KongZhong Q4 2005 Earnings Conference Call Transcript (KONG)

KongZhong (KONG)
Q4 2005 Earnings Conference Call
February 27th 2006, 8:00 PM.

Executives:

J.P. Gan, Chief Financial Officer
Yunfan Zhou, Chairman and Chief Executive Officer
Nick Yang, President and Chief Technology Officer

Analysts:

Mike Zhang, ThinkEquity
Lu Sun, Lehman Brothers
Paul Beaver, Piper Jaffrey
William Bean, Deutsche Bank
Ming Zhao, Susquehanna

Presentation

Operator

Good day ladies and gentlemen, and welcome to the KongZhong Corporation's Fourth Quarter Earnings Conference Call. My name is Latisha, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please key "*" followed by "0", and a conference coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to J.P. Gan, Chief Financial Officer. Please proceed, sir.

J.P. Gan, Chief Financial Officer

Thank you. Hi everybody, welcome to KongZhong Corporation's Fourth Quarter 2005 Earnings Conference Call. You can find our Q4 earnings press release at out website ir.kongzhong.com. Again, I am J.P. Gan, Chief Financial Officer of the Company. I will first go through our fourth quarter financial highlights. After my discussion, I will turn the floor to Yunfan Zhou, our Chairman and the Chief Executive Officer. She will review our operations, and talk about our business outlook. Nick Yang, our President and Chief Technology Officer will then discuss our new initiative for the Wireless Internet Business.

For fourth quarter, we had another record breaking quarter in terms of revenue. Our revenue grew by 9% sequentially to over $22 million, exceeding the high-end of our fourth quarter guidance of $21 to $22 million. 2.5G revenue was essentially flat year-over-year, but grew by 3% sequentially to 14.75 million. MMS was the main growth driver for 2.5G business as it increased by 32% from the third quarter, but was still 27% lower from the same period of last year. Our 2G business continues to perform well, and it grew by 25% quarter-on-quarter to over $7 million, it's consistent with our diversified growth strategy and our focus on gaining market share in the 2G business.

In the fourth quarter, 2.5G and 2G revenue split is 67, 33. The increase in MMS and SMS revenue are primarily because of customer demand during the Christmas and the Chinese New Year holiday, and also our increased promotional efforts to enhance their manufacturer, and great stability of the MISC platform at China Mobile. Handset manufacturers are becoming a more important distribution channel for us. Siemens, the handset manufacturer in the fourth quarter increased by approximately 50% from the previous quarter to about 2.6 million. Revenue sharing with content provider also increased by 34% from the previous quarter and totaled 1.1 million. The combination of those two factors drove down our gross margin to about 54%, compared to 60% in the third quarter.

Let me quickly give you a breakdown of the fourth quarter cost of sales in terms of our total revenue. Revenue sharing payments to the telecom operators was about 16% of total revenue. Transmission cost paid to telecom operators for sending MMS, SMS to our users was about 10% of total revenue. Payments to handset manufacturers were about 12% of total revenue, and the fees paid to content provider accounted for about 6%. The Remaining 2% is miscellaneous expenses. So, total cost of sales is about 46% of our total revenue and the gross margin is 54%.

Total operating expenses in the fourth quarter 2005 were about 6.3 million, excluding the one-time pending class-action lawsuit related provision made during the third quarter, our total operating expenses in the fourth quarter increased by 9.6% from the third quarter. The increase came from higher positive elements in the sales and marketing expenses. Our G&A expense actually decreased by 8% from the third quarter. The increase in SG&A expenses was due to higher number of employees and their discussion of bonus determined in the fourth quarter, and also increased marketing and promotional expenses related to our core WVAS business as well as expenses related to our corporate brand building and our wireless Internet business, which Yunfan and Nick will be talking in a more detail.

Our net income for the quarter totaled 6.2 million, it's a decrease of 6% from the same period of last year, and also declined by approximately 9.6% from the previous quarter again excluding the one-time class action provisions made during the third quarter. Our net margin was approximately 28%, and diluted earnings per ADS were $0.17 for the fourth quarter. For 2005, our net income was 22 million, an increase of 9% above 2004 and diluted earnings per ADS was approximately $0.62.

Yunfan Zhou, Chairman and Chief Executive Officer

We exceeded our Q4 guidance by growing our revenue by 9% sequentially and 34% year-over-year to reach a new record of $22.14 million. We are also very proud of what we have achieved in the whole year of 2005, with 77.75 million revenue which is 62% growth from 2004. We believe, we executed well on our diversified growth strategy, gaining the market share in all of our service market and sustain our leadership position in the 2.5G market. We expect our Q1 revenue to be between 24 and 25 million.

In terms of 2.5G services, we achieved 3% revenue growth in Q4 over Q3. We expect to see continued 2.5G revenue growth in Q1. We anticipate our MMS revenues will continue to show double-digit growth from Q4 level. We expect our Java revenue to be flat in Q1, and after making a series of efforts, we expect our WAP revenue to resume growth in Q1. This sequential growth rate is expected at to be 1% to 5%.

In terms of 2G services, we achieved 25% revenue growth in Q4 over Q3. We expect to see continued 2G revenue growth in Q1, driven by the growth of SMS and the revenues consolidated from Sharp Edge. In terms of revenue breakdown from different operators, our revenue from China Unicom, China Telecom and China Netcom accounted for 7% of the total revenues in Q4. This acquisition of Sharp Edge, we believe this ratio will be over 10% in Q1. Excluding expenses relating to employee share options, we expect our Q1 diluted earnings per ADS will increase to between $0.21 and $0.22 from $0.17 in Q4. The Q1 diluted earnings per ADS estimate includes a one-time gain on the sale of eFriendsNet shares and a part of first quarter earnings generated by Sharp Edge.

In the coming year, our organic growth after acquisition of Sharp Edge, we believe we will further gain market share in our core WVAS business, at all four telecom operators in China. Our diversified operator relationship, will position ourselves in the upcoming introduction of 3G services in China. In 2006, we will invest heavily in preparation for 3G, Gearing up KongZhong brand and expanding our wireless Internet business which we believe has tremendous potential in the future. We have recently launched our new Wireless Internet Portal KongZhong.net, which is upgraded from KongZhong Media WAP portal Condo.net.

We have established now over a 100 people team, dedicated for this portal. We also leverage our KongZhong's future based content and distribution channel, to develop and promote this portal, we believe the traffic of Condo Net is already the among the top Wireless Internet portal's in China today. We believe Wireless Internet is now at a very early stage in China. And it is worth investing. Our goal is to build Condo.net to be the largest wireless Internet portal in China. We plan to invest about $10 million in our wireless Internet business in 2006. We're focused on building our user base, traffic and Kongzhong brand.

To summarize our goals for 2006, we expect our annual revenue will grow to $105 to $110 million. This investment in the Wireless Internet Business, our annual net profit is expected at to be between $25 to $30 million US excluding expenses relating to employee share options. Now I would like to turn to Nick to explain more on our Wireless Internet Business strategy. Thank you.

Nick Yang, President and Chief Technology Officer

Thank you, Yunfan. First of all, before we explore our wireless Internet strategy let's take a look at evolution of the Japanese wireless market, which means the role in terms of wireless technology and business model. Only a couple of years ago, the wireless data market in Japan are dominated by the operators. SCs or CPs provides content and services behind the operator portal on different platform without any brand. Today however, accessing free or operator independent wireless Internet site outside the operators well guarded is now very common. Many traditional media and businesses are now creating their wireless Internet site, and using wireless marketing in a very similar fashion at PC Internet marketing.

We believe, China lacks Japan in this pace in about one to two year. Our vision is that China will also follow this path. This migration also parallels that of the PC Internet. The operators dominated mobile portal is similar to the early days of the Internet when the AOL was started and operator independent wireless Internet is very similar to the CP Internet. Therefore, we believe wireless Internet will follow a similar evolutionary path at CP Internet. We plan a two form strategy, on the one hand, continues to exert our leadership in the operator equipment mobile valued added services business. On the other hand, create a wireless Internet portal that focuses on mobile media, community and again outside the world guarded.

There will be two business models. One is our current business of selling mobile content through the operator's channel and billing platform. The other model is to sell advertising on our branded wireless Internet portal. In Q4, we have successfully completed a trial wireless advertising where we have gained over $20,000 of advertising revenue. We believe there are two likely path for service providers to take, one path is to becoming a content provider, the other path is to becoming a branded content distribution platform. We believe brand loyalty is the paramount competitive advantage in consumer driven business model, and we believe getting customers to seek out our branded platform will lead to improvements of our margin. Therefore, we will be making a very sizeable investment into brand building today.

We believe wireless Internet will bring profound changes in people's life in China, although China's PC Internet population is world's second largest. The penetration level is only 10% to 15% of China's current population. Internet sale is not a vital part of majority of people's life. Due to the high mobile phone penetration level, we believe high Internet penetration level is only possible with wireless Internet. Finally, we believe our advantages at the early mover with company-wide focus, and then experience Internet team already made us one of the top leaders in the space. A little bit of background about our team, both Yunfan and myself co-founded China Net in 1999, which was one of the largest community website before selling the company to SOHU, we stand on our senior management of SOHU before starting KongZhong. We believe our experiences are very relevant in helping us compete well in future. Thank you.

J.P. Gan, Chief Financial Officer

Thank you, Nick. Operator, we will open the floor for question-and-answers please.

Questions & Answers

Operator

Ladies and Gentlemen, if you wish to ask a question, please press "*" followed by "1" on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, please press "*" followed by "2". Again, please press "*" "1" to ask a question. And your first question comes from the line of Mike Zhang with ThinkEquity. Please proceed.

Q - Mike Zhang

Hi, good morning.

A - Yunfan Zhou

Good morning Mike.

Q - Mike Zhang

Hey, how are you?

A - Yunfan Zhou

Good.

Q - Mike Zhang

Two quick questions. The first one is upon the revenue guidance. The revenue guidance of 105 to 110 for '06 and 24 to 25 for 1Q, how much is from the Sharp Edge acquisition?

A - Yunfan Zhou

We expect Sharp Edge will generate somewhere between $11 to $13 million in revenue for 2006. For the first quarter, we are still in the process of reviewing various, you know, accounting procedures and literatures to determine which part of the revenue and earnings could be included. We expect somewhere between, you know, 1 to 1.5 million in revenue from Sharp Edge.

Q - Mike Zhang

Okay, thank you. And my second question is related to the margins. When I look at the at the margin on -- I am talking about the pro forma of operating margin, which adds to the one-time charge and stock options. So KONG, right now is at the higher end of the industry range, and you know, I think it's unnecessarily high to maintain if you want grow the business. So, If acquisition of Sharp Edge, the 2G revenue will grow in about rapidly in 2006. And also these lines -- Zhou has talked about you are going to invest heavily on the branding and for the preparation of 3G. So combined those two forces, how are they going to impact your operating margins into 2006 and beyond?

A - J.P. Gan

I think Yunfan Zhou mentioned, we estimate revenue to be between 105 and 110 million for 2006. And with that, our net margin for 2006 to be somewhere between 23% to 26%. And that includes a few things; one, as you mentioned is acquisition of Sharp Edge. Sharp Edge is primarily is a 2G business. So its gross margin is actually lower than ours, however being a private company, it is very new, actually its the net operating margin at this point is much higher than our Company. So, on a combined basis, that's actually helped with our operating margin in 2006. And second, the operating income numbers that Yunfan mentioned include the $10 million that we planed to invest in our wireless Internet business, and also the cost related to building up our corporate brand in 2006.

Q - Mike Zhang

Okay, just a very quick followup. If you have a branding campaign in place, when are you going to run it in '06?

A - J.P. Gan

We are actually finalizing our branding plan -- marketing plan at this moment. So it should start, you know, probably at the end of this quarter or early next quarter. But we already have spend some, you know close to a million dollars, you know, wireless Internet business, that includes human resources, and also some marketing expenses.

Q - Mike Zhang

Okay, thank you very much. And congratulations on the great quarter.

A - Yunfan Zhou

Thank you.

Operator

Your next question comes from the line of Lu Sun with Lehman Brothers. Please proceed.

Q - Lu Sun

Hi, good morning everybody.

A - Yunfan Zhou

Hi.

Q - Lu Sun

Great quarter. I actually just want to ask two quick questions. Number one is on your Java business line. It seems like you are guiding for a flat quarter for the first quarter, and actually the fourth quarter number wasn’t high as expected as well. Do you envision this business will be slowing down in 2006 as a whole, or do you think that it will actually pickup in the second half of the year?

A - Yunfan Zhou

Okay. Thank you, Lu. I think we have talked about this before. We expect Java business to go into, you know kind of step by step growth. Right now, there is still some constraints on the GPIS network to download relative larger files. Secondly, the authorization, authentication and also billing platform has some capacity limitation. And third, we are also experiencing some, you know, relatively slow in testing and the specification of our games. So when the operator decides to upgrade the authorization, authentication in the billing platform, and also you know dramatically increase the resources for testing the specification, our Java revenue will be relatively, you know, basically single digit growth quarter-on-quarter. However, if the operator do expand the platform significantly, then hopefully being the number one player in China, we will again, you know, see a, you know, one big quarter growth.

Q - Lu Sun

So this has nothing to do with increasing competitive pressure in the business, which is pretty much network constraints on the part of the operators.

A - Yunfan Zhou

I think there is some competitive pressure that further jammed up the platform, just because more people are trying to execute more games. But we continue to hold the number one positioning in the Java business.

Q - Lu Sun

Okay. Thank you. And also you actually broke down the cost of revenue for the first quarter of '05. I just wonder, if you could do the same for the third quarter, so that we can identify where the increase is actually coming from?

A - Yunfan Zhou

Sure, for the third quarter, the operator fee is -- you know the revenue share with operator fee is about 15%, transmission is about 9%, the payment to handset manufacturer is about 9% total revenue, and the content about 4%. And remaining 2% is miscellaneous.

Q - Lu Sun

I see. Okay. So it seems like that payment to the handset makers and the content fees saw probably the biggest increase of all, and also I just want to follow up on that. Of course, handset revenue sharing, how much of your revenue is actually coming from the handset alliance these days?

A - J.P. Gan

We actually did not just close that numbers specifically. But you know knowing our business, you should be able to derive an estimate out of that.

Q - Lu Sun

Okay. And do you think that will, that mix will increase in 2006?

A - J.P. Gan

Actually for the fourth quarter, there a couple of innovative issues. First of all, we have the, you know, quite a bit of joint promotion with the handset manufacturers during the holiday season. You know, we actually have these digital greeting cards via MMS and several other things. And also the handset manufacturers usually at this time of year, they are trying to sell their phones in larger discount. And so you know the Companies that we setup alliance with basically pushing out their inventory, that partially contribute to the much higher increase in handset manufacturer payment.

Q - Lu Sun

I see, thank you. And last question is on the $10 million investment in WAP, in wireless Internet business, where would you spend that money on other than headcount?

A - Yunfan Zhou

Lu, this is Yunfan. I think for the 10 million, probably part of that is for the headcount, we have over a hundred people of team right now. So probably to the year-end it's towards like 150 or more. A big part is definitely for the branding campaign which hopefully will start some time in the first half of this year. And also, pretty big part is for the promotions for the user base and traffic, so that's different from the promotions of the brand, and we definitely going to spend a lot of money on that. So it's probably a third, you know the headcount, and probably more than a third on the brand and less than a third on the user base of the traffic.

Q - Lu Sun

And headcounts are mostly R&D people?

A - Yunfan Zhou

R&D people, advertising people, operational people, technology people. So it's pretty big team right now. So we started to form this team, started some time in the second half of last year, and those some cost already went into last Q4 expenses as human resource cost.

Q - Lu Sun

I see, Thank you very much.

A - Yunfan Zhou

Thank you.

Operator

Your next question comes from the line of Safa Rashtchy with Piper Jaffrey. Please proceed.

Q -Paul Beaver

Good morning, this is Paul Beaver for Safa. I have two questions, thanks for taking my questions. What are your goals for carrier diversifications of this era? And then secondly, while the gross margins continue to decline throughout the year?

A - Yunfan Zhou

Yeah, I think for the carrier diversification, for the first quarter, our organic growth and the acquisition of Sharp Edge, we believe China Unicom, Telecom, Netcom's revenue will be more than 10%. And starting second quarter, this weekend fully consolidates the quarterly revenue from Sharp Edge, we believe that this number will go into somewhere around 20%, so that's our estimate right now. So for the whole year, I think it's about 20/80, 20% for the three operators or more than, a little bit more than 20%, and then 80% were China Mobile.

A - J.P. Gan

This is J.P. If I may add, I think the overall market breakdown is that, China Mobile has about 70% of the market share, are you able to see operating profit (phonetic) about 30%.

Q -Paul Beaver

And with the gross margins, will have stabilize or they continues to go down.

A - Yunfan Zhou

In 2006, as you probably see from our 2005 earnings, the gross margins will fluctuate from time to time. But with the increasing revenue from the non-China mobile operators, and more 2G business. We still expect our gross margins to probably decline slightly over the year.

Q -Paul Beaver

Okay, thank you.

A - Yunfan Zhou

Thank you.

Operator

Your next question comes from the line of William Bean with Deutsche Bank. Please proceed.

Q - William Bean

Hi guys, this is kind of a general question, but I was wondering give us an update on your platform strategy in new products, you are moving in sort of more of vertical model or horizontal model or a platform model. Can you just give us a update on the new products you are developing there?

A - Yunfan Zhou

Yes, as I mentioned, we have two-pronged strategy. One strategy is to continue to exert our leadership in the mobile dominated portal. So constantly, implementing new products, new features, continually upgrading our product in that aspect. And also there is many new opportunities with the coming 3G, of course with, we are working on the applications such as the mobile streaming, such as mobile online games, such as many of the new applications that would be possible with the faster network, that's one aspect behind the portal, behind well guarded. And other aspect, as you have mentioned we have over a 100% team working on our wireless Internet strategy which is to build this distribution platform -- our branded distribution platform, our branded portal outside the well guarded, so that's another strategy. So we believe that, because at the end of day, brand will be the ultimate competitive barrier in consumer driven business. So we believe that, getting users to recognize our brand, and to come to our brand, come to our distribution platform to access information, to access content to services, we will also be, well, actually I think in the long run to improve our margin. Because, you spend advertise to build the brand, the customer recognize the brand and come to you. So these are the two strategies we currently hold.

A - J.P. Gan

I will add one more point. I think for the value added services, we have six different platforms, we are running right now. And we do expect to launch a lot of new products, SMS, MMS, color ring back tone areas on the Java product. So it's, right now, we already have hundreds of different products on these different platforms. And we do expect to see the revenue growth from most of these, almost all of these platforms in 2006.

Q - William Bean

Okay, thanks. And just in terms of your content licensing program, could you just give us a sense of where you are there?

A - Yunfan Zhou

Sure William. We, as you know, we have signed two movie deals "The Promise" and the "The Myth" being referred in the fourth quarter. Both the movies had generally a larger Publicity and as well as significant revenue for us. We also have non-inclusive content deals with, pretty much all the major music labels, and some of the smaller music labels in China.

Q - William Bean

Okay, thanks. One last thing, just give a sense of where you tax rate is going.

A - J.P. Gan

By the end of 2006 the maximum effective income tax rate will be 7.5% if you exclude all the one-time items.

Q - William Bean

Okay, thank you.

A - Yunfan Zhou

Thank you, William.

Operator

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

Q - Ming Zhao

Thank you. Good morning gentlemen. Just a couple of questions. First question, can you give us a idea, how much of the revenue is coming from music? And when you see that content cost increasing, is it mainly because of the music label companies are asking for more, or is it because other content, not music content providers are asking for more? And if you could maybe -- the percentage of the revenue sharing will be good indicator. Thanks.

A - Yunfan Zhou

We should not give specific breakout for music. In terms of content cost partially it's because of the growth in revenues. We are sharing revenue with the music labels, and also partially it's because that we have find some, exclusive content deals that require minimum guarantee payment or one-time fixed payment.

Q - Ming Zhao

Okay, all right. So, in your guidance you are predicting the return of growth for the WAP segment. And this, can we say that your WAP has bottom in the Q4 or is it just a rebound and/or is it just some necessity associated with this WAP segment?

Operator

(Audio gap)

Please standby. Ladies and gentlemen, please standby while we’re connecting to speaker.

A - J.P. Gan

Hello.

Q - Ming Zhao

Hi.

A - J.P. Gan

Hi, this is J.P. Gan, and we are back on line. Sorry about that. We still have people around.

Q - Ming Zhao

It’s okay, I can't hear you.

A - J.P. Gan

Okay. Is it Ming?

Q - Ming Zhao

Yes, you’re right.

A - J.P. Gan

Okay. In terms of WAP, we believe, you know, fourth quarter is the bottom of our WAP business. However, as we mentioned in the press release we’re definitely facing increasing competition on the WAP business. The primary reason for our WAP revenue decline is because of the silent user of that operator introduced in April 2005. As a definition of your silent user or the active user is eight months. So, that impact was pretty much all the way carry along to December 2005. So, we believe our first quarter revenues will grow, and we also hope at this point in the coming quarters our WAP revenue will continue its growth.

Q - Ming Zhao

So, what you say competition, do you also mean the competition of the free WAP sites announcing China Mobile is the, basically curbing the growth of those free WAP sites. Do you think your growth is coming from that site?

A - Yunfan Zhou

I don’t think the free WAP right now has a big challenge to the paid WAP, the reason is that is the different user base. So, people access the Monster net, probably another people who access the free WAP site. So, the competition, as J.P mentioned, mainly coming from the competitors in the Monster net, and there are more companies right now working on the WAP business, and also people are, you know a lot of people are, as mentioned earlier a lot of competitors out there for sales, so they are doing their best together to get the revenue. So, that’s where the main competition comes from.

Q - Ming Zhao

Okay. I have a last question very quickly. I mean, in terms of your preparation for the 3G, you mentioned about the $10 million of investment. Do you think that enough, you know, I think we would have heard the numbers when you guys launched the China run how much cash you guys have earned? So, my question is do you think $10 million is enough, or will you spend more on that?

A - J.P. Gan

I think for the 3G strategy is actually, also as Nick mentioned that there are two different sets of strategies, there is a strategy for the paid order. We partner closely with the operators including China Mobile, Telecom, Netcom and Unicom. We have heard a rumor about the 3G license giving to three to four operators either late this year or probably sometime next year before the Olympics. And so, we’re working very closely with these operators. We have set up dedicated team to partner with them on the 3G preparation. Internally, we also have a lot of people working on new products that’s specially designed for 3G. But, we believe, you know, even after 3G license dealers it will take, you know, at least a year for lot of people to be able to use this 3G services, they need to have their new handsets. So, it takes pretty long time for, you know, the 3G things to really, to generate much revenue from the partnership with the operators. Another set of strategy is to launch free WAP or we said wireless Internet portal. You mentioned China, if I remember correctly revenue in China in 1999 we received a total of $10.25 million from Goldman Sachs and bunch of other investors. And we poured all the money, maybe in a year and three months. We feel China will be the probably the fourth largest Internet portal in China. So, that’s how much money we spend. And so, believe for our preparation for 3G and building our KongZhong brand and the Condo net portal. If we spent 10 million this year, it definitely some - it definitely a beginning, but it’s now, you know, something too small. 10 million is a lot of money, so we believe that we can spends this smartly, and we definitely establish a pretty brand name and also very good user base. As I mentioned the Condo net is already now the leading wireless Internet portal in China today, and the size of the wireless Internet is still not that big right now. So, we believe that, you know, after two to three years it’s definitely hitting the net market, it will be around, it will be probably, you know, something I see that Internet today, because of the mobile penetration in China.

Q - Ming Zhao

Okay. Thank you very much.

A - J.P. Gan

Okay, thank you.

A - J.P. Gan

Hi, operator. Hello.

Operator

Your next question comes from the line of Wallace Cheung with Credit Suisse. Please proceed.

Q - Wallace Cheung

Hi, good morning, great quarter. Just a couple of, I think more macro questions. First of all, so excluding - based on your forecast right now, excluding Sharp Edge right now incremental revenue, you actually expect that core KongZhong is actually picking market share or actually loosing market share to some of your competitors, and strategy that’s one you had to gain. Because why I'm asking this question is, because excluding - by taking the first quarter guidance and it’s simply multiplied by 4 atleast you got around 100 million, but your guidance, full year is only 105, 110 million. So, either you expecting Sharp Edge or either your expectation of full year guidance is pretty conservative? Second question is also pretty macro question, how does you see the visibility or kind of any potential risk that any investors that we have to pay attention in everyday after this year, I think recently we have heard about some rumors saying potentially China Mobile based on restrictions related to the partnership between SPs and handset brand vendors, that could be, or now maybe potential from other areas that we may have to pay attention on. Can you give us some highlight on that? Thank you.

A - J.P. Gan

Thank you Wallace. It terms of revenue guidance. Well, definitely are relatively conservative in terms of giving revenue guidance, especially in this environment. As you mentioned, there's some rumors about some things which I think Yunfan clarify a little bit later. We have, we do 24, the low end of our first quarter guidance, we multiply that by four, that’s about $96million. And we actually hit the $110m, that’s still pretty healthy growth. Sharp Edge, we just recently complete the acquisition. On the revenue and profit contribution we think we have a good idea, but still we have to wait and see to see how the company executes. And then we probably will get more comfortable with giving guidance, both in top line and bottom line, relating to Sharp Edge. Yunfan will answer the second question.

A - Yunfan Zhou

Yes. I think for a little bit add-on on the first one. I think we are, we believe we have gained market share in 2005, take a look at our revenue growth and also the revenue growth of the comps, the other least cost. Based on the numbers we have already publicized -- published, I think is, our growth is pretty high, it’s pretty good. And if you take a look at the projection for 2006 and compared this to 2005, we still 35%, 40% or more than 40% is our 2005. So that we believe that, that’s a pretty good growth. And for the handset manufacturer part of this. I think KongZhong together with a few other big names, the top, right now the leaders in the market in revenue, and also in the partnerships with the handset manufacturers. We are also working closely with China Mobile on their new project called MIDC, and this our new project. China Mobile they set up their own portal or with the handset manufacturers that they subsidize. However, that’s only right now currently handset that they subsidized, which is a very small part of the handset sold in the market. And most of the handset are subsidized are the foreign -- are made by the foreign the big names like Nokia, Motorola. While most of the domestic phone companies are more like PCL, probably are not even a player right now. So we believe that our strategy’s to lend hand and to work closely with the handset manufacturers because they sell, they have the power to sell their phones besides what is in their phones. And the other -- On the other hand to work closely with China Mobile as their MIDC project, to be included in their MIDC project when they partner we support. So, and we do believe there won't be much deal by the rumor you heard right now. Our strategy is still very clear.

Q - Wallace Cheung

Okay, thank you. And just one more question is, in Sharp Edge we all understand that pretty good in the, say business dealing with some non China Mobile operators. But, at the same time the whole, well know that, some of these operators are pretty, you know, conservative in term of their payments balance. So, in such a case, you been I think KongZhong is getting quite ready like first five case such as platform and time mix. Are you willing to us little bit more in terms of cash flow payments firms or more specified on DSO terms to gain more market share in Unicom, Telecom, Netcom, versus do you maintain relatively healthy margin and cash flow payments in the future to sustain this further with it? Thank you.

A - J.P. Gan

In term of margin, as I mentioned earlier at this moment Sharp Edge is also offering the margin actually higher than ours. So, we actually expect Sharp Edge acquisition will improve our operating margin. In term of cash flow, yes, you’re absolutely right, I think the other three operators payments time is usually longer than China Mobile, it is part of our business, and we have 117 million in cash sitting on the balance sheet. And, you know, in the near future pending cash is probably not within our priority, our key is to gain market share and also generate and grow our net income for our shareholders.

A - Yunfan Zhou

Yeah, I think for the other three operators, I think China Mobile is the leader in the market. Their motto is actually following the Monster Net model. If you talk a look at what happened in China Mobile two years ago, the payments terms are similar what we have with the other operators today, but China Mobile gradually improved their payments terms. So, right now we have pretty good cash flow from China Mobile, and we do expect that the other operators will gradually improve their payment terms as well in the future.

Q - Wallace Cheung

Great, thank you very much.

A - Yunfan Zhou

Thank you.

Operator

Your next question comes from the line of Mike Zhang with ThinkEquity. Please proceed.

Q - Mike Zhang

Hi. One follow-up question on the acquisition strategies. You mentioned that you have $117m in cash, that’s a lot of cash. I don’t know if you have, give us a, give us some color on your future acquisition strategies? And will you consider a share repurchase program if the stock becomes more attractive? Thank you.

A - J.P. Gan

Thank you, Mike. I also hope that our share price will go up.

Q - Mike Zhang

Oh, I'm delighted.

A - J.P. Gan

In any case, yes, we do have a good cash balance on our balance sheet. We will continue to make acquisition. The criteria of acquisition will be probably be. First of all, it has to be complementary to our existing business. Second, the valuation has to be attractive and hopefully accretive to our earnings. And the third, well, the management team has to be good managers and also fit in well with our existing culture. So we think Sharp Edge is a great company, that’s why we are willing to spend a relatively large amount of capital on this acquisition. And we actually have to take out the money for contingent payments for Sharp Edge deal. So we’ll continue to look for acquisitions and, as you probably know, all acquisition makes sense strategically. And the key is integrated acquisition into our existing business and the platform. So we’ll be very careful and very conservative in terms of buying companies. In terms of share buyback program, we have a resolution in 2005 that authorize our Board of Directors to buy back shares as they see fit. So we’ll continue to monitor our share price and also to look at our future business plan, and return of investment if we invest some money internally. And compare that to and we’ll make decision where we see fit.

A - Yunfan Zhou

Yeah, I think, yeah, just one more thing on the cash. Its definitely that the dilemma we faces that we have a lot of cash in hand, and we definitely want to invest in the new business, to acquire a company and then to expand and another way to invest in new business like what we’re doing right now for the wireless Internet business that we believe is the right direction to go for us. And so why we decided to use $10 million as investment to the wireless business. And that will definitely hurt our, you know, as we invest in the new business rather than the acquisition, that will definitely hurt our net profit, and so, that the dilemma we faces. We take this 10 million numbers, because we believe that this year we need to invest enough money in the wireless Internet business and we need to - on the other hand to maintain a pretty good margin and also good profit. But, however, if the market allows and you guys, the investors, really want us to spend more money. We definitely want to invest more into the wireless Internet business in the future.

Q - Mike Zhang

Yeah, I think that wireless, you know, it’s a beautiful business in the future, I think with the more investment the better you get. Well, you said the management of the board approved a plan, do have they authorized the amount for..?

A - J.P. Gan

No, the board - the board did not approve our plan.

Q - Mike Zhang

Okay.

A - J.P. Gan

The shareholders have a resolution to authorize the Board of Directors to initial the plan, at any time that the directors see fit.

Q - Mike Zhang

Okay, I got it. Thank you.

Operator

Your next question comes from the line of David Nensick, with Wellington Management Company. Please proceed.

A - Yunfan Zhou

Hi David.

Q - David Nensick

Hi, how are you?

A - Yunfan Zhou

Good.

Q - David Nensick

Can you give us an update on the ability for China Mobile's prepaid subscribers, and about 185 million of them to be able to use 2.5G services?

A - Yunfan Zhou

I think, this is Yunfan. I think they are in the process, still in the process of opening the prepaid networks for the 2.5G services. I think Shanghai and Beijing are definite already to use 2.5G services. And as you mentioned a few quarters, probably two quarters of them, that the key practice here is still the static, because the prepaid network and the postpaid network they have different billing systems. And it's very important that the China Mobile adjust their dealing systems right, while people to use the 2.5G service that would be able to be build, so those are the two different issues that we are still seeing the China Mobile expecting to improve there.

Q - David Nensick

So, Shanghai and Beijing, is the billing system ready?

A - J.P. Gan

Yes, we believe so, as well as KongZhong.

Q - David Nensick

And have you seen any meaningful usage from prepaid subscribers, and are you able to identify if they are prepaid?

A - J.P. Gan

At this moment, the revenue contribution is still not significant. You know, Shanghai and Beijing KongZhong actually in those large City may actually, in those Cities actually there are more postpaid users, and the prepaid users in general the revenue per user is lower both for the million and also for the wireless data entry services. We have seen some new customers, some new prepaid customers, but at this moment, well, revenue is still not significant. We hope to see good improvement over the year.

A - Yunfan Zhou

Yeah, I think the duration is a lot of prepaid users are able to use the 2.5G services. But most of the provinces still not able to deal that, and that's why they are not able to pay the service providers for the prepaid usage.

Q - David Nensick

Got it. And is there, has there if any change, and what your 2.5G or even for 2G customers are using. It seems that, there was a five quarter trend has been reversed which interactive entertainment category has actually gone down as a percentage of total revenues in media has increased as a percentage of total revenue?

A - Yunfan Zhou

That's correct David. In the fourth quarter, well, the growth driver was MMS. As you know, MMS is mostly related to our digital magazines and digital greeting cards. We, of course, see digital magazine into the media.

Q - David Nensick

Okay, and last question. Do you know, where China assets is, in terms of disposing its 3 million shares. I believe, they have until May to do it. Do you have a sense if there actually already completed that?

A - Yunfan Zhou

We have seen a 13G filing as of December 31st, they have refused, they are positioning from 9.7% to 6.7% as of December 31st.

Q - David Nensick

Okay, thank you.

A - J.P. Gan

Thank you.

Operator

Again, ladies and gentlemen to ask a question, please press "*" followed by "1" on your touchtone telephone. And your next question comes from the line of Chang-hua Qiu, FORUN Technology Research.

Q - Chang-hua Qiu

Yeah, good morning Yunfan, Nick and J.P.

A - Yunfan Zhou

Good morning.

Q - Chang-hua Qiu

I wonder, whether, can you give us a little bit more color regarding your wireless Internet, you know, if you use a PC Internet analogy, right now you know, people, where are they coming from, advertising, from e-commerce, from a community, from emails, or from search. So your wireless Internet effort, do you have any focus, or for they moment, or the impression is, your focus is from online advertising, and maybe some online again?

A - J.P. Gan

Yes, thank you. If you look at the history of an Internet, the first business model that comes up is the wireless, Internet portal system model, which is based on advertising. I think, the wireless Internet will playout, we believe those have a similar fashion, that because the, initially, they use a number, of course, if that's small right, then comes the catches in the early mainstream then the mainstream, then the advertising curse, so in the beginning we believe that at this time, that the most, the strategies to take right now should be the portal strategy, then with the portal, with the digital branded distribution platform, then you can have other business model that system has.

I think the portal is the best property to acquire right now, so our portal will be based on these following things, these following factors. First of all, well a lot of that will be based on media services. If people need to know, people need to deploy information, it's always a very, very big need. And second, is that will be developing our branding strategy, because as I said, branding is the ultimate barrier to entry, I believe for the consumer driven business model. And third is that gaming and entertainment and the community will follow on, we believe that people are paid for the games, who will pay for the community, but people were not likely to pay for media or information, because in the PC Internet world, news or other short information or entertainment information, it's free. If you watch TV, most of the TV content is also free. So for content only services, it should be the pre-model supported by advertising, the other model games, communities, which our portal will also be working on, we believe in the future that you can have other business models in charge, customers again charge customers billing advertising communities, and then other business model will come to it. I believe, wireless Internet will be a, if you look at the transition numbers in China, we believe it will be a much bigger deal than the PC Internet. So I believe other business models will also come to, when they become little prevalent such as the hotel booking, e-commerce, or other auction, whatever, I think many of these models will come true. Believe me, right now, our strategy in this time should be the portal strategy.

Q - Chang-hua Qiu

Okay, in terms of the numbers, you know, with this 10 million investment and with you know the, for how many order revenue will be your future years. So if this 10 million all recognize in '06 cost or, part of it, which should be recognized as cause for other years. In your net earnings guidance, how much you included for that guidance.

A - J.P. Gan

I think we included all the 10 million investment as, well most of them operating expenses, so with that 10 million unit, as I projected earlier the main profit probably 25 to 30 million for the whole year 2006. Definitely this is 10 million investment, we won't be able to be profitable on the wireless Internet business. It will take atleast, as I project, you know, 2 to 3 years atleast to, for the wireless Internet business to be profitable, using the most of the revenue probably comes from, first it will come from the advertising, as Nick mentioned, that we already see the trial last Q4, I mean we got some advertising dollars in revenue. So we believe that, you know, it's a viable model, and right now probably the early, the important thing to do early on is to build out the brand and the traffic.

Q - Chang-hua Qiu

Yeah, yeah. That's great. Thanks a lot.

Operator

Again, ladies and gentlemen to ask a question, press "*" "1" on your touchtone telephone. There are no more questions at this time. I will now turn the call back over to Mr. Gan for closing remarks.

J.P. Gan, Chief Financial Officer

Thank you. Thank you, everybody for attending, sorry about the technical difficulties we had. Any have, we believe we had a good quarter. And we look forward to continue to execute well, and deliver return for shareholder in 2006. Take care everybody

Yunfan Zhou, Chairman and Chief Executive Officer

Thank you.

Nick Yang, President and Chief Technology Officer

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation, you may all disconnect. Have a good day.

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