EX-1 2 v380185_ex1.htm EXHIBIT 1

 

KongZhong Corporation Reports First Quarter 2014 Unaudited Financial Results

 

BEIJING, China - May 28, 2014 - KongZhong Corporation (NASDAQ: KONG), a leading provider of digital entertainment services for consumers in the PRC, today announced its unaudited financial results for the first quarter ended March 31, 2014.

 

First Quarter 2014 Financial Highlights

l    Total revenues were US$ 49.61 mn, an increase of 13.2% from the fourth quarter of 2013 and 3.5% from the same period last year, exceeding the guidance range of US$ 45.5 mn to US$ 46.5 mn.

l    Gross profit was US$ 23.32 mn, an increase of 7.4% from the fourth quarter of 2013 and 25.4% from the same period last year, in line with the guidance range of US$ 22.5 mn to US$ 23.5 mn.

l    Net income was US$ 9.95 mn, a decrease of 0.8% from the fourth quarter of 2013, but an increase of 46.2% from the same period last year, in line with the guidance range of US$ 9.5 mn to US$ 10.5 mn. Diluted net income per American Depositary Shares ("ADS") was US$ 0.21.

l    Non-GAAP net income was US$ 10.61 mn, an increase of 19.3% from the same period last year, in line with the guidance range of US$ 10.5 mn to US$ 11.5 mn. Non-GAAP diluted net income per ADS was US$ 0.23 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures”).

l    As of March 31, 2014, the Company had US$ 201.89 mn in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash or US$ 4.45 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash. The decline in cash and cash equivalents from the end of the fourth quarter of 2013 reflects the cash outlay for our strategic investment of RMB 100.0 mn in Ourgame.

l    Change in Stock Ticker from "KONG" to "KZ" - KongZhong Corporation today also announced that the Company will change its NASDAQ ticker symbol to "KZ" from "KONG" to better align its company branding as a online games company. The new ticker KZ will be effective as the start of trading on Monday, June 16, 2014.

 

The Company's Chairman and Chief Executive Officer, Leilei Wang said, " Based on the recently released War Saga brand, with 40.0 mn World of Tank Chinese players, the upcoming open beta test for World of Warplanes, and next year's anticipated release of World of Warships and Blitzkrieg 3, we have created China's largest military genre online game platform. In addition, due to strong user acquisition, outstanding retention and attractive in-game economy metrics from our open beta test for Guild Wars 2 and World of Warplanes, with the strong support of our development partners, in 2Q14 we committed significant marketing resources to commercially release these games to the China market. We are confident that through the successful release of Guild Wars 2 and World of Warplanes in 2Q14, that KongZhong ("KZ") from both a user and revenue standpoint, will see strong future growth based on a newly diversified PC online game portfolio. At the same time, we continue to invest heavily into our self-developed mobile games with a goal to supplement this business through the licensing of overseas games and distribution of our games overseas. I believe KZ will continue to development positively in the future as a leading and differentiated online game company."

 

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   Three Months Ended 
   March 31,   December 31,   March 31, 
   2013   2013   2014 
   US$ in thousands   US$ in thousands   US$ in thousands 
             
Revenues   47,937    43,838    49,607 
    Internet Games   28,381    25,082    25,079 
    Mobile Games   3,706    4,924    8,112 
    WVAS   15,850    13,832    16,416 
                
Sales Tax   1,822    876    652 
    Internet Games   1,570    558    317 
    Mobile Games   41    42    42 
    WVAS   211    276    293 
                
Cost of Revenue   27,522    21,246    25,637 
    Internet Games   13,695    10,873    12,073 
    Mobile Games   1,803    1,436    4,050 
    WVAS   12,024    8,937    9,514 
                
Gross Profit   18,593    21,716    23,318 
    Internet Games   13,116    13,651    12,689 
    Mobile Games   1,862    3,446    4,020 
    WVAS   3,615    4,619    6,609 
                
Gross Margin   39%   50%   47%
    Internet Games   46%   54%   51%
    Mobile Games   50%   70%   50%
    WVAS   23%   33%   40%

 

Revenues

Total revenues for the first quarter of 2014 were US$ 49.61 mn, an increase of 13.2% from the fourth quarter of 2013 and 3.5% from the same period of last year.

 

Internet Games Revenues

Internet Game (“Net Game”) revenues were US$ 25.08 mn in the first quarter of 2014, flat compared to the fourth quarter of 2013.

 

Domestic Net Game revenues were US$ 24.78 mn, a 2.3% increase from the fourth quarter of 2013. Monthly active users (“MAU”s) from World of Tanks (“WoT”) has continued to see stable growth with the 3rd anniversary of the game in China being celebrated in the first quarter of 2014.

 

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For the first quarter of 2014, mainland China online game operations achieved average MAUs of 1.70 mn and aggregated monthly paying accounts (“APAs”) of 280k with monthly average revenue per user (“ARPU”) of RMB 181.

 

    Three Months Ended  
    March 31,
2013		     December 31,
2013		       March 31,
2014		  
MAU     1,790 k     1,641 k     1,696 k
APA     330 k     271 k     280 k
ARPU     176       183       181  

 

Internet game revenues made up 50.6% of total revenues in the first quarter of 2014.

 

Mobile Games Revenues

Total mobile game revenues were US$ 8.11 mn, a 64.7% increase from the fourth quarter of 2013, and a 118.9% increase from the same period of last year. The increase in mobile games revenues was mainly due to increased revenues from Kooky Three Kingdoms and Three Kingdom Generals in the first quarter of 2014.

 

Total mobile game revenues made up 16.4% of total revenues in the first quarter of 2014.

 

WVAS Revenues

WVAS revenues were US$ 16.42 mn, an 18.7% increase from the fourth quarter of 2013, and a 3.6% increase from the same period of last year. We expect the WVAS operating environment in the second quarter of 2014 to see an increase in mobile operator policies which could lead to a decrease in WVAS revenues.

 

WVAS made up 33.0% of total revenues in the first quarter of 2014.

 

Gross Profit

Total gross profit for the first quarter of 2014 was US$ 23.32 mn, a 7.4% increase from the fourth quarter of 2013 and a 25.4% increase from the same period last year.

 

Total gross margin was 47.0% in the first quarter of 2014.

 

Internet Game Gross Profit

Internet game gross profit was US$ 12.69 mn, a 7.0% decrease from the fourth quarter of 2013. Internet game gross margin was 50.6% compared to 54.4% in the fourth quarter of 2013. The slight decline in internet game gross margins was due to the lower contribution from overseas license fees of our self-developed Internet games.

 

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Mobile Game Gross Profit

Mobile games gross profit was US$ 4.02 mn, a 16.7% increase from the fourth quarter of 2013. Mobile games gross margin was 49.6% compared to 70.0% in the fourth quarter of 2013.

The decline in mobile games gross margins was due to increased contribution from feature phone revenues which have lower margins than our smartphone games revenues.

 

WVAS Gross Profit

WVAS gross profit was US$ 6.61 mn, a 43.1 % increase from the fourth quarter of 2013. WVAS gross margin was 40.3% compared to 33.4% in the fourth quarter of 2013. We expect the WVAS operating environment in the second quarter of 2014 to see an increase in mobile operator policies which could lead to a decrease in WVAS revenues and gross margins.

 

Operating Expenses

Total operating expenses in the first quarter of 2014 were US$ 15.04 mn compared to US$ 15.70 mn in the fourth quarter of 2013.

 

Product development expenses in the first quarter of 2014 were US$ 5.93 mn compared to US$ 6.82 mn in the fourth quarter of 2013. The reduction in product development expenses were due to optimizations undertaken in product development team costs.

 

Sales and marketing expenses in the first quarter of 2014 were US$ 6.74 mn compared to US$ 6.52 mn in the fourth quarter of 2013.

 

General and administrative expenses in the first quarter of 2014 were US$ 2.36 mn compared to US$ 2.36 mn in the fourth quarter of 2013.

 

The Company’s total headcount remained stable in the first quarter of 2014 to 1,116 compared to 1,153 at the end of 2013.

 

Earnings

Net income and Non-GAAP net income were US$ 9.95 mn and US$ 10.61 mn, respectively. Diluted income per ADS and diluted Non-GAAP earnings per ADS were US$ 0.21 and US$ 0.23 in the first quarter of 2014, respectively.

 

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Total ADS on a diluted basis outstanding during the first quarter of 2014 were 47.03 mn, compared to 46.85 mn outstanding during the fourth quarter of 2013.

 

For the purpose of earnings per share calculation  Number during three months ended
December 31, 2013		   Number during three months ended
March 31, 2014		 
ADS (in mns)   45.32    45.39 
Add: Dilution impact from options and nonvested shares   0.58    0.54 
Warrants issued to business partners   0.95    1.10 
ADS on diluted basis   46.85    47.03 

 

Balance Sheet

As of March 31, 2014, the Company had US$ 201.89 mn in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash or US$ 4.45 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash. The decline in cash and cash equivalents from the end of the fourth quarter of 2013 reflects the cash outlay for our strategic investment of RMB 100.0 mn in Ourgame.

 

Change in Stock Ticker

Change in Stock Ticker from "KONG" to "KZ" - KongZhong Corporation today also announced that the Company will change its NASDAQ ticker symbol to "KZ" from "KONG" to better align it's Company branding as a online games Company. The new ticker KZ will be effective as the start of trading on Monday, June 16, 2014.

 

Business Outlook (For the second quarter ending June 30, 2014)

The Company expects total revenues for the second quarter of 2014 to be within the range of US$ 57.5 mn to US$ 58.5 mn, with business unit revenues at the mid-point expected to roughly consist of Net Game revenues of US$ 33.5 mn, mobile game revenues of US$ 10.5 mn and WVAS revenues of US$ 14 mn.

 

Guild Wars 2 CD-Keys purchased and activated during the pre-order sales period will be amortized over a period of six months beginning from May 1st which was the headstart period for Guild Wars 2 in China. Future post open beta CD-Key revenues will be amortized from the date of activation.

 

The Company expects total gross profit to be within the range of US$ 24 mn to US$ 25 mn. We expect net loss to be US$ 0.5 mn to US$1.5 mn and Non-GAAP net profit is expected to be roughly break even.

 

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Our 2Q14 guidance reflects roughly US$ 10.0 mn in incremental sales and marketing related expenses compared to 1Q14, for expenses related to the May 15th open beta launch of Guild Wars 2, the open beta launch of World of War Planes on May 29th and other the marketing activities related to the release of the War Saga brand.  As such, we expect total operating expenses in 2Q14 to be between US$ 27-28 mn.   However, we expect sales and marketing expenses to revert to roughly pre-2Q14 levels as a percentage of sales in subsequent financial periods for Internet games.

 

Conference Call

 

Kongzhong’s management will hold a conference call and webcast to discuss the results at 7:30 PM Eastern Standard Time (EST) on Wednesday, May 28, 2014 (7:30 AM Beijing/Hong Kong time, Thursday, May 29, 2014)

 

The conference call will be available live via webcast on the Investors section of KongZhong’s website at http://ir.kongzhong.com. The archive replay will be available on the website shortly after the call.

 

The company welcomes all interested parties to participate in the live conference call. The dial-in details are as below:

 

- U.S. Toll Free Dial-in Number: +1 866 519 4004

- Hong Kong Toll Free Dial-in Number: 800 930 346

- Mainland China Dial-in Number: 800 819 0121, 400 620 8038

- International Dial-in Number: +65 6723 9381

Passcode: 35403631

 

The live conference call via webcast and archive replay will be available on the Investor Relations section of Kongzhong's website at http://ir.kongzhong.com.

 

A dial-in replay of the conference call will be available until June 4, 2014:
- U.S. Toll Free Dial-in Number: +1 855 452 5696
- International Dial-in Number: +61 2 8199 0299
Passcode: 35403631

 

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About KongZhong

 

KongZhong (KONG), listed in Nasdaq in 2004, is one of the leading providers of digital entertainment services for consumers in the PRC. We operate three main business units, namely WVAS, mobile games and Internet games. Within Internet games, KONG has the exclusive publishing rights for World of Tanks, World of Warplanes, World of Warships, Guild Wars 2 and other titles in mainland China. Since the acquisition of our proprietary smartphone game engine platform in 2011, KONG has expanded our smartphone game development team across 4 cities in China currently developing over 10 smartphone games across various genres, including MMORPG, RTS, military, and fantasy. For more information, please visit http://ir.kongzhong.com.

 

Safe Harbor Statements

 

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, mobile games and online 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, mobile games and online games industries and the effect of such pressure on revenues; our ability to develop new products that are commercially successful; unpredictable changes in technology, consumer demand and usage preferences in the markets we operate; our ability to protect our intellectual property rights; the short operating history of certain of our business segments, in particular the online games segment; 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, mobile games and online games segments; changes in the regulations or policies of the Ministry of Industry and Information Technology and other government authorities relevant to our businesses; 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 and online games markets. 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

Jay Chang

Chief Financial Officer

 

Liddy Li

Investor Relations

Tel.: (+86-10) 8857.6000

E-mail: ir@kongzhong.com

 

Media Contact

Yuan Liu

Manager

Tel: (+86-10) 8857.6000

E-mail: liuyuan@kongzhong.com

 

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KongZhong Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, US$ in thousands, except per share and share data)

 

   Three Months Ended 
   March 31,   December 31,   March 31, 
   2013   2013   2014 
             
Revenues   47,937    43,838    49,607 
Sales tax   1,822    876    652 
Net revenues   46,115    42,962    48,955 
                
Cost of revenues   27,522    21,246    25,637 
                
Gross profit   18,593    21,716    23,318 
                
Operating expenses               
    Product development   6,136    6,819    5,934 
    Sales and marketing   4,568    6,520    6,737 
    General and administrative   2,426    2,356    2,364 
Total operating expenses   13,130    15,695    15,035 
                
Government subsidy   153    1,371    194 
                
Income from operations   5,616    7,392    8,477 
                
Interest income   1,452    2,170    2,269 
Interest expense   57    -    - 
Imputed interest on long-term liabilities   150    150    150 
Exchange gain (loss)   158    898    (348)
Income before tax expense   7,019    10,310    10,248 
Income tax expense   214    284    298 
Net income   6,805    10,026    9,950 
                
Earnings per ADS, basic   0.17    0.22    0.22 
Earnings per ADS, diluted   0.16    0.21    0.21 
                
Weighted average ADS outstanding (million)   40.74    45.32    45.39 
Weighted average ADS used in diluted EPS calculation (million)   41.85    46.85    47.03 
                
Net income   6,805    10,026    9,950 
Other comprehensive income (loss)   903    2,043    (2,799)
Total comprehensive income   7,708    12,069    7,151 

 

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KongZhong Corporation

Condensed Consolidated Balance Sheets

(Unaudited, US$ in thousands)

 

    As of December 31,      As of March 31,  
    2013      2014  
Assets                
Current assets                
    Cash and cash equivalents     123,428       118,303  
    Term deposits     4,449       4,716  
    Held-to-maturity securities     51,866       42,283  
    Accounts receivable (net)     17,231       19,526  
    Other current assets     7,762       8,936  
Total current assets     204,736       193,764  
                 
Non-current assets                
    Rental deposits     796       629  
    Intangible assets (net)     78,727       78,127  
    Property and equipment (net)     5,843       7,076  
    Long-term investments     2,000       18,380  
    Goodwill     90,267       89,575  
    Restricted cash     36,871       36,591  
Total non-current assets     214,504       230,378  
Total assets     419,240       424,142  
                 
Liabilities and Shareholders' Equity                
Current Liabilities                
    Accounts payable
(including accounts payable of the consolidated variable interest entities ("VIE")  without recourse to KongZhong Corporation of $39,488 and $39,438 as of December 31, 2013 and March 31, 2014, respectively) 		     39,514       39,460  
    Deferred revenue
(including deferred revenue of the consolidated VIE without recourse to KongZhong Corporation of $2,262 and $2,958 as of December 31, 2013 and March 31, 2014, respectively)		     2,262       2,987  
    Other current liabilities
(including other current liabilities of the consolidated VIE without recourse to KongZhong Corporation of $15,760 and $11,062 as of December 31, 2013 and March 31, 2014, respectively)		     25,595       21,095  
Total current liabilities     67,371       63,542  
                 
Non-current Liabilities                
                 
    Other long-term liabilities
(including other long-term liabilities of the  consolidated VIE without recourse to KongZhong Corporation of $19,260 and $19,410 as of December 31, 2013 and March 31, 2014,  respectively)		     19,260       19,410  
                 
Total liabilities     86,631       82,952  
                 
Shareholders’ equity     332,609       341,190  
Total liabilities and shareholders’ equity     419,240       424,142  

 

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KongZhong Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, US$ in thousands)

 

   Three Months Ended 
   March 31,   March 31, 
   2013   2014 
Cash Flows From Operating Activities          
    Net income   6,805    9,950 
    Adjustments to reconcile net income to net cash provided by operating activities          
    Depreciation and amortization   1,825    1,091 
    Imputed interest on long-term liabilities   150    150 
    Share-based compensation   556    333 
    Changes in operating assets and liabilities   6,294    (6,728)
Net Cash Provided by Operating Activities   15,630    4,796 
           
Cash Flows From Investing Activities          
    Purchase of intangible assets   -    (98)
    Long-term investment   -    (16,380)
    Purchase of term deposits   (16,413)   (1,569)
    Proceeds from disposal of term deposits        1,267 
    Purchase of held-to-maturity securities   (13,202)   (42,507)
    Proceeds from disposal of held-to-maturity securities   16,323    51,746 
    Purchase of property and equipment   (935)   (2,075)
    Restricted cash   (10,351)   - 
Net Cash (Used in) Provided by Investing Activities   (24,578)   (9,616)
           
Cash Flows From Financing Activities          
    Proceeds from exercise of employee stock options   55    429 
    Deferred payments for acquisition of business   (3,000)   - 
    Deferred payments for intangible assets   (500)   (372)
    Repurchase of ordinary shares   (9,341)   (12)
    Proceeds from bank borrowing   9,000    - 
Net Cash (Used in) Provided by Financing Activities   (3,786)   45 
           
Effect of foreign exchange rate changes   171    (350)
           
Net (decrease) increase in Cash and Cash Equivalents   (12,563)   (5,125)
Cash and Cash Equivalents, Beginning of Period   120,695    123,428 
Cash and Cash Equivalents, End of Period   108,132    118,303 

 

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Non-GAAP Financial Measures

 

To supplement the unaudited condensed statements of comprehensive 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, the Company’s 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 of intangibles, share-based compensation expense, imputed interest on long-term liabilities, as well as is adjusted for the dilution impact on ADS numbers from stock options, non-vested shares and warrants.

Reconciliation of the Company’s Non-GAAP financial measures to the GAAP financial measures is set forth below.

 

    Three Months Ended  
  March 31,     December 31,       March 31,  
    2013     2013     2014  
GAAP net income     6,805       10,026       9,950  
Share-based compensation     556       290       333  
Imputed interest on long-term liabilities     150       150       150  
Amortization of intangibles     1,386       187       180  
Non-GAAP net income     8,897       10,653       10,613  
                         
Weighted average ADS used in diluted     41.85       46.85       47.03  
Non-GAAP diluted net income per ADS     0.21       0.23       0.23  

 

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