Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Leilei Wang - Chairman of the Board, Chief Executive Officer

Sam Sun - Chief Financial Officer

Analysts

Michael Olson - Piper Jaffray

C. Ming Zhao - Susquehanna Financial Group

KongZhong Corporation (KONG) Q3 2008 Earnings Call November 17, 2008 7:30 PM ET

Operator

Good day, ladies and gentlemen. Welcome to the third quarter 2008 KongZhong Corporation earnings conference call. (Operator Instructions) At this time, I would like to hand the presentation over to your host for today’s call, Mr. Sam Sun, Chief Financial Officer. Please proceed, sir.

Sam Sun

Thank you. Hello, everyone. Welcome to KongZhong Corporation’s third quarter 2008 earnings conference call. You can find our Q3 2008 earnings release at our website, ir.kongzhong.com. This is Sam Sun, Chief Financial Officer of the company. We also have Leilei Wang, our Chairman and CEO; Nick Yang, our President; and Xin Wang, our COO, on the line. I will first go through our financial highlights. After my discussion, I will turn it over to Leilei, who will review our operations and talk about our business outlook.

Overall, our Q3 2008 revenues are better than what we expected in August 2008. Our Q3 total revenues were $25.05 million, exceeding our guidance of $23.5 million to $24.5 million. On the cash flow side, we generated $9.7 million operating cash inflow in the first nine months of 2008, which helped increase our cash level to $134.89 million as of September 30, 2008. We believe cash is quite important in today’s financial market situation.

Regarding the segment reporting, we made a change this quarter. Because of the rapid growth of the mobile games market in China, starting from the third quarter of 2008 we have classified the operations related to mobile games -- that is, mobile online games, downloadable offline games, and WAP games -- into a separate operating segment and report the revenues, costs, and expenses of the mobile games segment separately.

So our WVAS revenues now excluding mobile games revenues increased 38% from the same quarter last year and increased 2% quarter over quarter to $22.07 million. Mobile game revenues -- this is the new segment -- increased 179% from the same quarter last year and increased 63% quarter over quarter to $2.37 million. Mobile advertising revenues increased 104% from the third quarter of 2007 and increased 57% quarter over quarter to $0.61 million.

WVAS gross margin in the third quarter of 2008 was 45%, consistent with 45% in the second quarter of 2008. Mobile games gross margin in the third quarter was 60%, consistent with 59% in the second quarter of 2008. Mobile advertising gross margin in the third quarter of 2008 was 50% compared to the 29% in the second quarter of 2008, mainly because the percentage of fixed costs towards revenues decreased when revenue increased. For Q4, we expect gross margin for the three segments consistent with Q3.

Our total operating expenses were $34.27 million, which includes a goodwill impairment loss of $21.62 million. During the recent financial turmoil, KongZhong's market capitalization decreased and remains below its net asset value and cash value. Many of our peers and competitors are also experiencing low valuations, mainly because of the market conditions and KongZhong's low market capitalization. In this quarter, we recorded $21.62 million of provision for impairment of goodwill arising from past year’s acquisition in WVAS segment. Mainly because of this goodwill impairment, our U.S. GAAP net loss was $21.57 million in Q3. If excluding such impairment, we would have been at a net income position of $50,000 net income.

Non-GAAP income was $0.81 million, which excluded share-based compensation costs of $604,000 and amortization of intangibles of $152,000 and goodwill impairment loss of $21.62 million. Diluted non-GAAP income per ADS was $0.02.

With that, I will now turn it over to Leilei for his remarks.

Leilei Wang

Thanks, Sam. Good morning and good evening, everyone. I am Leilei Wang. I just joined KongZhong for almost one month as Chairman and CEO of the company. First of all, I am very impressed with KongZhong's staff quality and passion and also I am very excited about some new things, like mobile online game and mobile advertising business with Kong.net mobile Internet portal. From now until the end of this year, I will work out with my staff about to get more understanding about KongZhong's business plans, operating structure, efficiency, and also the high cost structure.

Now I will tell you some macro strategy for ’09, KongZhong's strategy. We will insist on developing the wireless value-added service business in China, improve the margin, and generate more revenue growth, and also we are focused on developing the leading wireless Internet portal of Kong.net.

For wireless WVAS, we will focus on game and entertainment related products, like music and some video clips download services, and also we will focus on expense, some offline provincial carrier-based channels in China and [our cooperations] in China and also we will insist on focus on developing the handset manufacturers cooperation, which gives us high margin wireless value-added service revenues from the handset [inaudible] service.

Now I just have some revised strategy for Kong.net. We will now compete with some strong media brands from the Internet portals to their wireless portals. For online, Kong.net portal will develop and focus on developing some community Internet-based services mixed with our content channels, and also we have a heavy reduction about Kong.net branded marketing budget, which has revised the marketing strategies out from the traditional branded marketing strategy, like TV ads and billboard ads to some strategies, which is focused on user acquisition in ’09 to develop the online marketing promotions. For example, like some alliances with free websites.

Now I believe I will give you more detailed information for the next quarters, including about KongZhong's new detailed strategies and some financial outlook in ’09.

Let me tell you more about the macro market wireless value-added service in China. First of all, I am very confident with the fast-growing market for the telecom and the wireless value-added industry in China and this industry is less impact for the traditional economic declines and just like some business, console game business in the U.S., people just make more reduction about outside entertainment and because of the lack of entertainment options, they have to stay at home or play virtual games. In China, it is the same situation. [The jobless] will have more entertainment options in handsets and mobile gaming services.

Now we think the government policy, which is to expand the domestic demand, they will make more investment on the 3G infrastructure and this -- that carrier to heavily develop some 3G users in ’09, so these kinds of policies can give us more opportunities for handset manufacturing industry and also with service providers service, value-added service industry.

For example, for ’09 the carrier will make more a reduction about wireless Internet accessing fee, which is like some fixed line Internet. Everybody knows that the fixed line Internet online game was ramping up. The major reason is the fixed line carrier just upgraded bandwidth from narrow-band to broadband and also they have a heavily -- some reduction about Internet accessing fees. So we believe in ’09, more and more people will become mobile Internet users and more and more complicated and rich content will come up to the market from online mobile games and online video clips streaming services and many of the rich content services. So I am very happy to join KongZhong online and we will share more information and [inaudible] with my team and also with you guys here. Thanks.

Sam Sun

Operator, we will open the line for question-and-answers, please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mike Olson with Piper Jaffray.

Michael Olson - Piper Jaffray

Good morning, everybody. I just have two quick questions and both on the mobile games. It looks like mobile games revenue was about 10% of revenue in the September quarter, and what percent of revenue do you think mobile games could be in 2009?

Leilei Wang

We hope our mobile games revenues is about 20% to 25% of the total revenues now of next year.

Michael Olson - Piper Jaffray

Okay, that’s very helpful. And then I guess the second question is does the focus on mobile games going forward kind of change the competitive landscape for the company? Are you facing -- do you feel like you are facing a new set of competitors now with this as an increased focus going forward?

Leilei Wang

No, KongZhong's first mobile online game, Tian Jie Online, is the number one game in terms of the concurrent user base and the revenue side. We think some competitor will come in from the games developers and like some Internet games developers and now the third quarter it is not our competitors directly.

Michael Olson - Piper Jaffray

Okay. Thank you very much.

Operator

Our next question comes from the line of Ming Zhao with SIG. Please proceed.

C. Ming Zhao - Susquehanna Financial Group

Thank you for taking my question and good morning, everyone and congratulations, Leilei, on your new role. I have two questions here -- the first question is it seems like KongZhong and also some other industry peers have been booking some stable revenue trends lately, so I wanted your comment on the regulatory environment. Are we seeing a less stricter policy from the mobile carriers or is this just because the bubble has been squeezed out and the market environment is cleaner than before?

Leilei Wang

I think the regulation, it’s always happened for this industry, but I think carriers continual strategy is have the close relationship with the major players for the provider industry, like KongZhong, Sina, and TOM. Almost less than 10 service providers have a close relationship with carrier and it seems the carrier has more detailed strategies and policies to support the big carrier, the big service providers in this market. For example, the carrier just only to allocate their cell phone sales channel to the major service providers in China and also we have the communication with some provincial based carriers, like Guangdong, [inaudible] and [inaudible]. They were very happy to have the cooperation with the major service providers, which is [Lisgo] Company and also their revenue sites is bigger than maybe $100 million, so this is some first choice for provincial based carriers.

C. Ming Zhao - Susquehanna Financial Group

Okay. My second question is you mentioned in your prepared remarks that you are going to reduce Kong.net’s marketing expense. I was wondering, how much are you going to spend on Kong.net next year versus this year? How much did you spend this year or plan to spend by the end of this year?

Leilei Wang

It’s very difficult to give you some detailed numbers of the marketing budget for ’09 but for historical examples, the Kong.net has many heavy marketing campaigns for branded campaigns for the last two years to promote the Kong.net brand on TV and billboard and many traditional advertising media, so I think [as enough] for brand awareness for Kong.net in the market and the user awareness is very high. For online, we just revised our marketing strategy. We will pay much more money on online promotion with the target for user acquisition and -- for example, we have [inaudible] budget for online promotion on free website [inaudible] and also we will start up some offline also for universities. This is very efficient to develop the user base of the Kong.net Internet communities.

And I think Sam will give you some historical numbers for Kong.net marketing fees in the last two years. Sam.

Sam Sun

Regarding historical numbers, I think in 2007 the -- each year Kong.net, in total spending on Kong.net is around $10 million to $12 million and I believe in 2009 there should be a significant reduction of this Kong.net spending.

C. Ming Zhao - Susquehanna Financial Group

Okay, that’s helpful. Thank you very much.

Operator

(Operator Instructions) There are no further questions in queue at this time.

Sam Sun

All right. Okay, thanks to everyone for calling in and I look forward to talking to you next quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: KongZhong Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts