KongZhong's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: KongZhong Corporation (KZ)

KongZhong Corporation (KONG) Q1 2013 Earnings Call May 21, 2013 7:30 AM ET


Jay Chang – Chief Financial Officer

Wang Lei Lei – Chief Executive Officer


Nick Ning – 86 Research


Ladies and gentlemen, thank you for standing by and Welcome to the Q1 2013 KongZhong Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) This conference is being recorded Wednesday 22 May, 2013. I would now like to hand the conference over to KongZhong Corp's Chief Financial Officer, Mr. Jay Chang. Thank you, please go ahead.

Jay Chang

Thank you, operator. This conference call may contain forward-looking statements. 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 upon them. For additional discussions of risks and uncertainties relating to forward-looking statements 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 conference call.

Thank you for your interest in KongZhong. I will first review our first quarter results before handing over the call to our CEO, Mr. Wang Lei Lei.

Total revenues for the first quarter were $47.94 million compared to the guidance range of $45 million to $46 million, representing 9% increase from the same period last year. As we continue to transition our business to become a cross-platform digital entertainment company, mobile game made an 8% of total revenues, while internet games contributed roughly 60% of total revenue, with overall gaming revenues making up 67% of total revenue.

Total gross profit was $18.6 million in the first quarter compared to guidance of $17 million to $18 million, representing a 3.3% increase from the fourth quarter. Net income in the first quarter was $6.8 million compared to our guidance range of $3 million to $4 million. As the introduction of the China Tank Series in the World of Tanks and made in our game World of Tanks succeeded expectations supported by cost savings.

Basically net income per ADS was $0.17. Non-GAAP net income was $8.9 million above the guidance range of $5.5 million to $6.5 million. While non-GAAP net income per ADS was $0.21. As of March 31, 2013 the Company had $185 million in cash and cash equivalents, term deposits, held-to-maturity securities and restricted cash, or $4.55 per ADS. Now turning to each business unit.

Internet games revenue were $28.3 million in the first quarter, a 48% increase from the same period last year and an 19% increase from 4Q. Revenues from World of Tanks continue to grow in the first quarter compared to the fourth quarter, while revenues from our self-developed games and overseas games declined as Company has re-focused our efforts on domestic game development towards more differentiated internet game genres.

Domestic internet game revenues were $27.8 million, a 22% increase from the fourth quarter and a 54% increase from the same period last year. Overseas internet game revenues were $600,000, a 40% decrease from the fourth quarter.

For the first quarter, mainland China online game operations achieved average concurrent users of 364,000, aggregated paying accounts of 950,000 with quarterly average revenue per user or ARPU of RMB184. ACUs in first quarter were up 60% from the same period last year.

Internet game gross profit in the first quarter was $13.1 million, a 27% increase from the same period last year and a 14.6% increase from the fourth quarter. First quarter internet game gross margins were 46% compared to 53% in the same period last year and 48% in the fourth quarter.

Turning to mobile game; mobile game revenues in the first quarter were $3.7 million, a 30% decrease from the same period last year and 11% decrease from the fourth quarter.

Feature phone mobile games revenues in first quarter were $2.37 million, compared to $2.13 million in the fourth quarter or 11% quarter-over-quarter increase. Our mobile operator partners however, continued to implement strict operating policies and continued to de-emphasis their marketing of feature phone mobile games. We see these difficulties continuing this year for our legacy feature-phone mobile game business.

Smartphone mobile games in the first quarter were $1.34 million, a 34% decrease from fourth quarter. The decrease of smartphone mobile games revenues was due to a pause in new smartphone game launches in fourth quarter, as we continue to transition a portion of our PC MMO game development team onto our internal smartphone game engine. We expect to launch a number of new iPhone and Android games in the second quarter and third quarter of this year.

Mobile games gross profit in the first quarter $1.86 million, a 22.5% decrease from the fourth quarter. While mobile games gross margin was 50% in the first quarter, compared to 42% in the same period last year.

WVAS revenues in the first quarter were $15.85 million, a 17% decrease from the same period last year, but an 8.4% increase from fourth quarter. Sequentially the WVAS operating environment stabilized compared to prior periods, but we continue to expect the WVAS operating environment to remain difficult in 2013.

WVAS gross profit in the first quarter was $3.62 million, a 13% decrease from the fourth quarter, while gross margins were 22.8% in the first quarter, compared to 28.4% in the fourth quarter.

Total OpEx in the first quarter was $13.13 million, compared to $14.4 million in the fourth quarter. While product development expenses were $6.14 million compared to $5.33 million in fourth quarter. The increase in product development expenses was due to additional resources and investments made towards our 2013 game pipeline, including our Guild Wars 2 China team.

Sales and marketing expenses in first quarter were $ 4.6 million compared to $5.9 million in the fourth quarter. The reduction in sales and marketing expenses was due mainly to a pause in new smartphone game launches during the period.

G&A expenses in first quarter were $2.43 million compared to $3.2 million in the fourth quarter. The decrease in G&A expenses was mainly due to a decrease in share based compensation expenses.

The Company's total headcount increased in first quarter to 1,132 staff compared to 1,100 staff at the end of '12. The increase in headcount is associated with our recruitment of new staff for our 2013 game pipeline. Now turning to the second quarter to 2013 guidance.

The Company expects total revenues for the second quarter to be within the range of $43.5 million to $44.5 million, with business unit revenues at the mid-point expected to roughly consist of WVAS revenues of $15 million, mobile game revenues of $3.5 million and internet game revenues of $25.5 million. We also expect gross profit to be within the range of $17 million to $ 18 million, operating profit and net profit to be within the range of $5.5 million to $6.5 million, and non-GAAP net profit is expected to be $6.5 million to $7.5 million.

Within internet games, we saw peak of revenues in the first quarter, due to the release of China Tank Series with a moderation in growth in the second quarter. Now I'd like to turn the call over to our CEO, Mr. Wang Lei Lei.

Wang Lei Lei

Thanks, Jay. Good morning and good evening everyone. Thanks for your continued interest and support for KongZhong Corporation. Just as Jay said, we had a good quarter which is mainly because of rapid growth of our internet game revenues compared to last year. KongZhong had lot of changes, not only in terms of growth but also the make-up of our revenue and profit generation.

The rapid growth in internet games made up for the decrease in the traditional WVAS and feature phone business. Our internet and the mobile game business are now the major contributor of revenue and the profit. KongZhong as a game developer and operator has both strong internal game development capabilities and operational skill of oversees games, covering both internet to mobile platforms.

We believe, in the future the game business in China KongZhong's a king of distribution and we have based our game development and aligned [ph] strategy upon its belief. A successful product depends on attractive graphics, innovative core game play, proved and commercialization model, as well as our strong gamer community support.

Our team has shifted the focus from operations to product and we believe, product quality is a key to success. KongZhong is a newcomer in the gaming industry in China. We have built differentiated development and our operation strategy in the top three years. We will focus on mid-tier [ph] these types of games such as World of Tanks, World of Warplanes etc.

We have also partnered with innovative overseas MMO gamers such as Guild Wars 2. In the second half of this year, we expect both World of Warplanes and Guild Wars 2 we will launch into the China market. In addition, our Shanghai internet gaming developing team has self-developed a new innovative Martial Arts e-sport multiplayer online Battle Arena game, Master of Meteor Blades.

The core developing team member and the core game play coming from U4iA [ph] PC game, named Meteor, Butterfly and the Blade which was one of the most popular game in China market.

So first to closed beta of this game took place in May and the results reached over internal targets. We hope, this game will be Open Beta at the first quarter this quarter.

Now let's talk about KongZhong's smartphone gaming business shows acquisition in Noumena team in 2012 and the restructuring of our internal PC MMO development team. We now have eight smartphone gaming development studios located in Beijing, Shanghai and Dacheng.

They're reaching the final stage of the development of five large scale MMORPG mobile games. These games will be launched on both iOS and Android platform, in the second quarter and the third quarter. We believe, they will have a good performance in China market.

For summary speaking, KongZhong has substantial way of transforming our sales from our traditional WVAS Company to a multi-platform gaming Company. In the future, by developing robust internet and mobile game product pipeline. We will regulate, extend over success from our initial success in World of Tanks towards the provide private [ph] games platform Company. Now I'd like to open the call, operator?

Question-and-Answer Session


Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Nick Ning – 86 Research. Please ask your question.

Nick Ning – 86 Research

Hi, thanks for taking my questions and congratulations on the results. My question is, first on your PC gaming side. So we see some upside on this line. Is this mainly because of World of Tanks and could you talk about trends for this game going forward and the competitive landscape for this genre like, say like Tank in the China market? Thanks.

Jay Chang

Hi, Nick. Thanks so for World of Tanks, we introduced in roughly February time period, the Chinese Tank Series which was the new Chinese Tank Tech Tree to market which was based on Chinese Military history, which was very well received, that was unique piece of contact in World of Tanks, which really galvanize the user community and to improve all types of metrics including revenues.

However, since that time period there haven't been any new specific localized content. Though we have seen, some of that peak in revenue moderate in the second quarter. Going forward for the rest of the year, we are looking more towards I think there is patch called 8.6, which has more casual change in terms of the game play to make it less hardcore, and we are working very closely for gaming to try to broaden up the base of World of Tanks, that said we also are working on launching World of Warplanes as well as the other Wargaming titles, which we're in partnership with Wargaming with, so we look forward to launching those over the next two or three years.

Wang Lei Lei

And also we believe the World of Tanks, PC obviously will continue to grow this year. We cooperate with our partner for gaming as World of Tanks producer. We prepare about eight to nine content packages patch update for this year and for the second quarter because of the first quarter, we push lot on marketing resources to promote our big content patch for Chinese Tanks series.

So we believe, for the second quarter. Our first target for World of Tanks, not the revenue growth and we just want to make more user activities and for PC use and use the overall [ph], as second quarter World of Tanks operation target.

Nick Ning – 86 Research

That's very helpful. So to follow on that on your PC gaming side. You also mentioned that, you will launch what about World of Warplanes and Guild Wars for this year. Are we talking about commercialization or that's the some initial testing?

Jay Chang

Hi, Nick. We right now haven't announced any specific Open Beta date for either of those games, but we're going to have to believe do closed beta testing for both the games in 2013. We just finished for the very small scale closed beta test for Guilds Wars 2, and we will also in the near future start closed beta testing for World of Warplanes, but any Open Beta in commercialization is based on, a number of factors including how we feel about the localization of the game, as well as the government approval.

So at the time, we haven't announced any specific Open Beta dates, but we will be doing many closed beta tests for both those games in 2013.

Nick Ning – 86 Research

Thanks. So you also mentioned on the mobile gaming side, you mentioned we have five MMORPG type game for Beta and so we've also think some key things in the market, which mostly growth in more than 10 million or even higher than that, so and I'm just curious, do you see any games in our pipeline that has potential to reach such kind of skill and what does it take, to make such risk [ph] in mobile and what's the difference from PC MMO? Thanks.

Jay Chang

We do believe, we have some games that have the potential for that scale. Most of the games, we are developing are I would say, are third generation from some of the games we currently have on the app store. There is game called Tiny War out there, R-Tech Commander some of the games, I would consider first generation for us. After putting those games to the market, we learned a lot, and then once integrating our PC MMORPG team onto the Noumena platform, some of the games were currently alpha testing internally, we believe are very competitive against some of the other more successful games, whether they're in China or globally, but once again we're still kind of alpha testing internally.

We expect to release some of those games towards the end of the second quarter, as well as and in the third quarter and hope we are able to have success at some of that scale, as we launch and market these games to initially to the China Android market and then the global iOS market.

Nick Ning – 86 Research

So what is the market condition right now. It seems a lot of people are getting into this sentiment including those big client companies. Are we seeing a bubble in this segment or is it getting very crowded and difficult to get fit in, in this situation?

Wang Lei Lei

This is for instance [ph] that's the reason why KongZhong have delayed the launch of our smartphone games about for three to four months because we see the market money in studios for smartphone gaming, they only focus on the tarot game, the similar looking and very, no differentiated gaming and also they heavily rely on the smartphone platform. As we mentioned, smartphone gaming business is just as internet game, PC game business is product driven business.

So we focus on develop are differentiated smartphone products and also we believe for this market, about next two or three years regular MMORPG games, I mean the last scale regular MMORPG games is very popular, should be very popular in this smartphone market in China, smartphone market and although five smartphone games is all for MMORPG games and we just leverage our traditional (inaudible) PC game and MMORPG assurance to developing and operate this games in the China market.

Nick Ning – 86 Research

Thanks. So we finally have a following question is, on this feature phone game business. I see that for this quarter is actually it should be going up right, on sequential base. If that's the case, what's the reason and how should we look at this business?

Wang Lei Lei

We see the long-term, the feature phone business is continue to decline because the market and the user behavior change, shift their gaming requirement from the feature phone to smartphone and this small increase, if not means anything about the feature phone because we just, the market and all the market is tend from feature phone to smartphone.

Nick Ning – 86 Research

Okay, that leaves, it's only temporary. And lastly on your cash flows seeing that there is deferred payment of acquisition business of about $3 million and the intangible assets of $500,000 could you elaborate a little bit on this?

Jay Chang

During the first quarter, I believe that's due to the Noumena's. We had some cash payments related to the acquisition of Noumena.

Nick Ning – 86 Research

Okay and also on your balance sheet. It seems there is a decline in deferred revenue balance, so how should we look at this line going forward? I mean, is it into some changing our regulation or policy or is it due to our mobile gaming revenue?

Jay Chang

No, that's in line with our guidance for internet game revenues. Which we see a sequential, a slide decline in the first quarter given some of the reasons we talked, about with the Chinese tank series in first quarter and no specific, big lookalike content in the second quarter for World of Tanks.

Nick Ning – 86 Research

Okay, thanks that's all my questions.

Jay Chang

Okay, thank you.


There are no further questions at this time. (OPERATOR INSTRUCTIONS) There are no further questions at this time. So, now I will hand back to the speaker for any closing remark.

Jay Chang

Okay. Well thank you very much for your continued interest in KongZhong and we look forward to speaking to you in the near future. Take care, bye.


Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you so much for your attendance your may all disconnect.

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