KongZhong Corporation Reports Unaudited Fourth Quarter 2010 Financial Results

BEIJING, March 2, 2011 /PRNewswire-Asia/ -- KongZhong Corporation (Nasdaq: KONG), a leading mobile Internet company in China, today announced its unaudited fourth quarter 2010 and full year 2010 financial results.

Fourth Quarter 2010 Financial Highlights:

(Note: Unless otherwise indicated, all financial statement amounts used in this press release are based on United States Generally Accepted Accounting Principles (GAAP) and denominated in US dollars)

• Revenues inline with guidance – Total revenues for the Fourth Quarter of 2010 ("4Q10") increased 5% year-over-year ("YoY") to US$ 36.0 million ("mn"), inline with the Company's 4Q10 revenue guidance range of US$ 35.5 mn to US$ 36.5 mn.
• Gross profit inline with guidance – Total gross profit was US$ 15.96 mn for 4Q10, inline with the Company's 4Q10 guidance range of US$ 15.5 mn to US$ 16.5mn.
• Net income grew quarter-over-quarter ("QoQ") and YoY – Net income in 4Q10 was US$ 5.01 mn a 330% increase compared to US$ 1.17 mn in 3Q10 and a 149% increase compared to US$ 2.0 mn in 4Q09. Basic net income per ADS was US$ 0.13 based on 37.31 mn ADS while diluted net income per ADS was US$ 0.13 based on 39.08 mn ADS outstanding as of December 31, 2010.
• Non-GAAP net income exceeds guidance – Non-GAAP net income was US$ 7.27 mn, exceeding the Company's guidance range of US$ 5.5 mn to US$ 6.5 mn, while Non-GAAP diluted net income per ADS was US$ 0.18 (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, 2010, the Company had US$ 157.17 mn in cash and cash equivalents or US$ 4.21 per basic ADS in cash and cash equivalents.

Full Year 2010 Financial Highlights:

• Total revenues were $149.58 million for the full year 2010, or a 14% YoY increase.  Of which WVAS revenues were $83.28 mn, Mobile games revenues were $49.17 mn and Internet games were $17.13 mn.
• Full year gross margin was 44%.  Of which WVAS gross margin was 40%, Mobile games gross margin was 38% and Internet games gross margin was 82%.
• Full year net income was stable – Net income in 2010 was US$ 11.92 mn, compared to 2009 net income of US$ 12.58 mn.
• Full year Non-GAAP net income increased – Non-GAAP net income was US$22.85 mn,  a 13% increase compared to 2009 full year Non-GAAP net income of US$ 20.15 mn

Commenting on the results, the Company's Chairman and Chief Executive Officer, Leilei Wang, said, "KONG achieved our highest quarterly net profit and non-GAAP net profit since I joined the Company, driven by our diversification into Internet games, cost efficiencies and a stabilizing WVAS market. With the strong performance from Internet games helping to balance the challenges in WVAS, I believe our diversification into Internet games has been a success.

"In 4Q, we launched Shengmozhixue, (or Shengmo) our self-developed 3D MMORPG game with a Western-style fantasy theme. Shengmo outperformed our expectations as we have begun to introduce more console game quality action special effects into our games, differentiating ourselves from other Chinese online games, which helped lead to better player acceptance and retention during the quarter.

"At the end of February 2011, World of Tanks ("WoT") in China had over 900k registered users and exceeded 90k PCUs during the closed beta testing stage. With a stronger than expected response from Chinese gamers we have moved up the open beta test period to begin on March 15th.

"Already one of the top games in it's home market of Russia, we believe WoT has the potential to be one of the top online team-based shooters in the China market and a significant contributor to KONG's profitability beginning in the 2nd quarter of 2011."

Noteworthy Items:

• World of Tanks - During closed beta testing stage, achieved over 900k registered users and over 90k PCUs as of February 28th.
• Kung Fu Hero (Self-developed 3D MMORPG) - Technical closed beta testing began on February 28th.  Open beta test planned for 3Q 2011.
• Emofaze 2 (Self-developed 3D MMORPG) – Second title in Emofaze series.  Open beta test planned by end of 2011.
• KongZhong prepaid 70% of the aggregate principal amount of the 5-year convertible senior note for US$ 9.31 million in cash, plus any accrued but unpaid interest on the note in February 2011. The prepaid portion of the note has rights to be converted into 1.33 million American Depositary Shares (ADS) equivalent to 53.2 million ordinary shares, representing about 3.6% of KongZhong's total shares outstanding as of December 31, 2010.

Financial Results:

Revenues

WVAS Revenues

WVAS revenues in 4Q10 were US$ 17.32 mn, a 17% decrease from 3Q10 and a 36% decrease from the same period last year.  WVAS revenues declined due to the ongoing implementation of WVAS policy restrictions from our mobile operator partners.  Relative to our prior US$ 18.5 mn guidance for WVAS revenues in 4Q10, the shortfall was due to a slightly more restrictive policy environment than we had previously estimated in 4Q10, however, we now expect a recovery in our WVAS business in the coming quarters as the WVAS operating environment has stabilized.

In 4Q10, 2G revenues represented 89% of total newly reported WVAS revenues, while 2.5G services made up 11% of total WVAS revenues.

WVAS made up 48.1% of total revenues in 4Q10.

Mobile Games Revenues

Total mobile game revenues in 4Q10 were US$ 12.76 mn, a 74% increase from the same period last year but an 8% decrease from 3Q10.  

Revenues from downloadable mobile games were US$ 12.32 mn representing an 89% increase from the same period last year but a decrease of 6% from 3Q10. 4Q10 downloadable mobile game revenues were impacted by the ongoing reduction in marketing activities by our mobile operator partners as well as year-end subscriber confirmation notices, which led to higher than prior period churn rates. In 4Q10, average monthly mobile game subscribers were maintained at roughly 2.0 mn per month, at a similar level compared to 3Q10.

Revenues from mobile multi-player online games ("MMO" or "online mobile games") were US$ 0.45 mn, a decrease of 49% from 3Q10, and a decrease of 46% from the same period last year.   All three of our online mobile games experienced a sequential decline in revenues due to product lifecycle and competitive issues.

Revenues from downloadable mobile games made up 97% of total mobile game revenues compared to 94% in 3Q10.  Revenues from online mobile games made up roughly 3% of total mobile game revenues compared to 6% in 3Q10.

Mobile game revenues made up 35.4% of total revenues in 4Q10.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$ 5.92 mn in 4Q10, a 100% increase from 3Q10. Net Game revenues outperformed our expectations due to the strong performance of Shengmozhixue, our self-developed 3D MMORPG title and also from the licensing of our online games to overseas markets such as Taiwan, SE Asia, Hong Kong, Korea, Japan and North America.  During the quarter, Loong, Xiakexing and Shengmozhixue license fees all contributed to overseas revenues.

Specific to Shengmozhixue, our in-house development team had begun to improve the action gameplay component of this 3D MMORPG title, which led to better than expected user acceptance and retention.  The Company expects that in the future, another key differentiator of 3D online games in China will be the ability for game developers to incorporate more and more complex action special effects into MMORPG games and have begun to focus our future development efforts towards this.

Total overseas revenues as a percentage of total Net game revenues in 4Q10 were 39% compared to 18% in 3Q10.

For the 4Q10 3-month period, mainland China online game operations achieved average concurrent users ("ACUs") of 81k compared to 69k in 3Q10 and aggregate paying accounts ("APAs") of 120k with quarterly ARPU of RMB 201 compared to 69k APAs with quarterly ARPU of RMB 240 in 3Q10.

Net game revenues made up 16.5% of total revenues in 4Q10.

Gross Profit

Total gross profit was US$ 15.96 mn in 4Q10, a 2% increase compared to 3Q10, and a 2% increase compared to the same period last year. Total gross margin was 44% in 4Q10 compared to 41% in 3Q10.

WVAS Gross Profit

WVAS gross profit in 4Q10 was US$ 6.71 mn, a 20% decrease from 3Q10 and a 44% decrease compared to the same period last year.  4Q10 WVAS gross margin was 39% compared to 41% in 3Q10 as ongoing policy measures led us to rely more on higher cost distribution channels as a percentage of WVAS revenues compared to previous periods.

Mobile Game Gross Profit

Mobile games gross profit in 4Q10 was US$ 4.46 mn, a 21% increase compared to the same period last year but a 12% decrease from 3Q10.  4Q10 mobile games gross margin was 35% compared to 36% in 3Q10.  We had previously expected mobile game gross margins to improve from 3Q10 levels, but the higher margin distribution channels we had expected to promote our mobile game services through during the period were impacted by certain mobile operator policies and churn rates.

Internet Game Gross Profit

Internet game gross profit in 4Q10 was US$ 4.79 mn, a 124% increase from 3Q10. Internet game gross margin was 81% in 4Q10, an increase from the 72% gross margin level in 3Q10.  Net game gross profit improved significantly from 3Q10 due to the better than expected performance of Shengmozhixue and the higher contribution from overseas license fees which were recognized in the quarter.  

Operating Expenses

Total operating expenses included a US$ 8.73 mn provision for impairment of goodwill and intangibles. Excluding this provision, total operating expenses decreased 23.2% to US$ 11.03 mn in 4Q10 compared to US$ 14.37 mn in 3Q10, as the efforts we undertook in the 2nd half of 2010 to streamline our WVAS and WIS teams resulted in ongoing cost savings for the Company.

Product development expenses in 4Q10 were US$ 4.77 mn compared to US$ 6.21 mn in 3Q10 or a 23% decrease.

Sales and marketing expenses in 4Q10 were US$ 4.13 mn compared to US$ 5.30 mn in 3Q10 and US$ 4.95 mn in the same period last year.

General and administrative expenses in 4Q10 were US$ 2.13 mn compared to US$ 2.86 mn in 3Q10, or a decrease 25% quarter-over-quarter.

The Company's total headcount decreased to 1,050 at the end of 4Q10 compared to 1,065 at the end of 3Q10.

Operating Profit/(Loss)

Operating loss for 4Q10 was US$ 3.80 mn compared to operating profit US$ 1.24 mn in 3Q10, mainly due to the US$ 8.73 mn provision for impairment of goodwill and intangibles.

Other Items

Impairment of Long-term Investment

During 4Q10, the Company deemed its investment in Xin Chuang Hang Yuan Technology Co., Ltd., ("XCHY") to be impaired and recognized a US$ 1.51 mn investment impairment loss. In May 2008, we entered into a definitive agreement with XCHY, a company that provides electronic coupons on mobile phones, to acquire 19.9% of the total equity interest of XCHY. As of December 31st 2010, the Company no longer had any value related to our investment in XCHY as part of long-term investments.

Government Subsidy

In 4Q10, the Company recognized a gain of US$ 338k from various government subsidies related to the development of both Internet and mobile games.  

Revised Total Consideration and Impairment Test for Dacheng

As announced on December 15th 2009, the Company entered into a transaction to acquire Shanghai Dacheng Network Technology Co., Ltd. (Dacheng), where the total consideration price was estimated to be US$ 75.17 mn at the time of closing.  However based on the actual estimated 2010 performance of Dacheng, a revised total consideration for Dacheng was re-calculated downwards to US$ 64.28 mn.  The goodwill and intangibles associated with Dacheng were impaired due to lowered expectations in the Company's operating forecast compared to the forecast made at the acquisition date.

Based on the revised estimated total consideration, we recognized a US$ 10.89 mn change of contingent payable in 4Q.

In addition, as of December 31, 2010, based on a 3rd party appraisal of our Internet game business, the fair value of the goodwill and intangible assets associated with our Internet games segment decreased. This adjustment in goodwill and intangible assets was US $8.73 mn in 4Q10.

However, the combined effects of the change in total estimated consideration and the change in goodwill and intangible asset value for Dacheng was a US$ 2.17 mn net gain.

Earnings

Net income and Non-GAAP net income in 4Q10 were US$ 5.01 mn and US$ 7.27 mn, respectively.  Diluted earnings per ADS and diluted Non-GAAP earnings per ADS were US$ 0.13 and US$ 0.18 in 4Q10, respectively.  

Total diluted ADS outstanding as of December 31, 2010 were 39.08 mn, compared to 38.28 mn as of September 30, 2010.  

Balance Sheet

As of December 31, 2010, the Company had $157.17 mn in cash and cash equivalents or US$ 4.21 per basic ADS in cash and cash equivalents.

Final Payment for Dacheng

Based on the terms of our agreement with the shareholders of Dacheng, we expect the final payment to Dacheng to be US$ 40.16 mn, of which roughly 64% (or US$ 25.6 mn) to be paid in ordinary shares of the Company and the remaining 36% (or US$ 14.6 mn) to be paid in cash, funded by cash on hand.

For the share portion, the number of shares to be issued will be determined by the 30-day historic trading average of our share price prior to the date of the third payment. We expect to finalize the last payment for Dacheng sometime before the end of 1Q 2011.

Business Outlook (For the 3-month period ending March 31, 2011):

The Company expects total revenues for 1Q11 to be within the range of US$ 38.5 mn to US$ 39.5 mn, with business unit revenues at the mid-point expected to roughly consist of WVAS revenues of US$ 20.3 mn, mobile game revenues of US$ 13.5 mn and Online Game revenues of US$ 5.2 mn.  

The Company expects total gross profit to be within the range of US$ 15.5 mn to US$ 16.5 mn, total operating profit to be US$ 4 mn to US$ 5 mn, net profit to be US$ 2 mn to US$ 3 mn (which includes an estimated US$ 1.6 mn non-cash expense related to the early extinguishment of the portion of NGP convertible notes prepaid), while Non-GAAP net profit is expected to be between US$ 6 mn to US$ 7 mn.

Conference Call:

The Company's management team will conduct a conference call at 8:30 am Beijing time on March 3rd, 2011 (7:30 pm Eastern time and 4:30 pm Pacific time on March 2nd 2011).  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 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 notes, impairment of goodwill and intangibles, change of contingent payable and investment impairment loss.

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. We began providing WVAS on the networks of China Mobile in 2002. Since 2004, we have provided WVAS on the networks of China Unicom, China Telecom, China Netcom and the other major telecommunications operators in the PRC. Since 2004, we have also offered news, entertainment, community and mobile advertising services through our wireless Internet sites, including Kong.net, ko.cn and ct.cn. In 2008, we began reporting our mobile games business as a stand-alone operating segment, while it was previously reported as part of our WVAS business. We began our Internet games business in 2010, through our acquisition of Dacheng Networks, a developer and operator of online games.

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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