China Finance Online Co. Limited
Q1 2018 Earnings Call Transcript

Published: 22 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the China Finance Online Reports Q1 2018 Earnings Conference Call. At this time all participants are in a listen only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, 22nd of May 2018. I would now like to hand the conference over to your first speaker today, Dixon Chen. Thank you. Please go ahead.

[Dixon Chen:]

Thank you, operator. Welcome to China Finance Online's 2018 First Quarter Financial Results Earnings Conference Call. With us today are Mr. Zhiwei Zhao, Chairman and CEO; Mr. Lin Yang, Vice President; and Ms. Julie Zhu, Director of Investor Relations. Mr. Zhao will provide a summary of business dynamics in the quarter, and then Mr. Yang will review the quarterly financial results. Thereafter, the management will hold a Q&A session. We will provide translation during the Q&A. Before we begin, I'll remind all listeners that throughout this call, we may present statements that may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. The words believes, estimates, plans, expect, anticipates, projects, targets, optimistic, intend, aim, future, will or similar expressions are intended to identify forward-looking statements. All statements other than historical facts may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning China Finance Online's operations, financial performance and condition. China Finance Online cautions that these statements by their nature involve risks and uncertainties, and the actual results may differ materially depending on a variety of important factors, including those discussed in China Finance Online's reports filed with the Securities & Exchange Commission from time to time. China Finance Online specifically disclaims any obligation to update the forward-looking statements in the future. At this time, I would now like to turn the conference call over to Mr. Zhao.

[Zhiwei Zhao:]

Good morning and good evening. Thank you for joining today’s call. With our cloud based software sales continue to increase, our bottom line losses narrowed. After four quarters of streamlining our business units, our efficiency also reached a new recent high. With the bulk of our investment in our cloud system and user interface completed, we will continue to improve operational efficiency and leverage our intelligent-finance driven fintech business to drive better economy of scale. We will continue to focus on fundamental operational measures to further strengthen our professional journalism and content quality. We strongly believe that our continued improvement on content will be recognized by more and more readers of financial market news. During the development and extension of our new product for the enterprise market, Genius Zhisheng, a cloud-based one-stop investment research platform for institutional investors, we continued to find new services scenarios. Our products and services draw interest from brokerage firms and wealth management advisors. As more potential users are partaking beta testing, we are gradually monetizing our products and services for enterprise market. Our Robo-Advisor product, Lingxi, recorded strong performance in the first quarter of 2018. In the first quarter, Lingxi had an average return of 2.4% with an average draw down rate of 4%, which significantly outperformed the Shanghai Compository Index in return with a significantly lower drawdown. According to our internal research, Lingxi’s performance in the first quarter of 2018, also exceeded most of its peer product in the market for its better return with a lower draw down. Even though experiencing several market fluctuations in the first quarter of 2018, one of the best performing strategies by Lingxi produced an annualized return of 15.81%, overall in the first quarter of 2018, the aggressive portfolio of Lingxi beat 92% of equity fund and hybrid fund in terms of return. Since its inception in late 2016, Lingxi provides Chinese middle class retail investor with a wide array of investment combinations and personalized global asset allocation through Chinese domestic mutual funds. Lingxi Platinum product, which targets mass affluent investors in China outperformed the average level of public funds of funds [indiscernible] in return with a significant lower draw down in the first quarter of 2018. In order to leverage China Finance Online's market influence as the leading financial media in China and share our robust machine learning and research capability on public companies' value creation, in May 2018, we hosted the 2018 Value Discovery Forum for Public Companies on Chinese Stock Markets in Chengdu. Over 80 prestigious public companies listed on the Shenzhen and Shanghai stock markets and influential investors attended the forum. During the forum, we also announced the 2018 Top 30 Growth Non-State-Owned-Companies, and 2018 Top 30 Socially Responsible Non-State-Owned-Companies and 2018 Top 30 Investor Confidence Non-State-Owned-Companies, those three lists. These rankings are based on China Finance Online's proprietary algorithms dynamically tracking a series of data points including financials, valuation, growth trends, environment, social and governance and other metrics, which enable investors to identify investment opportunities and discover value stocks. With that, I’ll turn the call over to our Vice-President Lin Yang, to go over the financial details for the quarter. Thank you.

[Lin Yang:]

Thank you, Zhao. Let me walk through our major items for the first quarter. Please note that all financial numbers are unaudited and are presented in U.S. dollars rounded to 1 decimal point for approximation. During the first quarter of 2018, our net revenues were $13.3 million compared with $8.3 million during the first quarter of 2017 and $13.6 million during the fourth quarter of 2017. During the first quarter of 2018, revenues from financial services, the financial information and advisory business and the advertising services contributed 50%, 37% and 13% of the net revenues, respectively, compared with 52%, 33% and 5%, respectively, for the corresponding period in 2017. Revenues from financial services were $6.7 million compared with $5.4 million during the first quarter of 2017 and $8.9 million during the fourth quarter of 2017. Revenues from financial services mainly represent equity brokerage services. The equity brokerage business grew 47.1% year-over-year and decreased 27.2% quarter-over-quarter. Revenue from financial information and advancement of the business were $4.9 million, an increase of 72.7% from $2.8 million during the first quarter of 2017 and 59.2% from $2.9 million in the fourth quarter of 2017. Revenues from the financial information and the advisory business were comprised of subscription services from individual and institutional customers. During the first quarter, subscription revenue from individual investors grew by 1314.3% year-over-year mainly due to the increase in subscription of the company’s cloud based analytical tools among regional investors. The year-over-year and the quarter-over-quarter increase of revenues from financial information and advisory business were mainly due to the increased subscription revenue from individual investors. Revenues from advertising were $1.7 million compared with $0.4 million in the first quarter of 2017 and $1.6 million in the fourth quarter of 2017. The increased traffic to our site and leadership recognition of our premium content also helped elevate our advertising revenues. Gross profit was $8.2 million compared with $4 million in the first quarter of 2017 and $6.8 million in the fourth quarter of 2017. Gross margin in the first quarter of 2018 was 61.9% compared with 46.4% in the first quarter of 2017 and 49.7% in the fourth quarter of 2017. The year-over-year and quarter-over-quarter increases in gross margin were mainly due to revenue mix changes associated with the growth of the financial information and the advisory business, which carries a higher margin. General and administrative expenses were $3.3 million, a decrease of 20.9% from $4.1 million in the first quarter of 2017, and a decrease of 19.8% from $4.1 million in the fourth quarter of 2017. The year-over-year and the quarter-over-quarter decreases were mainly attributable to more stringent expense control measures and streamlining operations. Sales and marketing expenses were $6.2 million, a decrease of 25.2% from $8.3 million in the first quarter of 2017, and a decrease of 8.8% from $6.8 million in the fourth quarter of 2017. The year-over-year and the quarter-over-quarter decreases were mainly attributable to the reduction in headcount and the rental expenses associated with the terminated commodity brokerage operation. Research and development expenses were $3.8 million, a decrease of 12.4% from $4.3 million in the first quarter of 2017 and with no significant difference from $3.8 million in the fourth quarter of 2017. The year-over-year decrease was mainly attributable to improved efficiency after the consolidation of the R&D team. The Company continues to maintain a team of senior software engineers, data scientists and capital market professionals to support further development in its fintech capabilities. Total operating expenses were $13.3 million, a decrease of 20.8% from $16.8 million in the first quarter of 2017, and a decrease of 9.9% from $14.7 million in the fourth quarter of 2017. The year-over-year and quarter-over-quarter decreases were mainly due to improved operational efficiency and effective cost controls. Loss from operations was $5.0 million, compared with a loss from operations of $12.5 million in the first quarter of 2017 and a loss operations of $8.0 million in the fourth quarter of 2017. Net loss attributable to China Finance Online was $5.2 million, compared with a net loss of $11.6 million in the first quarter of 2017 and a net loss of $8.4 million in the fourth quarter of 2017. Fully diluted loss per ADS attributable to China Finance Online was $0.23 for the first quarter of 2018, compared with fully diluted loss per ADS of $0.51 for the first quarter of 2017 and fully diluted loss per ADS of $0.37 for the fourth quarter of 2017. Basic and diluted weighted average numbers of ADSs for the first quarter of 2018 were 22.8 million, compared with basic and diluted weighted average number of ADSs of 22.7 million for the first quarter of 2017. Each ADS represents five ordinary shares of the Company. As of March 31, 2018, total cash and cash equivalents, restricted cash and short-term investments were $24.7 million. This wraps up my remarks. And operator, we are ready for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions]. Your first question comes from the line of Pat Murphy. Please ask your question.

[Unidentified Analyst:]

Hi. What has driven the rapid growth of the traffic to your site? Can you elaborate the things you did in marketing to grow the traffic?

[Zhiwei Zhao:]

The growth of our website is mainly attributable to our focus on best-in-class proprietary web-based content, professional journalism and more and more news aggregate sites are republishing our content and coverage. We have consolidated high quality [banking] [ph] sources along with the most followed economic topics and policy orientation to open a series of column discussion such as China Finance Online living room, go catch, top ranking stocks, through these discussions with top ranked portfolio managers these column provide in-depth analysis of economy and discuss about investment philosophies. Build upon our market influence as the leading financial media in China, we've recently hosted a series of investment forums to bring investment professionals together to discuss hot topics such financial market – financial innovations and cyber securities. Week ago we just successfully hosted 2018 value discovery forum for the public companies on Chinese stock market. During the forum, attendees and speakers undertook constructive discussions on Non-State-Owned enterprises and their future area of growth; industry advancement and market development. We create such open platform for investment professionals to meet and share their thoughts. We also release quantitative report on the Non-State-Owned-Companies value chain. This report pivoting on three dimensions, innovation, efficiency, and capital analysis Non-State-Owned Companies. We are pleased that this report is well received by the investment community as they've incorporated new data points of investor confidence and social responsibility. In the future we will continue to develop value added products and services that enable investors to identify investment opportunities. So back to your question, we believe traffic is the building blocks of future business and we will continue to strengthen our core competence in operations to drive traffic. Thank you.

[Operator:]

Your next question comes from the line of John Block from Sugar Capital. Please ask your question. Q - John Block Great, great conference guys. Just want to ask – so I noticed on your website you guys are covering Berkshire Hathaway, their annual shareholder meeting. And just curious why that is? Charlie Munger, you know, he talked about investment opportunities in the Chinese stock market. So can you tell us what the investor sentiment is in China? Thank you.

[Zhiwei Zhao:]

Yes. This is actually the second year we cover this key industry event Berkshire Hathaway annual shareholder meeting. We all know that Warren Buffett’s successful investment philosophy is to maintain long-term value investment. Chinese stock market is gradually moving towards maturity. During this process there are many things we can learn from the U.S. market. We hope through our active coverage on such industry event to not only spread about investment philosophy but also enable Chinese investors to participate in thought provoking discussions in the world's most advanced market, develop long-term and rational investment mentality, and partake in a movement of maturing Chinese stock market. We are a firm believer that investor education is an important part of the services. Thank you.

[Operator:]

Your next question is a follow-up question from Pat Murphy [ph]. Please ask your question.

[Unidentified Analyst:]

Your gross margin grows in this quarter, while your expenses went down significantly. What kind of numbers should we use to model the gross margin and total expenses going forward?

[Zhiwei Zhao:]

We have been dedicated to developing best-in-class products. This means we will continue to invest in R&D. With the continued improvement of our quality we will also increase marketing intensity. That's also the market like to see. On the gross margin side, the growth is associated with our focus on product development, but it's still far below our goal. There will be further improvement. In addition to that, we will continue to improve operational efficiency. As our Intelligent Research and Big Data capability continues to improve, we look forward to becoming a more scalable and efficient fintech company. Thank you.

[Operator:]

Your next question comes from the line of [Jeff Hung] [ph]. Please ask your question.

[Unidentified Analyst:]

Yes. So, I actually have two questions. So the first question is based on Q4, 2017 financial statement there are more than 40 million cash and equivalent, but in Q1, 2018 and I only see like there are 24 million, just curious what's going on here. And the second question will be in Q4…

[Zhiwei Zhao:]

Hold on. Do you repeat your first questions?

[Unidentified Analyst:]

Yes. So the first question in Q4, 2017, I see the cash and cash equivalent is more than $40 million, but in Q1, 2018, I see it, it’s actually dropped, I believe 40% to 24 million, so just curious about what's going on here?

[Zhiwei Zhao:]

The cash, right.

[Unidentified Analyst:]

Yes, correct.

[Zhiwei Zhao:]

The cash in the fourth quarter versus the first quarter?

[Unidentified Analyst:]

The Q1, 2018 versus Q4, 2017.

[Zhiwei Zhao:]

Okay. The changes in the cash position from end of 2017 to end of first quarter 2018 is mainly due to two factors; one is the operation in our Mainland China business has a bit of cash burn during the first quarter. And the second part is mainly due to our operation in the brokerage business in Hong Kong. We were supporting our Hong Kong operation and they had ongoing growth strategy and growing their brokerage business. And so some of the business, so we are laying down some cash to help them with the margin, but they has been producing pretty significant growth in the past year or so, so we'll continue to support that.

[Operator:]

There are no further questions. At this time, I would now like to turn the conference back to Lin Yang. Please continue.

[Lin Yang:]

Thank for everyone attending China Finance Online's first quarter 2018 earnings conference call. We look forward to speaking with you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.