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KongZhong Corporation (KONG)

Q4 2010 Earnings Conference Call

March 2, 2011 7:30 PM EST

Executives

Jay Chang – CFO

Wang Leilei – CEO

Analysts

Andrey Glukhov – Brean Murray

Adam Krejcik – Roth Capital Partners

Nan Li [ph] – SIG

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 KongZhong Corp. earnings conference call.

My name is Jeremy and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Jay Chang, Chief Financial Officer. Please proceed, sir.

Jay Chang

Thank you, operator. This conference call may contain forward-looking statements. 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.

For additional discussions of risks and uncertainties relating to forward-looking statements 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 conference call.

Thank you for your interest in KongZhong.

I will first go over our fourth quarter and full-year 2010 results before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the fourth quarter of 2010 were $36 million, a 4% sequential decrease and a 5% increase from the same period last year.

As we continue to transition our business to become a cross-platform digital entertainment company, mobile game revenues made up 35% of total revenues, while internet games contributed another 16%, and combined mobile and internet games made over half of our fourth quarter revenues.

Total gross profit was $16 million compared to $15.6 million in 3Q, while gross margins improved to 44% compared to 41% in the third quarter, due to the improved contribution from internet games.

If excluding a provision for impairment of goodwill and intangibles due to the change in the file consideration for Dacheng, total operating expenses were $11 million compared to $14.4 million in 3Q, due to the efforts we undertook in the second half of 2010 to streamline our WVAS and wireless internet service business lines, which were combined in the third quarter into a single WVAS reporting line.

Fourth quarter net profit was $5 million compared to $1.2 million in 3Q and $2 million in the same period last year.

Non-GAAP net profit was $7.3 million, compared to $4.1 million in 3Q and $5.4 million in the same period last year. Fourth quarter net profit and non-GAAP net profit was the highest since our CEO, Mr. Wang Leilei, joined the company in late 2008.

Based on 37.31 million basic and 39.03 million fully diluted ADS outstanding at the end of 4Q, net profit per basic ADS was $0.13, net profit per diluted ADS was $0.13 and non-GAAP net profit per diluted ADS was $0.18.

At the end of fourth quarter, our cash and cash equivalents were $157 million, equivalent to $4.21 per basic ADS, as we improved year-end accounts receivables collection and cash flow improve based on the fourth quarter net profit.

For the full-year 2010, total revenues were $149.6 million, a 14% year-over-year increase, of which, WVAS was $83.3 million, mobile games was $49.2 million, and internet game revenues were $17.1 million.

Full-year gross margin was 44%, of which, WVAS gross margins were 40%, mobile game gross margins were 38%, and internet game gross margins were 82%.

Full-year net income was $11.9 million compared to previous year’s $12.6 million, while full-year non-GAAP 2010 net income increased to $22.9 million or an increase of 13% compared to 2009’s full-year non-GAAP net income of $20.2 million.

Now, I’d like to turn to each business units’ financial performance namely mobile games, internet games, and WVAS.

Total mobile game revenues in 4Q were $12.8 million compared to $13.9 million in the third quarter, an 8% decrease, but still a 74% increase from the same period last year. Revenues from downloadable mobile games were $12.3 million, representing an 89% increase from the same period last year, but a decrease of 6% from 3Q. Fourth quarter downloadable mobile game revenues were impacted by the ongoing reduction in marketing activities by our mobile operator partners, as well as year-end subscriber confirmation notices, which led to slightly higher than prior period churn rates.

In 4Q, average monthly mobile game subscribers were maintained at roughly 2 million per month at a similar level compared to 3Q. Revenues from online mobile games were $0.45 million, a decrease of 49% from 3Q and 46% from the same period last year. All three of our online mobile games experienced a sequential decline in revenues due to product lifecycle and competitive issues. Revenues from downloadable mobile games made up 97% of total mobile game revenues compared to 94% in the 3Q.

Mobile games gross profit in 4Q was $4.5 million, a 21% increase compared to the same period last year, but a 12% decrease from 3Q, while our 4Q mobile game gross margin was 35% compared to 36% in 3Q. We had previously expected mobile game gross margins to improve during the fourth quarter, but the higher margin distribution channels that we had expected to promote our mobile game services through during the period were impacted by certain mobile operator policies and churn rates.

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