Chinese wireless value-added services firm KongZhong (KONG) reports that total revenues for its first quarter decreased 28% from the same quarter of 2006 and decreased 15% sequentially to US$20.13 million.

Yunfan Zhou, chairman and CEO, said, "The first quarter was a challenging quarter for us given the tough WVAS operating environment, and we expect that the tough operating environment is likely to continue for some time. Our total revenues were in line with the guidance. We are happy that we achieved double-digit quarter- over-quarter growth in mobile advertising revenue. We believe we are making good progress in our wireless Internet business."

Revenues from 2.5G services accounted for approximately 46% of total WVAS revenues and revenues from 2G services represented the remaining 54%.

Revenues from 2.5G services, which include services delivered using wireless application protocol, multimedia messaging service, and Java technologies, decreased 48% from the same period in 2006 but increased 1% sequentially to US$9.22 million. WAP revenues in the first quarter of 2007 were US$4.40 million, a decrease of 50% from the same quarter of 2006 and a decrease of 9% sequentially. MMS revenues in the first quarter of 2007 were US$4.13 million, a decrease of 48% from the same period of 2006, but an increase of 4% sequentially. Java revenues in the first quarter were US$0.69 million, a 39% decrease from the same quarter of 2006 and a 99% increase sequentially, mainly due to the cooperation with China Mobile on a premium games channel launched on Monternet starting from December 2006.

Revenues from 2G services, including short messaging service, interactive voice response, and color ring back tone, grew 8% year-over-year but decreased 25% sequentially to US$10.78 million in the first quarter of 2007.

The aggregate revenues from China Unicom, China Telecom and China Netcom accounted for approximately 24% of the total first quarter revenues. This was consistent with the relative market positions of the four major telecommunications operators in the PRC mobile industry. Total mobile advertising revenues, which were mainly generated from KongZhong's wireless Internet portal Kong.net, increased 12% sequentially to US$116,000 in the first quarter of 2007.

The cost of revenues in the first quarter of 2007 totaled US$9.39 million, a decrease of 20% from the first quarter of 2006 and a decrease of 19% sequentially, largely as a result of the decreased revenues derived from the users of China Unicom, China Telecom and China Netcom. Gross margin in the first quarter of 2007 increased slightly to 53% compared to 51% in the fourth quarter of 2006.

Total operating expenses in the first quarter of 2007 were US$9.83 million, an increase of 6% year-over-year and 13% sequentially. Product development expenses increased by 22% sequentially and represented 16% of revenues.

The company recorded US$0.57 million in non-cash share-based compensation expenses in the first quarter, compared to US$0.30 million in the fourth quarter of 2006. The company's total headcount declined from 798 as of December 31, 2006 to 777 as of March 31, 2007.

US GAAP net income totaled US$1.56 million in the first quarter of 2007, a decrease of 82% from the same period of last year and a 57% decrease sequentially. Diluted US GAAP earnings per ADS were US$0.04 for the first quarter. Non-GAAP income in the first quarter of 2007 was US$2.13 million, a 73% decrease from the same period in 2006 and a 49% decrease from the previous quarter. Diluted Non-GAAP earnings per ADS were US$0.06.

At the end of the quarter, the company had US$115.36 million in cash and cash equivalents. Cash flow from operating activities totaled US$0.15 million in the first quarter of 2007.

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