KongZhong Corporation (KONG)

Q3 2011 Earnings Call

November 29, 2011 7:30 p.m. EST


Jay Chang – Chairman and CEO

Leilei Wang – CFO


Ming Zhao – SIG

Steve Chen – ROTH Capital Partners

Michael Lee – Royal Capital Management


Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2011 KongZhong Corp’s Earnings Conference Call.

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At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to queue for a question, you will need to press star followed by 1 on your telephone keypad. I must advise that this conference is being recorded today, Wednesday, the 30th of November, 2011.

I would now like to hand the conference over to your host today, CFO, Mr. Jay Chang. Thank you. Please go ahead.

Jay Chang

Thank you, operator.

This conference call may contain forward-looking statements. 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 upon that. For additional discussions of risks and uncertainties related to the forward-looking statements 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 as of the date of this call.

Thank you for your continued interest in KongZhong. I will first go over a review of our third quarter results before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the third quarter of 2011 was $38.9 million, a 6% sequential decrease but a 3% increase from the same period last year. As we continue to transition our business to become a cross-platform visual entertainment company, Mobile Games made up 26% of total revenue and Internet Games contributed another 23%.

Total gross profit was $14 million compared with $17 million in the second quarter, while gross margin declined at 36% compared to 41% in 2Q, as gross profits from WVAS continued to underperform due to the ongoing challenges in the WVAS market, offset by the continued strong performance of World of Tanks. If excluding a non-cash position for impairment of goodwill and intangible assets of $20.26 million, total OpEx would have been $12 million, roughly stable from the second quarter of 2011.

Net loss in 3Q was $17.26 million compared to net profit of $4.4 million in the second quarter, with the basic net loss per ADS of $0.42 based on 41.2 million ADS. Excluding the goodwill impairments, net profit would have been $3 million. Non-GAAP net income was $4.7 million, in line with the company’s guidance range of $4 million to $5 million, while non-GAAP diluted net income per ADS was $0.11.

At the end of 3Q, the company had $143.1 million in cash and cash equivalents or $3.5 per ADS in cash and cash equivalents, compared to $134.2 million at the end of the second quarter of 2011. However, cash and cash equivalents exclude the $22 million loan to a third party. If including the value of [this renminbi/dollar] loan, which was made solely for the purposes of treasury management, total cash and third-party loans amounted to $165.1 million at the end of the third quarter, or equivalent to $4 per ADS.

Now I would like to turn to each business unit’s financial performance, namely, Internet Games, Mobile Games and WVAS.

Internet Game revenues were $8.81 million, a 15% decrease from the second quarter but almost a 200% increase compared to 3Q 2010. Internet Game revenues were drived by continued strong performance of World of Tanks which was launched commercially on March 15, 2011.

Domestic Internet Game revenues were $7.8 million, a 6% decrease from the second quarter, but a 219% increase from the same period last year, due to continued growth of the World of Tanks community, offset by a gradual decline in the older, soft-developed 3D MMORPG games.

Overseas Internet Game revenues were $1.04 million, a 50% decrease from the second quarter, but a 98% increase from the same period last year. Total overseas revenues as a percentage of total Internet Games in the third quarter was 12% compared to 20% in the second quarter.

For the third quarter three-month period, domestic Mainland Chinese Online Game operations achieved ACUs of 157,000 and aggregate paying accounts of 450,000, with quarterly average of revenue increase on our ARPU of 111 renminbi.

Internet Games gross profit in 3Q was $4.26 million, a 25% decrease from 2Q but a 99% increase from the same period last year. Third quarter Internet Game gross margins were 48% compared to 55% in the previous quarter, due to the higher revenue contribution from World of Tanks, which includes revenue share to Wargaming, our third-party game development partner for World of Tanks.

Now, turning to Mobile Games. Total Mobile Game revenues in the third quarter were $ 10mn, a 9% decrease from the second quarter and a 28% decrease from the same period last year. Revenues from downloadable mobile games were $ 9.7 million, representing an 8% decrease from the second quarter and a 26% decrease from the same period last year.

In 3Q, Mobile Games continued to underperform our expectations as China Mobile implemented more strict operating policies and continued to adjust its Mobile Game marketing strategies. We see these difficulties continuing in 4Q11. In 3Q11, average monthly Mobile Game subscribers were roughly 1.7 million compared to 1.7 million to 2 million in the second quarter. However, the company continues to invest in the development of smartphone game platforms, including iOS and Android, and expect to accelerate the development of these platforms in the coming quarters as the market demand develops.

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