EX-1.2 3 ex1-2.htm CORPORATION REPORTS EX 1.2
 
 
EXHIBIT 1.2
 
KongZhong Corporation Reports Unaudited First Quarter 2008 Financial Results
 
Beijing, China, May 16, 2008 - KongZhong Corporation (NASDAQ: KONG), a leading wireless value-added services (WVAS) and wireless media company in China, today announced its unaudited first quarter 2008 financial results.

First Quarter 2008 Financial Highlights:
l  
Total revenues increased 8% sequentially to $21.39 million, exceeding the Company’s first-quarter revenue guidance of $20 million to $21 million.
l  
Total mobile advertising revenues were $212,000.
l  
US GAAP net income was $0.09 million. Basic earnings per ADS were $0.00. Diluted earnings per ADS were $0.00.
l  
Non-GAAP net income was $0.95 million. Non-GAAP diluted earnings per ADS were $0.03. 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, “Our WVAS revenues increased in Q1 mainly as a result of seasonal factors. However, seasonal factors also resulted in our lower mobile advertising revenues. We expect our mobile advertising revenues to increase rapidly in Q2. In 2008, we will continue pursuing our wireless Internet strategic initiative.”
 
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
March 31, 2007
(US$ thousands)
  
For the Three Months Ended
December 31, 2007
(US$ thousands)
  
For the Three Months Ended
March 31, 2008
(US$ thousands)
  
WVAS Revenues
              
2.5G:
              
WAP
  
$
4,399
  
$
2,154
  
$
3,060
  
MMS
    
4,130
    
2,797
    
2,868
  
JAVATM
    
693
    
664
    
781
  
     
9,222
    
5,615
    
6,709
  
2G:
                    
SMS
    
8,563
    
7,995
    
9,592
  
IVR
    
1,017
    
4,269
    
2,873
  
CRBT
    
1,197
    
1,591
    
1,971
  
     
10,777
    
13,855
    
14,436
  
Total WVAS revenues
    
19,999
    
19,470
    
21,145
  
WVAS Cost of revenues
    
9,204
    
10,054
   
11,587
 
WVAS Gross profit
   
10,795
    
9,416
    
9,558
  
WVAS Operating expenses
                    
Product development
    
2,275
    
1,965
    
2,189
  
Sales & marketing
    
2,937
    
3,223
    
3,579
  
General & administrative
    
2,167
    
1,568
    
1,648
  
Subtotal
    
7,379
    
6,756
    
7,416
  
WVAS Operating income
    
3,416
  
$
2,660
  
$
2,142
  
                     
WVAS Gross margin
    
54
%
  
48
%
  
45
%
WVAS Operating margin
    
17
%
  
14
%
  
10
%
                   
Total WVAS revenues for the first quarter increased 9% sequentially to $21.15 million, mainly because of an increase in the volume of our services during the holiday season in the PRC. Revenues from 2.5G services accounted for approximately 32% of total WVAS revenues and revenues from 2G services represented the remaining 68%.
 
 
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Revenues from 2.5G services, which include services delivered using wireless application protocol (WAP), multimedia messaging service (MMS), and JAVATM technologies, increased 19% sequentially to $6.71 million. WAP revenues in the first quarter of 2008 were $3.06 million, an increase of 42% sequentially. MMS revenues in the first quarter of 2008 were $2.87 million, an increase of 3% sequentially. JAVATM revenues in the first quarter of 2008 were $0.78 million, an increase of 18% sequentially.
 
Revenues from 2G services, including short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT), increased 4% sequentially to $14.44 million in the first quarter of 2008. SMS revenues in the first quarter of 2008 increased 20% sequentially to $9.59 million. IVR revenues in the first quarter of 2008 decreased 33% sequentially to $2.87 million. CRBT increased 24% sequentially to $1.97 million the first quarter of 2008.
 
The aggregate revenues from China Unicom, China Telecom and China Netcom accounted for approximately 24% of the total first quarter WVAS revenues, while revenues from China Mobile accounted for the remaining 76%.
 
WVAS Cost and Expenses
 
The WVAS cost of revenues in the first quarter of 2008 totaled $11.59 million, an increase of 15% sequentially. WVAS gross margin in the first quarter of 2008 decreased to 45% compared to 48% in the fourth quarter of 2007, mainly as a result of higher revenue sharing with mobile handset manufacturers.
 
Total WVAS operating expenses in the first quarter of 2008 were $7.42 million, an increase of 10% sequentially, mainly because of an increase in compensation to our employees. Product development expenses increased by 11% sequentially and represented 10% of revenues. Sales and marketing expenses increased by 11% sequentially and represented 17% of revenues. General and administrative expenses increased by 5% sequentially and represented 8% of revenues.
 
 
 
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Wireless Internet segment
   
For the Three Months Ended
March 31, 2007
(US$ thousands)
  
For the Three Months Ended
December 31, 2007
(US$ thousands)
  
For the Three Months Ended
March 31, 2008
(US$ thousands)
  
Mobile advertising revenues
  
$
116
  
$
298
  
$
212
  
Other revenues
    
12
    
42
    
29
  
Total Revenues
    
128
    
340
    
241
  
Cost of revenues
    
182
    
166
    
233
  
Gross (loss) profit
   
(54
)
  
174
    
8
  
Operating expenses
    
2,447
    
3,223
    
3,249
  
Operating loss
  
$
(2,501
)
$
(3,049
)
$
(3,241
)
                   
Total mobile advertising revenues, which were mainly generated from KongZhong’s wireless Internet sites, were $212,000 in the first quarter of 2008 as the advertising market is seasonally low in Q1.
 
Operating expenses related to the Company’s wireless Internet sites were $3.25 million, which included $1.84 million in marketing and advertising expenses.
 
The Company’s total headcount increased from 804 as of December 31, 2007 to 817 as of March 31, 2008.
 
Earnings
US GAAP net income totaled $0.09 million in the first quarter of 2008. Basic earnings per ADS were $0.00. Diluted US GAAP earnings per ADS were $0.00 for the first quarter.
Non-GAAP net income in the first quarter of 2008 was $0.95 million. Diluted Non-GAAP earnings per ADS were $0.03 for the first quarter.
 
Balance Sheet and Cash Flow
As of March 31, 2008, the Company had $126.81 million in cash and cash equivalents. Cash in-flows from operating activities totaled $2.32 million in the first quarter of 2008.
 
 
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Business Outlook:
Based on information available on May 16, 2008, the Company expects total revenues for the second quarter of 2008 to be between $22 million and $23 million.

Conference Call:
The Company’s management team will conduct a conference call at 8:30 am Beijing time on May 16 (8:30 pm Eastern time and 5:30 pm Pacific time on May 15, 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
March 31, 2007
  
For the Three Months Ended
December 31, 2007
  
For the Three Months Ended
March 31, 2008
  
Revenues
  
$
20,127
  
$
19,810
  
$
21,386
  
Cost of revenues
    
9,386
    
10,220
   
11,820
 
Gross profit
    
10,741
    
9,590
   
9,566
  
Operating expense
                    
Product development
    
3,204
    
3,047
    
3,576
  
Sales & marketing
    
4,401
    
5,363
    
5,422
  
General & administrative
    
2,221
    
1,569
    
1,667
  
Subtotal
    
9,826
    
9,979
    
10,665
  
Operating income (loss)
    
915
    
(389
)
  
(1,099
)
Non-operating income
                   
Interest income
    
1,024
    
889
    
1,273
  
Investment income
    
208
    
-
    
-
  
Subtotal
    
1,232
    
889
   
1,273
  
Income before tax expense
    
2,147
    
500
    
174
  
Income tax expense (benefit)
    
585
    
(187
)
  
86
  
Net income
  
$
1,562
  
$
687
  
$
88
  
                     
Basic earnings per ADS
  
$
0.04
  
$
0.02
  
$
0.00
  
Diluted earnings per ADS
  
$
0.04
  
$
0.02
  
$
0.00
  
ADS outstanding (million)
    
35.58
    
35.58
    
35.58
  
ADS used in diluted EPS calculation (million)
    
35.77
    
35.81
    
35.93
  



 
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 KongZhong Corporation
Condensed Consolidated Statements of Cash Flows
(US$ thousands)
(Unaudited)
 
   
For the Three Months Ended
March 31, 2007
  
For the Three Months Ended
March 31, 2008
  
Cash Flows From Operating Activities
              
Net Income
  
$
1,562
  
$
88
  
Adjustments to reconcile net income to net cash
              
provided by operating activities
              
Share-based compensation
    
569
    
671
  
Depreciation and amortization
    
692
    
746
  
Gain on sales of investment
    
(208
)
  
-
  
Changes in operating assets and liabilities
    
(2,466
)
  
810
  
Net Cash Provided by Operating Activities
    
149
    
2,315
  
               
Cash Flows From Investing Activities
              
Proceeds from sales of investment
    
208
    
-
  
Purchase of property and equipment
    
(381
)
  
(328
)
Acquisition of subsidiaries
   
(17,000
)
  
(1,500
)
Net Cash Used in Investing Activities
    
(17,173
)
  
(1,828
)
               
Cash Flows From Financing Activities
              
Proceeds from exercise of share options
    
125
    
-
  
Net Cash Provided by Financing Activities
    
125
    
-
  
               
Effect of foreign exchange rate changes
    
859
    
3,981
  
               
Net (decrease) increase in Cash and Cash Equivalents
    
($16,040
)
$
4,468
  
Cash and Cash Equivalents, Beginning of Period
  
$
131,402
  
$
122,343
  
Cash and Cash Equivalents, End of Period
  
$
115,362
  
$
126,811
  


 
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KongZhong Corporation
Condensed Consolidated Balance Sheets
(US$ thousands)
(Unaudited)

   
March 31, 2007
  
December 31, 2007
  
March 31, 2008
  
Cash and cash equivalents
  
$
115,362
  
$
122,343
  
$
126,811
  
Accounts receivable (net)
    
14,234
    
14,993
    
15,874
  
Other current assets
    
2,567
    
4,498
    
4,381
  
Total current assets
    
132,163
    
141,834
    
147,066
  
                     
Rental deposits
    
449
    
447
    
465
  
Intangible assets (net)
    
1,809
    
1,266
    
1,132
  
Property and equipment (net)
    
3,128
    
3,427
    
3,357
  
Long-term investment
   
-
    
-
    
1,500
  
Goodwill
    
32,987
    
34,919
    
36,361
  
Total assets
  
$
170,536
  
$
181,893
  
$
189,881
  
                     
Accounts payable
  
$
6,428
  
$
5,597
  
$
7,547
  
Other current liabilities
    
4,774
    
5,697
    
5,420
  
Total current liabilities
    
11,202
    
11,294
    
12,967
  
                     
Non-current deferred tax liability
    
129
    
123
   
147
 
Total liabilities
  
$
11,331
  
$
11,417
  
$
13,114
  
                     
Shareholders’ equity
    
159,205
    
170,476
    
176,767
  
Total liabilities & shareholders’ equity
  
$
170,536
  
$
181,893
  
$
189,881
  
                     
 
 
 
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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 on sales of investment, and 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
March 31, 2007
  
 
For the Three
Months Ended
December 31, 2007
  
 
For the Three
Months Ended
March 31, 2008
  
GAAP Net Income
  
$
1,562
  
$
687
  
$
88
  
Gain on sales of investment
    
(208
)
  
-
    
-
  
Share-based compensation
    
569
    
672
    
671
  
Amortization or write-off of intangibles
    
206
    
215
    
189
  
Non-GAAP Net Income
  
$
2,129
  
$
1,574
  
$
948
  
                     
Non-GAAP adjusted diluted net income per ADS ønote 1÷
  
$
0.06
  
$
0.04
  
$
0.03
  

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.
 
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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