China Finance Online Co. Limited
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the China Finance Online reports Q2 2017 conference call. At [Operator Instructions] I must advise you that this conference is being recorded today, August 15, 2017. I'd now like to hand the conference over to your first speaker today, Mr. Dickson Chan. Thank you. Please go ahead.

[Unidentified Company Representative:]

Thank you, operator. Welcome to China Finance Online's Second Quarter and First 6 Months of 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 this quarter; and then Mr. Yang will review the quarterly and semiannual financial results. Thereafter, the management will hold a Q&A session. We'll 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 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 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. We posted sequential improvement in the second quarter. Our revenue was higher quarter-over-quarter, and the bottom line loss was narrowed from the first quarter. Again, we believe the worst is now behind us. During the second quarter, a number of major precious metal exchange in China announced that they will not accept new purchase orders and will only trade for liquidation of current holdings. Such suspension announcement have adversely affected companies in commodity brokerage businesses in China including us. As a result, we made necessary adjustments to be compliant to the regulations. On a positive side, our intelligent, finance-driven fintech business is gaining traction as credit retail investors began to subscribe our mobile application-based analytical tools to guide their quantitative trading investment strategies. In addition, we are in beta test of our cloud-based investment research software product for enterprise users namely large financial institutions. We remain confident that we will turn a positive net cash flow in the fourth quarter. We also announced the re-branding of our Robo-Advisor product. Inspired by an ancient Chinese proverb, the renamed Lingxi Robo-Advisor service is committed to deliver more personalized financial services to the large retail investor community. Through Yinglibao mobile app, Lingxi Robo-Advisor offers a wide array of investment combinations and personalized global asset allocations through Chinese domestic mutual funds. During the first six months of 2017, Lingxi significantly outperformed the Shanghai composite index in return with a significant lower drawdown. As of July 31, Lingxi year-to-date performance also beat most of its peer product in the market for its average return of 8.47% with an average drawdown of 1.53%. We plan to continue to building out its core capability in the intelligent finance-driven fintech space to lay a solid foundation for its further expansion into services for institution and retail investors. As more personalized custom services are increasingly becoming key differentiator over accessibility when it comes to mutual fund sales in China and fund selection portfolio construction are 2 core value-added services for fund to fund, we recently organized Fund-of-funds forums in China to discuss the current market opportunities and challenges in China for FOF, our Fund-of-funds investment strategy. There were 36 mutual funds in attendance in Beijing venue and 38 mutual funds in attendance in Shenzhen forum. Among these attendants, there were portfolio managers from leading investment managers, such as China Southern Asset Management, Harvest Fund Management, China Asset Management, Bosera Asset Management, CCB Principal Asset Management, Fullgoal Asset Management, E Fund Management, MANULIFE TEDA Fund Management and Haitong-Fortis Investment Management. As the Chinese stock market continues to mature, we remain committed to providing state-of-the-art tools with cloud-computing capabilities and robust database to power our users in their investment decisions. With that, I'll now turn the call to our Vice President, Lin Yang, to go over the financial details for the second quarter and the first 6 months of 2017. Thank you.

[Lin Yang:]

Thank you, Zhao. Let me walk you through our major items for the second quarter. Please note that all financial numbers are unaudited and are presented in U.S. dollars rounded to one decimal point for approximation. First, let me walk you through our second quarter financial results. Net revenues were USD $9.6 million compared with USD $16 million during the second quarter of 2016 and USD $8.7 million during the first quarter of 2017. During the second quarter of 2017, revenues from financial services, and financial information and advisory business and advertising services contributed 67%, 20% and 10% of net revenues, respectively, compared with 76%, 18% and 5%, respectively, for the corresponding period in 2016. Revenues from financial services were USD $6.4 million compared with $12.2 million during the second quarter of 2016 and $5.4 million during the first quarter of 2017. Revenues from financial services mainly represent equity and commodities brokerage services. The equity brokerage business grew 456.9% year-over-year and 8.3% 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. Revenue from commodities brokerage declined by 85.7% year-over-year but up 94.0% quarter-over-quarter. Revenues from the financial information and advisory business were $2 million, a decrease of 31.7% from $2.9 million during the second quarter of 2016, and 30.6% from $2.8 million in the first quarter of 2017. Revenues from the financial information and advisory business were comprised of subscription services from individual and institutional customers. The year-over-year revenue decline from the financial information and advisory business was mainly due to the sale of a less profitable division in the financial information segment. Revenues from advertising were $0.9 million compared with $0.9 million in the second quarter of 2016 and $0.4 million in the first quarter of 2017. Gross profit was $ 5.1 million compared with $ 12.1 million in second quarter of 2016 and $ 4 million in the first quarter of 2017. Gross margin in the second quarter of 2017 was 52.9% compared with 75.7% in the second quarter of 2016, and 46.4% in the first quarter of 2017. The year-over-year 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 $ 3.9 million, a decrease of 31.6% from $ 5.6 million in the second quarter of 2016, and a decrease of 6.1% from $ 4.1 million in the first quarter of 2017. The year-over-year and quarter-over-quarter decreases were mainly attributable to more stringent expense control measures. Sales and marketing expenses were $ 7.3 million, a decrease of 33.1% from $ 11 million in the second quarter of 2016, and a decrease of 12.1% from $ 8.3 million in the first quarter of 2017. The year-over-year and quarter-over-quarter decreases were mainly attributable to headcount reductions in the commodity brokerage operation during the second quarter of 2017. Research and development expenses were US$4.3 million, an increase of 36% from US$3.1 million in the second quarter of 2016 and flat in comparison with US$4.3 million in the first quarter of 2017. 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 US$15.7 million, a decrease of 42.7% from US$27.5 million in the second quarter of 2016 and a decrease of 6.1% from US$16.8 million in the first quarter of 2017. Loss from operations was US$10.7 million compared with a loss from operations of US$15.3 million in the second quarter of 2016 and a loss from operations of US$12.5 million in the first quarter of 2017. Net loss attributable to China Finance Online was US$8.3 million compared with a net income of US$12.8 million in the second quarter of 2016 and a net loss of US$11.6 million in the first quarter of 2017. Fully diluted loss per American Depository Shares attributable to China Finance Online was US$0.37 for the second quarter of 2017 compared with fully diluted earnings per ADS of US$0.50 for the second quarter of 2016 and a fully diluted loss per ADS of US$0.51 for the first quarter of 2017. Basic and diluted weighted average numbers of ADS for the second quarter of 2017 were 22.7 million compared with basic and diluted weighted average number of ADS of 22.6 million and 25.4 million respectively for the second quarter of 2016. Each ADS represents five ordinary shares of the company. Let me now review our first six months financial results. Net revenues for the first six months of 2017 were US$18.3 million, a decrease of 60.9% compared with US$46.8 million in the first six months of 2016. Gross profit for the first six months of 2017 was US$9.1 million, a decrease of 76.1% compared with US$38 million in the first six months of 2016. Net loss attributable to China Finance Online for the first six months of 2017 was US$19.9 million compared to a net income of US$14.8 million in the first six months of 2016. Fully diluted loss per ADS attributable to China Finance Online was USD 0.88 for the first 6 months of 2017 compared with fully diluted earnings of USD 0.58 for the first 6 months of 2016. As of June 30, 2017, total cash and cash equivalents, restricted cash and the short-term investments were USD 44.8 million. Total shareholders' equity of China Finance Online was USD 69.1 million as of June 30, 2017. This wraps up my remarks, and operator, we are ready for questions.

[Zhiwei Zhao:]

Operator, we're ready for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Charlie Yang[ph]. Pleased ask.

[Unidentified Analyst:]

Okay, thank you Mr. Zhao, this is Charlie Yang from U.S. I'm a private shareholder. My question is on your Robo-Advisor. What does the typical portfolio look like and what kind of asset allocation you have? I know you achieved a pretty good performance last 6 months. How do you achieve such an outperformance compared to the peers in China competitive market? Please answer for me. Thank you

[Zhiwei Zhao:]

Thank you Charlie. [Foreign language]. At the time of opening account on our Robo-Advisor program, the user for our Robo-Advisor service will need to go through a long survey, which enables us to map out their risk appetites and investment goals. Our Robo-Advisor then constructs a customized portfolio based on their individual risk profile. A typical portfolio has different kinds of equity index covering the Chinese stock market, Hong Kong market, U.S. market and goal and fixed income products as well. Our resourceful platform for mutual fund distributions, capable investment research team, along with advanced algorithm and investment strategy, enable us to post very strong performance for our Robo-Advisor product users in the first 6 months and 7 months of the year.

[Operator:]

Your next question comes from the line of Rob Wilson.

[Unidentified Analyst:]

It sounds like you're winding down the commodity trading business. Can you talk about the other business units that would generate solid revenue going forward? And I also have a second question.

[Zhiwei Zhao:]

In this market where every investor is looking for our funds, we see that majority of retail investment community need more professional help, help them to better and faster identify, analyze trading opportunities. In the second quarter, we introduced a series of algorithm-driven stock-picking and quantitative trading strategy tools that build upon our fintech capability and advanced proprietary database for market data. These mobile app software tools quickly gained traction in both trial downloads, subscription conversion and payment. In addition, we are in beta test of our more robust cloud-based investment research enterprise software for large financial institutions.

[Unidentified Analyst:]

Also, in the earlier stages of your company's development, business software was your core products until it was terminated in recent years. What is the difference between your software products now and then?

[Zhiwei Zhao:]

To answer your question, they are very different. Back in 2007, our software products were mainly for investors who look up market data and stock fundamentals. With these data, they then make their own decisions based on their gut feelings and experience. Nowadays, building upon superior algorithm for intelligent investment research, advanced database and strong intelligent finance research team we have in-house, we introduced JRJ app-based intelligent stock-picking and quantitative trading strategy product to enable users to identify good investment targets more easily and faster. These tools with strong cloud-computing power can analyze both massive historical data and live market data and identify trading pattern to better guide investors on their trading decisions. As we mentioned earlier, we're already in beta test of our more robust cloud-based investment research enterprise software. These enterprise software are geared towards large financial institutions. So we're looking to roll out those products as well.

[Operator:]

We don't have any additional questions as of the moment. I would now like to hand the call back to today's presenter. Please continue.

[Unidentified Company Representative:]

Thank you, everyone, for attending China Finance Online's second quarter and first half of year 2017 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 all disconnect.