Full Transcript of KongZhong’s 3Q05 Conference Call — Q&A (KONG)

Here’s the entire text of the Q&A from KongZhong’s (ticker: KONG) Q3 2005 conference call. The prepared remarks are 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.

Questions and Answers

Operator

Operator Instructions The first question will be coming from Mr. James Lee. Please go ahead, sir.

Q - James Lee

Thank you. Congratulations, guys; very good quarter.

A - J.P. Gan

Thank you.

A - Yunfan Zhou

Thank you, James.

Q - James Lee

Can you guys review the trends again by product categories? I didn't get that completely. Will you guys mind just going through that one more time, to make sure I have it?

A - Yunfan Zhou

You mean the Q4?

Q - James Lee

Yes. Going to 4Q, exactly.

A - Yunfan Zhou

I think I already said that Q4 we expect to have growth in the 2.5G area. And so the driver is MMS services, Multi-Media Messaging Services, and we have already almost completed the transition to the MISC platforms in most of the major provinces, so the MMS environment is stabilized. So we expect to have a pretty good growth in MMS. As for Java, it seems we grew Java by a lot, over 100% in Q3 over Q2. So we expect the Java revenue will be rather around about flat in Q4, to stabilize in the Q3 level. And for WAP services, continues to decline a little bit and hopefully we can get it back in the next two quarters. And so that's where the 2.5G, overall, we expect to have growth. For the 2G services, we expect to be flat or have a little growth in the 2G area in Q4. And most other services, for example SMS or Coming Back Home, either flat or a little bit of growth. Our focus in Q4 will be the 2.5G area, especially MMS area.

Q - James Lee

Okay. It seems like you guys had a tremendous growth in 3Q on the SMS side. What was the driver behind that and why do you think that's going to be somewhat flattish going to 4Q?

A - Yunfan Zhou

I think for SMS one of the big things, actually we had it twice this year, is that the universities, the college students, they have their English examination, qualifying examination, the partners, involve the partners. And so they take the exam twice a year, one time in the end of June; the other is probably the end of January. So the revenue actually topped for SMS in Q3, because they use SMS to check their marks. And so we had probably more than 1m people who did this. So that is the top in SMS revenue. And another thing is that we definitely spend a lot of effort in diversifying the SMS revenue from the channel of China Mobile to the other three operators. And as you see, we already grew our main China Mobile revenue from 2% of total to 6% of total in Q3. So, I think we'd rather, you'd rather stabilize this number in Q4. Going forward, SMS could show a little bit of growth or about flat in Q4.

Q - James Lee

Okay. Yunfan or J.P., can you guys talk about your recent initiatives on the CRBT side, let's say revenues of 15% quarter-over-quarter? Obviously, your numbers still behind the leaders in the industry, like Common Wire or Ringtel. Can you give us a sense of what you're doing there in order to bolster your music portfolio to compete better with your peers?

A - Yunfan Zhou

Yes. I think we, in a previous conference call we already said that we started late in the color ring back tone services. So we are first to go through the access stage, so this means that we have to talk to different provincial operators of these four operators, and to get connected in these provinces. So in the highlights we said we established six additional color ring back tone connection points at provincial levels, and that brought the total to 50 by September 30. And literally, we just got another access, which is Guangzhou Mobile, which is the largest local provincial mobile operator in China, and we got access to Guangzhou Mobile's color ring back tone services. So that's the efforts we are making and that's why you'll see our color ring back tone services, the revenues is growing. Last quarter I think was about 15% sequentially. And some of the peers, as you mentioned, they actually declined their color ring back tone revenues in Q3 in comparison with Q2. So, what we do with the value, in the next two quarters we will continue to make these efforts to get more connection points, especially in the big provinces, and leverage our conference. So we definitely will generate more revenues, see more connection points. And we believe that it's still too early to see who is, right now who is the leader in this market because we're still at a very early stage for the color ring back tone.

Q - James Lee

Okay. And my last question here, if you guys can talk about your acquisition strategies here, with lots of cash on your balance sheet. Any specific plan, anything you're targeting in the near term, anything in your portfolio that you would like to add on to it to bolster your offerings?

A - J.P. Gan

We would consider two types of acquisition. First is SPs, companies that are in the same lines of business but have a different niche, for instance companies that specialize in SMS, such as the Company we just acquired in Hubei. And also companies that have interests in the business in the other three operators - China Unicom, China Telecom and China Netcom. And this type of acquisition will hopefully be accretive to our earnings. On top of that, we are also looking at new business initiatives, especially in the 3G environment. We will be looking at companies with unique technology or innovative products. Those are going to be relatively small and may or may not be accretive to our earnings. And as a part of that, we're also looking to acquire content. A lot of companies have been talking about music. We also have been looking at certain music content providers.

Q - James Lee

Okay, great. Thank you, Yunfan, thanks, J.P.

A - J.P. Gan

Thank you.

Operator

Thank you, sir. That does conclude your question.

A - J.P. Gan

Sorry?

Operator

Does that conclude your question, sir? Thank you.

A - J.P. Gan

Okay.

Operator

The next question will be coming from Mr. Andy Collier from New York Global Securities. Please go ahead, sir.

Q - Andy Collier

Yes, hello. Thanks for the time. I have two questions. One is you talked about diversifying into the provinces. Do you expect any impact on your ARPU once you move out of the less affluent areas on the coast?

A - J.P. Gan

Well, I think in general, it would definitely be a yes. The price is highly regulated by the operators. They set a range of pricing for each type of product. For instance, MMS the charge can only go from CNY5 to maybe CNY20, so that range is well defined. We don't think we're going to, each product will have any impact on our ARPU. However, some of the singular operators or services, our margin actually is a little bit more. Hope that answers your question, Andy?

Q - Andy Collier

Just to follow up, I guess when you say your market is lower, that sort of answers the question. Even though the pricing may be the same nationally, the amount of consumer expenditure available to your average student in Chengde would be lower than it would be in Beijing, would that impact you at all?

A - J.P. Gan

The thing is that in general, the wireless value-added services, we don't think is very elastic. So when the person decides to purchase our service or product, it doesn't make that much difference whether it's CNY5 or CNY6. It's a very, relatively small amount of money.

Q - Andy Collier

I see, okay. The other question I have is on the music business. There's a growth in that business but it's often very low base. What do you think the ultimate end game or what the ultimate address of the market might be for downloading music? And do you think that's songs themselves or just ring back tones?

A - Yunfan Zhou

Are you referring to our color ring back tones?

Q - Andy Collier

Well, you talked, front above that and what other aspirations you have in the music business. I'm just curious, there's really no legal music market in China right now, or it's very small. How large do you think that market may be and how much would that be driven through the WVAS services?

A - Nick Yang

Hi. This is Nick. I'm the President of the Company. About the music business, I think it's, overall, I think music is big all over the world. It's a big market anywhere there's a developed economy. The reason why music has been depressed, the market has been depressed in China, is due to piracy of the music CDs in the traditional music industry. That's why most of the music companies haven't done a lot in the past many years in China. I think, with the advent of the mobile music business, that finally you have a way to control piracy and you have a way to monitor legal music. And that's why we've seen these music companies do better now with wireless WAP for music. So I think, as far as which way people can deliver this music, actually I'm more positive on ring tone plans then color ring back tones. The reason for that is the ring back tones is for others to hear, and from our own market study, it's that in ring back tone people tend to change it a lot less then they do change ring tone. If we have a ring tone and people call you, you hear it. And ring back tone, you really don't know what other people are hearing. You get that from what they tell you that they hear. So in the future, downloading full music to your phone, I believe that will be very viable and big business with 3G and beyond.

Q - Andy Collier

Do you think, is that dependent upon 3G, because then we're really talking about --?

A - Nick Yang

No. With 2.5G now, you can have more than just polyphonic ring tones. Now you can have MP3 ring tones. But then again, MP3 ring tones and MP3 are two different concepts. With MP3 ring tones, typically it's a lot smaller, a higher compression ratio and smaller. It's pieces of music rather than the full song itself. And with the contractor, now you can, then you can quickly download the full song.

A - J.P. Gan

Andy, even as of today, about a quarter to one-third of our WAP revenue actually comes from ring tone downloads, and that's considered as part of the music.

Q - Andy Collier

I see. But just in terms of the size of the market, it's growing on a pretty low base and there's limitations to what people want to spend and how much the sound quality is on the phones. There's a lot of limitations. Until we get the 3G, do you believe that it's a limited addressable market or is it unlimited or virtually unlimited?

A - J.P. Gan

I think, even with the old, in the early days, with the uniphonic ring tones here, with only one call, there was still a lot of people downloading music because it doesn't sound very nice. The market is there. When this came out, the improvement, when the storage space of the phones becomes bigger and when the bandwidth becomes faster, I believe the market will become even bigger if the need is there. It's a real customer need of music.

A - Yunfan Zhou

Well, we think music is going to grow in line with the general WVAS market. It's part of it.

Q - Andy Collier

Thank you very much.

A - J.P. Gan

Thank you, Andy.

Operator

Thank you and the next question will be coming from Ming Choi from Fiscohana Financial Group. Please go ahead.

Q - Ming Choi

Good evening. I have a couple of questions. First, for your WAP side, can you comment on that? Is that going to have some stabilization effect on your existing WAP business? And also on WAP, the WAP side of the user clean up, do you think it is the silent user clean up that will slow down your growth in the fourth quarter? And the second question is about the gross margin. You mentioned that the transmission cost, is it because China Mobile is charging more for the same traffics that are generated? Are you going to see more transmission costs going forward? Thank you.

A - Nick Yang

Hi. This is Nick again. I will talk about the WAP, the three quarter first. We're very positive on the three quarter business and we believe that actually, we don't view it as counteracting our existing piece business. Because we feel what we are providing through WAP is an information portal with news, with words, with entertainment, information, so it's the information-based portal. So we're, the brand we're launching, the Free WAP, which is called Kongzhong Media or Kota. That's the short name of Kongzhong Media. So we view this as a media portal, so people can get information. And in the media business most of the media, if you look whether it's on the Internet or whether it's on TV, network TV, the information is free. But with the media model, it's that you give information to the customers and get their attention, and you them sell the advertising. And we believe this is very early days of the WAP development in China and this is, we feel it's like 1996 or '97 in the Internet base. So now, if you invest in building a portal, it will be very lucrative in the future; you can sell advertising on the portal. This is the model for Free WAP. As far as the WAP is concerned, because we were very early here in WAP in China, so we have a very large base in WAP. And also the type of users, of course we have a longer accumulation of that type of users of many of the new interests. That's one issue. I think the second issue is that because the multi-net menu has been recently extended to many new categories. So in many of the new categories that, of course, is fair play in the new categories and many of the new interests are investing heavily into the new WAP menu. And of course we have seen that happening and we're going to concentrate more of our efforts into these new menus. And so hopefully in a couple of quarters that you are going to see improvements in the WAP base. I will pass that question to J.P.

A - J.P. Gan

To answer your third question, I think that your question is whether we are paying more for the same number of message. Right?

Q - Ming Choi

Yes.

A - J.P. Gan

Okay. Well, the charge has been standard throughout the years at China Mobile. They charge roughly about $0.02 per message. In the most recent quarter, we have been sending SMS to market our Java users to promote our Java Games. In fact, just a question. The price is about CNY0.05. So it's less then $0.01 per SMS, and that price has been the same for quite a while. So what we have been doing is to send SMS to our existing Java users, to promote our new additions, our new games, new game titles. That's one of the reasons that our Java revenue has grown by over 100% this quarter.

Q - Ming Choi

Okay. So the transmission cost did not incur because of the policy change from the China Mobile side, right?

A - J.P. Gan

That's correct, yes.

Q - Ming Choi

Okay. A final question, if I may. You mentioned that there's a MTV-Olay, you will participate in their show. Is that something like the Supergirl?

A - Yunfan Zhou

It's similar. Basically, MTV is trying to select a number of new talents to do singing and dancing, and those people have potential to enter into MTV Videoquest, to basically become the new actors or new actresses.

Q - Ming Choi

Okay. Thank you. Good quarter.

A - Yunfan Zhou

Thank you.

Operator

Thank you, sir. The next question will be coming from Chang Chi from UF. Please go ahead, sir.

Q - Chang Chi

Good evening, J.P. and Nick, a good quarter.

A - J.P. Gan

Thank you.

Q - Chang Chi

Maybe somebody already asked this, but maybe I'll just ask it again. For your various lines, like WAP, MMS, Java, SMS, IVR, can you give us some color in terms of the growth trend what you see in your guidance?

A - Yunfan Zhou

Yes. I think for, I already said that, but I'll quickly, I think for MMS in Q4 we expect to see a very good growth for MMS after the stabilizing of the MISC platform transition is almost complete. As for WAP, we probably will see a little bit of decline in Q4 over Q3 due to, as Nick mentioned, the clean-up of the silent users after the new menu placements, which we have already started to really focus now. And for Java, you see just 135% Q-to-Q new revenue in Q3. We hopefully will stabilize in that level in Q4, and so that's for the 2.5G. So overall, 2.5G revenues will grow and also we believe that the percentage of 2.5G services in our total revenue in Q2 was 71%, and in Q4 will probably be higher than that. And our 2G services will be showing either flat or a little bit growth totally. And for SMS, it will a little bit of growth. IVR may be a little bit down and for color ring back tone maybe a little bit of growth. So total will be kind of flat or showing a little bit of growth. We believe that 2G has been our focus and growth, driving the growth for the past few quarters, and in Q4 we definitely will spend more effort in promoting the 2.5G services, especially MMS.

Q - Chang Chi

Right. In terms of competition, now looks like some of the smaller ones are out in terms of Wireless Value Added service. Do you see more heat in the competition from the, or amount of these guys?

A - Yunfan Zhou

Actually, I think that the core competition still comes from the big players, the listcos. So we believe that the smaller ones are always there. There are thousands of them out there for the last three, four years. So our focus is still to grow our own internal competitiveness and grow our revenues, and also our focus our strategic niche appeal for equaling the mobile games and also the media, the free media portal. So the smaller ones, really, we don't worry too much about them yet.

Q - Chang Chi

Okay. In terms of a local sales team, what's your view about it? It's still important, how, what's the situation you guys are seeing in terms of a national build out?

A - Yunfan Zhou

Yes. I think we have made a continuous progress in building our local sales team. I think in Q3 we have close to 100 people in 20, 25-plus provinces or municipalities. And so we believe that having a good local sales force is really helpful to our business, as we are dealing with, now that we are dealing with all the low-cost bidders, in addition to the headquarters of these operators. And we're also spreading to other three operators than China Mobile, so the local sales team is actually getting more efficient because they're dealing with more operators. They're dealing with four different local operators in each and every province, so that's why we kept it. So easily, we'll continue to make an effort in expanding our local sales team and that's also a gradual effort.

Q - Chang Chi

Right, okay. All right. Thank you.

A - Yunfan Zhou

Thank you.

Operator

Has that completed your questions, sir?

Q - Chang Chi

Yes.

Operator

Thank you very much. And the next question will be coming from Rod Nigh from U.S. Please go ahead, sir.

Q - Rod Nigh

Yes. I'm a little late for the call, so I apologize if I ask the same question. Can you talk a little bit about Magic Box and how that's doing?

A - Yunfan Zhou

Magic Box, that's, you mean Java Game?

Q - Rod Nigh

Yes. Java Game.

A - Yunfan Zhou

Java Box, okay.

A - Nick Yang

I think, of course, we have been working the beginning of the Java growth in China, and you've seen our result and it's definitely demonstrated that. Our Java has grown over 100% from Q2 to Q3, if we talk about business. And as far as the future is concerned, I think because China Mobile's regulatory environment in the Treasure Box is improving, since before it was run by a small company that ran the platform for China Mobile, which was very inefficient and, of course, the market did not grow very well for Treasure Box. But then China Mobile is transferring that the operational, the Treasure Box platform to Aspire, which is the thing that runs the WAP and MMS MISC, among others. So the, and also, China Mobile is allowing more handsets to channel the enabled handsets to the Treasure Box certified. So then more of the Java-enabled handsets could download Java Games. So we're seeing a definite expansion of available handsets in the market. So that's about it for the Java business.

Q - Rod Nigh

Thank you very much.

A - Nick Yang

Okay, thank you.

Operator

Thank you, sir. Does that conclude your question? Operator Instructions There appears to be no further questions at this point, and I would like to hand the call to Mr. J.P. Gan for the closing remarks.

J.P. Gan, Chief Financial Officer

Thank you. Thank you for joining our call. In conclusion, we are very pleased with our third quarter financial result and we're very proud of our track record of growing revenue every single quarter for the last 13 consecutive quarters, since our inception.

With that, we look forward to speaking with you in the coming months. Thank you. Bye, bye.

Yunfan Zhou, Chairman and Chief Executive Officer

Thank you, operator.

Operator

Thank you. That concludes today's conference call. On behalf of KongZhong, we would like to thank everyone for participating in today's conference. All lines may disconnect now and good day to you all. Thank you.

Related:

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• All China Stock Blog articles on KongZhong.
• A list of full conference call transcripts available on the Seeking Alpha Network.
• The complete list of China stocks (and links to articles about them) covered by The China Stock Blog.

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