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

Here’s the entire text of the prepared remarks from KongZhong’s (ticker: KONG) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

J.P. Gan, Chief Financial Officer

Yunfan Zhou, Chairman and Chief Executive Officer

Nick Yang, President and CTO

Analysts:

James Lee, Analyst

Andy Collier, New York Global Securities - Analyst

Ming Choi, Fiscohana Financial Group - Analyst

Chang Chi, Analyst

Rod Nigh, Analyst

Operator

Good day, everyone, and welcome to KongZhong's Third Quarter 2005 Earnings Results Conference Call. For the duration of the presentation, all lines will be placed in listen-only mode. A question and answer session will follow the main presentation.

Operator Instructions And I would like to hand the call over to Mr. J.P. Gan, and I will be standing by for the Q&A session. Please go ahead. Thank you.

J.P. Gan, Chief Financial Officer

Thank you, operator. Hi. I'm J.P. Gan, Chief Financial Officer of the Company. Welcome to KongZhong Corporation's third quarter 2005 earnings conference call. If you don't have the press release, please go to our website at ir.kongzhong.com for press release. We also have a presentation there.

Today we'll start with Yunfan's comments on operations and the business outlook. Yunfan, please.

Yunfan Zhou, Chairman and Chief Executive Officer

Thank you. Good evening and good morning. We are pleased to announce that we have exceeded our guidance by growing the Q3 revenue by 10% sequentially and 64% year-over-year, to reach a new record of $20.25 million. We're also proud to announce that we have been able to increase our revenues again for the thirteenth straight quarter since our inception. Our solid performance was the result of our broad and diversified product offerings and a focused execution.

We believe we continue to hold the leadership position in the 2.5G services on China mobiles network. In the meantime, we have made a significant progress in diversifying our revenues generated from China Unicom, China Telecom and China Netcom. About 6% of our revenues came from these three operators in Q3, while there was only 2% in Q2.

We expect our Q4 revenue to be between $21 million to $22 million.

In terms of 2.5G services, we achieved 6% revenue growth in Q3 over Q2. We expect to see continuous 2.5G revenue growth in Q4, driven by the growth in MMS. We anticipate our MMS revenues to grow fast from the Q3 level, as the transition to the MMS MISC platform has been stabilized. We expect the transition to the MMS MISC platform for the remaining provinces to be smooth.

We expect our WAP revenue to continue to have a slight decline from the Q3 level.

We expect our Java revenues to be around about flat in Q4. After we have achieved around 35% Q-to-Q growth in Q3, we believe the Java game market in China is beginning to take off.

In terms of 2G services, we achieved 22% revenue growth in Q3 over Q2. Our strategy in Q4 is to focus on the growth of 2.5G services, especially MMS services. Thus our revenue from 2G services may be flat or show a little growth over Q3. We also believe that there is still much growth potential left for the 2G services in the long run.

In addition to revenue growth, we have started to make more effort to promote our free Kongzhong media lap portal. We will leverage our Kongzhong user base content, distribution channels and editorial teams to develop and promote this portal. We believe wireless Internet is now at a very early stage in China and it's very worth investing.

So to summarize, we will continue to deploy our diversified growth strategies for different platforms and operators. Our major focus in Q4 will be the growth of MMS services. And as the leader in the 2.5G market in China, we believe we are in an ideal position to capture the market growth opportunity in the 2.5G and upcoming 3G services in the future.

Thank you and I will give back to J.P.

J.P. Gan, Chief Financial Officer

Thank you, Yunfan. I will go over some of the financial highlights. As Yunfan mentioned, we had a record-breaking quarter in terms of revenues. We grew our revenues 10% sequentially, to over $20 million.

We are very pleased that our 2.5G revenues began to grow again in the third quarter and reached $14.37 million.

As discussed in the previous conference calls, our WAP did decline by 2%, which is much better than the previous quarter's decline of 4.6%. The decline in WAP is more than offset by our MMS and Java growth.

Our 2G business continues to perform well, as it grew by 22% sequentially to $5.87 million. We have grown our revenues from China Unicom, China Telecom and China Netcom. Revenues from these three operators in the third quarter was $1.2 million versus $346,000 in Q2. The changes in revenue mix had some negative impact on our gross margin, which declined to 60%.

I will agree that our gross margin decline was because we paid higher transmissions charges to mobile operators for using their channels and networks to mainly promote our Java Games and gain market share. Net transmission charges paid to the operators increased by $644,000, or a little over 56% from the second quarter of 2005. This is roughly 3% of our gross revenues.

During the third quarter, we made a $3.5 million one-time non-recurring provision related to the pending settlement of the class action lawsuit. We announced that we have entered into an MOU with the plaintiff on September 14. We are now in the final negotiation stage for definitive agreement to hopefully settle the lawsuit. The settlement will also be subject to court approval.

The one-time provision and the $129,000 in legal expenses related to the class action lawsuit represents approximately 18% of our total revenues in the quarter and about $0.10 diluted earnings per ADS.

Excluding the $3.6 million in expenses related to the class action lawsuit in the third quarter, and $326,000 in legal expenses in Q2, our operating spend increased by 7% from the second quarter. It is in line with our revenue growth.

Our net income in the quarter was $3.4 million and the diluted EPS was about $0.10. If we had not incurred the class action lawsuit related expenses of $3.6 million, our net income would have been a little over $7 million and our diluted earnings per ADS would have been $0.198.

Finally, our cash flow was extremely strong in the third quarter. We generated over $10 million in operating cash flow, mostly due to favorable change in net working capital.

With that, we will conclude our presentation. Operator, can you open the floor for questions and answers please?

Question-and-Answer Session

Related:

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

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

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

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

Source: Full Transcript of KongZhong’s 3Q05 Conference Call - Prepared Remarks (KONG)
This Transcript
All Transcripts