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Executives

Jay Chang – CFO

Wang Leilei – Chairman & CEO

Analysts

Andrey Glukhov – Brean Murray

Adam Krejcik – ROTH Capital Partners

Ming Zhao – SIG

Jenny Wu – Morgan Stanley

KongZhong Corporation (KONG) Q1 2010 Earnings Call Transcript May 19, 2010 7:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 KongZhong Corporation earnings conference call. My name is Eva, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions)

I would now like to turn the call over to your host for today, Mr. Jay Chang. Please proceed, sir.

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 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’s CFO. I will go over our 1Q results before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the first quarter of 2010 were $40.6 million, an 18% sequential increase and a 37% increase from the same period last year. As we continue to transition our business to become a cross-platform digital entertainment company, mobile game revenues made up 23% of total revenues, while Internet online games contributed about 10%. WVAS revenues contributed less than 65% of total revenues compared to 80% in the same period last year.

Total gross profit was $17.7 million compared to $15.7 million in 4Q, while gross margin declined slightly to 44% compared to 46% in the fourth quarter. Total OpEx was $14 million in 1Q, a 17% sequential increase due to additional product development, headcount in our online game division, and the addition of $1.1 million in intangible amortization associated with the acquisition of Dacheng.

Total operating profit in 1Q was $3.7 million compared to $3.6 million in 4Q, while operating margins were 9% compared to 10.6% in the fourth quarter. First quarter net profit was $3.2 million compared to $2 million in 4Q, with net margins of 7.8%. Non-GAAP net profit, which excludes stock-based compensation charges and amortization of intangibles associated with the acquisition of Dacheng was $6.1 million compared to $5.4 million in the fourth quarter.

Based on 35.6 million basic and 38.8 million fully diluted ADS, net profit was $0.09 per basic ADS, $0.08 per diluted ADS, and $0.15 per non-GAAP net profit per diluted ADS. At the end of 1Q, our cash and cash equivalents were $130 million, roughly equal to $3.7 million or $3.7 per basic ADS, and this figure already takes into account the cash portion of the first payment to Dacheng shareholders of $9.6 million.

Now, I would like to turn to each business unit’s financial performance, namely Mobile Games, Wireless Internet Services, WVAS and through the acquisition of Dacheng Net Games. Total mobile game revenues in the first quarter were $9.5 million, a 92% increase from the same period last year and a 29% quarter-over-quarter increase. Mobile game gross profit for 1Q was $3.6 million compared to $3.7 million in the previous quarter, a slight decrease due to the higher revenue share to China Mobile for additional distribution fees for the mobile game monthly subscription package platform, a 29% increase from the same period last year.

Mobile game gross margin was 38% compared to 50% in 4Q. As previously discussed from the past quarter, the decline in mobile game gross margins is due to the company’s proactive shift to a new mobile gaming platform, namely China Mobile monthly mobile game subscription package in order to offset the impact of the transaction-based portion of the G Plus mobile game billing platform which was suspended at the beginning of December. However, while this new mobile game platform is expected to be a more stable source of recurring revenue, it relies more on our mobile operator partner's resources and therefore has a higher revenue share component to our mobile operator partners compared to the transaction-based portion of the G Plus game platform.

As mentioned before, we are still working with China Mobile's mobile game center in Jiangsu province to transition a portion of our mobile game monthly subscribers to a new billing platform, which will allow us to promote and acquire game subscribers on our own channels and bypass the traditional distribution fees. As a result, we expect gross margin for our mobile game business to increase gradually in the coming quarters, with a target of 45% to 50% gross margin over the medium term.

Revenues from downloadable mobile games were $8.95 million, representing a 112% increase from the same period last year and a 37% increase from 4Q. As mentioned before, the strong performance in the downloadable mobile game revenue was due to the company's proactive focus on developing monthly mobile game subscription packages with China Mobile.

Revenues from online mobile games were $0.53 million, a decrease of 27% from the same period last year and a decrease of 36% from 4Q. In a continuation of trends from the previous quarter, namely the initial poor performance of Feng Shen not compensating for the decline in revenues from Tian Jie, total online mobile game revenues continued to decline. However, towards the end of 1Q, a new expansion pack for Feng Shen was launched which we expect to stabilize our online mobile game revenues in the future. In addition, the company intends to refresh our online mobile game content portfolio in 2010 by launching Fantasy Tianjie, a turn-based 2D mobile MMO sometime in 3Q, and the second generation version of Tian Jie, currently called Tian Jie 2, sometime in early 2011.

Turning to WIS, Wireless Internet Services, WIS revenues in 1Q were $1.1 million [ph] – or $1 million, representing an increase of 4% from the same period last year, but a decrease of 41% from 4Q. The decline in WIS revenues was mainly due to the suspension of the WAP billing platform across all of our mobile operator partners. In 1Q, 40% of WIS revenues were from wireless advertising with the remaining 60% of revenues from premium services on the Kong.net mobile Internet site and revenues coming from our Internet literature site, Zhulang.com. Gross profit for WIS in 1Q was $0.28 million compared to $0.60 million in the previous quarter.

Turning now to Net Games, from January 14th, 2010, revenues from our newly acquired Online Game business unit, or Dacheng Networks, now reported under Online Games, recorded $4.24 million in revenues, all primarily from Dacheng's main online game called Loong. Of this, roughly 93% was related to mainland Chinese operations of Loong and the other roughly 7% from overseas license fees and the net revenue share from overseas online game distribution partners. Online gross profit for 1Q was $3.69 million, with gross margins of 87%. For the full quarter, Loong mainland Chinese operations achieved average concurrent users of 77,000, aggregate paying accounts of 185,000, with quarterly ARPU of roughly 172 Renminbi.

Now, turning to WVAS, WVAS revenues in 1Q were $25.9 million, a 3% increase from 4Q and a 9% increase from the same period last year. Although the bulk of our WVAS revenues, both 2G and 2.5G, were negatively impacted by various new mobile operator policies implemented during the course of 1Q, our IVR services saw a strong seasonal increase due to the Chinese New Year holiday period. As a result, 2G revenues represented 91% of total WVAS compared to 81% in 4Q. WVAS gross profit in 1Q was $10.12 million compared to $11.37 million in 4Q. First quarter gross margins were 39% compared to 45%. The decline in gross margin levels was due to the new Chinese mobile operator policies as well as the lower gross margin nature of our IVR business.

Now, turning to our 2Q 2010 guidance, we expect total revenues for 2Q to be within the range of $34.5 million to $35.5 million, with business unit revenues at the mid-point expected to roughly consist of WVAS revenues of $16.5 million, mobile game revenues of $13 million, WIS revenues of $1 million, and Online Game revenues of $4.5 million. We expect total gross profit to be within the range of $16.5 million to $17.5 million, total operating profit as well as net profit to be $2.5 million to $3.0 million, while non-GAAP net profit to be roughly $5.3 million to $5.8 million.

For WVAS, we have previously mentioned a $20 million per quarter level for revenues, but in the regulatory environment, we have taken a more conservative approach to managing our distribution partners, promotion and begun to reduce lower gross margin services, which while in the near term will lead to a lower level of WVAS revenue, however in the long term, we believe will allow us to be better positioned for the ongoing industry rationalization as the ratings with the operators should continue to outperform many of our peers. So, in other words, we could have managed for a higher level of WVAS in the second quarter, but potentially at the expense of gaining additional market share in the future.

Finally, as we continue to transform our business into a cross-platform digital entertainment company away from WVAS, in the second quarter, we expect mobile games and online games combined to exceed WVAS for the first time.

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

Wang Leilei

Thanks, Jay. In the first quarter, KongZhong increased our efforts to transform our business from a traditional WVAS player into a cross-platform digital entertainment company. I am very pleased with the progress our team has made to date, especially our mobile game business, but believe we still have significant room for development and improvement.

In the first quarter of 2010, despite a difficult wireless services environment, we continued to grow and lead the Chinese mobile game market by transitioning to China Mobile's mobile game subscription package platform. With over 1 million average monthly users subscribing to our mobile game package, we believe this new model creates a more stable source of revenues and stronger recognition by Chinese users of the KONG mobile game brand.

On January 14th, we completed our acquisition of Dacheng Networks, supporting our transition from a traditional wireless services player to a cross-platform digital entertainment company. In the first quarter, Dacheng's flagship game named Loong, achieved 77,000 average concurrent users and was launched commercially into Taiwan, Hong Kong and Malaysia online game markets. In addition to a recent expansion pack for Loong, launched on May 8th, we plan to launch at least two additional 3D online games in the coming months. First, we plan to launch Demon Code Online commercially on May 27th and will be launching another 3D online game, called Xia Ke Xing, sometime in the third quarter of 2010.

Our strategy for the rest of this year is two-fold. Firstly, we plan to transition from a single game operation to a major top three stable 3D games, and secondly, we expect to continue our efforts to license and operate our 3D games in overseas markets. For example, we recently licensed our game, Loong to the Russian and Vietnam markets and are seeking similar opportunities for Demon Code Online and Xia Ke Xing.

Looking further out, based on our current development pipeline, we plan to launch at least four additional 3D games in the next year as we leverage our two self-developed 3D game engines. We believe that by having multiple 3D game engines provides KongZhong more flexibility and the potential to become a leading mainland Chinese 3D online game company, and by designing our game engines to more easily suit the requirements of our overseas online game partners, increases our export market potential.

While our WVAS business will continue to experience challenges in the near-term, we expect to maintain positive cash flow and continue our transition to become a leading cross-platform digital entertainment company for Chinese users. Once again, I continue to be optimistic about KongZhong's ability to transition through this period as a more diversified, more product-driven and more profitable company. Chang?

Jay Chang

Okay. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Andrey Glukhov with Brean Murray. Please proceed.

Andrey Glukhov – Brean Murray

Yes, thank you for taking the question. A couple of things. First of all, on the WVAS environment, once the environment stabilizes and let's say, if that revenue kind of bottoms out, do you or at what point do you expect WVAS revenue to kind of start growing back, or should we think of it as a rather stable component kind of once it bottoms out going forward?

Jay Chang

Based on the current outlook, right now, we think the regulatory environment is relatively stable today, but still a lot of large players, I think are still relatively cautious. Assuming no changes in the environment and I can’t guarantee that, maybe towards the end of the third quarter, you can start seeing things improving, but not in a significant, I think it would be very gradual.

Wang Leilei

I think in other words, WVAS provision as a cash cost business line for KongZhong Corporation, and for example, like the second quarter, we hope the mobile game and Internet Games business revenues have continuously exceeded WVAS revenues, and which has capped the high margins, which represent the WVAS.

Andrey Glukhov – Brean Murray

Okay. that was helpful. When it comes to the Online Gaming business, I guess two things. First, given that you recently launched a pretty meaningful expansion pack for Loong, can you kind of talk about what usage trends you are experiencing, what is the adoption of that expansion pack? And in a similar vein, to the extent we are going to have another game launched in Q2 that is also going to contribute to revenue, are you guys being perhaps a little bit too pessimistic on the Online Gaming outlook here in the near term?

Jay Chang

So, our view is if you look at across the 3D Online Game sector, in China, besides Perfect World and World of Warcraft, there actually hasn’t been that many large-scale successful 3D Online Game companies, including ourselves although I think if you compare Loong compared to some of the other recent 3D game launches, whether it’s Changyou's Zhong Hua Ying Xiong or China Hero, JX3 so on and so forth, King of Kings 3, we actually still believe Loong actually has still outperformed them. So, based on our engine, based on the current ongoing development plan, we still think there’s lot of potential for us in the next 12 to 18 months to become a leading 3D game player. But we still think there’s lot of things we need to execute and improve on that, but we think there’s enough opportunity there. That’s looking a little bit further out.

In terms of recently as you have noticed, there was lot of server consolidation for Loong. The game actually has been technically in operation since September – August of last year, so actually been at the market for quite a long time. During the April period, when the server consolidation was happening, there was a lot of new kind of 3D games also launched. That contributed to, I think a more significant server consolidation that we would have liked. After we launched the expansion pack, because the game has been out there quite some time, it stabilized the game, it improved the kind of ACUs at a much lower level than we would have liked to prefer. We think going forward, we will still manage to launch expansion packs for the quarter for Loong, but our kind of ongoing strategy now is to maintain Loong at kind of the current levels, which is around 26 server groups for the remainder of the year, and focus on launching new games.

We think in the current market environment, as many analysts have noticed, the game lifecycle has been to shorten further drastically. So, what we plan to do is take advantage of our 3D game, multiple 3D game engines to launch games more rapidly to the market and at the same time, we are still really focused on the 2011 pipeline, which includes two large-scale games, which have been under development by that time two to three years, Kung Fu 2 and a game called Shing [ph] as well as launching additional games based on our engine. So, kind of our guidance reflects the lower level of operating activity for Loong, given the game actually has been out there quite some time. But one thing I would like to note is that if you look at the 17173 kind of download rating, Loong, even though we actually aren’t spending any marketing right now, still one of the top downloaded games in China. There is some longevity issues, a lot of the – most of the players in China have actually downloaded the game and tried to install it.

Some of them have had some hardware issues. So, those are things that we are trying to fix for Demon Code as well as future games that we plan to launch next 12 to 18 months. So, I think overall – and just on top of that, just I am sure this question will come; we still do believe Dacheng will be able to achieve or potentially exceed the $10 million total year net profit, but for the first half, right now, we are assuming that we would not exceed the $5 million earn-out bonus payment.

Andrey Glukhov – Brean Murray

Okay. And I guess lastly, to the extent you are exploring alternative distribution channels for the downloadable mobile games, does that process in any way hurt your spending as a premier SP with China Mobile?

Jay Chang

The first alternative is actually there are new platforms which allows us to get back our distribution fees.

Andrey Glukhov – Brean Murray

Okay. Perfect. Thank you very much.

Jay Chang

We are still with China Mobile.

Operator

Your next question comes from the line of Adam Krejcik with ROTH Capital Partners. Please proceed sir.

Adam Krejcik – ROTH Capital Partners

Yes. Hi, thanks for the questions. First off, just housekeeping, Jay, the guidance that you provided in the press release, I just want to make sure, is that for net revenue after sales taxes or is that pre of –?

Jay Chang

Gross revenues.

Adam Krejcik – ROTH Capital Partners

Gross revenues, okay.

Jay Chang

Yes.

Adam Krejcik – ROTH Capital Partners

Got it. And then on the Mobile Game gross margin, I understand that came down because of the bundled subscription packages you did with China Mobile. What's kind of a good way to think of that going forward and your longer-term thoughts on the gross margin for Mobile Games?

Jay Chang

I think for the next few quarters, we are still looking at around the 40% level and as we mentioned over the medium term, as the China Mobile game center opens its new distribution channel platform to us, that should trend more to 45% to 50% past that period.

Adam Krejcik – ROTH Capital Partners

Okay. And what's the timing on that again?

Jay Chang

Previously, we had assumed towards the end of 2Q.

Adam Krejcik – ROTH Capital Partners

Yes.

Jay Chang

Right now, that’s still kind of in progress. So, it’s essential that we may get access to that in June, but right now, there are actually no official timeline from China Mobile as it stands right now.

Adam Krejcik – ROTH Capital Partners

Got it. And then, on the Online Game business, just wondering if you could be a little more specific in terms of the guidance you provided of $4.5 million. How much if anything do you include from license fee revenue, and then are you assuming any revenues from Demon Code online?

Jay Chang

Yes, on both. Right now, we look at our business as an overall game portfolio. So, right now, the guidance part, we are not going to break out Demon Code first versus Loong, but in terms of online – overseas licensing, the over $1 million was in the second quarter.

Adam Krejcik – ROTH Capital Partners

Okay, great. And then just I guess some top level questions on the Online Game business, kind of about your guys' strategy and place in the market. What is the general production time for a new 3D game? And on average, not to give away any of your competitive advantages, but just on average, how long does it take to develop and how long? And then I have one more follow-up.

Jay Chang

So, kind of a flagship game, I still think it’s probably 12 to 18 months, if not longer. And those two games right now we are talking about Loong, E Mo Fa Ze, Demon Code, Kung Fu 2 sometime next year and Shing. And in terms of something like Xia Ke Xing actually could be as short as four to five months, but it’s much more of the content, leveraging some existing assets from the previous flagship games by changing the maps, changing a lot of the characters, a lot of the artwork, different maybe developing some features for that game. So, in those instances, we would expect much lower marketing budget and much lower kind of ACU ARPU levels and much shorter lifecycle. But kind of based on our internal estimates, we are still looking at 100% plus IRRs on those types of projects as well. So, we think that’s once again that shows that having your own game engine actually is very important, and then being able to fix things in the market is very important.

For example, if you look at the 17173 download games ranking today, some of the top games that last year people thought were going to be really big 3D games, including KingSoft JX3 and NCsoft’s Aion, Loong today as well as Demon Code actually even though it’s not launched yet has ten times more daily downloads in terms of client installs. So, we think we actually have a lot of potential we understand we need to execute now, and we hope over the next few quarters, we can prove that, but I think we have the right assets in place. So, we just need to execute more and more efficiently going forward.

Adam Krejcik – ROTH Capital Partners

And in terms of development costs for flagship versus smaller games?

Jay Chang

Lot of it is going to come to the marketing budget, but in terms of headcount, for flagship games, we are looking 70 people roughly. For mini, it’s not a mini game, but kind of more short turnaround kind of development game to head a specific market niche, which is something that we want to do with our engine is actually do both big content as well as targeting content for specific niches, whether it’s focusing on specific deals or whatever player set, you know, talking a team of maybe 15 to 25 people. This is also leveraging an engine we have been developing over the past seven years, two engines actually.

Adam Krejcik – ROTH Capital Partners

And then finally just on sales and marketing, it seems like you are keeping a fairly constrained marketing budget especially relative to some of your competitors who spend pretty aggressively on marketing especially around new game launches. I guess what's a good way to think about that line item going forward around new game launches and just your own internal opinion about how much return you get per marketing dollar? And I am talking specifically about the Online Game business. Thanks.

Jay Chang

Sure. So, if you look at your guidance, you can pretty well work out that OpEx guidance is like $14 million to $14.5 million. So, we are pretty trying to manage our costs as efficiently as we can. At the same time, we do understand the marketing competition out there on different channels so on and so forth. We are not in the channels, we do work with all the same traditional channels. Because given our size today, we are not willing to go out and spend huge amounts and build a loss-making kind of profile given there is obviously always risks when you launch a game. So, based on that, we do believe our product quality actually is quite good, and we think that’s being proved out in the client downloads. The area where I think we need to build more execution proof is in the operation of the game. So, in terms of Loong, I think there is lot of things to improve on and as we mentioned before, given the expansion pack is done only okay, there is lot of things where we are working to improve especially for future expansion packs and then more importantly the future launch of Demon Code.

So, based on all that, we do think still at the end of the day, this is a gamers market. They are going to play the game based on the game’s content quality, game play as well as graphics, and those things that we are really focused on. Marketing is something that will step up when we are at a much, hopefully at a larger scale through game operations, the game content quality. So, we are going to do on a gradual basis and not try to be too aggressive in the current marketplace today.

Adam Krejcik – ROTH Capital Partners

Got it. Very helpful. Thank you.

Operator

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

Ming Zhao – SIG

Thank you for taking my questions. Good morning Leilei and Jay. A question on the Online Games side, do you actually disclose the ARPU level of the games?

Jay Chang

What levels, sorry?

Ming Zhao – SIG

The monetization, the ARPU level?

Jay Chang

We did, it’s in our press release. 172 Renminbi ARPU on a quarter basis on 185,000 active paying accounts.

Ming Zhao – SIG

Okay, good. And the second question is we have seen some cooperation with Shanda Games there. How are things progressing there? Do you feel that partnership could add significant revenue to the Online Games?

Jay Chang

Not at the current kind of moment. I think they only have two server groups open right now. Again, once again, the issue goes that, that Loong itself has actually been in the marketplace for quite some time. Over the past like nine months, it’s been one of the top ten most downloaded 3D games in China for various reasons, whether the game design, although I think the first thing to note is because of the engine, we believe we have superior 3D graphics quality game, with just some of the operational things that we are improving and working to improve now. A lot of players have already touched the game. So, going on the Shanda platform although, we would hope things have gone better. I think a lot of players have actually kind of played Loong already before and people are always actively looking to play out new games. So, our focus now is maintaining levels of Loong today, and we hope partnerships with Shanda as well as we also with Shin Lei [ph] as well in corporation will continue, and we hope that they can improve overtime. But our focus is really developing the next seven games over the next 12 to 18 months.

Wang Leilei

I think the major revenue is still coming from our self-controlled servers, not from some partnered servers because Loong has run almost eight months. And it's a little bit late to have the conclusion with other partners like Shanda and Shin Lei. We will look at some license from that, like from last week, we launched Demon Code Online, maybe we can have the partnership with like Shanda and the other two companies earlier than Loong, maybe one month or two months after official launch of Demon Code, we can make cooperation with the other new partners.

Ming Zhao – SIG

Okay, all right. And lastly, maybe just to get your comments or thoughts about the engineer, the talents in the game market, do you think you can continue to find and gain talents? Is there any talent lost there? Any thoughts would be helpful.

Wang Leilei

I think we have more operative rewarding plan to the new product engineers. And also we have a commission plan for every project for our new pipeline of online games. We believe today Internet games is only the new business plan KongZhong Corporation. Important for us is it’s not one game excellence for Loong or one-game strategy game, we hope for this year, we will try from one game to three-game metrics for KongZhong Internet game business plan, and also we have multiple operation team, designing team and the programming teams and they have more rewarding plans to actuate, to make more pipeline for us. Hello?

Ming Zhao – SIG

Yes, okay. All right. Thank you.

Operator

Your next question comes from the line of Jenny Wu. Please proceed.

Jenny Wu – Morgan Stanley

Hi, Leilei, Jay. Sorry if I come late, if the question's been asked, I have to apologize first. And there are two questions. First is on the regulatory environment, and I just was wondering on your observation, when will this, the regulatory environment will become stabilized? And actually we heard there's some (inaudible) for the China Mobile's top management. Just wondering if you think that that would impact for the regulatory policy. And how should we gauge the mobile value-added service growth this year? And I have a follow-up. Thanks.

Jay Chang

Okay. In terms of the regulatory environment, it’s still quite strict today, and that’s reflected in our 2Q WVAS guidance. So, a lot of that also through actually being more conservative than a lot of our competitors, given there is a very official SP ranking system based on revenues, customer complaints, product quality, so on and so forth, which we want to maintain the highest level, especially relative to all of our competitors. As the market continues to stabilize, we believe to stabilize today, a lot of players are getting their codes suspended so on and so forth, that’s the process they are continuing. At the current moment though, a lot of those partners that could be working with us are actually not accepting because we still want to be conservative, so that’s kind of the reason why we are reflecting the lower level of WVAS in the second quarter than maybe we had previously discussed before.

In terms of management changes, I think we referred to you, we don’t – those shouldn’t really change the SP businesses around for quite some time. It’s very institutionalized, a lot of processes are very institutionalized. We don’t think that would be changing anything significant.

Wang Leilei

So, I think you can score numbers that the mobile games, we have a good number in the first quarter, and I would give a good guidance in the second quarter, and we believe some of the new business for wireless will focus on mobile game business and we can see our growth will exceed the market growth. So, we believe not any impact for some management change of our partner, and also for WVAS, we will continue to position our WVAS business as cash power business and the challenge for us is how far we can last our mobile games, Internet game business profile, and always give the guidance in the second quarter, this number, the mobile game and Internet game business revenues we hope can surpass or exceed the WVAS revenue and becomes a major revenue contribution for our gaming business.

Jay Chang

And to quickly answer your second question, one thing I just would like to point out is most of our competitors, when they report WVAS, they include mobile games. So, if you include both WVAS and mobile games in our 2Q guidance, you can see that actually we are outperforming market, but we believe the mobile games is a standalone, it is a standalone business for us and is a major focus for us to grow over the next three to five years, especially if 3G develops in China. That’s the reason why we split it out separate.

Jenny Wu – Morgan Stanley

Great. Just to follow up on Mobile Games, and I observe that many competitors, they have also your obvious mobile games strategy and they also took some lead in certain (inaudible). Just wondering, can you help us understand the mobile game industry competitive landscape nowadays and also, how do you think how sustainable you can maintain your leadership in this area?

Jay Chang

So, the mobile game industry is being driven by China Mobile to a certain extent, and then there is some other kind of alternative platforms like Tencent’s platform, although CP’s revenue share is only 20% or 30%, and then some other kind of MTK [ph] server platforms. On those kinds of platforms, with MTK, the product quality is very, very, very low, and if you use some of the service businesses, you know, very easy to get – they charge for something you really don’t want. So, there is little bit kind of revenue bubble there, which you think over the long term is not great for consumers. On China Mobile, especially the mobile monthly subscription package, China Mobile internally has a game rating system, which very clear guidelines for product quality. And on the mobile, the monthly game package, which we offer, we actually only can put games on there that have 8 or above rating, which actually means they have to be very, very quality.

Most of our competitors have only entered the mobile game development businesses over the past six months. Develop good quality games, we have been doing it, both Sim Life and Tian Jie as well as our Beijing team for seven or eight years. So, we believe we actually have a significant both toolsets understanding as well as development capabilities in terms of number of developers close to 200 that we feel we have a multi-year advantage over most of our competitors. In addition to that, because of our scale and relationship with China Mobile, especially on the SP side, lot of high quality, highly rated game developers whether they are Gameloft or other overseas developers will actually distribute through us, which gives us another advantage in terms of putting the best quality content, both proprietary as well as overseas to Chinese users. So, that’s our strategy, we still think the market has a lot of room to grow. And we think we hope to continue to execute kind of based on that strategy.

Jenny Wu – Morgan Stanley

Great. Okay. The final question is on your R&D people. How many R&D talents do you have for Online Games and the Mobile Games separately?

Wang Leilei

For Mobile Games, now, we have the three R&D teams based in Tianjin, Shanghai and Beijing. It’s about 200 R&D people for Mobile Games. For Internet games, now we have two teams, which is based in Shanghai and Beijing. It’s about 270 people for R&D for Internet games.

Jenny Wu – Morgan Stanley

What's your expansion plan by the end of this year or what is the increase of this R&D count?

Wang Leilei

We have the budget, which is initiated in the first quarter this year. We believe by the end of this year, it’s about (inaudible) growth for the total R&D team including Mobile Games and Internet games.

Jenny Wu – Morgan Stanley

Okay. Very helpful. Thank you very much.

Wang Leilei

Thank you.

Operator

(Operator instructions) We have no further questions at this time.

Jay Chang

Okay. Thank you everybody for your interest in KongZhong, and we look forward to speaking to you in the coming days 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 great day.

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Source: KongZhong Corporation Q1 2010 Earnings Call Transcript
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