KongZhong Corporation

KongZhong Corporation Announces Unaudited Second Quarter Results for the Period Ended June 30, 2004

Beijing (ots/PRNewswire) - KongZhong Corporation (Nasdaq: KONG), a leading provider of advanced second generation (2.5G) wireless value added services in China, today announced its second quarter (2Q04) diluted earnings of US$0.19 per ADS under generally accepted accounting principles in the United States (US GAAP), up from a diluted earnings of US$0.01 per ADS in the same period of the previous year (2Q03) and diluted earnings of US$0.11 per ADS in the first quarter of 2004 (1Q04). Net income in the second quarter was US$5.30 million, up from US$0.24 million in 2Q03 and US$3.14 million in 1Q04. (The Company issued 8 million American Depositary Shares in early July as part of its initial public offering. Using the enlarged share count, the Company's earnings per ADS in 1Q04 and 2Q04 would have been US$0.09 and US$0.15 respectively.) Commenting on the results, the Company's Chairman and CEO, Yunfan Zhou, said, "We are very pleased with our achievements in the second quarter. The Chinese market is continuing its transition from 2G to 2.5G wireless technology. We continue to witness very strong interest in our products and services that utilize the enhanced capabilities offered by the 2.5G network, particularly in our media related products. This strong demand allowed us to deliver very strong financial results across all segments of our business and has allowed us to remain China Mobile's top 2.5G service provider." "In early July, we successfully completed our initial public offering and raised US$80 million under very challenging market conditions. We believe the proceeds, as well as the higher profile associated with being a publicly listed company, should help us to enlarge and enrich our mobile content offerings, expand our distribution network, and attract talented employees." "We are confident of the 2.5G market's long-term prospects. As a leading 2.5G service provider in China, we believe we are well positioned to capture this long-term potential." 2Q04 Financial Highlights: -Revenue grew 876% year-over-year and 67% sequentially to US$11.97 million. -The Company's 2.5G revenue grew 950% year-over-year and 83% sequentially to US $9.61 million. -The Company's 2G revenue grew 655% year-over-year and 24% sequentially to US$2.36 million. -Net income increased 2,142% year-over-year and 69% sequentially to US$5.30 million. -Net margin was 44.3%, up from 19.3% in 2Q03 and 44.0% in 1Q04. Business Highlights: -The Company retained its number one position with China Mobile in WAP, MMS, and Java revenues. -The Company achieved three of the top five spots on China Mobile's games download ranking, including the number one position, in both revenues and the number of downloads. -The Company signed agreements with China Telecom and China Netcom to provide value added services to their fixed line and PHS customers. -The Company signed agreements with Amoi, CECT, DBTel, Panasonic, and Samsung to provide contents and services on their mobile phones for use on China Mobile's network. -The Company signed agreements with ACME, Gameloft, and Macrospace (leading Singaporean, French, and British publishers of mobile Java games, respectively) to distribute their mobile games in China. -The Company signed agreements with HI Corp and Superscape (leading Japanese and British publishers of mobile games, respectively) to distribute their 3D games. -The Company signed agreement with Net Village, a leading Japanese wireless value added service provider, to distribute its mobile games and WAP pictures. -The Company partnered with Warner Brothers to distribute MMS contents from the movie "Troy." Second Quarter Financial Review (Note: Unless otherwise stated, all financial statement amounts used in this press release are based on US GAAP and denominated in US dollars.) Revenues Revenues for the quarter totaled a record US$11.97 million, up 876% from the same period of the previous year and up 67% from 1Q04. By platform, revenues from 2.5G wireless value added services accounted for 80% of total revenues and revenues from 2G wireless value added services represented the remaining 20%, compared with 73% and 27%, respectively, in 1Q04. Revenues from 2.5G services, which include services delivered using wireless access protocol (WAP), multimedia messaging service (MMS), and Java technology, grew 950% from 2Q03 and 83% from 1Q04 to US$9.61 million in 2Q04. Growth in MMS revenues accounted for the largest increase in 2.5G revenues. Revenue from 2G services, which include short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT), grew 655% from 2Q03 and 24% from 1Q04 to US$2.36 million in 2Q04. IVR revenues registered the highest growth rate in 2G revenues, primarily as a result of its small base in 1Q04. By type, revenues from monthly subscriptions accounted for 91% of total revenues, and revenues from downloads accounted for the remaining 9%. During the quarter, the number of monthly subscriptions grew by 66% from 1Q04 to 12.81 million, and average revenue per subscription fell by almost 1%. 1Q04 2Q04 Subscription Revenue 93% 91% Download Revenue 7% 9% Total 100% 100% By service category, the Company derived 47% of its revenues from interactive entertainment, 37% from media services, and 16% from community. 1Q04 2Q04 Interactive Entertainment 56% 47% Media 25% 37% Community 19% 16% Total 100% 100% Expenses Cost of revenues (COR) in 2Q04 totaled US$3.49 million, up 956% from 2Q03 and up 56% from 1Q04. Gross margin for the quarter was 70.8%, down from 73.0% in the same period of the previous year and up from 68.7% in 1Q04. The sequential margin expansion was attributed primarily to slower growth in transmission fees and content fees. Total operating expenses in 2Q04 increased by 382% from the same period of the previous year and 80% from 1Q04 and represented 26.6% of revenues, compared with 53.7% and 24.7% of revenues in 2Q03 and 1Q04, respectively. Product development expense increased by 51% from 1Q04 and represented 9.1% of revenues. The increase was primarily due to higher headcount and the staff expenses associated with higher headcount. Sales and marketing expense increased by 188% from 1Q04 and represented 7.1% of revenues. The increase was primarily driven by higher promotion and business development expense, as well as costs associated with higher headcount. General and administrative expense increased by 63% from 1Q04 and represented 9.2% of revenues. The increase was primarily driven by higher salary & benefits as well as higher business tax. Overall, the Company's operating margin improved from 19.3% in 2Q03 and 44.0% in 1Q04 to 44.2%. Company-wide headcount increased 29% from the end of 1Q04 to 405 at the end of 2Q04. Earnings Net income totaled US$5.30 million in the second quarter, an increase of 2,142% from US$0.24 million in the same period of the previous year and an increase of 69% from US$3.14 million in 1Q04. Net margin was 44.3%, up from 19.3% in 2Q03 and 44.0% in 1Q04. Diluted EPS was US$0.19, up from US$0.01 from the same period of the previous period and US$0.11 in 1Q04. Balance Sheet and Cash Flow At the end of the quarter, the Company had US$9.35 million in cash and cash equivalent and US$17.61 million in total assets. In second quarter, the Company generated net cash increase of US$3.62 million. In the first half of this year, the Company generated US$6.32 million in cash flow from operations and spent US$0.63 million on capital expenditures. In July, the Company issued 8 million American Depositary Shares and raised US$80 million in gross proceeds from its initial public offering and inclusion of its American Depositary Shares for quotation on the Nasdaq National Market. Business Outlook: The Company presently expects its third quarter revenues to grow by about 10-20% from 2Q04 with 2.5G services as the main growth driver. The Company estimates its operating margin should contract slightly from its 2Q04 level. KongZhong Corporation Consolidated Statements of Income (US$ thousands, except percentages and per share data) (unaudited) For the For the For the Three Three Three Months Months Months Ended Ended Ended Jun. 30, Mar. 31, Jun. 30, 2003 2004 2004 Revenues $1,226 $7,148 $11,968 Cost of revenues 331 2,239 3,494 Gross profit 895 4,909 8,474 Operating expense Product development 271 716 1,084 Sales & marketing 213 294 847 General & administrative 175 676 1,102 Amortization of deferred stock compensation - 81 146 Subtotal 659 1,767 3,179 Operating income 236 3,142 5,295 Non-operating expense (income) Interest expense - (1) (9) Others - 1 4 Subtotal - 0 (5) Income before tax 236 3,142 5,300 Income tax expense - - - Net income $236 3,142 5,300 Basic EPS $0.02 $0.27 $0.45 Diluted EPS $0.01 $0.11 $0.19 Margin Analysis: Gross margin 73.0% 68.7% 70.8% Operating margin 19.3% 44.0% 44.2% Net margin 19.3% 44.0% 44.3% Additional Data: 2.5G revenue $915 $5,245 $9,607 2G revenue 311 1,903 2,361 ADS outstanding 11,725,000 11,725,000 11,725,000 ADS used in diluted EPS calculation 27,308,472 27,455,164 27,441,525 KongZhong Corporation Consolidated Statements of Cash Flows (US$ thousands) (unaudited) For the 6-Month For the 6-Month Ended Ended Jun. 30, 2003 Jun. 30, 2004 Cash Flows From Operating Activities Net Income $334 $8,442 Adjustments Amortization of deferred stock compensation 227 Depreciation and amortization 84 271 Changes in operating assets and liabilities (197) (2,624) Net Cash Provided by Operating Activities 221 6,316 Cash Flows From Investing Activities Purchase of property & equipment (443) (633) Net Cash Used in Investing Activities (443) (633) Cash Flows From Financing Activities Increase in minority interest - 121 Payment for IPO expenses - (195) Net Cash Used in Financing Activities - (74) Translation Adjustments - - Net increase in Cash and Cash Equivalents (222) 5,609 Cash and Cash Equivalents, Beginning of Period 2,646 3,743 Cash and Cash Equivalents, End of Period 2,424 9,352 KongZhong Corporation Consolidated Balance Sheet (US$ thousands) (unaudited) Dec. 31, 2003 Jun. 30, 2004 Cash and cash equivalents $3,743 $9,352 Accounts receivable 1,704 6,279 Other current assets 198 429 Total current assets 5,645 16,060 Rental deposit 74 342 PP&E (net) 848 1,210 Total assets $6,567 $17,612 Accounts payable 564 1,550 Other current liabilities 393 1,752 Amount due to related party 90 - Total current liabilities 1,047 3,302 Minority interest - 121 Series B redeemable convertible preferred shares 2,970 2,970 Total liabilities 4,017 6,393 Shareholders' equity 2,550 11,219 Total liabilities & shareholders' equity $6,567 $17,612 KongZhong Corporation is a leading provider of advanced second generation (2.5G) wireless interactive entertainment, media, and community services to consumers in China. The Company delivers a broad range of services, through multiple technology platforms, which users can access directly from their mobile phones by choosing an icon embedded in select models of handsets or from a mobile operator's portal or web site. This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although these forward-looking statements, which may include statements regarding our future results of operations, financial condition or business prospects, are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on these forward-looking statements, which apply only as of the date of this press release. Our actual results of operations, financial condition or business prospects may differ materially from those expressed or implied in these forward looking statements for a variety of reasons. For a discussion of these risks and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. Web site: http://www.kongzhong.com ots Originaltext: KongZhong Corporation Im Internet recherchierbar: http://www.newsaktuell.ch Contact: Richard Wei, Chief Financial Officer of KongZhong Corporation, +86-10-6808-1818, ext. 935, fax, +86-10-6808-2128, or rwei@kongzhong.com

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