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KongZhong Reports Weak Mobile Ad Sales, Unhealthy Reliance On Chinese Telecoms

Chinese wireless value-added services company KongZhong (KONG) says its unaudited first quarter 2008 financial results reveal total revenues increased 8% sequentially to US$21.39 million, but total mobile advertising revenues were a weak US$212,000.

The aggregate revenues from China Unicom, China Telecom and China Netcom accounted for approximately 24% of the total first quarter WVAS revenues, while revenues from China Mobile accounted for the remaining 76%. This still shows an incredibly large reliance on the company of the good will of these telecommunications companies, which have in the past been fickle in their policies and have directly resulted in revenue and profit losses for KongZhong.

Chairman and CEO Yunfan Zhou said, "Our WVAS revenues increased in Q1 mainly as a result of seasonal factors. However, seasonal factors also resulted in our lower mobile advertising revenues. We expect our mobile advertising revenues to increase rapidly in Q2. In 2008, we will continue pursuing our wireless Internet strategic initiative."

Revenues from 2.5G wireless services accounted for approximately 32% of total WVAS revenues and revenues from 2G services represented the remaining 68%. Revenues from 2.5G services, which include services delivered using WAP, MMS, and JAVA technologies, increased 19% sequentially to US$6.71 million. WAP revenues in the first quarter of 2008 were US$3.06 million, an increase of 42% sequentially. MMS revenues in the first quarter of 2008 were US$2.87 million, an increase of 3% sequentially. JAVArevenues in the first quarter of 2008 were US$0.78 million, an increase of 18% sequentially.

Revenues from 2G services, including short messaging service, interactive voice response, and color ring back tone, increased 4% sequentially to US$14.44 million in the first quarter of 2008. SMS revenues in the first quarter of 2008 increased 20% sequentially to US$9.59 million. IVR revenues in the first quarter of 2008 decreased 33% sequentially to US$2.87 million. CRBT increased 24% sequentially to US$1.97 million the first quarter of 2008.

The WVAS cost of revenues in the first quarter of 2008 totaled US$11.59 million, an increase of 15% sequentially. WVAS gross margin in the first quarter of 2008 decreased to 45% compared to 48% in the fourth quarter of 2007, mainly as a result of higher revenue sharing with mobile handset manufacturers. Total WVAS operating expenses in the first quarter of 2008 were US$7.42 million, an increase of 10% sequentially, mainly because of an increase in compensation to employees. Product development expenses increased by 11% sequentially and represented 10% of revenues. Sales and marketing expenses increased by 11% sequentially and represented 17% of revenues. General and administrative expenses increased by 5% sequentially and represented 8% of revenues. Operating expenses related to the company's wireless Internet sites were US$3.25 million, which included US$1.84 million in marketing and advertising expenses.

As of March 31, 2008, the company had US$126.81 million in cash and cash equivalents.

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