KongZhong Corporation Reports First Quarter 2015 Unaudited Financial Results (PR Newswire)

BEIJING, May 20, 2015 /PRNewswire/ — Kong Zhong Corporation (NASDAQ: KZ), a leading online games publisher and developer in the PRC, today announced its unaudited financial results for the first quarter of 2015.

First Quarter 2015 Financial Highlights

  • Total revenues for the first quarter of 2015 were US$ 50.51 mn, exceeding the guidance range of US$ 46 mn to US$ 47 mn.
  • Total gross profit was US$ 19.11 mn, exceeding the guidance range of US$ 17 mn to US$ 18 mn.
  • Net income was US$ 4.20 mn, with diluted net income per American Depositary Shares (“ADS”) of US$ 0.09, exceeding the guidance level of US$ 4 mn.
  • Non-GAAP net income was US$ 5.17 mn, with Non-GAAP diluted net income per ADS of US$ 0.11 (Non-GAAP Financial Measures are described and reconciled to the corresponding GAAP measures in the section titled “Non-GAAP Financial Measures”), exceeding the guidance level of US$ 5 mn.
  • As of March 31 2015, the Company had US$ 190.12 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 4.08 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 49.96 mn short-term bank loan. The mark to fair value of the Company’s investments in Ourgame and Forgame were priced at HK$ 3.83 and HK$ 14.84 per ordinary share, respectively (or US$ 29.04 mn and US$ 17.02 mn, respectively) as of March 31, 2015, compared to the May 19th price of Ourgame and Forgame shares at HK$ 8.90 and HK$ 19.36 (or US$ 67.51 mn and US$ 22.21 mn, respectively). 

The Company’s Chairman and Chief Executive Officer, Leilei Wang said, “In 1Q15 we performed in-line with our prior expectations as we had a pause in new smartphone game releases.  However, moving into the second quarter and the remainder of 2015, we expect to significantly increase the release of high-quality smartphone games beginning with our highly anticipated Western Fantasy themed Card Battle Game “Super God Battle Squad” with it’s open beta release scheduled for the middle of June and the strong release of Rush Three Kingdoms into the South Korean and Taiwan mobile game markets.  In PC games we have begun to close beta test World of Warships and are working closely with ArenaNet on the expansion pack of Guild Wars 2. Lastly, we have begun to leverage our strategic investments in both Ourgame and Forgame to develop synergies with our business in the areas of mobile game distribution and mobile game development, among other areas, for the China mobile game market.”

Business Highlights

Internet Game Business Highlights
Key games under operations highlights

— War Saga: World of Tanks will continue to be the primary contributor to Internet game revenues, supplemented by the 2nd War Saga game, World of Warplanes.   

— ArenaNet: The developer of Guild Wars 2, announced the first expansion for the game, “Hearts of Thorns”, on January 24 2015 with first playable demos of the expansion in early March 2015 at PAX East, with closed beta testing expected to follow in the near future.

Internet game pipeline highlights
— World of Warships, the 3rd War Saga game, has begun small scale closed beta testing with multiple beta weekend events planned for May 2015 and further closed beta testing planned into 3Q15.

— The Chronicles of Dragon Wing, a newly licensed 3D Turn-based Tactical Battle Game, has begun closed beta testing in 2Q15.

— Blitzkrieg 3, an asymmetric real time strategy military game, will undertake alpha testing to Chinese players in 2Q15.

— World of Tank Generals, a card based strategy cross platform military game, will begin its first alpha test to Chinese players in 2Q15.

Mobile Game Business Highlights
1Q15 Overview

— No new mobile game launches with smartphone game revenues driven mainly by 5 main games under operation including (1) Rush Three Kingdoms (Three Kingdoms themed Real Time Strategy) (2) My Princess is Cutest (Puzzle / Card RPG)  and (3) General Three Kingdoms (Mobile Battle RPG)

For 2Q15 and beyond, we have the following mobile games in our pipeline.

— Released “Rush Three Kingdoms” in South Korea and Taiwan with 3rd party publisher on Google Play.

— Western Fantasy themed Card Battle Game from Chinese studio (Expected release at middle of June 2015)  (“Super God Battle Squad”)

— Three Kingdoms themed 3D Action RPG from Chinese studio (Expected release, late 2Q15 or 3Q15)

— Western Fantasy themed 3D mobile MOBA from Chinese studio (Expected release 3Q15)
— Western Fantasy themed 3D Action RPG co-development with Korean Studio (Expected release 3Q15) (Working name: Castle of Heroes)

— Western Fantasy themed Side-scrolling Action RPG co-development with Korean Studio 2nd half 2015 (Working name: Three Heroes)

— At least 10 other mobile games under development internally, licensed or in discussions to license for 2nd half 2015 and 2016 release.

Three Months Ended

March 31,

December 31,

March 31,

2014

2014

2015

US$ in thousands

US$ in thousands

US$ in thousands

Revenues

48,955

61,637

50,512

    Internet Games

24,762

29,446

26,364

    Mobile Games

8,070

15,178

10,555

    WVAS

16,123

17,013

13,593

Cost of Revenue

25,637

34,962

31,400

    Internet Games

12,073

15,892

14,325

    Mobile Games

4,050

7,148

6,667

    WVAS

9,514

11,922

10,408

Gross Profit

23,318

26,675

19,112

    Internet Games

12,689

13,554

12,039

    Mobile Games

4,020

8,030

3,888

    WVAS

6,609

5,091

3,185

Gross Margin

48%

43%

38%

    Internet Games

51%

46%

46%

    Mobile Games

50%

53%

37%

    WVAS

41%

30%

23%

Revenues

Total revenues for the first quarter of 2015 were US$ 50.51 mn, an 18.0% decrease from the fourth quarter of 2014 but an increase of 3.2% from the same period last year.

Internet Games Revenues

Internet Game (“Net Game”) revenues were US$ 26.36 mn in the first quarter of 2015, an increase of 6.5% from the same period of last year but a 10.5% QoQ decline, as although World of Tanks demonstrated continued stable performance, user activity and purchases in Guild Wars 2 and World of Warplanes continued to moderate during the period. We expect performance and player purchases in Guild Wars 2 to remain depressed until the release of the upcoming expansion pack.

For the first quarter of 2015, mainland China online game operations achieved average monthly active users (“MAUs”) of 1.9 mn and aggregated monthly paying accounts (“APAs”) of 333k with monthly average revenue per user (“ARPU”) of RMB 163.

Three Months Ended

March 31,

2014

December 31,

2014

March 31,

2015

MAU

1,696k

1,840k

1,909k

APA

280k

327k

333k

ARPU

181

185

163

Internet game revenues made up 52.2% of total revenues in the first quarter of 2015.

Mobile Games Revenues

Total mobile game revenues were US$ 10.56 mn, a 30.8% increase from the same period of last year but a 30.5% decrease from the fourth quarter of 2014. The decrease in mobile game revenues was due to a pause in the release of new self-developed and licensed games on Chinese smartphone game platforms during the 1Q15 period.

Total mobile game revenues made up 20.9% of total revenues in the first quarter of 2015.

WVAS Revenues

WVAS revenues were US$ 13.59 mn, a 20.1% decrease from the fourth quarter of 2014 and 15.7% decrease from the same period of last year.

WVAS made up 26.9% of total revenues in the first quarter of 2015.

Gross Profit

Total gross profit for the first quarter of 2015 was US$ 19.11 mn, a 28.4% decrease from the fourth quarter of 2014 and a decrease of 18.0% from the same period last year.

Total gross margin was 37.8% in the first quarter of 2015.

Internet Game Gross Profit

Internet game gross profit was US$ 12.04 mn, an 11.2% decrease from the fourth quarter of 2014 and a 5.1% decrease from the same period last year. Internet game gross margin was 45.7% compared to 46.0% in the fourth quarter of 2014.

Mobile Game Gross Profit

Mobile games gross profit was US$ 3.89 mn, a 51.6% decrease from the fourth quarter of 2014 and 3.3% decrease from the same period last year. Mobile games gross margin was 36.8% compared to 52.9% in the fourth quarter of 2014 due to higher contribution of mobile game revenues from mobile operator channels during the period.

WVAS Gross Profit

WVAS gross profit was US$ 3.18 mn, a 37.4% decrease from the fourth quarter of 2014 and 51.8% decrease from the same period last year. WVAS gross margin was 23.4% compared to 29.9% in the fourth quarter of 2014.

Operating Expenses

Total operating expenses in the first quarter of 2015 were US$ 16.19 mn compared to US$ 19.40 mn in the fourth quarter of 2014.

Product development expenses in the first quarter of 2015 were US$ 6.12 mn compared to US$ 6.08 mn in the fourth quarter of 2014.

Sales and marketing expenses in the first quarter of 2015 were US$ 6.23 mn compared to US$ 9.08mn in the fourth quarter of 2014. Sales and marketing expenses decreased as we did not release any major new Internet or mobile games in the first quarter.

General and administrative expenses in the first quarter of 2015 were US$ 3.84 mn compared to US$ 4.24 mn in the fourth quarter of 2014.

The Company’s total headcount in the first quarter of 2015 was stable at 1,063 staff compared to 1,091 staff at the end of the fourth quarter of 2014.

Earnings

US GAAP net income and diluted income per ADS were US$ 4.20 mn and US$ 0.09, respectively. Non-GAAP net income and diluted income per ADS were US$ 5.17 mn and US$ 0.11, respectively.

Total ADS on a diluted basis outstanding during the first quarter of 2015 were 46.85 mn, compared to 46.59 mn outstanding during the fourth quarter of 2014.

For the purpose of earnings
      per share calculation

Number during three
months ended

December 31, 2014

Number during three
months ended

March 31, 2015

ADS (in mns)

46.34

46.61

Add: Dilution impact from
options and nonvested shares

0.25

0.24

Warrants issued to business partners

0.00

0.00

ADS on diluted basis

46.59

46.85

Balance Sheet

As of March 31, 2015, the Company had US$ 190.12 mn in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash or US$ 4.08 per ADS in cash and cash equivalents, term deposits, held-to-maturity securities, available-for-sale securities and restricted cash, net of a US$ 49.96 mn short-term loan. The mark to fair value of the Company’s investments in Ourgame and Forgame were priced at HK$ 3.83 and HK$ 14.84 per ordinary share, respectively (or US$ 29.04 mn and US$ 17.02 mn, respectively) as of March 31, 2015, compared to the May 19th price of Ourgame and Forgame shares at HK$ 8.90 and HK$ 19.36 (or US$ 67.51 mn and US$ 22.21 mn, respectively).  

Investment in Ourgame

In the first quarter of 2014, the Company acquired a minority interest in Ourgame International Holdings Limited (“Ourgame” also known as “LianZhong”) for a total consideration of RMB 100.0 mn in cash (equivalent to roughly US$ 16.5 mn at then exchange rates).  Ourgame was subsequently successfully listed on the Hong Kong Stock Exchange (6899.HK) in June 2014.

Investment in Forgame

In the first quarter 2015, the Company entered into an agreement to acquire 8.89 million issued ordinary shares of Forgame Holdings Limited (“Forgame”, listed on the Hong Kong Stock Exchange under ticker “0484.HK)) for a total consideration of HK$124,506,200 in cash (equivalent to approximately US$16.1 million). The acquisition was completed in January 2015 and the investment represented 7% equity interest in Forgame. As the Company has no significant influence over Forgame and Forgame is a listed company in Hong Kong, this investment was recorded as available-for-sale securities.

Business Outlook (For the second quarter ending June 30, 2015)

The Company expects total revenues for the second quarter of 2015 to be within the range of US$ 51 mn to US$ 52 mn.  The Company expects total gross profit to be within the range of US$ 19 mn to US$ 20 mn. We expect net income to be around US$ 4 mn and Non-GAAP net income is expected to be around US$ 5 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, May 20, 2015 ( 7:30 AM Beijing/ Hong Kong time, Thursday, May 21, 2015)

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
– U.S. Dial-in Number: +1 845 675 0437
– Hong Kong Toll Free Dial-in Number: 800 906 601
– Hong Kong Dial-in Number: +852 3018 6771
– Mainland China Dial-in Number: 800 819 0121, 400 620 8038
– International Dial-in Number: +65 6723 9381
Passcode: 3690 1684

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. The archive replay will be available on the website shortly after the call.

A dial-in replay of the conference call will be available until May 28, 2015:

– U.S. Toll Free Dial-in Number: +1 855 452 5696
– U.S. Dial-in Number: +1 646 254 3697
– Hong Kong Toll Free Dial-in Number: 800 963 117
– Hong Kong Dial-in Number: +852 3051 2780
– Mainland China Dial-in Number: 800 870 0206, 400 602 2065
– International Dial-in Number: +61 2 8199 0299
Passcode: 3690 1684

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

March 31,

December 31,

March 31,

2014

2014

2015

Revenues

48,955

61,637

50,512

Cost of revenues

25,637

34,962

31,400

Gross profit

23,318

26,675

19,112

Operating expenses

    Product development

5,934

6,083

6,118

    Sales and marketing

6,737

9,076

6,232

    General and administrative

2,364

4,236

3,838

Total operating expenses

15,035

19,395

16,188

Government subsidy

194

480

214

Income from operations

8,477

7,760

3,138

Interest income

2,269

1,891

1,640

Interest expense

(176)

(183)

Imputed interest on long-term liabilities

(150)

(150)

(140)

Exchange gain (loss)

(348)

385

(73)

Income before income tax expense, loss on
equity method investment, net of income
tax

10,248

9,710

4,382

Income tax expense

298

641

160

Loss on equity method investment, net of
income tax

(25)

Net income

9,950

9,069

4,197

Earnings per ADS, basic

0.22

0.20

0.09

Earnings per ADS, diluted

0.21

0.19

0.09

Weighted average ADS outstanding (million)

45.39

46.34

46.61

Weighted average ADS used in diluted EPS calculation (million)

47.03

46.59

46.85

Net income

9,950

9,069

4,197

Other comprehensive (loss) income

(2,799)

(7,873)

8,000

Total comprehensive income

7,151

1,196

12,197

 

KongZhong Corporation

Condensed Consolidated Balance Sheets

(Unaudited, US$ in thousands)

As of
March 31,

As of
December 31,

As of
March 31,

2014

2014

2015

Assets

Current assets

    Cash and cash equivalents

118,303

105,093

85,168

    Term deposits

4,716

16,907

16,088

Available-for-sale securities

20,014

46,062

    Held-to-maturity securities

42,283

24,359

20,667

    Accounts receivable (net)

19,526

30,244

29,235

    Restricted cash

53,376

61,286

    Other current assets

8,936

19,070

36,990

Total current assets

193,764

269,063

295,496

Non-current assets

    Rental deposits

629

1,445

1,440

    Intangible assets (net)

78,127

55,510

52,101

    Property and equipment (net)

7,076

5,659

4,902

    Long-term investments

18,380

1,076

    Goodwill

89,575

90,019

89,675

    Restricted cash

36,591

10,885

10,816

Total non-current assets

230,378

163,518

160,010

Total assets

424,142

432,581

455,506

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable
(including accounts payable of the
consolidated variable interest entities
(“VIE”) without recourse to KongZhong
Corporation of $39,438, $31,546 and
$33,403 as of March 31, 2014, December
31, 2014 and March 31, 2015, respectively)

39,460

31,600

33,455

Short-term bank loan

(including short-term bank loan of the
consolidated VIE without recourse to
KongZhong Corporation of $nil, $nil and
$nil as of March 31, 2014, December 31,
2014 and March 31, 2015, respectively)

42,429

49,963

Deferred revenue
(including deferred revenue of the
consolidated VIE without recourse to
KongZhong Corporation of $2,958, $4,622
and $5,013 as of March 31, 2014,
December 31, 2014 and March 31, 2015,
respectively)

2,987

4,652

5,042

Other current liabilities
(including other current liabilities of the
consolidated VIE without recourse to
KongZhong Corporation of $11,062,
$14,693 and $15,138 as of March 31, 2014,
December 31, 2014 and March 31, 2015,
respectively)

21,095

22,110

23,472

Total current liabilities

63,542

100,791

111,932

Non-current Liabilities

Other long-term liabilities
(including other long-term liabilities of the
consolidated VIE without recourse to
KongZhong Corporation of $19,410,
$9,860 and $10,000 as of March 31, 2014,
December 31, 2014 and March 31, 2015,
respectively)

19,410

9,860

10,000

Total liabilities

82,952

110,651

121,932

Shareholders’ equity

341,190

321,930

333,574

Total liabilities and shareholders’ equity

424,142

432,581

455,506

KongZhong Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, US$ in thousands)

Three Months Ended 

March 31,

March 31,

2014

2015

Cash Flows From Operating Activities

    Net income

9,950

4,197

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

    Depreciation and amortization

1,091

3,998

    Imputed interest on long-term liabilities

150

140

    Loss on equity method investment

25

    Share-based compensation

333

234

    Changes in operating assets and liabilities

(6,728)

(3,124)

Net Cash Provided by Operating Activities

4,796

5,470

Cash Flows From Investing Activities

    Purchase of intangible assets

(98)

    Purchase of term deposits

(1,569)

    Proceeds from disposal of term deposits

1,267

815

    Investments

(16,380)

(4,086)

    Loan to equity method investee

(7,618)

    Purchase of held-to-maturity securities

(42,507)

(17,699)

    Purchase of available-for-sale securities

(16,060)

    Proceeds from disposal of held-to-maturity securities

51,746

21,300

    Purchase of property and equipment

(2,075)

(55)

    Addition of restricted cash

(8,145)

Net Cash Used in Investing Activities

(9,616)

(31,548)

Cash Flows From Financing Activities

    Proceeds from exercise of employee stock options

429

    Deferred payments for intangible assets

(372)

(407)

    Repurchase of ordinary shares

(12)

    Proceeds from bank borrowing

7,534

Net Cash Provided by Financing Activities

45

7,127

Effect of foreign exchange rate changes

(350)

(974)

Net decrease in Cash and Cash Equivalents

(5,125)

(19,925)

Cash and Cash Equivalents, Beginning of Period

123,428

105,093

Cash and Cash Equivalents, End of Period

118,303

85,168

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, impairment loss on cost method investment and intangible assets, 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,

2014

2014

2015

GAAP net income

9,950

9,069

4,197

Share-based compensation

333

230

234

Imputed interest on long-term
liabilities

150

150

140

Amortization of intangibles

180

600

600

Non-GAAP net income

10,613

10,049

5,171

Weighted average ADS used in diluted EPS calculation (million)

47.03

46.59

46.85

Non-GAAP diluted net income per ADS

0.23

0.22

0.11

SOURCE KongZhong Corporation

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