China Finance Online Co. Limited
Q3 2017 Earnings Call Transcript

Published: 15 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the China Finance Online 2017 Q3 Earnings Conference Call. At this time all participants are in a listen only mode. Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 14 of November 2017 -- excuse me, Wednesday, the 15 of November 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, operator. Welcome to China Finance Online's Third Quarter 2017 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 question-and-answer session. We'll provide translation during the Q&A session. 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 SEC 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 us today for our earnings conference call. As the Chinese stock market experienced solid growth in 2017, the overall investors' confidence has improved substantially. We continue to recover our top line as our intelligent finance-driven fintech business shows solid traction and our brokerage-related business maintain strong growth momentum. We are experiencing over 30% sequential increase in our financial information division. At the end of October, our Alexa rating also reached into the top 60 in China and top 500 globally. We recently rolled out our cloud-based software product for enterprise users. These products feature proprietary financial engineering with artificial intelligence, big data and cloud computing to enable investment researchers and sophisticated investors to improve investment efficiency and optimize investment decisions and empower professional investment advisers to better serve their clients. These intelligent products are -- have already been well received by large financial institutions. We expect to generate revenue from enterprise software subscription business in the coming quarters. During the first nine months of 2017, our Robo-Advisor product, Lingxi, posted an average return of 9.8%, with average drawdown rate of 1.5% and significantly outperformed the Shanghai Composite Index in return with a significant low drawdown. According to China Finance Online's internal research, Lingxi's first nine months performance also beat most of its peer product in the market for its better return with a lower drawdown. One of the best-performing strategies by Lingxi produced a return of 16.6% in the first nine months, on track to achieve a strong annual return of 25%. During the third quarter, sales of Robo-Advisor products increased by 400%, with active users nearly doubled. Since its inception in late 2016, Lingxi provided Chinese retail investors with a wide array of investment combinations and personalized global asset allocations through Chinese domestic mutual funds. In late October of 2017, we also introduced the Lingxi Platinum product, targeting mass affluent investors in China. We remain confident that we will return a positive net cash flow in this fourth quarter. With our strong fintech capability and state-of-the-art products, we're well positioned to ride the next wave of the bull market in China. Before I turn the call to my colleague to go over the quarterly financials, I would like to share a very good piece of news with our investors. Recently, our wholly owned subsidiary, Rifa Asset Management Limited has received approval from the Securities and Futures Commission of Hong Kong for its Type nine License, Type four License and Type five License. Securities and Futures Commission is the independent statutory body in charge of regulating the securities and futures markets in Hong Kong. The Type nine License allows Rifa to manage a portfolio of securities or futures contracts for clients on a discretionary basis. The Type four License allows Rifa to give investment advice to clients relating to the sale and purchase of the securities. And Type five License allows Rifa to give investment advice to clients related to the sale and purchase of future contracts. With that, I'll turn the call to our Vice President, Lin Yang, to go over our second quarter financial details. Thank you.

[Lin Yang:]

Thank you, Zhao. Let me walk through our major items for the third quarter. Please note that all financial numbers are unaudited and are presented in U.S. dollars rounded to 1 decimal point for approximation. First, let's review our third quarter financial results. Net revenues were $10.7 million compared with $17.1 million during the third quarter of 2016 and $9.6 million during the second quarter of 2017. During the third quarter of 2017, revenues from financial services, the financial information and advisory business and the advertising services contributed 70%, 24% and 5% of the net revenues, respectively, compared with 82%, 13% and 4%, respectively, for the corresponding period in 2016. Revenues from financial services were $7.5 million compared with $14 million during the third quarter of 2016 and $6.4 million during the second quarter of 2017. Revenues from financial services mainly represent equity and commodities brokerage services. The equity brokerage business grew 155.4% year-over-year and 50.6% 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 after the suspension of new commodities trading by precious metal exchange in China. Revenue from commodities brokerage declined by 97.6% year-over-year. Revenues from the financial information and the advisory business were $2.6 million, an increase of 19.2% from $2.2 million during the third quarter of 2016 and 30.4% from $2 million in the second 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 increase of revenue from financial information and advisory business was mainly due to the increase in subscription revenue from individual investors. Revenues from advertising were $0.6 million compared with $0.7 million in the third quarter of 2016 and $0.9 million in the second quarter of 2017. Gross profit was $4.8 million compared with $12.6 million in the third quarter of 2016 and $5.1 million in the second quarter of 2017. Gross margin in the third quarter of 2017 was 44.9% compared with 73.9% in the third quarter of 2016 and 52.9% in the second quarter of 2017. The year-over-year and quarter-over-quarter decreases in gross margin were mainly due to revenue mix changes associated with the company's transition to increased services for equity capital market. General and administrative expenses were $3.2 million, a decrease of 32.4% from $4.8 million in the third quarter of 2016 and a decrease of 16.6% from $3.9 million in the second quarter of 2017. The year-over-year and the quarter-over-quarter decreases were mainly attributable to more stringent expense control measures. Sales and marketing expenses were $6.9 million, a decrease of 46.3% from $12.9 million in the third quarter of 2016 and a decrease of 5.2% from $7.3 million in the second quarter of 2017. The year-over-year and quarter-over-quarter decreases were mainly attributable to the reductions in headcounts and sales commissions in the commodity brokerage operation during the third quarter of 2017. Research and development expenses were $3.8 million, slightly higher than $3.7 million in the third quarter of 2016, but lower than $4.3 million in the second quarter of 2017. The company continues to maintain a team of senior software engineers and capital market professionals to support further development in fintech capability. Total operating expenses were $14 million, a decrease of 34.4% from $21.3 million in the third quarter of 2016 and a decrease of 11% from $15.7 million in the second quarter of 2017. Loss from operations was $9.2 million compared with a loss from operations of $8.1 million in the third quarter of 2016 and a loss from operations of $10.7 million in the second quarter of 2017. Net loss attributable to China Finance Online was $8.5 million compared with a net loss of $3.6 million in the third quarter of 2016 and a net loss of $8.3 million in the second quarter of 2017. Fully diluted loss per ADS attributable to China Finance Online was $0.37 for the third quarter of 2017 compared with fully diluted loss per ADS of $0.16 for the third quarter of 2016, and fully diluted loss per ADS of $0.37 for the second quarter of 2017. Basic and diluted weighted average numbers of ADSs for the third quarter of 2017 were 22.7 million compared with basic and diluted weighted average number of ADS of 22.7 million for the third quarter of 2016. Each ADS represents five ordinary shares of the company. Now let me walk you through our first nine months financial results. Net revenues for the first nine months of 2017 were $29 million, a decrease of 54.5% compared with $63.8 million in the first nine months of 2016. Gross profit for the first nine months of 2017 was $13.9 million, a decrease of 72.5% compared with $50.7 million in the first nine months of 2016. Net loss attributable to China Finance Online for the first nine months of 2017 was $28.4 million compared to a net income of $11.2 million in the first nine months of 2016. Fully diluted losses per ADS attributable to China Finance Online was $1.25 for the first nine months of 2017 compared with fully diluted earnings of US$0.44 for the nine months of 2016. As of September 30, 2017, total cash and cash equivalents, restricted cash and short-term investments were US$36.1 million. Total shareholders' equity of China Finance Online was US$61.8 million as of September 30, 2017. Okay. Thank you.

[Dixon Chen:]

With that, operator, we're ready for questions.

[Operator:]

Thank you, very much. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question today comes from the line of [Matt Murphy]. Please go ahead.

[Unidentified Analyst:]

Going forward, what would be the most main focus of your company?

[Zhiwei Zhao:]

In order to better meet market demand, we introduced a cost set of these three strategies, which stands for intelligent technology; intelligent viewpoint; and intelligent copilot. Since we started building a brand-new fintech service ecosystem, so far, our production have been well received by the market. Based upon our track record in financial media, financial data services and securities advisory services, along with our robust fintech capability, we have made breakthrough in developing products and services to service both retail investor and institutional investors. Our strategic planning is to create synergy among retail investor services, institutional -- investor services and wealth management. With our ongoing technological advancement and customer service improvements, we will enter into the asset management business in the foreseeable future. We will continue to strengthen our innovation capability to further apply advanced technologies in the financial sector and empower securities industry with fintech. In short, we want to help our clients simplify their investment decisions.

[Dixon Chen:]

That will be our answer to your questions.

[Operator:]

Your next question today comes from the line of Bob Wilson -- sorry, from [Matt Murphy].

[Unidentified Analyst:]

Given the massive traffic on your site, what is the plan to monetize it through advertising placement?

[Zhiwei Zhao:]

Thank you for your question. Our strategy is to further expand, enrich and personalize news coverage through our proprietary content development and have subject discovery, which will enable us to add value for more and more retail and institutional investors. As a top 60 websites in China and the top 500 in the world, our ranking on Alexa demonstrated that we remain a very popular online destination as we continue to produce high-quality content and introduce value-adding services to engage our audience in China. With better content and better services, we will grow our ad revenue in the future. Our ad customer base has already improved as we have signed up more and more financial institutions such as China Construction Bank, Harvest Asset Management, Ningbo Bank, Minsheng Bank and China Asset Management, et cetera. Thank you.

[Operator:]

The next question comes from the line of [Rob Wilson].

[Unidentified Analyst:]

Rifa has won some important licenses in Hong Kong. Could you give us what the next steps in the plan are?

[Zhiwei Zhao:]

In 2017 -- first, thank you for your question. For 2017, the growth of globe -- with the growth of global stock market, Hong Kong market also experienced strong recovery. As a result of this strong market, our brokerage business and service business in Hong Kong posted solid growth. Hong Kong is always a strategically important place in the global market as they do financial center for China and for the world. And Hong Kong is also one of the most active trading markets, and it's also the gateway between China market and global market. So, our wholly owned subsidiary, Rifa, has over 45 years history in Hong Kong, with a very strong client resources and a long-standing reputation. We believe that with these newly acquired licenses, namely Type 4, Type 5 and Type 9 Licenses, we're not only expanding our product and service offerings but enable us to provide multi-region, full-service wealth management services to our clients as well. With the ongoing development of Hong Kong and Shanghai, and Hong Kong and Shenzhen connect programs, we look forward to growing our brokerage services and asset management business in Hong Kong.

[Operator:]

There are no further questions at this time. I would now like to hand the conference back to the management team. Please continue.

[Dixon Chen:]

Thank you all for attending China Finance Online 2017 Third 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.