KongZhong Corp and Hurray! Holding Co, Chinese companies that sell games and ring tones to mobile phone users, reported fourth-quarter profit declines on increased marketing and development costs to differentiate their services.
Net income of KongZhong fell a more-than-expected 5 per cent to US$6.26 million from a year earlier and Hurray's profit dropped 43 per cent to US$3 million, according to the Beijing-based companies. Shares of KongZhong, the largest Chinese wireless services company by market value on the NASDAQ Stock Market, fell 1 per cent in US after-hours trading. Hurray's stock dropped 8.5 per cent on the NASDAQ
Companies such as KongZhong are developing their own mobile phone content including ring tones and pictures based on movies such as Hong Kong superstar Jackie Chan's "The Myth" as competition increases. Prices for ring tones in China's mobile market, the world's largest with almost 400 million users, have fallen to below 1 yuan (US$0.12).
"There are too many products on the market that are too similar," Jim Sun, an analyst with Evolution Securities, said before KongZhong and Hurray released their earnings. "Content is a real problem right now."
KongZhong's fourth-quarter sales rose 34 per cent from a year earlier to a record US$22.1 million, while Hurray's sales gained 14 per cent to US$16 million, according to their statements.
Introducing these services increases marketing expenses and adds to the cost of paying for copyrighted material. KongZhong also developed a game based on the "Kung Fu Hustle" hit movie. The title was voted the best mobile game at China's 2005 Annual Game Industry Conference.
"Users aren't interested in text messaging services anymore, which was cheap for these companies to develop," Duncan Clark, managing director of Beijing-based technology research firm BDA China Ltd, said before the earnings releases.
KongZhong's profit of 17 US cents a share missed the median 20-US cent estimate provided by eight analysts surveyed by Thomson Financial. Hurray's profit of 13 US cents per share fell short of estimate for 17 US cents, according to the median from four analysts surveyed by Thomson.
KongZhong's fourth-quarter product development costs increased 82 per cent from a year earlier to US$2.56 million and sales and marketing costs gained 29 per cent to US$1.8 million. Hurray's product development costs rose 17 per cent to US$692,000 from a year ago, and sales and marketing expenses climbed 58 per cent to US$2.78 million.
Shares of KongZhong, which has a market capitalization of US$433 million, fell to US$12.47 in after-hours trading on the NASDAQ exchange. Shares of Hurray, worth US$179 million, fell to US$7.50 in after-hours trading on the NASDAQ.
KongZhong said it expected first-quarter net income to be between 21 US cents and 22 US cents per share on sales of between US$24 million and US$25 million. Hurray said it expected first-quarter sales of US$16.5 million and US$17.5 million, without giving a forecast for profit.
Companies such as KongZhong and Hurray must also pay 15 per cent of their revenue to China Mobile (Hong Kong) Ltd and China Unicom Ltd for the right to deliver products over the two telecommunication carrier's networks.
"I see limitations for the growth of wireless companies in the short term," Sun said. Sun rates KongZhong a "hold." He does not cover Hurray.
Source: China Daily