China Finance Online Co. Limited
Q2 2014 Earnings Call Transcript

Published: 30 Sep 2014

[Operator:]

Good day everyone and welcome to China Finance Online Second Quarter 2014 Earnings Conference Call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. At this point I’ll now like to turn the call over to Ms. Julie Zhu. Thank you. Please go ahead.

[Julie Zhu:]

Thank you operator. Welcome to China Finance Online second quarter 2014 earnings conference call. With us today are Mr. Zhiwei Zhao, Chairman and CEO; Jeff Wang, Director and CFO and Mr. David Tan, Vice President of Strategy and Finance. 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, estimate, plan, expect, anticipate, project, 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 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 the forward-looking information in the future. At this time I would now like to turn the conference call over to Mr. Zhiwei Zhao, Chairman and CEO of China Finance Online for prepared remarks. As usual we will conduct a question-and-answer session at the end of our presentation.

[Zhiwei Zhao:]

[Interpreted] Thank you good morning and good evening everyone. Welcome to China Finance Online's second quarter 2014 earnings call. We’re pleased to announce that we have seen a promising beginning towards building an integrated online securities trading and wealth management platform. In August we launched Securities Master or Zhengquantong, the first integrated web based securities trading platform in China. As a part of Securities Master’s launch, we entered into a strategic partnership with CITIC Securities, the largest brokerage firm in China to integrate Securities Master’s state-of-the-art web based architect with CITIC Securities’ robust trading and settlement system by creating a simple and seamless experience for retail investors from the opening of an account to real time trading. Investors will be able to effectively and efficiently manage their finances over our Securities Master platform. For the first time, retail investors will have access to one-stop professional level financial information and services such as securities trading, portfolio management, market data, analytics, and research reports as well as real time online advisory services. In further leveraging our Securities Master platform, in September we entered into another similar strategic partnership agreement with Zhongshan Securities to integrate our Securities Master platform with Zhongshan Securities trading and settlement system. This partnership will allow customers to easily create new trading accounts and offer highly competitive commission rates which can be as low as 0.025%. Zhongshan Securities will also provide our users with additional services such as access to micro-finance loans and several other products. During the second quarter, we continue to build upon the momentum we've generated since expanding our portfolio of products which now includes precious metal trading, wealth management and brokerage services. These business segments provided us with not only revenue growth but also extensive experience expanding other brokerage and trading products. We will continue to expand our businesses which will allow retail investors to effectively diversify their financial product portfolio. Looking ahead, we aim to launch more strategic partnerships similar to these by the end of this year. Meanwhile, we will also continue to leverage, expand, and optimize our innovative and comprehensive financial platform for China’s growing population of retail investors. We certainly believe that we are building a solid ecosystem that will continue to attract new users and strengthen our foundation for future monetization. Now, I will turn the call over to our CFO, Mr. Jeff Wang for our detailed financial results. Thank you.

[Jeff Wang:]

Thank you. First of all, let me review our second quarter 2014 financial results. Please note that all financial numbers are presented in U.S. dollars and rounded to one decimal point for approximation. Our net revenues for the second quarter of 2014 increased by 171% year-over-year to US$20.6 million from US$7.6 million in the second quarter of 2013 and compared with US$23.2 million in the first quarter of 2014. The company’s net revenues are categorized under A, revenues from financial information and advisory business which includes subscription fees from individual customers and institutional customers; and B, revenues from financial services which include brokerage related revenues in our precious metal trading services; and C revenue from advertising; and D, others. During the second quarter of 2014, revenues from financial information and advisory business, financial services, advertising and others contributed 11.9%, 79.5%, 8.2%, and 0.4% of all total revenues respectively compared with 32.3%, 43.1%, 22.1%, and 2.5% respectively in the second quarter of 2013. Revenues from financial information and advisory business were US$2.5 million compared with US$2.5 million in the second quarter of 2013, and US$3.2 million in the first quarter of 2014. Revenues from financial services increased by 399% year-over-year to US$16.4 million compared with US$3.3 million in the second quarter of 2013, and US$18 million in the first quarter of 2014. The quarter-over-quarter decrease is mainly due to market fluctuations of the precious metal market. Revenue from advertising remained stable at US$1.7 million compared with US$1.7 million in the second quarter of 2013 and US$1.8 million in the first quarter of 2014. Gross profit increased by 193.5% year-over-year to US$15.1 million from US$5.2 million in the second quarter of 2013 and compared with US$17.8 million in the first quarter of 2014. Gross margin for the second quarter of 2014 was 73.5% compared with 67.9% in the second quarter of 2013, and 76.8% in the first quarter of 2014. The change in the gross margin was mainly driven by revenues related to higher margin and financial services. General and administrative expenses for the second quarter of 2014 were US$3.8 million or 18.6% of net revenues compared with US$3.2 million or 41.5% of net revenues in the second quarter of 2013 or US$4 million or 17.2% of net revenues in the first quarter of 2014. The year-over-year increase in G&A expenses was mainly due to expansion of new businesses, share based compensation expenses, and increased rental cost. Sales and marketing expenses for the second quarter of 2014 were US$12.9 million or 62.5% of net revenues compared with US$4.5 million, or 59.6% of net revenues in the second quarter of 2013, and US $12.1 million, or 52.2% of net revenues in the first quarter of 2014. The year-over-year increase in sales and marketing expenses was mainly due to increased sales from the Company's financial services business. Research and development expenses for the second quarter of 2014 were US$2.6 million, or 12.5% of net revenues, compared with US$2.2 million, or 29.2% of net revenues for the second quarter in 2013 and US$2.6 million or 11% of net revenues for the first quarter of 2014. The year-over-year increase in R&D expenses was mainly due to the ongoing development in the Company's products and services offerings. The Company recognized an impairment loss of intangible assets and goodwill of US$1.8 million and US$8.2 million, respectively during the second quarter of 2014. The loss was mainly caused by Company's restructuring of financial information and advisory services. Net loss attributable to China Finance Online for the second quarter of 2014 was US$6.2 million, compared with a net loss of US$4.5 million in the second quarter of 2013, and a net loss of US$2 million in the first quarter of 2014. The increase in net loss was mainly due to the loss from impairments of intangible assets and goodwill. Non-GAAP net income attributable to China Finance Online, which excluded losses from impairments of goodwill and intangible assets attributable to the Company and non-cash share-based compensation expenses for the second quarter of 2014 was US$0.3 million, compared with a non-GAAP net loss of US$4.4 million in the second quarter of 2013 and a non-GAAP net loss of US$1.5 million in the first quarter of 2014. On a six month basis, total revenues for the first half of 2014 increased by 234.3% year over year to US$43.8 million from US$13.1 million in the first half of 2013. Gross profit for the first half of 2014 increased by 274.4% to US$32.9 million compared with US$8.8 million in the first half of 2013. Net loss attributable to the Company for the first half of 2014 was US$8.4 million compared with US$8.9 million in the first half of 2013. Now let me walk you through our financial position. As of June 30, 2014, total cash and the cash equivalents were US$20.4 million compared with US$36.4 million at the end of 2013. Total shareholders' equity of China Finance Online was US$59.5 million as of June 30, 2014. With that operator. we are ready to begin the Q&A session.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And the first question comes from the line of Kevin Zinser. Please ask your question.

[Unidentified Analyst:]

Good morning. I actually have three questions if I may. It looks like you’ve been signing with brokerage firms, what’s your strategy for Securities Master?

[David Tan:]

This is David Tan, Vice President of Strategy. Let me try to answer your question. We would partner with at least five securities firms by the end of this year including CITIC and Zhongshan Securities. We will also provide a broad offering of investment funds and other financial products for our customers. Our goal is to develop a selection of security trading partners for users and provide a rich choice of wealth management products as well as innovative financial business tools. Our ultimate goal is not to be the first, but the best online trading in the wealth management platform in China with the largest active investor base.

[Unidentified Analyst:]

Okay, thank you. And my second question is, what are the services, values provided to traders from the partnership with Zhongshan Securities?

[David Tan:]

The partnership with Zhongshan Securities allows customers to easily create new trading accounts and offer highly competitive commission rates which can be as low as 0.025%, the lowest in China for new trading comps. The partnership will also be able to provide the users with additional services. For instance, access to microfinance loans, asset management products with attractive yield profiles, and 7x24 customer service. All of these services are available to online traders for the first time in China.

[Unidentified Analyst:]

Thank you. The third question I have is when are you going to launch the mobile trading platform?

[David Tan:]

Yes, very soon. The mobile trading platform will be very innovative and intuitive. For the first time, there will be a mobile app that integrates news, real time quotes, portfolio management, and a fast trading option, trading order placements.

[Unidentified Analyst:]

Okay, thank you.

[David Tan:]

Thank you.

[Operator:]

Thank you. And the next question comes from the line of (John Block of Sugar Capital) [ph]. Please ask your question.

[Unidentified Analyst:]

Yes, hello, nice presentation. I have two questions for you. One is, how are you going to be acquiring your users? And the second question is what is your business model going forward?

[David Tan:]

Good question. For the question of user acquisition, let me put it this way. Acquiring active investors is our priority at this stage. As a leading financial product with tens of millions of current site visitors and the registered users, we aim to convert our current financial news viewers to our trading platform. Most of our viewers have existing trade accounts with a brokerage firm. Recently, the government has allowed traders to open multiple brokerage accounts. This new regulatory reform is a tailwind to our success. Now, if we could offer broad and attractive financial products and services that give users a breed of first class investment tools as well as superior user experience, our current viewer would easily become our transactional customers. In addition, our brokerage partners also have millions of accounts that can stand up to our Securities Master platform. The second question is about business model. As you can see, our traditional revenues are derived from financial information software, advertising, and the financial services such as brokerage service in Hong Kong and the precious metal trading services. However, with the launch of pioneering securities trading in the wealth management platforms, our revenue model is getting similar to an online broker in U.S. For example, if we take a look of the revenue composites and the e-trade or Charles Schwab. We noticed that only less than a quarter of revenue were from trading commissions. Online wealth management is a game changing factor in China. After we would acquire millions and millions of active investors, we expect high margin, high gross revenues, revenue stream from asset management as well as corresponding peer-to-peer financing and other innovative products in the fast changing Chinese capital markets.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, we have now reached the end of our Q&A session. I will now turn the call back to Ms. Julie Zhu. Thank you, please go ahead.

[Julie Zhu:]

Thank you to all for participating in this earnings call and webcast. We look forward to speaking with you again. Thank you.

[Operator:]

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