EX-1.1 2 h00710exv1w1.txt EX-1.1 PRESS RELEASE DATED AUGUST 14,2006 KONGZHONG CORPORATION REPORTS SECOND QUARTER 2006 UNAUDITED FINANCIAL RESULTS -- REVENUE UP 64% AND NET INCOME UP 15% YEAR-OVER-YEAR Beijing, China, August 14, 2006 -- KongZhong Corporation (NASDAQ: KONG), a leading provider of wireless value-added services and the operator of a leading wireless Internet portal in China, today announced its unaudited second quarter 2006 financial results. SECOND QUARTER 2006 FINANCIAL HIGHLIGHTS: o Total revenues in the second quarter of 2006 grew 64% year-over-year and 8% sequentially to a new record of $30.07 million, meeting the Company's second quarter revenue guidance of $29.5 to $30.5 million. Since inception, the Company has grown its revenues every quarter for 16 consecutive quarters. o Revenues from the customers of China Unicom, China Telecom, and China Netcom accounted for approximately 23% of the total second quarter revenues, compared to 9% in the first quarter of 2006. o US GAAP net income grew 15% year-over-year and decreased 12% sequentially to $7.60 million. Diluted earnings per ADS in the second quarter were $0.21, meeting the Company's second quarter guidance of $0.21 to $0.22. o Non-GAAP income in the second quarter of 2006 grew 24% from same period last year and 5% from the first quarter of 2006 to reach a new record of $8.24 million. Non-GAAP diluted earnings per ADS were $0.23, meeting the Company's second quarter guidance of $0.23 to $0.24. 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, Yunfan Zhou, Chairman and Chief Executive Officer, said, "We are very pleased that both our revenue and operating profit reached new records in the second quarter. We believe we have maintained our No. 2 position in terms of revenue in the Chinese WVAS industry. As previously announced, we anticipate challenges in the remainder of 2006 due to policy changes implemented by the telecommunication operators in China. In response to those changes, we recently completed a headcount reduction program to lay off approximately 15% of the workforce. We will continue to reduce cost and improve efficiency with the goal of maintaining profitability. Given our strong experience and execution capability, we are confident that we can get through this difficult time and continue to deliver returns for our shareholders." FINANCIAL RESULTS: (Note: Unless otherwise stated, all financial statement amounts used in this press release are based on US GAAP and denominated in US dollars.) 4 Revenues Total revenue for the quarter increased 8% from the first quarter of 2006 and 64% from the same quarter of 2005 to reach a new record of $30.07 million. Revenue from 2.5G WVAS accounted for approximately 46% of total revenues and revenue from 2G services represented the remaining 54%. Revenue from 2.5G services, which include services delivered using wireless application protocol (WAP), multimedia messaging service (MMS), and Java technologies, grew 2% from the same period in 2005 and decreased 23% from the first quarter of 2006 to $13.77 million. WAP revenue in the second quarter of 2006 was $6.67 million, a decrease of 32% from the same quarter of 2005 and a decrease of 25% from the first quarter of 2006. The Company continues to face pressure from China Mobile's policy changes and intensifying competition in WAP. MMS revenue in the second quarter of 2006 was $6.51 million, an increase of 97% from the same period of 2005, and a decrease of 18% from the first quarter of 2006. As discussed previously, MMS revenue in the first quarter of 2006 was seasonally strong. Java revenue in the second quarter was $0.59 million, a 29% increase from the second quarter of 2005 but a 48% decrease sequentially. Revenue from 2G services, including short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT), grew 238% year-over-year and 63% quarter-over-quarter to $16.26 million in the second quarter of 2006. Growth in 2G revenue was driven by the acquisition of Sharp Edge completed in the first quarter and was also a result of the Company's diversified growth strategy. SMS revenue in the second quarter of 2006 was $12.61 million, which was 300% higher than the same period of 2005 and 55% higher than the previous quarter. IVR revenue in the second quarter of 2006 was $2.18 million, a 60% increase year-over-year and 85% sequentially. CRBT revenue grew by 395% year-over-year, and 121% sequentially to $1.46 million in the second quarter of 2006. The table below sets forth the revenue breakdown by technology platforms. 5 2Q05 3Q05 Q405 Q106 2Q06 ------------------------------------------------------------------------------------------------------ 2.5G: 74% 71% 67% 64% 46% ------------------------------------------------------------------------------------------------------ WAP 53% 47% 40% 32% 22% ------------------------------------------------------------------------------------------------------ MMS 18% 19% 22% 28% 22% ------------------------------------------------------------------------------------------------------ Java 3% 5% 5% 4% 2% ------------------------------------------------------------------------------------------------------ 2G: 26% 29% 33% 36% 54% ------------------------------------------------------------------------------------------------------ SMS 17% 20% 25% 29% 42% ------------------------------------------------------------------------------------------------------ IVR 7% 7% 6% 4% 7% ------------------------------------------------------------------------------------------------------ CRBT and others 2% 2% 2% 3% 5% ------------------------------------------------------------------------------------------------------ Total 100% 100% 100% 100% 100% ------------------------------------------------------------------------------------------------------
The Company continues to make progress in diversifying operator relationships. Total revenues from the customers of China Unicom, China Telecom, and China Netcom accounted for approximately 23% of the total second quarter revenues, compared to 9% in the first quarter of 2006. Expenses The cost of revenue in the second quarter of 2006 totaled $12.94 million, an increase of 92% from the second quarter of 2005 and 10% from the first quarter of 2006, and represented 43% of total revenues. The gross margin in the second quarter of 2006 was 57% compared to 58% in the previous quarter. The lower gross margin is primarily due to higher proportion of revenue from 2G services, which generally have lower gross margin than 2.5G services. 6 Total operating expenses in the second quarter of 2006 were $10.10 million, an increase of 82% year-over-year and 9% quarter-over-quarter. Product development expense decreased by 8% quarter-over-quarter and represented 10% of revenue. General and administrative expenses decreased by 8% from the first quarter of 2006 and represented 8% of revenue. Sales and marketing expense increased by 40% quarter-over-quarter and represented 16% of revenue. The increase in sales and marketing expenses is primarily due to a nationwide marketing campaign to promote the wireless internet portal, Kong.net, and KongZhong corporate brand. The marketing campaign was launched in late May 2006 and the first phase is expected to be completed by the end of August. Higher sales and market expenses was also due to sales and promotional expenses related to our WAP service. Total cost associated with the Company's wireless internet portal business in the first quarter 2006 was close to $3 million, including $1.5 million in marketing expense. The Company recorded $0.47 million in non-cash share-based compensation expense in the second quarter, compared to $0.35 million in the first quarter of 2006. The Company's headcount increased by approximately 6% from 963 at the end of the first quarter of 2006 to 1,016 as of June 30, 2006. On July 31, 2006, the Company announced a headcount reduction program to lay off approximately 15% of the workforce, which has been completed. Earnings US GAAP net income totaled $7.60 million in the second quarter of 2006, an increase of 15% from the same period of last year and a decrease of 12% from the first quarter of 2006. The Company recorded a one-time gain on investment of $1.2 million in the first quarter of 2006. Diluted US GAAP earnings per ADS were $0.21 for the second quarter. Non-GAAP income in the second quarter of 2006 was $8.24 million, a 24% increase from the same period in 2005 and a 5% increase from the previous quarter. Diluted Non-GAAP income per ADS was $0.23, up from $0.22 in the first quarter of 2006 and $0.19 in the second quarter of 2005, respectively. Balance Sheet and Cash Flow As of June 30, 2006, the Company had $122.29 million in cash and cash equivalents. Cash flow from operating activities totaled $4.63 million in the second quarter of 2006. BUSINESS OUTLOOK: Based on information available on August 14, 2006, the Company expects total revenues for the third quarter of 2006 to be between $23 and $24 million. Absent any significant changes in the policies and regulations of the telecommunication operators and the Ministry of Information 7 Industry in China, the Company expects its fiscal year 2006 revenue to be between $97and 105million. CONFERENCE CALL: The Company's management team will conduct a conference call at 8:30 am Beijing time on August 15, (8:30 pm Eastern time and 5:30 pm Pacific time on August 14, 2006). A webcast of this conference call will be accessible on the Company's web site at http://ir.kongzhong.com. 8 KONGZHONG CORPORATION Condensed Consolidated Statements of Income (US$ thousands, except percentages, per share data, and share count) (Unaudited)
FOR THE THREE FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED MONTHS ENDED JUN. 30, 2005 MAR. 31, 2006 JUN. 30, 2006 (NOTE 1) (NOTE 2) -------------------- ------------------ ------------------ Revenues $18,357 $27,907 $30,068 Cost of revenues 6,734 11,749 12,943 Gross profit 11,623 16,158 17,125 Operating expense Product development 2,110 3,241 2,970 Sales & marketing 1,196 3,361 4,712 General & administrative 2,250 2,630 2,417 Subtotal 5,556 9,232 10,099 Operating income 6,067 6,926 7,026 Non-operating expense (income) Interest expense (income) (601) (885) (915) Investment loss (income) - (1,241) - Other expense (income) - 26 87 Subtotal (601) (2,100) (828) Income before tax expense 6,668 9,026 7,854 Income tax expense 67 417 255 Net income 6,601 8,609 7,599 Basic earnings per ADS $0.19 $0.25 $0.22 Diluted earnings per ADS $0.19 $0.24 $0.21 MARGIN ANALYSIS: Gross margin 63% 58% 57% Operating margin 33% 25% 23% Net margin 36% 31% 25% ADDITIONAL DATA: 2.5G revenue $13,519 $17,880 $13,773 2G revenue 4,816 9,999 16,256 ADS outstanding (million) 34.36 34.65 34.89 ADS used in diluted EPS calculation (million) 35.49 35.63 35.67
NOTE 1: THE CONVERSION OF RENMINBI (RMB) INTO US DOLLAR (USD) FOR THE FIRST QUARTER OF 2006 IS BASED ON THE WEIGHTED AVERAGE RATE OF USD 1.00=RMB 8.0511 (THE EXCHANGE RATE QUOTED BY THE PEOPLE'S BANK OF CHINA). 9 Note 2: The conversion of Renminbi (RMB) into US dollar (USD) for the second quarter of 2006 is based on the weighted average rate of USD 1.00=RMB 8.0130 (The exchange rate quoted by the People's Bank of China). 10 KongZhong Corporation CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (US$ THOUSANDS) (UNAUDITED)
FOR THE 6 MONTHS ENDED FOR THE 6 MONTHS ENDED JUN. 30 2005 JUN. 30, 2006 (NOTE 1) ---------------------- ----------------------- Cash Flows From Operating Activities Net Income $12,485 $16,208 Adjustments Share-based compensation expenses 191 817 Depreciation and amortization 739 1,542 Loss on disposal of property and equipment 3 - Gain on sales of investment - (1,241) Changes in operating assets and liabilities (532) (8,517) Net Cash Provided by Operating Activities 12,886 8,809 Cash Flows From Investing Activities Proceeds from sales of investment - 1,741 Purchase of property and equipment (899) (1,262) Acquisition of long-term investments (500) - Acquisition of subsidiaries (819) (6,139) Net Cash Used in Investing Activities (2,218) (5,660) Cash Flows From Financing Activities Exercise of employee share options 45 1,519 Decrease in minority interest (96) - Net Cash (Used in ) Provided by Financing Activities (51) 1,519 Foreign Currency Translation Adjustments (2) 475 Net increase in Cash and Cash Equivalents 10,615 5,143 Cash and Cash Equivalents, Beginning of Year 90,714 117,142 Cash and Cash Equivalents, End of Year 101,329 122,285
Note 1: The conversion of Renminbi (RMB) into US dollar (USD) for the first six months of 2006 is based on the weighted average rate of USD 1.00=RMB 8.0321 (The exchange rate quoted by the People's Bank of China). 11 KongZhong Corporation Condensed Consolidated Balance Sheets (US$ thousands) (Unaudited)
JUN. 30, 2005 MAR. 31, 2006 JUN. 30, 2006 (Note 1) (Note 2) (Note 3) ---------------- ---------------- ---------------- Cash and cash equivalents $101,329 $117,036 $122,285 Accounts receivable (net) 12,777 15,106 18,900 Other current assets 711 6,215 2,424 Total current assets 114,817 138,357 143,609 RENTAL DEPOSITS 376 482 556 INTANGIBLE ASSETS 295 2,394 2,226 PROPERTY AND EQUIPMENT (NET) 2,674 3,031 3,080 Long-term investment 500 - - Goodwill 646 4,434 4,434 Total assets $119,308 $148,698 $153,905 Accounts payable $ 3,445 $5,189 $5,009 Other current liabilities 3,275 9,960 5,849 Amount due to related party 36 - - Total current liabilities 6,756 15,149 10,858 Minority interest 24 24 24 Total liabilities 6,780 15,173 10,882 Shareholders' equity 112,528 133,525 143,023 Total liabilities & shareholders' equity $119,308 $148,698 $153,905
NOTE 1: THE CONVERSION OF RENMINBI (RMB) INTO US DOLLAR (USD) IS BASED ON THE EXCHANGE RATE OF JUNE 30, 2005 USD1.00=RMB 8.2765. (THE EXCHANGE RATE QUOTED BY THE PEOPLE'S BANK OF CHINA). NOTE 2: THE CONVERSION OF RENMINBI (RMB) INTO US DOLLAR (USD) IS BASED ON THE EXCHANGE RATE OF MARCH 31, 2006 USD1.00=RMB 8.0170. (THE EXCHANGE RATE QUOTED BY THE PEOPLE'S BANK OF CHINA). NOTE 3: THE CONVERSION OF RENMINBI (RMB) INTO US DOLLAR (USD) IS BASED ON THE EXCHANGE RATE OF JUNE 30, 2006 USD1.00=RMB 7.9956. (THE EXCHANGE RATE QUOTED BY THE PEOPLE'S BANK OF CHINA). 12 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 FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED MONTHS ENDED JUN. 30, 2005 MAR. 31, 2006 JUN. 30, 2006 ------------- ------------- ------------- GAAP Net Income $6,601 $8,609 $7,599 Gain on sale of investment - (1,241) - Non-cashshare-based compensation 56 348 469 Amortization or write-off of intangibles 10 159 167 Non-GAAP Net Income $6,667 $7,875 $8,235 Non-GAAP diluted net income per ADS 0.19 0.22 0.23
ABOUT KONGZHONG: KongZhong Corporation is a leading provider of wireless value-added services and also operates one of the leading wireless Internet portals 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), JAVA, short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT). The Company also operates a wireless internet portal, Kong.net, which enables users to access media and entertainment 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 market 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 market 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 13 telecommunications operators; our dependence on the billing systems of telecommunication operators for our performance; 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: JP Gan 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 14