43.8% in the third quarter of 2015 compared to Non-GAAP gross margins of 41.9% in the second quarter of 2015.

Internet Game Gross Profit

Internet game gross profit was US$ 12.71mn, a 7.5% increase from Non-GAAP gross profits in the second quarter of 2015 and a 14.1% decrease from the same period last year. Internet game gross margin was 53.5% compared to 48.3% in the second quarter of 2015, if excluding the effect of impairment on intangible assets related to the underperformance of Guild Wars 2.

Mobile Game Gross Profit

Mobile games gross profit was US$ 1.07mn, a 76.1% decrease from the second quarter of 2015 and an 80.3% decrease from the same period last year. Mobile games gross margin was 40.0% compared to 47.5% in the second quarter of 2015.

WVAS Gross Profit

WVAS gross profit was US$3.12mn, a 13.7% decrease from the second quarter of 2015 and a 13.1% decrease from the same period last year. WVAS gross margin was 25.7% compared to 26.5% in the second quarter of 2015.

Operating Expenses

Total operating expenses in the third quarter of 2015 were US$ 13.17mn compared to US$ 17.41mn in the second quarter of 2015.

Product development expenses in the third quarter of 2015 were US$ 5.77mn compared to US$ 6.12mn in the second quarter of 2015.

Sales and marketing expenses in the third quarter of 2015 were US$ 5.20mn compared to US$ 8.11mn in the second quarter of 2015. Sales and marketing expenses decreased as we did not release any major new Internet or mobile games in the third quarter.

General and administrative expenses in the third quarter of 2015 were US$ 2.20mn compared to US$ 3.18mn in the second quarter of 2015.

The Company's total headcount in the third quarter of 2015 was 913 staff compared to 1,022 staff at the end of the second quarter of 2015 as the Company has begun optimize our cost structure for the lower amount of business in mobile games and WVAS.

Earnings

US GAAP net income and diluted income per ADS were US$ 3.90mn and US$ 0.08, respectively. Non-GAAP net income and diluted income per ADS were US$ 4.54mn and US$ 0.10, respectively.

Total ADS on a diluted basis outstanding during the third quarter of 2015 were 47.21mn, compared to 47.10mn outstanding during the second quarter of 2015.

Note: There is no diluted effect for the US GAAP loss per ADS. There is a diluted effect on Non-GAAP earnings per share as it was net income on Non-GAAP measures.

Balance Sheet

As of September 30, 2015, the Company had US$ 137.97mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 2.95 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 49.96mn bank loan. The mark to fair value of the Company's investments in Ourgame and Forgame were priced at HK$ 3.94 and HK$ 14.20 per ordinary share, respectively (or US$ 30.47mn and US$ 22.09mn, respectively) as of September 30, 2015, compared to the mark to fair value of the Company's investments in Ourgame and Forgame which were priced at HK$ 6.49 and HK$ 22.25 per ordinary share, respectively (or US$ 50.18mn and US$ 34.61mn, respectively) as of June 30, 2015.

Business Outlook (for the fourth quarter ending December 31, 2015)

The Company expects total revenues for the fourth quarter of 2015 to be within the range of US$ 41 mn to US$ 42 mn. The Company expects total gross profit to be within the range of US$ 19mn to US$ 20mn. We expect net income to be within the range of US$ 3mn to US$ 4mn and Non-GAAP net income is expected to be within the range of US$ 4mn to US$ 5mn.

4Q15 guidance reflects partial quarterly contribution from the open beta of World of Warships and the expansion pack for Guild Wars 2, offset by increased marketing for those game releases as well as an expected small rebound in mobile games due to new mobile games releases off a lowered based in 3Q15 and continued moderation in our WVAS business sequentially.

Recent Developments

On June 29, 2015, the Company announced that its board of directors (the "Board") had received a preliminary non-binding proposal letter from Leilei Wang, chairman and chief executive officer of the Company, and IDG-Accel China Growth Fund II L.P. to acquire all of the outstanding ordinary shares of the Company not owned by them or their affiliates for US$ 8.56 in cash per American depositary share (the "ADS", each representing forty ordinary shares) (the "Going Private Proposal").

On July 8, 2015, the Company announced that the Board has formed a special committee (the "Special Committee") consisting of two independent directors, Hope Ni and Xiaolong Li, and delegated to the Special Committee the exclusive power and authority of the Board to, among other things, evaluate and respond to the Going Private Proposal. Ms. Ni is serving as the chair of the Special Committee.

On November 3, 2015, the Company announced that the Special Committee has retained Duff & Phelps, LLC and Duff & Phelps Securities LLC as its financial advisors and Skadden, Arps, Slate, Meagher & Flom as its legal counsel in connection with its review and evaluation of the Going Private Proposal.

The Board cautions the Company's shareholders and others considering trading in the Company's securities that no decisions have been made by the Special Committee or the Company with respect to the Company's response to the Going Private Proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other proposed transaction involving the Company, its securities and/or its assets will be approved or consummated. The Company does not undertake any obligation to provide any updates with respect to this or any other proposed transaction, except as required under applicable law.

Conference Call

KongZhong's management will hold a conference call and live webcast to discuss the results at 7:30 PM Eastern Time (ET) on Monday, November 23, 2015 (8:30 AM Beijing/Hong Kong time, Tuesday, November 24, 2015)

The Company welcomes all interested parties to participate in the live conference call. An Operator will greet you and ask for the Conference ID shown as following.

The live conference call via webcast and archive replay will be available on the Investor Relations section of KongZhong's website at http://ir.kongzhong.com. The archive replay will be available on the website shortly after the call.

A dial-in replay of the conference call will be available until December 1, 2015:

About KongZhong

KongZhong Corporation (NASDAQ: KZ), listed on Nasdaq in 2004, is a leading online game developer and operator in China. KongZhong operates three main business units, namely Internet Games, Mobile Games and WVAS. Under Internet Games, KongZhong operates the largest Chinese military gaming platform under the "WAR SAGA" brand, which includes games such as World of Tanks, World of Warplanes and World of Warships. On May 15, 2014, KongZhong officially launched the most-anticipated 3D fantasy MMORPG Guild Wars 2 in China. KongZhong has the exclusive publishing rights for World of Tanks, World of Warplanes and World of Warships, Guild Wars 2, Auto Club Revolution, Blitzkrieg 3 and other titles in Mainland China.

KongZhong entered the smartphone game industry in 2011 through an acquisition of smartphone game engine and has expanded its mobile game development team across 4 cities across Mainland China. KongZhong offers popular mobile games in China and overseas with over 10 smartphone games across various genres being under development, including RPG, RTS, military, fantasy and etc. For more information, please visit http://ir.kongzhong.com.

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.

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 gross profit, 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 gross profit excludes, as applicable, impairment loss on intangible assets.  In addition, 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, imputed interest on long-term liabilities, impairment loss on intangible assets, as well as impairment loss on cost method investment  are 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.

SOURCE KongZhong Corporation

Related Links

http://www.kongzhong.com