KongZhong Q1 2009 Earnings Call Transcript

| About: KongZhong Corporation (KZ)

KongZhong Corporation (KONG) Q1 2009 Earnings Call May 13, 2009 8:30 PM ET

Executives

Jay K. Chang - Chief Financial Officer

Wang Leilei - Chairman of the Board, Chief Executive Officer

Nick Yang - Vice Chairman, Co-Founder

Analysts

Mike Olson - Piper Jaffray

Dick Wei - JP Morgan

Wallace Chung - Credit Suisse

Ryan Wang - Haytong Securities

Jenny Wu - Morgan Stanley

Eric Wynn - Main First

Lee Shi - Integral Capital

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 KongZhong Corporation earnings conference call. My name is Yvette and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to Mr. Jay Chang, CFO. Please proceed, sir.

Jay K. 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 any 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; our Vice Chairman and co-Founder, Mr. Nick Yang; and myself, Jay Chang, the company’s CFO. I will briefly go over our 1Q results before handing over the call to Mr. Wang Leilei.

Total revenues for the first quarter of 2009 increased 38% year over year and 11% quarter over quarter to $29.6 million, exceeding our first quarter revenue guidance of $27.5 million to $28.5 million. Total gross profit was $14.6 million compared to $13.2 million in the fourth quarter, or roughly an 11% increase sequentially. Gross margins in the first quarter were 49%, roughly the same as 4Q, but an increase from the 45% gross margin level from the same period a year ago.

Total operating expenses were lower sequentially at $11.9 million, compared to $13.6 in 4Q, due to a decrease in our sales and marketing activities offset by increases in product and development expenses as we continued to build out our R&D capabilities around Kong.net and our mobile gaming business.

However, we expect sales and marketing levels to rebound towards first quarter ’08 levels in the coming quarters as we continue to invest in effective marketing channels to grow our mobile game and Kong.net businesses.

Operating profit was $2.6 million compared to an operating loss of $0.4 as we returned the company to a positive operating profit position.

U.S. GAAP net profit was $2.5 million, while non-GAAP net profit was $3.7 million.

And based on 35.4 million basic and 36.74 million fully diluted ADS outstanding at the end of the first quarter, net profit per ADS was $0.07 and non-GAAP net profit per ADS was $0.10.

Cash and cash equivalents at the end of the first quarter was $141.7 million, including the $6.8 million in capital raised from [inaudible] growth partners in the form of convertible notes.

Now I would like to turn to each business unit’s financial performance, namely WVAS, mobile games, and wireless Internet services.

First turning to mobile games -- in the first quarter, mobile game revenues grew 83% sequentially to $4.9 million compared to $2.7 million in the fourth quarter. Of this, roughly 85%, or $4.2 million was from downloadable mobile games, representing 106% sequential increase from the fourth quarter, while online mobile games were roughly $700,000, or an increase of about 11% quarter on quarter.

The strong growth in our mobile games business was a combination of a number of factors, which included the benefits of lower data tariffs, but more importantly our efforts to aggressively expand and diversify our mobile game distribution channels, including on China Mobile and Nokia game platforms.

First quarter mobile game gross profit was $2.9 million, compared to $1.6 million in the fourth quarter, representing a small decline in gross margins from 61% to 59%, as the contribution from downloadable games increased, which has a slightly lower gross margin than online games, in addition to some one-time content fees booked in the first quarter.

In the first quarter, mobile games contributed 17% of total revenues compared to 10% in 4Q and 6% in the same period last year, and we expect mobile games to contribute a larger portion of our business in the future.

Turning to WIS, or wireless Internet services, the WIS revenues in the fourth quarter were $1 million compared to $800,000 in the fourth quarter. Previously almost all wireless Internet service revenues were from mobile advertising, but in the first quarter, as we have begun to offer premium services to Kong.net users in the form of virtual currency sales and cross-selling of mobile games and other WVAS services, in the first quarter roughly half of WIS revenues were from mobile advertising and the other half from premium services.

As such, wireless Internet gross profit from first quarter was $0.49 million compared to $0.46 million in the fourth quarter. Gross margins declined slightly to 50% in the first quarter compared to 58% in 4Q, due to a decrease in wireless advertising revenues due to seasonal factors, increased costs associated with higher traffic on Kong.net, and partner revenue share associated with billing for virtual item sales and other premium services on Kong.net.

Lastly turning to WVAS, WVAS revenues in the first quarter were $23.7 million, representing a 2% increase from 4Q and a 19% increase from the same period last year. Revenues from 2.5G services accounted for about 20% of total revenues, WVAS revenues, and revenues from 2G services represented the remaining 80% compared to 74% in 4Q.

During the quarter, sequential growth in both IVR and color ringback tone revenues increased the 2G portion of total WVAS revenues, as we broaden our distribution channels for these business lines. While WAP and MMS each declined sequentially due to more stringent mobile operator policies leading up to and continuing after consumer day activity.

Gross profit for WVAS in 1Q was $11.2 million, compared to $11 million in the fourth quarter, although gross margins declined slightly from 48% to 47%.

Now turning to some accounting housekeeping issues -- on March 18th, we completed the issuance of $6.8 million in convertible notes and warrants equivalent to $2 million ADS to Nokia Growth Partners. Based on U.S. GAAP, we are required to estimate the fair value of the warrants and the beneficial conversion feature of the notes, as the conversion price was below our share price on March 18th, relative to the notes’ nominal value. As a result, for the second quarter of 2009, we expect to amortize roughly $0.1 million in non-cash related expenses related to the amortization of the debt discount component of the note, in addition to roughly $0.1 million interest payments.

Lastly, turning to a subsequent event, in April we completed our acquisition of a mobile gaming company called [My Li Phong]. Although the total consideration was roughly $2.1 million, taking into account the [inaudible] related party receivables and net cash on the company’s balance sheet, we estimate our net cash outlay from [My Li Phong] was only about $0.44 million. We acquired [My Li Phong] to further broaden our distribution channels for mobile games on China Mobile and other mobile game distribution platforms.

Finally, turning to our second quarter 2009 revenue guidance, based on information as of May 14th, we expect total 2Q revenues to be within the range of $30.5 million to $31.5 million, which implies roughly 3% to 6% quarter on quarter growth, or 30% to 34% growth from the same period a year ago.

Now I would like to turn the call over to our CEO and Chairman, Mr. Wang Leilei.

Wang Leilei

Thank you, Jay. During our last call, I discussed KongZhong's new strategy focused around three key areas -- first, develop mobile games into a key growth driver for 2009 and beyond; second, transform Kong.net into a mobile based social gaming and community platform; and the third one is to manage our WVAS business for strong cash flow.

In my first full quarter as CEO of KongZhong, I believe we are executing well in each of these business lines and I would like to discuss key initiatives we began during the quarter, which I believe positions KongZhong well for future growth opportunities.

For mobile games, during the quarter, we estimate KongZhong has become the number one mobile game publisher and developer in the mainland China market based on revenues, as we continue to enhance our in-house development capabilities while expanding our mobile games distribution channels.

Based on our estimate, we believe we achieved our average of our 15% of market share during the quarter, with over 150 mobile game titles commercially available across all major mobile game channels, including China Mobile’s platform, [inaudible] alliances, Kong.net channel, and other handset preloading channels, especially for Nokia China’s wireless value-added service platform.

In March, Tien Jie, our online mobile game, achieved a record high of nearly 500,000 monthly active users, with this level [softening] through April and May, we believe the combined benefit of the reduced [GPS] fees and our experience in operating online mobile games have contributed to this recent growth.

Also, after nearly two years of development, on May 7th, we launched the open beta version for [inaudible] online, our second major online mobile game, and have plans to launch at least two more online games in the second half of this year.

I continue to expect mobile games to contribute 20% to 30% of our total revenues by the end of this year and in my discussions with China Mobile operators and based on the current trends, we will see strong continued growth in 2010, given the coming of 3G.

Let’s talk about Kong.net -- at the end of the first quarter, Kong.net achieved over $3 million unique visitors per day. To ensure we have the best offering of the mobile entertainment content, we recently signed a partnership with [inaudible], China’s largest [inaudible] print media firms, as well as launching a woman’s channel on Kong.net, which is where we signed a contract with the largest fashion channel based on [inaudible] Internet.

We believe by leveraging our strong content offerings, mixed with our new community offerings, we will be able to create a better user experience for Kong.net users, while driving traffic to our newly developed social networking applications.

For example, our partnership as an official mobile website for the NBA in China during the play-offs attracts over 1 million unique visitors per day, with this user base driving over half of the total NBA traffic towards community based services. This user behavior supports our drive to complement our content services with community and social game applications.

During the first quarter, we launched China’s first mobile based social game, called [inaudible], which leverages Kong’s upgraded virtual currency system. During this closed beta period, we attracted over 50,000 users and plan to enhance this game as well as launch additional mobile based social games later this year.

We believe that mobile based social games have a unique feature in that we are able to develop localized features into our games, based on users’ mobile phone numbers. In the future, this will allow KongZhong to tailor in-game features and virtual items to a users’ specificity [or preference], which we believe will help create a unique experience compared to other type of PC based social games.

During the quarter, our team also launched China’s first Flashlight game portal, upgraded various social network platforms, including Kong.net, [inaudible] and as part of our acquisition of Sigma Interactive, have increased our planned software development team to over 20 staff and plan to launch a number of mobile developed applications in the second half of this year.

Most importantly, at the beginning of the first quarter, we began offering premium paid services to Kong.net users based on our traffic to transaction, or T-to-T strategy, which revolves around our upgraded virtual currency system that allows Kong.net users to purchase in-game virtual items or access mobile games and other WVAS services. This translated into over RMB1 million in March.

So lastly, our WVAS business performed in line with our goals, providing a strong cash flow source for our mobile game and Kong.net business. Although there was some impact from mobile operator policies related to handsets in [inaudible] and other marketing channels [still to the consumer date], which is in the middle of March, KongZhong is well-positioned as a top three service provider in each of the major WVAS categories, providing us with a strong relationship with each of the Chinese mobile operators.

However, we are beginning to leverage our distribution channels in WVAS to accelerate the development of both our mobile game business and Kong.net, which we believe provides us a competitive advantage compared to pure mobile game developers, or pure [inaudible] players.

Overall, I am very pleased with our results for the first quarter of 2009 and look forward to build upon this achievement as we seek to become the number one leader of the mobile Internet industry in China.

Operator, I would like to open the call to questions now. Thank you.

Question-and-Answer Session

Operator

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

Mike Olson - Piper Jaffray

Good morning and congratulations on a good quarter. Just a quick question -- as the makeup of the business is changing and games as a percentage of revenue, what should we expect for seasonality in the business overall? And then maybe even in each segment, if any of the three segments don’t have seasonality that’s consistent with the overall business?

Jay K. Chang

I think WVAS is probably the one that’s most impacted by any seasonality, given it’s a much more mature market. Mobile games and Kong.net, however, are still at least very, very early. Obviously Kong.net is much, much earlier than the mobile game side, and Kong.net is very new, given that we actually -- for the new business models and the virtual item sales, so on and so forth, were only started in the first quarter of 2009, so what we are doing now is basically unprecedented in the China market. So that I think we still need to develop that over the next few years to see how seasonality impacts that.

I think for mobile games, definitely there are positive effects during the holidays -- just the reason is because many of our mobile game users, they are not working or they have more spare time, so they actually do have more time to download games or play mobile MMO games and we have seen that impact through to various different holidays, including the May holiday, including Chinese New Year holiday.

Mike Olson - Piper Jaffray

All right, thanks. And then as far as on the gross margin side with games being obviously higher gross margin and growing as a percentage of revenue, what should we expect for gross margin over the next few quarters? You know, with lower WIS or WVAS gross margin, if that continues to fall, will it lead to overall gross margin being stable or do you actually expect gross margin to increase as games grows as a portion of the business?

Jay K. Chang

There’s potential for it to increase I think from the first quarter level, obviously given the mix of mobile games compared to the overall mix. But we are also looking to see where we can find efficiencies in our WVAS business as well. So we are trying to manage the gross margin around the -- currently around the 50% level.

Mike Olson - Piper Jaffray

Okay, and then one last one -- what do you expect taxes to look like for the remainder of this year?

Jay K. Chang

So our tax, as you probably can see, it looks relatively high relative to U.S. GAAP and that’s the reason -- basically overall our PRC GAAP tax rate is around 20% to 25% and you are not able to take out the expenses related to depreciation, stock-based compensation charges mainly. So on a PRC GAAP basis, which would be relative to our operating profit or EBITDA, is around 20%, 25%.

Mike Olson - Piper Jaffray

Okay. Perfect. Thanks a lot.

Operator

Your next question comes from the line of Dick Wei with JP Morgan.

Dick Wei - JP Morgan

Thanks for taking my questions -- I have two questions. First of all, if you can discuss the type of games that you guys are looking to launch over the next one or two years and just in general the type of games, and also kind of the life cycle of the games and the development cycle as well.

And the second question is do you have any thoughts for the rest of the year, kind of the revenue outlook? Thanks.

Wang Leilei

The major downloadable game is still coming from the Java-based game. And now we have widened our product portfolio from Java-based. This is for [inaudible], especially for almost 55% coming from the Nokia handset users and also some [inaudible] base we will develop. That is for the main brand, the Chinese name [inaudible] users. And also we are looking forward to get some experience from the technology team to develop some high-end [inaudible] based game, which is the Nokia focus in the future, handsets.

Also, I think the downloadable games, now we have over 150 downloadable games on the line, is about 20% of the games, almost 80% of the revenue contribution. And we believe for the MMO online mobile game, the last period is almost -- I think it is two or three years [inaudible]. For example, for our first mobile online game, Tien Jie, we just launched in the early stage of 2008. Not it’s almost one-and-a-half years and we see the numbers have hit a record high. So we believe the mobile online games, the right period is two or three years.

Dick Wei - JP Morgan

That was helpful. And how long does it take to develop one of the mobile games on average and what is your R&D headcount, or the team that you need to develop one game?

Wang Leilei

For the downloadable games, now we have over 150 people to develop the downloadable game, and we can generate five to eight downloadable games per month. And for mobile MMO online games, it’s about one-and-a-half years development period for one game. But we believe for our second game, it is short than the first game and the program and development team have more experience after they launched the first mobile online game. So that means the development period will be shorter than before.

Dick Wei - JP Morgan

That’s great and the last question on the game side, as far as the platform is concerned, you mentioned that you guys are looking at Nokia and the [media tech] platform. I guess probably [a more logical question] that if you develop one Java-based game on the Nokia platform, it works for all the Nokia handsets as long as they have a decent sized screen and et cetera? Or how many different versions of the same games that you need to develop?

Jay K. Chang

So Java games is basically probably the most popular platform for mobile games in China, just given that not only Nokia but other handset vendors like Sony, Samsung, and that’s over 50% of the market right there, actually, support Java. And many other vendors support Java. The MTK platform actually doesn’t support Java that well -- you actually need to write directly to C for that platform, so there are some porting issues related to that but those two platforms together, the majority of the market for people who want them and are willing to pay for and play mobile games.

Dick Wei - JP Morgan

Great. Last question is just on the full year outlook [inaudible] you can share?

Jay K. Chang

I think the current company policy is just to give current quarter guidance for now, so that’s -- right now, that’s our current policy.

Dick Wei - JP Morgan

Great. Thanks for that and congrats on a good quarter.

Jay K. Chang

I like to hear from you, Dick. Thanks.

Operator

Your next question comes from the line of Wallace Chung with Credit Suisse.

Wallace Chung - Credit Suisse

Good morning. Congratulations on a good quarter. Thank you for taking my questions. I think a couple of questions, if you don’t mind. I just want to learn more about your very strong momentum of the business.

Number one is again, following up Dick’s question regarding the games sector, mobile games sector, can you elaborate a little bit like -- first of all, what’s the size of the existing, the target customer segment? Is it similar a size of the WAP and MMS kind of segmentation? And the number two question would be who are the key competitors in the mobile game sector right now, including both the downloadable games and the mobile MMO, as well? And then I’ll follow-up with two other questions. Thank you.

Wang Leilei

We see most of our mobile game user base coming from the downloadable games. Now by the end of ’08, the mobile Internet user base has grown to over 100 million and we believe the downloadable game user base is growing faster than before, because China Mobile has heavily discounted for the traffic fee and we don’t have the very complicated number for the downloadable game user base in China. We see the daily download volume for downloadable games for KongZhong is about 50,000 per day for downloadable games and also for mobile MMO online games, it’s smaller than downloadable games. We can see KongZhong's market share and our registered user base, I think the total mobile MMO online game, the user base in China is about 5 million. It’s in the early stage. It’s early stage, smaller than the downloadable game users.

I think our major competition is coming from some major wireless operators, like [inaudible] and other, the biggest wireless Internet and Internet portals mobile game players. And I think our focus to develop our development team and alliances with many of the more develop in-house and also expand our mobile game platform distribution channels, which is more device [inaudible] from the [inaudible] on the China Mobile channels. Now we’ll see our distribution channels is more diversified than the IP WVAS business. It’s only 30% coming from the carrier related channels and 30% coming from the [inaudible] WAP alliance’s channel, and other coming from the [pre-loading] handset channels, especially for the Nokia based value-added service platform.

Wallace Chung - Credit Suisse

I just wanted to follow-up on the question about a longer term strategy -- so [inaudible], I joined KongZhong, basically we are seeing Kong is migrating from a pure sort of a mobile value-added service company into a multi-business company and aim to be one of the largest mobile game and mobile WAP portal company. Am I correct regarding about that strategy?

And the second point will be so in terms of the revenue mix, are you going to see because sort of this new incentive, are you going to see the revenue mix is going to be changed like towards the end of the year? Thank you.

Wang Leilei

I think compared with the regular WVAS business, mobile game is a product driven business and we will focus on strengthening our developing mobile game development team, so this is our [key] products for KongZhong.

And for the Kong.net portal, as we mentioned, we will convert the content based portal to community based, especially for the [inaudible] social game community portal, so that means we have our self-controlled distribution channels.

See, now is the unique visitors for Kong.net is over 3 million and half of them is [inaudible] our [inaudible] game and the community related services, and we believe it is very major distribution channel in the future to promote our mobile game business.

So this is -- the two divisions for mobile game and the Kong.net portal are related as a product and channel.

Wallace Chung - Credit Suisse

And about the revenue mix?

Wang Leilei

For this year, for the first quarter, the mobile game is about 17% of the total revenue and we believe for the full year of 2009, the mobile game business revenue is about 25% to 30% of the total revenue. And because the margin is higher than regular WVAS, I think the gross profit contribution from the mobile game is about 45% to 50% of the total gross profit of the company for this year.

Wallace Chung - Credit Suisse

Great. So we are going to see 3G is going to be launching more aggressively in the China market, so we should be [inaudible] the mobile game business in terms of revenue contribution we increased for the [inaudible], correct?

Wang Leilei

Yes.

Wallace Chung - Credit Suisse

That’s fantastic. Thanks for all your answers, Leilei and Jay. Thank you.

Operator

Your next question comes from the line of [Ryan Wang] with [Haytong] Securities.

Ryan Wang - Haytong Securities

I just have one question -- you described the downloadable mobile games revenue increased because you continued to broaden your distribution channels, including your cooperation with Nokia, and you’ve just also mentioned China Mobile. Can you just explain a little bit more what you have done with the distribution channels to achieve such good results?

Wang Leilei

I think for some reason, coming from the channel expansion, that we have many preloading game channels, like handset [inaudible] and preloading, and especially for Nokia value-added service channel, and we have a very close relationship with Nokia, [inaudible] and to preload many of our downloadable games in their platform.

And the other channel, important channel is coming from the [Free WAP] alliance channel and we have many alliances channel promotions to promote our existing downloadable games. And also, we expand our numbers of the downloadable game.

In 4Q, we now -- we only have a hundred downloadable games and in 1Q, first quarter for this year, we have over 150 downloadable games online.

Ryan Wang - Haytong Securities

Thanks very much. I just have one more question -- I see that your sales and marketing expense in Q1 is significantly decreased. So what is it going to be in the coming three quarters?

Jay K. Chang

In the coming three quarters, it should be back towards the 1Q levels of ’08 -- around the $5 million or so, yes.

Ryan Wang - Haytong Securities

You can’t give some guidance of the percentage of sales and marketing expense to the revenue?

Jay K. Chang

As I mentioned before, in terms of giving guidance, our policy is to only give the revenue guidance in the current quarter.

Ryan Wang - Haytong Securities

Okay, thanks. I understand. Thanks very much. Congratulations on your first successful full quarter.

Operator

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

Jenny Wu - Morgan Stanley

Number one question is the mobile games, and obviously we see very strong growth momentum here. Would you please help us understand what are the key factors for the popularity of the games, and what is the bottleneck? And also, how the user profile is different from those online games? Thank you.

Wang Leilei

I think the mobile game, the targeted user base is totally different compared with [inaudible] Internet game. Most of the people play games for [inaudible] and so it’s very difficult to say one game can contain most of the revenues. This is the reason why we have 150 mobile downloadable games online from the fighting game, the MMO game, and other [inaudible] games, to [meet] the different needs of the mobile game users.

And for MMO mobile online game, now it’s similar to the Internet, fixed line Internet game. We just -- the user plays, the game is all free and they buy virtual goods to enhance some features.

But as I mentioned, the user base, whatever for downloadable games and mobile online games is totally different user base compared with the fixed line Internet game users.

Jenny Wu - Morgan Stanley

Okay, sure. And what’s the bottleneck for the future growth?

Wang Leilei

I think some challenges we see from the iPhone model -- it seems like they combine the Internet user and the mobile user together and the iPhone model game model is similar like an Internet game. But we see that KongZhong is focused on targeting the mobile user, which cannot access the Internet.

For the Internet user, it’s 200 million, 300 million, and the mobile user is over 600 million, so we focus on the non-Internet mobile users. And also you will see whatever the iPhone game, the [inaudible] in China, but their sales volume is still a small portion of the total handsets sold in China. So we see the market share from a different handset brand. Nokia is about 40% of the total market and 30% coming from non-branded handsets sold in China.

So also where we see the user base, which has used our downloadable game and mobile online MMO game is about -- over 55% users coming from the Nokia phones.

Jay K. Chang

In terms of kind of mobile game user makeup, roughly about two-thirds come from three major categories -- one is actually military, because they actually can’t access the open Internet but they can access Internet on the phone; the third is the service industry, mainly in second tier, third tier cities; and the third is kind of more factory workers level type of people who have incomes. So that’s your very, very different mix than maybe the [Shandas] or the [inaudible] kind of high-end 3D online games where it’s Shanghai, Beijing, Guangdong type of high income, or relatively a higher -- like, you are talking about 3D kind of games.

Jenny Wu - Morgan Stanley

That’s very helpful, thanks. And another question is regarding China Mobile’s new data system, and we heard it from [inaudible] some of that, and it would be very helpful if you could give us more details on this and especially what is the impact on KongZhong?

Wang Leilei

What kind of system from China Mobile?

Jenny Wu - Morgan Stanley

It’s kind of the new data system called the [inaudible]?

Wang Leilei

D.O.? Okay. This is I think is another money collection channels, like China Mobile was launched a game money collection channel named G-Plus six months ago, so this is kind of enhanced our [inaudible] payment way, payment channel. I think this is very positive payment issue for our WVAS and mobile games, and also includes the Kong.net payment platform.

Jenny Wu - Morgan Stanley

Okay. You’ve mentioned you will increase the revenue sharing -- is that the same across the board or just for some particular company?

Wang Leilei

I think the D.O. model is complementary for existing payment platform of carrier and the D.O. model has more flags for payment solutions, and it’s a good complement to the existing payment model. It does [a complete] model for existing channels and payments.

Jenny Wu - Morgan Stanley

Okay, sure. So now the revenue sharing is a 25% outlook for your company?

Wang Leilei

You mean the D.O. model?

Jenny Wu - Morgan Stanley

Yeah.

Wang Leilei

It’s about 25 -- yeah, 25 and 75 revenue sharing model, yeah.

Jenny Wu - Morgan Stanley

Okay, good. And one last -- can you give me some revenue picture about how much revenue from China Mobile related business and from other two mobile carriers?

Wang Leilei

Now it’s about 20% coming from the non-China Mobile operators, like China Unicom and China Telecom, and 80% by China Mobile. And we see the future, the revenue will [inaudible] the right side for the three carriers in China.

Jenny Wu - Morgan Stanley

So 80% from China Mobile, right?

Wang Leilei

Yeah.

Jenny Wu - Morgan Stanley

Okay. Thank you. That’s all my questions. Congratulations again.

Wang Leilei

Thank you.

Operator

Your next question comes from the line of [Eric Wynn] with Main First.

Eric Wynn - Main First

Congratulations on the good quarter. Thanks for taking my call. I have just three questions -- number one is regarding the -- I know that the operators are pretty busy with launching 3G, so do you expect that your growth rate, and I know you don’t comment on the full year but in theory that after they finish the network construction, they are going to spend more time on promote mobile data and do you see that will continue to be a major priority for them, starting 2010?

My second question is we heard that China Mobile is testing a new application environment called Mobile Market. Can you comment on how that will affect your business? Do you plan to participate in that -- I heard it’s kind of like Apple’s app store kind of platform. Thanks.

Wang Leilei

For the first question, I just joined the [inaudible] Provincial Based Carriers 3G forum and we heard some targets that in China, the 3G users will hit 100 million by the end of 2010. We will follow-up with different carriers in China to provide a more rich content on the games, and especially for games, some [joke] for me is 3G -- it wasn’t even 3G. It’s a game, gambling, and [girl], so the government cannot let us do some other gambling and girl business, so we focus on the mobile game, especially for the 3G application. Killer apps I think is games.

And so the second question is for China Mobile’s new platform, Mobile Markets, MM platform is similar like the iPhone store. I think the challenge for China Mobile is -- you know, the iPhone store is only for one model and they have no unimportant issue for the different handsets and different OS. So the mobile market platform must have a different porting system and platform for the different Nokia and MTK and other platforms. And now we are working closely with [Guangdong] provincial based carrier, which is the major operator for the MM platform and we provide many of the downloadable games and other -- some [inaudible] applications to MMM. It seems like the mobile market platform is another sales channel from China Mobile can expand our sales channels for the future. It’s not a compete strategy or channel for the existing channels of KongZhong.

Eric Wynn - Main First

My last question is you mentioned about expanding your business to the Unicom and Telecom platform, and I noticed that your competitor, Hurray!, a long-term competitor Hurray! is getting some interest and some [inaudible] organizations internally -- how do you see the market share, especially on the China Telecom platform? Who do you see as a new competitor? What happened with Hurray? Do you see their market share going forward? And how do you capture -- for example, 10cent has become the partner on the WAP side. What do you plan to do, for example, going forward to capture more of China Telecom’s business?

Wang Leilei

It is very difficult to estimate the market share from the other new coming mobile carriers in China. We will see Unicom has more mature infrastructure, 3G infrastructure and their handsets for WCDMA is more mature than the other China Telecom and the TD from China Mobile. So whatever the market share of the carrier, of the new [inaudible] carrier, and the different technology format of the different 3G [inaudible] and infrastructure, we will focus on providing more mobile games and entertainment related products to the new carriers, cooperate with the new carrier’s channels and we will see the Q2 performance in first quarter [as a great company] and we believe this market is not the one player market and they have a more flexible platform and more vertical players in the mobile market. KongZhong is very focused on developing the different game business, especially for mobile games and mobile online games, and also we focused on developing our S&S social game community business and Kong.net entertainment social game community portals, so we believe we have more focus than our major competitors.

Eric Wynn - Main First

Thanks very much. Congratulations.

Operator

(Operator Instructions) Your next question comes from the line of Lee Shi with Integral Capital. Please proceed.

Lee Shi - Integral Capital

Thank you for taking my question and congratulations on a solid quarter -- and I have a quick question -- what is your estimated percentage of users are using your service, no matter downloading games or browsing your web portal through China Mobile’s 3G network?

Wang Leilei

You mean how many percentage from the 3G users who use our WAP portal, or -- and the games. Okay. It’s a very -- I think the percentage is below 1% of the -- from the TD and other 3G users to use our game. Because the 3G user penetration in China is very low, it is early stage, yeah.

Lee Shi - Integral Capital

Okay, so most of the users are still coming from the traditional 2.5 --

Wang Leilei

[inaudible] yeah.

Lee Shi - Integral Capital

Okay. And my second question is about the mobile gaming -- so what is -- you talk about the gross margin and the gross profit from the mobile gaming. So my question is maybe can you show me some color on what is the biggest cost for your mobile gaming business? It is R&D costs or revenue allocation to mobile operators?

Jay K. Chang

So the gross margin doesn’t include any of the development costs -- those are generally below the line in our product development expense line, so the gross margin, the biggest cost there is the revenue share with both the operators and other distribution partners like handset vendors, including Nokia.

Lee Shi - Integral Capital

Okay, understood. Okay, thank you and congratulations again on the quarter.

Operator

You have a follow-up question from Ryan Wang with Haytong Securities.

Ryan Wang - Haytong Securities

I am back again -- can you share a little bit of information about the [inaudible] three carriers prepare for value-added service under 3G? I heard about some new product [inaudible] IVR -- video, CRBT, these products -- can you talk a little bit more about this?

Wang Leilei

What kind of services they prepare, caller ringback tone or video? Do you mean the video of caller ringback tone, right?

Ryan Wang - Haytong Securities

Yes, video caller ringback tone?

Wang Leilei

You mean the radio or video?

Ryan Wang - Haytong Securities

Video -- caller ringback tone video.

Wang Leilei

I think the music business is not our focus and I think the video caller ringback tone in China shouldn’t have a heavy popularity for the users, and the handset cannot support -- a few handsets cannot support the video caller ringback tone function now in China. And see the -- I think most of the carriers in China, they think the video applications is a killer apps in the 3G platform, but we see some data from the overseas 3G carriers. The video forecasting business, very popular, like [inaudible] and other [inaudible] 3G business. But this is not our focus, we believe.

Ryan Wang - Haytong Securities

So do you know --

Wang Leilei

Especially in China, they have many standards for the broadcast video standards from the [inaudible] and they have more government control for video. There is a real media policy control in the 3G platform.

Ryan Wang - Haytong Securities

Right, right -- I understand. So can you share something about the -- then what are the carriers are preparing for value-added service under 3G? I mean, new products [inaudible] the previous value-added services?

Wang Leilei

We saw that the carrier’s focus now is for the infrastructure construction for different cities and they were mostly [inaudible] from the existing 2.5G and to an existing data service platform to a 3G platform, from the bidding system, content management system and other system. This is not a very different platform compared with 2.5G.

Ryan Wang - Haytong Securities

Okay, thanks. Thanks very much.

Operator

With no further questions in the queue, I would now like to turn the call back over to Mr. Jay Chang for closing remarks. You may proceed.

Jay K. Chang

Thank you, everybody, for attending the first quarter earnings results for KongZhong and we look forward to speaking to you over the next few months, as well as at our second quarter results. Thank you very much.

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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