KongZhong's (KONG) unaudited third quarter 2006 financial results show revenue declined over the second quarter, due to expected regulatory changes, and the company expects fourth quarter revenue to decrease even more.

Total revenues for the third quarter increased 24% from the same quarter of 2005 to US$25.08 million but decreased 17% from the second quarter of 2006. Revenue from 2.5G services accounted for approximately 44% of total revenues and revenue from 2G services represented the remaining 56%.

Revenue from 2.5G services, which include services delivered using wireless application protocol (WAP), multimedia messaging service (MMS), and Java technologies, decreased 24% from the same period in 2005 and decreased 20% from the second quarter of 2006 to US$10.97 million. The sequential revenue decrease was primarily due to new regulatory changes introduced by China Mobile during the third quarter that, among other things, imposed a one-month free trial period for new users, required that subscription reminders be sent to existing users and cancelled the billing of WAP subscriptions that have not been active for more than four months.

Commenting on the results, Yunfan Zhou, Chairman and Chief Executive Officer, said, "As we anticipated, due to some regulatory changes introduced by the telecommunication operators in the third quarter, our revenue in the third quarter declined from the previous quarter. However, we are pleased that our revenue exceeded our third quarter guidance. As previously announced, we still anticipate challenges in the wireless value-added business during the remainder of 2006. On the other hand, we continue to make progress in our wireless internet portal business. Although the wireless internet portal is in the early development stage, we have begun to see the growth of our mobile advertising revenue. We will continue to invest in the wireless internet portal Kong.net and we are confident about its future."

WAP revenue in the third quarter of 2006 was US$5.79 million, a decrease of 39% from the same quarter of 2005 and a decrease of 13% from the second quarter of 2006. MMS revenue in the third quarter of 2006 was US$4.76 million, an increase of 27% from the same period of 2005, but a decrease of 27% from the second quarter of 2006. Java revenue in the third quarter was US$0.43 million, a 60% decrease from the third quarter of 2005 and a 27% decrease sequentially.

Revenue from 2G services, including short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT), grew 139% year-over-year but decreased 14% quarter-over-quarter to US$14.04 million in the third quarter of 2006.

Year-over-year growth in 2G revenue was primarily driven by the acquisition of Sharp Edge, which was completed in the first quarter of 2006.

Total revenues from China Unicom, China Telecom, and China Netcom accounted for approximately 25% of the total third quarter revenues, compared to 23% in the second quarter of 2006.

Total advertising revenue generated from KongZhong's wireless internet portal Kong.net increased from US$22,000 in the second quarter of 2006 to US$59,000 in the third quarter of 2006.

The cost of revenue in the third quarter of 2006 totaled US$11.39 million, an increase of 40% from the third quarter of 2005 and a decrease of 12% from the second quarter of 2006. Gross margin in the third quarter of 2006 was 55% compared to 57% in the previous quarter. The lower gross margin was primarily due to the fixed nature of certain costs of revenue despite the decline in revenue.

Total operating expenses in the third quarter of 2006 were US$9.77 million, an increase of 6% year-over-year but a decrease of 3% quarter-over-quarter.

US GAAP net income totaled US$4.82 million in the third quarter of 2006, an increase of 41% from the same period of last year but a decrease of 37% from the second quarter of 2006.

As of September 30, 2006, the Company had US$118.61 million in cash and cash equivalents. Cash flow from operating activities totaled US$7.74 million in the third quarter of 2006.

As a result of the continuing impact of regulatory changes introduced by telecommunication operators and Ministry of Information Industry, and based on information available on November 9, 2006, KongZhong expects total revenues for the fourth quarter of 2006 to be between US$20.5 million and US$21.5 million.

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