KongZhong Corporation (ADR) (NASDAQ:KZ) has seen strong gains in recent trading, rising over 30% in about the last month. Overall market sentiment has clearly played a role in the stock’s move higher, however the market may also be weighing the company’s Q1 results, which are slated to be released in late May.
Based on the company’s earlier disclosures, Q1 FY2015 results won’t be anything spectacular, mostly due to the lack of new mobile games launches. At the end of Q4 FY2014, the company only had five mobile games really contributing to the bottom line, and considering the relatively short lifespan of mobile titles, there will be declining revenues in the first quarter.
KongZhong’s Internet games segment probably won’t be anything shocking either. Unfortunately for investors, both Guild Wars 2 and World of Warplanes didn’t perform as well as expected, and it’ll be a while before new updates for GW2 are available, and World of Warships wasn’t expected to start closed beta testing until Q2 FY2015.
Management’s Q1 guidance was for total revenues of about 46 million USD, gross profit of about 17.5 million USD, and net income of about 4 million USD on a GAAP basis (non-GAAP net income of about 5 million USD). On the last quarterly call, management noted factors including a lack of mobile game launches in the quarter as well as soft performance from GW2 and World of Warplanes as key to its guidance.
After some back of the envelope analysis, it seems like revenue may come in slightly higher than management’s guidance, based on the following assumptions:
- World of tanks performance is flattish at 24 million USD
- WVAS revenues are flat YoY at about 16 million USD
- Mobile game revenues growth is flat YoY due to no new launches (mobile games typically have shorter lifespans than PC games, so the period of prime revenue production is also shorter).
Assuming the no real changes with R&D spending (about 6 million USD), and selling and marketing throttling back (there are no major upcoming releases like GW2 last year, effecting the YoY comparison), operating expenses could be about 15 million USD (note there are no goodwill charges, impairments, or government subsidies in this assumption).
Combining the above, operating profit would be about 2.8 million USD, representing a margin of about 6%, but lower than Q1 last year’s 8.5 million USD, an OPM of about 17%.
But who cares?
The drop on a YoY basis shouldn’t really come as much of a surprise, in part due to the clarity with which management has conveyed the main factors behind its Q1 outlook. Although things aren’t firing on all cylinders for the company (yet), they’ve helpfully communicated with investors regarding how things look from their perspective.
What is more interesting for shareholders is the company’s Q2 outlook, which should set the stage for how the full year will look, and also provide visibility how mobile games will contribute to the bottom-line on an ongoing basis.
It’s important to remember that KongZhong’s smartphone game effort is still relatively new (after all, it really only joined the fray through a FY2013 acquisition), and is only now starting to see the strategy bear fruit. On a full-year basis, mobile games accounted for about 20% of FY2014 revenue (the majority of which came in the 2H as the business ramped up).
There were about 10 games in the mobile game development pipeline as of early Q1, and it seems likely that some of these titles should be contributing to Q2 performance. KongZhong did release one title in late April, “超神战队” (Supergod Clan), which was rated with 4.5/5 stars on 17173.com’s website dedicated to mobile (here’s a link). Although it’s still early for that title, it does illustrate that the company is making incremental progress in mobile.
With a mobile game segment more actively contributing to the business, more improves that just the top-line. Mobile game gross profit margins have typically been the strongest segment (averaging 49% in FY2014), which could result in operating, and net, margin expansion going forward.
Internet game revenues will be on a sideways trend until there are new launches of updates (either GW2 or World of Warships), and WVAS seems likely to continue being the cash cow cranking out a stable stream of quarterly revenues. As a result, the near-term focus for growth falls squarely on KongZhong’s mobile business. There have been some positive signs that the company is making progress in this area, and a confirmation and updated outlook from management could provide support for recent share price gains.