EX-1.2 3 v132727_ex1-2.htm Unassociated Document

KongZhong Corporation Reports Unaudited Third Quarter 2008 Financial Results
 
 
Beijing, China, November 17, 2008 - KongZhong Corporation (NASDAQ: KONG), a leading mobile Internet company in China, today announced its unaudited third quarter 2008 financial results.

Third Quarter 2008 Financial Highlights:
 
Total revenues for the third quarter of 2008 increased 46% year-over-year and increased 7% quarter-over-quarter to $25.05 million, exceeding the Company’s third-quarter revenue guidance of $23.5 million to $24.5 million.

Because of the rapid growth of the mobile games market in China, the Company has decided to make a concerted effort to explore the opportunities in this market. Starting from the third quarter of 2008, the Company has classified its operations related to mobile games into a separate operating segment. Financial measures associated with mobile online games, downloadable offline games and wireless application protocol (WAP) games, previously included in the financial measures for the WVAS segment, will be shown separately.

During the recent financial turmoil, the Company’s market capitalization decreased and remains below its net assets value. Many of the Company’s peers and competitors are also experiencing low valuations. Mainly because of the market conditions and the Company’s low market capitalization, in the third quarter, the Company recorded $21.62 million of provision for impairment of goodwill associated with the WVAS segment.

For the third quarter of 2008, the Company’s

·
WVAS revenues (now excluding mobile game revenues) increased 38% from the third quarter of 2007 and increased 2% quarter-over-quarter to $22.07 million;

·
mobile game revenues increased 179% from the third quarter of 2007 and increased 63% quarter-over-quarter to $2.37 million;

·
mobile advertising revenues increased 104% from the third quarter of 2007 and increased 57% quarter-over-quarter to $0.61 million;

·
net loss based on US Generally Accepted Accounting Principles (GAAP) was $21.57 million, which includes the $21.62 million provision for the impairment of goodwill; and

·
non-GAAP net income was $ 0.81 million. Non-GAAP diluted net income per ADS were $0.02. (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures.”) 
 
 
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Commenting on the results, KongZhong’s Chairman and Chief Executive Officer, Leilei Wang, said, “As the newly appointed Chairman and CEO of KongZhong I believe there are a number of noteworthy developments which bode well for the long-term future of the Company as I begin to map out new strategies for KongZhong. Firstly, I’ve begun to undertake efforts to grow our WVAS business which we expect to become a stable cash flow generation unit for the Company. More importantly as noted by our new operating segment this quarter, the launch of Tian Jie Online (a new mobile MMORPG) has performed up to our expectations as a new growth area for the Company. Also, KONG.net continues to build a loyal user base as leading free WAP site. Over the coming months we plan to share more of our new strategies with the market, while I continue to be impressed by the quality and passion of the KongZhong team to become the leading mobile Internet player in the China market.”

Business Highlights:

·
Tian Jie Online, a massively multiplayer online role-playing game (MMORPG), developed and operated by the Company, passed China Mobile's testing and was launched on China Mobile's Mobile Online Game Platform on September 10, 2008. On November 4, 2008, Tian Jie Online was named “Most Popular Mobile Online Game” at the 2008 China Joy Best Games Contest.
 
·
Traffic to Kong.net, the Company’s wireless Internet portal, reached its peak during the Beijing Olympics with 150 million daily page views and 2.4 million daily unique visitors.
 
·
Traffic to cn.NBA.com, the official NBA Chinese mobile site operated by the Company, bounced upwards strongly with the start of the new NBA regular season. Daily page views reached an all-time high of 40 million with 600,000 daily unique visitors.
 
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.)

 
  
For the
Three Months Ended
September 30, 2007
(US$ thousands)
 
For the
Three Months Ended
June 30, 2008
(US$ thousands)
 
For the
Three Months Ended
September 30, 2008
(US$ thousands)
  
Revenues
  
$
17,121
  
$
23,518
  
$
25,050
  
WVAS
    
15,972
    
21,675
   
22,070
 
Mobile Games
    
849
    
1,453
   
2,368
 
Wireless Internet Portal
    
300
    
390
   
612
 
                     
Cost of Revenue
   
8,180
    
12,812
   
13,395
 
WVAS
    
7,654
    
11,934
   
12,135
 
Mobile Games
    
352
    
600
   
955
 
Wireless Internet Portal
    
174
    
278
   
305
 
                     
Gross profit
  
$
8,941
  
$
10,706
  
$
11,655
  
WVAS
    
8,318
    
9,741
    
9,935
  
Mobile Games
    
497
    
853
    
1,413
  
Wireless Internet Portal
    
126
    
112
    
307
  
                     
Gross profit ratio
    
52
%
  
46
%
  
47
%
WVAS
    
52
%
  
45
%
  
45
%
Mobile Games
    
59
%
  
59
%
  
60
%
Wireless Internet Portal
    
42
%
  
29
%
  
50
%
 
 
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Revenues

WVAS revenues for the third quarter increased 38% from the third quarter of 2007 and increased 2% quarter-over-quarter to $22.07 million. Revenues from 2.5G services accounted for approximately 31% of the total WVAS revenues and revenues from 2G services represented the remaining 69%.

Mobile games revenues for the third quarter increased 179% from the third quarter of 2007 and increased 63% to $2.37 million. Revenues from mobile online games were $0.48 million, an increase of 61% quarter-over-quarter. Revenues from downloadable offline games and WAP games were $1.89 million, an increase of 63% quarter-over-quarter.

Mobile advertising revenues, which were mainly generated from the Company’s wireless Internet sites, increased 104% from the third quarter of 2007 and increased 57% to $0.61 million in the third quarter of 2008, as more advertisers and mobile phone users recognize wireless Internet as a new form of media.
 
Cost of Revenues 

The WVAS cost of revenues in the third quarter of 2008 totaled $12.14 million, an increase of 2% quarter-over-quarter. WVAS gross margin in the third quarter of 2008 was 45%, consistent with the 45% in the second quarter of 2008.

The mobile games cost of revenues in the third quarter of 2008 totaled $0.96 million, an increase of 59% quarter-over-quarter. Mobile games gross margin in the third quarter of 2008 was 60% consistent with the 59% in the second quarter of 2008.

The mobile advertising cost of revenues in the third quarter of 2008 totaled $0.31 million, an increase of 10% quarter-over-quarter. Mobile advertising gross margin in the third quarter of 2008 was 50% compared to the 29% in the second quarter of 2008 mainly because the percentage of fixed cost towards revenues decreased when revenues increased.

Operating Expenses
 
   
For the
Three Months Ended
September 30, 2007
(US$ thousands)
 
For the
Three Months Ended
June 30, 2008
(US$ thousands)
 
For the
Three Months Ended
September 30, 2008
(US$ thousands)
  
Product development
  
$
3,216
  
$
3,363
  
$
4,078
  
Sales and marketing
    
4,481
    
5,083
    
5,018
  
General and administrative
    
1,475
    
2,851
    
3,551
  
Goodwill impairment loss
    
-
    
-
    
21,624
  
Total Operating Expenses
  
$
9,172
  
$
11,297
  
$
34,271
  

Product development expenses in the third quarter of 2008 were $4.08 million, an increase of 21% quarter-over-quarter. The increase mainly resulted from the Company’s continuing efforts to develop mobile games and wireless Internet portal segments.

Sales and marketing expenses in the third quarter of 2008 were $5.02 million, a decrease of 1% quarter-over-quarter.
 
 
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General and administrative expenses in the third quarter of 2008 were $3.55 million, an increase of 25% quarter-over-quarter.

The Company’s total headcount increased from 855 as of June 30, 2008 to 868 as of September 30, 2008.

Earnings
 
US GAAP net loss was $21.57 million, which includes the $21.62 million provision for the impairment of goodwill.
Non-GAAP net income in the third quarter of 2008 was $0.81 million. Diluted Non-GAAP earnings per ADS were $0.02 for the third quarter.

Balance Sheet and Cash Flow
 
As of September 30, 2008, the Company had $134.89 million in cash and cash equivalents. Cash in-flows from operating activities totaled $9.74 million in the first nine months of 2008.

Business Outlook:
 
Based on information available on November 18, 2008, the Company expects total revenues for the fourth quarter of 2008 to be between $25.5 million and $26.5 million.

Conference Call:
 
The Company’s management team will conduct a conference call at 8:30 am Beijing time on November 18 (7:30 pm Eastern time and 4:30 pm Pacific time on November 17, 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
September 30, 2007
 
For the
Three Months Ended
June 30, 2008
 
For the
Three Months Ended
September 30, 2008
  
Revenues
  
$
17,121
  
$
23,518
  
$
25,050
  
Cost of revenues
    
8,180
    
12,812
    
13,395
  
Gross profit
    
8,941
    
10,706
    
11,655
  
Operating expenses
                    
Product development
    
3,216
    
3,363
    
4,078
  
Sales & marketing
    
4,481
    
5,083
    
5,018
  
General & administrative
    
1,475
    
2,851
    
3,551
  
Goodwill impairment loss
    
-
    
-
    
21,624
  
Total operating expenses
    
9,172
    
11,297
    
34,271
  
Operating loss
    
(231
)
  
(591
)
  
(22,616
)
Interest income
    
945
    
1,388
    
1,134
  
Income (loss) before tax expense
    
714
    
797
    
(21,482
)
Income tax expense
    
170
    
497
    
89
  
Net income
  
$
544
  
$
300
    
($21,571
)
                     
Basic earnings per ADS
  
$
0.02
  
$
0.01
    
($0.61
)
Diluted earnings per ADS
  
$
0.02
  
$
0.01
    
($0.61
)
ADS outstanding (million)
    
35.58
    
35.62
    
35.63
  
ADS used in diluted EPS calculation (million)
    
35.75
    
35.93
    
35.63
  
 
 
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 KongZhong Corporation
Condensed Consolidated Statements of Cash Flows
(US$ thousands)
(Unaudited)
 
   
For the
Nine Months Ended
September 30, 2007
 
For the
Nine Months Ended
September 30, 2008
  
Cash Flows From Operating Activities
              
Net Income (Loss)
  
$
2,146
    
($21,183
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
              
Share-based compensation
    
1,878
    
1,862
  
Depreciation and amortization
    
2,050
    
2,204
  
Disposal of property and equipment
    
8
    
-
  
Gain on sales of investment
    
(208
)
  
-
  
Goodwill impairment loss
    
-
    
21,624
  
Changes in operating assets and liabilities
    
(3,503
)
  
5,236
  
Net Cash Provided by Operating Activities
    
2,371
    
9,743
  
 
              
Cash Flows From Investing Activities
              
Proceeds from sales of investment
    
208
    
-
  
Purchase of property and equipment
    
(1,336
)
  
(1,277
)
Acquisition of subsidiaries
   
(17,000
)
  
-
  
Long-term investment
    
-
    
(2,964
)
Net Cash Used in Investing Activities
    
(18,128
)
  
(4,241
)
               
Cash Flows From Financing Activities
              
Proceeds from exercise of share options
    
144
    
-
  
Net Cash Provided by Financing Activities
    
144
    
-
  
               
Effect of foreign exchange rate changes
    
3,736
    
7,043
  
               
Net (decrease) increase in Cash and Cash Equivalents
    
($11,877
)
$
12,545
  
Cash and Cash Equivalents, Beginning of Period
  
$
131,402
  
$
122,343
  
Cash and Cash Equivalents, End of Period
  
$
119,525
  
$
134,888
  
 
 
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KongZhong Corporation
Condensed Consolidated Balance Sheets
(US$ thousands)
(Unaudited)

   
September 30, 2007
 
June 30, 08
 
September 30, 2008
  
Cash and cash equivalents
  
$
119,525
  
$
130,628
  
$
134,888
  
Accounts receivable (net)
    
13,764
    
18,368
    
16,457
  
Other current assets
    
3,680
    
3,535
    
2,742
  
Total current assets
    
136,969
    
152,531
    
154,087
  
                     
Rental deposits
    
434
    
522
    
525
  
Intangible assets (net)
    
1,438
    
982
    
831
  
Property and equipment (net)
    
3,279
    
3,760
    
3,286
  
Long-term investment
   
-
    
1,500
    
2,964
  
Goodwill
    
33,964
    
37,167
    
15,776
  
Total assets
  
$
176,084
  
$
196,462
  
$
177,469
  
                     
Accounts payable
  
$
5,604
  
$
8,543
  
$
10,529
  
Other current liabilities
    
5,054
    
6,689
    
5,806
  
Total current liabilities
    
10,658
    
15,232
    
16,335
  
                     
Non-current deferred tax liability
    
103
    
131
    
112
  
Total liabilities
  
$
10,761
  
$
15,363
  
$
16,447
  
                     
Shareholders’ equity
    
165,323
    
181,099
    
161,022
  
Total liabilities & shareholders’ equity
  
$
176,084
  
$
196,462
  
$
177,469
  

 
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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, 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, share-based compensation expense and goodwill impairment loss.

Reconciliation of the Company's Non-GAAP Financial Measures to the GAAP financial measures is set forth below.
 
   
For the
Three Months Ended
September 30, 2007
(US$ thousands)
 
For the
Three Months Ended
June 30, 2008
(US$ thousands)
 
For the
Three Months Ended
September 30, 2008
(US$ thousands)
  
GAAP Net Income (Loss)
  
$
544
  
$
300
    
($21,571
)
Share-based compensation
    
618
    
587
    
604
  
Amortization or write-off of intangibles
    
211
    
169
    
152
  
Goodwill impairment loss
    
-
    
-
    
21,624
  
Non-GAAP Net Income
  
$
1,373
  
$
1,056
  
$
809
  
                     
Non-GAAP diluted net income per ADS (Note 1)
  
$
0.04
  
$
0.03
  
$
0.02
  

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 mobile Internet company in China. The Company delivers wireless value-added services to consumers in China through multiple technology platforms including WAP, multimedia messaging service (MMS), short messaging service (SMS), interactive voice response (IVR), and color ring-back tone (CRBT). The Company 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. The Company also designs and operates mobile games, including mobile online games, downloadable offline games and WAP games.

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, as amended. Such forward-looking statements include, without limitation, statements regarding trends in the wireless value-added services, wireless media and mobile 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 and mobile games industries and the effect of such pressure on prices; unpredictable changes in technology, consumer demand and usage preferences in the market; the state of and any change in our relationship with China’s telecommunications operators, which may be affected by the on-going restructuring of the PRC telecommunications industry as announced by the Ministry of Information and Industry Technology in May 2008; 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 and mobile games segment; changes in the regulations or policies of the Ministry of Industry and Information Technology 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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