EX-99.1 2 v395252_ex1-1.htm EXHIBIT 1.1

Exhibit 1.1

 

KongZhong Corporation Reports Third Quarter 2014 Unaudited Financial Results

 

BEIJING, China - November 24, 2014 - KongZhong Corporation (NASDAQ: KZ), a leading online games publisher and developer in the PRC, today announced its unaudited financial results for the third quarter ended September 30, 2014.

 

Third Quarter 2014 Financial Highlights

 

l Total revenues were US$ 60.14 mn, an increase of 3.9% from the second quarter of 2014 and 36.4% from the same period last year.

 

l Total gross profit was US$ 23.83 mn, an increase of 24.8% from the same period last year.

 

l Net income was US$ 3.50 mn, including US$ 1.32 mn impairment on intangible assets and US$2.00 mn cost method impairment on long-term investments. Diluted net income per American Depositary Shares ("ADS") was US$ 0.08.

 

l Non-GAAP net income was US$ 7.79 mn. Non-GAAP diluted net income per ADS was US$ 0.17 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures”).

 

l As of September 30, 2014, the Company had US$ 232.75 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 5.11 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash.

 

l On October 17, 2014, the Company announced that its Board of Directors had declared a special one-time cash dividend of US$0.022 per ordinary share, or US$0.88 per ADS for record holders of the Company's ordinary shares and holders of the Company's ADS as of the close of business on October 27, 2014.

 

The Company's Chairman and Chief Executive Officer, Leilei Wang said, "Due to delays in the release of our new smartphone mobile games, we under performed our previously given guidance for US GAAP and Non-GAAP NPAT.  Nonetheless, the Company still returned to solid profitability in 3Q14 compared to 2Q14. This was driven by stable performance in our Internet Game business as we continued to release new updates for World of Tanks and Guild Wars 2 stabilized around a core loyal player base.  In mobile games, at the end of 3Q14 we released our self-developed mobile game, "Rush Three Kingdoms" which has become a consistent performing game in the China market and in November 2014, we released "My Cutest Princess" a licensed game from Japan.  We expect to release 1 to 2 high quality mobile games to the market per quarter for the foreseeable future."

 

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   Three Months Ended 
   September 30,   June 30,   September 30, 
   2013   2014   2014 
   US$ in thousands   US$ in thousands   US$ in thousands 
             
Revenues   44,084    57,870    60,139 
Internet Games   21,370    32,022    32,446 
Mobile Games   4,702    10,537    11,396 
WVAS   18,012    15,311    16,297 
                
Sales Tax   1,506    503    502 
Internet Games   1,191    277    300 
Mobile Games   37    33    111 
WVAS   278    193    91 
                
Cost of Revenue   23,483    32,871    35,809 
Internet Games   9,851    16,126    17,353 
Mobile Games   2,355    5,933    5,846 
WVAS   11,277    10,812    12,610 
                
Gross Profit   19,095    24,496    23,828 
Internet Games   10,328    15,619    14,793 
Mobile Games   2,310    4,571    5,439 
WVAS   6,457    4,306    3,596 
                
Gross Margin   43%   42%   40%
Internet Games   48%   49%   46%
Mobile Games   49%   43%   48%
WVAS   36%   28%   22%

 

Revenues

 

Total revenues for the third quarter of 2014 were US$ 60.14 mn, an increase of 3.9% from the second quarter of 2014 and 36.4% from the same period of last year.

 

Internet Games Revenues

 

Internet Game (“Net Game”) revenues were US$ 32.45 mn in the third quarter of 2014, an increase of 1.3% from the second quarter of 2014 and 51.8% from the same period of last year, as we saw stable financial performance from our key Internet Game titles, War Saga and Guild Wars 2 compared to the 2Q14 period.

 

For the third quarter of 2014, mainland China online game operations achieved average monthly active users (“MAUs”) of 2.2 mn and aggregated monthly paying accounts (“APAs”) of 343k with monthly average revenue per user (“ARPU”) of RMB 193.

 

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   Three Months Ended
   September 30,
2013		  June 30,
2014		  September 30,
2014
MAU  1,745k  2,616k  2,207k
APA  270k  427k  343k
ARPU  158  152  193

 

Internet game revenues made up 54.0% of total revenues in the third quarter of 2014.

 

Mobile Games Revenues

 

Total mobile game revenues were US$ 11.40 mn, an 8.2% increase from the second quarter of 2014, and a 142.4% increase from the same period of last year.

 

Total mobile game revenues made up 18.9% of total revenues in the third quarter of 2014.

 

WVAS Revenues

 

WVAS revenues were US$ 16.30 mn, a 6.4% increase from the second quarter of 2014, but a 9.5% decrease from the same period of last year.

 

WVAS made up 27.1% of total revenues in the third quarter of 2014.

 

Gross Profit

 

Total gross profit for the third quarter of 2014 was US$ 23.83 mn, a 2.7% decrease from the second quarter of 2014, but a 24.8% increase from the same period last year.

 

Total gross margin was 39.6% in the third quarter of 2014.

 

Internet Game Gross Profit

 

Internet game gross profit was US$ 14.79 mn, a 5.3% decrease from the second quarter of 2014. Internet game gross margin was 45.6% compared to 48.8% in the second quarter of 2014 due to higher costs associated with revenue share and license fees to our Internet game developer partners.

 

Mobile Game Gross Profit

 

Mobile games gross profit was US$ 5.44 mn, a 19.0% increase from the second quarter of 2014. Mobile games gross margin was 47.7% compared to 43.4% in the second quarter of 2014. The increase in mobile game gross margins reflects increased contribution from newly release smartphone games on the iOS platform.

 

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WVAS Gross Profit

 

WVAS gross profit was US$ 3.60 mn, a 16.5% decrease from the second quarter of 2014. WVAS gross margin was 22.1% compared to 28.1% in the second quarter of 2014.

 

Operating Expenses

 

Total operating expenses in the third quarter of 2014 were US$ 21.11 mn compared to US$ 25.98 mn in the second quarter of 2014. Third quarter operating expenses included US$ 1.32 mn impairment on intangible assets.

 

Product development expenses in the third quarter of 2014 were US$ 6.58 mn compared to US$ 6.51 mn in the second quarter of 2014.

 

Sales and marketing expenses in the third quarter of 2014 were US$ 10.70 mn compared to US$ 16.01 mn in the second quarter of 2014. Sales and marketing expenses receded from second quarter levels, when the Company launched one-time promotional activities associated with the commercial release of Guild Wars 2 and World of Warplanes.

 

General and administrative expenses in the third quarter of 2014 were US$ 2.50 mn compared to US$ 3.46 mn in the second quarter of 2014. The decrease in G&A was due to a decline in stock based compensation and office expenses in 3Q14.

 

The Company’s total headcount in the third quarter of 2014 was 1,151 staff compared to 1,201 staff at the end of the second quarter of 2014.

 

Earnings

 

US GAAP net income and diluted income per ADS were US$ 3.50 mn and US$ 0.08, respectively. Non-GAAP net income and earnings per ADS were US$ 7.79 mn and US$ 0.17, respectively.

 

Total ADS on a diluted basis outstanding during the third quarter of 2014 were 46.64 mn, compared to 47.31 mn outstanding during the second quarter of 2014.

 

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For the purpose of earnings
per share calculation		  Number during three
months ended
June 30, 2014		   Number during three
months ended
September 30, 2014		 
ADS (in mns)   45.52    45.56 
Add: Dilution impact from options and nonvested shares   0.56    0.46 
Warrants issued to business partners   1.23    0.62 
ADS on diluted basis   47.31    46.64 

 

Balance Sheet

 

As of September 30, 2014, the Company had US$ 232.75 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 5.11 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash.

 

Business Outlook (For the fourth quarter ending December 31, 2014)

 

The Company expects total revenues for the fourth quarter of 2014 to be within the range of US$ 59 mn to US$ 60 mn. The Company expects total gross profit to be within the range of US$ 24 mn to US$ 25

mn. We expect net income to be US$ 9 mn to US$ 10 mn and Non-GAAP net income is expected to be US$ 10 mn to US$ 11 mn.

 

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 Monday, November 24, 2014 (8:30 AM Beijing/Hong Kong time, Tuesday, November 25, 2014)

 

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

 

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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: +1 800 742 9301

- U.S. Dial-in Number: +1 845 507 1610

- Hong Kong Toll Free Dial-in Number: 800 906 648

- Hong Kong Dial-in Number: +852 3051 2792

- Mainland China Dial-in Number: 800 870 0210, 400 120 3170

- International Dial-in Number: +61 2 8373 3610

Passcode: 2777 2594

 

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 December 2, 2014:

- U.S. Toll Free Dial-in Number: +1 855 452 5696

- U.S. Dial-in Number: +1 646 254 3697

- Hong Kong Toll Free Dial-in Number: 800 963 117

- Hong Kong Dial-in Number: +852 3051 2780

- Mainland China Dial-in Number: 800 870 0205, 400 602 2065

- International Dial-in Number: +61 2 8199 0299

Passcode: 2777 2594

 

About KongZhong

 

KongZhong Corporation (NASDAQ: KZ), listed on Nasdaq in 2004, is a leading online game developer and operator in China. KongZhong operates three main business units, namely Internet Games, Mobile Games and WVAS. Under Internet Games, KongZhong operates the largest Chinese military gaming platform under the "WAR SAGA" brand, which includes games such as World of Tanks, World of Warplanes and World of Battleships. On May 15, 2014, KongZhong officially launched the most-anticipated 3D fantasy MMORPG Guild Wars 2 in China. KongZhong has the exclusive publishing rights for World of Tanks, World of Warplanes and World of Battleships, Guild Wars 2, Auto Club Revolution, Blitzkrieg 3 and other titles in Mainland China.

 

KongZhong entered the smartphone game industry in 2011 through an acquisition of smartphone game engine and has expanded its mobile game development team across 4 cities across Mainland China. KongZhong offers popular mobile games in China and overseas with over 10 smartphone games across various genres being under development, including RPG, RTS, military, fantasy and etc. For more information, please visit http://ir.kongzhong.com .

 

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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.

 

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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

Xingran Chen

Public Relations

Tel.: (+86-10) 8857.6000

E-mail:chenxingran@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 
   September 30,   June 30,   September 30, 
   2013   2014   2014 
   　         
Revenues   44,084    57,870    60,139 
Sales tax   1,506    503    502 
Net revenues   42,578    57,367    59,637 
                
Cost of revenues   23,483    32,871    35,809 
    　    　    　 
Gross profit   19,095    24,496    23,828 
                
Operating expenses               
Product development   6,991    6,510    6,580 
Sales and marketing   10,942    16,009    10,702 
General and administrative   2,029    3,463    2,502 
Impairment loss on intangible assets   1,562    -    1,323 
Total operating expenses   21,524    25,982    21,107 
                
Government subsidy   -    267    198 
                
(Loss) income from operations   (2,429)   (1,219)   2,919 
                
Interest income   1,685    1,751    2,835 
Impairment loss on cost method investment   2,000    -    2,000 
Imputed interest on long-term liabilities   150    150    150 
Exchange gain (loss)   210    (316)   8 
Investment income   26    -    - 
(Loss) income before tax expense   (2,658)   66    3,612 
Income tax expense   23    -    109 
Net (loss) income   (2,681)   66    3,503 
                
Earnings per ADS, basic   (0.06)   0.00    0.08 
Earnings per ADS, diluted   (0.06)   0.00    0.08 
Weighted average ADS outstanding (million)   43.50    45.52    45.56 
Weighted average ADS used in diluted EPS calculation (million)   43.50    47.31    46.64 
Net (loss) income   (2,681)   66    3,503 
Other comprehensive income   1,915    10,561    2,079 
Total comprehensive (loss) income   (766)   10,627    5,582 

 

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KongZhong Corporation

 Condensed Consolidated Balance Sheets

(Unaudited, US$ in thousands)

 

   As of
September 30,		   As of
June 30,		   As of
September 30,		 
   2013   2014   2014 
Assets               
Current assets               
Cash and cash equivalents   104,528    68,506    114,654 
Term deposits   3,873    5,021    2,781 
Available-for-sale securities   -    28,444    30,447 
Held-to-maturity securities   49,248    92,045    48,297 
Accounts receivable (net)   22,690    23,245    24,805 
Restricted cash   10,570    -    - 
Other current assets   6,993    8,093    10,195 
Total current assets   197,902    225,354    231,179 
                
Non-current assets               
Rental deposits   557    890    1,321 
Intangible assets (net)   78,545    74,223    60,507 
Property and equipment (net)   6,498    7,048    6,402 
Long-term investments   2,000    2,000    - 
Goodwill   89,568    89,497    89,524 
Restricted cash   36,588    36,560    36,571 
Total non-current assets   213,756    210,218    194,325 
Total assets   411,658    435,572    425,504 
    　         　 
Liabilities and Shareholders' Equity               
Current Liabilities               
Accounts payable
(including accounts payable of the consolidated variable interest entities ("VIE") without recourse to KongZhong Corporation of $43,198, $35,003 and $31,140 as of September 30, 2013, June 30, 2014 and September 30, 2014, respectively)		   43,307    35,016    31,581 
Deferred revenue
(including deferred revenue of the consolidated VIE without recourse to KongZhong Corporation of $3,212, $15,954 and $9,445 as of September 30, 2013, June 30, 2014 and September 30, 2014, respectively)		   3,245    15,984    9,475 
Other current liabilities
(including other current liabilities of the consolidated VIE without recourse to KongZhong Corporation of $13,478, $16,523 and $12,582 as of September 30, 2013, June 30, 2014 and September 30, 2014, respectively)		   25,790    22,427    18,494 
Total current liabilities   72,342    73,427    59,550 
                
Non-current Liabilities               
Other long-term liabilities
(including other long-term liabilities of the consolidated VIE without recourse to KongZhong Corporation of $19,110, $9,560 and $9,710 as of September 30, 2013, June 30, 2014 and September 30, 2014, respectively)		   19,110    9,560    9,710 
Total liabilities   91,452    82,987    69,260 
Shareholders’ equity   320,206    352,585    356,244 
Total liabilities and shareholders’ equity   411,658    435,572    425,504 

  

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KongZhong Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, US$ in thousands)         

 

   Nine Months Ended 
   September 30,   September 30, 
   2013   2014 
Cash Flows From Operating Activities          
Net income   10,635    13,519 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation and amortization   3,924    15,415 
Imputed interest on long-term liabilities   450    450 
Impairment loss on cost method investment   2,000    2,000 
Impairment loss on intangible assets   1,813    1,323 
Share-based compensation   1,283    1,318 
Changes in operating assets and liabilities   3,715    (4,050)
Net Cash Provided by Operating Activities   23,820    29,975 
           
Cash Flows From Investing Activities          
Purchase of intangible assets   (1,565)   (98)
Purchase of term deposits   (18,803)   (2,610)
Proceeds from disposal of term deposits   15,232    4,237 
Long-term investment   -    (16,380)
Purchase of held-to-maturity securities   (211,193)   (166,880)
Proceeds from disposal of held-to-maturity securities   180,124    170,075 
Purchase of property and equipment   (4,906)   (3,076)
Restricted cash   (10,351)   - 
Net Cash Used in Investing Activities   (51,462)   (14,732)
           
Cash Flows From Financing Activities          
Proceeds from exercise of employee stock options   815    434 
Deferred payments for acquisition of business   (3,000)   (2,881)
Deferred payments for intangible assets   (5,463)   (20,829)
Repurchase of ordinary shares   (10,124)   (12)
Proceeds from exercise of warrants   27,820    - 
Proceeds from bank borrowing   9,000    - 
Repayment of bank borrowing   (9,057)   - 
Net Cash Provided by (Used in) Financing Activities   9,991    (23,288)
           
Effect of foreign exchange rate changes   1,484    (729)
           
Net decrease in Cash and Cash Equivalents   (16,167)   (8,774)
Cash and Cash Equivalents, Beginning of Period   120,695    123,428 
Cash and Cash Equivalents, End of Period   104,528    114,654 

 

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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, impairment loss on cost method investment and intangible assets, 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.

 

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

              

   Three Months Ended 
   September 30,   June 30,   September 30, 
   2013   2014   2014 
GAAP net (loss) income   (2,681)   66    3,503 
Share-based compensation   284    768    217 
Impairment loss on cost method investment   2,000    -    2,000 
Impairment loss on intangible assets   1,562    -    1,323 
Imputed interest on long-term liabilities   150    150    150 
Amortization of intangibles   185    462    599 
Non-GAAP net income   1,500    1,446    7,792 
                
Weighted average ADS used in diluted EPS calculation (million)   43.50    47.31    46.64 
Non-GAAP diluted net income per ADS   0.03    0.03    0.17 

 

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