KongZhong Corporation (KONG)

Q1 2011 Earnings Call

May 25, 2011 9:30 pm ET

Executives

Jay Chang – CFO

Wang Leilei – CEO

Analysts

Adam Krejcik – ROTH Capital Partners LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2011 KongZhong Corp earnings conference call. My name is Walter, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jay Chang, Chief Financial Officer; and Wang Lei, Chief Executive Officer.

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 continued interest in KongZhong. I’ll first go over our 1Q results, before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the first quarter of 2011 were $40.1 million, an 11% sequential increase, but a 1% decrease from the same period last year.

As we continue to transition our business to become a cross-platform digital entertainment company, mobile games made up 31% of total revenues, Internet games contributed 16% and combined, mobile and Internet games made up nearly half of 1Q total revenues.

Total gross profit was $16.5 million, compared to $16 million in 4Q, while gross margins declined to 41% compared to 44% in 4Q. Total operating expenses, we have $11.4 million, a decrease from $19.8 million in 4Q and $14 million in 1Q of 2010.

Net loss in 1Q was $0.46 million; however, this included a charge related to a change in the fair value of the Dacheng contingent consideration of roughly $3.7 million. Excluding this, net income in 1Q was $3.2 million, a 3% increase compared to $3.17 million in 1Q of the same period last year.

Basic net loss per ADS was $0.01 based on 37.6 million ADS. Non-GAAP net income was $6.9 million, in line with the company’s guidance range of $6 million to $7 million, while non-GAAP diluted net income per ADS was $0.17.

As of 1Q, the company had $118.3 million cash and cash equivalents or $3.1 per basic ADS in cash and cash equivalents. This included a $9.3 million payment for the early extinguishment of convertible note issued to – a partial extinguishment of the convertible note issued to Nokia Growth Partners, a $14.6 million payment for the cash portion related to the final payment for Dacheng and a $21.2 million investment in RENMINIBI denominated short-term loan to a third party. It’s including the value of this RENMINIBI third-party loan which was made totally for the purpose of treasury management.

Total cash and third-party loans amounted to $140 million exiting the first quarter of 2011.

Now, I would like turn to each business unit’s financial performance in the mobile games, Internet games, and WVAS. Total mobile game revenues in 1Q were $12.3 million, a 29% increase from the same period last year but a 4% decrease from 4Q.

Revenues from downloadable mobile games were $11.69, representing a 31% increase from the same period last year, but a decrease of 5% from 4Q.

In 1Q, revenues from monthly mobile game subscriptions in partnership with China Mobile

were stable compared to 4Q, but one-time download revenues were negatively impacted by changes in China Mobile's marketing policies of mobile games on the Monternet portal.

In 1Q, average monthly mobile game subscribers were maintained at roughly 2 million per month. In 1Q, mobile games underperformed our expectations as China Mobile continued to adjust their mobile game marketing strategies and we see these difficulties continuing into 2Q. However, the company continues to invest in the development of mobile games, including iPhone and the Android platform and expect to accelerate our development of these platforms in the coming quarters as the market develops.

Revenues from online mobile games were $0.6 million, 11% increase from the same period last year and a 30% increase from 4Q. Online mobile games benefited sequentially due to seasonal promotions of our online mobile games.

Turning to Internet Games, Internet Games revenues were $6.5 million in 1Q, a 10% increase from 4Q and a 53.3% increase compared to 1Q 2010. Net Game revenues outperformed our expectations due to the strong initial performance of WoT or World of Tanks, which was launched commercially on March 15th.

Domestic Internet game revenues were $5 million, a 38% increase from 4Q and a 27% increase from 1Q due to the successful commercial launch of WoT.

Overseas Internet game revenues were $1.52 million, a 34% decrease from 4Q, but a

384% increase from 1Q10. Total overseas revenues as a percentage of total Net game revenues in 1Q were 23% compared to 39% in 4Q.

For the 1Q, domestic mainland Chinese online game operations achieved average concurrent users or ACUs, 145,000 compared to 81,000 in 4Q and aggregate paying accounts of 218,000 with quarterly ARPU of RENMINIBI 150,000 compared to 120,000 APAs in 4Q with ARPU of 200. WoT operational metrics for ACUs and APAs were only recorded from March 2011.

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