EX-1.3 4 v106079_ex1-3.htm Unassociated Document
KongZhong Corporation Reports Unaudited Fourth Quarter
and Fiscal Year 2007 Financial Results

Beijing, China, March 5, 2008 - KongZhong Corporation (NASDAQ: KONG), a leading wireless value-added services (“WVAS”) and wireless media company in China, today announced its unaudited fourth quarter and fiscal year 2007 financial results.

Fourth Quarter 2007 Financial Highlights:
 
l  
Total revenues increased 16% sequentially to $19.81 million, exceeding the Company’s fourth-quarter revenue guidance of $18.5 million to $19.5 million.
   
l  
Total mobile advertising revenues increased 12% sequentially to $298,000.
   
l  
US GAAP net income increased 26% sequentially to $0.69 million. Diluted earnings per ADS were $0.02.
   
l  
Non-GAAP net income increased 15% sequentially to $1.57 million. Non-GAAP diluted earnings per ADS were $0.04. Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures”.

Fiscal Year 2007 Financial Highlights:
 
l  
Total revenues were $74.02 million. Total WVAS revenues were $73.01 million and total mobile advertising revenues were $903,000.
   
l  
US GAAP net income was $2.83 million. Diluted earnings per ADS were $0.08.
   
l  
Non-GAAP net income was $6.01 million. Non-GAAP diluted earnings per ADS were $0.17. Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures”.

Commenting on the results, KongZhong’s Chairman and Chief Executive Officer, Yunfan Zhou, said, “We are happy that our WVAS business has regained growth momentum in Q4 2007. We expect the Company to have a better WVAS business in 2008. In regards to our wireless Internet business, we are glad that we have achieved continual growth in our mobile advertising revenues. We are confident about the future of our wireless Internet business and will continue our efforts to develop Kong.net in 2008.”
 
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Business Highlights:
 
l  
In March 2008, the Company signed a strategic alliance agreement with Focus Wireless Media Technology Co., Ltd. (“Focus Wireless”), a subsidiary of Focus Media Holding Ltd., to jointly expand their respective mobile advertising business by leveraging on the strong advertising sales force of Focus Wireless and KongZhong’s reputable wireless Internet portal Kong.net. The Company expects the strategic alliance to help generate a significant portion of its mobile advertising revenues over the next two years and bring the mobile advertising business to the next level.
   
l  
In January 2008, the Company signed a strategic alliance agreement with China Sports Industry Group Co., Ltd (“CSIG”) to jointly explore business opportunities for developing sports-related content for mobile phones, including wireless value-added services and wireless Internet sites.
   
l  
In January 2008 and February 2008, the Company signed cooperation agreements with Infront to operate the official mobile websites for the Men’s Professional League of the Chinese Basketball Association, China’s National Basketball Teams and China’s National Football Teams.
   
l  
In January 2008, the Company signed an agreement with HiU! Media, a company providing residential community direct marketing advertising network and residential community marketing solutions in China, to purchase 9.87% of the total equity interest in HiU! Media for $1.5 million. The investment was completed in January 2008. Nick Yang, KongZhong’s President, was an early investor in HiU! Media. Through its investment in HiU! Media, Kongzhong expects to strengthen the Kong.net brand by launching advertisement campaigns on HiU! Media’s advertising network.
   
l  
The Company signed cooperation agreements with Xinhua PR Newswire, Dow Jones & Company and Finet Group Limited to provide, on the finance channel of Kong.net, stock quotes and news updates about companies listed on the Shanghai Stock Exchange, the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and the stock exchanges in the United States. 

Financial Results:
 
(Note: Unless otherwise indicated, all financial statement amounts used in this press release are based on US GAAP and denominated in US dollars.)
 
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WVAS segment
 
   
For the Three Months Ended
September 30, 2007
(US$ thousands)
  
For the Three Months Ended
December 31, 2007
(US$ thousands)
  
WVAS Revenues
          
2.5G:
          
WAP
  
$
1,938
  
$
2,154
  
MMS
    
2,744
    
2,797
  
JAVATM
    
849
    
664
  
2G:
              
SMS
    
7,564
    
7,995
  
IVR
    
2,603
    
4,269
  
CRBT
    
1,123
    
1,591
  
Total WVAS revenues
    
16,821
    
19,470
  
WVAS Cost of revenues
    
8,006
    
10,054
 
WVAS Gross profit
   
8,815
    
9,416
  
WVAS Operating expenses
              
Product development
    
2,111
    
1,965
  
Sales & marketing
    
2,990
    
3,223
  
General & administrative
    
1,474
    
1,568
  
Subtotal
    
6,575
    
6,756
  
WVAS Operating income
  
$
2,240
  
$
2,660
  
               
WVAS Gross margin
    
52
%
  
48
%
WVAS Operating margin
    
13
%
  
14
%

Total WVAS revenues for the fourth quarter increased 16% sequentially to $19.47 million. Revenues from 2.5G services accounted for approximately 29% of total WVAS revenues and revenues from 2G services represented the remaining 71%.

Revenues from 2.5G services, which include services delivered using wireless application protocol (“WAP”), multimedia messaging service (“MMS”), and JAVATM technologies, increased 2% sequentially to $5.62 million. WAP revenues in the fourth quarter of 2007 were $2.15 million, an increase of 11% sequentially. MMS revenues in the fourth quarter of 2007 were $2.80 million, an increase of 2% sequentially. JAVATM revenues in the fourth quarter were $0.66 million, a decrease of 22% sequentially.
 
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Revenues from 2G services, including short messaging service (“SMS”), interactive voice response (“IVR”), and color ring back tone (“CRBT”), increased 23% sequentially to $13.86 million in the fourth quarter of 2007, as we enhanced our 2G sales and promotion efforts. SMS revenues in the fourth quarter of 2007 increased 6% sequentially to $8.00 million. IVR revenues in the fourth quarter of 2007 were $4.27 million, a 64% increase sequentially. CRBT increased 42% sequentially to $1.59 million in the fourth quarter of 2007.

The aggregate revenues from China Unicom, China Telecom and China Netcom accounted for approximately 23% of the total fourth quarter WVAS revenues, while revenues from China Mobile accounted for the remaining 77%.

WVAS Expenses
 
The WVAS cost of revenues in the fourth quarter of 2007 totaled $10.05 million, an increase of 26% sequentially. WVAS gross margin in the fourth quarter of 2007 decreased to 48% compared to 52% in the third quarter of 2007. The lower gross margin was primarily due to the higher percentage of IVR revenues, which generally were derived at a higher cost compared to other revenues.

Total WVAS operating expenses in the fourth quarter of 2007 were $6.76 million, an increase of 3% sequentially. Product development expenses decreased by 7% sequentially and represented 10% of revenues. Sales and marketing expenses increased by 8% sequentially and represented 17% of revenues, mainly due to increased sales and promotion activities. General and administrative expenses increased by 6% sequentially and represented 8% of revenues.
 
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Wireless Internet segment
 
   
For the Three Months Ended
September 30, 2007
(US$ thousands)
  
For the Three Months Ended
December 31, 2007
(US$ thousands)
  
Mobile advertising revenues
  
$
265
  
$
298
  
Other revenues
    
35
    
42
  
Total Revenues
    
300
    
340
  
Cost of revenues
    
174
    
166
  
Gross profit
    
126
    
174
  
Operating expenses
    
2,597
    
3,223
  
Operating loss
  
$
(2,471
)
$
(3,049
)

Total mobile advertising revenues, which were mainly generated from KongZhong’s wireless Internet sites, increased 12% sequentially to $298,000 in the fourth quarter of 2007.

Operating expenses related to the Company’s wireless Internet sites were $3.22 million, which included $2.14 million in marketing and advertising expenses.

The Company’s total headcount increased from 791 as of September 30, 2007 to 804 as of December 31, 2007.

Earnings
 
US GAAP net income totaled $0.69 million in the fourth quarter of 2007, a 26% increase sequentially. Diluted US GAAP earnings per ADS were $0.02 for the fourth quarter.
 
Non-GAAP net income in the fourth quarter of 2007 was $1.57 million, a 15% increase sequentially. Diluted Non-GAAP earnings per ADS were $0.04 for the fourth quarter.

Balance Sheet and Cash Flow
 
As of December 31, 2007, the Company had $122.34 million in cash and cash equivalents. Cash in flows from operating activities totaled $0.94 million in the fourth quarter of 2007.

Based upon an analysis of the value of the Company’s assets during 2007, the Company was classified as a passive foreign investment company (“PFIC”) during 2007 for US Federal income tax purposes. Further details about the PFIC rules are available in the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2006. US investors are advised to consult their own tax advisors regarding the application of the PFIC rules to their particular circumstances.
 
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Business Outlook:
 
Based on information available on March 5, 2008, the Company expects total revenues for the first quarter of 2008 to be between $20 million and $21 million.

In 2008, the Company will continue to focus on expanding its wireless Internet business. Consistent with the Company’s operational practice adopted in 2007, a major portion of the operating income generated from the WVAS segment will be invested into the development of the wireless Internet business, which the Company believes will be one of the major drivers of the Company’s growth in the future.

Conference Call:
 
The Company’s management team will conduct a conference call at 8:30 am Beijing time on March 5 (7:30 pm Eastern time and 4:30 pm Pacific time on March 4, 2008). A webcast of this conference call will be accessible on the Company’s web site at http://ir.kongzhong.com.
 
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KongZhong Corporation
Condensed Consolidated Statements of Income
(US$ thousands, except percentages, per share data, and share count)
(Unaudited)
 
   
For the Three Months Ended
December 31, 2006
  
For the Three Months Ended
September 30, 2007
 
For the Three Months Ended
December 31, 2007
  
Revenues
  
$
23,712
  
$
17,121
  
$
19,810
  
Cost of revenues
    
11,579
    
8,180
    
10,220
 
Gross profit
    
12,133
    
8,941
    
9,590
 
Operating expense
                    
Product development
    
2,629
    
3,216
    
3,047
  
Sales & marketing
    
4,151
    
4,481
    
5,363
  
General & administrative
    
1,927
    
1,475
    
1,569
  
Subtotal
    
8,707
   
9,172
    
9,979
  
Operating income (loss)
    
3,426
    
(231
)
  
(389
)
Non-operating income (expenses)
                    
Interest income
    
1,031
    
945
    
889
  
Other expense
    
(11
)
  
-
    
-
  
Subtotal
    
1,020
    
945
   
889
 
Income before tax expense
    
4,446
    
714
    
500
  
Income tax expense
    
782
    
170
    
(187
)
Net income
  
$
3,664
  
$
544
  
$
687
  
                     
Basic earnings per ADS
  
$
0.10
  
$
0.02
  
$
0.02
  
Diluted earnings per ADS
  
$
0.10
  
$
0.02
  
$
0.02
  
ADS outstanding (million)
    
35.28
    
35.58
    
35.58
  
ADS used in diluted EPS calculation (million)
    
35.71
    
35.75
    
35.81
  
 
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KongZhong Corporation
Condensed Consolidated Statements of Income
(US$ thousands, except percentages, per share data, and share count)
(Unaudited)
 
   
For the Twelve Months Ended
December 31, 2006
 
For the Twelve Months Ended
December 31, 2007
  
Revenues
  
$
106,769
  
$
74,017
  
Cost of revenues
    
47,665
    
36,496
  
Gross profit
    
59,104
    
37,521
  
Operating expense
              
Product development
    
12,026
    
12,535
  
Sales & marketing
    
16,755
    
18,094
  
General & administrative
    
9,105
    
7,221
  
Subtotal
    
37,886
    
37,850
  
Operating income (loss)
    
21,218
    
(329
)
Non-operating income (expenses)
              
Interest income
    
3,867
    
3,810
  
Investment gain
   
1,241
    
208
  
Other expense
    
(50
)
  
-
  
Subtotal
    
5,058
    
4,018
  
Income before tax expense
    
26,276
    
3,689
  
Income tax expense
    
1,584
    
857
  
Net income
  
$
24,692
  
$
2,832
  
               
Basic earnings per ADS
  
$
0.71
  
$
0.08
  
Diluted earnings per ADS
  
$
0.69
  
$
0.08
  
ADS outstanding (million)
    
34.99
    
35.58
  
ADS used in diluted EPS calculation (million)
    
35.67
    
35.77
  
 
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KongZhong Corporation
Condensed Consolidated Statements of Cash Flows
(US$ thousands)
(Unaudited)
 
   
For the Year Ended
December 31, 2006
  
For the Year Ended
December 31, 2007
  
Cash Flows From Operating Activities
          
Net Income
  
$
24,692
  
$
2,832
  
Adjustments to reconcile net income to net cash
              
provided by operating activities
              
Share-based compensation
    
1,638
    
2,550
  
Depreciation and amortization
    
3,030
    
2,771
  
Loss on disposal of property and equipment
    
17
    
11
  
Gain on sales of investment
    
(1,241
)
  
(208
)
Changes in operating assets and liabilities
    
(126
)
  
(4,640
)
Net Cash Provided by Operating Activities
    
28,010
    
3,316
  
               
Cash Flows From Investing Activities
              
Proceeds from sales of investment
    
1,741
    
208
  
Purchase of property and equipment
    
(2,518
)
  
(1,928
)
Acquisition of subsidiaries
   
(17,139
)
  
(17,000
)
Net Cash Used in Investing Activities
    
(17,916
)
  
(18,720
)
               
Cash Flows From Financing Activities
              
Proceeds from exercise of share options
    
2,214
    
152
  
(Increase) in minority interest
    
(24
)
  
-
  
Net Cash Provided by Financing Activities
    
2,190
    
152
  
               
Effect of foreign exchange rate changes
    
1,976
    
6,193
  
               
Net increase (decrease) in Cash and Cash Equivalents
  
$
14,260
  
$
(9,059
)
Cash and Cash Equivalents, Beginning of Period
  
$
117,142
  
$
131,402
  
Cash and Cash Equivalents, End of Period
  
$
131,402
  
$
122,343
  
 
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KongZhong Corporation
Condensed Consolidated Balance Sheets
(US$ thousands)
(Unaudited)

   
December 31, 2006
 
September 30, 2007
 
December 31, 2007
  
Cash and cash equivalents
  
$
131,402
  
$
119,525
  
$
122,343
  
Accounts receivable (net)
    
11,569
    
13,764
    
14,993
  
Other current assets
    
2,375
    
3,680
    
4,498
  
Total current assets
    
145,346
    
136,969
    
141,834
  
                     
Rental deposits
    
461
    
434
    
447
  
Intangible assets
    
1,997
    
1,438
    
1,266
  
Property and equipment (net)
    
3,101
    
3,279
    
3,427
  
Goodwill
    
15,836
    
33,964
    
34,919
  
Total assets
  
$
166,741
  
$
176,084
  
$
181,893
  
                     
Accounts payable
  
$
6,013
  
$
5,604
  
$
5,597
  
Other current liabilities
    
4,809
    
5,054
    
5,697
  
Total current liabilities
    
10,822
    
10,658
    
11,294
  
                     
Non-current deferred tax liability
    
142
    
103
    
123
 
Total liabilities
  
$
10,964
  
$
10,761
  
$
11,417
  
                     
Shareholders’ equity
    
155,777
    
165,323
    
170,476
  
Total liabilities & shareholders’ equity
  
$
166,741
  
$
176,084
  
$
181,893
  
 
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Non-GAAP Financial Measures
 
To supplement the unaudited condensed statements of income presented in accordance with United States Generally Accepted Accounting Principles (“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, our 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 or write-off of intangibles, gain and loss on investment, and non-cash share-based compensation expense.
 
Reconciliation of the Company's Non-GAAP Financial Measures to the GAAP financial measures is set forth below.
 
   
For the Three Months Ended
December 31, 2006
  
For the Three Months Ended
September 30, 2007
 
For the Three Months Ended
December 31, 2007
  
GAAP Net Income
  
$
3,664
  
$
544
  
$
687
  
Non-cash share-based compensation
    
301
    
618
    
672
  
Amortization or write-off of
intangibles
    
230
    
211
    
215
  
Non-GAAP Net Income
  
$
4,195
  
$
1,373
  
$
1,574
  
                     
Non-GAAP adjusted diluted net income per ADS ønote 1÷
  
$
0.12
  
$
0.04
  
$
0.04
  

Note 1: The Non-GAAP adjusted net income per ADS is computed using Non-GAAP Net Income and number of ADS used in GAAP diluted EPS calculation, where the number of ADS is adjusted for dilution due to employee share based compensation.
 
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About KongZhong:
 
KongZhong Corporation is a leading wireless value-added services and wireless media company in China. The Company delivers wireless value-added services to consumers in China through multiple technology platforms including wireless application protocol (“WAP”), multimedia messaging service (“MMS”), JAVATM, short messaging service (“SMS”), interactive voice response (“IVR”), and color ring-back tone (“CRBT”). The Company also operates three wireless Internet sites, Kong.net, Ko.cn and cn.NBA.com, which enable users to access media, entertainment and community content directly from their mobile phones.

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, wireless Internet and mobile advertising 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 Internet and mobile advertising industries 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 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 segment; changes in the regulations or 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.
 
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KongZhong Contacts
 
Investor Contact:   Media Contact:
Sam Sun   Xiaohu Wang
Chief Financial Officer   Manager
Tel.: +86 10 8857 6000    Tel: +86 10 8857 6000
Fax: +86 10 8857 5891   Fax: +86 10 8857 5900
E-mail:  ir@kongzhong.com    E-mail: xiaohu@kongzhong.com
 
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