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KongZhong Corporation Reports Unaudited First Quarter 2010 Financial Results

BEIJING, May 19 /CHICAGOPRESSRELEASE.COM/ — KongZhong Corporation ( KONG),
a leading mobile Internet company in China, today announced its unaudited
first quarter 2010 financial results.

First Quarter 2010 Financial Highlights:

(Note: Unless otherwise indicated, all financial statement amounts used in
this press release are based on United States Generally Accepted Accounting
Principles (GAAP) and denominated in US dollars)

    -- Revenues above prior guidance - Total revenues for the First Quarter of
       2010 ("1Q10") increased 37% year-over-year to US$ 40.64 million ("mn"),
       above the Company's revised 1Q10 revenue guidance of US$ 37.5 mn.
    -- Gross margin decreased - Total gross margin was 44% in 1Q10, a decrease
       compared with 46% in 4Q09.
    -- Net income increased - Net income in 1Q10 was US$ 3.17 mn, a 57%
       increase compared with 4Q09 net income of US$ 2.02 mn. Basic net income
       per ADS was US$ 0.09 based on 35.57 mn ADS while diluted net income per
       ADS was US$ 0.08 based on 38.77 mn ADS outstanding as of March 31, 2010.
    -- Non-GAAP net income increased - Non-GAAP net income was US$ 6.08 mn, a
       63% increase compared to 1Q09 Non-GAAP net income of US$ 3.73 mn, while
       Non-GAAP diluted net income per ADS was US$ 0.15 (Non-GAAP Financial
       Measures are described and reconciled to the corresponding GAAP
       measures in the section titled "Non-GAAP Financial Measures.")
    -- Cash and cash equivalents - As of March 31, 2010, the Company had US$
       130 mn in cash and cash equivalents or US$ 3.7 per basic ADS in cash
       and cash equivalents, already taking into account the first payment
       (cash portion) for the acquisition of Dacheng Networks, or US$ 9.6 mn.

Commenting on the results, the Company’s Chairman and Chief Executive
Officer, Leilei Wang, said, “In the first quarter, KongZhong increased our
efforts to transform our business from a traditional WVAS player into a
cross-platform digital entertainment company. I’m pleased with the progress
our team has made to date, especially our mobile game business, but believe we
still have significant room for development and improvement.

“In 1Q10, despite a difficult wireless services environment, we continued
to grow and lead the Chinese mobile game market by transitioning to China
Mobile’s mobile game monthly subscription package platform. With over 1 mn
average monthly users subscribing to our mobile game package, we believe this
new model creates a more stable source of revenues and stronger recognition by
Chinese users of the KONG mobile game brand.

“On January 14th, we completed our acquisition of Dacheng Networks,
supporting our transition from a traditional wireless services player to a
cross-platform digital entertainment company. In the first quarter, Dacheng’s
flagship game, Loong, achieved 77k average concurrent users and was launched
commercially into the Taiwan, Hong Kong and Malaysia online game markets.

“In addition to a recent expansion pack for Loong, launched on May 8th, we
plan to launch at least two additional 3D online games in the coming months.
First, we plan to launch “E Mo Fa Ze” (or Demon Code Online) commercially on
May 27th and will be launching another 3D online game, called Xia Ke Xing,
sometime in the 3rd quarter of 2010.

“Our strategy for the remainder of this year is two-fold. Firstly, we plan
to transition from a single game under operation, Loong, to a portfolio of
three stable 3D online games, and secondly, we expect to continue our efforts
to license and operate our 3D games in overseas markets. For example, we
recently licensed Loong to the Russian and Vietnam markets and are seeking
similar opportunities for Demon Code Online and Xia Ke Xing.

“Looking further out, based on our current development pipeline, we plan
to launch at least four additional 3D online games in 2011 as we leverage our
two proprietary 3D game engines. We believe that possessing multiple 3D game
engines provides us the flexibility and potential to become a leading mainland
Chinese 3D online game company, and by specifically designing our game engines
to more easily suit the requirements of our overseas online game operators,
increases our export market potential.

“While our WVAS business will continue to experience challenges in the
near-term, we expect to maintain positive cashflow and continue our transition
to become a leading cross-platform digital entertainment company for Chinese
users.

    "Once again, I continue to be optimistic about KongZhong's ability to
transition through this period as a more diversified, more product driven and
more profitable company."



    Financial Results:

                             For the Three    For the Three     For the Three
                             Months Ended     Months Ended      Months Ended
                                 March 31,     December 31,         March 31,
                                     2009             2009              2010
                            (US$ thousands)  (US$ thousands)   (US$ thousands)

    Revenues                      $29,586          $34,334           $40,636
      WVAS                         23,658           25,267            25,900
      Mobile Games                  4,944            7,349             9,476
      Wireless Internet
       Service                        984            1,718             1,021
      Online Games                     --               --             4,239

    Sales Tax                        $562             $641              $825
      WVAS                            433              406               420
      Mobile Games                     83              148               252
      Wireless Internet
       Service                         46               87                55
      Online Games                     --               --                98

    Cost of Revenue               $15,010          $18,037           $22,097
      WVAS                         12,470           13,493            15,356
      Mobile Games                  2,045            3,511             5,601
      Wireless Internet
       Service                        495            1,033               686
      Online Games                     --               --               454

    Gross profit                  $14,014          $15,656           $17,714
      WVAS                         10,755           11,368            10,124
      Mobile Games                  2,816            3,690             3,623
      Wireless Internet
       Service                        443              598               280
      Online Games                     --               --             3,687

    Gross profit ratio                 47%              46%              44%
      WVAS                             45%              45%              39%
      Mobile Games                     57%              50%              38%
      Wireless Internet
       Service                         45%              35%              27%
      Online Games                     --               --               87%

Revenues

WVAS revenues in 1Q10 were US$ 25.9 mn, a 3% increase from 4Q09 and a 9%
increase from the same period last year. Although the bulk of the Company’s
WVAS services, both 2G and 2.5G, were negatively impacted by various new
mobile operator policies implemented during the course of 1Q10, its IVR
services saw a strong seasonal increase due to the Chinese New Year holiday
period. As a result, 2G revenues represented 91% of total WVAS revenues
compared to 81% in 4Q09, while 2.5G services made up 9% of total WVAS revenues.

Total mobile game revenues in 1Q10 were US$ 9.48 mn, a 92% increase from
the same period last year and a 29% increase from 4Q09.

Revenues from downloadable mobile games were US$ 8.95 mn representing a
112% increase from the same period last year and an increase of 37% from 4Q09.
The strong performance in the Company’s downloadable mobile game revenues was
due to the Company’s proactive focus on developing monthly mobile game
subscription packages with China Mobile, which the Company believes provides
both a source of growth potential, but more importantly a more stable source
of revenues due to the recurring nature of monthly subscriptions for a package
of mobile games compared to the previously more prevalent per transaction
downloadable mobile game model.

Revenues from mobile multi-player online games (“MMO” or “online mobile
games”) were US$ 0.53 mn, a decrease of 27% from the same period last year and
a decrease of 36% from 4Q09. In a continuation of trends from the previous
quarter, namely the initial poor performance of “Feng Shen,” the Company’s
newer online mobile game, not compensating for the decline in revenues for
“Tian Jie,” its older online mobile game, the Company’s online mobile game
revenues continued to decline. However, towards the end of 1Q10, a new
expansion pack for Feng Shen was launched which the Company expects to
stabilize its online mobile game revenues in the future. In addition, the
Company intends to refresh its online mobile game content portfolio in 2010 by
launching “Fantasy Tianjie,” a turn-based 2D mobile MMO sometime in 3Q10 and
the second generation version of Tian Jie, currently called Tian Jie 2,
sometime in early 2011.

Revenues from “Tian Jie” accounted for about 96% of the Company’s online
mobile game revenues while revenues from “Feng Shen” accounted for the
remaining 4%, compared to 11% in 4Q09.

Revenues from downloadable mobile games made up 94% of total mobile game
revenues compared to 89% in 4Q09. Revenues from online mobile games made up
roughly 6% of total mobile game revenues compared to 11% in 4Q09.

Wireless Internet service (“WIS”) revenues were US$ 1.02 mn in 1Q10,
representing an increase of 4% from the same period last year but decrease of
41% from 4Q09. The decline in sequential WIS revenues was mainly due to the
suspension of the WAP billing platform across the Company’s mobile operator
partners. In 1Q10, 40% of WIS revenues were from wireless advertising with the
remaining 60% of revenues from premium services on the Kong.net mobile
Internet site and revenues coming from the Company’s Internet literature site,
http://www.Zhulang.com .

From January 14th 2010, revenues from our newly acquired Online Game
business unit, or Dacheng Networks (under “Online Games”), recorded US$ 4.24
mn in revenues, all primarily from Dacheng’s main online game, Loong. Of this,
roughly 93% were related to mainland Chinese operations of Loong and the other
roughly 7% from overseas license fees and the net revenue share from overseas
online game operation partners.

For the full quarter, Loong’s mainland China operations achieved average
concurrent users (“ACUs”) of 77k, aggregate paying accounts of 185k with
quarterly ARPU of RMB 172.

Change to Presentation of Sales tax

Prior to October 1, 2009, the Company recorded sales tax in general and
administrative expenses. Since October 1, 2009, the Company has presented
sales tax as separate item in gross profit in the consolidated statements of
operations in an effort to provide better comparability to the Company’s peers.
The Company has applied this change in accounting principle retrospectively to
all prior periods presented.

As a result, the gross profit and gross margin discussion below is based
on the revised presentation of sales tax as a separate line item vs. as part
of general and administrative expenses as previously.

Gross Profit

Total gross profit was US$ 17.71 mn in 1Q10, a 26% increase compared to
the same period last year and a 13% increase compared to 4Q09, primarily due
to the contribution from the Company’s acquisition of Dacheng Networks in 1Q10
(under “Online Games”). Total gross margin was 44% in 1Q10 compared to 46% in
4Q09.

WVAS gross profit in 1Q10 was US$ 10.12 mn, a 6% decrease compared to the
same period last year and an 11% decrease from 4Q09. 1Q10 WVAS gross margin
was 39% compared to 45% in 4Q09. The decline in gross margin levels was due to
the new Chinese mobile operator policies implemented during the 1Q period and
the lower gross margin nature of the Company’s IVR business.

Mobile games gross profit for 1Q10 was US$ 3.62 mn or a slight decline
compared to US$ 3.69 mn in 4Q09 but an increase of 29% from US$ 2.82 mn in the
same period last year. Mobile games gross margin was 38% compared to 50% in
4Q09 and 57% in 1Q09. The decline in mobile game gross margins was due to the
Company’s proactive shift to a new mobile game billing platform (namely China
Mobile’s monthly mobile game subscription package) in order to offset the
impact of the transaction-based portion of the G+ mobile game billing platform
which was suspended at the beginning of December. While this new mobile game
platform is expected to be a more stable source of recurring revenue, in the
short-term, it relies more on the Company’s mobile operator partner’s
resources and includes an additional operator distribution channel fee.
However, as the current mobile services policy environment stabilizes, the
Company expects to be able to leverage more of its own distribution resources,
bypassing these additional fees.

Wireless Internet service gross profit for 1Q10 was US$ 0.28 mn compared
to $ 0.60 mn in 4Q09 and $0.44 mn in the same period last year. The decline in
WIS gross profit is directly related to the suspension of WAP billing across
the Company’s mobile operator partners. Wireless Internet gross margins were
27%, a decrease from the 35% gross margin level in 4Q09.

Online Game gross profit for 1Q10 was US$ 3.69 mn for the period from
January 14th 2010 to March 31st 2010 with gross margins of 87%.



    Operating Expenses

                          For the Three    For the Three    For the Three
                           Months Ended     Months Ended     Months Ended
                               March 31,     December 31,        March 31,
                                   2009             2009             2010
                          (US$ thousands)  (US$ thousands)  (US$ thousands)

    Product development          $4,848          $4,221            $6,841
    Sales and marketing           4,077           4,953             4,406
    General and
     administrative               2,456           2,856             2,796
    Total Operating
     Expenses                   $11,381         $12,030           $14,043

Total operating expenses increased 17% sequentially to US$ 14.04 mn in
1Q10 compared to US$ 12.03 mn in 4Q09, primarily due to the inclusion of
Dacheng Networks in 1Q10.

Product development expenses in 1Q10 were US$ 6.84 mn compared to US$ 4.22
mn in 4Q09 or a 62% increase. The large increase in product development
expenses reflects the acquisition of Dacheng Networks product development team
as well as the addition of US$ 1.1 mn for the amortization of intangibles
related to the acquisition of Dacheng Networks.

Sales and marketing expenses in 1Q10 were US$ 4.41 mn compared to US$ 4.95
mn in 4Q09 and US$ 4.08 mn in the same period last year. The small sequential
decrease in sales and marketing reflects cost management in the Company’s WVAS,
mobile game and WIS businesses with regards to sales and marketing activities
offset by the inclusion of sales and marketing expenses as part of the
acquisition of Dacheng and marketing activities for Loong.

General and administrative expenses in 1Q10 were US$ 2.80 mn compared to
US$ 2.86 mn in 4Q09, or a decrease of roughly 2% quarter-over-quarter.

The Company’s total headcount increased to 1,330 as of March 31st, 2010
compared to 1,002 as of December 31, 2009 with the Company’s acquisition of
Dacheng Network.

Operating Profit

Operating profit for 1Q10 was US$ 3.67 mn compared to US$ 3.63 mn in 4Q09.
Operating margins were 9% in 1Q10 compared to 11% in 4Q09. The decline in
operating margins were due to the direct and indirect impact of new Chinese
mobile operator policies across the Company’s WVAS, mobile games and WIS
business lines as well as the addition of amortization of intangibles related
to the acquisition of Dacheng Networks.

Earnings

Net income and Non-GAAP net income in 1Q10 were US$ 3.17 mn and US$ 6.08
mn, respectively. Diluted earnings per ADS and diluted Non-GAAP earnings per
ADS were US$ 0.08 and US$ 0.15 or 1Q10, respectively.

Total diluted ADS outstanding as of March 31, 2010 were 38.77 mn, compared
to 39.27 mn as of December 31, 2009.

                                Balance as of      Balance as of
                            December 31, 2009     March 31, 2010


    Basic ADS                           34.33             35.57
    Add: Outstanding
     options and
     nonvested shares                    3.68              2.27
        Warrant to NGP                   1.26              0.93
    Diluted ADS                         39.27             38.77

    Note: Basic ADS as of March 31st 2010 includes 1.07 mn ADS issued as part
          of 1st payment to shareholders of Dacheng Networks.

Balance Sheet

As of March 31, 2010, the Company had $130 mn in cash and cash equivalents
or US$ 3.7 per basic ADS in cash and cash equivalents, already taking into
account the first payment (cash portion) for the acquisition of Dacheng
Networks, or US$ 9.6 mn.

Business Outlook (For the 3-month period ending June 30, 2010):

The Company expects total revenues for 2Q10 to be within the range of US$
34.5mn to 35.5mn, with business unit revenues at the mid-point expected to
roughly consist of WVAS revenues of US$ 16.5 mn, mobile game revenues of US$
13.0 mn, WIS revenues of US$ 1.0 mn and Online Game revenues of US$ 4.5mn.

The Company expects total gross profit to be within the range of US$
16.5mn to 17.5 mn, total operating profit and net profit to be US$ 2.5mn to
3.0 mn, while Non-GAAP net profit to be roughly US$ 5.3 mn to US$ 5.8 mn.

Conference Call:

The Company’s management team will conduct a conference call at 7:30 am
Beijing time on May 20th, 2010 (7:30 pm Eastern time and 4:30 pm Pacific time
on May 19th 2010). A webcast of this conference call will be accessible on the
Company’s web site at http://ir.kongzhong.com .



                              KongZhong Corporation
                  Condensed Consolidated Statements of Income
            (US$ thousands, except per share data, and share count)
                                   (Unaudited)

                            For the Three     For the Three    For the Three
                             Months Ended      Months Ended     Months Ended
                                 March 31,      December 31,        March 31,
                                     2009              2009             2010

    Revenues                      $29,586           $34,334          $40,636
    Sales Tax                         562               641              825
    Cost of revenues               15,010            18,037           22,097
    Gross profit                   14,014            15,656           17,714
    Operating expenses
       Product
        development                 4,848             4,221            6,841
       Sales & marketing            4,077             4,953            4,406
       General &
        administrative              2,456             2,856            2,796
       Total operating
        expenses                   11,381            12,030           14,043
    Operating profit
     (loss)                         2,633             3,626            3,671
    Interest income                 1,032               600              406
    Investment income                  --                88              132
    Loss from impairment
     of cost method
     investment                        --             1,500               --
    Interest expense on
     convertible notes                 34               234              253
    Income  before tax
     expense                        3,631             2,580            3,956
    Income tax expense              1,110               563              791
    Net income (loss)              $2,521            $2,017           $3,165
    Basic earnings
     (loss) per ADS                 $0.07             $0.06            $0.09
    Diluted earnings
     (loss)  per ADS                $0.07             $0.05            $0.08
    Weighted average ADS
     outstanding (mn)               35.40             34.33            35.57
    Weighted average ADS
     used in diluted EPS
     calculation (mn)               36.74             39.27            38.77



                             KongZhong Corporation
                 Condensed Consolidated Statements of Cash Flows
                                (US$ thousands)
                                  (Unaudited)

                                              For the Three     For the Three
                                              Months Ended      Months Ended
                                              March 31, 2009    March 31, 2010
    Cash Flows From Operating Activities
    Net Income (Loss)                               $2,521            $3,165
    Adjustments to reconcile net income
     to net cash provided by operating
     activities
      Share-based compensation                       1,014             1,241
      Depreciation and amortization                    622             1,960
      Disposal of property and equipment                (4)               --
      Investment Income                                 --               112
      Amortization of the debt discount                 14               119
      Changes in operating assets and
       liabilities                                  (2,809)           (6,117)
    Net Cash Provided by Operating
     Activities                                      1,358               480

    Cash Flows From Investing Activities
    Purchases of subsidiaries                         (729)           (8,604)
    Purchase of property and equipment                (281)             (715)
    Proceeds from disposal of property                   4                --
    Net Cash Used in Investing Activities           (1,006)           (9,319)

    Cash Flows From Financing Activities
    Proceeds from issuance of convertible
     notes                                           6,775                --
    Interest paid for convertible notes                 --              (271)
    Proceeds from exercise of share
     options                                            36               104
    Stock Repurchase                                (1,559)               --
    Net Cash Used in Financing Activities            5,252              (167)

    Effect of foreign exchange rate
     changes                                             7                11

    Net increase in Cash and Cash
     Equivalents                                    $5,611            (8,995)
    Cash and Cash Equivalents, Beginning
     of Period                                    $136,054          $139,289
    Cash and Cash Equivalents, End of
     Period                                       $141,665          $130,294



                             KongZhong Corporation
                    Condensed Consolidated Balance Sheets
                                (US$ thousands)
                                  (Unaudited)

                                     March 31,    December 31,     March 31,
                                        2009            2009          2010

    Cash and cash equivalents       $141,665        $139,289      $130,294
    Short-term investments                --             101            47
    Accounts receivable (net)         19,216          25,277        29,747
    Other current assets               3,700           4,908         5,010
    Total current assets             164,581         169,575       165,098

    Rental deposits                      529             597           651
    Intangible assets (net)              652           2,285        13,986
    Property and equipment (net)       3,159           3,116         4,239
    Long-term investments              2,963           1,464         1,465
    Goodwill                          16,564          23,042        90,095
    Total assets                    $188,448        $200,079      $275,534

    Accounts payable                  $9,329         $13,265       $11,838
    Deferred revenue                      --              --         2,196
    Other current liabilities          9,556          10,300        65,828
    Total current liabilities         18,885          23,565        79,862

    Convertible notes                  2,464           3,001         2,983
    Non-current deferred tax
     liability                            44             472         3,415
    Total liabilities                $21,393         $27,038       $86,260

    Shareholders' equity             167,055         173,041       189,274
    Total liabilities &
     shareholders' equity           $188,448        $200,079      $275,534

Non-GAAP Financial Measures

To supplement the unaudited condensed statements of income presented in
accordance with US GAAP, the Company uses non-GAAP financial measures
(Non-GAAP Financial Measures) of net income and net income per diluted ADS,
which are adjusted from results based on GAAP to exclude certain infrequent or
unusual or non-cash based expenses, gains and losses. The Non-GAAP Financial
Measures are provided as additional information to help both management and
investors compare business trends among different reporting periods on a
consistent and more meaningful basis and enhance investors’ overall
understanding of the Company’s current financial performance and prospects for
the future.

The Non-GAAP Financial Measures should be considered in addition to
results prepared in accordance with GAAP, but should not be considered a
substitute for or superior to GAAP results. In addition, the Company’s
calculation of the Non-GAAP Financial Measures may be different from the
calculation used by other companies, and therefore comparability may be
limited.

For the periods presented, the Company’s non-GAAP net income and non-GAAP
net income per diluted ADS exclude, as applicable, the amortization of
intangibles, share-based compensation expense and interest expense on
convertible notes.

Reconciliation of the Company’s Non-GAAP financial measures to the GAAP
financial measures is set forth below.



                               For the Three    For the Three    For the Three
                                Months Ended     Months Ended     Months Ended
                                    March 31,     December 31,        March 31,
                                        2009             2009             2010
                              (US$ thousands)  (US$ thousands)  (US$ thousands)

    GAAP Net  Income (Loss)          $2,521           $2,017           $3,165
    Share-based compensation          1,014            1,248            1,241
    Financial expense on
     convertible notes                   34              234              253
    Amortization of intangibles         159              441            1,423
    Investment impairment loss           --            1,500               --
    Non-GAAP Net Income              $3,728           $5,440           $6,082

    Non-GAAP diluted net income
     per ADS (Note 1)                 $0.10            $0.13            $0.15

Note 1: The non-GAAP adjusted net income per ADS is computed using
non-GAAP net income and number of ADS used in GAAP diluted EPS calculation,
where the number of ADS is adjusted for dilution due to convertible notes
issued to Nokia Growth Partners, or equivalent to 40.67 million ADS.

About KongZhong:

We are one of the leading providers of digital entertainment services for
consumers in the PRC. We operate four main business units, namely WVAS, WIS,
mobile games and online games. We are one of the leading providers of WVAS to
mobile phone users. We began providing WVAS on the networks of China Mobile in
2002. Since 2004, we have provided WVAS on the networks of China Unicom, China
Telecom, China Netcom and the other major telecommunications operators in the
PRC. Since 2004, we have been offering news, entertainment, community and
mobile advertising services through our wireless Internet sites, including
http://www.Kong.net , http://www.ko.cn and http://www.ct.cn . In 2008, we
began reporting our mobile games business as a stand-alone operating segment,
while it was previously reported as part of our WVAS business. We began our
online games business in 2010, through our acquisition of Dacheng Networks, a
developer and operator of online games.

Safe Harbor Statement:

This press release contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include, without limitation, statements regarding trends in the wireless
value-added services, wireless media and mobile games industries and our
future results of operations, financial condition and business prospects.
Although such statements are based on our own information and information from
other sources we believe to be reliable, you should not place undue reliance
on them. These statements involve risks and uncertainties, and actual market
trends and our results may differ materially from those expressed or implied
in these forward looking statements for a variety of reasons. Potential risks
and uncertainties include, but are not limited to, continued competitive
pressure in China’s wireless value-added services, wireless media and mobile
games industries and the effect of such pressure on prices; unpredictable
changes in technology, consumer demand and usage preferences in the market;
the state of and any change in our relationship with China’s
telecommunications operators; our dependence on the billing systems of
telecommunications operators for our performance; the outcome of our
investment of operating income generated from the WVAS segment into the
development of our wireless Internet segment and mobile games segment; changes
in the regulations or policies of the Ministry of Industry and Information
Technology and other relevant government authorities; and changes in political,
economic, legal and social conditions in China, including the Chinese
government’s policies with respect to economic growth, foreign exchange,
foreign investment and entry by foreign companies into China’s
telecommunications market. For additional discussion of these risks and
uncertainties and other factors, please see the documents we file from time to
time with the Securities and Exchange Commission. We assume no obligation to
update any forward-looking statements, which apply only as of the date of this
press release.

SOURCE KongZhong Corporation

http://www.kongzhong.comhttp://www.Kong.nethttp://www.ko.cnhttp://www.ct.cnhttp://www.Zhulang.com

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