KongZhong Corporation Reports First Quarter 2014 Unaudited Financial Results - CW15 - OMAHA

KongZhong Corporation Reports First Quarter 2014 Unaudited Financial Results

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SOURCE KongZhong Corporation

BEIJING, May 28, 2014 /PRNewswire/ -- KongZhong Corporation (NASDAQ: KONG), a leading provider of digital entertainment services for consumers in the PRC, today announced its unaudited financial results for the first quarter ended March 31, 2014.

First Quarter 2014 Financial Highlights

  • Total revenues were US$ 49.61 mn, an increase of 13.2% from the fourth quarter of 2013 and 3.5% from the same period last year, exceeding the guidance range of US$ 45.5 mn to US$ 46.5 mn.
  • Gross profit was US$ 23.32 mn, an increase of 7.4% from the fourth quarter of 2013 and 25.4% from the same period last year, in line with the guidance range of US$ 22.5 mn to US$ 23.5 mn.
  • Net income was US$ 9.95 mn, a decrease of 0.8% from the fourth quarter of 2013, but an increase of 46.2% from the same period last year, in line with the guidance range of US$ 9.5 mn to US$ 10.5 mn. Diluted net income per American Depositary Shares ("ADS") was US$ 0.21.
  • Non-GAAP net income was US$ 10.61 mn, an increase of 19.3% from the same period last year,  in line with the guidance range of US$ 10.5 mn to US$ 11.5 mn.  Non-GAAP diluted net income per ADS was US$ 0.23 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled "Non-GAAP Financial Measures").
  • As of March 31, 2014, the Company had US$ 201.89 mn in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash or US$ 4.45 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash. The decline in cash and cash equivalents from the end of the fourth quarter of 2013 reflects the cash outlay for our strategic investment of RMB 100.0 mn in Ourgame.
  • Change in Stock Ticker from "KONG" to "KZ" - KongZhong Corporation today also announced that the Company will change its NASDAQ ticker symbol to "KZ" from "KONG" to better align its company branding as a online games company. The new ticker KZ will be effective as the start of trading on Monday, June 16, 2014.

The Company's Chairman and Chief Executive Officer, Leilei Wang said, " Based on the recently released War Saga brand, with 40.0 mn World of Tank Chinese players, the upcoming open beta test for World of Warplanes, and next year's anticipated release of World of Warships and Blitzkrieg 3, we have created China's largest military genre online game platform.  In addition, due to strong user acquisition, outstanding retention and attractive in-game economy metrics from our open beta test for Guild Wars 2 and World of Warplanes, with the strong support of our development partners, in 2Q14 we committed significant marketing resources to commercially release these games to the China market.  We are confident that through the successful release of Guild Wars 2 and World of Warplanes in 2Q14, that KongZhong ("KZ") from both a user and revenue standpoint, will see strong future growth based on a newly diversified PC online game portfolio.  At the same time, we continue to invest heavily into our self-developed mobile games with a goal to supplement this business through the licensing of overseas games and distribution of our games overseas.  I believe KZ will continue to development positively in the future as a leading and differentiated online game company."


Three Months Ended 


March 31,


December 31,


March 31,


2013


2013


2014


US$ in thousands


US$ in thousands


US$ in thousands







Revenues

47,937


43,838


49,607

    Internet Games

28,381


25,082


25,079

    Mobile Games

3,706


4,924


8,112

    WVAS

15,850


13,832


16,416







Sales Tax

1,822


876


652

    Internet Games

1,570


558


317

    Mobile Games

41


42


42

    WVAS

211


276


293







Cost of Revenue

27,522


21,246


25,637

    Internet Games

13,695


10,873


12,073

    Mobile Games

1,803


1,436


4,050

    WVAS

12,024


8,937


9,514







Gross Profit

18,593


21,716


23,318

    Internet Games

13,116


13,651


12,689

    Mobile Games

1,862


3,446


4,020

    WVAS

3,615


4,619


6,609







Gross Margin

39%


50%


47%

    Internet Games

46%


54%


51%

    Mobile Games

50%


70%


50%

    WVAS

23%


33%


40%

Revenues

Total revenues for the first quarter of 2014 were US$ 49.61 mn, an increase of 13.2% from the fourth quarter of 2013 and 3.5% from the same period of last year.

Internet Games Revenues

Internet Game ("Net Game") revenues were US$ 25.08 mn in the first quarter of 2014, flat compared to the fourth quarter of 2013.

Domestic Net Game revenues were US$ 24.78 mn, a 2.3% increase from the fourth quarter of 2013. Monthly active users ("MAU"s) from World of Tanks ("WoT") has continued to see stable growth with the 3rd anniversary of the game in China being celebrated in the first quarter of 2014.

For the first quarter of 2014, mainland China online game operations achieved average MAUs of 1.70 mn and aggregated monthly paying accounts ("APAs") of 280k with monthly average revenue per user ("ARPU") of RMB 181


Three Months Ended

March 31, 2013

December 31, 2013

March 31, 2014

MAU

1,790k

1,641k

1,696k

APA

330k

271k

280k

ARPU

176

183

181

Internet game revenues made up 50.6% of total revenues in the first quarter of 2014.

Mobile Games Revenues

Total mobile game revenues were US$ 8.11 mn, a 64.7% increase from the fourth quarter of 2013, and a 118.9% increase from the same period of last year.  The increase in mobile games revenues was mainly due to increased revenues from Kooky Three Kingdoms and Three Kingdom Generals in the first quarter of 2014.

Total mobile game revenues made up 16.4% of total revenues in the first quarter of 2014.

WVAS Revenues

WVAS revenues were US$ 16.42 mn, an 18.7% increase from the fourth quarter of 2013, and a 3.6% increase from the same period of last year.  We expect the WVAS operating environment in the second quarter of 2014 to see an increase in mobile operator policies which could lead to a decrease in WVAS revenues.

WVAS made up 33.0% of total revenues in the first quarter of 2014.

Gross Profit

Total gross profit for the first quarter of 2014 was US$ 23.32 mn, a 7.4% increase from the fourth quarter of 2013 and a 25.4% increase from the same period last year.

Total gross margin was 47.0% in the first quarter of 2014.

Internet Game Gross Profit

Internet game gross profit was US$ 12.69 mn, a 7.0% decrease from the fourth quarter of 2013. Internet game gross margin was 50.6% compared to 54.4% in the fourth quarter of 2013.  The slight decline in internet game gross margins was due to the lower contribution from overseas license fees of our self-developed Internet games.

Mobile Game Gross Profit

Mobile games gross profit was US$ 4.02 mn, a 16.7% increase from the fourth quarter of 2013. Mobile games gross margin was 49.6% compared to 70.0% in the fourth quarter of 2013.

The decline in mobile games gross margins was due to increased contribution from feature phone revenues which have lower margins than our smartphone games revenues.

WVAS Gross Profit

WVAS gross profit was US$ 6.61 mn, a 43.1 % increase from the fourth quarter of 2013. WVAS gross margin was 40.3% compared to 33.4% in the fourth quarter of 2013. We expect the WVAS operating environment in the second quarter of 2014 to see an increase in mobile operator policies which could lead to a decrease in WVAS revenues and gross margins.

Operating Expenses

Total operating expenses in the first quarter of 2014 were US$ 15.04 mn compared to US$ 15.70 mn in the fourth quarter of 2013.

Product development expenses in the first quarter of 2014 were US$ 5.93 mn compared to US$ 6.82 mn in the fourth quarter of 2013. The reduction in product development expenses were due to optimizations undertaken in product development team costs.

Sales and marketing expenses in the first quarter of 2014 were US$ 6.74 mn compared to US$ 6.52 mn in the fourth quarter of 2013.

General and administrative expenses in the first quarter of 2014 were US$ 2.36 mn compared to US$ 2.36 mn in the fourth quarter of 2013.

The Company's total headcount remained stable in the first quarter of 2014 to 1,116 compared to 1,153 at the end of 2013.

Earnings

Net income andNon-GAAP net income were US$ 9.95 mn and US$ 10.61 mn, respectively.  Diluted income per ADS and diluted Non-GAAP earnings per ADS were US$ 0.21 and US$ 0.23 in the first quarter of 2014, respectively.

Total ADS on a diluted basis outstanding during the first quarter of 2014 were 47.03 mn, compared to 46.85 mn outstanding during the fourth quarter of 2013.

For the purpose of earnings
per share calculation

Number during three months ended

December 31, 2013

Number during three months ended

March 31, 2014

ADS (in mns)

45.32

45.39

Add: Dilution impact from
options and nonvested shares

0.58

0.54

Warrants issued to business partners

0.95

1.10

ADS on diluted basis

46.85

47.03

Balance Sheet

As of March 31, 2014, the Company had US$ 201.89 mn in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash or US$ 4.45 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash. The decline in cash and cash equivalents from the end of the fourth quarter of 2013 reflects the cash outlay for our strategic investment of RMB 100.0 mn in Ourgame.

Change in Stock Ticker

Change in Stock Ticker from "KONG" to "KZ" - KongZhong Corporation today also announced that the Company will change its NASDAQ ticker symbol to "KZ" from "KONG" to better align it's Company branding as a online games Company. The new ticker KZ will be effective as the start of trading on Monday, June 16, 2014.

Business Outlook (For the second quarter ending June 30, 2014)

The Company expects total revenues for the second quarter of 2014 to be within the range of US$ 57.5 mn to US$ 58.5 mn, with business unit revenues at the mid-point expected to roughly consist of  Net Game revenues of US$ 33.5 mn, mobile game revenues of US$ 10.5 mn and WVAS revenues of US$ 14 mn
 
Guild Wars 2 CD-Keys purchased and activated during the pre-order sales period will be amortized over a period of six months beginning from May 1st which was the headstart period for Guild Wars 2 in China.  Future post open beta CD-Key revenues will be amortized from the date of activation.
 
The Company expects total gross profit to be within the range of US$ 24 mn to US$ 25 mn. We expect net loss to be US$ 0.5 mn to US$1.5 mn and Non-GAAP net profit is expected to be roughly break even.
 
Our 2Q14 guidance reflects roughly US$ 10.0 mn in incremental sales and marketing related expenses compared to 1Q14, for expenses related to the May 15th open beta launch of Guild Wars 2, the open beta launch of World of War Planes on May 29th and other the marketing activities related to the release of the War Saga brand.  As such, we expect total operating expenses in 2Q14 to be between US$ 27-28 mn.   However, we expect sales and marketing expenses to revert to roughly pre-2Q14 levels as a percentage of sales in subsequent financial periods for Internet games.

Conference Call

Kongzhong's management will hold a conference call and webcast to discuss the results at 7:30 PM Eastern Time (ET) on Wednesday, May 28, 2014 (7:30 AM Beijing/Hong Kong time, Thursday, May 29, 2014)

The conference call will be available live via webcast on the Investors section of KongZhong's website at http://ir.kongzhong.com. The archive replay will be available on the website shortly after the call.

The company welcomes all interested parties to participate in the live conference call. The dial-in details are as below:

- U.S. Toll Free Dial-in Number: +1 866 519 4004
- Hong Kong Toll Free Dial-in Number: 800 930 346
- Mainland China Dial-in Number: 800 819 0121, 400 620 8038
- International Dial-in Number: +65 6723 9381
Passcode: 35403631

The live conference call via webcast and archive replay will be available on the Investor Relations section of Kongzhong's website at http://ir.kongzhong.com.

A dial-in replay of the conference call will be available until June 4, 2014:
- U.S. Toll Free Dial-in Number: +1 855 452 5696
- International Dial-in Number: +61 2 8199 0299
Passcode: 35403631

About KongZhong

KongZhong (KONG), listed in Nasdaq in 2004, is one of the leading providers of digital entertainment services for consumers in the PRC. We operate three main business units, namely WVAS, mobile games and Internet games. Within Internet games, KONG has the exclusive publishing rights for World of Tanks, World of Warplanes, World of Warships, Guild Wars 2 and other titles in mainland China. Since the acquisition of our proprietary smartphone game engine platform in 2011, KONG has expanded our smartphone game development team across 4 cities in China currently developing over 10 smartphone games across various genres, including MMORPG, RTS, military, and fantasy. For more information, please visit http://ir.kongzhong.com.

Safe Harbor Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding trends in the wireless value-added services, wireless media, mobile games and online games industries and our future results of operations, financial condition and business prospects.  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.  These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward looking statements for a variety of reasons.  Potential risks and uncertainties include, but are not limited to, continued competitive pressure in China's wireless value-added services, wireless media, mobile games and online games industries and the effect of such pressure on revenues; our ability to develop new products that are commercially successful; unpredictable changes in technology, consumer demand and usage preferences in the markets we operate; our ability to protect our intellectual property rights; the short operating history of certain of our business segments, in particular the online games segment;  the state of and any change in our relationship with China's telecommunications operators; our dependence on the billing systems of telecommunications operators for our performance; the outcome of our investment of operating income generated from the WVAS segment into the development of our wireless Internet, mobile games and online games segments; changes in the regulations or policies of the Ministry of Industry and Information Technology and other government authorities relevant to our businesses; and changes in political, economic, legal and social conditions in China, including the Chinese government's policies with respect to economic growth, foreign exchange, foreign investment and entry by foreign companies into China's telecommunications and online games markets.  For additional discussion of these risks and uncertainties 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 press release.

KongZhong Contacts

Investor Contact
Jay Chang
Chief Financial Officer

Liddy Li
Investor Relations
Tel.: (+86-10) 8857.6000
E-mail: ir@kongzhong.com

Media Contact
Yuan Liu
Manager
Tel: (+86-10) 8857.6000
E-mail: liuyuan@kongzhong.com

KongZhong Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, US$ in thousands, except per share and share data)










Three Months Ended 



March 31,


December 31,


March 31,



2013


2013


2014








Revenues


47,937


43,838


49,607

Sales tax


1,822


876


652

Net revenues


46,115


42,962


48,955








Cost of revenues


27,522


21,246


25,637








Gross profit


18,593


21,716


23,318








Operating expenses







    Product development


6,136


6,819


5,934

    Sales and marketing


4,568


6,520


6,737

    General and administrative


2,426


2,356


2,364

Total operating expenses


13,130


15,695


15,035








Government subsidy


153


1,371


194








Income from operations


5,616


7,392


8,477








Interest income


1,452


2,170


2,269

Interest expense


57


-


-

Imputed interest on long-term liabilities


150


150


150

Exchange gain (loss)


158


898


(348)

Income before tax expense


7,019


10,310


10,248

Income tax expense


214


284


298

Net income


6,805


10,026


9,950








Earnings per ADS, basic


0.17


0.22


0.22

Earnings per ADS, diluted


0.16


0.21


0.21








Weighted average ADS outstanding (million)


40.74


45.32


45.39

Weighted average ADS used in diluted
EPS calculation (million)


41.85


46.85


47.03








Net income


6,805


10,026


9,950

Other comprehensive income (loss)


903


2,043


(2,799)

Total comprehensive income


7,708


12,069


7,151

 

KongZhong Corporation

Condensed Consolidated Balance Sheets

(Unaudited, US$ in thousands)








As of December 31,


As of March 31,



2013


2014

Assets





Current assets





    Cash and cash equivalents


123,428


118,303

    Term deposits


4,449


4,716

    Held-to-maturity securities


51,866


42,283

    Accounts receivable (net)


17,231


19,526

    Other current assets


7,762


8,936

Total current assets


204,736


193,764






Non-current assets





    Rental deposits


796


629

    Intangible assets (net)


78,727


78,127

    Property and equipment (net)


5,843


7,076

    Long-term investments


2,000


18,380

    Goodwill


90,267


89,575

    Restricted cash


36,871


36,591

Total non-current assets


214,504


230,378

Total assets


419,240


424,142






Liabilities and Shareholders' Equity





Current Liabilities





    Accounts payable
(including accounts payable of the consolidated variable interest entities
("VIE")  without recourse to KongZhong Corporation of $39,488 and
$39,438 as of December 31, 2013 and March 31, 2014, respectively) 


39,514


39,460

    Deferred revenue
(including deferred revenue of the consolidated VIE without recourse to
KongZhong Corporation of $2,262 and $2,958 as of December 31, 2013
and March 31, 2014, respectively)


2,262


2,987

    Other current liabilities
(including other current liabilities of the consolidated VIE without
recourse to KongZhong Corporation of $15,760 and $11,062 as of
December 31, 2013 and March 31, 2014, respectively)


25,595


21,095

Total current liabilities


67,371


63,542






Non-current Liabilities





    Other long-term liabilities
(including other long-term liabilitiesof the  consolidated VIE without
recourse to KongZhong Corporation of $19,260 and $19,410 as of
December 31, 2013 and March 31, 2014,  respectively)


19,260


19,410

Total liabilities


86,631


82,952






Shareholders' equity


332,609


341,190

Total liabilities and shareholders' equity


419,240


424,142

 

KongZhong Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, US$ in thousands)








Three Months Ended 



March 31,


March 31,



2013


2014

Cash Flows From Operating Activities





    Net income


6,805


9,950

    Adjustments to reconcile net income to net cash provided by
operating activities





    Depreciation and amortization


1,825


1,091

    Imputed interest on long-term liabilities


150


150

    Share-based compensation


556


333

    Changes in operating assets and liabilities


6,294


(6,728)

Net Cash Provided by Operating Activities


15,630


4,796






Cash Flows From Investing Activities





    Purchase of intangible assets


-


(98)

    Long-term investment


-


(16,380)

    Purchase of term deposits


(16,413)


(1,569)

    Proceeds from disposal of term deposits




1,267

    Purchase of held-to-maturity securities


(13,202)


(42,507)

    Proceeds from disposal of held-to-maturity securities


16,323


51,746

    Purchase of property and equipment


(935)


(2,075)

    Restricted cash


(10,351)


-

Net Cash (Used in) Provided by Investing Activities


(24,578)


(9,616)






Cash Flows From Financing Activities





    Proceeds from exercise of employee stock options


55


429

    Deferred payments for acquisition of business


(3,000)


-

    Deferred payments for intangible assets


(500)


(372)

    Repurchase of ordinary shares


(9,341)


(12)

    Proceeds from bank borrowing


9,000


-

Net Cash (Used in) Provided by Financing Activities


(3,786)


45






Effect of foreign exchange rate changes


171


(350)






Net (decrease) increase in Cash and Cash Equivalents


(12,563)


(5,125)

Cash and Cash Equivalents, Beginning of Period


120,695


123,428

Cash and Cash Equivalents, End of Period


108,132


118,303

 

Non-GAAP Financial Measures 


To supplement the unaudited condensed statements of comprehensive 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, imputed interest on long-term liabilities, as well as is adjusted for the dilution impact on ADS numbers from stock options, non-vested shares and warrants.

Reconciliation of the Company's Non-GAAP financial measures to the GAAP financial measures is set forth below.

(US$ in thousands, except per share and share data)












Three Months Ended 


March 31,


December 31,


March 31,


2013


2013


2014

GAAP net income

6,805


10,026


9,950

Share-based compensation

556


290


333

Imputed interest on long-term liabilities

150


150


150

Amortization of intangibles

1,386


187


180

Non-GAAP net income

8,897


10,653


10,613







Weighted average ADS used in diluted 

41.85


46.85


47.03

Non-GAAP diluted net income per ADS

0.21


0.23


0.23

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