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KongZhong Corporation Announces Unaudited Third Quarter Results
for the Period Ended September 30, 2004
3Q04 Financial Highlights:
* Revenue grew 509% year-over-year and 3% sequentially to a record $12.36
million.
* The Company's 2.5G revenue grew 556% year-over-year and 10% sequentially
to $10.53 million.
* The Company's 2G revenue grew 330% year-over-year but declined 22%
sequentially to $1.83 million.
* Net income increased 935% year-over-year and 1% sequentially to $5.33
million.
* Net margin was 43.1%, up from 25.4% in 3Q03 and down slightly from 44.3%
in 2Q04.
BEIJING, Nov. 12 /Xinhua-PRNewswire/ -- KongZhong Corporation (NASDAQ: KONG), a
leading provider of advanced second generation (2.5G) wireless value added
services in China, today announced its third quarter 2004 financial results.
Under United States Generally Accepted Accounting Principles (US GAAP), diluted
earnings per ADS was $0.15, up from a diluted earnings per ADS of $0.02 in the
same period of the previous year (3Q03) and down from a diluted earnings per
ADS of $0.19 in the second quarter of 2004 (2Q04). Net income in the third
quarter was $5.33 million, an increase from $0.51 million in 3Q03 and $5.30
million in 2Q04.
As part of the Company's initial public offering, 8 million American Depositary
Shares were issued in early July. Using the enlarged share count, the
Company's earnings per ADS in 1Q04, 2Q04, and 3Q04 would have been $0.09,
$0.15, and $0.15 respectively.
Commenting on the results, the Company's Chairman and CEO, Yunfan Zhou, said,
'In the third quarter, the wireless value-added services market faced a number
of challenging issues, including the transition of SMS services to the MISC
service management platform, changes in billing centers for MMS, a tightening
of regulations governing wireless value-added services by mobile operators, and
increased competition in general. These factors caused our top-line growth to
slow considerably compared to prior periods. We believe these factors will
continue to pose challenges in the fourth quarter for us and other service
providers in this market. Nonetheless, we are confident of the 2.5G market's
long-term prospects, as Chinese consumers continue to migrate from 2G to 2.5G
mobile phones. As a leading 2.5G service provider in China, we believe we are
well positioned to capture this long-term potential.'
Business Highlights:
* The Company believes it remained the leader with China Mobile in terms
of 2.5G revenues, which are comprised of WAP, MMS, and Java revenues.
* The Company grew its mobile game revenue from 2.5G services by 11%
sequentially to approximately $1.40 million in 3Q04.
* The Company signed agreements with:
-- Hutchison Telecom in Hong Kong to provide wireless value-added
services to Hutchison's customers in Hong Kong and Macau.
-- Beijing Buena Vista Business Consulting Company to provide
interactive voice response (IVR) services using content from the
Dragon Club, a cartoon program that is popular with Chinese children
and authorized by the Walt Disney Company.
-- Beijing Kirin Kid Production Ltd. to use sound, music, pictures,
and personal information from the rock band Heibao, including its
new album 'Heibao V,' in KongZhong's wireless value-added
services.
-- Phoenix Weekly (HK) in which Phoenix Weekly will provide the Company
with pictures and essays for use in the Company's wireless value-
added services. The Company also agrees to set up a club in its
wireless communities for the readers of Phoenix Weekly to exchange
information.
-- China Film Group in October to give the Company exclusive rights in
China to use video clips, stage photos, posters, music, dialogues,
and sound effects from the forthcoming film 'Kung Fu Hustle' in
the Company's wireless value-added services.
Third Quarter Financial Review
(Note: Unless otherwise stated, all financial statement amounts used in this
press release are based on US GAAP and denominated in US dollars.)
Revenues
Revenues for the quarter totaled a record $12.36 million, up 509% from the same
period of the previous year and up 3% from 2Q04. By platform, revenues from
2.5G wireless value-added services accounted for 85% of total revenues and
revenues from 2G wireless value-added services represented the remaining 15%,
compared with 80% and 20%, respectively, in 2Q04.
Revenues from 2.5G services, which include services delivered using wireless
access protocol (WAP), multimedia messaging service (MMS), and Java technology,
grew 556% from 3Q03 and 10% from 2Q04 to $10.53 million in 3Q04. Growth in WAP
revenues accounted for the largest increase in 2.5G revenues. Revenue from 2G
services, which include short messaging service (SMS), interactive voice
response, and color ring back tone (CRBT), grew 330% from 3Q03 but decreased
22% from 2Q04 to $1.83 million in 3Q04. The sequential decline in 2G revenues
resulted from a decrease in SMS revenue, which was mainly caused by mobile
operators' transitioning SMS services to the MISC service management platform
in a number of provinces.
By type, revenue from monthly subscriptions accounted for 92% of total revenue,
and revenue from downloads accounted for the remaining 8%. During the quarter,
the number of monthly subscriptions grew by 21% from 2Q04 to 15.48 million, and
average revenue per subscription fell by 14%.
1Q04 2Q04 3Q04
Subscription
Revenue 93 % 91 % 92 %
Download Revenue 7 % 9 % 8 %
Total 100 % 100 % 100 %
By service category, the Company derived 47% of its revenues from interactive
entertainment, 36% from media services, and 17% from community- related
services.
1Q04 2Q04 3Q04
Interactive
Entertainment 56 % 47 % 47 %
Media 25 % 37 % 36 %
Community 19 % 16 % 17 %
Total 100 % 100 % 100 %
Expenses
Cost of revenues (COR) in 3Q04 totaled $4.32 million, up 564% from 3Q03 and up
24% from 2Q04. The year-over-year increase was a result of higher business
turnover and was primarily due to greater amounts paid to mobile operators,
handset manufacturers, and content partners. Gross margin for the quarter was
65.0%, down from 67.9% in the same period of the previous year and 70.8% in
2Q04. The sequential margin contraction was attributed primarily to higher
fees paid to handset manufacturers and, to a lesser extent, higher fees paid to
mobile operators.
Total operating expenses in 3Q04 increased by 243% from the same period of the
previous year and contracted by 7% from 2Q04. The year-over-year increase was
largely due to increases in salary and benefits (associated with increased
headcount), office rental expense, professional fees, and business tax. Total
operating expenses represented 24.0% of revenues, compared with 42.6% and 26.6%
of revenues in 3Q03 and 2Q04, respectively. Product development expense
increased by 6% from 2Q04 and represented 9.3% of revenues. The increase was
driven primarily by higher office rental expense and, to a lesser extent,
higher depreciation. Sales and marketing expenses decreased by 20% from 2Q04
and represented 5.5% of revenues. The decrease was primarily the result of
reduced sales and marketing activities due to the uncertain environment.
General and administrative expenses decreased by 7% from 2Q04 and represented
8.3% of revenues. Amortization of deferred stock compensation decreased by 17%
from 2Q04 and represented 1.0% of revenues. Overall, the Company's operating
margin improved from 25.3% in 3Q03 to 41.0% in 3Q04, but contracted from 44.2%
in 2Q04.
The company-wide headcount increased 16% from 405 at the end of 2Q04 to 470 at
the end of 3Q04.
Earnings
Net income totaled $5.33 million in the third quarter, an increase of 935% from
$0.51 million in the same period of the previous year and an increase of 1%
from $5.30 million in 2Q04. Net margin was 43.1%, up from 25.4% in 3Q03 but
down from 44.3% in 2Q04. Diluted earnings per ADS were $0.15, up from $0.02
from the same period of the previous period and down from $0.19 in 2Q04.
Balance Sheet and Cash Flow
At the end of the quarter, the Company had $82.07 million in cash and cash
equivalent funds and $98.41 million in total assets.
Cash flow from operating activities totaled $0.74 million in the third quarter,
compared to $4.07 million in the second quarter. The sequential decline in
cash flow from operating activities was primarily due to an increase in
accounts receivable from $6.28 million at the end of the second quarter to
$10.94 million at the end of the third quarter. The $4.66 million increase in
accounts receivable came as a result of delays in payments by several
provincial operators to all wireless service providers. In the third quarter,
the Company spent $1.45 million on capital expenditures.
Business Outlook:
The Company presently expects its revenues to grow from $12.36 million in 3Q04
to $12.5-13.0 million in 4Q04, as it continues to adapt to recent changes in
the marketplace. The Company estimates that its operating margin may contract
slightly from the 3Q04 level.
Webcast of Conference Call:
The Company's management team will conduct a conference call at 11:00 pm
Beijing time (10:00 am Eastern time and 7:00 am Pacific time) on November 12. A
webcast of this conference call will be accessible on the Company's web site at
http://ir.kongzhong.com/ .
KongZhong Corporation
Consolidated Statements of Income
(US$ thousands, except percentages, per share data, and share count)
(unaudited)
For the For the For the
Three Three Three
Months Months Months
Ended Ended Ended
Sep. 30, Jun. 30, Sep. 30,
2003 2004 2004
Revenues $2,031 $11,968 $12,360
Cost of revenues 651 3,494 4,323
Gross profit 1,380 8,474 8,037
Operating expense
Product development 390 1,084 1,146
Sales & marketing 204 847 674
General & administrative 263 1,102 1,024
Amortization of deferred
stock compensation 9 146 120
Subtotal 866 3,179 2,964
Operating income 514 5,295 5,073
Non-operating expense
(income)
Interest expense (1) (9) (261)
Others -- 4 6
Subtotal (1) (5) (255)
Income before tax 515 5,300 5,328
Income tax expense -- -- --
Net income $515 5,300 5,328
Basic earnings per ADS $0.04 $0.45 $0.17
Diluted earnings per ADS $0.02 $0.19 $0.15
Margin Analysis:
Gross margin 67.9 % 70.8 % 65.0 %
Operating margin 25.3 % 44.2 % 41.0 %
Net margin 25.4 % 44.3 % 43.1 %
Additional Data:
2.5G revenue $1,605 $9,607 $10,525
2G revenue 426 2,361 1,835
ADS outstanding (million) 11.73 11.73 34.25
ADS used in diluted EPS
calculation (million) 27.40 27.44 34.72
KongZhong Corporation
Consolidated Statements of Cash Flows
(US$ thousands)
(unaudited)
For the 9- For the 9-
Months Ended Months Ended
Sep. 30, 2003 Sep. 30, 2004
Cash Flows From Operating
Activities
Net Income $848 $13,770
Adjustments
Amortization of deferred stock
compensation 2 347
Depreciation and amortization 167 493
Changes in operating assets and
liabilities (275) (7,558)
Net Cash Provided by Operating
Activities 812 7,052
Cash Flows From Investing
Activities
Purchase of property & equipment (672) (2,083)
Net Cash Used in Investing (672) (2,083)
Activities
Cash Flows From Financing
Activities
Issuance of New Equity -- 73,241
Increase in minority interest -- 121
Net Cash Provided by Financing
Activities -- 73,362
Translation Adjustments 1 1
Net increase in Cash and Cash
Equivalents 141 78,332
Cash and Cash Equivalents, 2,646 3,743
Beginning of Period
Cash and Cash Equivalents, End of
Period 2,787 82,075
KongZhong Corporation
Consolidated Balance Sheet
(US$ thousands)
(unaudited)
Dec. 31, 2003 Sep. 30, 2004
Cash and cash equivalents $3,743 $82,075
Accounts receivable 1,704 10,942
Other current assets 198 2,618
Total current assets 5,645 95,635
Rental deposit 74 342
PP&E (net) 848 2,438
Total assets $6,567 $98,415
Accounts payable 564 2,340
Other current liabilities 393 2,880
Amount due to related party 90 --
Total current liabilities 1,047 5,220
Minority interest -- 121
Series B redeemable 2,970 --
convertible preferred shares
Total liabilities 4,017 5,341
Shareholders' equity 2,550 93,074
Total liabilities & $6,567 $98,415
shareholders' equity
KongZhong Corporation is a leading provider of advanced second generation
(2.5G) wireless interactive entertainment, media, and community services to
consumers in China. The Company delivers a broad range of services, through
multiple technology platforms, which users can access directly from their
mobile phones by choosing an icon embedded in select models of handsets or from
a mobile operator's portal or web site.
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. Such forward-looking statements include, without
limitation, statements regarding trends in the wireless value-added services
market 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 interactive services market and the
effect of such pressure on prices; unpredictable changes in technology,
consumer demand and usage preferences in this market; the state of and any
change in our relationship with China's telecommunications operators; our
dependence on the billing systems of mobile operators for our performance;
changes in the regulatory policies of the Ministry of Information Industry and
other relevant government authorities; 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 market. 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.
For more information, please contact:
Richard Wei
Chief Financial Officer
Tel: +86-10-8857-6000
Fax: +86-10-8857-5891
Email:
DATASOURCE: KongZhong Corporation
CONTACT: Richard Wei Chief Financial Officer +86-10-8857-6000
or fax, +86-10-8857-5891, or
Web site: http://www.kongzhong.com/