Media Research Asia - Leading analysis on media and communications

Advanced Search Search Subscriber Login
Login
Password login Forgot your password? | Sign up! Home Analysis Research Money News Consulting Events Jobs Media Route 26 Login About AsiaMediaJournal.com September 6, 2011 Print | Email | Bookmark Tweet 

KongZhong Corp. Revenues On Track In Q2

KongZhong Corporation (NASDAQ: KONG), a leading provider of digital entertainment services for consumers in the PRC, today announced its unaudited financial results for the second quarter ended June 30, 2011.

Second quarter 2011 Financial Highlights:

Revenues inline with guidance - Total revenues for the second quarter of 2011 increased 4% from the first quarter of 2011 to US$ 41.6 million, inline with the Company's 2Q11 revenue guidance range of US$ 41.5 mn to US$ 42.5 mn.
Gross profit exceeds guidance - Total gross profit was US$ 17.03 mn for 2Q11, slightly exceeding the Company's 2Q11 guidance range of US$ 16 mn to US$ 17 mn.
Net income inline with guidance - Net income in 2Q11 was US$4.39 mn, inline with the Company's guidance range of US$ 4.0 mn to US$ 5.0 mn. The net loss in 1Q11 wasUS$0.5 mn, which included a loss on change in fair value of contingent consideration ofUS$3.7 mn. Basic net income per American Depositary Shares ("ADS") was US$ 0.11.
Non-GAAP net income inline with guidance - Non-GAAP net income was US$ 6.18 mn, inline with the Company's guidance range of US$ 6.0 mn to US$ 7.0 mn, while Non-GAAP diluted net income per ADS was US$ 0.14 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures.")
Cash and cash equivalents - As of June 30, 2011, the Company had US$ 134.2 mn in cash and cash equivalents or US$ 3.3 per ADS in cash and cash equivalents, compared to US$ 118.3 mn at the end of 1Q11. Cash and cash equivalents exclude US$ 21.64 mn loans to a third party.
Commenting on the results, the Company's Chairman and Chief Executive Officer, Leilei Wangsaid, "The Company generated stable Non-GAAP net profit and increased our cash balance while continuing to build future growth opportunities in our Internet game business.

"More importantly, our Internet game business achieved over US$ 10.0 mn in quarterly revenues for the first time after only entering the online game market in early 2010, making KONG one of the fastest growing new entrants in the Chinese online game market.

"This performance was driven by our successful commercial launch of World of Tanks ("WoT"), in partnership with Wargaming.net ("Wargaming"). Over the next few quarters, in addition to further game enhancements developed by Wargaming, we plan to introduce WoT's Clan War add-on to the China market which will bring another level of user engagement to the already strong Chinese WoT community. In the coming months, KONG will introduce our self-developed online competition or "arena" platform to further enhance the quality of online events that users of WoT and eventually Paperman can participate in.

"For Paperman, the Anime-based first person shooter developed by Gamepot from Japan, we expect to launch the game commercially in China by the end of 2011.

"In addition, we continue to have confidence in our self-developed Internet game pipeline. For Kung Fu Hero, based on internal testing and user feedback, we now expect to begin small scale open beta testing by the end of 2011 with large scale testing and commercialization slated for early 2012. We continue to believe that Kung Fu Hero has the potential to become KONG's flagship online game for 2012 and 2013.

"Lastly, to better align our overall Internet game marketing resources, we are now planning to begin open beta testing for Emofaze 3 in early 2012 with commercialization now slated for mid-2012."

Revenues

WVAS Revenues
WVAS revenues in 2Q11 were US$ 20.30 mn, a 11% increase from the same period of 2010 but a 5% decrease from 1Q11. WVAS revenues were relatively stable compared to prior periods although the WVAS operating environment remains difficult.
In 2Q11, 2G revenues represented 84% of total WVAS revenues, while 2.5G services made up 16% of total WVAS revenues.
WVAS made up 48.8% of total revenues in 2Q11.

Mobile Games Revenues
Total mobile game revenues in 2Q11 were US$ 10.97 mn, a 11% decrease from 1Q11 and a 16% decrease from the same period of 2010.
Revenues from downloadable mobile games were US$ 10.58 mn representing a 10% decrease from 1Q11 and a 14% decrease from the same period last year. In 2Q11, 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 the 2nd half of 2011. In 2Q11, average monthly mobile game subscribers declined to between about 1.75 mn to 2.0 mn per month from over 2.0 mn per month in prior periods. However, the Company continues to invest in the development of new mobile game platforms, including iPhone and Android platforms, and expect to accelerate our development of these platforms in the coming quarters as the market demand develops.

Revenues from mobile multi-player online games ("MMO" or "online mobile games") were US$ 0.39 mn, a 33% decrease from 1Q11. All three of our online mobile games experienced a sequential decline in revenues due to product lifecycle and competitive issues.
Revenues from downloadable mobile games made up 96% of total mobile game revenues compared to 95% in 1Q11.
Mobile game revenues made up 26.3% of total revenues in 2Q11.

Internet Games Revenues
Internet Game ("Net Game") revenues were US$ 10.35 mn in 2Q11, a 59% increase from 1Q11 and a 158% increase compared to 2Q10. Net Game revenues were driven by the strong performance of World of Tanks ("WoT") which was launched commercially on March 15th 2011.

Domestic Net game revenues were US$ 8.29 mn, a 66% increase from 1Q11 and a 228% increase from 2Q10 due to the successful commercial launch of WoT. Overseas Net game revenues were US$ 2.06 mn, a 36% increase from 1Q11 and a 39% increase from 2Q10 due mainly to contribution from our self-developed 3D MMORPG, Shengmozhixue ("Demon Code Online"), in Taiwan. Total overseas revenues as a percentage of total Net game revenues in 2Q11 were 20% compared to 23% in 1Q11.

For the 2Q11 3-month period, domestic mainland China online game operations achieved average concurrent users ("ACUs") of 157k and aggregate paying accounts ("APAs") of 445k with quarterly average revenue per user ("ARPU") of RMB 121.

We had previously reported 1Q11 ACU figures that assumed as if WoT were operating for the entire 3-mth period of 1Q11 at post launch levels versus only for the last 17 days of 1Q11 fromMarch 15th 2011, or ACU figures of 145k. However, if we calculated 1Q11's actual ACU figure in the same manner as we do 2Q11 and 4Q10 (whereby WoT would have recorded zero ACUs prior to the March 15th 2011 commercial launch date under this reporting method), ACUs for 1Q11 would have been 66k compared to 157k in 2Q11 and 81k in 4Q10.

Net game revenues made up 24.9% of total revenues in 2Q11.

Gross Profit
Total gross profit was US$17.03 mn in 2Q11, a 3% increase compared to 1Q11 and a 1% increase compared to the same period of 2010. Total gross margin was 41% in 2Q11 and stable compared to 41% in 1Q11.

WVAS Gross Profit
WVAS gross profit in 2Q11 was US$ 7.22 mn, a 8% decrease from 1Q11 and a 8% decrease compared to the same period of 2010. 2Q11 WVAS gross margin was 36% compared to 37% in 1Q11 as ongoing policy measures led us to rely more on higher cost distribution channels as a percentage of WVAS revenues compared to previous periods.

Mobile Game Gross Profit
Mobile games gross profit in 2Q11 was US$ 4.11 mn, a 5% decrease from 1Q11 and a 26% decrease compared to the same period last year as policies from China Mobile in our mobile game monthly subscription business led to higher churn and lower profitability. 2Q11 mobile games gross margin was 37% compared to with 35% in 1Q11.

Internet Game Gross Profit
Internet game gross profit in 2Q11 was US$ 5.70 mn, a 31% increase from 1Q11 and a 64% increase from the same period last year. 2Q11 Internet game gross margin was 55% compared to 67% in 1Q11 due to the higher revenue contribution from WoT, which compared to our self-developed Internet games, includes revenue share to Wargaming, our 3rd party game development partner for WoT.

Operating Expenses
Total operating expenses increased 8% to US$ 12.26 mn in 2Q11 compared to US$ 11.38 mn in 1Q11.
Product development expenses in 2Q11 were US$ 3.95 mn compared to US$ 3.61 mn in 1Q11 or a 10% increase.
Sales and marketing expenses in 2Q11 were US$ 5.35 mn compared to US$ 4.83 mn in 1Q11 and US$ 5.14 mn in the same period last year. The sequential increase in sales and marketing was driven by activities related to the commercial launch of WoT and we expect to continue to make marketing investments in WoT and our other new Net games in the coming quarters.

General and administrative ("G&A") expenses in 2Q11 were US$ 2.96 mn compared to US$ 2.94 mn in 1Q11 and US$ 2.69 mn in the same period last year. We expect G&A to be maintained at 2Q11 levels in the coming periods.

The Company's total headcount remained stable in 2Q11 at 1,048 compared to 1,037 at the end of 1Q11.

Operating Profit/(Loss)
Operating profit for 2Q11 was US$ 4.77 mn compared to US$ 1.43 mn in 1Q11, which included a loss on change in fair value of contingent consideration in 1Q11. Operating margins were 11.5% in 2Q11 compared to 3.6% in 1Q11. If excluding the loss on change in fair value of contingent consideration, operating profit in 1Q11 was US$5.16 mn with operating margin of 12.9%.

Earnings
Net income and Non-GAAP net income in 2Q11 were US$ 4.39 mn and US$ 6.18 mn, respectively. Diluted earnings per ADS and diluted Non-GAAP earnings per ADS were US$ 0.10 and US$ 0.14in 2Q11, respectively.

Total ADS on diluted basis outstanding during 2Q11 were 42.54 mn, compared to 37.58 mn outstanding during 1Q11.

Balance Sheet
As of June 30, 2011, the Company had $134.2 mn in cash and cash equivalents or US$ 3.3 per basic ADS in cash and cash equivalents compared to US$ 118.3 mn at the end of 1Q11. Cash and cash equivalents exclude US$ 21.64 mn loans to a third party.
Business Outlook (For the 3-month period ending September 30, 2011):
The Company expects total revenues for 3Q11 to be within the range of US$ 38.5 mn to US$ 39.5 mn, with business unit revenues at the mid-point expected to roughly consist of WVAS revenues ofUS$ 19 mn, mobile game revenues of US$ 10 mn and Online Game revenues of US$ 10 mn.

The Company expects total gross profit to be within the range of US$ 14.5 mn to US$ 15.5 mn, total operating profit to be US$2.5 mn to US$ 3.5 mn, net profit to be US$ 2.5 mn to US$ 3.5 mn, and Non-GAAP net profit is expected to be between US$ 4 mn to US$ 5 mn.

Conference Call:
The Company's management team will conduct a conference call at 8:00 amBeijing time onSeptember 7th 2011 (20:00pm Eastern time and 17:00 pm Pacific time on September 6th, 2011).A webcast of this conference call will be accessible on the Company's web site athttp://ir.kongzhong.com

Non-GAAP Financial Measures
To supplement the unaudited condensed statements of income presented in accordance with US GAAP, the Company uses non-GAAP financial measures (Non-GAAP Financial Measures) of net income and net income per diluted ADS, which are adjusted from results based on GAAP to exclude certain infrequent or unusual or non-cash based expenses, gains and losses. The Non-GAAP Financial Measures are provided as additional information to help both management and investors compare business trends among different reporting periods on a consistent and more meaningful basis and enhance investors' overall understanding of the Company's current financial performance and prospects for the future.

The Non-GAAP Financial Measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. In addition, the Company's calculation of the Non-GAAP Financial Measures may be different from the calculation used by other companies, and therefore comparability may be limited.
For the periods presented, the Company's non-GAAP net income and non-GAAP net income per diluted ADS exclude, as applicable, the amortization of intangibles, share-based compensation expense, interest expense on convertible note, loss on change in fair value of contingent consideration and loss on extinguishment of debt upon prepayment of convertible senior note, as well as is adjusted for the dilution impact on ADS numbers of the convertible note.

Latest Research
Big Festive Season for DTH
Ad Demand Remains Resilient
Up and Down in Korea
Videocon Overtakes Big TV
Future Promise for India Movie Business
More »

Media Partners Asia Limited © 2011 Media Partners Asia, Ltd. All rights reserved.
About Media Partners Asia
For further information or assistance, please contact us