KongZhong (KONG) reports within rev guidance range; WAP and 2G show strong growth; MMS weak (1Q05 earnings)

| About: KongZhong Corporation (KZ)

KongZhong (ticker: KONG), a provider of advanced second-generation
(2.5G) wireless interactive entertainment, media and community services reported Q1 2005 results today. The company showed sequential revenue growth of 3% versus guidance of 1-5% growth. There were no analyst estimates available. Details:

Q1 2005:
(all percentage changes and comparisons are year on year, unless stated otherwise)

  • Revenue rose 138% to $17.0 million, and rose 3% sequentially. Guidance of 3-5% sequential revenue growth.
  • 2.5G revenue rose 161% to $13.68 million but fell 7% sequentially.
  • WAP revenue rose 195% to $10.24 million, and rose 32% sequentially.
  • MMS revenue rose 84% to $3.09 million, but fell 54% sequentially.
  • 2G (SMS, IV, CRBT) revenue rose 71% to $3.25 million, and rose 89% sequentially.
  • SMS revenue rose 11% to $2.03 million, and rose 64% sequentially.
  • IVR revenue rose 2298% to $1.14 million, and rose 153% sequentially.
  • Revenue from 2.5G accounted for 80% of total revenue, and 2G accounted for 20%.
  • Mobile game revenue rose 5% sequentially to $1.63 million.
  • Cost of revenue rose 179% to $6.25 million, and rose 11% sequentially.
  • Gross margin was 63% versus 69%, and 66% in Q4.
  • Sales and marketing expenses rose 239% to $997,000, but fell 29% sequentially.
  • General and administrative expenses rose 179% to $1.9 million, and rose 17% sequentially.
  • Operating expenses increased 202% to $5.34 million, and rose 17% sequentially.
  • Operating expenses represented 31% of revenue versus 25%, and 28% in Q4.
  • Operating income rose 72% to $5.4 million, but declined 14% sequentially.
  • Operating margin was 32% versus 44%, and 38% in Q4. The company guided for slight margin contraction.
  • Net income rose 87% to $5.88 million but declined 11% sequentially.
  • Net margin was 35% versus 44%, and 40% in Q4.
  • Diluted earnings per ADS were $0.17 versus $0.11, and $0.19 in Q4.
  • Without legal expense, company would have reported diluted earnings per ADS of $0.19.

Notes on income statement

  • Sequential decline in MMS revenues was mainly caused by the new MMS revenue recognition policy introduced by China Mobile in January.
  • Cost of revenue increase primarily due to increased payments to mobile operators, handset manufacturers, and content partners.
  • Operating expenses include $0.86 million in legal expenses related to the issues raised in the class-action litigation commenced in August 2004.
  • If the company had not incurred the $0.86 million in legal expenses related to the issues raised in the class-action litigation, the net margin would have been flat from the previous quarter and the diluted earnings per ADS would have been $0.02 greater in 1Q05.

Balance Sheet

  • As of March 31,2005, cash and equivalents of $96.22 million.

Q2 Guidance

  • Revenue of $17.0 - $17.5
  • WAP revenue to decline from Q1 due to changes in China Mobile's
    WAP revenue recognition policy that were introduced in Q2.
  • Expects that diversified growth in its other
    services will offset the decline in WAP revenue.

Chairman and CEO, Yunfan Zhou

We are pleased to announce that we have met our guidance by growing our first quarter revenue by 3% sequentially and 138% year-over-year, despite a challenging regulatory and market environment.  In the first quarter, China Mobile changed its MMS revenue recognition policy and this caused our MMS revenue to decline from last quarter.  Thanks to our diversified growth strategy and broad product portfolio, we were able to offset the decline in MMS revenue and continue to maintain our leadership position in the 2.5G market in China.  We believe we are in an excellent position to capture the market growth opportunity in 2.5G and 3G services in the future.

KONG chart.


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Tagged: , Multimedia & Graphics Software, China, Earnings
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