KongZhong's CEO Discusses Q2 2011 Results - Earnings Call Transcript

KongZhong Corporation (KONG)

Q2 2011 Earnings Call

September 6, 2011 8:00 PM ET

Executives

Jay Chang – CFO

Leilei Wang – Chairman and CEO

Analysts

Adam Krejcik – ROTH Capital Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 KongZhong Corporation Earnings Conference Call. My name is Jonathan, and I’m your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session after the prepared remarks. (Operator Instructions).

At this time I would like to hand the call of to one of your speakers for today Mr. Jay Chang, CFO. You may 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 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. I will first go over our 2Q results, before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the second quarter of 2011 were $41.6 million, a 4% sequential increase, an 18% increase 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 26% of total revenues, Internet games contributed 25% and combined, mobile and Internet games made up over half of 2Q total revenues.

Total gross profit was $17 million compared to $16.5 million in 1Q, while gross margins remain stable at 41%. Total OpEx was $12.3 million, an increase of – from 1Q levels of $11.4 million as we increased sales and marketing activities for the long-term loan to tax for the full period of 2Q.

Net profit in the quarter was $4.39 million compared to a net loss in 1Q of $0.46 million, but this included a charge related to the change in the fair value of the Dacheng contingent consideration of $3.73 million. Basic net profit for ADS was $0.11 based on $40.9 million ADS which included the full quarter – first two quarters impact of new shares issued to the shareholder’s of Dacheng at the end of March.

Non-GAAP net income was $6.2 million in line with the company’s guidance range of $6 million to $7 million, while non-GAAP diluted net income per ADS was $0.14.

At the end of 2Q, the company had $134.2 million in cash and cash equivalents or $3.3 per basic ADS in cash compared to 11 of a $118.3 million at the end of 1Q. However, cash and cash equivalents exclude to $21.6 million third party loan and it’s including the value of the RMB third-party loan which was made totally for the purpose of treasury management.

Total cash and third-party loans amounted to $155.8 million at the end of 2Q or equivalent to $3.8 per ADS.

Now, I would like turn to each business unit’s financial performance in the Internet games, mobile games, and WVAS. Internet game revenues in the second quarter were $10.35 million a 59% increase from 1Q and 158% increase compared to 2Q 2.10. Net game revenues were driven by the strong performance of World of Tanks which was launched commercially on March 15, 2011.

Domestic net game revenues were $8.3 million, a 66% increase from 1Q and a 228% increase from 2Q 2010 due to the successful commercial launch of WoT or World of Tanks. Overseas, net game revenues were $2 million a 36% increase from 1Q and a 39% increase from 2Q 2010 due mainly to the contribution from a self developed 3D MMORPG game Shengmozhixue or Demon Code Online in Taiwan. Total overseas revenues as a percentage of total Internet game revenues in 2Q were 20% compared to 23% in 1Q.

For the second quarter three month period, domestic Mainland Chinese online game operations achieved average concurrent users or ACUs of 157,000 and aggregate paying accounts or APAs of 445,000 with quarterly ARPU of RMB121. We have previously reported first quarter ACU figures, which assumed as of World of Tanks as operating for the entire three month period of 1Q at post launch levels versus only for the last 17 days of the first quarter of the March 15 or ACU figures of 145,000.

However, if we were to calculate 1Q actual ACU figures in the same manner we do 2Q, 2011 and 4Q 2010, whereby World of Tanks would have only recorded zero ACUs prior to the March 15 of commercial launch date. ACUs for 1Q would have been 66,000 compared to 157,000 in 2Q of 2011 and 81,000 in 4Q of 2010. Net game revenues made up 25% of total revenues in 2Q’11.

Internet game gross profit in 2Q was $5.7 million a 31% increase from 1Q and a 64% increase from the same period of last year. 2Q internet game gross margins were 55% compared to 67% in 1Q due to the higher revenue contribution from WoT or World of Tanks, which compared to a self developed internet games includes revenue share war gaming, our third-party game development partner for World of Tanks.

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