KongZhong Corp. (KONG)

Q2 2010 Earnings Call

August 25, 2010 7:30 pm ET

Executives

Jay Chang - Chief Financial Officer

Leilei Wang - Chairman and CEO

Analysts

Andrey Glukhov - Brean Murray

Ming Zhao - SIG

Adam Krejcik - Roth Capital Partners

Richard Safranek - Wafra Investment Advisors

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 KongZhong Corporation earnings conference call. (Operator Instructions)

I would now like to turn the call over to Mr. Jay Chang, Chief Financial Officer.

Jay Chang

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 on them. For additional discussion of risks and uncertainties relating to 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 only as of the date of this call.

Thank you for your interest in KongZhong. On the call today, we have our Chairman and CEO, Mr. Wang Leilei; and myself, Jay Chang, the company's CFO. I will briefly go over our 2Q results before handing over the call to Leilei.

Total revenues for the second quarter of 2010 were $35.3 million, a 13% sequential decrease from the previous quarter, but a 9% increase from the same period last year.

As we continue to transition our business to become a cross-platform digital entertainment company, mobile game revenues made up 37% of total revenues, while internet online games contributed another 11%. More importantly, for the first time, our non-WVAS businesses combined contributed more than 50% of revenues and gross profit in 2Q.

Total gross profit was $16.9 million compared to $17.7 million in 1Q, while gross margins improved to 48% compared to 44% in 1Q due to a focus on higher-margin WVAS and mobile game distribution channel.

Total operating expenses were $14 million, roughly flat compared to 1Q levels, as we implemented strict cost controls due to the more restricted WVAS environment.

The company's total headcount decreased to 1,200 people at the end of 2Q compared to 1,300 at the end of 1Q. Due to continued restricted WVAS regulatory environment, we implemented cost saving measures, which did lead to some streamlining of our WIS and WVAS business team. However, as a result, headcount in mobile game and online games now represents 50% of total headcount compared to 22% at the end of 2009, prior to acquisition of Dacheng.

Total operating profit in 2Q was $2.9 million compared to $3.7 million in 1Q, while operating margins were 8.2% compared to 9%. 2Q net profit was $2.6 million compared to $3.2 million in 1Q with net margins of 7.3%.

Non-GAAP net profit, excluding stock-based compensation charges and amortization of intangibles associated with the acquisition of Dacheng, was $5.4 million compared to $6.1 million in 1Q.

Based on $36.76 million basic and $38.65 million fully diluted ADS, at the end of 2Q, net profit per basic ADS was $0.07, per diluted ADS was $0.07 and non-GAAP net profit per diluted ADS was $0.13. At the end of the second quarter, our cash and cash equivalents were $135 million, equivalent to about $3.7 per basic ADS.

Now, I'd like to turn to each business unit's financial performance namely mobile games, online games, WVAS and wireless internet services.

Total mobile game revenue in 2Q was $13 million compared to $9.5 million in 1Q or 91% increase from the same period last year and a 37% quarter-over-quarter increase. Mobile games gross profit in 2Q was $5.5 million compared to $3.6 in 1Q. Mobile games gross margin was 43%, an increase compared to 38% in 1Q, but a decrease compared to 56% gross margins in the same period last year.

As previously discussed, the year-over-year decline in mobile game gross margins is due to the company's shift to partner with and promote China Mobile's monthly mobile game subscription package, which has a higher revenue share of the China Mobile. Although we have previously expected China Mobile to release a third-party distribution version of their mobile game package, which allow us for better revenue share, the timing of such a platform has been delayed.

As a result, although we saw some margin improvement in mobile game in 2Q, we would expect gross margins for our mobile game business to stabilize around the 40% level over the short-to-medium term compared to the 45% levels previously discussed.

Revenues from downloadable mobile games were $12.4 million, representing 145% increase from the same period last year and an increase of 38% from 1Q. Revenues from online mobile games were $0.7 million, a decrease of 63% from the same period last year, but an increase of 24% from 1Q.

At the end of 1Q, a new expansion pack for Feng Shen which was launched helped stabilize online mobile game revenues relative to Tian Jie approaching a three-year lifecyle end.

In addition, we recently launched Fantasy Tianjie, a turn-based 2D mobile MMO, but still expect our downloadable mobile game business to be the key driver of our overall mobile game business in the near future.

For the second quarter for online games, combined revenues from our games, Loong and EMoFaZe, were $4 million compared to $4.2 million in 1Q. Of this, roughly 62% of the online game revenues were related to mainland Chinese operations and 37% from overseas licensees and net revenue share from overseas game operation.

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