KongZhong Corporation Reports Second Quarter 2014 Unaudited Financial Results

BEIJING, August 28, 2014 /PRNewswire/ — KongZhong Corporation (NASDAQ: KZ), a leading online games publisher and developer in the PRC, today announced its unaudited financial results for the second quarter ended June 30, 2014.

Second Quarter 2014 Financial Highlights

  • Total revenues were US$ 57.87 mn, an increase of 16.7% from the first quarter of 2014 and 32.8% from the same period last year, in line with the guidance range of US$ 57.5 mn to US$ 58.5 mn.
  • Total gross profit was US$ 24.50 mn, an increase of 5.1% from the first quarter of 2014 and 37.2% from the same period last year, in line with the guidance range of US$ 24.0 mn to US$ 25.0 mn.
  • Net income was US$ 0.07 mn, beating the guidance loss range of US$ 0.5 mn to US$ 1.5 mn. Diluted net income per American Depositary Shares (“ADS”) was US$ 0.00.
  • Non-GAAP net income was US$ 1.45 mn, exceeding the break even guidance. Non-GAAP diluted net income per ADS was US$ 0.03 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures”).
  • As of June 30, 2014, the Company had US$ 230.58 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 5.07 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash.

The Company’s Chairman and Chief Executive Officer, Leilei Wang said, “In 2Q14, we successfully released Guild Wars 2 and World of Warplanes to Chinese players and have established a strong long-term operating strategy to become a leader in the Chinese PC game market through the War Saga Brand, Guild Wars 2 and our other differentiated PC games under development. In mobile games, we expect to bring 5 key titles to market in the coming months across 4 main areas, namely (1) licensed mobile games from high-quality partners from Japan and Korean markets in the Puzzle RPG and Action RPG genres (2) Cross border co-development with an experienced Korean mobile game developer, in the Action RPG genre and (3) A self-developed game in the next generation RTS genre and (4) and a self-developed RPG title based upon the ‘Kuiba’ animated movies series IP. I believe KZ will continue to development positively in the future as a leading and differentiated online game company.”

Three Months Ended

June 30,

March 31,

June 30,

2013

2014

2014

US$ in
thousands

US$ in
thousands

US$ in
thousands

Revenues

43,581

49,607

57,870

Internet Games

23,616

25,079

32,022

Mobile Games

3,737

8,112

10,537

WVAS

16,228

16,416

15,311

Sales Tax

1,582

652

503

Internet Games

1,337

317

277

Mobile Games

41

42

33

WVAS

204

293

193

Cost of Revenue

24,149

25,637

32,871

Internet Games

11,115

12,073

16,126

Mobile Games

2,186

4,050

5,933

WVAS

10,848

9,514

10,812

Gross Profit

17,850

23,318

24,496

Internet Games

11,164

12,689

15,619

Mobile Games

1,510

4,020

4,571

WVAS

5,176

6,609

4,306

Gross Margin

41%

47%

42%

Internet Games

47%

51%

49%

Mobile Games

40%

50%

43%

WVAS

32%

40%

28%

Revenues

Total revenues for the second quarter of 2014 were US$ 57.87 mn, an increase of 16.7% from the first quarter of 2014 and 32.8% from the same period of last year.

Internet Games Revenues

Internet Game (“Net Game”) revenues were US$ 32.02 mn in the second quarter of 2014, an increase of 27.7% from the first quarter of 2014 and 35.6% from the same period of last year. The increase in Net Game revenues was mainly due to the new launch of Guild War 2 and World of Warplane.

For the second quarter of 2014, mainland China online game operations achieved average monthly active users (“MAUs”) of 2.6 mn and aggregated monthly paying accounts (“APAs”) of 427k with monthly average revenue per user (“ARPU”) of RMB 152. The increase in 2Q14 mainland China online game operations metrics were due to the contribution of new users from Guild Wars 2 and World of Warplanes.

Three Months Ended

June 30,

2013

March 31,

2014

June 30,

2014

MAU

1,741k

1,696k

2,616k

APA

291k

280k

427k

ARPU

165

181

152

Internet game revenues made up 55.3% of total revenues in the second quarter of 2014.

Mobile Games Revenues

Total mobile game revenues were US$ 10.54 mn, a 29.9% increase from the first quarter of 2014, and a 182.0% increase from the same period of last year.

Total mobile game revenues made up 18.2% of total revenues in the second quarter of 2014.

WVAS Revenues

WVAS revenues were US$ 15.31 mn, a 6.7% decrease from the first quarter of 2014, and a 5.7% decrease from the same period of last year.

WVAS made up 26.5% of total revenues in the second quarter of 2014.

Gross Profit

Total gross profit for the second quarter of 2014 was US$ 24.50 mn, a 5.1% increase from the first quarter of 2014 and a 37.2% increase from the same period last year.

Total gross margin was 42.3% in the second quarter of 2014.

Internet Game Gross Profit

Internet game gross profit was US$ 15.62 mn, a 23.1% increase from the first quarter of 2014. Internet game gross margin was 48.8% compared to 50.6% in the first quarter of 2014.

Mobile Game Gross Profit

Mobile games gross profit was US$ 4.57 mn, a 13.7% increase from the first quarter of 2014. Mobile games gross margin was 43.4% compared to 49.6% in the first quarter of 2014.

The decline in mobile games gross margins was due to increased contribution from carrier billing channel revenues which have lower margins than other billing channels.

WVAS Gross Profit

WVAS gross profit was US$ 4.31mn, a 34.8% decrease from the first quarter of 2014. WVAS gross margin was 28.1% compared to 40.3% in the first quarter of 2014 and 31.9% from the same period last year. The decrease in WVAS gross margins was mainly attributed to the increase of revenue sharing costs to our media and distribution partners in the second quarter of 2014 compared to 1Q14.

Operating Expenses

Total operating expenses in the second quarter of 2014 were US$ 25.98 mn compared to US$ 15.04 mn in the first quarter of 2014.

Product development expenses in the second quarter of 2014 were US$ 6.51 mn compared to US$ 5.93 mn in the first quarter of 2014. The increase in product development expenses were due to the slight increase of game operation team staff costs.

Sales and marketing expenses in the second quarter of 2014 were US$ 16.01 mn compared to US$ 6.74 mn in the first quarter of 2014. The increase in 2Q14 marketing expenses were related to promotional activities associated with the commercial release of Guild Wars 2, the commercial release of World of Warplanes and the marketing of the War Saga brand.

General and administrative expenses in the second quarter of 2014 were US$ 3.46 mn compared to US$ 2.36 mn in the first quarter of 2014. The increase in G&A was partly due to higher stock based compensation expenses.

The Company’s total headcount remained stable in the second quarter of 2014 at 1,201 staff compared to 1,116 staff at the end of the first quarter of 2014.

Earnings

US GAAP net income and diluted income per ADS were US$ 0.07 mn and US$ 0.00, respectively. Non-GAAP net income and earnings per ADS were US$ 1.45 mn and US$ 0.03, respectively.

Total ADS on a diluted basis outstanding during the second quarter of 2014 were 47.31 mn, compared to 47.03 mn outstanding during the first quarter of 2014.

For the purpose of earnings
per share calculation

Number during three
months ended

March 31, 2014

Number during three
months ended

June 30, 2014

ADS (in mns)

45.39

45.52

Add: Dilution impact from
options and nonvested shares

0.54

0.56

Warrants issued to business
partners

1.10

1.23

ADS on diluted basis

47.03

47.31

Balance Sheet

As of June 30, 2014, the Company had US$ 230.58 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 5.07 per ADS in in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash.

Investment in Ourgame

In the first quarter 2014, the Company invested RMB 100 mn in Ourgame International Holdings Limited (“Ourgame” also known as “LianZhong”). On June 30, 2014, Ourgame has successfully listed on the Hong Kong Stock Exchange under the stock code “6899.HK”.

The market value of this long-term investment was about US$ 28.44 mn at the end of the second quarter of 2014 compared to our holding cost of roughly US$ 16.38 mn at the end of the second quarter of 2014. The fair value of this investment was recorded under available-for-sale securities, and the gain of US$ 12.06 mn was recorded under Other Comprehensive Income.

Business Outlook (For the third quarter ending September 30, 2014)

The Company expects total revenues for the third quarter of 2014 to be within the range of US$ 64 mn to US$ 65 mn. The Company expects total gross profit to be within the range of US$ 26 mn to US$ 27 mn. We expect net income to be US$ 9 mn to US$ 10 mn and Non-GAAP net income is expected to be US$ 10 mn to US$ 11 mn.

Conference Call

KongZhong’s management will hold a conference call and webcast to discuss the results at 7:30 PM Eastern Daylight Time (EDT) on Wednesday, August 27, 2014 (7:30 AM Beijing/Hong Kong time, Thursday, August 28, 2014)

The conference call will be available live via webcast on the Investor Relations 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
– Hong Kong Dial-in Number: +852 2475 0994
– Mainland China Dial-in Number: 800 819 0121, 400 620 8038
– International Dial-in Number: +65 6723 9381
Passcode: 84141367

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 September 4, 2014:

– U.S. Toll Free Dial-in Number: +1 855 452 5696
– Hong Kong Toll Free Dial-in Number: 800 963 117
– Mainland China Dial-in Number: 800 870 0206, 400 602 2065
– International Dial-in Number: +61 2 8199 0299
Passcode: 84141367

About KongZhong

KongZhong Corporation (NASDAQ: KZ), listed on Nasdaq in 2004, is a leading online game developer and operator in China. KongZhong operates three main business units, namely Internet Games, Mobile Games and WVAS. Under Internet Games, KongZhong operates the largest Chinese military gaming platform under the “WAR SAGA” brand, which includes games such as World of Tanks, World of Warplanes and World of Warships. On May 15, 2014, KongZhong officially launched the most-anticipated 3D fantasy MMORPG Guild Wars 2 in China. KongZhong has the exclusive publishing rights for World of Tanks, World of Warplanes and World of Warships, Guild Wars 2, Auto Club Revolution, Blitzkrieg 3 and other titles in Mainland China.

KongZhong entered the smartphone game industry in 2011 through an acquisition of smartphone game engine and has expanded its mobile game development team across 4 cities across Mainland China. KongZhong offers popular mobile games in China and overseas with over 10 smartphone games across various genres being under development, including RPG, RTS, military, fantasy and etc. 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

Xingran Chen
Public Relations
Tel.: (+86-10) 8857.6000
E-mail: chenxingran@kongzhong.com

KongZhong Corporation

Condensed Consolidated Statements of Comprehensive Income

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

Three Months Ended

June 30,

March 31,

June 30,

2013

2014

2014

Revenues

43,581

49,607

57,870

Sales tax

1,582

652

503

Net revenues

41,999

48,955

57,367

Cost of revenues

24,149

25,637

32,871

Gross profit

17,850

23,318

24,496

Operating expenses

Product development

6,455

5,934

6,510

Sales and marketing

4,644

6,737

16,009

General and administrative

2,166

2,364

3,463

Total operating expenses

13,265

15,035

25,982

Government subsidy

652

194

267

Income (loss) from operations

5,237

8,477

(1,219)

Interest income

1,431

2,269

1,751

Interest expense

36

Imputed interest on long-term liabilities

150

150

150

Exchange gain (loss)

221

(348)

(316)

Income before tax expense

6,703

10,248

66

Income tax expense

191

298

Net income

6,512

9,950

66

Earnings per ADS, basic

0.16

0.22

0.00

Earnings per ADS, diluted

0.15

0.21

0.00

Weighted average ADS outstanding
(million)

41.93

45.39

45.52

Weighted average ADS used in diluted
EPS calculation (million)

42.96

47.03

47.31

Net income

6,512

9,950

66

Other comprehensive income (loss)

4,084

(2,799)

10,561

Total comprehensive income (loss)

10,596

7,151

10,627

KongZhong Corporation

Condensed Consolidated Balance Sheets

(Unaudited, US$ in thousands)

As of
June 30,

As of
March 31,

As of
June 30,

2013

2014

2014

Assets

Current assets

Cash and cash equivalents

69,676

118,303

68,506

Term deposits

16,851

4,716

5,021

Available-for-sale securities

28,444

Held-to-maturity securities

57,694

42,283

92,045

Accounts receivable (net)

19,246

19,526

23,245

Restricted cash

10,520

Other current assets

6,157

8,936

8,093

Total current assets

180,144

193,764

225,354

Non-current assets

Rental deposits

517

629

890

Intangible assets (net)

80,633

78,127

74,223

Property and equipment (net)

4,699

7,076

7,048

Long-term investments

4,000

18,380

2,000

Goodwill

89,140

89,575

89,497

Restricted cash

36,415

36,591

36,560

Total non-current assets

215,404

230,378

210,218

Total assets

395,548

424,142

435,572

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable
(including accounts payable of the consolidated
variable interest entities (“VIE”) without recourse to
KongZhong Corporation of $42,505, $39,438 and
$35,003 as of June 30, 2013, March 31, 2014 and
June 30, 2014, respectively)

42,605

39,460

35,016

Deferred revenue
(including deferred revenue of the consolidated VIE
without recourse to KongZhong Corporation of
$2,854, $2,958 and $15,954 as of June 30, 2013,
March 31, 2014 and June 30, 2014, respectively)

3,057

2,987

15,984

Other current liabilities
(including other current liabilities of the
consolidated VIE without recourse to KongZhong
Corporation of $9,932, $11,062 and $16,523 as of
June 30, 2013, March 31, 2014 and June 30, 2014,
respectively)

20,972

21,095

22,427

Total current liabilities

66,634

63,542

73,427

Non-current Liabilities

Other long-term liabilities
(including other long-term liabilities of the
consolidated VIE without recourse to KongZhong
Corporation of $18,984, $19,410 and $9,560 as of
June 30, 2013, March 31, 2014 and June 30, 2014, respectively)

18,984

19,410

9,560

Total liabilities

85,618

82,952

82,987

Shareholders’ equity

309,930

341,190

352,585

Total liabilities and shareholders’ equity

395,548

424,142

435,572

KongZhong Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, US$ in thousands)

Six Months Ended

June 30,

June 30,

2013

2014

Cash Flows From Operating Activities

Net income

13,317

10,016

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

Depreciation and amortization

3,042

5,567

Imputed interest on long-term liabilities

300

300

Impairment loss on intangible assets

251

Share-based compensation

1,000

1,101

Changes in operating assets and liabilities

1,425

12,358

Net Cash Provided by Operating Activities

19,335

29,342

Cash Flows From Investing Activities

Purchase of intangible assets

(1,080)

(98)

Purchase of term deposits

(16,583)

(2,479)

Proceeds from disposal of term deposits

1,868

Long-term investment

(16,380)

Purchase of held-to-maturity securities

(162,117)

(134,372)

Proceeds from disposal of held-to-maturity securities

122,358

93,858

Purchase of property and equipment

(2,521)

(2,857)

Restricted cash

(10,351)

Net Cash Used in Investing Activities

(70,294)

(64,460)

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

(5,463)

(23,405)

Repurchase of ordinary shares

(10,124)

(12)

Proceeds from exercise of warrants

17,820

Proceeds from bank borrowing

9,000

Repayment of bank borrowing

(9,057)

Net Cash Used in Financing Activities

(769)

(22,988)

Effect of foreign exchange rate changes

709

(816)

Net decrease in Cash and Cash Equivalents

(51,019)

(54,922)

Cash and Cash Equivalents, Beginning of Period

120,695

123,428

Cash and Cash Equivalents, End of Period

69,676

68,506

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

June 30,

March 31,

June 30,

2013

2014

2014

GAAP net income

6,512

9,950

66

Share-based compensation

444

333

768

Imputed interest on long-term liabilities

150

150

150

Amortization of intangibles

717

180

462

Non-GAAP net income

7,823

10,613

1,446

Weighted average ADS used in diluted
EPS calculation (million)

42.96

47.03

47.31


Non-GAAP diluted net income per ADS

0.18

0.23

0.03