China Finance Online Co. Limited
Q1 2017 Earnings Call Transcript

Published: 15 Jun 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the China Finance Online Reports Q1 2017 Conference Call. At this time, all participants are in a listen-only mode. There will a presentation followed by a question-and-answer session [Operator Instructions]. I must advise you that this conference is being recorded today, Thursday, June 15, 2017. I would now like to hand the conference over to your first speaker today, Mr. Dixon Chen. Thank you. Please go ahead.

[Dixon Chen:]

Thank you, Christian. Welcome to China Finance Online first quarter 2017 financial results earnings conference call. With us today are Mr. Zhiwei Zhao, Chairman and CEO and Mr. Lin Yang, Vice President. Mr. Zhao will provide a summary of business dynamics in the first quarter, and then Mr. Yang will review the quarterly financial results. Thereafter, the management will hold a question-and-answer 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 the Private Securities Litigation Reform Act of 1995. The words believe, estimates, plans, expect, anticipate, projects, target, 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 our current expectations or beliefs, including but not limited to, statements concerning China Finance Online's operations, financial performance and conditions. China Finance Online cautions that these statements, by their nature, involve risks and uncertainties and 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 and Exchange Commission from time-to-time. China Finance Online specifically disclaims any obligation to update forward-looking statements in the future. At this time, I would like to turn the conference call over to Mr. Zhao.

[Zhiwei Zhao:]

Good day everybody. And thank you for joining today's call. In the recent period, the increased regulatory enforcement pressured a number of commodities exchanges to significantly reduce their commodity trading, and eventually led to complete suspension of opening new trades on several commodities exchanged during the second quarter. These dynamics and its ripple effect negatively impacted our commodity brokerage business. However, for our overall business, we believe that the worst is now behind us. And we expect to turn a positive net cash flow in the fourth quarter, as our dedication to develop our intelligent finance-driven fintech business starts to bear fruits, and our cost control measures will take effect. We are determined to become the one-stop investment and wealth management gateway for Chinese investors by providing our best-in-class fintech product to meet Chinese investors' growing need. Based upon different investors' risk profile, China Finance Online's Robo-Advisor product offers a wide array of investment combination and personalized global asset allocations through Chinese domestic mutual funds. During the first five months of 2017, our Robo-Advisor product significantly outperformed the Shanghai Composite Index in investment return with a significantly lower drawdown. More encouragingly, this Robo-Advisor product also beat most of its peer products in the market, for its better return with lower drawdown. In addition, this Robo-Advisor product has the industry's lowest entry RMB500. We plan to continue building out our core capability in fintech to lay a solid foundation for our further expansion into services for institution and retail investors. In May, we inaugurated China's first A-Share market non-state-owned-enterprises Top 1000 Wealth List that tracks and publishes the 1,000 most successful companies publicly listed in Chinese stock market, measured by both their shareholder value creation and their societal contribution. Based on proprietary market data from our solely-owned industry-leading market data services, Genius, A-Share Top 1000 Wealth List screens all non-state-owned enterprises, publicly listed on Shanghai Stock Exchange and Shenzhen Stock Exchange, and analyze their market caps, tax contributions, employee compensations and cash dividend with four key metrics, which are fundamentals support coefficient, environmental contribution coefficient, fundamental support value and social contribution value, powered by 420,000 lines of records from Genius and a series of advanced algorithms engineered by our fintech expert. The A-Share Top 1000 Wealth List features three proprietary rankings; family wealth value, corporate wealth creation value, and comprehensive wealth creation score. Through a multi-dimensional intelligent evaluation mechanism, this list enables investors to better understand these companies and to discover values in these companies from a brand-new angle, which bodes well with China Finance Online's corporate motto, Making Investment Easier. The full list, along with the top 50 tax contributors, top 50 dividend payers, and other analytics of geographic mappings, industries, and ages are available on our Web site. With that, I'll turn the call to our Vice President, Mr. Lin Yang, to go over our financial details for the quarter. Thank you.

[Lin Yang:]

Thank you, Zhao. Let me walk you all through our major items for first quarter. Please note that all financial numbers and all details are unaudited and they are presented in U.S. dollars, rounding to one decimal point for approximation. First quarter 2017 financial results, net revenues were $8.7 million compared with $30.7 million during the first quarter of 2016 and $19.2 million during the fourth quarter of 2016. During the first quarter of 2017, revenues from financial services, the financial information and the advisory business, and the advertising services contributed 62%, 33%, and 5% of the net revenues, respectively compared with 87%, 10%, and 2%, respectively for the corresponding period in 2016. Revenues from financial services were $5.4 million compared with $26.8 million during the first quarter of 2016, and $16 million during the fourth quarter of 2016. Revenues from financial services mainly represent equity and the commodity brokerage services. The equity brokerage services business grew 424.8% year-over-year and declined 0.8% quarter-over-quarter. The year-over-year decrease of revenues from financial services was mainly due to a decline in revenues from the Company's commodities brokerage services. Revenues from commodities brokerage declined by 96.8% year-over-year and 92.7% quarter-over-quarter. Revenues from the financial information and advisory business were $2.8 million, a decrease of 9.9% from $3.2 million during the first quarter of 2016, but an increase of 20.5% from $2.4 million in the fourth quarter of 2016. Revenues from the financial information and the advisory business were comprised of subscription services from individual and institutional customers. The year-over-year revenue decline from the financial information and the advisory business was mainly due to the sale of a less profitable division in the financial information segment. Driven by an effective campaign and increased user engagement, iTougu's revenue contribution posted 23.3% year-over-year increase and 102.5% quarter-over-quarter increase. Revenues from advertising were $0.4 million, compared with $D0.6 million in the first quarter of 2016 and $0.7 million in the fourth quarter of 2016. Gross profit was $4 million compared with $25.9 million in the first quarter of 2016 and $12 million in the fourth quarter of 2016. Gross margin in the first quarter of 2017 was 46.4% compared with 84.3% in the first quarter of 2016 and 62.5% in the fourth quarter of 2016. The year-over-year and quarter-over-quarter decreases in gross margin were mainly due to a decrease in revenues from the Company's commodities brokerage services, which typically carry higher gross margins. General and administrative expenses were $4.1 million, a decrease of 16.4% from $4.9 million in the first quarter of 2016, and decrease of 8.7% from $4.5 million in the fourth quarter of 2016. The year-over-year and quarter-over-quarter decreases were mainly attributable to more stringent expense control measures. Sales and marketing expenses were $8.3 million, a decrease of 29.2% from $11.8 million in the first quarter of 2016, and a decrease of 42.2% from $14.4 million in the fourth quarter of 2016. The year-over-year and quarter-over-quarter decreases were mainly attributable to sales bonus reductions associated with weaker commodity brokerage services business during the first quarter of 2017. Research and development expenses were $4.3 million, an increase of 59.4% from $2.7 million in the first quarter of 2016 and a decrease of 14.2% from $5 million in the fourth quarter of 2016. The year-over-year increase was mainly attributable to an increase in recruitment of senior software engineers and capital market professionals to support further development in fintech capability. Total operating expenses were $16.8 million, a decrease of 13.6% from $19.4 million in the first quarter of 2016, and a decrease of 30.1% from $24 million in the fourth quarter of 2016. Loss from operation was $12.5 million compared with an income from operations of $7 million in the first quarter of 2016, and a loss from operations of $11.9 million in the fourth quarter of 2016. Net loss attributable to China Finance Online was $11.6 million compared with a net income of $2 million in the first quarter of 2016, and a net loss of $12.8 million in the fourth quarter of 2016. Fully diluted loss per American Depository Shares attributable to China Finance Online was $0.51 for the first quarter of 2017 compared with fully diluted earnings per ADS of $0.08 for the first quarter of 2016, and fully diluted loss per ADS of $0.57 for the fourth quarter of 2016. Basic and diluted weighted average numbers of ADS for the first quarter of 2017 were $22.7 million compared with basic and diluted weighted average number of ADS for $22.6 million and $25.4 million, respectively for the first quarter of 2016. Each ADS represents five ordinary shares of the Company. As of March 31, 2017, total cash and cash equivalents, restricted cash and short-term investments were $67.9 million. Total shareholders' equity of China Finance Online was $75.9 million as of March 31, 2017.

[Zhiwei Zhao:]

This wraps up my presentation. And operator, we are ready for questions.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. Your first question today comes from the line of [20.17] John Block from Sugar Capital.

[Unidentified Analyst:]

So my question is, in your press release, you mentioned that intelligent finance is your future. Can you explain a bit more what is unique about your intelligent finance? Thank you so much.

[Zhiwei Zhao:]

We have always maintained our strategy of becoming the one-stop investment and wealth management platform with intelligent finance as the engine and trading as its core offering. At present, our research and development in intelligent finance have started showing initial results. Regarding our Robo-Advisory product, based on user's different risk tolerance, we provide personalized global asset allocation solutions through Chinese domestic mutual funds. During the first five months of 2017, our Robo-Advisor product's performance was leading the industry in China, in both investment return and risk management. In the meantime, we will apply our intelligent finance capability in stock investment as well as investment research, and we expect to continue to introduce related products in the future.

[Operator:]

The next question comes from the line of [ph] Bob Wilson. Please go ahead.

[Unidentified Analyst:]

Could you please tell us exactly what happened in the commodities business and what are your next plans?

[Zhiwei Zhao:]

In the backdrop of a nationwide reform among all commodities exchange, the commodity exchanges that our commodity brokerage business rely upon have either significantly changed their margin policies or suspended trading. We fully support Chinese government's decision and action and proactively adapt to the changing environment. Going forward, we will implement more stringent cost control measures. At the same time, our other lines of business remain unaffected by the reform. From the perspective of our overall business, we believe that the worst is now behind us. Considering our dedicated development of intelligent finance-driven fintech business, we’ll produce milestone-like results in the future, along with cost control measures taking effect. We expect to turn a positive net cash flow in the fourth quarter.

[Operator:]

Ladies and gentlemen, that does conclude our question-and-answer session for today. I'll now hand the call back to Dixon. Thank you very much.

[Dixon Chen:]

Thank you everyone for attending China Finance Online's 2017 first quarter earnings conference call. We look forward to speaking with you. Thank you.

[Operator:]

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