Company Reports Record Revenue and 13th Straight Quarter of Revenue
Growth BEIJING, Nov. 15 /Xinhua-PRNewswire/ -- KongZhong
Corporation (NASDAQ: KONG), a leading provider of advanced second
generation (2.5G) wireless value- added services in China, today
announced its unaudited third quarter 2005 financial results.
Financial Highlights: -- Total revenues in the third quarter of
2005 grew 64% year-over-year and 10% sequentially to a new record
of $20.25 million, exceeding the high end of our third quarter
revenue guidance of $19 to $19.5 million. Since inception, the
Company has grown its revenues every quarter for 13 consecutive
quarters. -- 2.5G revenue grew 36% year-over-year and 6%
sequentially to $14.37 million. 2.5G revenue resumed growth from
the second quarter of 2005 on the strength of JAVA and multimedia
messaging service (MMS) platforms. -- Java revenue grew more than
135% sequentially to reach a new record of $1.07 million during the
third quarter, compared to $455,000 in the second quarter of 2005.
-- 2G revenue grew 220% year-over-year and 22% sequentially to
$5.87 million. -- The Company made a one-time provision of $3.5
million related to the pending settlement of class action lawsuit
during the quarter. -- Diluted earnings per ADS were $0.10. If the
Company had not incurred the one-time $3.5 million provision and
$129,000 in legal expense related to the class action settlement,
the diluted earnings per ADS would have been $0.10 greater.
Commenting on the results, Yunfan Zhou, Chairman and Chief
Executive Officer, said, 'We are very pleased that we had another
record breaking quarter. Our Java game revenue surpassed the $1
million mark for the first time and grew by more than 135% from the
second quarter. We believe, in terms of revenue, we continue to be
the No. 1 player in the 2.5G wireless valued added services (WVAS)
space in China. In the coming months, we will focus on gaining
market share and investing in our product development capabilities,
KongZhong brands, and new products.' Business Highlights: -- The
Company believes it remained the leader in China in terms of
revenue from 2.5G services, including wireless access protocol
(WAP), MMS, and Java platforms, based on the public disclosure of
our industry peers and our market analysis. -- The Company
continues to make progress in diversifying its revenue streams. In
the third quarter, revenue from China Unicom, China Telecom, and
China Netcom accounted for approximately 6% of total revenues,
compared to 2% in the second quarter. The remaining 94% in the
third quarter and 98% in the second quarter, respectively, were
from China Mobile's customers. -- The mobile game business
continued its strong growth. Revenue from 2.5G games reached $2.4
million in the third quarter, which was 34% higher than the
previous quarter. Revenue from Java games during the quarter was
$1.07 million, up 135% from $455,000 in the second quarter. -- The
China Digital Entertainment Expos & Conference (ChinaJoy) gave
KongZhong its 'Best Wireless Game Provider' award and Mickey Mouse
Mahjong, an internally-developed Java game with the licensed Disney
Character, the 'Best China Mobile Wireless Game' award. -- During
the quarter, the Company established 6 additional color ring back
tone (CRBT) connection points at provincial operators of China
Mobile, China Unicom, China Telecom, and China Netcom. CRBT
connection points totaled 50 as of September 30. -- The Company
signed an agreement to be the exclusive WVAS provider for the
MTV-Olay New Talents Hunt. The finals are planned for December
2005. -- The Company signed agreements with: -- the film 'The Myth'
featuring Jackie Chan. The Company has exclusive rights in China to
develop WVAS products and services based on the movie's content.
'The Myth' was released in September 2005; -- the film 'The
Promise', directed by Kaige Chen, an international award winning
director. The Company has exclusive rights in China to develop WVAS
products and services based on the movie's content. 'The Promise'
was due for release in December 2005; -- Baidu to promote
KongZhong's MMS service; -- Gameloft to license its mobile game
Band of Brothers based on the popular TV series; and -- GLU to
license its mobile games Mr. and Mrs. Smith based on a recently
released feature film. 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
revenue for the quarter increased 10% from the second quarter of
2005 and 64% from the same quarter of 2004 to reach a new record of
$20.25 million. Revenue from 2.5G WVAS accounted for 71% of total
revenue and revenue from 2G WVAS represented the remaining 29%.
Revenue from 2.5G services, which include services delivered using
WAP, MMS, and Java technologies, grew 36% from the same period of
2004 and 6% from the second quarter of 2005 to $14.37 million. WAP
revenue in the third quarter of 2005 was $9.54 million, an increase
of 60% from the third quarter of 2004, but a decrease of 2% from
the second quarter of 2005. The sequential decline in WAP revenue
was caused mainly by a new policy that was introduced by China
Mobile in April 2005 pursuant to which WAP subscriptions that have
not been active for eight months are automatically cancelled. MMS
revenue in the third quarter of 2005 was $3.75 million, a decrease
of 14% from the same period of 2004, but an increase of 14% from
the second quarter of 2005. The sequential growth in MMS is because
the MMS market has recovered from the negative impact of changed
MMS revenue recognition policy introduced in early 2005 and the
near completion of Mobile Information Service Center (MISC)
migration at China Mobile. Java revenue in the third quarter was
$1.07 million, a 442% increase from the third quarter of 2004 and a
135% increase from the second quarter of 2005, due to the improved
Java infrastructure of China Mobile, an increase in Java enabled
handsets in the China market, and the Company's promotional efforts
during the quarter. Revenue from 2G services, including short
messaging service (SMS), interactive voice response (IVR), and
CRBT, grew 220% from same period last year and 22% from the second
quarter of 2005 to $5.87 million in the third quarter of 2005. SMS
revenue in the third quarter of 2005 was $4.11 million, which was
186% higher than the same period of 2004 and 30% higher than the
previous quarter. IVR revenue grew by more than 291%
year-over-year, and 4% sequentially to reach $1.41 million in the
third quarter of 2005. CRBT revenue grew by more than 905%
year-over-year, and 15% sequentially to $0.34 million in the third
quarter of 2005. The table below sets forth the revenue breakdown
by technology platforms. 3Q04 4Q04 1Q05 2Q05 3Q05 2.5G: 85 % 90 %
80 % 74 % 71 % WAP 48 % 47 % 60 % 53 % 47 % MMS 35 % 41 % 18 % 18 %
19 % Java 2 % 2 % 2 % 3 % 5 % 2G: 15 % 10 % 20 % 26 % 29 % SMS 12 %
7 % 12 % 17 % 20 % IVR 3 % 3 % 7 % 7 % 7 % CRBT and others 0 % 0 %
1 % 2 % 2 % Total 100 % 100 % 100 % 100 % 100 % By service/product
category, the Company derived 59% of its revenue from interactive
entertainment, 18% from media service, and 23% from community-
related services (See table below for a detailed breakdown). 3Q04
4Q04 1Q05 2Q05 3Q05 Interactive Entertainment 47 % 50 % 52 % 57 %
59 % Media 36 % 36 % 23 % 20 % 18 % Community 17 % 14 % 25 % 23 %
23 % Total 100 % 100 % 100 % 100 % 100 % The Company made
significant progress in diversifying operator relationships. Total
revenues from the customers of China Unicom, China Telecom, and
China Netcom accounted for approximately 6% of the third quarter
total revenues, compared to 2% in the second quarter Expenses The
cost of revenue in the third quarter of 2005 totaled $8.12 million,
an increase of 88% from the third quarter of 2004 and 21% from the
second quarter of 2005. The year-over-year increase was driven by
significantly higher business activities and was primarily due to
higher payments to mobile operators, handset manufacturers, and
content partners. The increase in cost of revenue from the previous
quarter was due to higher transmission charges paid to mobile
operators for using their channels and networks to mainly promote
our Java games and gain market share. Net transmission charges paid
to the operators increased by $644,000 or over 56% from the second
quarter 2005. The increase represents approximately 3% of the third
quarter total revenues. In addition, the Company continues to
execute on its diversified growth strategy by expanding into the 2G
services and targeting the customers of China Unicom, China
Telecom, and China Netcom. The gross margin from 2G services and
these operators are in general lower than the 2.5G customers of
China Mobile. The gross margin for the third quarter declined to
60%. Total operating expenses in the third quarter 2005 were $9.25
million, an increase of 66% over the previous quarter. The
significant increase in operating expenses is largely due to the
$3.5 million one-time non-recurring provision related to the
pending settlement of the class action lawsuit made during the
third quarter. The one-time provision and $129,000 in legal expense
related to the issues raised in the class-action lawsuit represent
approximately 18% of the third quarter total revenues. Product
development expenses increased by 9% quarter-on-quarter and
represented 11% of revenue. Sales and marketing expenses increased
by 11% quarter-on-quarter and represented 6% of revenue. The
increase in product development and sales and marketing expenses
was primarily due to increased promotional efforts, new business
initiatives, and increase in number of employees and office space.
The Company continues to invest heavily in its product development
and sales and marketing capabilities, brand, distribution channels,
and new products in order to further broaden product offerings and
pursue a diversified growth strategy. General and administrative
expenses increased by 2% from the second quarter of 2005 and
represented 10% of revenue. The Company's headcount increased by
10% from 686 at the end of the second quarter of 2005 to 754 as of
September 30, 2005. Pending Settlement of Class Action Lawsuit As
reported on September 14, 2005, the Company announced it had
entered into a memorandum of understanding with counsel for the
lead plaintiff to settle a class action lawsuit arising out of the
Company's initial public offering in July 2004 for $3.5 million. A
one-time non-recurring provision of $3.5 million for the settlement
was made during the third quarter. The $3.5 million provision and
the $129,000 in legal expense related to the issues raised in the
class-action lawsuit together, represent approximately 18% of third
quarter revenue and $0.10 per diluted ADS. Earnings Net income
totaled $3.43 million in the third quarter, a decrease of 36% from
$5.33 million in the same period of last year and 48% from $6.60
million in the second quarter of 2005. The Company's net margin
contracted from 43% in third quarter 2004 and 36% in the second
quarter of 2005 to 17%. Diluted earnings per ADS was $0.10, down
from $0.19 in the previous quarter. The decline in net income, net
margin, and diluted earnings per ADS were due to the $3.5 million
provision related to the class action lawsuit settlement. If the
Company had not incurred the one-time $3.5 million provision and
$129,000 legal expense related to the class action settlement, the
net margin would have been 35% and diluted earnings per ADS would
have been $0.10 greater than the reported earnings per diluted ADS
of $0.10. Balance Sheet and Cash Flow At the end of the quarter,
the Company had $111.73 million in cash and cash equivalents. Cash
flow from operating activities totaled $10.62 million in the third
quarter, compared to $0.74 million in third quarter 2004 and $6.11
million in the second quarter of 2005. Recent Development On
November 14, 2005, the Company has entered into a definitive
agreement to acquire all of the economic interest in a wireless
value-added service provider in Hubei province, China, for a
purchase price (net of cash in the company) of RMB4.4 million
(approximately US$0.54 million). JP Gan, Chief Financial Officer,
concluded, 'The acquisition in Hubei will help us further grow our
SMS business and enhance our operations in central China. Although
the one-time class action settlement provision negatively impacted
our earnings, we believe we have executed well and delivered solid
results in the third quarter. Once the class action lawsuit is
fully resolved, we will be able to focus all of our time and
efforts on business operations and executing on our diversified
growth strategy.' Fourth Quarter 2005 Outlook: The Company expects
revenue for the fourth quarter of 2005 to be between $21 and $22
million. Conference Call: The Company's management team will
conduct a conference call at 9:00 pm Beijing time (8:00 am Eastern
time and 5:00 am Pacific time) on November 15. A webcast of this
conference call will be accessible on the Company's web site at
http://ir.kongzhong.com/ . KongZhong Corporation Condensed
Consolidated Statements of Income (US$ thousands, except
percentages, per share data, and share count) (unaudited) For the
Three For the For the Months Ended Three Three Sep. 30, 2004 Months
Ended Months Ended Jun. 30,2005 Sep. 30,2005 Revenues $12,360
$18,357 $20,255 Cost of revenues 4,323 6,734 8,120 Gross profit
8,037 11,623 12,135 Operating expense Product development 1,146
2,091 2,287 Sales & marketing 674 1,183 1,308 General &
administrative 1,024 1,900 1,945 Class action lawsuit settlement
and legal expenses related to the issues raised in the class-action
litigation commenced in August 2004 326 3,629 Amortization of
deferred stock compensation 120 56 80 Subtotal 2,964 5,556 9,249
Operating income 5,073 6,067 2,886 Non-operating expense (income)
Interest expense (income) (261) (601) (689) Other expense (income)
6 -- -- Subtotal (255) (601) (689) Income before tax 5,328 6,668
3,575 Income tax expense -- 67 149 Net income 5,328 6,601 3,426
Basic earnings per ADS $0.17 $0.19 $0.10 Diluted earnings per ADS
$0.15 $0.19 $0.10 Margin Analysis: Gross margin 65 % 63 % 60 %
Operating margin 41 % 33 % 14 % Net margin 43 % 36 % 17 %
Additional Data: 2.5G revenue $10,525 $13,519 $14,366 2G revenue
1,835 4,816 5,866 ADS outstanding (million) 34.25 34.36 34.45 ADS
used in diluted EPS calculation million) 34.72 35.49 35.64 Note 1:
The conversion of Renminbi (RMB) into US dollar (USD) is based on
the weighted average rate of USD 1.00=RMB 8.1391. (The noon buying
rate from July 1 to July 21, 2005 was USD1.00=RMB8.2765, and the
noon buying rate from July 22 to September 30, 2005 was
approximately USD1.00=RMB 8.0987 in The City of New York for cable
transfers of RMB as certified for customs purposes by the Federal
Reserve Bank of New York.) KongZhong Corporation Condensed
Consolidated Statements of Cash Flows(US$ thousands) (unaudited)
For the 9-Month For the 9-Month Ended Ended Sep. 30, 2004 Sep. 30,
2005 Cash Flows From Operating Activities Net Income $13,770
$15,911 Adjustments Amortization of deferred stock compensation 347
270 Depreciation and amortization 493 1,265 Disposal of property
& equipment -- 3 Changes in operating assets and liabilities
(7,558) 6,059 Net Cash Provided by Operating Activities 7,052
23,508 Cash Flows From Investing Activities Purchase of property
& equipment (2,083) (1,820) Acquisition of long-term
investments (500) Acquisition of subsidiaries (819) Net Cash Used
in Investing Activities (2,083) (3,139) Cash Flows From Financing
Activities Exercised employee share options 109 Incurred IPO
expenses 73,241 -- Increase (decrease) in minority interest 121
(97) Net Cash Used in Financing Activities 73,362 12 Translation
Adjustments 1 630 Net increase in Cash and Cash Equivalents 78,332
21,011 Cash and Cash Equivalents, Beginning of Period 3,743 90,714
Cash and Cash Equivalents, End of Period 82,075 111,725 Note 1: The
conversion of Renminbi (RMB) into US dollar (USD) is based on the
weighted average rate of USD 1.00=RMB 8.1391. (The noon buying rate
from July 1 to July 21, 2005 was USD1.00=RMB8.2765 and the noon
buying rate from July 22 to September 30, 2005 was approximately
USD1.00=RMB 8.0987 in The City of New York for cable transfers of
RMB as certified for customs purposes by the Federal Reserve Bank
of New York.) KongZhong Corporation Condensed Consolidated Balance
Sheets (US$ thousands) (unaudited) Dec. 31, 2004 Jun. 30, 2005 Sep.
30, 2005 (Note 2) Cash and cash equivalents $90,714 $101,329
$111,725 Accounts receivable 10,199 12,777 10,243 Other current
assets 720 711 1,504 Total current assets 101,633 114,817 123,472
Rental deposits 256 376 392 Intangible assets -- 295 276 Property
and equipment (net) 2,484 2,674 3,089 Long-term investment -- 500
500 Goodwill -- 646 646 Total assets $104,373 $119,308 $128,375
Accounts payable $2,499 $3,445 $4,048 Other current liabilities
1,899 3,275 7,248 Amount due to related party 46 36 -- Total
current liabilities 4,444 6,756 11,296 Minority interest 121 24 24
Total liabilities 4,565 6,780 11,320 Shareholders' equity 99,808
112,528 117,055 Total liabilities & shareholders' equity
$104,373 $119,308 $128,375 Note 1: The conversion of Renminbi (RMB)
into US dollar (USD) is based on the weighted average rate of USD
1.00=RMB 8.1391. (The noon buying rate from July 1 to July 21, 2005
was USD1.00=RMB8.2765, and the noon buying rate from July 22 to
September 30, 2005 was approximately USD1.00=RMB 8.0987 in The City
of New York for cable transfers of RMB as certified for customs
purposes by the Federal Reserve Bank of New York.) Note 2: The
financial information at December 31, 2004 is derived from the
audited financial statements for the year ended December 31, 2004
filed on Form 20-F. About KongZhong KongZhong Corporation is a
leading provider of advanced second generation (2.5G) wireless
interactive entertainment, media, and community services to
consumers in China. The Company delivers a broad range of services,
through multiple technology platforms, which users can access
directly from their mobile phones by choosing an icon embedded in
select models of handsets or from a mobile operator's portal or web
site. 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 interactive 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 mobile
operators for our performance; changes in the regulatory 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: Investor Contact: JP Gan Chief
Financial Officer Tel: +86-10-8857-6000 Fax: +86-10-8857-5891
Email: Media Contact: Xiaohu Wang Manager Tel: +86-10-8857-6000
Fax: +86-10-8857-5900 Email: DATASOURCE: KongZhong Corporation
CONTACT: Xiaohu Wang, Manager of KONG, +86-10-8857-6000, or fax,
+86-10-8857-5900, or Web Site: http://ir.kongzhong.com/
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