KongZhong Falls Back to Earth
KongZhong Corp. (KONG) has sold off since its Q3 earnings release falling almost 30%. So how bad were those earnings and guidance? It turns out both were reasonable.
Earnings beat estimates and revenues beat guidance. Forward guidance was good and management were refreshingly open on their Q3 conference call.
So why the large sell-off? KONG was heavily promoted by at least two newsletters and was a darling of the momo crowd. The shares were overvalued and stretched prior to the earnings release and only exceptional earnings and guidance on every front could have sustained the price.
Once the shares started to show weakness the momentum investors jumped ship and the the newsletter subscribers suddenly found themselves holding a falling stock which they didn’t really understand in the first place, so they joined the sellers.
Perhaps investors focused on WIS (KONG.net) revenues ,which fell slightly. As management explained they’re concentrating on building a user base now, not revenue.
How about margins? Margins showed continued strength. Gross margins were stable and operating margins were up.
So what now? Well KONG has finally fallen to a level I’d consider buying back the shares I sold in August. Valuation levels are no longer at nose bleed levels and decent returns are again possible.
Risks. Kong is small Chinese company operating in a highly regulated segment and dependent on major telecom providers. On top of which future revenues are currently dependent on basic 3G phones ruling the roost in China as opposed to iPhone style smart phones bring mobile internet to China.
KONG remains a speculative story stock.
For the Record Q3 2009 Earnings Release
- Total revenues increased 40% year-over-year and increased 9% quarter-over-quarter to $35.1 million.
- Gross margin stable at 51%.
- Net income increased to $4.50M, a 27% increase compared with 2Q09 net income of $3.55 mn and a net loss in 3Q08. Basic net income per ADS was $0.13 based on 34.08 mn ADS while diluted net income per ADS was $0.11 based on 39.24mn ADS.
- Non-GAAP net income was $6.28M, a 33% increase compared to 2Q09, while Non-GAAP diluted net income per ADS was $0.16
- Cash and cash equivalents increased to $134M.
Commenting on the results, the Company’s Chairman and Chief Executive Officer, Leilei Wang, said,
“We continued to execute upon our strategy of delivering solid financial performance while continuing to the make long-term investments in KONG.net.
Overall, our mobile games business continued to lead the China market with 20% sequential growth and over 200% year-over-year growth. We believe we are still in the early development phase of the Chinese mobile game market and through our strong game development capabilities, have become a preferred partner for all the Chinese mobile operators who are seeking to grow the mobile games market in the coming 3G era.
Against the backdrop of stable 3Q financial performance at KONG.net (or WIS), the team has undertaken a number of initiatives, which position us well for strong user growth over the coming year. For example during the quarter, we announced a strategic alliance with CCTV that will leverage their audience of over 1.0 billion viewers to jointly develop mobile Internet services in China. Moreover, we also launched the new Ko.cn platform, which we plan to develop into the leading social mobile game platform in China.
Lastly, our WVAS division continued to deliver stable cashflow growth helping to improve the overall profitability of KONG and providing us additional resources as we seek to extend our leadership in mobile games and invest in KONG.net”
Disclosure: Long KONG.
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