KongZhong Q2 2008 Earnings Call Transcript

| About: KongZhong Corporation (KZ)

KongZhong Corporation (KONG) Q2 2008 Earnings Call August 14, 2008 8:30 PM ET

Executives

Sam Sun - Chief Financial Officer

Yunfan Zhou - Chairman of the Board, Chief Executive Officer

Nick Yang - President, Chief Technology Officer, Director

Analysts

Michael Olson - Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the second quarter KongZhong Corp. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today, Mr. Sam Sun, Chief Financial Officer of KongZhong. Please proceed, sir.

Sam Sun

Thank you. Hello, everyone. Welcome to KongZhong Corporation’s second quarter 2008 earnings conference call. You can find our Q2 2008 earnings release at our website, ir.kongzhong.com. This is Sam Sun, Chief Financial Officer for the company. We also have Yunfan Zhou, our Chairman and CEO, and Nick Yang, our President, on the line. I will first go through our financial highlights. After my discussion, I will turn it over to Yunfan, who will review our operations and talk about our business outlook.

Overall, our Q2 2008 revenues are better than what we expected in May 2008. Our Q2 total revenues were $23.52 million, exceeding our guidance of $22 million to $23 million. Our WVAS gross margin in Q2 was 46%, slightly higher than 45% in the previous quarter. Total WVAS operating expenses in Q2 2008 were $8.50 million, and WVAS operating margin was 9%.

We expect the WVAS gross margin and operating margin to maintain such levels in the next quarter.

In Q2, our mobile advertising revenues were $357,000, a 68% increase from Q1. We continue our efforts in wireless Internet business. In Q2, we spent $2.80 million related with our wireless Internet sites. We expect a similar level of spending in the next quarter.

Our U.S. GAAP net income was $300,000 in Q2. Diluted U.S. GAAP earnings per ADS were $0.01 in Q2.

First quarter non-GAAP income was $1.06 million, which excluded share-based compensation costs of $587,000 and amortization of intangibles of $169,000. Diluted non-GAAP income per ADS was $0.03.

On the cash flow side, we generated $4.65 million operating cash in-flow in the first six months of 2008, which helped increase our cash level to $130.63 million as of June 30, 2008.

With that, I will now turn it over to Yunfan for his remarks.

Yunfan Zhou

Thank you, Sam. First of all, we are pleased that our total revenues increased 10% sequentially to $23.52 million, exceeding our second quarter guidance of $22 million to $23 million.

Our total WVAS revenues for the second quarter increased 9% sequentially to $23.13 million. We are happy that our WVAS business has resumed the growth since the second half of last year.

Our revenues from 2.5G services, which include WAP, MMS, and Java, increased 15% sequentially to $7.73 million. Our revenues from 2G services also increased 7% sequentially to $15.4 million.

Looking forward, although we face many continuous challenges in the WVAS business, we expect to have a better WVAS business in the second half of 2008.

Based on the information available by today, we expect our total Q3 revenue to be between $23.5 million and $24.5 million. In addition to the good performance of the WVAS business, our mobile advertising revenue increased 68% sequentially to $357,000 in Q2.

We are glad that both our mobile advertising revenue volume and the number of customers reached an historical high in Q2. In Q2, the official Chinese NBA mobile WAP site was one of the major drivers to increase our traffic, user base, and mobile advertising revenue. We are confident about the future of our wireless Internet business. In addition to the good performance of the wireless Internet portal, Kong.net, we have made very good progress in our mobile online games business. Our major mobile online game, Reincarnation, has grown rapidly in the last two quarters. It has accumulated over 2 million registered users. The peak concurrent users reached 20,000. It is one of the most popular mobile online games in China today.

We have got a team of over 300 people focused on the wireless Internet portal and the mobile online games. We have spent million of dollars promoting our Kong.net brand in the past two years. We have also established many important partnerships, including NBA, Opera, et cetera.

In 2008, we will continue pursuing our wireless Internet strategic initiatives. As we have observed, the wireless Internet is becoming a more important source of information and entertainment for multi-millions of mobile phone users in China. Thank you.

Sam Sun

Thank you. Operator, we’ll open the line for Q&A, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mike Olson with Piper Jaffray. Please proceed.

Michael Olson - Piper Jaffray

Good morning, everybody. A couple of quick questions; one regarding the mobile add revenue -- are you guys still expecting $2 million to $3 million in mobile ad revenue for calendar ’08?

Sam Sun

We still maintain the target of $2 million to $3 million advertising revenues for the year 2008.

Michael Olson - Piper Jaffray

And then a question about gross margins -- do you expect gross margins are going to stay in the mid-40s? Or is there the potential to see gross margins move back into the upper-40s later this year or next year?

Sam Sun

Well, in terms of the gross margins, so far our take is that, as I just said, we expect the gross margin to maintain at such level, mid-40s. And this is mainly because of the environment of the WVAS industry. We need to do revenue share with mobile operators, with handset manufacturers, with content providers, et cetera.

I think it may be too early to discuss what’s going to happen next year in the WVAS industry but at least for next quarter, we expect it will maintain at this mid-40s level.

Michael Olson - Piper Jaffray

Okay, that’s very good to know. And then the last thing is G&A expense was fairly high in the quarter. As far as we go into the next couple of quarters, what will it look like? Will G&A still be at the same level it was this quarter, or will it come down in coming quarters?

Sam Sun

Well, I think G&A expense will remain at levels similar to this quarter.

Michael Olson - Piper Jaffray

Okay. Thank you very much.

Operator

(Operator Instructions) At this time, Mr. Sun, I am showing there are no further questions in the queue.

Sam Sun

Operator, anymore questions?

Operator

No, sir, there are no further questions in the queue at this time.

Sam Sun

All right. In that case, thanks to everyone for calling in and we look forward to talking to you again next quarter.

Operator

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

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