Chinese mobile value-added services company KongZhong (KONG) has announced its unaudited fourth quarter and fiscal year 2006 financial results.

Total revenues for the fourth quarter increased 7% from the same quarter of 2005 to US$23.71 million, but decreased 5% from the third quarter of 2006. Revenues from 2.5G services accounted for approximately 39% of total revenues and revenues from 2G services represented the remaining 61%.

Revenues from 2.5G services, which include services delivered using wireless application protocol (WAP), multimedia messaging service (MMS), and Java technologies, decreased 38% from the same period in 2005 and decreased 16% from the third quarter of 2006 to US$9.17 million. The MVAS company says the sequential revenues decrease was primarily due to the continuing effect of the regulatory changes introduced by China Mobile during the third quarter 2006 that, among other things, imposed a one-month free trial period for new subscription users, required that new users confirm subscriptions twice and mandated the termination of WAP subscriptions that have not been active for more than four months.

WAP revenues in the fourth quarter of 2006 were US$4.85 million, a decrease of 44% from the same quarter of 2005 and a decrease of 16% from the third quarter of 2006. MMS revenues in the fourth quarter of 2006 were US$3.97 million, a decrease of 20% from the same period of 2005, and a decrease of 17% from the third quarter of 2006. Java revenues in the fourth quarter were US$0.35 million, a 70% decrease from the fourth quarter of 2005 and a 19% decrease sequentially.

Yunfan Zhou, chairman and chief executive officer, put a happy spin on the results and said, "We are pleased that both of our fourth quarter revenues and fiscal year 2006 revenues exceeded the guidance, despite of the regulatory changes in 2006. In addition, we have seen continuous and steady growth of mobile advertising revenues which were mainly generated from our wireless Internet portal Kong.net. Our founders and management team's strong experiences in the wireless value-added services and Internet portal and community are very helpful to develop our wireless Internet portal business. We are confident about the future of our wireless Internet portal business and will increase our efforts to develop Kong.net in 2007."

Revenues from 2G services, including short messaging service (SMS), interactive voice response (IVR), and color ring back tone (CRBT), grew 96% year-over-year and increased 2% quarter-over-quarter to US$14.39 million in the fourth quarter of 2006. Year-over-year growth in 2G revenues was primarily driven by the acquisition of Sharp Edge, which was completed in the first quarter of 2006. SMS revenues in the fourth quarter of 2006 were US$11.66 million, which were 109% higher than the same period of 2005 and 7% higher than the previous quarter. IVR revenues in the fourth quarter of 2006 were US$1.36 million, a 3% increase year-over-year but a 21% decrease sequentially. CRBT revenues grew by 210% year-over-year, but decreased 5% sequentially to US$1.37 million in the fourth quarter of 2006.

Total revenues from China Unicom, China Telecom, and China Netcom accounted for approximately 41% of the total fourth quarter revenues, compared to 25% in the third quarter of 2006. The increase in the relative proportion of revenues coming from operators other than China Mobile is mainly the result of a decline in revenues derived through China Mobile due to the regulatory changes and better revenue confirmation results from other operators at year's end.

Total mobile advertising revenues, which were mainly generated from KongZhong's wireless Internet portal Kong.net, increased from US$59,000 in the third quarter of 2006 to US$104,000 in the fourth quarter of 2006.

The cost of revenues in the fourth quarter of 2006 totaled US$11.58 million, an increase of 13% from the fourth quarter of 2005 and an increase of 2% from the third quarter of 2006. Gross margin in the fourth quarter of 2006 was 51% compared to 55% in the previous quarter. The lower gross margin was primarily due to the higher percentage of revenues derived from telecommunications operators other than China Mobile, which generally were derived at a higher cost compared to revenues derived from China Mobile.

Total operating expenses in the fourth quarter of 2006 were US$8.71 million, an increase of 40% year-over-year but a decrease of 11% quarter-over-quarter. Product development expenses decreased by 18% quarter-over-quarter and represented 11% of revenue. General and administrative expenses decreased by 6% from the third quarter of 2006 and represented 8% of revenues. Sales and marketing expenses decreased by 8% quarter-over-quarter and represented 18% of revenues. The decrease in operating expenses was primarily due to the headcount reduction during Q3 and other cost savings realized within the company.

Total cost associated with the company's wireless Internet portal Kong.net business in the fourth quarter of 2006 was approximately US$2.2 million, slightly lower than in the previous quarter. It included US$0.7 million in marketing expenses.

KongZhong recorded US$0.30 million in non-cash share-based compensation expenses in the fourth quarter, compared to US$0.52 million in the third quarter of 2006. The Company's total headcount declined from 816 as of Sep 30, 2006 to 798 as of December 31, 2006. US GAAP net income totaled US$3.66 million in the fourth quarter of 2006, a decrease of 42% from the same period of last year and a 24% decrease from the third quarter of 2006. Diluted US GAAP earnings per ADS were US$0.10 for the fourth quarter.

As of December 31, 2006, KongZhong had US$131.40 million in cash and cash equivalents. Cash flow from operating activities totaled 11.46 million in the fourth quarter of 2006.

As a result of the continuing impact of regulatory changes introduced by telecommunication operators and China's Ministry of Information Industry, and based on information available on March 2, 2007, KongZhong expects total revenues for the first quarter of 2007 to be between US$20 million and US$21 million.

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