KongZhong Blows Estimates Away
KongZhong Corporation (ADR) (NASDAQ:KONG) blew away analysts estimates when they reported after hours on Wednesday. Could this baby gorilla of the wireless market finally be growing up into a chest pounding 800lb gorilla? The three analysts following KongZhong had a consensus estimate of $0.03 with a range of $0.02-0.04. 2009 estimates are for $0.14 with a range of $0.09 -0.20. With 2010 $0.19 and a range of $0.16-0.24. Revenue estimate for the quarter was $27.76M with 2009 estimate of $108.2M and 2010 of $119.8M.
According to Market Watch
Wednesday reported its first-quarter net income rose to $2.5 million, or 7 cents per American depositary share, from $88,000, or breakeven, in the same quarter last year. Excluding items, the Beijing-based wireless services company would have earned 10 cents per ADS. Revenue increased to $29.6 million from $21.4 million a year ago, the company said. Analysts surveyed by FactSet Research had forecast earnings of 3 cents per ADS. The company expects second-quarter revenue of $30.5 million to $31.5 million
Q1 2009 Highlights
- Revenues exceeded guidance – revenues increased 38% year-over-year and increased 11% quarter-over-quarter to $ 29.6 million, exceeding guidance of $27.5M to $28.5M.
- Gross margin stabilized – Total gross margin was 49% or roughly the same level as in the fourth quarter of 2008 (“4Q08″).
- Mobile game accounted for 17% of total revenue in 1Q09, compared to 10% in 4Q08 [This is their new growth engine]
- Significant increase in net income – net income was $2.52M, a significant increase compared with 4Q08 net income of $ 0.52M.
- Diluted net income per ADS was $0.07 based on 36.74 mn ADS outstanding as of March 31, 2009.
- Non-GAAP net income was $3.73M and Non-GAAP diluted net income per ADS was $0.10.
- $141.67M in cash and cash equivalents – As of March 31, 2009, the Company had $141.67M in cash and cash equivalents, including funds received from the issuance of US$6.78M in convertible senior notes to Nokia Growth Partners.
The full release can be viewed here at PR Newswire.
That is an impressive beat, but how can this company with an ever changing strategy trade at $8? It’s forward P/E of 38 and a PEG of 3.45 would seem to place it in another era, a decade ago.
For starters it might be the $3.86/share cash on the balance with no debt. If you subtract the cash you get a forward EV/E of around 25 and a 2010 forward EV/E of 18 based on analysts estimates. Those numbers start looking a little more reasonable. Or perhaps the analysts have been low balling, as they have been burnt by Kong in the past. Earnings and revenue estimates are sure to be adjusted up. We might even see an upgrade.
Business Outlook: Based on information available on May 14, 2009, the Company expects total revenues for the second quarter of 2009 to be between $30.5 million and $31.5 million.
Analysts were expecting revenue of $25.32M with a range of $22.30M-28.33M for Q2 and eps of $0.03. Momentum studies like this, Momentum Strategies by Louis Chan, Narasimhan Jegadeesh and Josef Lakonishok, reveal how past earnings surprises predict large drifts in future returns as analysts and the market are slow to respond. I have found this to be especially true for companies like KongZhong, who have recently disappointed many market participants and have changed their strategy.
NOTE: I wrote the title and key points last night in anticipation of earnings beat. I am now editing this extensively and adding a lot of new information and analysis and will continue to do so throughout the day as time permits. Promises, promises. I’ve run out of time for writing as I’ve been too busy reading and modelling earnings. I encourage you to read the earnings release (linked above) and the conference call. I’m going out on a limb with ambitious targets of 2009 revenue of $136M and eps $0.35.
“Strategy is to develop mobile games into a key growth driver for 2009 and beyond; second, transform Kong.net into a mobile based social gaming and community platform; and the third one is to manage our WVAS business for strong cash flow.”
Stock Buy Back
As of March 31, 2009, a total of 568,994 ADSs of the Company (representing 22,759,760 ordinary shares), were repurchased at an average price of $4.0761 per ADS as part of the Company’s share repurchase program, which began on November 18, 2008. This aggregate figure includes the 223,090 ADRs repurchased before December 31, 2008, (representing 8,923,600 ordinary shares).
Finally a company buying their stock back near the lows, rather than the common practice of wasting shareholders funds by buying at high prices. Kong get a big tick in my book for this.
Take a Walk on the Dark Side
The following two charts highlight the simple moving average technique of closing and opening positions on a cross of the 50 and 200 day moving averages. When the 50 DMA crosses above the 200 DMA it’s called a Golden Cross and when the 50 crossed below the 200 it’s called the ominous Death Cross. Yes I did just say a few days ago that there is no need to use the same trigger for selling and buying, but there is also no reason to ignore them.
This longer term chart
Following the simple death and golden cross would have got you out of KongZhong at $9.88 and back in at $4.42. I’m not cherry picking these charts, it is what it is.
If you had of been flexible and were following the fundamental story of KongZhong you could have done even better. In mid 2006 new consumer protection rules for WVAS were introduced in China. The sell off in KONG was immediate. Kong started buying back shares in November 08 and the price continued to rise strongly.
I did neither, my KongZhong story is thus far not a proud chapter in my investing history, but at least it is profitable. It’s time I actually reviewed what I did and why. In short I sold $7.50 Mar07 puts on KONG is Sept 2006 for $1.30. I was put in March 07 for a cost price of $6.20. Actually now that I look at my records the story looks better than I thought. In late Sept07 I sold $7.50 Nov07 calls for $0.65. While I don’t actually reduce my cost price I do maintain an “owed” price, which accounts for profits from options on open positions. Those calls closed OTM so my owed price became $5.55. At expiration KONG was $4.85 and I made this note on my spreadsheet, “F***ing Sell, rather than p*** around with Calls” Though I don’t recall that specific trade, that highlights an important lesson to all newbie option traders. Trying to scalp a few extra nickels will often bite you on the arse. If you want to sell something, sell it.
Disclosure: Long KONG
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