KongZhong Q2 2009 Earnings Call Transcript

Aug.11.09 | About: KongZhong Corporation (KZ)

KongZhong Corporation (KONG) Q2 2009 Earnings Call August 10, 2009 8:30 PM ET

Executives

Jay K. Chang - Chief Financial Officer

Wang Leilei - Chairman of the Board, Chief Executive Officer

Nick Yang - Vice Chairman, Co-Founder

Analysts

Mike Olson - Piper Jaffray

Andrey Glukhov - Brean Murray Carret & Co.

Ming Zhao - SIG

Eddie Leung - Banc of America Merrill Lynch

Eric Wynn - Main First

Wallace Chung - Credit Suisse

Jenny Wu - Morgan Stanley

Ryan Wang - Haytong Securities

Alicia Yapp - Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 KongZhong Corporation earnings conference call. My name is Yvette and I will be your operator for today’s call. (Operator Instructions) I would now like to turn the call over to Mr. Jay Chang, CFO. Please proceed, sir.

Jay K. 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 on them. For additional discussion 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.

On the call today, we have our Chairman and CEO, Mr. Wang Leilei; and myself, Jay Chang. I will briefly go over our 2Q results before handing over the call to our CEO.

Total revenues for the second quarter of 2009 increased 37% year over year and 9% quarter over quarter to $32.3 million, exceeding our previous revenue guidance range of $30.5 million to $31.5 million. Mobile games made up 20% of revenue compared to 17% in the first quarter. Total gross profit was $16.6 million compared to $14.6 million in 1Q, or a roughly 14% increase sequentially. Overall gross margins in 2Q were 51%, an increase from 49% in 1Q and 46% from the same period last year, due to a higher contribution from a higher gross margin mobile game business.

Total operating expenses were flat sequentially at $11.95 million compared to the first quarter. Although our overall headcount and product development did increase as our mobile game division did not experience the same strong sequential growth in 2Q as compared to the first quarter, there was a slightly lower level of performance bonuses accrued which led to a small decline in product development expenses. However, we expect both product development and sales and marketing expenses to increase in the coming quarters as we continue to make long-term investments in R&D and marketing for Kong.net and our mobile game business.

Operating profit in 2Q was $4.6 with operating margins at 14.3% compared to $2.6 million in 1Q and a small operating loss in the same period last year. 2Q U.S. GAAP net profit was $3.5 million, with net margins of 11% compared to $2.5 million in 1Q, while 2Q non-GAAP net profit was $4.7 million compared to $3.7 million in 1Q. Based on 34.7 million basic and 38.5 million fully diluted ADS at the end of 2Q, net profit for basic ADS was $0.10 while net profit per diluted ADS was $0.09 and non-GAAP net profit per diluted ADS was $0.12.

Our cash and cash equivalents at the end of 2Q was $132 million, compared to $141.7 million at the end of 1Q, due mainly to the $9.55 million in cash we used to repurchase our shares as part of our share repurchase plan in the second quarter.

Now I would like to turn to each business unit’s financial performance, namely, mobile games, WIA, and WVAS.

First turning to mobile games -- in 2Q, mobile game revenues were $6.8 million, an increase of 38% sequentially and 368% compared to the same period last year. Revenues from downloadable games were $5.04 million, an increase of 335% from the same period last year and a 19% sequential increase. Revenues from downloadable games continued to perform well due to the overall growth of the mobile game market in China and our strong market position.

One unique feature of our downloadable mobile game business compared to other markets around the world is that a small but growing portion of our downloadable game revenues comes from virtual item sales, or try-and-buy editions, which allow downloadable games to mimic some of the business model advantages of the mobile MMO model and enhance our mobile game user experience.

Revenues from mobile MMOs were $1.76 million, an increase of 497% from the same period last year and 144% sequential increase. The bulk of these revenues were from [Tian Jei], one of the most popular mobile MMOs in the China market. The year over year and sequential strong performance in mobile MMOs was driven by increased marketing activity and optimized game operations, which led to an increase in [Tian Jei] users and a higher percentage of users purchasing in-game virtual items compared to previous periods.

Our new game, Feng Shen online did not contribute any meaningful revenues during Q2. However, due to a large portion of our mobile MMO users being students, we do not expect similar sequential performance in 3Q for our mobile MMO business as we enter the summer holiday season but we expect downloadable games -- our downloadable games business to maintain a strong momentum.

In 2Q, revenues from mobile MMO made up 26% of total mobile game revenue compared to 15% in 1Q. 2Q mobile game gross profit was $4 million compared to $2.9 million in 1Q, with gross margin stable quarter on quarter at 59%.

Turning to our wireless Internet services division, WIS revenues were $1.56 million in 2Q, representing an increase of 300% from the same period last year, an increase of 58% from 1Q. About 41% of WIS revenues are from wireless advertising with the remaining 59% from premium services generated on the Kong.net wireless Internet site, including virtual item sales and cross-selling of our mobile game and WVAS services.

Once again, however, due to seasonal factors, we do not expect WIS revenues to exhibit similar strong growth in 3Q but more importantly, given the early development stage of the 3G market, our focus remains on rapidly growing the Kong.net user base versus revenue growth in this segment of the business in the coming year of this early stage.

WIS gross profit, however was $0.79 million compared to $0.49 million in 1Q, with gross margin slightly increasing in this business unit to 51% compared to 50% in the previous quarter.

Turning to WVAS, or wireless value-added services, WVAS revenues in Q2 increased 10% from the same period last year and were up 1% from 1Q to $23.93 million. Revenue from 2.5G services accounted for about 21% of total WVAS revenue and revenues from 2G services represented the remaining 79%.

WVAS gross profit increased $11.75 million compared to $11.19 million in 1Q, while WVAS gross margins increased slightly to 49% compared to 47% in 1Q and 45% in the same period last year.

In addition, at the end of 2Q, we completed our acquisition of 100% of the shares of Sim Life, a leading mobile game developer in China. As per our agreement, we have paid $3 million in cash to the shareholders of Sim Life. An additional payment of $1.25 million in cash and issuance of 6 million ordinary shares equivalent to 150,000 ADS to certain shareholders of Sim Life are contingent upon Sim Life’s performance over the course of the next 12 months.

IDG Venture Partners, which owns approximately 6.7% of outstanding ordinary shares of KongZhong, also owned approximately 30% of the issued share capital of Sim Life.

Now turning to our third quarter 2009 revenue guidance -- based on information as of August 11th, we expect 3Q revenues to be within the range $34 million to $35 million, which implies roughly 5% to 8% quarter-over-quarter growth or 36% to 40% growth over the same period a year ago. The key driver for this growth is expected to come mainly from our continued strong momentum in our mobile game business, supplemented by further improvements in our WVAS business.

We expect our wireless Internet services business, or Kong.net, to be relatively stable in 3Q as our focus for Kong.net is on user growth and product development.

Lastly, we expect our operating and net margin levels to remain relatively stable.

Now I would like to turn the call over to our CEO, Mr. Wang Leilei, to discuss our second quarter business highlights.

Wang Leilei

Thanks, Jay. I am very pleased to report in the second quarter of 2009, KongZhong continued to execute according to our long-term strategy. Firstly and most importantly, we continue to increase overall operating profit for the company. Second, we achieved strong growth in our mobile game business and continue to be a leading position in the market. Third, our WVAS business remains a stable source of cash flow. Lastly, we continue to make the long-term investment in Kong.net to position KongZhong well for 3G market opportunities.

For mobile games, based on recent reports from our market research firm, the China Mobile game market in 2011 is estimated to be RMB4.2 billion, or $600 million as the 3G market begins to move into its high growth space. We expect this growth to be driven in the near and medium term by the downloadable game market and as mobile data fees continue to come down in price, supplemented by mobile MMOs over the medium and longer term.

In the second quarter complemented our industry game development team, [Tian Jei Mongovish], which [Tian Jei Mongovish] focuses on mass market java games and mobile MMOs we have acquired [inaudible] Sim Life to focus on high end sim games and other new mobile game development platforms which can take advantage of Sim Life’s strong three dimension mobile gaming capabilities. We believe the combination of these two separated game development studies provides KongZhong with a more stable and [inaudible] game development capabilities, especially compared to our competitors.

Turning to our mobile MMO business, in the second quarter mobile MMO revenues made up 26% of mobile game revenues versus 15% in the first quarter due to strong performance if [Tian Jei], which is one of the most popular games, popular mobile MMO games in the market. [Tian Jei’s] performance was driven by our team’s strong operational experience which saw a higher conversion rate of paying users in the second quarter compared to Q1. However, as we enter the summer school holiday season due to a large portion of [Tian Jei] users being students, we don’t expect to see similar growth in 3Q. Although this would be more than offset by continued strong growth in downloadable games which tends to be seasonally stronger during the summer holiday break. In addition, at the end of 2Q, we launched our new mobile MMO game, Feng Shen, online which had performed according to our expectations. However, different from PC based MMO games whose success is decided immediately upon launch due to early development of channels and the nature of the mobile MMO user base are generally grow gradually over time.

For Feng Shen online, in order to first grow a larger user base, we are strategically waiting to introduce the bulk of the games premium virtual items into the game, which we expect to do sometimes towards the end of 3Q or early 4Q, which would be a catalyst for monetization. We also plan to launch a third carrier mobile MMO game, [inaudible] online, sometime in the fourth quarter. [CO] is targeted for the low-end of the market, where users handsets are not able to support [inaudible] mobile MMO like Tian Jie or Feng Shen, we would expect this to have a similar development cycle as Tian Jie and Feng Shen, with revenue contribution occurring sometime early next year.

Total mobile MMO users for both Tian Jie and Feng Shen combined grow over 600,000 monthly active users.

Okay, let’s turn to Kong.net -- as of June, [inaudible] reported that there were 155 million mobile Internet users in China, representing growth of over 30% from the end of last year to almost three times the growth of the fixed line Internet user base as the market prepares for 3G.

To take advantage of this growing market opportunity, we continue to make long-term investments in Kong.net as we evolve Kong.net into a next generation 3G mobile portal and social networking services.

At the end of the second quarter, Kong.net remains one of the top mobile portals in China with over 15 million unique users per month. We continue to pursue our content plus [inaudible] strategy and over the past quarter made a number of achievements. During the quarter, we continued to develop our T-to-T, or traffic-to-transaction strategy which led to a roughly 80% sequential growth in revenue derived from the T-to-T, which is based upon leveraging the Kong.net platform to monetize traffic through virtual items, social games, and other WVAS services.

However, as mentioned in the past, our priority in the near-term for Kong.net is not revenue growth but user growth. User stickiness and to develop an industry-leading SMS platform. So although we expect T-to-T revenues to be in an up trend over the medium term, there is potential for more near-term fluctuations [and the bulk of our team] and resources at Kong.net remain focused on growing our user base.

We believe we are still in the early development phase of the 3G market in China. During the quarter, we still attracted over 500,000 registered users to our first self-development mobile social game, Nong Chang Da Heng, and have plans to launch additional social gaming and other community services over the next year.

So let’s talk about WVAS -- our WVAS business continues to provide stable source of cash flow for the company and I am proud of the efforts the WVAS team has made to support the development of Kong.net and the mobile games, which is [inaudible] of development wouldn’t be possible without the strong foundation of our WVAS infrastructure and team.

I am very pleased too with our results for the second quarter of 2009. More important, I believe KongZhong remains well-positioned in the Chinese 3G market for the future growth opportunities.

Now Operator, I would like to open the call to questions now. Thank you.

Question-and-Answer Session

Operator

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

Mike Olson - Piper Jaffray

Good morning and congratulations on a strong quarter. A couple of quick questions -- basically with gross margin going higher as games revenue grows, should we expect gross margin growth or at a minimum as flat for the remainder of ’09?

Jay K. Chang

Our target for the remainder of 09 is to maintain our slightly increase the gross margin level from the second quarter.

Mike Olson - Piper Jaffray

Okay. And then just as far as games revenue overall, I think you said to expect games revenue will be over 20% in 09 and would you be willing to give us a guess for what it will be in 2010 as a percentage of revenue?

Jay K. Chang

I think as we get to our next year budgeting and planning cycle, then we can be more specific on that but right now, we don’t have any number. However, our goal is to obviously increase the contribution of mobile games from 2009 -- or in 2010 compared to 2009 but a specific number, we are not at the current position to provide that right now.

Mike Olson - Piper Jaffray

Okay, and then just lastly, you mentioned gross margin will be flat to higher -- should we also assume operating margin will be flat to higher over the next few quarters, or is there going to be any investments or other operating expenses that kick in?

Jay K. Chang

As I mentioned on the guidance section, you should expect for us to continue to invest in Kong.net and the mobile game business, so we would expect operating margins and net margins to be relatively stable from the second quarter.

Mike Olson - Piper Jaffray

All right. Thanks very much.

Operator

Our next question comes from Andrey Glukhov with Brean Murray.

Andrey Glukhov - Brean Murray Carret & Co.

Yes, thanks. Congrats on the solid quarter, guys. As far as the -- so you mentioned the mobile social games and sort of the initial [inaudible] traction for the first one, for the first game you rolled out. Can you talk about I guess the pipeline of the mobile social games that you have and also how does the monetization profile on a social game differ in your initial results versus the mobile MMO?

Wang Leilei

Yes, we will launch another two mobile social games in the next coming quarters, which has a partnership revenue sharing model with some of the production house, which is very professional for the mobile social game. And we believe we will build up a mobile social game matrix for the next year at least [506 mobile SMS game] in over [inaudible] in Q1 next year.

Andrey Glukhov - Brean Murray Carret & Co.

Okay. And during the quarter, we’ve seen I guess the competitive entry from some of your Japanese peers into the China mobile market. Do you -- I mean, how much of a threat do you think is it for you competitively?

Jay K. Chang

We are always aware and focused on any competitor that comes into the market. From our side, our focus is to leverage the assets we have, which are unique to the China market, including our headpiece business and our self-developed mobile game team, which is now over 200 people in the mobile game division with the acquisition of Sim Life. So any competitor that comes into the market, I think as a leader, as we are the leader right now working to either replicate or try to catch up to us -- that said, we are always aware and we always want to learn from different competitors on any successes they have. But at the moment, there’s -- international companies coming into China generally have a very steep learning curve and from our perspective, there’s many other domestic competitors which I think we are more focused on in terms of having a better product and a better user experience.

Wang Leilei

And also the Japanese market is totally different compared with Mainland China’s market and of example, the key mobile game, [Xander], is a flash game. In China, a Java game is the big pie in the mobile game market and also a different user experience and the different user interface so for every game -- user experience.

Andrey Glukhov - Brean Murray Carret & Co.

Great. Good quarter, guys. Thanks.

Operator

Our next question comes from Ming Zhao with SIG.

Ming Zhao - SIG

Thank you for taking my questions. Good quarter. I have a couple of small questions here. First, can you tell us how were you able to actually cut the product and development expense by $0.5 million? Have you reduced personnel in that division?

Jay K. Chang

No, as written in our press release and also as I discussed on our call, overall headcount actually increased but it doesn’t include Sim Life, because Sim Life is coming at the end of the quarter, so there will be a product development increase just due simply to Sim Life in 3Q but it declined in the second quarter just because of our bonus system -- the mobile game division grew over 80% quarter on quarter from 1Q to 4Q. This quarter it grew substantially less, so we accrued a slightly lower level of bonuses as the key delta there.

Ming Zhao - SIG

And the second question is on your 3Q guidance of $34 million to $35 million in revenue, how much of that is coming from Sim Life?

Jay K. Chang

We’re not going to break out Sim Life going forward as a separate P&L. The way we look at Sim Life is it’s a new game studio for us for our Beijing operations team to leverage. The bulk of Sim Life will be coming towards later periods, not so much in the third quarter.

Wang Leilei

Sim Life’s games, they are [inaudible] in the high end for online game, mobile game users -- for example for the Sim Life game and other new game types for the future. So we try to leverage the Sim Life to be a good complementary for our existing development team, and Tian Jie which is mainly developed for Java game for the existing market.

Jay K. Chang

But the bulk of the growth that we are guiding for in 3Q, Sim Life contribution actually will be relatively minimal.

Ming Zhao - SIG

Okay. So another question on the cash flow statement, you incurred about $4.4 million for the acquisition of subsidiaries. I guess $3 million is for the Sim Life and then you have another $1.4 million for something else, is that correct?

Jay K. Chang

In the acquisition, there’s three things in there -- one is Sim Life, $3 million. Then there’s actually a portion that we estimated to be a contingent liability and then also we had an acquisition of a company called [Mi Li Fan], which we also announced previously. That --

Ming Zhao - SIG

Okay, great. Thank you.

Operator

Our next question comes from Eddie Leung with Banc of America Merrill Lynch.

Eddie Leung - Banc of America Merrill Lynch

Good morning. A couple of questions -- the first one is more on the -- I would say long-term pictures about your social networking service. Could you share with us some of your strategies to compete and differentiate on the social networking pieces, especially given some I would say larger competitors right now in the space, including Tencent and [inaudible]? Thanks.

Wang Leilei

Yes, because Tencent and [inaudible] have more resources from the [inaudible] Internet like [inaudible], their very strong traffic and unique user base for [inaudible] Internet. KongZhong will [dedicate to develop the mobile] SMS community and -- no, we just have a trial for our first SMS mobile SMS game in the Kong.net platform and it’s going well. As we mentioned, it’s about 500,000 registered users for the second quarter, compared with the first quarter, which is only 50,000 users registered for the SMS game and I think this is a new area and it’s not the overlap. The user base, the user behavior is not -- only [inaudible] from the [inaudible] Internet user base and user behavior and we just leveraged our [know-how] for wireless from the WVAS and more know-how from the mobile games business to build up and make some innovation for the mobile SMS platform and also we have seen many good achievements from the Japanese market SMS company and for the next step, we will have more open platforms to let more small production house to doing SMS products and launching these kinds of products for our SMS platform and we believe for SMS, mobile SMS platform and services now is in the early stage and we hope for the next coming quarter we will launch more SMS games with some partners to make more trial and testing this market for mobile.

Eddie Leung - Banc of America Merrill Lynch

Understood. Another question is could you also comment on the opportunities brought by the potential launch of iPhone in China?

Wang Leilei

I think it needs a long time to testing iPhone store, services in China and China is different because we have many of the platform similar like the iPhone store model and from the Nokia [inaudible] store and also from China Mobile’s new application download platform mobile market, I think the iPhone in China and it’s a small portion of the total handset sales in China.

For example, iPhone’s total sales volume is about 20 million in the world but for Nokia’s one type of handsets, like E71, it’s almost 25 million, you know, [hundred cells] in the world so the focus on the big pie, the type of handsets in China like Nokia and also includes MTK, some low-end handset sellers and we have a partnership with this kind of handset seller from Nokia and also from some of the name brand handsets in China, just to leverage the Sim Life to make some trials for some game types which can launch in the Apple Store.

Eddie Leung - Banc of America Merrill Lynch

Thank you. That makes sense. Thanks.

Operator

Our next question comes from Eric Wynn with Main First.

Eric Wynn - Main First

Good morning. Congratulations. Actually, my question is very similar to Eddie’s -- can you elaborate a little bit more on the app store model? We understand that both China Mobile’s O-phone and Unicon and there was some speculations on Unicon might be choosing some private company to run the app store platform for iPhone. Is there some opportunities that KongZhong would consider and also would you consider commenting on how big the opportunity can be for a private company like KongZhong or someone else, for any of the three platforms -- China Mobile’s O-phone, China Unicon’s iPhone and presumably China Telecom will also launch some kind of app store kind of application environment some time down the road. Is this something that you are looking at, how big the market collectively? Thanks.

Wang Leilei

I think that KongZhong's mobile game strategy that we position as a -- the mobile game producer and a mobile game operator and in China, many mobile games [inaudible] platform from the [inaudible] platform, [inaudible] platform, and also the platform from the Nokia game platform and also the [inaudible] platform and also the [Bondong], China Mobile phone launched their new application download platform mobile market which is similar like the Apple Store platform and also we think we will have a good partnership with all kinds of games platforms and sales channels. And everybody was talking about the apple store. This is open platform and we heard about that iPhone store will realize their fully opened strategy for their platforms. They will have more focus on the partnership with some high-end mobile producers like EA [inaudible] and also I think it needs time to find out the apple store strategy in China, how to run their business and get money from the China market.

So we believe KongZhong is well-positioned as a game producer and a game operator, which we have an open strategy to have a partnership with all game platforms or sales channels in China.

Jay K. Chang

But I would point out one other thing, is that the China market is very different than North America and other more affluent markets around the world. Most of the users here that actually play mobile games are not the users you see in Beijing and Shanghai, so even if iPhone is successful in Beijing and Shanghai, that is not where we believe, or where we are operating in terms of many of our mobile games today.

The market we believe over the long-term is going to be something more akin to what’s going to be successful in the Japanese market, which is actually more web-based services versus a platform [attendant] type of service. That said, we are -- one of the reasons we acquired Sim Life was that they do have iPhone development capabilities. They have their own 3D mobile game engine, which puts us in a very good position to take advantage of any opportunities as the iPhone becomes more prevalent in China with the business model and right now I would say those two don’t exist, and those things will take time.

But I think the China market is very different so when we look at our business where we can actually grow our business in a profitable and substantial manner, we look at things which are -- things that are more realistic on the ground relative to things that may have worked in the U.S. market and actually I would take a step back and say there’s probably not a single producer of games or content for the iPhone that has actually grown a substantial side, independent basis yet. And one of our peers, Glu Mobile, I think on their last conference call did talk about that the economics were still relatively difficult on the iPhone itself. So one thing that we are kind of blessed with is that the mobile game market in China is conducive to a player like ourselves to work with operators, to work with handset vendors in a more open as well as to reach a larger audience, which we believe has been -- potentially tens to hundreds of millions of consumers.

Eric Wynn - Main First

Yeah, I understand that. So it’s more like building competencies going forward. Thanks very much.

Operator

Our next question comes from Wallace Chung with Credit Suisse.

Wallace Chung - Credit Suisse

Congratulations on the quarter. I just wanted to ask the first question regarding some housekeeping questions -- maybe I joined the call a bit late. Have you disclosed the MMO -- the mobile MMOs, some of the operating metrics like the ACU, ARPU and the APA?

Jay K. Chang

We haven’t because actually they are still relatively small but in terms of total registered users for the combined game, it’s well over 600,000 now on a monthly basis. APA is actually a figure we haven’t given out yet but in terms of PCUs for the games combined, it’s around the 10,000 level.

Wallace Chung - Credit Suisse

10,000 level -- and how about the ARPU level?

Jay K. Chang

ARPU is relatively consistent and most of it is coming from Tian Jie with the RMB60 to RMB70 rate.

Wallace Chung - Credit Suisse

Okay, on a per quarter basis, am I correct?

Jay K. Chang

Yes, correct.

Wallace Chung - Credit Suisse

That’s perfect. Thank you very much. And the other question is a follow-up with the SMS related questions -- I think it’s very interesting to hear your new move and by the same time we understand China Mobile [139.com], it seems like they also have a similar kind of SMS incentive. Can you give us some understanding about the SMS market, mobile SMS market right now? Which are the key players in this market? Is there any cross-selling between the PC base and the [inaudible] and the mobile base as well as like -- how can you differentiate from other players? Thank you.

Wang Leilei

Yes, well, we already have the cooperation with China Mobile’s new 139 community and also China Mobile’s mobile market like we have almost over 30 mobile games we will launch in the new mobile market platform of China Mobile, and also we leverage the 139.com of China Mobile’s community to promote our content based services and also some community-based services. We believe we are positioned as a game developer and game operator and have a partnership with this kind of traffic channels and the distribution channels, which is good for KongZhong and we have a winning model with this kind of platform of China Mobile or other carriers in China.

Jay K. Chang

I think just to supplement that, we have probably four key competencies in the mobile SMS -- one is we -- not only do we -- well, we are probably following more closer to [inaudible] model which is a lot of self-development but we also provide open platforms to help seed the market because we are still very, very early and so we want to have competency not only in operating but mobile SMS gains but also developing.

On top of that, we have competency in marketing and growing user bases, which many kind of smaller game developers do not feel that they have, whether it’s our operator channels like working with 139 or handset channels or -- and eventually potentially TV channels.

And on top of that, given that we have -- we already have one of the leading SP businesses in China, we have core competency in billing and working closely with the operators to actually monetize these types of -- these games and assets. I think those competencies are very difficult things to put together and we worked very hard to maintain our lead and increase efficiency among those four different core competencies.

Wallace Chung - Credit Suisse

Thank you. Just one quick follow-up, again on the [SMS side] -- is there any possibility or are you thinking about to cooperate with the PC-based [inaudible] because some of [inaudible] pretty much fewer PC base than [you guys mobile], or if not maybe is it because simply the [target segmentation] is different so there’s no further cooperation?

Wang Leilei

I think we are open to have the cooperation with some of -- from the players in this market, including the Internet and the mobile Internet. For example, we have -- our company, Sim Life, have the long-term cooperation with [inaudible] to put our mobile games in their platforms and we have the revenue sharing model with [inaudible], Tencent, their mobile platform. And we will continue to have the cooperation with Tencent to leverage their distribution platform and we are very open to have the cooperation with some of the players from the Internet or mobile which kind of gives us more complementary assets or distribution channels to promote our product from this kind of platform.

Wallace Chung - Credit Suisse

Great. Thank you.

Operator

Our next question comes from Jenny Wu with Morgan Stanley.

Jenny Wu - Morgan Stanley

Congratulations on the quarter. My question is regarding your [inaudible] and what application and content do you think [will be] the most popular ones in 3G areas? And for the existing MVAS product, what kind of content and application do you think should receive the type of popularity increase for the existing opportunity, and especially for 2G services such as SMS, do you think 3G will also help them or they are -- [inaudible] actually will be kept away from [virtual other] applications? Thank you.

Wang Leilei

Actually for the 3G, we believe the game business and the music still are killer apps for the 3G content and application. Two kinds of the 3G [inaudible] we believe can have more user base in new 3G platforms. One is just like some Internet-based portals and applications, they can mostly transfer from the fixed line Internet to the mobile 3G platform. The other is a dedicated wireless services like music, mobile games, these kind of services can have more interactive interface to leverage the [inaudible] for the new 3G platform.

Jenny Wu - Morgan Stanley

I’m just wondering -- actually you mentioned for SM has this very traditional 2G services. We will also see the popularity will increase or actually will cover most users because of 3G.

Jay K. Chang

Jenny, I’m not sure I understand because you are breaking up a little bit but if your question is will mobile SMS services increase in popularity due to 3G, if that’s our belief, I think if it is our belief, that’s why we are continuing to make long-term investments in Kong.net, in that area.

I think the key thing to have success in a 3G market, as we mentioned in the past, is obviously having seen lower data tariff fees and we believe that will happen through the introduction of more competition from the operator side and especially as there’s potentially more opportunities to work with the operators to push and develop more sticky applications that use more 3G network services.

Jenny Wu - Morgan Stanley

Okay, sure. And we also noticed people talking about mobile TV and mobile emails and a lot of new applications, so in your view, how do you think about the apps [inaudible] and do you think actually they will become very popular ones and even more popular than [inaudible]?

Wang Leilei

For the mobile TV applications, we believe it’s one of the popular content-based services in the 3G platform because of the broadband bandwidth, and it’s a two kind of mobile TV services -- one is broadcasting mobile TV services, which is, for example, this CMMB in China, it’s all broadcasting and I think it’s not an area we can break into. We focused on to develop some video clips like user generated TV or video clips and this is very popular in Internet platforms, like YouTube model and the other, some user generated video platform for [inaudible]. And I think in the future, people select to see the news and the other broadcasting videos and also many of the teenagers and second tier, third tier cities will [inaudible] at user-generated streaming based TV clip services in 3G platform.

Jenny Wu - Morgan Stanley

Okay, sure. How about the mobile email?

Wang Leilei

I think email still is a very popular service but email is not entertainment related services from the BlackBerry and also China Mobile launched 136 push mail and it’s a killer app in the 3G platform but it’s not our focus.

Jenny Wu - Morgan Stanley

Okay, sure. And so going forward, do you have a [inaudible] that the 2G, 2.5G, and the new 3G service, what kind of the revenues [inaudible] among those different products?

Jay K. Chang

Sorry, Jenny, you’re breaking up -- could you repeat that question, please?

Jenny Wu - Morgan Stanley

Sorry about that. Is this better?

Jay K. Chang

Yes.

Jenny Wu - Morgan Stanley

Okay, there are 2G services and 2.5G and there are a lot of 3G services, so do you have an expectation that going forward, what is the revenue split among the different products?

Jay K. Chang

So what we have done, if you look at our financial statements now is we have actually segmented our business based on our view of what the most important categories are going to be in the future as 3G develops in China. And I have discussed this with other investors and I am not sure if I’ve discussed this on the call -- we don’t believe 3G will be that significant until potentially maybe the second half of next year as the networks get rolled out and built out the end of this year and new services in marketing and potentially handset subsidies start occurring next year.

So if you look at our segmentation, WVAS for us is still the 2G, 2.5G market, which is primarily focused on second tier, third tier cities, and the new subscribers who are coming online with low-end handsets and probably not coming on with 3G users.

Mobile games to us is a killer -- is going to be a key application, especially in China markets for 3G and 3G only improves the user experience relative to what China Mobile 2.75G users are getting today. And then Kong.net is really in our view the future of 3G -- not so much app stores so on and so forth, but web services on the phone, something that’s very similar that is proven to be successful not only in user base and user stickiness but also profitability and improving business model in the Japanese 3G markets.

So if you look at our business, that’s how we segment things out. In terms of actual breakdown in two to three years, we’re not in a position to give that specific breakdown right now.

Jenny Wu - Morgan Stanley

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

Operator

Our next question comes from Ryan Wang with Haytong Securities.

Ryan Wang - Haytong Securities

Thanks. Congratulations again and so my question is still about mobile games. I see you have described the second quarter growth of mobile games, especially downloadable game growth is mainly due to the overall growth of the mobile game market in China, so what is the major driven factor according to your analysis? I mean, the growth of the whole mobile game market?

Wang Leilei

Two things the growth driver for the mobile games -- one is our downloadable games, we promote -- we have almost 30 new games which is 80% is in-house developed games and the rest are coming from the revenue sharing operation games, which is launched in 2Q. Now we have almost 200 games in the game channels and also for MMO, we have the revenue from the MMO game ramping up quickly in Q2 because we put more virtual [inaudible] on the game shopping platform.

Ryan Wang - Haytong Securities

Okay, thanks. So what do you think about the total mobile game market, China Mobile? I heard that for the second quarter, the whole China Mobile game market will have more than 30% growth. I mean, what do you think about the major [inaudible] factor for the whole market? Is it because more new mobile Internet users are all the increase of our [inaudible] per users?

Wang Leilei

I think this is -- on one side it is from the user growth for the mobile Internet users. I mentioned by the end of June, the mobile Internet users reached 155 million total compared with 2008 December; it’s only 100 million. It’s about 30% growth for half a year and this is the user base growth.

Another is China Mobile and other mobile handset [inaudible] was very focused on developing the mobile game distribution platform. For example, China Mobile was focused on launching a different kind of application download platform, game download platform which is named Mobile Market. And also the other handset manufacturers, they all probably passed the same platform like iPhone, just to build up their own game and application software download platform embedding preloading their handsets. We have partnership with all these kind of platforms.

Ryan Wang - Haytong Securities

Okay, thanks, very helpful.

Operator

Our next question comes from Alicia Yapp with Citigroup.

Alicia Yapp - Citigroup

Thanks. I actually joined the call late so I apologize if the question already has been answered. A couple of questions -- first of all, can you comment on the competitive landscape on your mobile, the social game space? Who are some of the bigger players in the mobile social games now? And what is the typical business model for these type of games? Are they part of the downloadable games or are they free games but you monetize through advertising?

Wang Leilei

Yes, we think the major players for SMS, mobile SMS is from -- the biggest one is Tencent, it’s a [inaudible] for mobile area and the other competitor is still coming from the vertical communities for mobile platforms and we believe KongZhong has more advantage from the other mobile business to support the mobile SMS. For example, we have cash flow from the [IT] business, WVAS and also we have more mobile game business. This kind of business is a key monetization strategy. For example, we just leverage the SMS community to attract more of a user base, free user base and traffic and we can monetize to our mobile games, downloadable game revenues and also includes some music download revenues from the WVAS, so we believe the SMS, KongZhong's mobile SMS strategy is more similar like we mentioned, T-to-T strategy like the traffic-to-transaction. We just leveraged some free mobile services and features like SMS, content, and the regular communities to attract free user base and free traffic and we will try to monetize this kind of traffic and user base through our mobile game revenues and our existing WVAS revenues.

Alicia Yapp - Citigroup

Thank you. And then the other question is on the more -- specifically on the mobile games. Can you comment who are your typical user base for these type of games?

Wang Leilei

Okay, it’s totally different compared with Internet games and our mobile game users are mainly coming from the second tier, second tier cities such as the users’ lack of entertainment options. For example, it’s 20% coming from the students and 15% coming from some [inaudible], just like that. So it’s totally different compared with fixed Internet game users.

Alicia Yapp - Citigroup

Okay. Thank you so much.

Operator

You have a follow-up question from the line of Jenny Wu with Morgan Stanley.

Jenny Wu - Morgan Stanley

One question -- I noticed that most of your competitors like [inaudible] and SINA, they all have very strong online presence but KongZhong does not. Do you think actually it will hurt KongZhong, any disadvantage? And what is your way to [inaudible]?

Wang Leilei

I think we have three of -- Kong.net users or [inaudible] game users. It’s totally different compared with the Internet users, which is our users cannot access to [inaudible] Internet and cannot leverage the [inaudible] to get information. So for this kind of area, they must get more [inaudible] information and play the game through the handset, not the Internet.

The other thing is I really believe [inaudible] is our competitor but our company it seems like has a good partnership with [2Q] to -- we have the revenue sharing model for all our mobile games, put on our mobile games to the [2Q’s] mobile platform and to leverage their [inaudible] channel to promote our new games. This is some example.

Jenny Wu - Morgan Stanley

Okay. Thank you.

Operator

(Operator Instructions) At this time, you have no further questions in the queue.

Jay K. Chang

Okay. Thank you, everybody for attending the 2Q conference call for KongZhong and we look forward to meeting you over the next few months or speak to you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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