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Executives

Jay K. Chang - Chief Financial Officer

Wang Leilei - Chairman of the Board, Chief Executive Officer

Nick Yang - Vice Chairman, Co-Founder

Analysts

Andrey Glukhov - Brean Murray Carret & Co.

Eddie Leung - Banc of America Merrill Lynch

Ming Zhao - SIG

Eric Wynn - Main First

Wallace Cheung - Credit Suisse

Dick Wei - Analyst

KongZhong Corporation (KONG) Q3 2009 Earnings Call November 11, 2009 7:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 KongZhong Corporation earnings conference call. My name is Chris and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to Mr. Jay Chang, Chief Financial Officer. Please proceed.

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, the company CFO. I will briefly go over our 3Q results before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the third quarter of 2009 increased 40% year over year and 9% quarter over quarter to $35.1 million, exceeding our revenue guidance range of $34 million to $35 million. Mobile game revenues made up 23.4% of total revenues compared to 21% in 2Q. Total gross profit was $17.9 million compared to $16.6 million in 2Q, or an 8% sequential increase. 3Q gross profit was up 54% from the same period last year.

Overall gross margins in 3Q was 51%, roughly the same level as in 2Q and higher than the 47% gross margin level in the same period last year, due to the higher contribution from our mobile game business.

Total operating expenses were $12.6 million compared to $11.5 million in 2Q, or a 5% sequential increase as we continue to make measured investments in our product development resources.

Total operating profit in 3Q was $5.3, a 16% sequential increase compared to 2Q operating profit of $4.6 million. Operating margins improved to 15.2% compared to 14.3% in 2Q.

3Q U.S. GAAP net profit was $4.5 million compared to $3.5 million in 2Q, with net margins of roughly 13% compared to 11% in 2Q. Non-GAAP net profit in 3Q was $6.3 million compared to $4.7 million in 2Q.

Based on 34.8 million basic and 39.24 million fully diluted ADS outstanding at the end of the third quarter, net profit was $0.13 per basic ADS, while net profit per diluted ADS was $0.11, and non-GAAP net profit per diluted ADS was $0.16.

Cash and cash equivalents at the end of 3Q was $134 million.

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

First turning to mobile games, in 3Q total mobile game revenues were $8.2 million, an increase of 21% from 2Q and a 246% increase compared to the same period last year. 3Q mobile game gross profit was $4.9 million compared to $4 million in 2Q, with gross margins stable quarter on quarter at 59%.

Revenues from downloadable games were $7.1 million, an increase of 274% from the same period last year and a 41% increase from 2Q. In addition to the continued strong organic growth of the Chinese mobile game market, during the quarter we also began to distribute more downloadable games through Kong.net, our self-controlled mobile Internet portal. As the Kong.net user community continues to grow, we expect Kong.net and other free WAP site partners to become more and more important to our overall mobile game business.

Revenues from mobile online games were $1.12 million, or an increase of 134% from the same period last year but a decrease of 37% from 2Q. The sequential drop in mobile online game revenues was due to a number of factors. These included seasonal factors, such as access limitations for some of our game players before the National Chinese Holiday but primarily due to the impact of promotional activities we undertook during the quarter to transition from our older, more established mobile game, [Tian Jei], to our more recently launched mobile online game, Feng Shen. More specifically, while combined PCUs and ACUs for [Tian Jei] and Feng Shen saw stable quarter over quarter performance, marketing activities which included providing bonus or free virtual currency to promote user growth at Feng Shen impacted overall monetization of [Tian Jei], as the two games share a common virtual currency platform.

As this was the first time we attempted the transition from a single online mobile game to a portfolio of online mobile games, we recognize that we could have managed this transition better between [Tian Jei] and Feng Shen. More importantly, however, we have learned from this experience and we will be able to significantly improve new mobile online game product launches planned in the coming year.

Revenues from [Tian Jei] accounted for 97% of mobile online game revenues compared to Feng Shen, which accounted for the remaining 3%. We expect mobile online game revenues to stabilize and return to growth in the fourth quarter but continue to expect downloadable games and the downloadable mobile game market to be the major driver of our mobile game business in the coming quarters and in 2010.

Turning to wireless Internet services, wireless Internet service revenues were $1.5 million in 3Q, a 145% increase from the same period last year but a small decrease compared to 2Q WIS revenues of $1.56 million. As discussed on our last conference call, we did not expect WIS revenues in 3Q to continue 2Q’s strong performance. As we are still in the early stages of building the Kong.net platform to better position ourselves in the development 3G market, our near-term focus remains on rapidly growing this Kong.net user base versus revenue growth in this segment of our business in the coming year.

In 3Q, roughly 44% of WIS revenues were from mobile advertising with the remaining 56% from our traffic to transaction business model where premium services generated on the Kong.net wireless Internet site including virtual item sales.

WIS gross profit for 3Q was $0.75 million, roughly flat compared to $0.79 million in 2Q, with gross margins also relatively stable at 50%.

Turning to our wireless value-added services business, WVAS revenues in 3Q increased 15% from the same period last year and were also up 6% sequentially from 2Q to $25.4 million. Revenues from 2.5G services accounted for roughly about 20% of total WVAS revenues, from -- and 2G services represented the remaining 80%.

WVAS gross profit increased to $12.3 million compared to $11.75 million in 2Q, with stable gross margins at the 49% level.

Lastly, turning to a subsequent event, in October we acquired 100% of an online Chinese language novel company called [Julong] and its related party for an aggregate price of $2.3 million in cash and roughly 25,000 ADS. Julong.com is one of China’s leading Internet novel websites, mainly focused on the contemporary and martial arts genres. The acquisition of Julong will help support the development of Kong.net’s mobile novel channel while Kong will also seek to develop new and more innovative literature publishing business models based on mobile platforms.

Also, we expect Julong to support the development of our mobile games business as we are able to leverage content and other copyrights on the Julong platform for future mobile game titles.

Now turning to our fourth quarter guidance, based on information as of November 12th, we expect total 4Q revenues to be within the range of $37 million to $38 million, which implies roughly 5% to 8% quarter over quarter growth or 38% to 42% growth over the same period last year.

We expect to see sequential growth from all our business lines in the coming quarter but primarily driven by our mobile game business. However, due to our strategy of continuing to make long-term investments in Kong.net, we expect operating and net margin levels to remain flat compared to 3Q 2009 levels.

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

Wang Leilei

Thanks, Jay and thank you all for continuing to show your interest in KongZhong Corporation. In the third quarter of 2009, KongZhong continued to execute according to our long-term strategies. We are continuing to increase overall operating profit, [inaudible] to our wireless value-added services label, cash flow, and strong growth in our mobile games business, and also we continue to make the long-term investments in Kong.net to position KongZhong well for 3G market opportunities.

Let’s go to the mobile game business in the third quarter -- our mobile game business continued to demonstrate strong performance by growing over 200% year over year and 20% from the second quarter. More importantly, we believe a number of developments undertaken by China Mobile in the past quarter have created excellent conditions for continued growth in the China Mobile games market, especially for the downloadable mobile market in the coming years. During the third quarter, China Mobile finalized the integration of all their major mobile game platforms to central mobile game platform now run by provincial based subsidiary, [Jun-su] China Mobile. With this move towards a more operational mobile game platform, we believe China Mobile will be able to more effectively growth the mobile games market in China.

For example, we are now working with China Mobile to introduce RMB15 per month subscription packages to our mobile games business which we believe will create additional growth opportunities but also increase visibility and stability in the mobile game market.

Another good example for the centralization of the music business at China Mobile, the development of the China Mobile music club in 2006, within the first six months, China Mobile’s music club services signed up 17 million users and as of June 2009 this year, the figure has increased to nearly 100 million users with over $2 billion in revenues in the digital mobile music market in China. And also as an example of further partnership with China Mobile, in the third quarter, our Sim Life mobile game studio has also begun to develop the mobile game titles as the only Chinese game developer for the joint innovation lab platform, [namely JIL]. JIL is an alliance between China Mobile, [inaudible], Vodafone, and Verizon to build a mobile services platform which will reach a combined user base of over 1 billion users globally. Through the JIL, it is our hope we might be able to tap the overseas mobile game market in the coming years.

In terms of game development for the China market, we expect to produce an additional 8 to 10 downloadable games in the fourth quarter.

As Jay mentioned, our ongoing transition from a single mobile online game operator to a diversified portfolio mobile online game operator could have been handled more efficiently. However, we have already stabilized our mobile online game business and intend to learn from this experience through more effective play, launch new mobile online games in the coming year. Based on our update mobile MMO game pipeline for next year, we expect to launch at least three new mobile MMOs in the coming year, a [inaudible] MMO sometime in 1Q, a round space, a mobile MMORPG sometime in 2Q and the third, [Tian Jei] Extension, some time in the fourth quarter.

Let me go through the Kong.net business review in the third quarter. As we have said in the past, we focus for Kong.net in the coming year is to rapidly grow the Kong.net user base to better positioning KongZhong in the coming 3G market, which according to the number [we recently announced], the total mobile Internet users in China has reached 180 million by the end of October. This number was 155 million at the end of June this year. It has grown rapidly.

In line with this growth, while the third quarter is usually a slow season for Kong.net due to the summer school holidays, total unique monthly users continued to grow from over 15 million users to over 17.5 million users, or nearly a doubling from the same period last year.

More importantly, we have begun to see acceleration in user growth based on a number of initiatives we have begun to implement after the national holidays. In the third quarter, we announced our strategic relationship with CCTV.com to jointly develop the mobile Internet wap.cctv.com, leveraging Kong.net’s strong technology and mobile Internet experience. This partnership will seek to leverage CCTV’s TV resources and their over 1 billion viewers to promote and develop the mobile Internet services for the Chinese market.

In October, we relaunched ko.cn, our new mobile gaming platform which integrates all of our previous mobile community features and mobile social gaming platforms with new third-party mobile [inaudible] and mobile gaming API platform. Over the course of the past nine months, our team has either updated or developed from scratch five key services for the new ko.cn platform. This includes a downloadable mobile game community which can complement our existing mobile game business, [inaudible] WAP games, similar to [Tian Jei] but played through a WAP browser base just like some fixed Internet based web-based game. The third is social games like [inaudible], our self-developed farming game. The fourth is Flash like games and the last is underlying mobile SMS infrastructure services, such as chat, [inaudible], virtual currency, and other [bidding] systems.

Based on the successful models in the Japanese market, ko.cn is now the key flagship brand under Kong.net, integrating all of our mobile SMS and social gaming services. We intend to develop the majority of social applications and games on ko.cn ourselves, but have already launched a beta version of ko.cn’s third party platform which already has a few outside mobile game developers leveraging the ko.cn community to generate revenues.

Over the course of the next year, we intend to more aggressively growth the user base of Kong.net and ko.cn through partnerships like CCTV and begin building an ecosystem of third-party social game developers onto the ko.cn platform.

Lastly, as discussed in our press release, in October we acquired a Chinese novel website called [Julong] to support the development of Kong.net’s mobile novel channel. [inaudible] now to enter the Internet market but to leverage the experience of the [Julong] team and the [Julong] platform to further enhance our mobile novel competitiveness. [Julong.com] has over 5 million registered users with roughly 1 million unique users per day and nearly [inaudible] authors contributing to the platform content. More importantly, [Julong] is already an important partner and content provider for China Mobile’s mobile novel platform, contributing roughly 3,000 out of total 20,000 novels. Three to four out of the top 10 novels on China Mobile’s most popular novel list and roughly 25% of total content read on China Mobile’s mobile novel platform.

With the continued development of 3G, continued growth in Kong.net mobile novel channel and China Mobile’s mobile reader initiatives, we believe the [Julong] platform provides Kong.net with many advantages [no other mobile Internet firm possesses].

For our wireless value-added services, our WVAS business continued to be not only a stable source of cash flow for the company but also continued to grow as our WVAS team continues to consolidate market share by working more closely with some of the major handset partners like Nokia and expanding our distribution on traditional media channels.

I am very pleased by the momentum we have created in the third quarter going into 2010 and believe KongZhong remains well-positioned in the Chinese 3G market for the future growth opportunities.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Andrey Glukhov.

Andrey Glukhov - Brean Murray Carret & Co.

I guess first, Jay, can you give us a little bit more color on within your downloadable games on the opportunity to introduce sort of -- what percentage of that revenue is kind of tied to micro-transactions? And then on the -- I guess mobile online games, can you give us a little bit more granularity what exactly handicapped our growth a little bit and how we should do it differently next time?

Jay K. Chang

So in terms of the -- what we categorize as post-paid versus up-front paid, so when you download, that makes up the majority of downloadable game revenues. Roughly about the same as last quarter, roughly about 20% were from either what we call try and buy, where people can download the downloadable game for free, play a couple of levels, and then to play additional levels they pay through premium SMS, or they can buy virtual items in the game. That was roughly about once again, roughly about 20% of the 80% total, or more so of the downloadable game breakdown.

In terms of the mobile online games, during the quarter as we actually gave -- when you are seating and attracting users to come to Feng Shen, because we actually had a common virtual currency system by introducing almost over-inflation of virtual currency, that reduced the actual monetization we were able to get from [Tian Jei]. So previously maybe there were 100 different units out there that were actually all paid on [Tian Jei] but because we had the same virtual currency platform and on Feng Shen we actually may have introduced additional 500 for free, as people consume that 600, we still were only able to -- and people only consumed the same amount that they did before, given that the PCUs and ACUs were flat quarter over quarter, so that reduced the actual revenue level by the roughly 37% sequentially.

Andrey Glukhov - Brean Murray Carret & Co.

Okay, and would you be willing to tip your hand a little bit as far as next year is concerned, how many new mobile online games should we expect the company to introduce?

Jay K. Chang

Just as Leilei mentioned, we plan to introduce now at least three -- the first one will be a casual kind of card-playing game in the first quarter and then some time in the second quarter, end of the second quarter, we will actually release a martial arts MMO game that will still be produced by the [Tian Jei] team and then they are already upgrading and developing [Tian Jei] version 2 to be launched at the end of next year. But based on the historic [inaudible] we’ve seen with mobile MOs and given that we are more than doubling the number of games we would expect to see commensurate revenue growth next year -- basically, hopefully at least a doubling of mobile online game revenue growth next year but obviously we are coming from a low base.

Andrey Glukhov - Brean Murray Carret & Co.

Great, and then lastly from a housekeeping perspective, the literature revenue, to the extent there is any, what line item on the income statement this is going to flow through?

Jay K. Chang

It would go through WIS but it is very, very small.

Andrey Glukhov - Brean Murray Carret & Co.

Okay, thanks.

Operator

Our next question comes from the line of Eddie Leung.

Eddie Leung - Banc of America Merrill Lynch

Could you share with us how you see the competitive landscape on marketing and promotion, in particular the TV channels? Thanks.

Jay K. Chang

Yes, so there’s two ways we have to market Kong.net with the TV [inaudible] partners. One is through marketing alliances or WAP website alliances, like CCTV where they would handle the bulk of promoting a WAP site that is under their brand name but most of the services and infrastructure is delivered by us and that delivers users not only to them but also to the Kong.net services you can buy on that website. And we also are still actually in the process of evaluating --

[Audio Cuts Out]

-- where -- but on that basis, we are working with different both satellite and regional TV broadcasters but our goal there is to find the ultimate registered user cost, acquired registered users to be hopefully less than the current WAP alliance cost we are generating today.

Right now we are actually still in the process of finalizing, tweaking kind of the systematic approach we have to that but as we kind of tweak that, then we plan to put more resources into that and that is the reason why we give guidance for a flat operating margin level in 4Q relative to 3Q.

Wang Leilei

And also we have made a [trial] in fourth quarter to leverage our existing handset preloading channel to preload [the manual for Kong.net] features to promote the user and traffic to Kong.net.

Operator

Our next question comes from the line of Ming Zhao.

Ming Zhao - SIG

Thank you very much for taking my question. I have two questions regarding the distribution channels for the mobile games. The first question is very basic -- I don’t have experience in using, in downloading mobile games in China but my question is can a user download a mobile game from a mobile website, let’s say qq.com or Kong.net, directly and bypass China Mobile? Can a user do that?

Wang Leilei

I think the billing system is mainly leveraged the China Mobile’s billing system. Distribution is mainly leveraged at some distribution of self-controlled, like Kong.net and other alliances and distribution channels we control.

Jay K. Chang

So Ming, the answer is yes and if you look at our distribution channel breakdown for the mobile game business, as we said before roughly one-third is from the operator channel but another two-thirds is from non-operator channels, whether it is handset partners, other free WAP site partners and as we mentioned in our prepared statement, Kong.net. And in the third quarter, as we mentioned, we are looking to -- as the Kong.net traffic grows, it’s becoming a more important part of our overall mobile game distribution and I think in the third quarter it was just over 5% to 10% of mobile game revenue came from Kong.net associated downloads.

Ming Zhao - SIG

Okay, so how do users pay for that? Do they buy prepaid cards? Or do they deduct the money from their phone bill?

Wang Leilei

I think there are three ways to pay the bill for game download -- the first is when you download the game, you pay the money automatically to the billing system of the China Mobile. The second is we record [trying to buy]. Users download the game, it’s free and after he plays level one or two, for the next level he will pay the money for the new levels. The third one is a virtual [inaudible] model. The game download is free but if you want enhanced game features, you can buy some virtual goods in the game. This is three kinds of billing model.

Jay K. Chang

And one thing we actually are starting to introduce and we are going to do this gradually in a measured way is this new monthly subscription package. We saw a lot of learnings from the Japanese market where the bulk of mobile game revenues, at least on our understanding, is based on monthly bundles so for RMB15 a month, we can bundle 10 to 15 games that really leverages our portfolio and those are billed every month on the user’s phone bill.

However, what we can do if that user comes to Kong.net, as we mentioned before on ko.cn we launched a downloadable mobile game community, as users want to not only suggest fresh new games through that, they can actually sign up to a Kong.net of China Mobile mobile game bundle package where they pay RMB15 a month and we -- on that basis, the distribution would be through Kong.net or ko.cn and we would only rely on China Mobile for the billing part.

Ming Zhao - SIG

Okay.

Jay K. Chang

In the fourth quarter, we will try to convert some of our transaction based billing to the subscription billing system to the user [experience].

Ming Zhao - SIG

Okay, so let me try to understand -- so Jay, you said one-third of the revenue is from the mobile carriers platform and 5% to 10% from your own Kong.net. And what is the rest of that? Is it from handset alliance and others?

Jay K. Chang

Correct -- so if you take it in big buckets, one-third from the carrier, roughly; one-third from handset partners; and then one-third from other channels. And within that other, Kong.net is a part of that. You have other WAP sites, you have other distribution channel partners.

Ming Zhao - SIG

Okay, I see. So lastly, a question -- how many games are offered on your platform right now?

Wang Leilei

It’s about -- over 400 downloadable games we provided to the platform.

Ming Zhao - SIG

Okay, 400 -- but they can stay on that platform for a long time. There isn’t a large cycle issue here, right?

Wang Leilei

I think the mobile game market is a new market. For the different channels, it is little conversion between the different channels. So I think the last period for each downloadable game in the 400 is very long, one-and-a-half years.

Ming Zhao - SIG

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Eric Wynn.

Eric Wynn - Main First

Good morning. Thanks very much for taking my questions and congratulations on the very good quarter. My question is mainly about competition. In mobile games, who do you see your biggest competitor -- can you comment on both Tencent and anybody outside of Tencent?

And also, on your new initiative on literature, we noticed that it is also competing with Shanda which has they claim the biggest literature website in China. How does your competitive strategy against Shanda in terms of -- especially in terms of monetization capability compare to Shanda and how do you plan to grow that monetization capability going forward?

Wang Leilei

Thanks for the question. We are the number one mobile game operator in China in terms of revenue and also we are the -- we have a good partnership with -- we are a content provider with Tencent. We have the revenue sharing model [to our] mobile games in Tencent’s mobile plans and other platform. And also we believe some Internet competitors want to break into the mobile market but it’s a totally different market because it’s a little convergence between the fixed line Internet game users and the mobile game users. And also from the game development strategy and game distribution strategy, totally different between the fixed Internet and the mobile and we believe we interpret many of the value chain mobile market and KongZhong is very -- I think it’s very different because we have our self-controlled channel and as we said, we have a big service provider, wireless value-added service session. This is our exclusive resources compared with the other vertical game developers or game operators in China.

Eric Wynn - Main First

Could you comment on the literature website, how you plan to monetize?

Wang Leilei

Because we believe there is -- we believe in the future some of the content base, or user generated content applications will be [welcomed by the Internet] and mobile together, and especially for online novel applications, so our strategy to acquired [Julong] to strengthen or enhance our existing mobile novel business. Now it’s about over 17 million page views per day for our vertical mobile novel channel and we believe in the future we can leverage [Julong] other resources and visitor resources to enhance our novel content and novel potential visitors.

And also [Julong] has been in cooperation with China Mobile’s novel platform. As I said, it’s about 25% of the resources of China Mobile’s novel platform coming from [Julong] and the top 10 novels in China Mobile’s novel platform, it’s about three or four novels in the top 10 from the [Julong] platform.

Eric Wynn - Main First

So is [Julong] the biggest market share of mobile literature in China Mobile’s platform?

Wang Leilei

Yes, I think [Julong] has a big market share in the existing China Mobile’s novel platform but China Mobile’s novel platform is in the early stage. It’s launched only one year.

Eric Wynn - Main First

Okay, I understand. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Wallace Cheung.

Wallace Cheung - Credit Suisse

I have two questions -- number one is last night when Tencent reported results, it didn’t mention that -- you know, their wireless value-added service revenue actually down by around 5% whereas -- I mean, you have very strong growth and I think Sohu has quite a strong growth as well. But they did mention that some realization rate issue with China Mobile and also the mobile voice business has not been doing well. Have you experienced something similar in your wireless business?

My second question is can you also give us an update about the -- because recently I think all the three operators, when they are pushing 3G, they are all pushing the smartphone and all the smartphones actually seem to have their own sort of -- either China Mobile has mobile market or Apple has the App Store, so going forward do you see it’s kind of a new trend that the with the mobile phone that you may have to provide other types of downloadable games but not going through the mobile network -- it’s something that you are putting into your business plan as well? Thank you.

Jay K. Chang

So relative to the -- what they saw in 3Q relative to us, obviously we are not seeing the same thing but they are coming from a much, much, much larger scale. And in terms of IVR business, our IVR business quarter over quarter we are not seeing the same thing and in our guidance, we are not seeing the same thing.

Wang Leilei

And also we see the numbers in Q3 is about 15% growth and for our wireless value-added services, it shows we take market share from other competitors for the value-added service area.

The second question is -- say again for the second question, sorry?

Wallace Cheung - Credit Suisse

Sorry, let me rephrase my question better -- you know, there’s sort of an app store and mobile market of China Mobile, right? They are also providing games to download into the smartphone. Will KongZhong also be interested in providing a similar type of games?

Wang Leilei

I think KongZhong is positioned as a game developer and game operator and we have a good cooperation and partnership with China Mobile, especially for the mobile game session. We put many of our mobile games products on the different platform of China Mobile, like mobile market and also the other operators, the platform, which has traffic, user base so we can have the cooperation because as a content provider positioning, we are well-positioned and a good partnership with existing different distribution channels in the platform for the different carriers.

Wallace Cheung - Credit Suisse

Okay, and may I have one more separate question? It’s about -- last quarter I did ask a question regarding the wireless SMS. And I think, Leilei, you did mention about something, your sort of initial plan and potential [inaudible], and an update here?

Wang Leilei

We continue to have the cooperation with 139.com, because they are -- there’s China Mobile’s big mobile communities. They have a page view, user base traffic and we just put our -- many of the Kong.net features, content based features and also some payable services like mobile game services in their 139.com communities and we have the revenue sharing model with China Mobile.

Wallace Cheung - Credit Suisse

Okay. Thank you.

Operator

Our next question comes from the line of Dick Wei.

Dick Wei - Analyst

I just have a follow-up question on the payment channel -- is it still mainly relying on the China Mobile, how much is the payment channel coming through, like the [inaudible] or from the -- I don’t [inaudible] directly to, issued by the company?

Wang Leilei

I think most part of our billing system or payment channel is really on the operator’s channel because from the user experience and user behavior, there was easily to pay the game fee, other value-added service fee by phone bill.

Dick Wei - Analyst

Any plans to kind of expand it to the different channels or you don’t think it is related in the near-term?

Wang Leilei

We just to build up a platform, so the billing platform for Kong.net mobile games to have some credit card payment access or the other payment access and for now, the main payment usage is coming from the phone bill payment but not from the credit card or debit card payment.

Dick Wei - Analyst

Okay, and I just wondered, do you have any demographic information on the Kong.net user, as well as the mobile game user -- any different from the general Internet user demographics?

Wang Leilei

I think for the user analysis, it’s a little bit different because like the mobile Internet user is not mainly positioned in Shanghai, Beijing, and Guangzhou, like the first-tier cities. Our user is coming from some second-tier or third-tier cities and is younger than Internet users and I think just like the mobile Internet users which is have no [inaudible] trial for fixed Internet and we believe our users are a convergence between the Internet users and mobile Internet users is a little [inaudible].

Dick Wei - Analyst

Okay, great. Thanks.

Operator

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

Jay K. Chang

Okay. I would like to thank everybody for your interest in KongZhong and we look forward to speaking to you the next few weeks and months. Thank you very much.

Operator

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

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