KongZhong CEO Discusses Q3 2010 Results - Earnings Call Transcript

KongZhong Corporation ( KONG)

Q3 2010 Earnings Call

November 22, 2010 7:30 PM EST

Executives

Jay Chang – CFO

Wang Leilei – Chairman and CEO

Analysts

Andrey Glukhov – Brean Murray

Ming Zhao – SIG

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2010 KongZhong Corp. earnings conference call.

My name is Jeremy and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Jay Chang, Chief Financial Officer. Please proceed, sir.

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 on them.

For additional discussions 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 conference 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, company's CFO.

I will first go over our 3Q results before handing over the call to Leilei.

Total revenues for the third quarter of 2010 were $37.7 million, a 7% sequential increase and a 7% 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 8%, and combined mobile and internet games, made up 45% of total revenues.

Total gross profit was $15.6 million compared to $16.9 million in 2Q, while gross margins declined to 41% compared to 48% in 2Q.

Total OpEx was $14.4 million, a slight increase from 2Q of $14 million, as we continued to maintain strict cost controls due to the ongoing restrictive WVAS policy environment.

Total operating profit in 3Q was $1.2 million compared to $2.9 million in 2Q, while operating margins were 3.3% compared to 8.2% in the previous quarter.

3Q net profit was $1.2 million compared to $2.6 million in 2Q with net margins of 3%.

The non-GAAP net profit, excluding stock-based compensation charges and amortization of intangibles primarily associated with the acquisition of Dacheng, was $4.1 million compared to $4.5 million in 2Q.

Based on $37 million basic and $38.3 million fully diluted ADS outstanding at the end of 3Q, net profit per basic ADS was $0.03, net profit per diluted ADS was $0.03 and non-GAAP net profit per diluted ADS was $0.10. At the end of 3Q, our cash and cash equivalents were $139 million, equal to roughly $3.7 per basic ADS.

In terms of business line reporting going forward, during the third quarter, the company has consolidated our wireless internet services or WIS business line into our WVAS business line to reflect the ongoing changes in the wireless services industry.

More importantly, a key revenue driver for our WIS business going forward is expected to be a partnership with China Mobile’s mobile literature platform. This new revenue stream relies on significant resources from our WVAS business to operate this business, and as such, the company believes is more appropriate to combine WIS into our overall WVAS business lines.

Now, I’d like to turn to each business units’ financial performance namely mobile games, Net internet games and WVAS.

For mobile games, total mobile game revenues in 3Q were $13.9 million compared to $13 million in 2Q or 70% increase from the same period last year, and a 7% quarter-over-quarter increase. Mobile games gross profit for 3Q was $5 million compared to $5.5 million in 2Q, while mobile game gross margin was 36%, a decrease compared to 43% in 2Q.

Mobile game gross profits and gross margins declined sequentially as the company sought out new non-operator distribution channel to offset the decrease in marketing activities by China Mobile and our mobile games subscription business. The effectiveness of these new distribution channels was significantly lower than existing China Mobile channels, leading to lower gross profits in our overall mobile game business.

We expect mobile game gross margins to stabilize around the 37% to 38% levels in the near future as we work more closely with China Mobile, our mobile operator partners to offset the mix of lower margin distribution channel.

Revenues from downloadable mobile games were $13.1 million, representing an 84% increase from the same period last year and an increase of 6% from 2Q. In 3Q, growth in our downloadable mobile game business, primarily mobile game monthly subscriptions for China Mobile decelerated from previous period growth levels due to a moderation in promotional activities from our mobile operator partners.

In 3Q, average monthly mobile games subscribers were roughly 2 million per month at a similar level compared to 2Q.

For the remainder of 2010, we expect our mobile operator partners to continue to decrease their mobile game package marketing activity, limiting the near-term ability for us to grow our mobile game business, but expect these marketing activities to resume sometime in 2011.

Revenue from mobile online games were $0.87 million, an increase of 34% from 2Q, but a decrease of 22% from the same period last year.

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