KongZhong Corporation Announces Unaudited Third Quarter Results for
the Period Ended September 30, 2004 3Q04 Financial Highlights: *
Revenue grew 509% year-over-year and 3% sequentially to a record
$12.36 million. * The Company's 2.5G revenue grew 556%
year-over-year and 10% sequentially to $10.53 million. * The
Company's 2G revenue grew 330% year-over-year but declined 22%
sequentially to $1.83 million. * Net income increased 935%
year-over-year and 1% sequentially to $5.33 million. * Net margin
was 43.1%, up from 25.4% in 3Q03 and down slightly from 44.3% in
2Q04. BEIJING, Nov. 12 /Xinhua-PRNewswire/ -- KongZhong Corporation
(NASDAQ: KONG), a leading provider of advanced second generation
(2.5G) wireless value added services in China, today announced its
third quarter 2004 financial results. Under United States Generally
Accepted Accounting Principles (US GAAP), diluted earnings per ADS
was $0.15, up from a diluted earnings per ADS of $0.02 in the same
period of the previous year (3Q03) and down from a diluted earnings
per ADS of $0.19 in the second quarter of 2004 (2Q04). Net income
in the third quarter was $5.33 million, an increase from $0.51
million in 3Q03 and $5.30 million in 2Q04. As part of the Company's
initial public offering, 8 million American Depositary Shares were
issued in early July. Using the enlarged share count, the Company's
earnings per ADS in 1Q04, 2Q04, and 3Q04 would have been $0.09,
$0.15, and $0.15 respectively. Commenting on the results, the
Company's Chairman and CEO, Yunfan Zhou, said, 'In the third
quarter, the wireless value-added services market faced a number of
challenging issues, including the transition of SMS services to the
MISC service management platform, changes in billing centers for
MMS, a tightening of regulations governing wireless value-added
services by mobile operators, and increased competition in general.
These factors caused our top-line growth to slow considerably
compared to prior periods. We believe these factors will continue
to pose challenges in the fourth quarter for us and other service
providers in this market. Nonetheless, we are confident of the 2.5G
market's long-term prospects, as Chinese consumers continue to
migrate from 2G to 2.5G mobile phones. As a leading 2.5G service
provider in China, we believe we are well positioned to capture
this long-term potential.' Business Highlights: * The Company
believes it remained the leader with China Mobile in terms of 2.5G
revenues, which are comprised of WAP, MMS, and Java revenues. * The
Company grew its mobile game revenue from 2.5G services by 11%
sequentially to approximately $1.40 million in 3Q04. * The Company
signed agreements with: -- Hutchison Telecom in Hong Kong to
provide wireless value-added services to Hutchison's customers in
Hong Kong and Macau. -- Beijing Buena Vista Business Consulting
Company to provide interactive voice response (IVR) services using
content from the Dragon Club, a cartoon program that is popular
with Chinese children and authorized by the Walt Disney Company. --
Beijing Kirin Kid Production Ltd. to use sound, music, pictures,
and personal information from the rock band Heibao, including its
new album 'Heibao V,' in KongZhong's wireless value-added services.
-- Phoenix Weekly (HK) in which Phoenix Weekly will provide the
Company with pictures and essays for use in the Company's wireless
value- added services. The Company also agrees to set up a club in
its wireless communities for the readers of Phoenix Weekly to
exchange information. -- China Film Group in October to give the
Company exclusive rights in China to use video clips, stage photos,
posters, music, dialogues, and sound effects from the forthcoming
film 'Kung Fu Hustle' in the Company's wireless value-added
services. Third Quarter Financial Review (Note: Unless otherwise
stated, all financial statement amounts used in this press release
are based on US GAAP and denominated in US dollars.) Revenues
Revenues for the quarter totaled a record $12.36 million, up 509%
from the same period of the previous year and up 3% from 2Q04. By
platform, revenues from 2.5G wireless value-added services
accounted for 85% of total revenues and revenues from 2G wireless
value-added services represented the remaining 15%, compared with
80% and 20%, respectively, in 2Q04. Revenues from 2.5G services,
which include services delivered using wireless access protocol
(WAP), multimedia messaging service (MMS), and Java technology,
grew 556% from 3Q03 and 10% from 2Q04 to $10.53 million in 3Q04.
Growth in WAP revenues accounted for the largest increase in 2.5G
revenues. Revenue from 2G services, which include short messaging
service (SMS), interactive voice response, and color ring back tone
(CRBT), grew 330% from 3Q03 but decreased 22% from 2Q04 to $1.83
million in 3Q04. The sequential decline in 2G revenues resulted
from a decrease in SMS revenue, which was mainly caused by mobile
operators' transitioning SMS services to the MISC service
management platform in a number of provinces. By type, revenue from
monthly subscriptions accounted for 92% of total revenue, and
revenue from downloads accounted for the remaining 8%. During the
quarter, the number of monthly subscriptions grew by 21% from 2Q04
to 15.48 million, and average revenue per subscription fell by 14%.
1Q04 2Q04 3Q04 Subscription Revenue 93 % 91 % 92 % Download Revenue
7 % 9 % 8 % Total 100 % 100 % 100 % By service category, the
Company derived 47% of its revenues from interactive entertainment,
36% from media services, and 17% from community- related services.
1Q04 2Q04 3Q04 Interactive Entertainment 56 % 47 % 47 % Media 25 %
37 % 36 % Community 19 % 16 % 17 % Total 100 % 100 % 100 % Expenses
Cost of revenues (COR) in 3Q04 totaled $4.32 million, up 564% from
3Q03 and up 24% from 2Q04. The year-over-year increase was a result
of higher business turnover and was primarily due to greater
amounts paid to mobile operators, handset manufacturers, and
content partners. Gross margin for the quarter was 65.0%, down from
67.9% in the same period of the previous year and 70.8% in 2Q04.
The sequential margin contraction was attributed primarily to
higher fees paid to handset manufacturers and, to a lesser extent,
higher fees paid to mobile operators. Total operating expenses in
3Q04 increased by 243% from the same period of the previous year
and contracted by 7% from 2Q04. The year-over-year increase was
largely due to increases in salary and benefits (associated with
increased headcount), office rental expense, professional fees, and
business tax. Total operating expenses represented 24.0% of
revenues, compared with 42.6% and 26.6% of revenues in 3Q03 and
2Q04, respectively. Product development expense increased by 6%
from 2Q04 and represented 9.3% of revenues. The increase was driven
primarily by higher office rental expense and, to a lesser extent,
higher depreciation. Sales and marketing expenses decreased by 20%
from 2Q04 and represented 5.5% of revenues. The decrease was
primarily the result of reduced sales and marketing activities due
to the uncertain environment. General and administrative expenses
decreased by 7% from 2Q04 and represented 8.3% of revenues.
Amortization of deferred stock compensation decreased by 17% from
2Q04 and represented 1.0% of revenues. Overall, the Company's
operating margin improved from 25.3% in 3Q03 to 41.0% in 3Q04, but
contracted from 44.2% in 2Q04. The company-wide headcount increased
16% from 405 at the end of 2Q04 to 470 at the end of 3Q04. Earnings
Net income totaled $5.33 million in the third quarter, an increase
of 935% from $0.51 million in the same period of the previous year
and an increase of 1% from $5.30 million in 2Q04. Net margin was
43.1%, up from 25.4% in 3Q03 but down from 44.3% in 2Q04. Diluted
earnings per ADS were $0.15, up from $0.02 from the same period of
the previous period and down from $0.19 in 2Q04. Balance Sheet and
Cash Flow At the end of the quarter, the Company had $82.07 million
in cash and cash equivalent funds and $98.41 million in total
assets. Cash flow from operating activities totaled $0.74 million
in the third quarter, compared to $4.07 million in the second
quarter. The sequential decline in cash flow from operating
activities was primarily due to an increase in accounts receivable
from $6.28 million at the end of the second quarter to $10.94
million at the end of the third quarter. The $4.66 million increase
in accounts receivable came as a result of delays in payments by
several provincial operators to all wireless service providers. In
the third quarter, the Company spent $1.45 million on capital
expenditures. Business Outlook: The Company presently expects its
revenues to grow from $12.36 million in 3Q04 to $12.5-13.0 million
in 4Q04, as it continues to adapt to recent changes in the
marketplace. The Company estimates that its operating margin may
contract slightly from the 3Q04 level. Webcast of Conference Call:
The Company's management team will conduct a conference call at
11:00 pm Beijing time (10:00 am Eastern time and 7:00 am Pacific
time) on November 12. A webcast of this conference call will be
accessible on the Company's web site at http://ir.kongzhong.com/ .
KongZhong Corporation Consolidated Statements of Income (US$
thousands, except percentages, per share data, and share count)
(unaudited) For the For the For the Three Three Three Months Months
Months Ended Ended Ended Sep. 30, Jun. 30, Sep. 30, 2003 2004 2004
Revenues $2,031 $11,968 $12,360 Cost of revenues 651 3,494 4,323
Gross profit 1,380 8,474 8,037 Operating expense Product
development 390 1,084 1,146 Sales & marketing 204 847 674
General & administrative 263 1,102 1,024 Amortization of
deferred stock compensation 9 146 120 Subtotal 866 3,179 2,964
Operating income 514 5,295 5,073 Non-operating expense (income)
Interest expense (1) (9) (261) Others -- 4 6 Subtotal (1) (5) (255)
Income before tax 515 5,300 5,328 Income tax expense -- -- -- Net
income $515 5,300 5,328 Basic earnings per ADS $0.04 $0.45 $0.17
Diluted earnings per ADS $0.02 $0.19 $0.15 Margin Analysis: Gross
margin 67.9 % 70.8 % 65.0 % Operating margin 25.3 % 44.2 % 41.0 %
Net margin 25.4 % 44.3 % 43.1 % Additional Data: 2.5G revenue
$1,605 $9,607 $10,525 2G revenue 426 2,361 1,835 ADS outstanding
(million) 11.73 11.73 34.25 ADS used in diluted EPS calculation
(million) 27.40 27.44 34.72 KongZhong Corporation Consolidated
Statements of Cash Flows (US$ thousands) (unaudited) For the 9- For
the 9- Months Ended Months Ended Sep. 30, 2003 Sep. 30, 2004 Cash
Flows From Operating Activities Net Income $848 $13,770 Adjustments
Amortization of deferred stock compensation 2 347 Depreciation and
amortization 167 493 Changes in operating assets and liabilities
(275) (7,558) Net Cash Provided by Operating Activities 812 7,052
Cash Flows From Investing Activities Purchase of property &
equipment (672) (2,083) Net Cash Used in Investing (672) (2,083)
Activities Cash Flows From Financing Activities Issuance of New
Equity -- 73,241 Increase in minority interest -- 121 Net Cash
Provided by Financing Activities -- 73,362 Translation Adjustments
1 1 Net increase in Cash and Cash Equivalents 141 78,332 Cash and
Cash Equivalents, 2,646 3,743 Beginning of Period Cash and Cash
Equivalents, End of Period 2,787 82,075 KongZhong Corporation
Consolidated Balance Sheet (US$ thousands) (unaudited) Dec. 31,
2003 Sep. 30, 2004 Cash and cash equivalents $3,743 $82,075
Accounts receivable 1,704 10,942 Other current assets 198 2,618
Total current assets 5,645 95,635 Rental deposit 74 342 PP&E
(net) 848 2,438 Total assets $6,567 $98,415 Accounts payable 564
2,340 Other current liabilities 393 2,880 Amount due to related
party 90 -- Total current liabilities 1,047 5,220 Minority interest
-- 121 Series B redeemable 2,970 -- convertible preferred shares
Total liabilities 4,017 5,341 Shareholders' equity 2,550 93,074
Total liabilities & $6,567 $98,415 shareholders' equity
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. 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: Richard Wei Chief Financial Officer
Tel: +86-10-8857-6000 Fax: +86-10-8857-5891 Email: DATASOURCE:
KongZhong Corporation CONTACT: Richard Wei Chief Financial Officer
+86-10-8857-6000 or fax, +86-10-8857-5891, or Web site:
http://www.kongzhong.com/
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