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KongZhong Total Revenue Up, Key Quarterly Indicators Down

KongZhong's (KONG) unaudited second quarter 2006 financial results show total revenues in the second quarter of 2006 grew 64% year-over-year and 8% sequentially to US$30.07 million.

Revenue from 2.5G services grew 2% from the same period in 2005 but decreased 23% from the first quarter of 2006 to US$13.77 million. WAP revenue in the second quarter of 2006 was US$6.67 million, a decrease of 32% from the same quarter of 2005 and a decrease of 25% from the first quarter of 2006. The company says it continues to face pressure from China Mobile's policy changes and intensifying competition in WAP.

MMS revenue in the second quarter of 2006 was US$6.51 million, an increase of 97% from the same period of 2005, and a decrease of 18% from the first quarter of 2006.

Revenue from 2G services, including short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT), grew 238% year-over-year and 63% quarter-over-quarter to US$16.26 million in the second quarter of 2006. Growth in 2G revenue was driven by the acquisition of Sharp Edge completed in the first quarter and was also a result of the company's diversified growth strategy.

The cost of revenue in the second quarter of 2006 totaled US$12.94 million, an increase of 92% from the second quarter of 2005 and 10% from the first quarter of 2006, and represented 43% of total revenues. The gross margin in the second quarter of 2006 was 57% compared to 58% in the previous quarter. The lower gross margin is primarily due to higher proportion of revenue from 2G services, which generally have lower gross margin than 2.5G services.

Total operating expenses in the second quarter of 2006 were US$10.10 million, an increase of 82% year-over-year and 9% quarter-over-quarter. The company recorded US$0.47 million in non-cash share-based compensation expense in the second quarter, compared to US$0.35 million in the first quarter of 2006.

As of June 30, 2006, KongZhong had US$122.29 million in cash and cash equivalents. Cash flow from operating activities totalled US$4.63 million in the second quarter of 2006.

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